Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of applications and markets worldwide, including:
Embedded control systems typically incorporate a microcontroller as the principal active, and sometimes sole, component. A microcontroller is a self-contained computer-on-a-chip consisting of a central processing unit, often with on-board non-volatile program memory for program storage, random access memory for data storage and various analog and digital input/output peripheral capabilities. In addition to the microcontroller, a complete embedded control system often incorporates application-specific software, various analog, mixed-signal, timing, and connectivity, productssecurity and non-volatile memory components such as EEPROMs and Flash memory.
worldwide microcontroller market. We target the 8-bit, 16-bit, and 32-bit microcontroller and 32-bit embedded microprocessor markets. We have shipped close to 17more than 31.6 billion microcontrollers to customers worldwide since their introduction in 1990. We also offer specialized microcontrollers for automotive, networking,industrial, computing, communications, lighting, power supplies, motor control, human machine interface, security, wired connectivity and wireless connectivity. With over 1,400 microcontrollersconnectivity applications.
We offer a comprehensive set of low-cost and easy-to-learn application development tools. These tools enable system designers to quickly and easily program PIC microcontrollersour microcontroller and microprocessor products for specific applications and, we believe, they are a keyan important factor for facilitating design wins.
Many independent companies also develop and market application development tools that support our standard microcontroller and microprocessor product architecture. Currently, there are approximately 200architectures, including an extensive amount of third-party tool suppliers worldwide whose products support our proprietary microcontroller architecture.architectures.
We believe that familiarity with and adoption of development tools from Microchip as well as ourfrom third-party development tool partners by an increasing number of product designers will be an important factor in the future selection of our embedded control products. These development tools allow design engineers to develop thousands of application-specific products from our standard microcontrollers. To date, we have shipped approximately two million development tools.
Our manufacturing operations include wafer fabrication, wafer probe, assembly and test. The ownership of a substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry. By owning wafer fabrication facilities and our assembly and test operations, and by employing statistical techniques (statistical process control, designed experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture a portion of the wafer manufacturing and assembly and testing profit margin. We do outsource a significant portion of our manufacturing requirements to third parties and the amount of our outsourced manufacturing has increased in recent years due to our acquisitions of Microsemi and other companies that outsourceoutsourced all or substantial portions of their manufacturing. We comply with several quality systems, including: ISO9001 (2015 version), IATF16949 (2016 version), AS9100 (2016 version), and TL9000.
We continue to transition products to more advanced process technologies to reduce future manufacturing costs. We believe that our ability to successfully transition to more advanced process technologies is important for us to remain competitive.
Due to the high fixed costs inherent in semiconductor manufacturing, consistently high manufacturing yields have significant positive effects on our gross profit and overall operating results. Our continuous focus on manufacturing productivity has allowed us to maintain excellent manufacturing yields at our facilities. Our manufacturing yields are primarily driven by a comprehensive implementation of statistical process control, extensive employee training and our effective use of our manufacturing facilities and equipment. Maintenance of manufacturing productivity and yields are important factors in the achievement of our operating results. The manufacture of integrated circuits, particularly non-volatile, erasable complementary metal-oxide semiconductor (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 manufacturing 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 or above approximately the current levels.
Historically, we have relied on our ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with relatively short delivery schedules. In order to respond to such requirements, we have historically maintained a significant work-in-process and finished goods inventory.
We market and sell our products worldwide primarily through a network of direct sales personnel and distributors.
Our direct sales force focuses on a wide variety of strategic accounts in three geographical markets: the Americas, Europe and Asia. We currently maintain sales and technical support centers in major metropolitan areas in all three geographic markets. We believe that a strong technical service presence is essential to the continued development of the embedded control market. Many of our client engagement managers (CEMs), embedded system engineers (ESEs),CEMs, ESEs, and sales management have technical degrees or backgrounds and have been previously employed in high technology environments. We believe that the technical and business knowledge of our sales force is a key competitive advantage in the sale of our products. The primary mission of our ESE team is to provide technical assistance to customers and to conduct periodic training sessions for the balance of our sales team. ESEs also frequently conduct technical seminars and workshops in major cities around the world.world or through online webcasts.
Our licensing division has dedicated sales, technology, design, product, test and reliability personnel that support the requirements of our licensees.
Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base. We believe that customers recognize us for our products and brand name and use distributors as an effective supply channel.
We currently compete principally on the basis of the technical innovation and performance of our embedded control products, including the following product characteristics:
We believe that other important competitive factors in the embedded control market include:
We believe that we compete favorably with other companies on all of these factors, but we may be unable to compete successfully in the future, which could harm our business.
We maintain a portfolio of U.S. and foreign patents, expiring on various dates between 2016 and 2035.from 2022 through 2041. We also have numerous additional U.S. and foreign patent applications pending. We do not expect that the expiration of any particular patent will have a material impact on our business. While our intention is to continue to patent our technology and manufacturing processes, we believe that our continued success depends primarily on the technological skills and innovative capabilities of our personnel and our ability to rapidly commercialize new and enhanced products. As with any operating company, the scope and strength of our intellectual property assets, including our pending and existing patents, trademarks, copyrights, and other intellectual property rights may be insufficient to provide meaningful protection or commercial advantage. Moreover, pursuing violations of intellectual property rights on a worldwide basis is a complex challenge involving multinational patent, trademark, copyright and trade secret laws. Further, the laws of particular foreign countries often fail to protect our intellectual property rights to the same extent as the laws of the U.S.
infringement could be avoided. Licensees of our technology may become unable to pay, and have in the past and are currently disputing their obligations to pay us royalties or fees. Litigation, arbitration or other proceedings, which could result in substantial costs and require significant attention from management, mayhas been and is expected to be necessary to enforce our intellectual property rights, or to defend against claimed infringement of the rights of others. The failure to obtain necessary licenses, or the necessity of engaging in defensive litigation,legal proceedings, or any negative results of these proceedings could harm our business.
We must comply with many different federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of certain chemicals and gases used in our manufacturing processes. Our facilities have been designed to comply with these regulations and we believe that our activities are conducted in material compliance with such regulations. Any changes in such regulations or in their enforcement could require us to acquireresult in an increase in capital expenditures such as acquiring costly equipment or to incur other significant expenses to comply with environmental regulations. Any failure by us to adequately control the storage, use, discharge and disposal of regulated substances could result in significant future liabilities.
Increasing public attention has been focused on the environmental impact of electronic manufacturing operations. While we have not experienced any materially adverse effects on our operations from recently adopted environmental regulations, technological changes, or weather, our business and results of operations could suffer if for any reason we fail to control the storage or use of, or to adequately restrict the discharge or disposal of, hazardous substances under present or future environmental regulations.
The following sets forth certain information regarding our executive officers as of April 30, 2016:
Item 1A. RISK FACTORSRisk Factors
Our operating results are impacted by global economic conditions and may fluctuate in the future due to a number of factors that could reduce our net sales and profitability.
Our 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 operating results include:
Our operating results will suffer if we ineffectively utilize our manufacturing capacity or fail to maintain manufacturing yields.
We may not fully realize the anticipated benefits of our completed or future acquisitions or divestitures including our recently completed acquisition of Atmel.divestitures.
We have acquired, and expect in the future to acquire, additional businesses that we believe will complement or augment our existing businesses. On April 4, 2016,In May 2018, we acquired AtmelMicrosemi, which iswas our largest and most complex acquisition ever. In addition, in August 2015, we completed our acquisitionIntegration of Micrel; in July 2014, we completed our acquisition of a controlling interest in ISSC Technologies Corp. (ISSC); in April 2014, we completed our acquisition of Supertex, Inc. (Supertex); and in August 2012, we completed our acquisition of Standard Microsystems Corporation (SMSC). The integration process for our acquisitions is complex and may be complex, costly and time consuming and include unanticipated issues, expenses and liabilities. We may not be able to successfully or profitably integrate, operate, maintain and manage any newly acquired operations or employees. We may not be able to maintain uniform standards, procedures and policies and wepolicies. We may be unable tonot realize the expected synergies and cost savings from the integration. There may be increased risk due to integrating financial reporting and internal control systems. WeIt may have difficulty in developing, manufacturingbe difficult to develop, manufacture and marketingmarket the products of a newly
In addition to acquisitions, we have in the past, and expect in the future, to enter into joint development agreements or other business or strategic relationships with other companies. These transactions are subject to a number of risks similar to those we face with our acquisitions including our ability to realize the expected benefits of any such transaction, to successfully market and sell any products resulting from such transactions or to successfully integrate any technology developed through such transactions.
Our success dependsfailure to comply with federal, state, or international privacy and data protection laws and regulations may materially adversely affect our business, results of operations and financial condition.
We are subject to numerous laws and regulations in the U.S. and internationally regarding privacy and data protection such as the European Union’s (EU) General Data Protection Regulation (GDPR), the U.K. equivalent to the GDPR, the California Consumer Privacy Act, and the California Privacy Rights Act. The scope of these laws and regulations is rapidly evolving, subject to differing interpretations, and may be inconsistent among jurisdictions. Some of these laws create a broad definition of personal information, establish data privacy rights, impose data breach notification requirements, and create potentially severe statutory damages frameworks and private rights of action for certain data breaches. Some of the laws and regulations also place restrictions on our ability to introduce new productscollect, store, use, transmit and process personal information and other data across our business. For example, the GDPR restricts the ability of companies to transfer personal data from the European Economic Area (EEA) to the U.S. and other countries. Further, such laws and regulations have resulted and will continue to result in significantly greater compliance burdens and costs for companies such as us that have employees, customers, and operations in the EEA.
In order to comply with the GDPR, we have relied mainly on the European Commission’s Standard Contractual Clauses (SCCs), for transfers of personal information from the EEA to the U.S. or other countries. However, the Court of Justice of the EU in a timely basis.
Our future operating results depend onJuly 2020 decision (Schrems II) invalidated the EU-U.S. Privacy Shield Framework, and also called for stricter conditions in the use of the SCCs. Following the Schrems II decision, certain data protection authorities in the EU have issued statements advising companies within their jurisdiction not to transfer personal data to the U.S. under the SCCs. At present, there are few, if any, viable alternatives to the SCCs. If we are unable to implement sufficient safeguards to ensure that our transfers of personal information from the EEA are lawful, we may face increased exposure to regulatory actions and substantial fines and injunctions against processing personal information from the EEA. The loss of our ability to lawfully transfer personal data out of the EEA may cause reluctance or refusal by European customers to communicate with us as they are currently, and we may be required to increase our data processing capabilities in the EEA at significant expense. Additionally, other countries outside of the EEA have passed or are considering passing laws requiring local data residency which could increase the cost and complexity of providing our products in those jurisdictions.
Furthermore, the GDPR and the U.K. equivalent of the GDPR expose us to two parallel data protection regimes in Europe, each of which potentially authorizes fines and enforcement actions for certain violations. Substantial fines may be imposed for breaches of data protection requirements, which can be up to 4% of a company’s worldwide revenue or 20 million Euros, whichever is greater. Although the U.K. data protection regime currently permits data transfers from the U.K. to the EEA and other third countries, covered by a European Commission 'adequacy decision' through the continued use of SCCs and binding corporate rules, these laws and regulations are subject to change, and any such changes could have adverse implications for our transfer of personal data from the U.K. to the EEA and other third countries.
While we plan to continue to undertake efforts to conform to current regulatory obligations and evolving best practices, such efforts may be unsuccessful or result in significant costs. We may also experience reluctance, or refusal by European or multi-national customers to continue to provide us with personal data due to the potential risk exposure of personal data transfers and the current data protection obligations imposed on them by applicable data protection laws or by certain data protection authorities. These and any other data privacy laws and their interpretations continue to develop and timely introduce newtheir uncertainty and inconsistency may increase the cost of compliance, cause compliance challenges, restrict our ability to offer products that compete effectively onin certain locations in the basis of price and performance and which address customer requirements. The success of our new product introductions depends on various factors, including, but not limited to:
proper new product selection;
timely completion and introduction of new product designs;
procurement of licenses for intellectual property rights from third parties under commercially reasonable terms;
timely filing and protection of intellectual property rights for new product designs;
availability of development and support tools and collateral literaturesame way that make complex new products easy for engineers to understand and use; and
market acceptance of our customers' end products.
Because our products are complex, we have experienced delays from timebeen, potentially adversely affect certain third-party service providers, or subject us to time in completing new product development. In addition, our new products may not receive or maintain substantial market acceptance. We may be unable to timely design, develop and introduce competitive products,sanctions by data protection regulators, all of which could adversely impact 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.
Our technology licensing business exposes us to various risks.
Our technology licensing business is based on our SuperFlash and other technologies. The success of our licensing business depends on the continued market acceptance of these technologies and on our ability to further develop and enhance such technologies and to introduce new technologies in the future. To be successful, any such technology must be able to be repeatably implemented by licensees, provide satisfactory yield rates, address licensee and customer requirements, and perform competitively. The success of our technology licensing business depends on various other factors, including, but not limited to:
proper identification of licensee requirements;
timely development and introduction of new or enhanced technology;
our ability to protect and enforce our intellectual property rights for our licensed technology;
our ability to limit our liability and indemnification obligations to licensees;
availability of sufficient development and support services to assist licensees in their design and manufacture of products integrating our technology;
availability of foundry licensees with sufficient capacity to support OEM production; and
market acceptance of our customers' end products.
Because our licensed technologies are complex, there may be delays from time to time in developing and enhancing such technologies. There can be no assurance that our existing or any enhanced or new technology will achieve or maintain substantial market acceptance. Our licensees may experience disruptions in production or lower than expected production levels which would adversely affect the revenue that we receive from them. Our technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from intellectual property matters. We could be exposed to substantial liability for claims or damages related to intellectual property matters or indemnification claims. Any claim, with or without merit, could result in significant legal fees and require significant attention from our management. Any of the foregoing issues may adversely impact the success of our licensing business and adversely affect our future operating results.business, financial condition and results of operations.
We may lose sales if our suppliers of raw materials and equipment fail to meet our needs.
Our semiconductor manufacturing operations require raw and processed 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 materials and equipment that meet our standards. The materials and equipment necessary for our business could become more difficult to obtain as worldwide use of semiconductors in product applications increases. Additionally, consolidation in our supply chain due to mergers and acquisitions may reduce the number of suppliers or change the
relationships that we have with our suppliers. This could impair sourcing flexibility or increase costs. 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 or that they will no longer support certain equipment with updates or spare and replacement parts. An interruption of any materials or equipment sources, or the lack of supplier support for a particular piece of equipment, could harm our business.
We are exposed to various risks related to legal proceedings, investigations or claims.
We are currently, and in the future may be, involved in legal proceedings, investigations or claims regarding patent infringement, other intellectual property rights, product failures, our Microsemi acquisition, contracts and other matters. As is typical in the semiconductor industry, we receive notifications from third parties from time to time who believe that we owe them indemnification or other obligations related to claims made against us, our direct or indirect customers, or our licensees. These legal proceedings and claims, even if meritless, have in the past and could in the future result in substantial costs to us and divert our resources.us. If we are not ableunable to resolve a claim,or settle a matter, obtain necessary licenses on commercially reasonable terms, reengineer our products or processes to avoid infringement, provide a cost-effective remedy, or successfully prosecute or defend our position, we could incur uninsured liability in any of them, be required to take an appropriatea charge to operations, be enjoined from selling a material portion of our products or using certain processes, suffer a reduction or elimination in the value of our inventories, and our business, financial condition or results of operations could be harmed.
It is also possible that from time to time we may be subject to claims related to the manufacture, performance, or use of our products. These claims may be due to injuries, economic damage or environmental exposures related to manufacturing, a product's nonconformance to our specifications or our customer’s specifications, agreed upon with the customer, changes in our manufacturing processes, or unexpected customer system issues due to the integration of our products or insufficient design or testing by our customers. We could incur significant expenses related to such matters, including, but not limited to:
•costs related to writing off the value of our inventory of nonconforming products;
•recalling nonconforming products;
•providing support services, product replacements, or modifications to products and the defense of such claims;
•diversion of resources from other projects;
•lost revenue or a delay in the recognition of revenue due to cancellation of orders or unpaid receivables;
•customer imposed fines or penalties for failure to meet contractual requirements; and
•a requirement to pay damages or penalties.
Because the systems into which our products are integrated have a higher cost of goods than the products we sell, the expenses and damages we are asked to pay may be significantly higher than the salesrevenue and profits we received from the products involved.received. While we specifically exclude consequential damages in our standard terms and conditions, certain of our contracts may not exclude such liabilities. Further, our ability to avoid such liabilities may be limited by applicable law. We do have liability insurance which covers certain damages arising out of product defects, but we do not expect that insurance will cover all claims or be of a sufficient amount to fully protect against such claims. Costs or paymentsPayments we may make in connection with these customer claims may adversely affect the results of our operations.
Further, we sell to customers in industries such as automotive, aerospace, defense, safety, security, and medical, where failure of the systems in which our products are integratedapplication could cause damage to property or persons. We may be subject to claims if our products, or the integration of our products, cause system failures. We will face increased exposure to claims if there are substantial increases in either the volume of our sales into these applications or the frequency of system failures integrating our products.
Our contractual relationships with our customers expose us to risks and liabilities.
With the exception of orders placed under our Preferred Supply Program, we do not typically enter into long-term contracts with our non-distributor customers, and therefore we cannot be certain about future order levels from our customers. When we do enter into customer contracts (other than under our Preferred Supply Program), the contract is generally cancelable based on standard terms and conditions. Under our Preferred Supply Program, customers may cancel contracts in the event of price increases. While we had approximately 124,000 customers, and our ten largest direct customers accounted for approximately 12% of our total revenue in fiscal 2022, and five of our top ten direct customers are contract manufacturers that perform manufacturing services for many customers, cancellation of customer contracts could have an adverse impact on our revenue and profits. For example, due to uncertainty related to the COVID-19 pandemic, we experienced an increase in order cancellations and requests to reschedule deliveries to future dates in the first quarter of fiscal 2021.
Certain customer contracts differ from our standard terms of sale. For some of the markets that we sell into, such as the automotive and personal computer markets, our customers may have negotiating leverage over us as a result of their market size. For example, under certain contracts we have committed to supply products on scheduled delivery dates, or extended our obligations for liabilities such as warranties or indemnification for quality issues or intellectual property infringement. If we are unable to supply the customer as contractually required, the customer may incur additional production costs, lost revenues due to delays in their manufacturing schedule, or quality-related issues. We may be liable for costs and damages associated with customer claims, and we may be obligated to defend the customer against claims of intellectual property infringement and pay associated legal fees. While we try to minimize the number of contracts which contain such provisions, manage the risks of such liabilities, and set caps on our liability exposure, sometimes we are unable to do so. In order to win important designs, avoid losing business to competitors, maintain existing business, or be permitted to bid on new business, we have, and may in the future, have to agree to uncapped liability for such items as intellectual property infringement or product failure. This exposes us to risk of liability far exceeding the purchase price of the products sold under such contracts, the lifetime revenues we receive under such contracts, or potential consequential damages. Further, where we do not have negotiated customer contracts, our customer's order terms may govern the transaction and contain terms unfavorable to us. These risks could result in a material adverse impact on our results of operations and financial condition.
Failure to adequately protect our intellectual property could result in lost revenue or market opportunities.
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 technology 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 and new patents, trademarks and copyrights that issueare issued may not have sufficient scope or strength to provide meaningful protection or commercial advantage to us. We may be subject to, or may ourselves initiate, interference proceedings in the U.S. Patent and Trademark Office, patent offices of a foreign country or U.S. or foreign courts, 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 U.S. Infringement of our intellectual property rights by a third partythird-party could result in
uncompensated lost market and revenue opportunities for us. Although we continue to vigorously and aggressively defend and protect our intellectual property on a worldwide basis, there can be no assurance that we will be successful in our endeavors.successful.
Risks Related to Taxation, Laws and Regulations
Our operatingreported financial results may be adversely impacted if economic conditions impact the financial viability of our licensees, customers, distributors,affected by new accounting pronouncements or suppliers.changes in existing accounting standards and practices.
We regularly reviewprepare our financial statements in conformity with U.S. GAAP. These accounting principles are subject to interpretation or changes by the financial performanceFASB and the SEC. New accounting pronouncements and interpretations of our licensees, customers, distributorsaccounting standards and suppliers. However, any downturnpractices have occurred in global economic conditions may adversely impact the financial viability of our licensees, customers, distributors or suppliers. The financial failure of a large licensee, customer or distributor, an important supplier,past and are expected to occur in the future. New accounting pronouncements or a group thereof, couldchange in the interpretation of accounting standards or practices may have an adverse impacta significant effect on our operatingreported financial results and may affect our reporting of transactions completed before the change is effective.
Regulatory authorities in jurisdictions into or from which we ship our products or import supplies could result inlevy fines, restrict or delay our not being ableability to collect our accounts receivable balances, higher reserves for doubtful accounts, write-offs for accounts receivable, and higher operatingexport products or import supplies, or increase costs as a percentageassociated with the manufacture or transfer of net sales.products.
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 substantialA significant portion of our net sales. During fiscal 2016, approximately 84%sales require export and import activities. Our U.S.-manufactured products or products based on U.S. technology are subject to laws and regulations on international trade, including but not limited to the Foreign Corrupt Practices Act, EARs, International Traffic in Arms Regulations and trade sanctions against embargoed countries and denied entities, including those administered by the U.S. Department of our net sales were made to foreign customers, including 30% in China. During fiscal 2015, approximately 84%the Treasury, Office of our net sales were made to foreign customers, including 28% in China.
A strong position in the Chinese market is a key component of our global growth strategy. The market for integrated circuit products in China is highly competitive, and both international and domestic competitorsForeign Assets Control. Licenses or license exceptions are aggressively seeking to increase their market share. Increased competition or economic weakness in the China market may make it difficult for us to achieve our desired sales volumes in China. In particular, economic conditions in China remain uncertain and we are unable to predict whether such uncertainty will continue or worsen in future periods.
We deliver products to our European customers through our facilities in England. The UK’s EU referendum on June 23, 2016 (called "Brexit" in the press) is to determine whether the UK will leave the EU. If the UK does leave the EU, we may lose our ability to import and export products tax-free throughout Europe. As a result, it may increase the costs to Microchiprequired for the import and saleshipment of our products to our customers,certain countries. Our inability to timely obtain a license, for any reason, including a delay in license processing due to a federal government shutdown like that which may resultoccurred in 2018, could cause a decreasedelay in sales to certain of our customers. In order to avoid these costs, we may have to consider alternate methods for delivering product into Europe. In implementing these changes, we may experience a disruption in operations or product shipments.
We purchase a substantial portion of our raw materials and equipment from foreign suppliers. In addition, we own product assembly and testing facilities near Bangkok, Thailand,scheduled shipments which has experienced periods of political instability in the past. Substantially all of our finished goods inventory is maintained in Thailand. From time to time, Thailand has also experienced periods of severe flooding. There can be no assurance that any future flooding or political instability in Thailand would notcould have a material adverse impact on our operations. We use various foundriesrevenue within the quarter of a shutdown, and other foreign contractors forin following quarters depending on the extent that license processing is delayed. Further, determination by a significant portiongovernment that we have failed to comply with trade regulations or anti-bribery regulations can result in penalties which may include denial of export privileges, fines, penalties, and seizure of products, any of which could have a material adverse effect on our business, sales and earnings. A change in laws and regulations could restrict our ability to transfer product to previously permitted countries, customers, distributors or others. For example, in February 2022, the U.S. began implementing widescale sanctions against Russia due to Russia's invasion of the Ukraine. Sanctions against Belarus and certain Ukraine regions were later implemented. Because the actions by Russia against the Ukraine are in conflict with our Guiding Values, Microchip chose to cease shipments into Russia and Belarus, and we will continue to comply with applicable U.S. sanctions regarding Ukraine. While sales of our assemblyproducts into these regions, and testing and wafer fabrication requirements.
Our reliance on foreign operations, foreign suppliers, maintenance of substantially all of our finished goods inventoryto customers that sell into these regions, have been negatively impacted, at foreign locations and significant foreign sales exposes us to foreign political and economic risks, including, butthis time, we have not limited to:
political, social and economic instability;
economic uncertainty in the worldwide markets served by us;
trade restrictions and changes in tariffs;
import and export license requirements and restrictions;
changes in rules and laws related to taxes, environmental, health and safety, technical standards and consumer protection in various jurisdictions;
currency fluctuations and foreign exchange regulations;
difficulties in staffing and managing international operations;
employment regulations;
disruptions in international transport or delivery;
public health conditions;
difficulties in collecting receivables and longer payment cycles; and
potentially adverse tax consequences.
If any of these risks materialize, or are worse than we anticipate, our sales could decrease and our operating results could suffer.
We do not typically have long-term contracts with our customers, but where we do, certain terms of such contracts expose us to risks and liabilities.
We do not typically enter into long-term contracts with our customers and we cannot be certain about future order levels from our customers. When we do enter into customer contracts, the contract is generally cancelable at the convenience of the customer. Even though we had approximately 93,000 customers and our ten largest direct customers made up approximately 10% of our total revenue for fiscal 2016, cancellation of customer contracts could have anexperienced a material adverse impact on our revenuerevenue. An additional example occurred in April 2018, when the U.S. Commerce Department banned U.S. companies from selling products or transferring technology to ZTE, a Chinese company, and profits.
We have entered into contracts with certain customers that differsubsidiaries. This ban was lifted in July 2018. In fiscal 2020, when the U.S. Commerce Department banned U.S. companies from our standard terms of sale. Further,selling products or transferring technology to certain Chinese companies, including Huawei and certain subsidiaries. In fiscal 2020, the U.S. Federal Acquisition Regulation prohibited U.S. governmental agencies from buying equipment using covered telecommunications equipment as a resultsubstantial component or critical technology where the technology came from certain Chinese companies. In July 2020, this was expanded to prohibit U.S. governmental agencies from entering into a contract with any company that uses covered telecommunications equipment whether or not the Chinese technology is related to the procurement. Effective June 2020, amendments to the EAR regarding prohibitions of sales of items with a “military end use” into China, Russia, and Venezuela, and Belarus effective March 2021, and elimination of an EAR License Exception, apply to more of our acquisitions, we may inherit certain customer contracts that differ from our standard terms of sale. For severalproducts than the previous regulations. Any of the significant markets that we sell into, such as the automotive and personal computer markets,foregoing changes could adversely impact our current or potential customers may possess significant leverage over us in negotiating the terms and conditions of supply as a result of their market size and position. For example, under certain contracts we may commit to supply specific quantities of products on scheduled delivery dates, or agree to extend our obligations for certain liabilities such as warranties or indemnification for quality issues or claims of intellectual property infringement. If we are unable to supply the customer as required under the contract, the customer may incur additional productionoperational costs lost revenues due to subsequent delaysthe administrative impacts of complying with these regulations, and may limit those with whom we conduct business. Any one or more of these sanctions, future sanctions, a change in their own manufacturing schedule,laws or quality-related issues. We may be liable for the customer's costs, expenses and damages associated with their claims and we may be obligatedregulations, or a prohibition on shipment of our products or transfer of our technology to defend the customer against claims of intellectual property infringement and pay the associated legal fees. While we try to minimize the number of contracts which contain such provisions, manage the risks underlying such liabilities, and set capssignificant customers could have a material adverse effect on our liability exposure, sometimes we arebusiness, financial condition and results of operations.
The U.S. and other countries have levied tariffs and taxes on certain goods, implemented trade restrictions, and introduced national security protection policies. Trade tensions between the U.S. and China, which escalated in 2018, have
continued and include the U.S. increasing tariffs on Chinese origin goods and China increasing tariffs on U.S. origin goods. We took steps to mitigate the costs of these tariffs on our business by making adjustments in operations and supply. Although these tariff increases did not able to do so. In order to win important designs, avoid losing business to competitors, maintain existing business, or be permitted to bid on new business, we have been, and may in the future be, forced to agree to uncapped liability for such items as intellectual property infringement, product failure, or confidentiality. Such provisions expose us to risk of liability far exceeding the purchase price of the products we sell under such contracts, the lifetime revenues we receive from such products, or various forms of potential consequential damages. These significant additional risks could result in a material adverse impact on our operating costs in fiscal 2019 or fiscal 2020, they did reduce demand for our products during fiscal 2019 and fiscal 2020. Increased tariffs on our customers' products could adversely impact their sales, and increased tariffs on our products in comparison to those of our competitors could each result in lower demand for our products.
Further changes in trade or national security protection policy, tariffs, additional taxes, restrictions on exports or other trade barriers, may limit our ability to produce products, increase our selling and/or manufacturing costs, decrease margins, reduce the competitiveness of our products, or reduce our ability to sell products, which could have a material adverse effect on our business, results of operations or financial conditions.
The outcome of future examinations of our income tax returns could have an adverse effect on our results of operations.
We are subject to examination of our U.S. and certain foreign income tax returns for fiscal 2007 and later. We regularly assess the likelihood of adverse outcomes of these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from current or future examinations. There can be no assurance that the final determination of any of these or any future examinations will not have an adverse effect on our effective tax rates, financial position and results of operations.
Exposure to greater than anticipated income tax liabilities, changes in tax rules and regulations, changes in the interpretation of tax rules and regulations, or unfavorable assessments from tax audits could affect our effective tax rates, financial condition and results of operations.
We are a U.S.-based multinational company subject to tax in many U.S. and foreign jurisdictions. Our income tax obligations could be affected by many factors, including changes to our operating structure, intercompany arrangements and tax planning strategies.
Our income tax expense is computed based on tax rates at the time of the respective financial period. Our future effective tax rates, financial condition and results from operations could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in the tax rules and regulations or the interpretation of tax rules and regulations in the jurisdictions in which we do business or by changes in the valuation of our deferred tax assets.
The Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Shifting Project and is expected to continue to issue guidelines and proposals that may change aspects of the existing framework under which our tax obligations are determined in many of the countries where we do business. Similarly, the European Commission and several countries have issued proposals that would change aspects of the current tax framework under which we are taxed. These proposals include changes to the existing income tax framework, possibilities of a global minimum tax, and proposals to change or impose new types of non-income taxes, including taxes based on a percentage of revenue.
Our business, financial condition and operating results may be adversely impacted by policies implemented globally by the current or future administrations.
The current administration in the U.S. and administrations in other global jurisdictions in which we operate, have indicated support for significant legislative and policy changes in areas including but not limited to tax, trade, labor, and the environment. If implemented, these changes could increase our effective tax rate, and increase our selling and/or manufacturing costs, which could have a material adverse effect on our business, results of operations or financial conditions. Changes in tax policy, trade regulations or other matters, and any uncertainty surrounding the scope or timing of such changes, could negatively impact the stock market, and reduce the trading price of our stock. For example, in February 2022, the U.S. began implementing widescale sanctions against Russia due to Russia's invasion of the Ukraine. Sanctions against Belarus and certain Ukraine regions were later implemented. Because the actions by Russia against the Ukraine are in conflict with our Guiding Values, Microchip chose to cease shipments into Russia and Belarus, and we will continue to comply with applicable U.S. sanctions regarding Ukraine. While sales of our products into these regions, and to customers that sell into these regions, have been negatively impacted, at this time, we have not experienced a material adverse impact on our revenue. Retaliatory acts by Russia in response to the sanctions could include cyber attacks, sanctions, or other actions that could disrupt the economy. As a result of the foregoing risks or similar risks, the imposition of sanctions could have a material adverse effect on our business, results of operations or financial condition.
We are subject to stringent environmental and other regulations, which may force us to incur significant expenses.
We must attractcomply with federal, state, local and retain qualified personnelforeign governmental regulations related to be successful,the use, storage, discharge and competitiondisposal of hazardous substances used in our products and manufacturing processes. Our failure to comply, or the failure of entities that we have acquired over time to have complied, with regulations could result in significant fines, liability for qualified personnel can be intense.
clean-up, suspension of production, cessation of operations or future liabilities. Such regulations have required us in the past, and could require us in the future, to incur significant expenses to comply with such regulations. Our success depends uponfailure to control the efforts and abilitiesuse of, or adequately restrict the discharge of, hazardous substances could impact the health of our senior management, engineering, manufacturingemployees and others and could impact our ability to operate. Such failure could also restrict our ability to ship certain products to certain countries, require us to modify our logistics, or require us to incur other personnel. The competitionsignificant costs and expenses. Environmental laws continue to expand with a focus on reducing or eliminating hazardous substances in electronic products and shipping materials. Future environmental regulations could require us to reengineer certain of our existing products and may make it more expensive for qualified engineeringus to manufacture, sell and management personnel canship our products. In addition, the number and complexity of laws focused on the energy efficiency of electronic products, the recycling of electronic products, and the reduction in the amount and the recycling of packing materials have expanded significantly. It may be intense.difficult for us to timely comply with these laws and we may have insufficient quantities of compliant products to meet customers' needs, thereby adversely impacting our sales and profitability. We may be unsuccessful in retaininghave to write off inventory if we hold unsaleable inventory as a result of changes to regulations. We expect these risks to continue. These requirements may increase our existing key personnel or in attractingown costs, as well as those passed on to us by our supply chain.
Climate change regulations and retaining additional key personnelsustained adverse climate change pose risks 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. The lossresults of operations.
Climate change regulations or any inability to attract personnel, even if not key personnel, if experienced in sufficient numbers could harm our business. Wevoluntary actions we may have no employment agreements with any membertaken as part of our senior management team. Environmental, Social, and Governance initiatives could require us to limit emissions, change manufacturing processes, substitute materials which may cost more or be less available, fund offset projects, obtain new permits or undertake other costly activities. Failure to obtain required permits could result in fines, suspension or cessation of production. Restrictions on emissions could result in significant costs such as higher energy costs, carbon taxes, and emission cap and trade programs. The cost of compliance with such regulations could restrict our manufacturing operations, increase our costs, and have an adverse effect on our operating results.
Business interruptionsThe SEC has recently proposed a rule entitled Enhancement and Standardization of Climate-Related Disclosures for Investors. While the proposed rule is not yet in effect and is subject to change as a result of the SEC comment process, if it were to go in effect in its current form, we would incur significant additional costs of compliance due to the need for expanded data collection, analysis, and certification. Further, certain elements of the proposed rule, such as mandatory third-party verification of emissions, may be difficult to comply with in the proposed required timeframe as there may be an insufficient number of qualified third-party verification entities to meet demand.
Sustained adverse change in climate could have a direct adverse economic impact on us, such as utility shortages, and higher costs of utilities. Certain of our operations are located in arid or the operations oftropical regions, which some experts believe may become vulnerable to fires, storms, severe floods and droughts. While our key vendors, subcontractors, licensees or customers, whether duebusiness recovery plans are intended to allow us to recover from natural disasters or other disruptive events, our plans may not protect us from all events.
Customer demands and regulations related to conflict-free minerals may force us to incur additional expenses.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012, the SEC released investigation, and disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries. We filed a Form SD with the SEC regarding such matters on May 28, 2021. Other countries are considering similar regulations. If we cannot certify that our supply chain is free from the risk of irresponsible sourcing, customers may demand that we change the sourcing of materials used in the manufacture of our products, even if the costs for compliant materials significantly increases or availability is limited. If we change materials or suppliers, there will likely be costs associated with qualifying new suppliers and production capacity and quality could be negatively impacted. Our relationships with customers and suppliers may be adversely affected if we are unable to certify that our products are free from the risk of irresponsible sourcing. We have incurred, and expect in the future to incur, additional costs associated with complying with these disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. We may be unable to satisfy customers who require that all of the components of our products be certified as conflict free in a materially different manner than advocated by the Responsible Minerals Initiative or the Dodd-Frank Wall Street Reform and Consumer Protection Act. If we are unable to meet customer requirements, customers may disqualify us as a supplier and we may have to write off inventory if it cannot be sold.
In addition to concerns over “conflict” minerals mined from the Democratic Republic of Congo, our customers may require that other minerals and substances used within our supply chain be evaluated and reported on. An increase in reporting obligations will increase associated operating costs. This could have negative effects on our overall operating profits.
A requirement to fund our foreign pension plans could negatively affect our cash position and operating capital.
In connection with our acquisitions of Microsemi and Atmel, we assumed pension plans that cover certain French and German employees. Most of these plans are unfunded in compliance with statutory requirements, and we have no immediate intention of funding these plans. The projected benefit obligation totaled $74.6 million at March 31, 2022. Benefits are paid when amounts become due. We expect to pay approximately $1.6 million in fiscal 2023 for benefits earned. Should regulations require funding of these plans in the future, it could negatively affect our cash position and operating capital.
Risks Related to Capitalization and Financial Markets
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 recent 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, but not limited to:
•global economic and financial uncertainty due to the COVID-19 pandemic or other factors;
•quarterly variations in our operating results or the operating results of other technology companies;
•changes in our financial guidance or our failure to meet such guidance;
•changes in analysts' estimates of our financial performance or buy/sell recommendations;
•general conditions in the semiconductor industry;
•the amount and timing of repurchases of shares of our common stock;
•our ability to realize the expected benefits of our completed or future acquisitions; and
•actual or anticipated announcements of technical innovations or new products by us or our competitors.
In addition, the stock market has recently and in the past experienced significant price and volume fluctuations that have affected the market prices for many companies and that often have been unrelated to their operating performance. These broad market fluctuations and other factors have harmed and may harm the market price of our business.common stock. The foregoing factors could also cause the market price of our Convertible Debt to decline or fluctuate substantially.
OperationsThe amount and timing of our share repurchases may fluctuate in response to a variety of factors.
The amount, timing, and execution of repurchases of shares of our common stock may fluctuate based on the share price of our common stock, general business and market conditions, tax regulations impacting share repurchases and other factors including our operating results, level of cash flow, capital expenditures and dividend payments. Although our Board of Directors has authorized share repurchases of up to $4.00 billion, the authorization does not obligate us to acquire any particular amount of shares. We cannot guarantee that our share repurchase authorization will be fully consummated or that it will enhance long-term shareholder value. The repurchase authorization may be suspended or discontinued at any time at our discretion and may affect the trading price of our facilities, atcommon stock and increase volatility.
Our financial condition and results of operations could be adversely impacted if we do not effectively manage current or future debt.
As of March 31, 2022, the facilities of anyprincipal amount of our wafer fabrication or assembly and test subcontractors, or at anyoutstanding indebtedness was $7.84 billion. As a result of our significant vendorsacquisition of Microsemi, we have substantially more debt than we had prior to May 2018. At March 31, 2022, we had $1.40 billion in outstanding borrowings under our Revolving Credit Facility which provides up to $2.75 billion of revolving loan commitments that terminate in 2026. At March 31, 2022, we had $5.60 billion in aggregate principal amount of Senior Notes and $838.1 million in aggregate principal of Convertible Debt outstanding.
Our maintenance of substantial levels of debt could adversely affect our ability to take advantage of opportunities and could adversely affect our financial condition and results of operations. We may need or customers may be disrupted for reasons beyonddesire to refinance our control. These reasons may include work stoppages, power loss, incidents of terrorismcurrent or security risk, political instability, public health issues, telecommunications, transportation or other infrastructure failure, radioactive contamination, fire, earthquake, floods, volcanic eruptions or other natural disasters. We have taken steps to mitigate the impact of some of these events should they occur; however, we cannot be certain that our actions will be effective to avoid a significant impact on our business in the event of a disaster or other business interruption.
In particular, Thailand has experienced periods of severe flooding in recent years. While our facilities in Thailand have continued to operate normally,future debt and there can be no assurance that any future flooding in Thailand would not havewe will be able to do so on reasonable terms, if at all.
Servicing our debt requires a material adverse impact on our operations. If operations at anysignificant amount of our facilities, or our subcontractors' facilities are interrupted,cash, we may not be ablehave sufficient cash to shift productionfund payments and adverse changes in our credit ratings could increase our borrowing costs and adversely affect our ability to access the debt markets.
Our ability to make scheduled payments of principal, interest, or to refinance our indebtedness, including our outstanding Convertible Debt and Senior Notes, depends on our future performance, which is subject to economic, competitive and other facilities on a timely basis,factors including those related to the COVID-19 pandemic. Our business may not continue to generate sufficient cash flow to service our debt and to fund capital expenditures, dividend payments, share repurchases or acquisitions. If we are unable to generate such cash flow, we may needbe required to spend significant amountsundertake alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on onerous or highly dilutive terms. Our ability to repair or replacerefinance our facilitiesindebtedness will depend on the capital markets and equipment. Ifour financial condition at such time. Our senior secured notes are rated by certain major credit rating agencies. These credit ratings impact our cost of borrowing and our ability to access the capital markets and are based on our financial performance and financial metrics including debt levels. There is no assurance that we experienced business interruptions, we would likely experience delays in shipmentswill maintain our current credit ratings. A downgrade of products to our customers and alternate sources for production may be unavailable on acceptable terms. Thiscredit rating by a major credit rating agency could result in reduced revenuesincreased borrowing costs and profitscould adversely affect our ability to access the debt markets to refinance our existing debt or finance future debt.
Conversion of our Convertible Debt will dilute the ownership interest of our existing stockholders.
The conversion of some or all of our outstanding Convertible Debt will dilute the ownership interest of our existing stockholders to the extent we deliver common stock upon conversion of such debt. Following our irrevocable settlement election made on April 1, 2022, upon conversion, we are required to satisfy our conversion obligation with respect to such converted Convertible Debt by delivering cash equal to the principal amount of such converted Convertible Debt and the cancellationcash and shares of orderscommon stock or loss of customers. Although we maintain business interruption insurance, such insurance will likely 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.
Additionally, operationscombination, at our customers and licensees mayoption, with respect to any conversion value in excess thereof (i.e., the conversion spread). There would be disruptedno adjustment to the numerator in the net income per common share computation for a numberthe cash settled portion of reasons. In the eventConvertible Debt as that portion of customer disruptions,the debt instrument will always be settled in cash. The conversion spread will be included in the denominator for the computation of diluted net income per common share. Any sales in the public market of any common stock issuable upon conversion of our productsConvertible Debt could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Debt may decline andencourage short selling by market participants because the conversion of the Convertible Debt could be used to satisfy short positions, or anticipated conversion of the Convertible Debt into shares of our revenue, profitability and financial conditioncommon stock could suffer. Likewise, ifdepress the price of our licensees are unable to manufacture and ship products incorporating our technology, or if there is a decrease in product demand due to a business disruption, our royalty revenue may decline as our licenses are based on per unit royalties.common stock.
Fluctuations in foreign currency exchange rates could adversely impact our operating results.
We use forward currency exchange contracts in an attempt to reduce the adverse earnings impact from the effect of exchange rate fluctuations on our non-U.S. dollar net balance sheet exposures. Nevertheless, in periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in which we transact business, the value of our non-U.S. dollar transactions can have an adverse effect on our results of operations and financial condition. In particular, in periods when the value of a foreignnon-U.S. currency significantly declines in value in relationrelative to the U.S. dollar, customers transacting in that foreign currency may find it more difficultbe unable to fulfill their previously committed contractual obligations or to undertake new obligations to make payments or purchase products. In periods when the U.S. dollar isdeclines significantly declining in relationrelative to the British pound, Euro, and Thai baht and Taiwan dollar, the operational costs in our European and Thailand subsidiaries are adversely affected. Over the past several months, the U.S. dollar has declined slightly against the Euro and other major currencies. Although our business has not been materially adversely impacted by such changerecent changes in the value of the U.S. dollar, there can be no assurance as to the future impact that any weakness or strength in the strength of theU.S. dollar will have on our business or results of operations.
Interruptions in our information technology systems, or improper handling of data, could adversely affect our business.
We rely on the efficient and uninterrupted operation of complex information technology systems and networks to operate our business. Any significant disruption to our systems or networks, including, but not limited to, new system implementations, computer viruses, security breaches, facility issues, natural disasters, terrorism, war, telecommunication failures or energy blackouts could have a material adverse impact on our operations, sales and operating results. Such disruption could result in a loss of our intellectual property or the release of sensitive competitive information or supplier, customer or employee personal data. Any loss of such information could harm our competitive position, result in a loss of customer confidence, and cause us to incur significant costs to remedy the damages caused by any such disruptions or security breaches. Additionally, any failure to properly manage the collection, handling, transfer or disposal of personal data of employees and customers may result in regulatory penalties, enforcement actions, remediation obligations, litigation, fines and other sanctions.
From time to time, we have experienced verifiable attacks on our data, attempts to breach our security and attempts to introduce malicious software into our IT systems; however, such attacks have not previously resulted in any material damage to us. Were future attacks successful, we may be unaware of the incident, its magnitude, or its effects until significant harm is done. In recent years, we have implemented improvements to our protective measures which are not limited to the following: firewalls, antivirus measures, patches, log monitors, routine backups with offsite retention of storage media, system audits, data partitioning and routine password modifications. There can be no assurance that such system improvements will be sufficient to prevent or limit the damage from any future cyber attacks or disruptions. Any such attack or disruption could result in additional costs related to rebuilding of our internal systems, defending litigation, responding to regulatory actions, or paying damages. Such attacks or disruptions could have a material adverse impact on our business, operations and financial results.
Third-party service providers, such as wafer foundries, assembly and test contractors, distributors, credit card processors and other vendors have access to certain portions of our and our customers' sensitive data. In the event that these service providers do not properly safeguard the data that they hold, security breaches and loss of data could result. Any such loss of data by our third-party service providers could negatively impact our business, operations and financial results, as well as our relationship with our customers.
The occurrence of events for which we are self-insured, or which exceed our insurance limits, may adversely affect our profitability and liquidity.
We have insurance contracts with independent insurance companies related to many different types of risk; however, we self-insure for some potentially significant risks and obligations. In these circumstances, we believe that it is more cost effective for us to self-insure certain risks than to pay the high premium costs. The risks and exposures that we self-insure include, but are not limited to certain property, product defects, employment risks, environmental matters, political risks, and intellectual property matters. Should there be a loss or adverse judgment or other decision in an area for which we are self-insured, then our financial condition, results of operations and liquidity may be adversely affected.
We are subject to stringent environmental and other regulations, which may force us to incur significant expenses.
We must comply with many federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous substances used in our products and manufacturing processes. Our failure to comply with applicable regulations could result in fines, suspension of production, cessation of operations or future liabilities. Such environmental regulations have required us in the past, and could require us in the future to buy costly equipment or to incur significant expenses to comply with such regulations. Our failure to control the use of, or adequately restrict the discharge of, hazardous substances could impact the health of our employees and others and could impact our ability to operate. Such failure could also restrict our ability to ship certain products to certain countries, require us to modify our operations logistics, or require us to incur other significant costs and expenses. There is a continuing expansion in environmental laws with a focus on reducing or eliminating hazardous substances and substances of high concern in electronic products and shipping materials. These and other future environmental regulations could require us to reengineer certain of our existing products and may make it more expensive for us to manufacture, sell and ship our products. In addition, the number and complexity of laws focused on the energy efficiency of electronic products and accessories, the recycling of electronic products, and the reduction in the quantity and the recycling of packing materials have expanded significantly. It may be difficult for us to timely comply with these laws and we may not have sufficient quantities of compliant products to meet customers' needs, thereby adversely impacting our sales and profitability. We may also have to write off inventory in the event that we hold unsaleable inventory as a result of changes to regulations or customer requirements. We expect these risks and trends to continue. In addition, we anticipate increased customer requirements to meet voluntary criteria related to the reduction or elimination of substances of high concern in our products, energy efficiency measures, and supplier practices associated with sourcing and manufacturing. These requirements may increase our own costs, as well as those passed on to us by our supply chain.
Customer demands for us to implement business practices that are more stringent than existing legal requirements may reduce our revenue opportunities or cause us to incur higher costs.
Some of our customers and potential customers are requiring that we implement operating practices that are more stringent than what is required by applicable laws with respect to workplace and labor requirements, the type of materials we use in our products, environmental matters or other items. To comply with such requirements, we may have to pass these same operating practices on to our suppliers. Our suppliers may refuse to implement these operating practices, or may charge us more for complying with them. The cost to implement such practices may cause us to incur higher costs and reduce our profitability, and if we choose not to implement such practices, such customers may disqualify us as a supplier, resulting in decreased revenue opportunities. Developing, administering, monitoring and auditing these customer-requested practices at our own sites and those in our supply chain will increase our costs and may require that we hire more personnel.
Potential U.S. tax legislation regarding our foreign earnings could materially and adversely impact our business and financial results.
Currently, a majority of our revenue is generated from customers located outside the U.S., and a substantial portion of our assets, including employees, are located outside of the U.S. Present U.S. income taxes and foreign withholding taxes have not been provided on undistributed earnings for certain of our non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. In recent years, there have been a number of initiatives proposed by the Obama administration and members of Congress regarding the tax treatment of such undistributed earnings. If adopted, certain of these initiatives would substantially reduce our ability to defer U.S. taxes including repealing the deferral of U.S. taxation of foreign earnings, eliminating utilization of or substantially reducing our ability to claim foreign tax credits, and eliminating various tax deductions until foreign earnings are repatriated to the U.S. Changes in tax law such as these proposals could have a material adverse impact on our financial position and results of operations.
Customer demands and new regulations related to conflict-free minerals may force us to incur additional expenses.
As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012, the SEC released investigation, disclosure and reporting requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries and which are necessary to the functionality or production of products. We filed a report on Form SD with the SEC regarding such matters on June 1, 2015. Other countries are considering similar regulations. If we cannot certify that we are using conflict-free minerals, customers may demand that we change the sourcing of minerals and other materials used in the manufacture of our products, even if the costs for compliant minerals and materials significantly increases and availability is limited. If we make changes to materials or suppliers, there will likely be costs associated with qualifying new suppliers and production capacity and quality could be negatively impacted. Our relationships with customers and suppliers may be adversely affected if we are unable to certify that our products are "conflict-free." We have incurred, and
expect in the future to incur, additional costs associated with complying with these new disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict free in a materially different manner than advocated by the Conflict Free Smelter Initiative or the Dodd-Frank Wall Street Reform and Consumer Protection Act. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier and we may have to write off inventory in the event that it cannot be sold.
Regulatory authorities in jurisdictions into which we ship our products could levy fines or restrict our ability to export products.
A significant portion of our sales are made outside of the U.S. through the exporting and re-exporting of products. In addition to local jurisdictions' export regulations, our U.S.-manufactured products or products based on U.S. technology are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the Foreign Corrupt Practices Act, Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR) and trade sanctions against embargoed countries and destinations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC). Licenses or proper license exceptions are required for the shipment of our products to certain countries. A determination by the U.S. or foreign government that we have failed to comply with these or other export regulations or anti-bribery regulations can result in penalties which may include denial of export privileges, fines, civil or criminal penalties, and seizure of products. Such penalties could have a material adverse effect on our business, sales and earnings. Further, a change in these laws and regulations could restrict our ability to export to previously permitted countries, customers, distributors or other third parties. Any one or more of these sanctions or a change in laws or regulations could have a material adverse effect on our business, financial condition and results of operations.
The outcome of currently ongoing and future examinations of our income tax returns by the IRS could have an adverse effect on our results of operations.
We are subject to examination of our income tax returns by the IRS and other tax authorities for fiscal 2011 and later. We are currently under IRS audit for fiscal 2011 and fiscal 2012. We are subject to certain income tax examinations in foreign jurisdictions for fiscal 2008 and later. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuing examinations will not have an adverse effect on our future operating results.
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, but not limited to:
quarterly variations in our operating results or the operating results of other technology companies;
general conditions in the semiconductor industry;
global economic and financial conditions;
changes in our financial guidance or our failure to meet such guidance;
changes in analysts' estimates of our financial performance or buy/sell recommendations;
any acquisitions we pursue or complete (including our recent acquisition of Atmel); and
actual or anticipated announcements of technical innovations or new products by us or our competitors.
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for many companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations and other factors have harmed and may harm the market price of our common stock. Some or all of the foregoing factors could also cause the market price of our convertible debentures to decline or fluctuate substantially.
As a result of our acquisition activity, our goodwill and intangible assets have increased significantly in recent years and we may in the future incur impairments to goodwill or long-lived assets.
When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. As of March 31, 2016, we had goodwill of $1,012.7 million and net intangible assets of $606.3 million. We review our long-lived assets, including goodwill
and other intangible assets, for impairment annually in the fourth fiscal quarter or whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Factors that may be considered in assessing whether goodwill or intangible assets may not be recoverable include a decline in our stock price or market capitalization, reduced estimates of future cash flows and slower growth rates in our industry. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. Because we operate in highly competitive environments, projections of our future operating results and cash flows may vary significantly from our actual results. No goodwill or material long-lived asset impairment charges were recorded in fiscal 2016 or fiscal 2015. However, if in future periods, we determine that our long-lived assets, including goodwill or intangible assets, are impaired, we will be required to write down these assets which would have a negative effect on our consolidated financial statements.
Conversion of our debentures will dilute the ownership interest of existing stockholders, including holders who had previously converted their debentures.
The conversion of some or all of our outstanding debentures will dilute the ownership interest of existing stockholders to the extent we deliver common stock upon conversion of the debentures. Upon conversion, we may satisfy our conversion obligation by delivering cash, shares of common stock or any combination, at our option. If upon conversion we elect to deliver cash for the lesser of the conversion value and principal amount of the debentures, we would pay the holder the cash value of the applicable number of shares of our common stock. Upon conversion, we intend to satisfy the lesser of the principal amount or the conversion value of the debentures in cash. If the conversion value of a debenture exceeds the principal amount of the debenture, we may also elect to deliver cash in lieu of common stock for the conversion value in excess of the one thousand dollars principal amount (i.e., the conversion spread). There would be no adjustment to the numerator in the net income per common share computation for the cash settled portion of the debentures as that portion of the debt instrument will always be settled in cash. The conversion spread will be included in the denominator for the computation of diluted net income per common share. Any sales in the public market of any common stock issuable upon conversion of our debentures could adversely affect prevailing market prices of our common stock. In addition, the existence of the debentures may encourage short selling by market participants because the conversion of the debentures could be used to satisfy short positions, or anticipated conversion of the debentures into shares of our common stock could depress the price of our common stock.
Our reported financial results may be adversely affected by new accounting pronouncements or changes in existing accounting standards and practices.
We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation or changes by the FASB and the SEC. New accounting pronouncements and varying interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future. New accounting pronouncements or a change in the interpretation of existing accounting standards or practices may have a significant effect on our reported financial results and may even affect our reporting of transactions completed before the change is announced or effective. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 - Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue guidance under US GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We are currently evaluating the impact that the adoption of the standard may have on our consolidated financial statements and have not elected a transition method. Refer to Note 1 to our consolidated financial statements for additional information on the new guidance and its potential impact on us.
Climate change regulations and sustained adverse climate change pose regulatory and physical risks that could harm our results of operations or affect the way we conduct business.
Climate change regulations could require us to limit emissions, change our manufacturing processes, obtain substitute materials which may cost more or be less available, increase our investment in control technology for greenhouse gas emissions, fund offset projects or undertake other costly activities. These regulations could significantly increase our costs and restrict our manufacturing operations by virtue of requirements for new equipment. New permits may be required for our current operations, or expansions thereof. Failure to timely receive permits could result in fines, suspension of production, or cessation of operations at one or more facilities. In addition, restrictions on carbon dioxide or other greenhouse gas emissions could result in significant costs such as higher energy costs, and utility companies passing down carbon taxes, emission cap and trade programs and renewable portfolio standards. The cost of complying, or of failing to comply, with these and other climate change and emissions regulations could have an adverse effect on our operating results.
Further, any sustained adverse change in climate could have a direct adverse economic impact on us, such as water and power shortages, and higher costs of water or energy to control the temperature of our facilities. Certain of our operations are located in arid or tropical regions, such as Arizona and Thailand. Some environmental experts predict that these regions may become vulnerable to storms, severe floods and droughts due to climate change. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can interrupt business, we cannot be certain that our plans will protect us from all such disasters or events.
Item 1B. UNRESOLVED STAFF COMMENTSUnresolved Staff Comments
None.
Item 2. PROPERTIESProperties
At March 31, 2016,2022, we owned and used the facilities described below:
|
| | | | | | | | | | | | | |
| Location | | Approximate
Total Sq. Ft.
| | UsesPrincipal Operations |
| Gresham, Oregon | | 826,500 | | Wafer fabrication (Fab 4), R&D center, warehousing and administrative offices |
| Chandler, Arizona | | 415,000687,000 | | Executive and Administrative Offices; Wafer Probe;administrative offices, wafer probe, R&D Center; Salescenter, sales and Marketing;marketing, and Computercomputer and Service Functionsservice functions |
Tempe, ArizonaLamesa, Calamba, Philippines | | 457,000610,300 | | Wafer Fabrication (Fab 2); R&D Center; Administrative Offices;Assembly and Warehousingtest, warehousing and administrative offices |
Gresham, OregonChacherngsao, Thailand | | 826,500498,100 | | Assembly and test, wafer probe, sample center, warehousing and administrative offices |
| Colorado Springs, Colorado | | 480,000 | | Wafer Fabricationfabrication (Fab 4);5), test and R&D |
| Canlubang, Calamba, Philippines | | 460,000 | | Wafer probe, test, warehousing and administrative offices |
| Tempe, Arizona | | 388,100 | | Wafer fabrication (Fab 2), R&D Center; Administrative Offices;center, warehousing and Warehousingadministrative offices |
| Bangalore, India | | 294,000 | | R&D center, sales and marketing support and administrative offices |
| Chacherngsao, Thailand | | 267,100 | | Assembly and test, warehousing and administrative offices |
| Chennai, India | | 187,000 | | R&D center |
| Lawrence, Massachusetts | | 160,000 | | Manufacturing and administrative offices |
| Rousset, France | | 144,500 | | Test, R&D and administrative offices |
| Mount Holly Springs, Pennsylvania | | 100,000 | | Manufacturing, R&D and administrative offices |
| Garden Grove, California | | 98,100 | | Manufacturing, R&D and administrative offices |
| San Jose, California | | 186,00098,000 | | Wafer Fabrication; Wafer Probe; Test; R&D Center; Administrative Offices; and Warehousingadministrative offices |
Chacherngsao, ThailandNeckarbischofsheim, Germany | | 489,00083,800 | | AssemblyManufacturing and Test; Wafer Probe; Sample Center; Warehousing; and Administrative Officesadministrative offices |
Chacherngsao, ThailandNantes, France | | 215,00077,000 | | AssemblyWafer probe, test, R&D, warehousing and Testadministrative offices |
Bangalore, IndiaSan Jose, California | | 281,00071,000 | | ResearchR&D and Development; Salesadministrative offices |
| San Jose, California | | 57,000 | | R&D and Marketing Support,administrative offices |
| Beverly, Massachusetts | | 52,100 | | Manufacturing |
| Heilbronn, Germany | | 48,000 | | R&D and Administrative Officesadministrative offices |
| Karlsruhe, Germany | | 46,000 | | R&D and administrative offices |
| Ennis County, Ireland | | 40,000 | | Manufacturing, R&D and administrative offices |
| Simsbury, Connecticut | | 32,500 | | Manufacturing, R&D and administrative offices |
| Shanghai, China | | 21,000 | | R&D, sales and marketing support and administrative offices |
| Hsinchu, Taiwan | | 15,000 | | R&D and administrative offices |
In addition to the facilities we own, we lease several manufacturing, research and development facilities and sales offices in North America, Europe and Asia. Our aggregate monthly rental payment for our leased facilities is approximately $1.6 million.
We currently believe that our existing facilities are suitable and will be adequate to meet our requirements for at least the next 12 months.
See page 3942 for a discussion of the capacity utilization of our manufacturing facilities.
Item 3. LEGAL PROCEEDINGSLegal Proceedings
In the ordinary course ofRefer to Note 11 to our business, we are involved in a limited number ofconsolidated financial statements for information regarding legal actions, both as plaintiff and defendant. Consequently, we could incur uninsured liability in any of those actions. We also periodically receive notifications from various third parties alleging infringement of patents or other intellectual property rights. With respect to pending legal actions to which we are a party, although the outcomes of these actions are generally not determinable, we believe that the ultimate resolution of these matters will not harm our business and will not have a material adverse effect on our financial position, cash flows or results of operations. However, if an unfavorable ruling were to occur in any of the legal proceedings described below or in other legal proceedings that were not deemed material to us as of the date hereof, then such legal proceedings could have a material adverse effect on our financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon, and we are, from time to time, subject to such litigation. As a result, no assurances can be given with respect to the extent or outcome of any such litigation in the future.proceedings.
As a result of our acquisition of Atmel, which closed April 4, 2016, we became involved with the following lawsuits.
In re: Continental Airbag Products Liability Litigation. On May 11, 2016, an Amended and Consolidated Class Action Complaint ("Complaint") was filed in the United States District Court for the Southern District of Florida (Miami Division) against Atmel, Continental Automotive Systems, Inc., Honda Motor Co., Ltd. and an affiliate, and Daimler AG and an affiliate.
The Complaint which includes claims arising under federal law and Florida, California, New Jersey, Michigan and Louisiana state law-alleges that class members unknowingly purchased or leased vehicles containing defective airbag control units (allegedly incorporating defective application specific integrated circuits manufactured by Atmel between 2006 and 2010), and thereby suffered financial harm, including a loss in the value of their purchased or leased vehicles. The plaintiffs are seeking unspecified compensatory and exemplary damages, statutory penalties, pre- and post-judgment interest, attorneys' fees, and injunctive and other relief. Atmel intends to contest plaintiffs' claims vigorously.
Southern District of New York Action by LFoundry Rousset ("LFR") and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, individually and on behalf of a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York (the "District Court") against Atmel, its French subsidiary, Atmel Rousset S.A.S. ("Atmel Rousset"), and LFoundry GmbH ("LF"), LFR's German parent. The case purports to relate to Atmel Rousset's June 2010 sale of its wafer manufacturing facility in Rousset, France to LF, and LFR's subsequent insolvency, and later liquidation, more than three years later. The District Court dismissed the case on August 21, 2015, and plaintiffs are appealing the dismissal.
Individual Labor Actions by former LFR Employees. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in a French labor court. Atmel Rousset believes that each of these actions is entirely devoid of merit, and, further, that any assertion by any of the Claimants of a co-employment relationship with Atmel Rousset is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. Atmel Rousset therefore intends to defend vigorously against each of these claims.
Item 4. MINE SAFETY DISCLOSURESMine Safety Disclosures
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Market under the symbol "MCHP." The following table sets forth the quarterly high and low closing prices of our common stock as reported by NASDAQ for our last two fiscal years.
|
| | | | | | | | | | |
| Fiscal 2016 | | High | | Low | | Fiscal 2015 | | High | | Low |
| First Quarter | | $50.41 | | $46.66 | | First Quarter | | $49.48 | | $45.85 |
| Second Quarter | | $46.64 | | $39.57 | | Second Quarter | | $49.83 | | $45.02 |
| Third Quarter | | $49.11 | | $42.19 | | Third Quarter | | $46.59 | | $37.73 |
| Fourth Quarter | | $49.11 | | $39.65 | | Fourth Quarter | | $52.41 | | $43.02 |
Stock Price Performance Graph
The following graph and table show a comparison of the five-year cumulative total stockholder return, calculated on a dividend reinvestment basis, for Microchip Technology Incorporated, the Standard & Poor's (S&P) 500 Stock Index, and the Philadelphia Semiconductor Index.
Comparison of 5 year Cumulative Total Return*
*$100 invested on March 31, 2017 in stock or index, including reinvestment of dividends
Fiscal year ending March 31. |
| | | | | | | | | | | | |
| | | Cumulative Total Return |
| | | March 2011 | | March 2012 | | March 2013 | | March 2014 | | March 2015 | | March 2016 |
| Microchip Technology Incorporated | | 100.00 | | 101.77 | | 104.93 | | 141.11 | | 148.94 | | 151.51 |
| S&P 500 Stock Index | | 100.00 | | 108.54 | | 123.69 | | 150.73 | | 169.92 | | 172.95 |
| Philadelphia Semiconductor Index | | 100.00 | | 116.57 | | 118.80 | | 155.20 | | 181.98 | | 176.90 |
Copyright © 2022 Standard & Poor's, a division of S&P Global. All rights reserved.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Total Return |
| | March 2017 | | March 2018 | | March 2019 | | March 2020 | | March 2021 | | March 2022 |
| Microchip Technology Incorporated | | 100.00 | | 125.97 | | 116.39 | | 96.66 | | 224.15 | | 219.65 |
| S&P 500 Stock Index | | 100.00 | | 113.99 | | 124.82 | | 116.11 | | 181.54 | | 209.94 |
| Philadelphia Semiconductor Index | | 100.00 | | 133.58 | | 143.08 | | 157.93 | | 331.62 | | 368.27 |
Data acquired by Research Data Group, Inc. (www.researchdatagroup.com)(www.researchdatagroup.com)
The information in this Form 10-K appearing under the heading "Stock Price Performance Graph" is being "furnished" pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be "soliciting material" or "filed" with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201(e) of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act except to the extent that we specifically request that it be treated as such.
On May 16, 2016,12, 2022, there were approximately 455546 holders of record of our common stock. This figure does not reflect beneficial ownership of shares held in nominee names.
We have been declaringFor a description of our dividend policies, see Part II, Item 7, "Management's Discussion and paying quarterly cash dividends on our common stock since the third quarterAnalysis of fiscal 2003. Our total cash dividends paid were $291.1 million, $286.5 millionFinancial Condition and $281.2 million in fiscal 2016, fiscal 2015Results of Operations - Liquidity and fiscal 2014, respectively. The following table sets forth our quarterly cash dividends per common share and the total amount of the dividend payment for each quarter in fiscal 2016 and fiscal 2015 (amounts in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | |
| Fiscal 2016 | | Dividends per Common Share | | Aggregate Amount of Dividend Payment | | Fiscal 2015 | | Dividends per Common Share | | Aggregate Amount of Dividend Payment |
| First Quarter | | $ | 0.3575 |
| | $ | 72,331 |
| | First Quarter | | $ | 0.3555 |
| | $ | 71,202 |
|
| Second Quarter | | 0.3580 |
| | 72,686 |
| | Second Quarter | | 0.3560 |
| | 71,442 |
|
| Third Quarter | | 0.3585 |
| | 72,923 |
| | Third Quarter | | 0.3565 |
| | 71,787 |
|
| Fourth Quarter | | 0.3590 |
| | 73,147 |
| | Fourth Quarter | | 0.3570 |
| | 72,047 |
|
On May 4, 2016, we declared a quarterly cash dividend of $0.3595 per share, which will be paid on June 6, 2016 to stockholders of record on May 23, 2016 and the total amount of such dividend is expected to be approximately $77 million. Our Board of Directors is free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend, on our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and other factors deemed relevant by our Board of Directors. Our current intent is to provide for ongoing quarterly cash dividends depending upon market conditions and our results of operations.
Refer to "Item 12 -12. Security Ownership Ofof Certain Beneficial Owners And Management And Related Stockholder Matters," at page 50 below, for the information required by Item 201(d) of Regulation S-K with respect to securities authorized for issuance under our equity compensation plans at March 31, 2016.2022.
Issuer Purchases of Equity Securities
The following table sets forth our purchases of our common stock in the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced program | | Approximate dollar value of shares that may yet be purchased under the program(1) (in millions) |
| January 1, 2022 - January 31, 2022 | | — | | | $ | — | | | — | | | |
| February 1, 2022 - February 28, 2022 | | 2,115,188 | | | $ | 73.14 | | | 2,115,188 | | | |
| March 1, 2022 - March 31, 2022 | | 1,519,444 | | | $ | 69.06 | | | 1,519,444 | | | |
| | 3,634,632 | | | | | 3,634,632 | | | $ | 3,574.4 | |
(1) In May 2015,November 2021, our Board of Directors authorized the repurchase of up to 20.0 million shares$4.00 billion of our common stock in the open market or in privately negotiated transactions. As of March 31, 2016, we had repurchased 8.6 million shares under this authorization for approximately $363.8 million. In January 2016, our Board of Directors authorized an increase in the existing share repurchase program to 15.0 million shares of common stock from the approximately 11.4 million shares remaining under the current authorization. There is no expiration date associated with this repurchase program. We did not repurchase any shares of our common stock in our fourth fiscal quarter ended March 31, 2016.authorization.
Item 6. SELECTED FINANCIAL DATA[Reserved]
You should read the following selected consolidated financial data for the five-year period ended March 31, 2016 in conjunction with our consolidated financial statements and notes thereto and "Management's
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Items 7 and 8 of this Form 10-K. Our consolidated statements of income data for each of the years in the three-year period ended March 31, 2016, and the balance sheet data as of March 31, 2016 and 2015, are derived from our audited consolidated financial statements, included in Item 8 of this Form 10-K. The statement of income data for the years ended March 31, 2013 and 2012 and balance sheet data as of March 31, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements not included herein (in the tables below all amounts are in thousands, except per share data).Operations
Statement of Income Data:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended March 31, |
| | | 2016 (1) | | 2015 (1) | | 2014 | | 2013 | | 2012 |
| Net sales | | $ | 2,173,334 |
| | $ | 2,147,036 |
| | $ | 1,931,217 |
| | $ | 1,581,623 |
| | $ | 1,383,176 |
|
| Cost of sales | | 967,870 |
| | 917,472 |
| | 802,474 |
| | 743,164 |
| | 583,882 |
|
| Research and development | | 372,596 |
| | 349,543 |
| | 305,043 |
| | 254,723 |
| | 182,650 |
|
| Selling, general and administrative | | 301,670 |
| | 274,815 |
| | 267,278 |
| | 261,471 |
| | 208,328 |
|
| Amortization of acquired intangible assets | | 174,896 |
| | 176,746 |
| | 94,534 |
| | 111,537 |
| | 10,963 |
|
Special charges, net (2) | | 3,957 |
| | 2,840 |
| | 3,024 |
| | 32,175 |
| | 837 |
|
| Operating income | | 352,345 |
| | 425,620 |
| | 458,864 |
| | 178,553 |
| | 396,516 |
|
| Losses on equity method investments | | (345 | ) | | (317 | ) | | (177 | ) | | (617 | ) | | (195 | ) |
| Interest income | | 24,447 |
| | 19,527 |
| | 16,485 |
| | 15,560 |
| | 17,992 |
|
| Interest expense | | (104,018 | ) | | (62,034 | ) | | (48,716 | ) | | (40,915 | ) | | (34,266 | ) |
Loss on retirement of convertible debentures (3) | | — |
| | (50,631 | ) | | — |
| | — |
| | — |
|
| Other income (expense), net | | 8,864 |
| | 13,742 |
| | 5,898 |
| | (404 | ) | | (352 | ) |
| Income from continuing operations before income taxes | | 281,293 |
| | 345,907 |
| | 432,354 |
| | 152,177 |
| | 379,695 |
|
| Income tax (benefit) provision | | (42,632 | ) | | (19,418 | ) | | 37,073 |
| | 24,788 |
| | 42,990 |
|
| Net income from continuing operations | | 323,925 |
|
| 365,325 |
| | 395,281 |
| | 127,389 |
| | 336,705 |
|
| Less: Net loss attributable to noncontrolling interests | | 207 |
| | 3,684 |
| | — |
| | — |
| | — |
|
| Net income from continuing operations attributable to Microchip Technology | | $ | 324,132 |
| | $ | 369,009 |
| | $ | 395,281 |
| | $ | 127,389 |
| | $ | 336,705 |
|
| Basic net income per common share from continuing operations attributable to Microchip Technology stockholders | | $ | 1.59 |
| | $ | 1.84 |
| | $ | 1.99 |
| | $ | 0.65 |
| | $ | 1.76 |
|
| Diluted net income per common share from continuing operations attributable to Microchip Technology stockholders | | $ | 1.49 |
| | $ | 1.65 |
| | $ | 1.82 |
| | $ | 0.62 |
| | $ | 1.65 |
|
| Dividends declared per common share | | $ | 1.433 |
| | $ | 1.425 |
| | $ | 1.417 |
| | $ | 1.406 |
| | $ | 1.390 |
|
| Basic common shares outstanding | | 203,384 |
| | 200,937 |
| | 198,291 |
| | 194,595 |
| | 191,283 |
|
| Diluted common shares outstanding | | 217,388 |
| | 223,561 |
| | 217,630 |
| | 205,776 |
| | 203,519 |
|
| |
(1)
| Refer to Note 2 to our consolidated financial statements for an explanation of our material business combinations during fiscal 2016 and fiscal 2015. |
(2) The following table presents a summary of special charges, net for the five-year period ended March 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| Acquisition related expenses | | $ | 11,163 |
| | $ | 2,840 |
| | $ | 1,654 |
| | $ | 16,259 |
| | $ | 340 |
|
| Legal settlement | | (7,206 | ) | | — |
| | — |
| | 11,516 |
| | — |
|
| Adjustment to contingent consideration | | — |
| | — |
| | 1,370 |
| | 4,400 |
| | (1,000 | ) |
| Patent licenses | | — |
| | — |
| | — |
| | — |
| | 1,497 |
|
| Totals | | $ | 3,957 |
| | $ | 2,840 |
| | $ | 3,024 |
| | $ | 32,175 |
| | $ | 837 |
|
Discussions of the special charges for fiscal 2016, fiscal 2015 and fiscal 2014 are contained in Note 3 to our consolidated financial statements.
During fiscal 2013, we incurred special charges of $32.2 million comprised of a $4.4 million net increase in the fair value of contingent consideration related to one of our acquisitions, $16.3 million of primarily severance-related costs in addition to office closing and other costs associated with the acquisition of SMSC and legal settlement costs of approximately $11.5 million for certain legal matters related to an entity which we acquired in April 2010 in excess of previously accrued amounts.
During fiscal 2012, special charges included a benefit of $0.7 million of special income comprised of a $1.0 million favorable adjustment to contingent consideration offset by $0.3 million of severance-related charges related to a prior year acquisition. During the fourth quarter of fiscal 2012, we agreed to the terms of a patent license with an unrelated third party and signed an agreement on March 20, 2012. The patent license settled alleged infringement claims. The total payment made to the third-party in March 2012 was $2.8 million, $1.5 million of which was expensed in the fourth quarter of fiscal 2012 and the remaining $1.3 million was recorded as a prepaid royalty which will be amortized over the remaining life of the patents, which expires in December 2018.
(3) Refer to Note 15 to our consolidated financial statements for an explanation of the loss on retirement of convertible debentures of approximately $50.6 million in fiscal 2015.
Balance Sheet Data:
|
| | | | | | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| Working capital | | $ | 2,714,704 |
| | $ | 2,310,645 |
| | $ | 1,633,320 |
| | $ | 1,894,759 |
| | $ | 1,767,988 |
|
| Total assets | | 5,567,515 |
| | 4,780,713 |
| | 4,067,630 |
| | 3,851,405 |
| | 3,083,776 |
|
| Long-term obligations, less current portion | | 2,483,037 |
| | 1,826,858 |
| | 1,003,258 |
| | 983,385 |
| | 355,050 |
|
| Microchip Technology Stockholders' equity | | 2,150,919 |
| | 2,044,654 |
| | 2,135,461 |
| | 1,933,470 |
| | 1,990,673 |
|
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Note Regarding Forward-looking Statements
This report, including "Item 1 –1. Business," "Item 1A –1A. Risk Factors," and "Item 7 –7. Management's Discussion and Analysis of Financial Condition and Results of Operations," contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance and revenue sources. We use words such as "anticipate," "believe," "plan," "expect," "estimate," "future," "continue," "intend" and similar expressions to identify forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under "Risk Factors," beginning at page 12 and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement. These forward-looking statements include, without limitation, statements regarding the following:
•Our expectation that certain supply chain constraints will continue through calendar 2022 and into calendar 2023;
•That local governments could require us or our suppliers to reduce production, cease operations, or implement mandatory vaccine requirements, and we could experience constraints in fulfilling customer orders;
•The effects that adverseuncertain global economic conditions and fluctuations in the global credit and equity markets may have on our financial condition and results of operations;
•The effects and amount of competitive pricing pressure on our product lines and modest pricing declines in certain of our more mature proprietary product lines;
•Our ability to moderate future average selling price declines;
•The effect of product mix, capacity utilization, yields, fixed cost absorption, competition and economic conditions on gross margin;
•The amount of, and changes in, demand for our products and those of our customers;
•The impact of national security protections, trade restrictions and changes in tariffs, including those impacting China;
•Our expectation that in the future we will acquire additional businessbusinesses that we believe will complement our existing businesses;
•Our expectation that in the future we will enter into joint development agreements or other business or strategic relationships with other companies;
•The level of orders that will be received and shipped within a quarter;quarter, including the impact of our product lead times;
•Our expectation that our days of inventory levels in theat June 2016 quarter30, 2022 will increase from 1be 128 to 9 days from the March 2016 levels, not including the impact from inventory acquired from our Atmel acquisition, and that it will allow us to maintain competitive lead times and provide strong delivery performance to our customers;134 days;
The effect that distributor and customer inventory holding patterns will have on us;
•Our belief that customers recognize our products and brand name and use distributors as an effective supply channel;
Our belief that deferred cost•The accuracy of sales are recorded at their approximate carrying valueour estimates of the useful life and will have low riskvalues of material impairment;our property, assets and other liabilities;
Our belief that our direct sales personnel combined with our distributors provide an effective means of reaching our customer base;
•Our ability to increase the proprietary portion of our analog interface, mixed signal and timing product linesline and the effect of such an increase;
Our belief that our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new product designs;
•The impact of any supply disruption we may experience;
•Our ability to effectively utilize our facilities at appropriate capacity levels and anticipated costs;
•That we adjust capacity utilization to respond to actual and anticipated business and industry-related conditions;
That our existing facilities will provide sufficient capacity to respond to increases in demand with modest incremental capital expenditures;
•That manufacturing costs will be reduced by transition to advanced process technologies;
•Our ability to maintain manufacturing yields;
•Continuing our investments in new and enhanced products;
•The cost effectiveness of using our own assembly and test operations;
•Our expectation that foundry capacity will continue to be limited due to strong demand for wafers across the industry;
•Our expectation that we will continue to operate our manufacturing facilities at or above normal capacity if the current supply constraints relative to demand continue;
•Our anticipated level of capital expenditures;
•Continuation and amount of quarterly cash dividends;
•The sufficiency of our existing sources of liquidity to finance anticipated capital expenditures and otherwise meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on them;
•The impact of seasonality on our business;
•Our belief that our IT system compromise has not had a material adverse effect on our business or resulted in any material damage to us;
•Our expectation that we will continue to be the target of cyber-attacks, computer viruses, unauthorized access and other attempts to breach or otherwise compromise the security of our IT systems and data;
•The accuracy of our estimates used in valuing employee equity awards;
•That the resolution of legal actions will not have a material effect on our business, and the accuracy of our assessment of the probability of loss and range of potential loss;
•The recoverability of our deferred tax assets;
The adequacy of our tax reserves to offset any potential tax liabilities, having the appropriate support for our income tax positions and the accuracy of our estimated tax rate;
•Our belief that our determinations with respect toexpectation regarding the tax consequences of the Atmel acquisition are reasonable;
That if the UK leaves the EU, we may lose our ability to import and export products tax-free throughout Europe which may increase the costs to us for the import and saletreatment of our products to our customers, resultunrecognized tax benefits in a decrease in sales to certain of our customers or disrupt our operations and product shipments;calendar year 2022;
•Our belief that the expiration of any tax holidays will not have a material impact on our overall tax expense or effective tax rate;
•The impact of the geographical dispersion of our earnings and losses on our effective tax rate;
•Our belief that the estimates used in preparing our consolidated financial statements are reasonable;
Our belief that recently issued accounting pronouncements listed in this document will not have a material impact on our consolidated financial statements;
The accuracy of our estimates of the useful life and values of our property, assets and other liabilities;
The adequacy of our patent strategy, and our belief that the impact of the expiration of any particular patent will not have a material effect on our business;
•Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis;
•Our ability to obtain patents and intellectual property licenses and minimize the effects of litigation;
•The level of risk we are exposed to for product liability claims or indemnification claims;
•The effect of fluctuations in market interest rates on our income and/or cash flows;
•The effect of fluctuations in currency rates;
•That we could increase our borrowings or seek additional equity or debt financing to maintain or expand our facilities, or to fund cash dividends, share repurchases, acquisitions or other corporate activities, and that the timing and amount of such financing requirements will depend on a number of factors;
•Our belief that any unrealized losses represent an other-than-temporary impairment based onexpectations regarding the amounts and timing of repurchases under our evaluation of available evidence and our intent to hold these investments until these assets are no longer impaired;stock repurchase program;
That a significant portion of our future cash generation will be in our foreign subsidiaries;
•Our intention to satisfy the lesser of the principal amount or the conversion value of our debentureConvertible Debt in cash;
•Our intention to indefinitely reinvest undistributed earnings of certain non-US subsidiaries in those subsidiaries;expectation that our reliance on third-party contractors may increase over time as our business grows;
Our intent to maintain a high-quality investment portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield; and
•Our ability to collect accounts receivable.receivable; and
•The impact of the legislative and policy changes implemented or which may be implemented by the current administration, on our business and the trading price of our stock.
Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth in "Item 1A –1A. Risk Factors," and elsewhere in this Form 10-K. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update the information contained in any forward-looking statement.
Introduction
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document, as well as with other sections of this Annual Report on Form 10-K, including "Item 1 – Business;" "Item 6 – Selected Financial Data;" and "Item 8 –8. Financial Statements and Supplementary Data." For an overview of our business and recent trends, refer to "Part I Item 1. Business."
We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a summary of our overall business strategy to give the reader an overview of the goals of our business and the overall direction of our business and products. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. In the next section, beginning at page 36, weWe then discuss our Resultsresults of Operationsoperations for fiscal 20162022 compared to fiscal 2015, and for fiscal 2015 compared to fiscal 2014. We then provide2021, followed by an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the sectionssection titled "Liquidity and Capital Resources,Resources." "Contractual Obligations"Our liquidity and "Off-Balance Sheet Arrangements."
Strategy
Our goal iscapital resources section generally discusses fiscal 2022 compared to be a worldwide leader in providing specialized semiconductor products for a wide variety of embedded control applications. Our strategic focus is on embedded control solutions, including general purpose and specialized microcontrollers, development tools and related software, analog, interface, mixed signal and timing products, wired and wireless connectivity products, memory products and technology licensing. We provide highly cost-effective embedded control solutions that also offer the advantages of small size, high performance, extreme low power usage, wide voltage range operation, mixed signal integration and ease of development, thus enabling timely and cost-effective integrationfiscal 2021. For our discussion of our solutions byfiscal 2021 results compared to fiscal 2020 for both our customers in their end products. We license our SuperFlash technology and other technologies to wafer foundries, integrated device manufacturers and design partners throughout the world for use in the manufactureresults of advanced microcontroller products, gate array, RF and analog products that require embedded non-volatile memory.
We sell our products to a broad base of domestic and international customers across a variety of industries. The principal markets that we serve include consumer, automotive, industrial, office automation and telecommunications. Our business is subject to fluctuations based on economic conditions within these markets.
Our manufacturing operations include wafer fabrication, wafer probe and assembly and test. The ownership of a substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control resulting in us being one of the lowest cost producers in the embedded control industry. By owning wafer fabrication facilities and our assemblyliquidity and test operations,capital resources sections, refer to "Item 7. Management’s Discussion and by employing statistical process control techniques, we have been able to achieveAnalysis of Financial Condition and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture a portionResults of the wafer manufacturing and the assembly and test profit margin. We do outsource a significant portion of our manufacturing requirements to third parties.
We employ proprietary design and manufacturing processes in developing our embedded control products. We believe our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new product designs. While many of our competitors develop and optimize separate processes for their logic and memory product lines, we use a common process technology for both microcontroller and non-volatile memory products. This allows us to more fully leverage our process research and development costs and to deliver new products to market more rapidly. Our engineers utilize advanced computer-aided design (CAD) tools and software to perform circuit design, simulation and layout, and our in-house photomask and wafer fabrication facilities enable us to rapidly verify design techniques by processing test wafers quickly and efficiently.
We are committed to continuing our investment in new and enhanced products, including development systems, andOperations" in our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our competitive position. Our current research and development activities focusAnnual Report on Form 10-K for the design of new microcontrollers, digital signal controllers, memory, analog and mixed-signal products, Flash-IP systems, development systems, software and application-specific software libraries. We are also developing new design and process technologies to achieve further cost reductions and performance improvements in our products.fiscal year ended March 31, 2021 filed with the SEC on May 18, 2021, which is incorporated by reference herein.
We market and sell our products worldwide primarily through a network of direct sales personnel and distributors. Our distributors focus primarily on servicing the product and technical support requirements of a broad base of diverse customers. We believe that our direct sales personnel combined with our distributors provide an effective means of reaching this broad and diverse customer base. Our direct sales force focuses primarily on major strategic accounts in three geographical markets: the Americas, Europe and Asia. We currently maintain sales and support centers in major metropolitan areas in North America, Europe and Asia. We believe that a strong technical service presence is essential to the continued development of the embedded control market. Many of our client engagement manager (CEMs), embedded system engineer (ESEs), and sales management personnel have technical degrees and have been previously employed in an engineering environment. We believe that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The primary mission of our ESE team is to provide technical assistance to strategic accounts and to conduct periodic training sessions for CEMs and distributor sales teams. ESEs also frequently conduct technical seminars for our customers in major cities around the world, and work closely with our distributors to provide technical assistance and end-user support.
See "Our operating results are impacted by both seasonality and the wide fluctuation of supply and demand in the semiconductor industry," on page 15 for discussion of the impact of seasonality on our business.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. GAAP. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, business combinations, share-based compensation, inventories, income taxes, senior and junior subordinated convertible debenturesConvertible Debt and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our results may differ from these
estimates due to actual outcomes being different from those on which we based our assumptions. We review these estimates and judgments on an ongoing basis. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We also have other policies that we consider key accounting policies, such asgenerate revenue primarily from sales of our policy regardingsemiconductor products to distributors and non-distributor customers (direct customers) and, to a lesser extent, from royalties paid by licensees of our intellectual property. We apply the following five-step approach to determine the timing and amount of revenue recognitionrecognition: (i) identify the contract with the customer, (ii) identify performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to original equipment manufacturers (OEMs); however, wethe performance obligations in the contract, and (v) recognize revenue when the performance obligation is satisfied.
Sales to our distributors are governed by a distributor agreement, a purchase order, and an order acknowledgment. Sales to distributors do not believe these policies require us to make estimates or judgments that are as difficult or subjective as our policies described below.
Revenue Recognition – Distributors
Our distributors worldwide generally have broad price protection and product return rights, so we defer revenue recognitionmeet the definition of a contract until the distributor sellshas sent in a purchase order, we have acknowledged the productorder, we have deemed the collectability of the consideration to their customer. Revenue is recognized when the distributor sells the product to an end-user, at which time the sales price becomes fixed or determinable. Revenue is not recognized upon shipment to our distributors since, due to discounts from list price as well as price protection rights, the sales price is not substantially fixed or determinable at that time. At the time of shipment to these distributors, we record a trade receivable for the selling price as there is abe probable, and legally enforceable right to payment, relieve inventory for the carrying value of goods shipped since legal title has passed to the distributor,rights and record the gross margin in deferred income on shipments to distributors on our consolidated balance sheets.
Deferred income on shipments to distributors effectively represents the gross margin on the sale to the distributor; however, the amount of gross margin that we recognize in future periods could be less than the deferred margin as a result of credits granted to distributors on specifically identified products and customers to allow the distributors to earn a competitive gross margin on the sale of our products to their end customers and price protection concessions related to market pricing conditions.
We sell the majority of the items in our product catalog to our distributors worldwide at a uniform list price. However, distributors resell our products to end customers at a very broad range of individually negotiated price points. The majority of our distributors' resales require a reduction from the original list price paid. Often, under these circumstances, we remit back to the distributor a portion of their original purchase price after the resale transactionobligations have been created. As is completedcustomary in the form of a credit against the distributors' outstanding accounts receivable balance. The credits are on a per unit basis and are not given to the distributor until they provide information to us regarding the sale to their end customer. The price reductions vary significantly based on the customer, product, quantity ordered, geographic location and other factors and discounts to a price less than our cost have historically been rare. The effect of granting these credits establishes the net selling price to our distributors for the product and results in the net revenue recognized by us when the product is sold by the distributors to their end customers. Thus, a portion of the "deferred income on shipments to distributors" balance represents the amount of distributors' original purchase price that will be credited back to the distributor in the future. The wide range and variability of negotiatedsemiconductor industry, we offer price concessions grantedand stock rotation rights to distributors does not allow us to accurately estimate the portion of the balance in the deferred income on shipments to distributors account that will be credited back to the distributors. Therefore, we do not reduce deferred income on shipments to distributors or accounts receivable by anticipated future concessions; rather, price concessions are typically recorded against deferred income on shipments to distributors and accounts receivable when incurred, which is generally at the time the distributor sells the product. At March 31, 2016, we had approximately $267.2 million of deferred revenue and $83.8 million in deferred cost of sales recognized as $183.4 million of deferred income on shipments to distributors. At March 31, 2015, we had approximately $260.9 million of deferred revenue and $94.8 million in deferred cost of sales recognized as $166.1 million of deferred income on shipments to distributors. The deferred income on shipments to distributors that will ultimately be recognized in our income statement will be lower than the amount reflected on the balance sheet due to additional price credits to be granted to the distributors when the product is sold to their customers. These additional price credits historically have resulted in the deferred income approximating the overall gross margins that we recognize in the distribution channel of our business.
Distributor advances, reflected as a reduction of deferred income on shipments to distributors on our consolidated balance sheets, totaled $102.9 million at March 31, 2016 and $116.0 million at March 31, 2015. On sales to distributors, our payment terms generally require the distributor to settle amounts owed to us for an amount in excess of their ultimate cost. The sales price to our distributors may be higher than the amount that the distributors will ultimately owe us because distributors often negotiate price reductions after purchasing products from us and such reductions are often significant. It is our practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle receivable balances, on a current basis, generally within 30 days, for amounts originally invoiced. This practice has an adverse impact on the working capitalmany of our distributors. As such,these are forms of variable consideration, we have entered into agreements with certain distributors whereby we advance cash to the distributors to reduce the distributor's working capital requirements. These advances are reconciled at least on a quarterly basis and are estimated based onestimate the amount of ending inventory as reported byconsideration to which we will be entitled using recent historical data and applying the distributor multiplied by a negotiated percentage. Such advances have no impact on ourexpected value method. After the transaction price has been determined and allocated to the performance obligations, we recognize revenue recognitionwhen the performance obligations are satisfied. Substantially all of the revenue generated from contracts with distributors is recognized at, or our consolidated statements of income. We process
discounts taken by distributors against our deferred income on shipmentsnear to, distributors' balancethe time risk and true-up the advanced amounts generally after the end of each completed fiscal quarter. The terms of these advances are set forth in binding legal agreements and are unsecured, bear no interest on unsettled balances and are due upon demand. The agreements governing these advances can be canceled by us at any time.
We reduce product pricing through price protection based on market conditions, competitive considerations and other factors. Price protection is granted to distributors on the inventory they have on hand at the date the price protection is offered. When we reduce the price of our products, it allows the distributor to claim a credit against its outstanding accounts receivable balances based on the new pricetitle of the inventory ittransfers to the distributor.
Sales to our direct customers are generally governed by a purchase order and an order acknowledgment. Sales to direct customers usually do not meet the definition of a contract until the direct customer has on hand assent in a purchase order, we have acknowledged the order and deemed the collectability of the dateconsideration to be probable, and legally enforceable rights and obligations have been created. Generally, the transaction price associated with contracts with direct customers is set at the standalone selling price and is not variable. After the transaction price has been determined and allocated to the performance obligations, we recognize revenue when the performance obligations are satisfied. Substantially all of the price reduction. There
revenue generated from contracts with direct customers is no immediate revenue impact fromrecognized at, or near to, the price protection, as it is reflected as a reductiontime risk and title of the deferred income on shipmentsinventory transfers to distributors' balance.the customer.
Products returnedRevenue generated from our licensees is governed by distributors and subsequently scrapped have historically been immateriallicensing agreements. Our primary performance obligation related to our consolidated results of operations. We routinely evaluatethese agreements is to provide the risk of impairmentlicensee the right to use the intellectual property. The final transaction price is determined by multiplying the usage of the deferred cost of sales componentlicense by the royalty, which is fixed in the licensing agreement. Revenue is recognized as usage of the deferred income on shipments to distributors account. Because of the historically immaterial amounts of inventory that have been scrapped, and historically rare instances where discounts given to a distributor result in a price less than our cost, we believe the deferred costs are recorded at their approximate carrying value.license occurs.
Business Combinations
All of our business combinations are accounted for at fair value under the acquisition method of accounting. Under the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at fair value as an intangible asset at the acquisition date and amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will be recognized through income tax expense or directly in contributed capital.expense. The measurement of the fair value of assets acquired and liabilities assumed requires significant judgment. The valuation of intangible assets, and acquired investments, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows. The valuation of non-marketable equity investments acquired also takes into account variables such as conditions reflected in the capital markets, recent financing activity by the investees, the investees' capital structure and the terms of the investees' issued interests. Under the acquisition method of accounting, the aggregate amount of consideration we pay for a company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date. The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill. On an annual basis, we test goodwill for impairment and through March 31, 2016,2022, we have never recorded an impairment charge against our goodwill balance.related to goodwill.
Share-based Compensation
We measure at fair valueutilize RSUs with a service condition as our primary equity incentive compensation instrument for employees and recognizealso grant market-based and performance-based PSUs to executive officers and employees. Share-based compensation expensecost for all share-based payment awards, including grants of employee stock options, restricted stock units (RSUs) and employee stock purchase rights, to be recognized in our financial statements basedRSUs with a service condition or performance-based PSUs is measured on their respectivethe grant date fair values. Total share-based compensation in fiscal 2016 was $71.4 million, of which $63.1 million was reflected in operating expenses. Total share-based compensation included in cost of sales in fiscal 2016 was $8.3 million. Total share-based compensation included in our inventory balance was $6.2 million at March 31, 2016.
Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant requires judgment. The fair value of our RSUs is based on the fair market value of our common stock on the date of grant discounted for expected future dividends.dividends and is recognized as expense on a straight-line basis over the requisite service periods. We use the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase shares under our employee stock purchase plans. Option pricing models, includingPSUs with a market condition using a Monte Carlo simulation model as of the Black-Scholes model, require the usedate of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. We use a blend of historical and implied volatility based on options freely traded in the open market as we believe this is most reflective of market conditions and a better indicator of expected volatility thangrant using purely historical volatility. The expected life of the awards is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our history and expectation of future dividend payouts. We estimate the number of share-based awards that will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the impact on prior period amortization for all
unvested awards is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher or lower than the estimated forfeiture rate, then an adjustment is made to increase or decrease the estimated forfeiture rate, which will result in a decrease or increase to the expense recognized in our financial statements. If forfeiture adjustments are made, they would affect our gross margin, research and development expenses, and selling, general, and administrative expenses. The effect of forfeiture adjustments in fiscal 2016 was immaterial.
We evaluate the assumptions used to value our awards on a quarterly basis. If factors change and we employ different assumptions,Total share-based compensation expense may differ significantly from what we have recordedrecognized during the fiscal 2022 was $210.2 million, of which $175.9 million was reflected in the past. operating expenses and $34.3 million was reflected in cost of sales. Total share-based compensation included in our inventory was $7.5 million at March 31, 2022.
If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional equity awards to employees or we assume unvested equity awards in connection with acquisitions.
Inventories
Inventories are valued at the lower of cost or marketnet realizable value using the first-in, first-out method. We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated marketnet realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those we projected, additional inventory write-downs may be required. 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. In estimating our inventoryreserves for obsolescence, we primarily evaluate estimates ofprojected demand over a 12-month periodperiods that align with demand forecasts used to develop manufacturing plans and record impairment chargesinventory build decisions and provide reserves for inventory on hand in excess of the estimated 12-month demand. Estimates for projected 12-month demand are generally based on the average shipments of the prior three-month period, which are then annualized to adjust for any potential seasonality in our business. The estimated 12-month demand is compared to our most recently developed sales forecast to further reconcile the 12-month demand estimate. Management reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the extent any existing products are being replaced or discontinued.
In periods where our production levels are substantially below our normal operating capacity, the reduced production levels of our manufacturing facilities are charged directly to cost of sales. As a resultDuring fiscal 2022, we operated at above normal
capacity levels. During fiscal 2021, we operated at below normal operatingcapacity levels primarily due to general economic conditions and uncertainty from the COVID-19 pandemic resulting in our wafer fabrication facilities, approximately $1.9 million, $0.8 million and $19.0 million was charged directly to costunabsorbed capacity charges of sales in fiscal 2016, fiscal 2015 and fiscal 2014, respectively.$29.6 million.
Income Taxes
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 sheets. 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 provided valuation allowances for certain of our deferred tax assets, including state net operating loss carryforwards, foreign tax credits and state tax credits, where it is more likely than not that some portion, or all of such assets, will not be realized. At March 31, 2016, the valuation allowances totaled $161.8 million. 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 March 31, 2016, our deferred tax asset, net of valuation allowances, was $122.2million.
Various taxing authorities in the U.S. and other countries in which we do business scrutinize the tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. We are currently under IRS audit for fiscal years 2011 and 2012. We recognize liabilities for anticipatedbeing audited by the tax audit issuesauthorities in the U.S. and otherin various foreign jurisdictions. At this time, we do not know what the outcome of these audits will be. We record benefits for uncertain tax jurisdictionspositions based on our estimatean assessment of whether andit is more likely than not that the extent to which, additional tax payments are probable. We believepositions will be sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, we recognize the largest amount of the tax benefit that we maintain adequate tax reserves to offset any potential tax liabilities that may arise upon these and other pending audits in the U.S. and other countries in which we do business. If such amounts ultimately proveis more than 50% likely to be unnecessary,realized upon ultimate settlement.
The accounting model related to the resulting reversalvaluation of such reserves would resultuncertain tax positions requires us to presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information and that each tax position will be evaluated without consideration of the possibility of offset or aggregation with other positions. The recognition requirement for the liability exists even if we believe the possibility of examination by a taxing authority or discovery of the related risk matters is remote or where we have a long history of the taxing authority not performing an exam or overlooking an issue. We will record an adjustment to a previously recorded position if new information or facts related to the position are identified in tax benefits beinga subsequent period. All adjustments to the positions are recorded inthrough 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 wouldincome statement. Generally, adjustments will be recorded in periods subsequent to the initial recognition if the taxing authority has completed an audit of the period that results in which the assessment is determined. position being effectively settled or if the statute of limitation expires. Due to the inherent uncertainty in the estimation process and in consideration of the criteria of the accounting model, amounts recognized in the financial statements in periods subsequent to the initial recognition may significantly differ from the estimated exposure of the position under the accounting model.
Senior and Junior Subordinated Convertible DebenturesDebt
WeUpon issuance, we separately account for the liability and equity components of our seniorConvertible Debt by estimating the fair values of the i) liability component without a conversion feature and junior subordinated convertible debentures in a manner that reflects our nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized.ii) the conversion feature. This results in a bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statements of income.
Upon settlement of our Convertible Debt instruments, we allocate the total consideration between the liability and equity components based on the fair value of the liability component without the conversion feature. The difference between the consideration allocated to the liability component and the net carrying value of the liability component is recognized as an extinguishment loss or gain. The remaining settlement consideration is allocated to the equity component and recognized as a reduction of additional paid-in capital in our consolidated balance sheets. In addition, if the terms of the settlement are different from the contractual terms of the original instrument, we recognize an inducement loss, which is measured as the difference between the fair value of the original terms of the instrument and the fair value of the settlement terms.
Determining the fair value of the liability component without the conversion feature upon issuance and settlement involves estimating the equivalent borrowing rate for a similar non-convertible instrument. Given the values of these transactions, fair value estimates are sensitive to changes in the equivalent borrowing rate conclusions. The measurement of the equivalent borrowing rate requires that we make estimates of volatility and credit spreads to align observable market inputs with the instrument being valued.
Lastly, we include the dilutive effect of the shares of our common stock issuable upon conversion of the outstanding senior and junior subordinated convertible debenturesConvertible Debt in our diluted income per share calculation regardless of whether the market price triggers or other contingent conversion features have been met. We apply the treasury stock method as we have the intent and have adopted an accounting policy to settle the principal amount of the senior and junior subordinated convertible debenturesConvertible Debt in cash. This method results in incremental dilutive shares when the average fair value of our common stock for a reporting period exceeds the conversion prices per share which were $66.05 and $24.31 for the senior and junior subordinated convertible debentures, respectively, at March 31, 2016 and adjusts as dividends are recorded in the future.
Contingencies
In the ordinary course of our business, we are exposed to various liabilities as a result of contracts, product liability, customer claims, governmental investigations and other matters. Additionally, we are involved in a limited number of legal actions, both as plaintiff and defendant, anddefendant. Consequently, we could incur uninsured liability in any one or more of them.those actions. We also periodically receive notifications from various third parties alleging infringement of patents or other intellectual property rights, or other matters.from customers requesting reimbursement for various costs. With respect to pending legal actions to which we are a party and other claims, although the outcomes of these actions are generally not generally determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of operations. Litigation, governmental investigations and disputes relating to the semiconductor industry isare not uncommon, and we are, and from time to time, have been, subject to such litigation. Nolitigation, governmental investigations and disputes. As a result, no assurances can be given with respect to the extent or outcome of any such litigation, governmental investigations or disputes in the future.
We accrue for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, we review each of our matters and, where it is probable that a liability has been or will be incurred, we accrue for all probable and reasonably estimable losses. Where we can reasonably estimate a range of losses we may incur regarding such a matter, we record an accrual for the amount within the range that constitutes our best estimate. If we can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, we use the amount that is the low end of such range. Contingencies of an acquired company that exist as of the date of the acquisition are measured at fair value if determinable, which generally is based on a probability weighted model. If fair value is not determinable, contingencies of an acquired company are recognized when they become probable and reasonably estimable.
Results of Operations
The following table sets forth certain operational data as a percentage of net sales for the years indicated:fiscal 2022 and fiscal 2021:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Fiscal Year Ended March 31, |
| | | | | | | | | | | 2022 | | 2021 |
| Net sales | | | | | | | | | | | 100.0 | % | | 100.0 | % |
| Cost of sales | | | | | | | | | | | 34.8 | | | 37.9 | |
| Gross profit | | | | | | | | | | | 65.2 | | | 62.1 | |
| | | | | | | | | | | | | |
| Research and development | | | | | | | | | | | 14.5 | | | 15.4 | |
| Selling, general and administrative | | | | | | | | | | | 10.5 | | | 11.2 | |
| Amortization of acquired intangible assets | | | | | | | | | | | 12.7 | | | 17.1 | |
| Special charges and other, net | | | | | | | | | | | 0.4 | | | — | |
| Operating income | | | | | | | | | | | 27.1 | % | | 18.4 | % |
|
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | | 44.5 |
| | 42.7 |
| | 41.6 |
|
| Gross profit | | 55.5 |
| | 57.3 |
| | 58.4 |
|
| Research and development | | 17.1 |
| | 16.3 |
| | 15.8 |
|
| Selling, general and administrative | | 13.9 |
| | 12.8 |
| | 13.8 |
|
| Amortization of acquired intangible assets | | 8.1 |
| | 8.3 |
| | 4.9 |
|
| Special charges | | 0.2 |
| | 0.1 |
| | 0.1 |
|
| Operating income | | 16.2 | % | | 19.8 | % | | 23.8 | % |
Net Sales
We operate in two industry segments and engage primarily in the design, development, manufacture and sale of semiconductor products as well as the licensing of our SuperFlash and other technologies. We sell our products to distributors and OEMs in a broad range of markets, perform ongoing credit evaluations of our customers and generally require no collateral. In certain circumstances, a customer's financial condition may require collateral, and, in such cases, the collateral would be typically provided byin the form of letters of credit.
The following table summarizes our net sales of $2,147.0 millionfor fiscal 2022 and fiscal 2021 (dollars in fiscal 2015 increased by $215.8 million, or 11.2%, from fiscal 2014. millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | Fiscal Year Ended March 31, |
| | | | | | | | | | | | | | | | | 2022 | | 2021 | | Change |
| Net sales | | | | | | | | | | | | | | | | | $ | 6,820.9 | | | $ | 5,438.4 | | | 25.4 | % |
The increase in net sales in fiscal 2016 over2022 compared to fiscal 20152021 was primarily due primarilyto strong business conditions that began in the second half of fiscal 2021 as businesses and individuals adapted to the effects of the COVID-19 pandemic. Business conditions continued to be exceptionally strong in fiscal 2022. Additionally, semiconductor industry conditions have resulted in increased costs throughout our supply chain, which we have been passing on to our acquisitioncustomers in the form of Micrel, offset in part by weaker general economic and semiconductor industry conditions. Theprice increases. These price increases also contributed to the increase in net sales during fiscal 2022 compared to fiscal 2021. Our price increases were implemented at various times and in various amounts throughout fiscal 2022 with respect to our very broad range of customers and products. Due to the complexity of the implementation of the price increases and the changes in product, geographic and customer mix, we are not able to quantify the impact of the price increases on our net sales.
The net sales value of inventory at our distributor customers increased $11.2 million during fiscal 2022 compared to a decrease of $10.4 million during fiscal 2021. Excluding the impact of changes in distributor inventory levels on net sales, net sales increased by 25.0% in fiscal 2015 over2022 compared to fiscal 20142021. Our price increases positively impacted net sales during fiscal 2022. Additionally, demand for our products was due primarilypositively impacted by strength in our microcontroller and analog product lines. Due to the size, complexity and diversity of our acquisitions of ISSC and Supertex, market share gains and improved general economic and semiconductor industry conditionscustomer base, we are not able to quantify any material factor contributing to the change other than net demand fluctuations in the end markets that we serve. Average selling prices for
Other factors that we believe contributed to changes in our semiconductor products were down approximately 3% in fiscal 2016 over fiscal 2015 and were up approximately 2% in fiscal 2015 over fiscal 2014. The number of units of our semiconductor products sold was up approximately 6% in fiscal 2016 over fiscal 2015 and up approximately 11% in fiscal 2015 over fiscal 2014. The average selling prices and the unit volumes of our sales are impacted by the mix of our products sold and overall semiconductor market conditions. Key factors impacting the amount ofreported net sales during the last threefor fiscal years2022 compared to fiscal 2021 and which are drivers of long-term trends in our net sales but which factors we are not able to quantify include:
our acquisition of Micrel, which closed on August 3, 2015;
global economic conditions in the markets we serve;
•semiconductor industry conditions;
•our acquisition of ISSC on July 17, 2014;
our acquisition of Supertex on April 1, 2014;
ourvarious new product offerings that have increased our served available market;
customers'•customers’ increasing needs for the flexibility offered by our programmable solutions; and
inventory holding patterns of our customers;
•increasing semiconductor content in our customers' products;customers’ products through our Total Systems Solutions.
We sell a large number of products to a large and
continued market share gains in the segments diverse customer base and there was not any single product or customer that accounted for a material portion of the markets we address.change in our net sales in fiscal 2022 or fiscal 2021.
Net sales by product line for fiscal 2016, 20152022 and 2014fiscal 2021 were as follows (dollars in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Year Ended March 31, |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 2022 | | % | | 2021 | | % |
| Microcontrollers | | | | | | | | | | | | | | | | | | | | $ | 3,814.8 | | | 56.0 | | | $ | 2,961.0 | | | 54.5 | |
| Analog | | | | | | | | | | | | | | | | | | | | 1,939.1 | | | 28.4 | | | 1,519.8 | | | 27.9 | |
| Other | | | | | | | | | | | | | | | | | | | | 1,067.0 | | | 15.6 | | | 957.6 | | | 17.6 | |
| Total net sales | | | | | | | | | | | | | | | | | | | | $ | 6,820.9 | | | 100.0 | | | $ | 5,438.4 | | | 100.0 | |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | % | | 2015 | | % | | 2014 | | % |
| Microcontrollers | $ | 1,345,499 |
| | 61.9 | | $ | 1,393,607 |
| | 64.9 | | $ | 1,260,988 |
| | 65.3 |
| Analog, interface, mixed signal and timing products | 595,455 |
| | 27.4 | | 501,048 |
| | 23.3 | | 428,088 |
| | 22.2 |
| Memory products | 116,945 |
| | 5.4 | | 132,258 |
| | 6.2 | | 134,624 |
| | 7.0 |
| Technology licensing | 89,124 |
| | 4.1 | | 89,593 |
| | 4.2 | | 94,578 |
| | 4.9 |
| Other | 26,311 |
| | 1.2 | | 30,530 |
| | 1.4 | | 12,939 |
| | 0.6 |
| Total net sales | $ | 2,173,334 |
| | 100.0 | | $ | 2,147,036 |
| | 100.0 | | $ | 1,931,217 |
| | 100.0 |
Microcontrollers
Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and associated application development systems accounted for approximately 61.9%56.0% and 54.5% of our net sales in fiscal 2016, approximately 64.9% of our net sales in2022 and fiscal 2015 and approximately 65.3% of our net sales in fiscal 2014.2021, respectively.
Net sales of our microcontroller products decreasedincreased approximately 3.5%28.8% in fiscal 20162022 compared to fiscal 2015, and increased approximately 10.5% in fiscal 2015 compared to fiscal 2014. The decrease in net sales in fiscal 2016 compared to fiscal 2015 resulted primarily from weaker general economic and semiconductor industry conditions in the end markets we serve including the consumer, automotive, industrial control, communications and computing markets.2021. The increase in net sales was due primarily to strength in fiscal 2015 compared to fiscal 2014 resulted primarily fromdemand for our acquisition of ISSCmicrocontroller products in the second quarter of fiscal 2015, market share gains and improved general economic and semiconductor industry conditions in the end markets that we serve.serve and our price increases.
Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. TheHowever, the overall average selling prices of our microcontroller products have increased in recent periods and have remained relatively constantstable 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, primarily due to competitive conditions. We have in the past been able to, and expect in the future to be able to, moderate average selling price declines in our microcontroller product lines by introducing new products with more features and higher prices. We may be unable to maintain average selling prices for our microcontroller products as a result
Analog
Analog, Interface, Mixed Signal and Timing Products
Sales of ourOur analog product line includes analog, interface, mixed signal and timing productsproducts. Our analog product line accounted for approximately 27.4%28.4% and 27.9% of our net sales in fiscal 2016, approximately 23.3% of our net sales in2022 and fiscal 2015 and approximately 22.2% of our net sales in fiscal 2014.2021, respectively.
Net sales offrom our analog interface, mixed signal and timing productsproduct line increased approximately 18.8%27.6% in fiscal 20162022 compared to fiscal 2015 and increased approximately 17.0% in fiscal 2015 compared to fiscal 2014.2021. The increase in net sales was primarily due to strength in fiscal 2016 compared to fiscal 2015 was driven primarily bydemand for our acquisition of Micrelanalog products in the second quarter of fiscal 2016end markets that we serve and market share gains achieved within the analog, interface, mixed signal and timing market. The increase in net sales in fiscal 2015 compared to fiscal 2014 was driven primarily by our acquisition of Supertex in the first quarter of fiscal 2015, improved general economic and semiconductor industry conditions and market share gains achieved within the analog, interface, mixed signal and timing market.
price increases.
Analog, interface, mixed signal and timing products can be proprietary or non-proprietary in nature. Currently, weWe consider more than a majority of the products in our analog interface, mixed signal and timing product mixline to be proprietary in nature, where prices are relatively stable, similar to the pricing stability experienced in our microcontroller products. The non-proprietary portion of our analog interface, mixed signal and timing businessproduct line will experience price fluctuations, driven primarily by the current supply and demand for those products. We may be unable to maintain the average selling prices of our analog, interface, mixed signal and timing products as a result of increased pricing pressure in the future, which could adversely affect our operating results. We anticipate the proprietary portion of our analog, interface, mixed signal and timing products will increase over time.
Memory ProductsOther
Sales of our memoryOur other product line includes FPGA products, accounted for approximately 5.4% of our net sales in fiscal 2016, approximately 6.2% of our net sales in fiscal 2015 and approximately 7.0% of our net sales in fiscal 2014.
Net sales of our memory products decreased approximately 11.6% in fiscal 2016 compared to fiscal 2015, and decreased approximately 1.8% in fiscal 2015 compared to fiscal 2014. The decreases in memory product net sales in fiscal 2016 compared to fiscal 2015 and in fiscal 2015 compared to fiscal 2014 were driven primarily by adverse customer demand conditions within the Serial EEPROM and Flash memory markets.
Memory product pricing has historically been cyclical in nature, with steep price declines followed by periods of relative price stability, driven by changes in industry capacity at different stages of the business cycle. We have experienced, and expect to continue to experience, varying degrees of competitive pricing pressures in our memory products. We may be unable to maintain the average selling prices of our memory products as a result of increased pricing pressure in the future, which could adversely affect our operating results.
Technology Licensing
Technology licensing revenue includes a combination of royalties associated with licenses for the use of our SuperFlash and other technologies, andsales of our intellectual property, fees for engineering services. Technology licensingservices, memory products, timing systems, manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, and certain products for aerospace applications. Revenue from these services and products accounted for approximately 4.1%15.6% and 17.6% of our net sales in fiscal 2016, approximately 4.2% of our net sales in2022 and fiscal 2015 and approximately 4.9% of our net sales in fiscal 2014.2021, respectively.
Net sales related to our technology licensing decreasedthese products and services increased approximately 0.5%11.4% in fiscal 20162022 compared to fiscal 20152021. The increase in net sales was primarily due to strength in demand for our products in end markets that we serve and decreased approximately 5.3% in fiscal 2015 compared to fiscal 2014. Revenue from technology licensingour price increases. Net sales of our other product line can fluctuate over time based on the production activities of our licensees as well as general economic and semiconductor industry conditions.
Other
Revenue from waferconditions as well as changes in demand for our FPGA products, licenses, engineering services, memory products, and manufacturing services (wafer foundry and assembly and test subcontracting services accounted for approximately 1.2% of our net sales in fiscal 2016, approximately 1.4% of our net sales in fiscal 2015 and approximately 0.6% of our net sales in fiscal 2014.subcontracting).
Distribution
Distributors accounted for approximately 53%48% and 50% of our net sales in fiscal 2016, approximately 51%2022 and fiscal 2021, respectively. The decrease in the distribution percentage of our total net sales in fiscal 2015 and approximately 53%is due to lower Preferred Supply Program participation among our distributors as priority of our net sales in fiscal 2014.
Our two largest distributors together accounted for approximately 12% of our net sales in each of fiscal 2016 and 2015, and approximately 14% of our net sales in fiscal 2014.supply under the Preferred Supply Program is more prevalent with direct customers. No single distributor or end customer accounted for more than 10% of our net sales in fiscal 2016, 20152022 or 2014.fiscal 2021. Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base. We believe that customers recognize Microchip for its products and brand name and use distributors as an effective supply channel.
Generally, we do not have long-term agreements with our distributors and we, or our distributors, may terminate our relationshiprelationships with each other with little or no advanced notice.advance notice, with the exception of orders placed under our Preferred Supply Program. 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.
At March 31, 2016,2022, our distributors maintained 3217 days of inventory of our products compared to 3722 days at March 31, 2015 and 33 days at March 31, 2014.2021. Over the past fiveten fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 2717 days and 4740 days. We do not believe that inventoryInventory holding patterns at our distributors will materiallymay have a material impact on our net sales,sales. Our distributor inventory days are at historic lows due to the fact that we recognize revenue based on sell-throughimbalance between the supply of and the demand for all of our distributors.products in the current supply-constrained environment.
Net Sales by Geography
Net salesSales by geography for fiscal 2016, 20152022 and 2014fiscal 2021 were as follows (dollars in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fiscal Year Ended March 31, |
| | | | | | | | | | | | | | | | | | | | | 2022 | | % | | 2021 | | % |
| Americas | | | | | | | | | | | | | | | | | | | | | $ | 1,659.3 | | | 24.3 | | | $ | 1,389.1 | | | 25.5 | |
| Europe | | | | | | | | | | | | | | | | | | | | | 1,391.0 | | | 20.4 | | | 1,042.9 | | | 19.2 | |
| Asia | | | | | | | | | | | | | | | | | | | | | 3,770.6 | | | 55.3 | | | 3,006.4 | | | 55.3 | |
| Total net sales | | | | | | | | | | | | | | | | | | | | | $ | 6,820.9 | | | 100.0 | | | $ | 5,438.4 | | | 100.0 | |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | % | | 2015 | | % | | 2014 | | % |
| Americas | $ | 417,579 |
| | 19.2 | | $ | 421,947 |
| | 19.7 | | $ | 365,609 |
| | 18.9 |
| Europe | 474,629 |
| | 21.8 | | 452,165 |
| | 21.0 | | 411,531 |
| | 21.3 |
| Asia | 1,281,126 |
| | 59.0 | | 1,272,924 |
| | 59.3 | | 1,154,077 |
| | 59.8 |
| Total net sales | $ | 2,173,334 |
| | 100.0 | | $ | 2,147,036 |
| | 100.0 | | $ | 1,931,217 |
| | 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 U.S., Canada, Central America and South America.
Sales to foreign customers accounted for approximately 84%78% and 77% of our net sales in each of fiscal 2016, 20152022 and 2014.fiscal 2021, respectively. Substantially all of our foreign sales are U.S. dollar denominated. Sales to customers in Asia have generallyEurope as a percentage of total net sales increased over timein fiscal 2022 compared to fiscal 2021 primarily due to many of our customers transitioning their manufacturing operations to Asia and growthstrength in demand from the emerging Asian market.in our microcontroller and analog product lines. Our sales force in the Americas and Europe supports a significant portion of the design activity for products which are ultimately shipped to Asia.
Sales to customers in China, including Hong Kong, accounted for approximately 30%, 28% and 29% of our net sales in fiscal 2016, 2015 and 2014, respectively. Sales to customers in Taiwan accounted for approximately 12%, 14% and 13% of our net sales in fiscal 2016, 2015 and 2014, respectively. We did not have sales into any other countries that exceeded 10% of our net sales during the last three fiscal years.
Gross Profit
Our gross profit was $1,205.5 million in fiscal 2016, $1,229.6 million2022 was $4.45 billion, or 65.2% of net sales, compared to $3.38 billion, or 62.1% of net sales, in fiscal 20152021. The following table summarizes the material and $1,128.7 millionprimary drivers of our change in fiscal 2014. Grossgross profit as a percentage of net sales, was 55.5%with the material factors discussed in fiscal 2016, 57.3%more detail below the table (dollars in fiscal 2015 and 58.4% in fiscal 2014.millions):
| | | | | | | | | | | | | | | | | | |
| | | | |
| | | | |
| | | | Gross Profit | | %
of Net Sales | | |
| | | | $ | 3,378.8 | | | 62.1 | | Fiscal Year Ended March 31, 2021 |
| | | | 845.4 | | | — | | Increase in semiconductor net sales at prior year gross margins and excluding the impact of other factors quantified in this table |
| | | | 29.6 | | | 0.4 | | Impact of unabsorbed capacity charges |
| | | | 152.5 | | | 2.1 | | Net impact of product mix and average gross profit per unit |
| | | | 19.1 | | | 0.2 | | Increase in net sales to licensing customers, which has no associated cost of sales |
| | | | 24.2 | | | 0.4 | | Net impact of excess and obsolete inventories |
| | | | | | | | |
| | | | $ | 4,449.6 | | | 65.2 | | Fiscal Year Ended March 31, 2022 |
The most significant factors affecting our gross profit percentage in the periods covered by this report were:
Unabsorbed capacity charges of approximately $44.9 million in fiscal 2016 and approximately $24.4 million in fiscal 2015 related to the recognition of acquired inventory at fair value as a result of our acquisitions- When production levels are below normal capacity, which increased the value of our acquired inventory and subsequently increased our cost of sales and reduced our gross margins;
for each of fiscal 2016 and fiscal 2015, inventory write-downs being higher than the gross margin impact of sales of inventory that was previously written down; and
fluctuations in the product mix of microcontrollers, analog, interface, mixed signal and timing products, memory products and technology licensing.
Other factors that impacted our gross profit percentage in the periods covered by this report include:
continual cost reductions in wafer fabrication and assembly and test manufacturing, such as new manufacturing technologies and more efficient manufacturing techniques; and
lower depreciationwe measure as a percentage of the capacity of the installed equipment, we charge cost of sales.
sales for the unabsorbed capacity. We consider normal capacity at Fab 2 and Fab 4 to be 90% to 95%. We consider normal capacity at Fab 5 to be 70% to 75%. During fiscal 2022, we operated at above normal capacity levels and we expect this to continue if the current supply constraints relative to demand continue. During fiscal 2021, we operated at below normal capacity levels primarily due to general economic conditions and uncertainty from the COVID-19 pandemic resulting in unabsorbed capacity charges of $29.6 million. We adjust our wafer fabrication and assembly and test capacity utilization as required to respond to actual and anticipated business and industry-related conditions. When production levels are below normal capacity, we charge
Net impact of product mix and average gross profit per unit - The net impact of product mix and average gross profit per unit may fluctuate over time due to sales volumes of lower or higher margin products, changes in selling prices, and fluctuations in product costs. During fiscal 2022, product mix resulted in a decrease of $152.5 million in cost of sales for the unabsorbed capacity. Our wafer fabrication facilities operated below normal capacity levels, which we typically considergoods sold and an increase in gross profit compared to be 90% to 95% of the actual capacity of the installed equipment, during the third quarter of fiscal 2016, the first quarter of fiscal 2015 and all of fiscal 2014 in response to uncertain global economic conditions and our inventory position. As a result of production being below normal operating levels in our wafer fabs, approximately $1.9 million, $0.8 million and $19.0 million was charged to cost of sales in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. Our wafer fabrication facilities operated at normal capacity levels during the fourth quarter of fiscal 2016. In the future, if production levels are below normal capacity, we will charge cost of sales for the unabsorbed capacity. We operated at slightly below normal capacity levels in our Thailand assembly and test facilities during the third quarter of fiscal 2016. As a result, we charged cost of sales approximately2021.
$1.0 million during fiscal 2016. During fiscal 2015 and fiscal 2014, we operated at normal levels of capacity at our Thailand assembly and test facilities, and we selectively increased our assembly and test capacity at such facilities during such time.
The process technologies utilized in our wafer fabs impact our gross margins. Fab 2 currently utilizes various manufacturing process technologies, but predominantly utilizes our 0.5 micron to 1.0 micron processes. Fab 4 predominantly utilizes our 0.22 micron to 0.5 micron processes. We continue to transition products to more advanced process technologies to reduce future manufacturing costs. Substantially all of our production has been on 8-inch wafers during the periods covered by this report.
Our overall inventory levels were $306.8$854.4 million at March 31, 2016,2022, compared to $279.5$665.0 million at March 31, 2015 and $262.7 million at March 31, 2014.2021. We maintained 110125 days of inventory on our balance sheet at March 31, 20162022 compared to 111112 days of inventory at March 31, 2015 and 118 days at March 31, 2014.2021. We expect our days of inventory levels in theat June 2016 quarter30, 2022 to increase from 1be 128 to 9 days from the March 2016 levels, not including the impact from inventory acquired from our Atmel acquisition. We believe our existing level of inventory will allow us to maintain competitive lead times and provide strong delivery performance to our customers.134 days.
We anticipate that our gross margins will fluctuate over time, driven primarily by capacity utilization levels, the overall product mix of microcontroller, analog, interface, mixed signal and timingFPGA products, memory products, and technology licensing revenue and the percentage of net sales of each of these products in a particular quarter, as well as manufacturing yields, fixed cost absorption, and competitive and economic conditions in the markets we serve. We continue to transition products to more advanced process technologies to reduce future manufacturing costs.
We operate assembly and test facilities in Thailand, the Philippines, and other locations throughout the world. During fiscal 2016,2022, approximately 53%59% of our assembly requirements were performed in our Thailandinternal assembly facilities, compared to approximately 53% during fiscal 2021. During fiscal 2022, approximately 64% of our test requirements were performed in our internal test facilities, compared to approximately 57% during fiscal 20152021. The increases in the percentage of assembly and approximately 51% duringtest operations that were performed internally in fiscal 2014.2022 compared to fiscal 2021 are primarily due to our investments in assembly and test equipment, which increased our internal capacity capabilities. Third-party contractors located primarily in Asia perform the balance of our assembly and test operations. The percentage of our assembly workand test operations that isare performed internally fluctuates over time based on supply and demand conditions in the semiconductor industry, our internal capacity capabilities and our acquisition activities. Third-party contractors located in Asia perform the balance of our assembly operations. During fiscal 2016, approximately 81% of our test requirements were performed in our Thailand facilities compared to approximately 88% during fiscal 2015 and approximately 86% during fiscal 2014. The primary reason for the percentage reduction in the assembly and test operations performed in our Thailand facilities in fiscal 2016 compared to the prior periods is our acquisition of Micrel, which outsourced these activities. Over time, we intend to migrate a portion of the outsourced assembly and test activities to our Thailand facilities. We believe that the assembly and test operations performed at our Thailandinternal facilities provide us with significant cost savings compared to contractor assembly and test costs, as well as increased
control over these portions of the manufacturing process. We plan to continue to transition certain outsourced assembly and test capacity to our internal facilities.
We rely on outside wafer foundries for a significant portion of our wafer fabrication requirements. During eachApproximately 60% of fiscal 2016 and 2015, approximately 39% of our total net sales came from products that were produced at outside wafer foundries in fiscal 2022, compared to approximately 38% during61% in fiscal 2014.2021.
Our use of 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.
Research and Development (R&D)
R&D expenses for fiscal 20162022 were $372.6$989.1 million, or 17.1%14.5% of net sales, compared to $349.5$836.4 million, or 16.3%15.4% of net sales, for fiscal 2015 and $305.0 million, or 15.8% of sales, for fiscal 2014.2021. 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. R&D costs are expensed as incurred. Assets purchased to support our ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their expected useful lives. R&D expenses include labor, depreciation, masks, prototype wafers, and expenses for the development of process technologies, new packages, and software to support new products and design environments.
R&D expenses increased $23.1$152.7 million, or 6.6%18.3%, for fiscal 2016 over2022 compared to fiscal 2015 primarily due to additional costs from our acquisition of Micrel as well as higher headcount costs. R&D expenses increased $44.5 million, or 14.6%, for fiscal 2015 over fiscal 2014.2021. The primary reasonsreason for the increase in R&D costsexpenses in fiscal 20152022 compared to fiscal 2014 were additional2021 was higher compensation costs. In the first half of fiscal 2021, we initially implemented measures to help prepare for economic uncertainty, such as employee salary cuts, limiting hiring, reducing business travel costs from our acquisitions of Supertex and ISSC as well as higher headcount costs. discretionary spending. However, in December 2020, we restored previous reductions in compensation and resumed hiring.
R&D expenses fluctuate over time, primarily due to revenue and operating expense investment levels.
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 20162022 were $301.7$718.9 million, or 13.9%10.5% of net sales, compared to $274.8$610.3 million, or 12.8%11.2% of net sales, for fiscal 2015,2021. Our goal is to continue to be more efficient with our selling, general and $267.3 million, or 13.8% of sales, for fiscal 2014.administrative expenses. 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 includeas well as costs related to our direct sales force, CEMs and field applications engineersESEs who work inremotely from sales offices worldwide to stimulate demand by assisting customers in the selection and use of our products.
Selling, general and administrative expenses increased $26.9$108.6 million, or 9.8%17.8%, for fiscal 2016 over2022 compared to fiscal 2015 due primarily to additional costs from our acquisition of Micrel. Selling, general and administrative expenses increased $7.5 million, or 2.8%, for fiscal 2015 over fiscal 2014.2021. The primary reasonsreason for the increase in selling, general and administrative expenses was higher compensation costs. In the first half of fiscal 2021, we initially implemented measures to help prepare for economic uncertainty, such as employee salary cuts, limiting hiring, reducing business travel costs and discretionary spending. However, in fiscal 2015 over fiscal 2014 were additional costs from our acquisitions of SupertexDecember 2020, we restored previous reductions in compensation and ISSC and higher headcount costs partially offset by lower legal expenses.resumed hiring.
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense investment levels.
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets in fiscal 20162022 was $174.9$862.5 million compared to $176.7$932.3 million in fiscal 2015 and $94.5 million in fiscal 2014.2021. The primary reasonsreason for the decrease in acquired intangible asset amortization for fiscal 2016 comparedwas due to fiscal 2015 were decreasedthe use of accelerated amortization from our customer-related intangible assets from our acquisitionmethods.
Special Charges and Other, Net
During fiscal 2016,2022, we incurred special charges and other, net of $4.0$29.5 million comprised of $11.2 millionprimarily related to restructuring of acquired and existing wafer fabrication operations to increase operational efficiency, legal contingencies and exiting non-manufacturing facilities including contract termination costs, employee severance, office closing and other costs associated with our acquisition activity and legal settlement coststhe disposal of approximately $4.3 million partially offset by special income of $11.5 million related to an insurance settlement for reimbursement of funds we previously paid to settle a lawsuit in the second quarter of fiscal 2013.assets. During fiscal 2015 and 2014,2021, we incurred special charges and other, net of $2.8$1.7 million primarily related to the restructuring of our wafer fabrication operations partially offset by asset sales and other acquisition related activity. Restructuring expenses incurred during fiscal 2022 and fiscal 2021 include $21.1 million and $3.0$15.0 million, respectively, related to severance, office closing and other costs associated withthe restructuring of our acquisition activity.wafer fabrication operations.
Other Income (Expense)
Interest income in fiscal 20162022 was $24.4$0.5 million compared to $19.5$1.7 million in fiscal 2015 and $16.5 million in fiscal 2014. The primary reasons for the increases in interest income over these periods relates to higher yields on short-term cash investments and higher invested cash balances.2021.
Interest expense in fiscal 20162022 was $104.0$257.0 million compared to $62.0$356.9 million in fiscal 2015 and $48.7 million in fiscal 2014.2021. The primary reasonsreason for the increasedecrease in interest expense in fiscal 20162022 compared to fiscal 20152021 relates to non-cash interest expense from the amortization on the debt discountcumulative pay down of our 1.625% senior subordinated convertible debenturesdebt and lower interest expenserates on our outstanding variable rate debt.
Loss on settlement of debt in fiscal 2022 was $113.4 million compared to $299.6 million in fiscal 2021. In fiscal 2022, the losses primarily related to the 1.625% coupon on such debentures which were issued in February 2015. The increase in interest expense was partially offset by lower interest expense on our 2.125% junior subordinated convertible debentures assettlement of a resultportion of our purchase of 50% of such outstanding debentures in2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, and our 2017 Junior Convertible Debt as well as the fourth quarter of fiscal 2015. The primary reasons for the increase in interest expense in fiscal 2015 compared to fiscal 2014 relates to non-cash interest expense from the amortization on the debt discountamendment and restatement of our 1.625% senior subordinated convertible debentures which were issued in February 2015Credit Agreement and in increase in interest expense from our credit line borrowings.
Loss on retirementthe repayment of convertible debentures in fiscal 2015 was $50.6 million. In February 2015, we acquired certain of our 2.125% junior subordinated convertible debentures with a $575.0 million$1.00 billion aggregate principal amount for an aggregate purchase priceoutstanding of $1,134.6 million, basedour 3.922% 2021 Notes. In fiscal 2021, the losses primarily related to the settlement of a portion of our outstanding 2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, and our 2017 Junior Convertible Debt as well as the payment of all amounts outstanding under our Bridge Loan Facility, and our Term Loan Facility. The net losses recognized on market value. The transaction resulted in athe settlement of our Convertible Debt are comprised of two components (i) the inducement loss, on retirementwhich is the excess of convertible debenturesthe fair value of approximately $50.6 million,the consideration provided to the holder over the fair value of the debt and (ii) the extinguishment loss or gain, which representedis the difference between the fair value of the liability component at time of repurchase and the sum of the carrying values of the debt component and any unamortized debt issuance costs.the carrying value on the settlement date.
Other income, net, in fiscal 20162022 was $8.9$2.8 million compared to other income,loss, net of $13.7$3.8 million in fiscal 2015 and other income, net of $5.9 million in fiscal 2014. The primary reason for the change in other income, net during fiscal 2016 compared to fiscal 2015 relates to lower realized gains on the sale of marketable equity and debt securities and losses resulting from derivative activity.2021. The primary reasons for the change in other (loss) income, net during fiscal 20152022 compared to fiscal 20142021 relates to realized gains of $18.5 million from the sale of marketable equity and debt securities and fluctuations on our foreign currency derivatives.exchange rate fluctuations and gains on equity investments.
Provision for Income Taxes
Our provision or benefit for income taxes reflectsis attributable to U.S. federal, state, and foreign income taxes. A comparison of our tax on our foreign earnings and federal and state tax on U.S. earnings. We had an effective tax rate benefit of 15.2%rates in fiscal 20162022 and 5.6% in fiscal 2015 and an effective tax rate of 8.6% in fiscal 2014. Excluding certain tax events described below, our effective tax rates were lower than statutory rates in the U.S. primarily2021 is not meaningful due to our mixthe amount of earnings in foreign jurisdictions with lowerpre-tax income, and income tax rates andbenefit recorded during the R&D tax credit. prior period.
Our effective tax rate in fiscal 2016 includes $12.1 million of benefits related to audit closures and expirations of the statute of limitations on various tax reserves and $15.5 million of benefits related to intercompany prepaid tax amortization, which reduced our effective rate by 4.3% and 5.5%, respectively. Our effective tax rate in fiscal 2016 also2022 includes a $2.5$49.5 million benefit received from the reinstatement of the R&D credit and a $13.5 milliontax benefit received from current year generated R&D credits, which reduced our effective tax rate by 0.9% and 4.8%, respectively. Our3.3%; a $17.6 million tax benefit for share-based compensation deductions, which reduced our effective tax rate in fiscal 2015 included $33.1by 1.2%; a $47.1 million of benefitstax benefit related to audit closures and expirations of the statute of limitations onchanges in various tax reserves, which reduced our effective tax rate by 9.6%. Our3.2%; a $139.9 million tax expense for the effects of foreign operations, which increased our effective tax rate in fiscal 2015 also includedby 9.4%; and a $1.8$25.5 million tax benefit received fromrelated to the reinstatementsettlement of the R&D credit,convertible debt, which reduced our effective tax rate by 0.5%1.7%. During fiscal 2014, our
Our effective tax rate included $19.4in fiscal 2021 includes a $47.6 million of benefits related to various items including a settlement with the IRS for our fiscal 2009 and fiscal 2010 tax audits and the expiration of the statute of limitations on various tax reserves. These benefitsbenefit received from generated R&D credits, which reduced our effective tax rate by 4.5% to an14.0%; a $12.3 million tax benefit for share-based compensation deductions, which reduced our effective tax rate by 3.6%; a $28.1 million tax expense related to changes in various tax reserves, which increased our effective tax rate by 8.3%; a $122.5 million tax expense for the effects of 8.6%foreign operations, which increased our effective tax rate by 36.1%; a $48.1 million tax benefit related to the settlement of convertible debt, which reduced our effective tax rate by 14.2%; and a $63.8 million tax benefit related to intra-group transfers of certain intellectual property rights, which reduced our effective tax rate by 18.8%. The tax benefit for the intra-group asset transfers primarily consisted of $155.5 million recorded as a deferred tax asset which represents the book and tax basis difference on the transferred assets measured based on the new applicable statutory tax rate, as well as the reversal of the pre-existing deferred tax asset of $90.3 million, which represents the book and tax basis difference on the transferred assets measured based on the applicable statutory tax rate prior to the transfer. Over the next 15 years, we expect to be able to realize the future tax benefit of the deferred tax assets resulting from the intra-group asset transfers. It is not uncommon for taxing authorities of different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied
with respect to the valuation of intellectual property rights. The taxing authorities of jurisdictions in which we operate may challenge our methodologies for valuing the intellectual property rights transferred, which could increase our future effective income tax rate and harm our future results of operations.
We are subject to taxation in many jurisdictions in which we have operations. The effective tax rates that we pay in these jurisdictions vary widely, but they are generally lower than our combined U.S. federal and state effective tax rate. Our domestic blended statutory tax rate in each of fiscal 2022 and fiscal 2021 was approximately 22%. Our non-U.S. blended statutory tax rates in fiscal 2022 and fiscal 2021 were lower than this amount. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, tax holidays, financing arrangements and other factors. Our effective tax rate has been and will continue to be impacted by the geographical dispersion of our earnings and losses.
Our foreign tax rate differential benefit primarily relates to our operations and assets in Thailand and Ireland. Our Thailand manufacturing operations are currently subject to numerous tax holidays granted to us based on our investment in property, plant, and equipment in Thailand. Our tax holiday periods in Thailand expire at various times in the future; however, we actively seek to obtain new tax holidays, otherwise we will be subject to tax at the statutory tax rate of 20%. We do not expect the future expiration of any of our tax holiday periods in Thailand to have a material impact on our effective tax rate. The remaining material components of foreign income taxed at a rate lower than the U.S. are earnings accrued in Ireland at a 12.5% statutory tax rate.
In September 2021, we received a Statutory Notice of Deficiency (Notice) from the Internal Revenue Service (IRS) for fiscal 2007 through fiscal 2012. The disputed amounts largely relate to transfer pricing matters. We firmly believe that the assessments are without merit and plan to pursue all available administrative and judicial remedies necessary to resolve this matter. In December 2021, we filed a petition in the United States Tax Court challenging the Notice. We intend to vigorously defend our position and we are confident in our ability to prevail on the merits. We regularly assess the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of our tax reserves. We believe that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows and that we have adequate tax reserves for all tax matters. However, the ultimate outcome of disputes of this nature is uncertain, and if the IRS were to prevail on all of its assertions, the assessed tax, penalties, and deficiency interest could have a material adverse impact on our financial position, results of operations or cash flows.
Various taxing authorities in the U.S. and other countries in which we do business are increasing their scrutiny of the tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. For U.S. federal, and in general for U.S. state tax returns, our fiscal 20112007 and later tax returns remain effectively open for examination by the taxing authorities. We recognize liabilities for anticipatedare currently being audited by the tax audit issuesauthorities in the U.S. and otherin various foreign jurisdictions. At this time, we do not know what the outcome of these audits will be. We record benefits for uncertain tax jurisdictionspositions based on our estimatean assessment of whether andit is more likely than not that the extent to which, additional tax payments are probable. We believepositions will be sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, we recognize the largest amount of the tax benefit that we maintain adequate tax reserves to offset any potential tax liabilities that may arise upon these and other pending audits in the U.S. and other countries in which we do business. If such amounts ultimately proveis more than 50% likely to be unnecessary, the resulting reversalrealized upon ultimate settlement.
Our Thailand manufacturing operations currently benefit from numerous tax holidays that have been granted to us by the Thailand government based on our investments in property, plant and equipment in Thailand. Our tax holiday periods in Thailand expire at various times in the future. Any expiration of our tax holidays are expected to have a minimal impact on our overall tax expense due to other tax holidays and an increase in income in other taxing jurisdictions with lower statutory rates.
Liquidity and Capital Resources
We had $2,564.6$319.4 million in cash, cash equivalents and short-term and long-term investments at March 31, 2016,2022, an increase of $222.4$37.4 million from the March 31, 20152021 balance. The increase in cash, cash equivalents and short-term and long-term investments over this time period is primarily attributable to cash generated by operating activities and increases in borrowings under our credit facility offset in part by our dividend payments of $291.1 million and $343.9 million of cash, net of cash acquired, used for our acquisition of Micrel.
Operating Activities
Net cash provided fromby operating activities was $744.5 million$2.84 billion for fiscal 2016, $721.2 million for fiscal 2015 and $676.6 million for fiscal 2014. The increase in cash flow from operations in fiscal 2016 compared to fiscal 2015 was2022, primarily due to higher net salesincome of $1.29 billion, adjusted for non-cash and an increase innon-operating charges of $1.52 billion and net cash inflows of $34.2 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities in fiscal 2022 include an increase in cash flow from operations in fiscal 2015 compared to fiscal 2014 wastrade accounts receivable driven primarily due toby higher net sales during fiscal 2015.
and an increase in inventories related to increased production levels and higher costs of materials and production costs in support of customer demand for our products, offset by increases in accounts payable, accrued and other liabilities driven by timing of payments to our suppliers, higher accrued employee compensation and sales related reserves. Net cash provided by investingoperating activities was $800.4 million$1.92 billion for fiscal 2016. 2021, primarily due to net income of $349.4 million, adjusted for non-cash and non-operating charges of $1.59 billion and net cash outflows of $27.0 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities in fiscal 2021 include an increase in trade accounts receivable and lower inventories related to improved business conditions in the second half of fiscal 2021 as businesses recovered from the effects of the COVID-19 pandemic.
Investing Activities
Net cash used in investing activities was $678.3$477.7 million for fiscal 2015 and $503.3 million in fiscal 2014. The primary reason for the increase in cash from investing activities in fiscal 20162022 compared to $173.3 million for fiscal 2015 was an increase in2021. Fiscal 2022 and fiscal 2021 investing cash from our salesflows primarily related to capital purchases and maturities of available-for-sale investments of $1,112.6 million, offset in part by $343.9 million of cash consideration, net of $99.2 million of cash and cash equivalents acquired, used to finance our acquisition of Micrel in August 2015. The increase in net cash used in investing
activities in fiscal 2015 compared to fiscal 2014 was due primarily to $252.5 million of cash consideration, net of $15.1 million of cash and cash equivalents acquired, used to finance our acquisition of ISSC in July 2014 and $375.4 million of cash consideration, net of $14.8 million of cash and cash equivalents acquired, used to finance our acquisition of Supertex in April 2014, offset in part by an increase in cash from our purchases, sales and maturities of available-for-sale investments in fiscal 2015 compared to the prior year.other assets.
Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions. Capital expenditures were $97.9$370.1 million and $92.6 million in fiscal 2016, $149.5 million in2022 and fiscal 2015 and $113.1 million in fiscal 2014.2021, respectively. Capital expenditures arewere primarily for the expansion of production capacity and the addition of research and development equipment. Towards the second half of fiscal 2021 we started to invest more significantly to expand manufacturing capacity in response to supply constraints relative to current demand levels and we expect this to continue through calendar 2022 and into calendar 2023. We currently intend to spend approximately $140invest between $450 million and $550 million in equipment and facilities during the next twelve months to invest in equipment and facilities to maintain, and selectively increase, our capacity.
We expect to finance our capital expenditures through our existing cash balances and cash flows from operations.months. We believe that the capital expenditures anticipated to be incurred over the next twelve months will provide sufficient manufacturing capacity to meetsupport the growth of our production capabilities for our new products and technologies and to bring in-house more of the assembly and test operations that are currently anticipated needs.outsourced. We expect to finance our capital expenditures through our existing cash balances and cash flows from operations.
Financing Activities
Net cash used in financing activities was $59.9 million$2.33 billion for fiscal 20162022 compared to net cash provided by financing activities of $98.5million for fiscal 2015 and net cash used in financing activities of $235.0 million$1.86 billion for fiscal 2014. We made payments on2021. Significant transactions affecting our borrowings undernet financing cash flows include:
•in fiscal 2022, $1.38 billion of cash used to pay down certain principal of our credit agreementsdebt, including the cash portion of $1,614.5 million during fiscal 2016, $2,047.6 million during fiscalthe settlement of our 2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, and $1,103.5 million during fiscal 2014. Cash received on borrowings under our credit agreement totaled $2,204.5 million during fiscal 2016, $1,859.6 million during fiscal 20152017 Junior Convertible Debt, our Revolving Credit Facility and $1,133.5 million during fiscal 2014. In February 2015, we issued $1,725.0 million principal amountour 3.922% 2021 Notes, partially funded by the issuance of 1.625% senior subordinated convertible debentures due February 15, 2025. The debentures are subordinated to our senior notes, and
•in fiscal 2021, $1.41 billion of cash used to pay down certain principal of our debt, including amounts borrowed under our amended credit facility, but are senior to our outstanding 2.125% junior subordinated convertible debentures. Also, in February 2015, we acquired certainRevolving Credit Facility, Term Loan Facility and Bridge Loan Facility, and the cash portion of the settlement of our 2.125% junior subordinated convertible debentures with a $575.0 million aggregate principal amount for an aggregate purchase price of $1,134.6 million, based on market value. Cash expended for2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, and our 2017 Junior Convertible Debt, partially funded by the repurchase of sharesissuance of our common stock was $363.8 million senior notes, and
•in fiscal 2016. We did not repurchase any shares of our common stock during2022 and fiscal 2015 or fiscal 2014. We2021, we paid cash dividends to our stockholders of $291.1$503.8 million and $388.3 million, respectively, and
•in fiscal 2016, $286.5 million in fiscal 2015, and $281.2 million in fiscal 2014. Proceeds from the exercise of stock options and employee purchases under our employee stock purchase plans were $28.7 million for fiscal 2016, $34.4 million for fiscal 2015 and $60.1 million for fiscal 2014.
In February 2015,2022, we amended our $2.0 billion credit agreement with certain lenders. As a result of such amendment, the revolving credit facility portion of the agreement was increased from $1,650.0 million to $2,555.0 million and the $350.0 million term loan portion of the agreement was removed. The increase option permitting us, subject to certain requirements, to arrange with existing lenders or new lenders to provide up to an aggregate of $300.0 million in additional commitments, was also adjusted to $249.4 million. In December 2015, we exercised our increase option in our credit agreement to obtain additional revolving commitments of $219.0 million, bringing our total revolving credit facility commitments to $2,774.0 million. Proceeds of loans made under the credit agreement may be used for working capital and general corporate purposes. At March 31, 2016, $1,052.0 million of borrowings were outstanding under the credit agreement. See Note 16 of the notes to consolidated financial statements for more information regarding our credit agreement.
Our total cash, cash equivalents, short-term investments and long-term investments held by our foreign subsidiaries was $2,559.3 million at March 31, 2016 and $2,322.4 million at March 31, 2015. Under current tax laws and regulations, if accumulated earnings and profits held by our foreign subsidiaries that U.S. taxes had not previously been provided for were to be distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes. The balance of cash, cash equivalents, short-term investments and long-term investments available for our U.S. operations as of March 31, 2016 and March 31, 2015 was approximately $5.3 million and $19.8 million, respectively. We utilize a variety of tax planning and financing strategies (including borrowings under our credit agreement) with the objective of having our worldwide cash available in the locations in which it is needed. We consider our offshore earnings to be permanently reinvested offshore. However, we could determine to repatriate some of our offshore earnings in future periods to fund stockholder dividends, share repurchases, acquisitions or other corporate activities. We expect that a significant portion of our future cash generation will be in our foreign subsidiaries.
In March 2015, we entered into ten-year fixed-to-floating interest rate swap agreements on a portion of our fixed-rate 1.625% senior subordinated convertible debentures. The interest rate swap agreements are designated as fair value hedges. We paid variable interest equal to the three-month LIBOR minus 53.6 basis points and we received a fixed interest rate of 1.625%. The gross notional amount of these contracts outstanding at March 31, 2015 was $431.3 million. In February 2016, the Company terminated its interest rate swap agreements. Upon termination, the contracts were in an asset position, resulting in cash receipts of approximately $25.7 million, which included $3.7 million of accrued interest. The cash flows from the
termination of these interest rate swap agreements have been reported as operating activities in the consolidated statement of cash flows.
We enter into derivative transactions from time to time in an attempt to reduce 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. At March 31, 2016, we had no foreign currency forward contracts outstanding.
On August 3, 2015, we acquired Micrel for $14.00 per share and paid an aggregate of approximately $430.0 million in cash and issued an aggregate of 8.6millionrepurchased shares of our common stock for $425.6 million.
In December 2021, we amended and restated our Credit Agreement in its entirety. The amended and restated Credit Agreement provides for an unsecured revolving loan facility up to Micrel shareholders. We financed$2.75 billion that terminates on December 16, 2026. The Credit Agreement also permits us, subject to certain conditions, to add one or more incremental term loan facilities or increase the cash portionrevolving loan commitments up to $750.0 million. As of March 31, 2022, the purchase price withprincipal amount of our outstanding indebtedness was $7.84 billion. At March 31, 2022, we had $1.40 billion of outstanding borrowings under the Revolving Credit Facility compared to $2.35 billion at March 31, 2021. During fiscal 2021, we used borrowings under our existing credit agreement.Revolving
On April 4, 2016, we completed our acquisition Atmel. Under the terms of the merger agreement executed on January 19, 2016, Atmel stockholders received $8.15 per share in a combination of $7.00 per share in cashCredit Facility and $1.15 per share in shares of Microchip common stock. We financed the purchase price of our Atmel acquisition using approximately $2.04 billion of cash, cash equivalents, short-term investments and long-term investments held by certain of our foreign subsidiaries, approximately $0.94 billionproceeds from additional borrowings under our existing line of credit agreement and approximately $489 million through the issuance of an aggregate of 10.1 million shares of our common stock. The acquisition price represents a total equity value of approximately $3.47 billion, and a total enterprise value of approximately $3.43 billion, after excluding Atmel's cash and investments net of debt of approximately $39.3 million. The acquisition was structured in a manner that enabled us0.972% 2024 Notes to utilize a substantial portion of the cash, cash equivalents, short-term investments and long-term investments held by certain ofrepay all amounts outstanding under our foreign subsidiaries in a tax efficient manner. Although we believe our determinations with respect to the tax consequences of the acquisition are reasonable, we are regularly audited by the IRS and may be audited by other taxing authorities, and there can be no assurance as to the outcome of any such audit.Term Loan Facility.
Capital Returns
In May 2015,November 2021, our Board of Directors authorized the repurchase of up to 20.0 million shares$4.00 billion of our common stock in the open market or in privately negotiated transactions. In fiscal 2022, we repurchased approximately 5.6 million shares of our common stock for $425.6 million under this authorization. We did not repurchase any shares of our common stock in fiscal 2021. As of March 31, 2016, we had repurchased 8.6 million shares under this authorization for approximately $363.8 million. In January 2016, our Board of Directors authorized an increase in the existing share repurchase program to 15.0 million shares of common stock from the approximately 11.4 million shares remaining under the current authorization. There is no expiration date associated with this repurchase program.
As of March 31, 2016,2022, we held approximately 23.3 million shares as treasury shares. Our current intent is to regularly repurchase shares of our common stock over time based on our cash generation, leverage metrics, and market conditions.
OnIn October 28, 2002, we announced that our Board of Directors had approved and instituted a quarterly cash dividend on our common stock. The initial quarterly dividend of $0.02 per share was paid on December 6, 2003 in the amount of $4.1 million. To date, our cumulative dividend payments have totaled approximately $2.81$5.05 billion. During fiscal 2016, weCash dividends paid dividends in the amount of $1.433 per share for a totalwere $0.910 and $0.747 during fiscal 2022 and fiscal 2021, respectively. Total dividend paymentpayments amounted to $503.8 million and $388.3 million during fiscal 2022 and fiscal 2021, respectively. A quarterly dividend of $291.1 million. During fiscal 2015, we paid dividends in the amount of $1.425$0.276 per share for a total dividend payment of $286.5 million. During fiscal 2014, we paid dividends in the amount of $1.417 per share for a total dividend payment of $281.2 million. Onwas declared on May 4, 2016, we declared a quarterly cash dividend of $0.3595 per share, which9, 2022 and will be paid on June 6, 2016,3, 2022 to stockholders of record onas of May 23, 2016 and20, 2022. We expect the total amount of suchaggregate cash dividend is expectedfor the June 2022 quarter to be approximately $77$153.2 million. Our Board is free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend on our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and other factors deemed relevant by our Board. Our current intent is to provide for ongoingincrease our quarterly cash dividends depending upon market conditions, our results of operations, and potential changes in tax laws.
We believe that our existing sources of liquidity combined with cash generated from operations and borrowings under our credit agreementRevolving Credit Facility will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months. However,Our long-term liquidity requirements primarily arise from working capital requirements, interest and principal repayments related to our outstanding indebtedness, capital expenditures, cash dividends, share repurchases, and income tax payments. For additional information regarding our cash requirements see "Note 11. Commitments and Contingencies", "Note 10. Leases", "Note 6. Debt" and "Note 12. Income Taxes" of the notes to our consolidated financial statements. The semiconductor industry is capital intensive. Inintensive and 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 increase our borrowings under our credit agreementRevolving Credit Facility or seek additional equity or debt financing from time to time to maintain or expand our wafer fabrication and product assembly and test facilities, for cash dividends, for share repurchases or for acquisitions or other purposes. The timing and amount of any such financing requirements will depend on a number of factors, including our level of dividend payments, changes in tax laws and regulations regarding the repatriation of offshore cash, demand for our products, changes in industry conditions, product mix, competitive factors and our ability to identify suitable acquisition candidates. We may from time to time seek to refinance certain of our outstanding notes or Convertible Debt through issuances of new notes or convertible debt, tender offers, exchange transactions or open market repurchases. Such issuances, tender offers or exchanges or purchases, if any, will depend on prevailing market conditions, our ability to negotiate acceptable terms, our liquidity position and other factors. There can be no assurance that suchany financing will be available on acceptable terms due to uncertainties resulting from the COVID-19 pandemic, rising interest rates, higher inflation, economic uncertainty, or other factors, and any additional equity financing would result in incremental ownership dilution to our existing stockholders.
Contractual Obligations
The following table summarizes our significant contractual obligations at March 31, 2016, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes amounts already recorded on our balance sheet as current liabilities at March 31, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less than 1 year | | 1 – 3 years | | 3 – 5 years | | More than 5 years |
| Operating lease obligations | $ | 41,162 |
| | $ | 16,370 |
| | $ | 20,027 |
| | $ | 4,098 |
| | $ | 667 |
|
Capital purchase obligations (1) | 30,158 |
| | 30,158 |
| | — |
| | — |
| | — |
|
Other purchase obligations and commitments (2) | 57,565 |
| | 54,805 |
| | 2,276 |
| | 242 |
| | 242 |
|
Borrowings under credit agreement outstanding as of March 31, 2016 - principal and interest (3) | 1,130,357 |
| | 20,356 |
| | 40,712 |
| | 1,069,289 |
| | — |
|
1.625% senior convertible debentures - principal and interest on 1.625% coupon (4) | 1,973,778 |
| | 28,031 |
| | 56,063 |
| | 56,063 |
| | 1,833,621 |
|
2.125% junior convertible debentures – principal and interest on 2.125% coupon (5) | 840,249 |
| | 12,219 |
| | 24,438 |
| | 24,438 |
| | 779,154 |
|
Total contractual obligations (6) | $ | 4,073,269 |
| | $ | 161,939 |
| | $ | 143,516 |
| | $ | 1,154,130 |
| | $ | 2,613,684 |
|
|
| |
| (1) Capital purchase obligations represent commitments for construction or purchases of property, plant and equipment. These obligations were not recorded as liabilities on our balance sheet as of March 31, 2016, as we have not yet received the related goods or taken title to the property.
|
|
| |
| (2) Other purchase obligations and commitments include payments due under various types of licenses and outstanding purchase commitments with our wafer foundries of approximately $52.4 million for delivery of wafers in fiscal 2017.
|
|
| |
| (3) For purposes of this table we have assumed that the principal of our credit agreement borrowings outstanding at March 31, 2016 will be paid on February 4, 2020, which is the maturity date of such borrowings.
|
|
| |
| (4) For purposes of this table we have assumed that the principal of our senior convertible debentures will be paid on February 15, 2025, which is the maturity date of such debentures.
|
|
| |
| (5) For purposes of this table we have assumed that the principal of our junior convertible debentures will be paid on December 15, 2037, which is the maturity date of such debentures.
|
|
| |
| (6) Total contractual obligations do not include contractual obligations recorded on our balance sheet as current liabilities, or certain purchase obligations as discussed below. The contractual obligations also do not include amounts related to uncertain tax positions because reasonable estimates cannot be made.
|
Purchase orders or contracts for the purchase of raw materials and other goods and services, with the exception of commitments to our wafer foundries, are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For the purpose of this table, contractual obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors with short time horizons. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.
The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
Off-Balance Sheet Arrangements
As of March 31, 2016, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recently Issued Accounting Pronouncements
Refer to Note 1 to our consolidated financial statements regarding recently issued accounting pronouncements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
Our investments are intendedAs of March 31, 2022, our long-term debt totaled $7.84 billion. We have no interest rate exposure to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship torate changes on our investment guidelines and market conditions. Our investment portfolio, consisting of fixed income securities, money market funds, cash deposits, and marketable securities that we hold on an available-for-sale basis, was $2,564.6millionrate debt, which totaled $6.44 billion as of March 31, 2016 compared2022. We do have interest rate exposure with respect to $2,342.2 millionthe $1.40 billion of our variable interest rate debt outstanding as of March 31, 2015. The available-for-sale debt securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. We have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize any material adverse impact in income or cash flows if market interest rates increase. We sold a significant portion of our available-for-sale investments during the fourth quarter of fiscal 2016 to finance a portion of the purchase price of our Atmel acquisition which closed on April 4, 2016. The following table provides information about our available-for-sale securities that are sensitive to changes2022. A 50-basis point increase in interest rates as of March 31, 2016. We have aggregatedwould impact our available-for-sale securitiesexpected annual interest expense for presentation purposes since they are all very similar in nature (dollars in thousands):the next 12 months by approximately $7.0 million.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Financial instruments maturing during the fiscal year ended March 31, |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter |
| Available-for-sale securities | $ | 41,078 |
| | $ | 14,994 |
| | $ | 413,558 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Weighted-average yield rate | 0.98 | % | | 0.75 | % | | 1.21 | % | | — | % | | — | % | | — | % |
See Note 1 to our Consolidated Financial Statements for additional information on our investments.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements and Supplementary Data
The consolidated financial statements listed in the index appearing under Item 15(a)(1) hereof are filed as part of this Form 10-K. See also Index to Financial Statements below.
| |
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. CONTROLS AND PROCEDURESControls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act, of 1934, as amended (the "Exchange Act"), we evaluated under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act.Act). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures arewere effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange CommissionSEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no
matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
Management Report on Internal Control Over Financial Reporting
Our management, including our principal executive officer and our principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Management assessed our internal control over financial reporting as of March 31, 2016,2022, the end of our fiscal year. Management based its assessment on criteria established in Internal Control – Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included an evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our finance organization.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.U.S. GAAP. We reviewed the results of management's assessment with the Audit Committee of our Board of Directors.
Ernst & Young LLP, an independent registered public accounting firm, who audited our consolidated financial statements included in this Form 10-K has issued an attestation report on our internal control over financial reporting as of March 31, 2016,2022, which is included in Part II, Item 9A.on page F-4.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2016,2022, we transitioned certain of Microsemi's processes to our internal control processes and we expect to transition more of such processes throughout the remainder of calendar year 2022. Other than with respect to our transition of Microsemi to our systems and control environment as described above, during the three months ended March 31, 2022, there was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Microchip Technology Incorporated and subsidiaries
We have audited Microchip Technology Incorporated and subsidiaries' internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Microchip Technology Incorporated and subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Microchip Technology Incorporated and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Microchip Technology Incorporated as of March 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended March 31, 2016 and our report dated May 24, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 24, 2016
Item 9B. OTHER INFORMATIONOther Information
In May 2015 or earlier, each ofSteve Sanghi, our Executive Chair, J. Eric Bjornholt, our Senior Vice President and Chief Financial Officer, Mitch Little, our Senior Vice President, Worldwide SalesClient Engagement, and Applications, Steve Drehobl,Matthew W. Chapman, our Vice President, MCU8 and Technology Development Division, and Rich Simoncic, our Vice President, Analog Power and Interface Division,Board Member, have entered into trading plans as contemplated by Rule 10b-5-1 under the Exchange Act and periodic sales of our common stock have occurred and are expected to occur under such plans.
The foregoing disclosure is being made on a voluntary basis and not pursuant to any specific requirement under Form 10-K,10‑K, Form 8-K8‑K or otherwise.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEDirectors, Executive Officers and Corporate Governance
Information on the members of our Board of Directors is incorporated herein by reference to our proxy statement for our 20162022 annual meeting of stockholders under the captions "The Board of Directors," and "Proposal One – Election of Directors."
Information on the composition of our audit committee and the members of our audit committee, including information on our audit committee financial experts, is incorporated by reference to our proxy statement for our 20162022 annual meeting of stockholders under the caption "The Board of Directors – Committees of the Board of Directors – Audit Committee."
Information on our executive officers is provided in Item 1, Part I of this Form 10-K under the caption "Executive Officers of the Registrant" at page 10,11, above.
Information with respect to compliance with Section 16(a) of the Exchange Act, is incorporated herein by reference to our proxy statement for our 20162022 annual meeting of stockholders under the caption "Section"Delinquent Section 16(a) Beneficial Ownership Reporting Compliance.Reports."
Information with respect to our code of ethics that applies to our directors, executive officers (including our principal executive officer and our principal financial and accounting officer) and employees is incorporated by reference to our proxy statement for our 20162022 annual meeting of stockholders under the caption "Code of Business Conduct and Ethics." A copy of our Code of Business Conduct and Ethics is available on our website at the Investor Relations section under Mission Statement/Corporate Governance on www.microchip.com.www.microchip.com.
Information regarding material changes, if any, to procedures by which security holders may recommend nominees to our Board of Directors is incorporated by reference to our proxy statement for the 20162022 annual meeting of stockholders under the caption "Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the 20162022 Annual Meeting of Stockholders; Discretionary Authority to Vote on Stockholder Proposals."
Item 11. EXECUTIVE COMPENSATIONExecutive Compensation
Information with respect to executive compensation is incorporated herein by reference to the information under the caption "Executive Compensation" in our proxy statement for our 20162022 annual meeting of stockholders.
Information with respect to director compensation is incorporated herein by reference to the information under the caption "The Board of Directors – Director Compensation" in our proxy statement for our 20162022 annual meeting of stockholders.
Information with respect to compensation committee interlocks and insider participation in compensation decisions is incorporated herein by reference to the information under the caption "The Board of Directors – Compensation Committee Interlocks and Insider Participation" in our proxy statement for our 20162022 annual meeting of stockholders.
Our Board compensation committee report on executive compensation is incorporated herein by reference to the information under the caption "Executive Compensation – Compensation Committee Report on Executive Compensation" in our proxy statement for our 20162022 annual meeting of stockholders.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
| |
Item 12.
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information with respect to securities authorized for issuance under our equity compensation plans is incorporated herein by reference to the information under the caption "Executive Compensation – Equity Compensation Plan Information" in our proxy statement for our 20162022 annual meeting of stockholders.
Information with respect to security ownership of certain beneficial owners, members of our Board of Directors and management is incorporated herein by reference to the information under the caption "Security Ownership of Principal Stockholders, Directors and Executive Officers" in our proxy statement for our 20162022 annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCECertain Relationships and Related Transactions, and Director Independence
The information required by this Item pursuant to Item 404 of Regulation S-K is incorporated by reference to the information under the caption "Certain Transactions" contained in our proxy statement for our 20162022 annual meeting of stockholders.
The information required by this Item pursuant to Item 407(a) of Regulation S-K regarding the independence of our directors is incorporated by reference to the information under the caption "Meetings of the Board of Directors" contained in our proxy statement for our 20162022 annual meeting of stockholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPrincipal Accountant Fees and Services
The information required by this Item related to principal accountant fees and services as well as related pre-approval policies is incorporated by reference to the information under the caption "Independent Registered Public Accounting Firm" contained in our proxy statement for our 20162022 annual meeting of stockholders.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESExhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Form 10-K:
| | | | | | | | |
| | Page |
| (1) | | Page No.Financial Statements: | |
(1) | Financial Statements:
| |
| Report of Independent Registered Public Accounting Firm
(PCAOB ID: 42) | F-1 |
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | |
| Consolidated Balance Sheets as of March 31, 20162022 and 2015
2021 | F-2 |
| Consolidated Statements of Income for each of the three years in the period ended March 31, 2016
2022 | F-3 |
| Consolidated Statements of Comprehensive Income for each of the three years in the period ended March 31, 2016
2022 | F-4 |
| Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2016
2022 | F-5 |
| Consolidated Statements of Changes in Equity for each of the three years in the period ended March 31, 2016
2022 | F-7 |
| Notes to Consolidated Financial Statements
| F-9 |
| (2) | | Financial Statement Schedules
| None |
| (3) | | The Exhibits filed with this Form 10-K or incorporated herein by reference are set forth in the Exhibit Index, beginning on page 54 hereof, which Exhibit Index is incorporated herein by this reference. | |
(b) See Item 15(a)(3) above.
(c) See "Index to Financial Statements" included under Item 8 to this Form 10-K.
SIGNATURESItem 16. Form 10-K Summary
Not applicable.
| | | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| 3.1 | | 8-K | 000-21184 | | 3.1 | | August 26, 2021 | |
| | | | | | | |
| 3.2 | | 8-K | 000-21184 | | 3.1 | | May 28, 2021 | |
| | | | | | | |
| 4.1 | | 8-K | 000-21184 | | 4.1 | | February 11, 2015 | |
| | | | | | | |
| 4.2 | | 8-K | 000-21184 | | 4.1 | | February 15, 2017 | |
| | | | | | | |
| 4.3 | | 8-K | 000-21184 | | 4.3 | | February 15, 2017 | |
| | | | | | | |
| 4.4 | | 10-K | 000-21184 | | 4.4 | | May 22, 2020 | |
| | | | | | | |
| 4.5 | | 8-K | 000-21184 | | 4.1 | | June 3, 2020 | |
| | | | | | | |
| 4.6 | | 8-K | 000-21184 | | 4.2 | | June 3, 2020 | |
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| 4.7 | | 8-K | 000-21184 | | 4.3 | | June 3, 2020 | |
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| 4.8 | | 8-K | 000-21184 | | 4.4 | | June 3, 2020 | |
| | | | | | | |
| 4.9 | | 8-K | 000-21184 | | 4.1 | | December 2, 2020 | |
| | | | | | | |
| 4.10 | | 8-K | 000-21184 | | 4.2 | | December 2, 2020 | |
| | | | | | | |
| 4.11 | | 8-K | 000-21184 | | 4.1 | | December 18, 2020 | |
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| 4.12 | | 8-K | 000-21184 | | 4.2 | | December 18, 2020 | |
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| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| 4.13 | | 8-K | 000-21184 | | 4.1 | | May 28, 2021 | |
| | | | | | | |
| 4.14 | | 8-K | 000-21184 | | 4.2 | | May 28, 2021 | |
| | | | | | | |
| 10.1 | | 8-K | 000-21184 | | 10.2 | | November 20, 2020 | |
| | | | | | | |
| 10.2 | | 8-K | 000-21184 | | 10.3 | | May 29, 2018 | |
| | | | | | | |
| 10.3 | | 8-K | 000-21184 | | 10.1 | | December 16, 2021 | |
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| 10.4 | | | | | | | X |
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| 10.5* | | S-8 | 333-119939 | | 4.5 | | October 25, 2004 | |
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| 10.6* | | 10-K | 000-21184 | | 10.17 | | May 30, 2019 | |
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| 10.7* | | 10-K | 000-21184 | | 10.18 | | May 30, 2019 | |
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| 10.8* | | 10-K | 000-21184 | | 10.19 | | May 30, 2019 | |
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| 10.9* | | 10-K | 000-21184 | | 10.20 | | May 30, 2019 | |
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| 10.10* | | 8-K | 000-21184 | | 10.1 | | January 7, 2020 | |
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| 10.11* | | 8-K | 000-21184 | | 10.1 | | March 2, 2021 | |
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| 10.12* | | S-8 | 333-101696 | | 4.1.1 | December 6, 2002 | |
| | | | | | | |
| 10.13* | | 10-Q | 000-21184 | | 10.1 | | February 9, 2006 | |
| | | | | | | |
| 10.14* | | 10-K | 000-21184 | | 10.28 | | May 24, 2016 | |
| | | | | | | |
| 10.15* | | 10-Q | 000-21184 | | 10.1 | | November 4, 2021 | |
| | | | | | | |
| 10.16* | | 10-Q | 000-21184 | | 10.2 | | November 4, 2021 | |
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| | | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| 10.17* | | 10-Q | 000-21184 | | 10.3 | | November 4, 2021 | |
| | | | | | | |
| 10.18* | | | | | | | X |
| | | | | | | |
| 10.19* | | | | | | | X |
| | | | | | | |
| 10.20* | | 8-K | 000-21184 | | 10.1 | | December 18, 2008 | |
| | | | | | | |
| 10.21* | | 8-K | 000-21184 | | 10.2 | | December 18, 2008 | |
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| 10.22 | | 10-Q | 000-21184 | | 10.1 | | February 13, 1998 | |
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| 10.23 | | 10-K | 000-21184 | | 10.14 | | May 15, 2001 | |
| | | | | | | |
| 10.24 | | 10-Q | 000-21184 | | 10.2 | | February 13, 1998 | |
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| 21.1** | | | | | | | X |
| | | | | | | |
| 23.1 | | | | | | | X |
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| 24.1** | | | | | | | X |
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| 31.1** | | | | | | | X |
| | | | | | | |
| 31.2** | | | | | | | X |
| | | | | | | |
| 32** | | | | | | | X |
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| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive File because its XBRL tags are embedded within the Inline XBRL document | | | | | | X |
| | | | | | | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | | | | | | X |
| | | | | | | |
| 101.CAL | Taxonomy Extension Calculation Linkbase Document | | | | | | X |
| | | | | | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | X |
| | | | | | | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | | X |
| | | | | | | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document | | | | | | X |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. | | | | | | X |
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| *Compensation plans or arrangements in which directors or executive officers are eligible to participate | | | | | | |
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| ** Furnished herewith | | | | | | |
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 |
| (Registrant) |
| |
May 24, 201620, 2022 | By: /s/ Steve Sanghi Ganesh Moorthy |
| Steve SanghiGanesh Moorthy |
| President, Chief Executive Officer, and Chairman of the BoardDirector |
POWER OF ATTORNEY
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned officer or director of Microchip Technology Incorporated, a Delaware corporation (the "Company")Company), does hereby constitute and appoint each of STEVE SANGHIGANESH MOORTHY and J. ERIC BJORNHOLT, with full power to each of them to act alone, as the true and lawful attorneys and agents of the undersigned, with full power of substitution and resubstitution to each of said attorneys to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto relating to this annual report on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign such person's name individually and on behalf of the Company as an officer or director (as indicated below opposite such person's signature) to the Company's annual report on Form 10-K or any amendments or supplements thereto; and each of the undersigned does hereby fully ratify and confirm all that said attorneys and agents or any of them, shall do or cause to be done by virtue hereof. This Power of Attorney revokes any and all previous powers of attorney granted by any of the undersigned which such power would have entitled said attorneys and agents, or any of them, to sign such person's name, individually or on behalf of the Company, to any Form 10-K.
IN WITNESS WHEREOF, each of the undersigned has executed the foregoing power of attorney on this 24th20th day of May, 2016.2022.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | |
Name and Signature | | | Title | | Date |
| | | | | |
/s/ Steve Sanghi | | | Chief Executive Officer and Chairman of the Board | | May 24, 2016 |
Steve Sanghi | | | | | |
| | | | | |
| | | | | |
/s/ Matthew W. Chapman | | | Director | | May 24, 2016 |
Matthew W. Chapman | | | | | |
| | | | | |
| | | | | |
/s/ L.B. Day | | | Director | | May 24, 2016 |
L.B. Day | | | | | |
| | | | | |
| | | | | |
/s/ Esther L. Johnson | | | Director | | May 24, 2016 |
Esther L. Johnson | | | | | |
| | | | | |
| | | | | |
/s/ Wade F. Meyercord | | | Director | | May 24, 2016 |
Wade F. Meyercord | | | | | |
| | | | | |
| | | | | |
/s/ J. Eric Bjornholt | | | Vice President and Chief Financial Officer | | May 24, 2016 |
J. Eric Bjornholt | | | (Principal Financial and Accounting Officer) | | |
|
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| | | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Filed Herewith |
| 2.1 | | Agreement and Plan of Merger dated as of May 22, 2014 by and among Microchip Technology (Barbados) II Incorporated and ISSC Technologies Corp. | | 10-K | | 000-21184 | | 2.1 | | 5/30/2014 | | |
| 2.2 | | Tender Agreement dated May 22, 2014 between Microchip Technology (Barbados) II Incorporated and Directors, Certain Officers and Certain Shareholders of ISSC Technologies Corp. | | 10-K | | 000-21184 | | 2.2 | | 5/30/2014 | | |
| 2.3 | | Guaranty Concerning Merger Agreement dated May 22, 2014 made by Microchip Technology Incorporated with respect to certain obligations of Microchip Technology (Barbados) II Incorporated | | 10-K | | 000-21184 | | 2.3 | | 5/30/2014 | | |
| 2.4 | | Guaranty Concerning Tender Agreement dated May 22, 2014 made by Microchip Technology Incorporated with respect to certain obligations of Microchip Technology (Barbados) II Incorporated | | 10-K | | 000-21184 | | 2.4 | | 5/30/2014 | | |
| 2.5 | | Agreement and Plan of Merger dated as of February 9, 2014 by and among Microchip Technology Incorporated, Orchid Acquisition Corporation and Supertex, Inc. | | 10-K | | 000-21184 | | 2.5 | | 5/30/2014 | | |
| 2.6 | | Agreement and Plan of Merger dated as of May 1, 2012 by and among Microchip Technology Incorporated, Microchip Technology Management Co. and Standard Microsystems Corporation, including Form of Voting Agreement | | 10-K | | 000-21184 | | 2.2 | | 5/30/2012 | | |
| 2.7 | | Agreement and Plan of Merger dated as of May 7, 2015, by and among, Microchip Technology Incorporated, Micrel, Incorporated, Mambo Acquisition Corp. and Mambo Acquisition LLC | | 8-K | | 000-21184 | | 2.1 | | 5/8/2015 | | |
| 2.8 | | Agreement and Plan of Merger, dated as of January 19, 2016, by and among Microchip Technology, Atmel Corporation, and Hero Acquisition Corporation | | 8-K | | 000-21184 | | 2.1 | | 1/19/2016 | | |
| 3.1 | | Restated Certificate of Incorporation of Registrant | | 10-Q | | 000-21184 | | 3.1 | | 11/12/2002 | | |
| 3.2 | | Amended and Restated By-Laws of Registrant, as amended through October 1, 2013 | | 10-Q | | 000-21184 | | 3.1 | | 11/8/2013 | | |
| 4.1 | | Indenture, dated as of December 7, 2007, by and between Wells Fargo Bank, National Association, as Trustee, and Microchip Technology Incorporated | | 8-K | | 000-21184 | | 4.1 | | 12/7/2007 | | |
| 4.2 | | Indenture dated as of February 11, 2015 between Microchip Technology Incorporated and Wells Fargo Bank, N.A. | | 8-K | | 000-21184 | | 4.1 | | 2/11/2015 | | |
| 4.3 | | Registration Rights Agreement, dated as of December 7, 2007, by and between J.P. Morgan Securities Inc. and Microchip Technology Incorporated | | 8-K | | 000-21184 | | 4.2 | | 12/7/2007 | | |
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Filed Herewith |
| 10.1 | | Master Increasing Lender Supplement dated as of March 19, 2015, by and among Microchip Technology Incorporated and the Increasing Lenders thereto | | 10-K | | 000-21184 | | 10.1 | | 6/8/2015 | | |
| 10.2 | | Amendment No. 1, dated December 4, 2015, to Amended and Restated Credit Agreement, dated as of June 27, 2013, as amended and restated as of February 4, 2015 | | 8-K | | 000-21184 | | 10.1 | | 12/7/2015 | | |
| 10.3 | | Amendment and Restatement Agreement dated as of February 4, 2015, to the Credit Agreement, dated as of June 27, 2013, by and among Microchip Technology Incorporated, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent | | 8-K | | 000-21184 | | 10.1 | | 2/4/2015 | | |
| 10.4 | | Form of Indemnification Agreement between Registrant and its directors and certain of its officers | | S-1 | | 33-57960 | | 10.1 | | 2/5/1993 | | |
| 10.5 | | Microchip Technology Incorporated 2012 Inducement Award Plan | | S-8 | | 333-183074 | | 4.8 | | 8/3/2012 | | |
| 10.6 | | *2004 Equity Incentive Plan as amended and restated August 14, 2015 | | 8-K | | 000-21184 | | 10.1 | | 8/18/2015 | | |
| 10.7 | | *Form of Notice of Grant of Restricted Stock Units (officer) for 2004 Equity Incentive Plan | | S-8 | | 333-192273 | | 10.2 | | 11/12/2013 | | |
| 10.8 | | Form of Notice of Grant of Restricted Stock Units (non-officer) for 2004 Equity Incentive Plan | | S-8 | | 333-192273 | | 10.3 | | 11/12/2013 | | |
| 10.9 | | *Form of Notice of Grant for 2004 Equity Incentive Plan (including Exhibit A Stock Option Agreement) | | S-8 | | 333-119939 | | 4.5 | | 10/25/2004 | | |
| 10.10 | | Form of Notice of Grant (Foreign) for 2004 Equity Incentive Plan (including Exhibit A Stock Option Agreement (Foreign)) | | 10-K | | 000-21184 | | 10.4 | | 5/23/2005 | | |
| 10.11 | | *Form of Notice of Grant of Restricted Stock Units for 2004 Equity Incentive Plan (including Exhibit A Restricted Stock Units Agreement) | | 10-K | | 000-21184 | | 10.6 | | 5/31/2006 | | |
| 10.12 | | *Restricted Stock Units Agreement (Domestic) for 2004 Equity Incentive Plan | | 10-Q | | 000-21184 | | 10.3 | | 11/7/2007 | | |
| 10.13 | | Restricted Stock Units Agreement (Foreign) for 2004 Equity Incentive Plan | | 10-Q | | 000-21184 | | 10.4 | | 11/7/2008 | | |
| 10.14 | | *Form of Global RSU Agreement for 2004 Equity Incentive Plan (including Notice of Grant of Restricted Stock Units) | | 8-K | | 000-21184 | | 10.1 | | 9/27/2010 | | |
| 10.15 | | *Form of Notice of Grant For 1993 Stock Option Plan, with Exhibit A thereto, Form of Stock Option Agreement; and Exhibit B thereto, Form of Stock Purchase Agreement | | S-8 | | 333-872 | | 10.6 | | 1/23/1996 | | |
| 10.16 | | *Microchip Technology Incorporated 2001 Employee Stock Purchase Plan as amended through March 1, 2012 | | 10-Q | | 000-21184 | | 10.1 | | 2/6/2012 | | |
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Filed Herewith |
| 10.17 | | *1997 Nonstatutory Stock Option Plan, as Amended Through March 3, 2003 | | 10-K | | 000-21184 | | 10.13 | | 6/5/2003 | | |
| 10.18 | | *Form of Notice of Grant For 1997 Nonstatutory Stock Option Plan, with Exhibit A thereto, Form of Stock Option Agreement | | 10-K | | 000-21184 | | 10.17 | | 5/27/1998 | | |
| 10.19 | | Microchip Technology Incorporated International Employee Stock Purchase Plan as amended through May 19, 2014, including Purchase Agreement | | 10-K | | 000-21184 | | 10.17 | | 5/30/2014 | | |
| 10.20 | | *Executive Management Incentive Compensation Plan as amended on August 19, 2011 | | 8-K | | 000-21184 | | 10.1 | | 8/24/2011 | | |
| 10.21 | | *Discretionary Executive Management Incentive Compensation Plan | | 10-Q | | 000-21184 | | 10.3 | | 8/24/2006 | | |
| 10.22 | | Management Incentive Compensation Plan as amended by the Board of Directors on May 17, 2013 | | 10-K | | 000-21184 | | 10.21 | | 5/30/2013 | | |
| 10.23 | | *Microchip Technology Incorporated Supplemental Retirement Plan | | S-8 | | 333-101696 | | 4.1.1 | | 12/6/2002 | | |
| 10.24 | | *Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan dated January 1, 1997 | | S-8 | | 333-101696 | | 4.1.3 | | 12/6/2002 | | |
| 10.25 | | *Amendment dated December 9, 1999 to the Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan | | S-8 | | 333-101696 | | 4.1.4 | | 12/6/2002 | | |
| 10.26 | | *February 3, 2003 Amendment to the Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan | | 10-K | | 000-21184 | | 10.28 | | 6/5/2003 | | |
| 10.27 | | *Amendments to Supplemental Retirement Plan | | 10-Q | | 000-21184 | | 10.1 | | 2/9/2006 | | |
| 10.28 | | *Amended and Restated Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan dated October 8, 2008, as amended December 15, 2008 | | | | | | | | | | X |
| 10.29 | | *Change of Control Severance Agreement | | 8-K | | 000-21184 | | 10.1 | | 12/18/2008 | | |
| 10.30 | | *Change of Control Severance Agreement | | 8-K | | 000-21184 | | 10.2 | | 12/18/2008 | | |
| 10.31 | | Development Agreement dated as of August 29, 1997 by and between Registrant and the City of Chandler, Arizona | | 10-Q | | 000-21184 | | 10.1 | | 2/13/1998 | | |
| 10.32 | | Addendum to Development Agreement by and between Registrant and the City of Tempe, Arizona, dated May 11, 2000 | | 10-K | | 000-21184 | | 10.14 | | 5/15/2001 | | |
| 10.33 | | Development Agreement dated as of July 17, 1997 by and between Registrant and the City of Tempe, Arizona | | 10-Q | | 000-21184 | | 10.2 | | 2/13/1998 | | |
| 10.34 | | Amended Strategic Investment Program Contract dated as of June 8, 2009 between, Multnomah County, Oregon, City of Gresham, Oregon and Microchip Technology Incorporated | | 8-K | | 000-21184 | | 10.1 | | 6/11/2009 | | |
| 21.1 | | Subsidiaries of Registrant | | | | | | | | | | X |
|
| | | | | | | | | | | | |
| Name and Signature | | | Title | Incorporated by Reference | | Date |
Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Filed Herewith |
23.1 | | Consent of Independent Registered Public Accounting Firm | | | | | | | | | | X |
24.1/s/ Ganesh Moorthy | | Power of Attorney included on Page 53 of this Form 10-K | | | | | | | | | | X |
31.1 | | Certification ofPresident, Chief Executive Officer, Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act)and Director | | | | | | | | | | XMay 20, 2022 |
31.2Ganesh Moorthy | | Certification of | (Principal Executive Officer) | | |
| | | | | |
| | | | | |
| /s/ Steve Sanghi | | | Executive Chair | | May 20, 2022 |
| Steve Sanghi | | | | | |
| | | | | |
| | | | | |
| /s/ Matthew W. Chapman | | | Director | | May 20, 2022 |
| Matthew W. Chapman | | | | | |
| | | | | |
| | | | | |
| /s/ Esther L. Johnson | | | Director | | May 20, 2022 |
| Esther L. Johnson | | | | | |
| | | | | |
| | | | | |
| /s/ Karlton D. Johnson | | | Director | | May 20, 2022 |
| Karlton D. Johnson | | | | | |
| | | | | |
| | | | | |
| /s/ Wade F. Meyercord | | | Director | | May 20, 2022 |
| Wade F. Meyercord | | | | | |
| | | | | |
| | | | | |
| /s/ Karen M. Rapp | | | Director | | May 20, 2022 |
| Karen M. Rapp | | | | | |
| | | | | |
| | | | | |
| /s/ J. Eric Bjornholt | | | Senior Vice President and Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) | | | | | | | | | | XMay 20, 2022 |
32J. Eric Bjornholt | | Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | (Principal Financial and Accounting Officer) | | | | | | | | | X |
| | *Compensation plans or arrangements in which directors or executive officers are eligible to participate. | | | | | | | | | | |
Annual Report on Form 10-K
Item 8, Item 15(a)(1) and (2), (b) and (c)
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
YEAR ENDED MARCH 31, 20162022
MICROCHIP TECHNOLOGY INCORPORATED
AND SUBSIDIARIES
CHANDLER, ARIZONA
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
| | | | | |
| |
| Page Number |
| |
| Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) | F-1 |
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | |
Consolidated Balance Sheets as of March 31, 20162022 and 20152021 | F-2 |
| |
Consolidated Statements of Income for each of the three years in the period ended March 31, 20162022 | F-3 |
| |
Consolidated Statements of Comprehensive Income for each of the three years in the period ended March 31, 20162022 | F-4 |
| |
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 20162022 | F-5 |
| |
Consolidated Statements of Changes in Equity for each of the three years in the period ended March 31, 20162022 | F-7 |
| |
| Notes to Consolidated Financial Statements | F-9 |
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Shareholders and the Board of Directors and Stockholders of
Microchip Technology Incorporated and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microchip Technology Incorporated and subsidiaries(the Company) as of March 31, 20162022 and 2015, and2021, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended March 31, 2016. 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 20, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Unrecognized tax benefits
| | | | | | | | |
| Description of the Matter | | As more fully described in Note 12 to the consolidated financial statements, the Company operates in a number of tax jurisdictions and its income tax returns are subject to examination by tax authorities in those jurisdictions that may challenge any tax position on these returns. Because the matters challenged by authorities are typically complex and subject to interpretation, their ultimate outcome is uncertain. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more-likely-than-not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. As of March 31, 2022, the Company recognized accrued liabilities for unrecognized tax benefits associated with various tax positions totaling $804.1 million.
Because of the complexity of tax laws and regulations, auditing the recognition and measurement of unrecognized tax benefits requires a high degree of auditor judgment and increased extent of effort, including the involvement of our tax professionals. |
| | |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting process for unrecognized tax benefits. This included testing controls over management’s review of the technical merits of tax positions, including the process to measure the financial statement impact of these tax matters.
Our audit procedures included, among others, evaluating the assumptions the Company used to develop its tax positions and related unrecognized tax benefit amounts by jurisdiction and testing the completeness and accuracy of the underlying data used by the Company to calculate its uncertain tax positions. We involved our tax professionals located in the respective jurisdictions to assess the technical merits of the Company’s tax positions and to evaluate the application of relevant tax laws in the Company’s recognition determination. We assessed the Company’s correspondence with the relevant tax authorities and evaluated tax or legal opinions or other third-party advice obtained by the Company. We also evaluated the adequacy of the Company’s disclosures included in Note 12 in relation to these tax matters. |
Convertible debt transactions
| | | | | | | | |
| Description of the Matter | | As described in Note 6 to the consolidated financial statements, the Company privately negotiated several transactions to settle an aggregate of (1) $107.0 million principal amount of its 2015 Senior Convertible Debt, (2) $205.3 million principal amount of its 2017 Senior Convertible Debt and (3) $112.4 million principal amount of its 2017 Junior Convertible Debt. Through these transactions the Company provided holders an aggregate of (1) $424.7 million of cash and (2) 8.8 million shares of the Company’s common stock. The transactions were complex because the Company used significant judgment to estimate the current comparable borrowing rates for otherwise identical non-convertible debt instruments to determine the fair value of the liability components at each transaction date.
Auditing the valuation of the liability components was challenging because the Company used complex valuation methodologies and subjective assumptions, including the expected volatility and credit spread. |
| | |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to estimate the fair value of the liability components of the convertible debt instruments, including controls over management’s review of the valuation model and the significant assumptions used in the calculation.
Our audit procedures included, among others, inspecting the transaction agreements and involving our internal valuation specialist to assist in evaluating the reasonableness of valuation methodologies, models and significant assumptions. We also performed sensitivity analyses to evaluate the reasonableness of certain significant assumptions, including the current comparable borrowing rates. We tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We also evaluated the Company’s financial statement disclosures related to these matters included in Note 6 to the consolidated financial statements. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2001.
Phoenix, Arizona
May 20, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Microchip Technology Incorporated
Opinion on Internal Control Over Financial Reporting
We have audited Microchip Technology Incorporated’s internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the financial statements referred to above present fairly,Microchip Technology Incorporated (the Company) maintained, in all material respects, the consolidatedeffective internal control over financial positionreporting as of Microchip Technology Incorporated and subsidiaries at March 31, 2016 and 2015, and2022, based on the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2016, in conformity with U.S. generally accepted accounting principles.COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Microchip Technology Incorporatedthe consolidated balance sheets of the Company as of March 31, 2022 and subsidiaries'2021, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended March 31, 2022, and the related notes and our report dated May 20, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting asand for its assessment of March 31, 2016,the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on criteria establishedour audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in Internal Control—Integrated Framework issued byaccordance with the Committee of Sponsoring OrganizationsU.S. federal securities laws and the applicable rules and regulations of the TreadwaySecurities and Exchange Commission (2013 framework) and the PCAOB.
We conducted our report dated May 24, 2016 expressedaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an unqualified opinion thereon.understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 24, 201620, 2022
| |
Item1. | Financial Statements |
Item 1.Financial Statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands,millions, except share and per share amounts)
| | | | | | | | | | | |
| ASSETS |
| March 31, |
| | 2022 | | 2021 |
| Cash and cash equivalents | $ | 317.4 | | | $ | 280.0 | |
| Short-term investments | 2.0 | | | 2.0 | |
| Accounts receivable, net | 1,072.6 | | | 997.7 | |
| Inventories | 854.4 | | | 665.0 | |
| Other current assets | 206.2 | | | 200.5 | |
| Total current assets | 2,452.6 | | | 2,145.2 | |
| Property, plant and equipment, net | 967.9 | | | 854.7 | |
| | | |
| Goodwill | 6,673.6 | | | 6,670.6 | |
| Intangible assets, net | 4,043.1 | | | 4,794.8 | |
| Long-term deferred tax assets | 1,797.1 | | | 1,749.2 | |
| Other assets | 265.2 | | | 264.3 | |
| Total assets | $ | 16,199.5 | | | $ | 16,478.8 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY |
| Accounts payable | $ | 344.7 | | | $ | 292.4 | |
| Accrued liabilities | 1,054.3 | | | 794.3 | |
| Current portion of long-term debt | — | | | 1,322.9 | |
| Total current liabilities | 1,399.0 | | | 2,409.6 | |
| Long-term debt | 7,687.4 | | | 7,581.2 | |
| Long-term income tax payable | 704.6 | | | 689.9 | |
| Long-term deferred tax liability | 39.8 | | | 43.9 | |
| Other long-term liabilities | 473.9 | | | 417.1 | |
| Stockholders' equity: | | | |
| Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued or outstanding | — | | | — | |
| Common stock, $0.001 par value; authorized 900,000,000 shares; 577,805,396 shares issued and 554,500,524 shares outstanding at March 31, 2022; 568,958,158 shares issued and 547,057,188 shares outstanding at March 31, 2021 | 0.6 | | | 0.5 | |
| Additional paid-in capital | 2,535.9 | | | 2,403.1 | |
| Common stock held in treasury: 23,304,872 shares at March 31, 2022; 21,900,970 shares at March 31, 2021 | (796.3) | | | (433.8) | |
| Accumulated other comprehensive loss | (20.6) | | | (26.2) | |
| Retained earnings | 4,175.2 | | | 3,393.5 | |
| Total stockholders' equity | 5,894.8 | | | 5,337.1 | |
| Total liabilities and stockholders' equity | $ | 16,199.5 | | | $ | 16,478.8 | |
See accompanying notes to consolidated financial statements
|
| | | | | | | |
| ASSETS |
| | March 31, |
| | 2016 | | 2015 |
| Cash and cash equivalents | $ | 2,092,751 |
| | $ | 607,815 |
|
| Short-term investments | 353,284 |
| | 1,351,054 |
|
| Accounts receivable, net | 290,183 |
| | 273,937 |
|
| Inventories | 306,815 |
| | 279,456 |
|
| Prepaid expenses | 41,992 |
| | 34,717 |
|
| Deferred tax assets | — |
| | 71,045 |
|
| Assets held for sale | — |
| | 13,989 |
|
| Other current assets | 11,688 |
| | 32,604 |
|
| Total current assets | 3,096,713 |
| | 2,664,617 |
|
| Property, plant and equipment, net | 609,396 |
| | 581,572 |
|
| Long-term investments | 118,549 |
| | 383,326 |
|
| Goodwill | 1,012,652 |
| | 571,271 |
|
| Intangible assets, net | 606,349 |
| | 504,417 |
|
| Long-term deferred tax assets | 14,831 |
| | — |
|
| Other assets | 109,025 |
| | 75,510 |
|
| Total assets | $ | 5,567,515 |
| | $ | 4,780,713 |
|
| LIABILITIES AND EQUITY |
| Accounts payable | $ | 79,312 |
| | $ | 86,866 |
|
| Accrued liabilities | 119,265 |
| | 100,978 |
|
| Deferred income on shipments to distributors | 183,432 |
| | 166,128 |
|
| Total current liabilities | 382,009 |
| | 353,972 |
|
| Senior convertible debentures | 1,234,733 |
| | 1,174,036 |
|
| Junior convertible debentures | 196,304 |
| | 190,870 |
|
| Long-term line of credit | 1,052,000 |
| | 461,952 |
|
| Long-term income tax payable | 111,061 |
| | 114,336 |
|
| Long-term deferred tax liability | 399,218 |
| | 381,192 |
|
| Other long-term liabilities | 41,271 |
| | 43,329 |
|
| Stockholders' equity: | | | |
| Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued or outstanding | — |
| | — |
|
| Common stock, $0.001 par value; authorized 450,000,000 shares; 227,416,789 shares issued and 204,081,727 shares outstanding at March 31, 2016; 218,789,994 shares issued and 202,080,306 shares outstanding at March 31, 2015 | 204 |
| | 202 |
|
| Additional paid-in capital | 1,391,553 |
| | 999,515 |
|
| Common stock held in treasury: 23,335,062 shares at March 31, 2016; 16,709,688 shares at March 31, 2015 | (820,066 | ) | | (515,679 | ) |
| Accumulated other comprehensive (loss) income | (3,357 | ) | | 11,076 |
|
| Retained earnings | 1,582,585 |
| | 1,549,540 |
|
| Microchip Technology stockholders' equity | 2,150,919 |
| | 2,044,654 |
|
| Noncontrolling interests | — |
| | 16,372 |
|
| Total equity | 2,150,919 |
| | 2,061,026 |
|
| Total liabilities and equity | $ | 5,567,515 |
| | $ | 4,780,713 |
|
| See accompanying notes to consolidated financial statements |
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands,millions, except per share amounts)
| | | | Fiscal Year Ended March 31, | |
| | | | 2022 | | 2021 | | 2020 | |
| Net sales | | Net sales | $ | 6,820.9 | | | $ | 5,438.4 | | | $ | 5,274.2 | | |
| Cost of sales | | Cost of sales | 2,371.3 | | | 2,059.6 | | | 2,032.1 | | |
| Gross profit | | Gross profit | 4,449.6 | | | 3,378.8 | | | 3,242.1 | | |
| | Research and development | | Research and development | 989.1 | | | 836.4 | | | 877.8 | | |
| Selling, general and administrative | | Selling, general and administrative | 718.9 | | | 610.3 | | | 676.6 | | |
| Amortization of acquired intangible assets | | Amortization of acquired intangible assets | 862.5 | | | 932.3 | | | 993.9 | | |
| Special charges and other, net | | Special charges and other, net | 29.5 | | | 1.7 | | | 46.7 | | |
| Operating expenses | | Operating expenses | 2,600.0 | | | 2,380.7 | | | 2,595.0 | | |
| | Operating income | | Operating income | 1,849.6 | | | 998.1 | | | 647.1 | | |
| | Other income (expense): | | Other income (expense): | | |
| Interest income | | Interest income | 0.5 | | | 1.7 | | | 2.8 | | |
| Interest expense | | Interest expense | (257.0) | | | (356.9) | | | (497.3) | | |
| Loss on settlement of debt | | Loss on settlement of debt | (113.4) | | | (299.6) | | | (5.4) | | |
| Other income (loss), net | | Other income (loss), net | 2.8 | | | (3.8) | | | 3.2 | | |
| Income before income taxes | | Income before income taxes | 1,482.5 | | | 339.5 | | | 150.4 | | |
| Income tax provision (benefit) | | Income tax provision (benefit) | 197.0 | | | (9.9) | | | (420.2) | | |
| | | | Year ended March 31, | |
| | 2016 | | 2015 | | 2014 | |
| Net sales | $ | 2,173,334 |
| | $ | 2,147,036 |
| | $ | 1,931,217 |
| |
| Cost of sales (1) | 967,870 |
| | 917,472 |
| | 802,474 |
| |
| Gross profit | 1,205,464 |
| | 1,229,564 |
| | 1,128,743 |
| |
| | |
| | |
| | | |
| Research and development (1) | 372,596 |
| | 349,543 |
| | 305,043 |
| |
| Selling, general and administrative (1) | 301,670 |
| | 274,815 |
| | 267,278 |
| |
| Amortization of acquired intangible assets | 174,896 |
| | 176,746 |
| | 94,534 |
| |
| Special charges, net | 3,957 |
| | 2,840 |
| | 3,024 |
| |
| Operating expenses | 853,119 |
| | 803,944 |
| | 669,879 |
| |
| | | | | | | |
| Operating income | 352,345 |
| | 425,620 |
| | 458,864 |
| |
| Losses on equity method investments | (345 | ) | | (317 | ) | | (177 | ) | |
| Other income (expense): | | | | | | |
| Interest income | 24,447 |
| | 19,527 |
| | 16,485 |
| |
| Interest expense | (104,018 | ) | | (62,034 | ) | | (48,716 | ) | |
| Loss on retirement of convertible debentures | — |
| | (50,631 | ) | | — |
| |
| Other income, net | 8,864 |
| | 13,742 |
| | 5,898 |
| |
| Income before income taxes | 281,293 |
| | 345,907 |
| | 432,354 |
| |
| Income tax (benefit) provision | (42,632 | ) | | (19,418 | ) | | 37,073 |
| |
| | Net income | 323,925 |
| | 365,325 |
| | 395,281 |
| Net income | $ | 1,285.5 | | | $ | 349.4 | | | $ | 570.6 | | |
| Less: Net loss attributable to noncontrolling interests | 207 |
| | 3,684 |
| | — |
| |
| Net income attributable to Microchip Technology | $ | 324,132 |
| | $ | 369,009 |
| | $ | 395,281 |
| |
| Basic net income per common share attributable to Microchip Technology stockholders | $ | 1.59 |
| | $ | 1.84 |
| | $ | 1.99 |
| |
| Diluted net income per common share attributable to Microchip Technology stockholders | $ | 1.49 |
| | $ | 1.65 |
| | $ | 1.82 |
| |
| | | | Basic net income per common share | | Basic net income per common share | $ | 2.33 | | | $ | 0.67 | | | $ | 1.19 | | |
| | Diluted net income per common share | | Diluted net income per common share | $ | 2.27 | | | $ | 0.65 | | | $ | 1.11 | | |
| Dividends declared per common share | $ | 1.433 |
| | $ | 1.425 |
| | $ | 1.417 |
| Dividends declared per common share | $ | 0.910 | | | $ | 0.747 | | | $ | 0.733 | | |
| Basic common shares outstanding | 203,384 |
| | 200,937 |
| | 198,291 |
| Basic common shares outstanding | 552.3 | | | 519.2 | | | 477.7 | | |
| Diluted common shares outstanding | 217,388 |
| | 223,561 |
| | 217,630 |
| Diluted common shares outstanding | 565.9 | | | 541.2 | | | 512.4 | | |
| | | | | | | |
| (1) Includes share-based compensation expense as follows: | | | | | | |
| Cost of sales | $ | 8,252 |
| | $ | 9,010 |
| | $ | 7,340 |
| |
| Research and development | 32,022 |
| | 28,164 |
| | 24,554 |
| |
| Selling, general and administrative | 31,146 |
| | 21,422 |
| | 21,893 |
| |
|
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended March 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Net income | | | | | $ | 1,285.5 | | | $ | 349.4 | | | $ | 570.6 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Components of other comprehensive income (loss): | | | | | | | | | |
| Defined benefit plans: | | | | | | | | | |
| Actuarial gains (losses) related to defined benefit pension plans, net of tax effect | | | | | 6.9 | | | (9.4) | | | 1.4 | |
| Reclassification of realized transactions, net of tax effect | | | | | 0.9 | | | 1.1 | | | 0.8 | |
| Change in net foreign currency translation adjustment | | | | | (2.2) | | | 3.7 | | | (1.8) | |
| Other comprehensive income (loss), net of tax effect | | | | | 5.6 | | | (4.6) | | | 0.4 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Comprehensive income | | | | | $ | 1,291.1 | | | $ | 344.8 | | | $ | 571.0 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Net income | $ | 323,925 |
| | $ | 365,325 |
| | $ | 395,281 |
|
| Less: Net loss attributable to noncontrolling interests | 207 |
| | 3,684 |
| | — |
|
| Net income attributable to Microchip Technology | 324,132 |
| | 369,009 |
| | 395,281 |
|
| | | | | | |
| Components of other comprehensive (loss) income: | | | | | |
| Available-for sale securities: | | | | | |
| Unrealized holding (losses) gains, net of tax effect of $0, $12 and $497, respectively | (3,241 | ) | | 33,759 |
| | (4,377 | ) |
| Reclassification of realized transactions, net of tax effect of $0, $12 and $776, respectively | (10,948 | ) | | (18,694 | ) | | (1,595 | ) |
| Change in minimum pension liability, net of tax effect of $18, ($76) and $55, respectively | 31 |
| | (127 | ) | | 88 |
|
| Change in net foreign currency translation adjustment | — |
| | (5,188 | ) | | — |
|
| Other comprehensive (loss) income, net of taxes | (14,158 | ) | | 9,750 |
| | (5,884 | ) |
| Less: Other comprehensive loss attributable to noncontrolling interests | — |
| | 866 |
| | — |
|
| Other comprehensive (loss) income attributable to Microchip Technology | (14,158 | ) | | 10,616 |
| | (5,884 | ) |
| | | | | | |
| Comprehensive income | 309,767 |
| | 375,075 |
| | 389,397 |
|
| Less: Comprehensive loss attributable to noncontrolling interests | 207 |
| | 4,550 |
| | — |
|
| Comprehensive income attributable to Microchip Technology | $ | 309,974 |
| | $ | 379,625 |
| | $ | 389,397 |
|
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)millions)
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 1,285.5 | | | $ | 349.4 | | | $ | 570.6 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 1,143.5 | | | 1,153.3 | | | 1,215.6 | |
| Deferred income taxes | 7.9 | | | (138.9) | | | (490.3) | |
| Share-based compensation expense related to equity incentive plans | 210.2 | | | 198.3 | | | 170.2 | |
| Loss on settlement of debt | 113.4 | | | 299.6 | | | 5.4 | |
| Amortization of debt discount | 44.9 | | | 71.1 | | | 121.7 | |
| Amortization of debt issuance costs | 11.5 | | | 17.1 | | | 17.1 | |
| | | | | |
| | | | | |
| Impairment of intangible assets | 3.0 | | | — | | | 2.2 | |
| | | | | |
| | | | | |
| Other non-cash adjustment | (11.4) | | | (6.4) | | | (2.0) | |
| Changes in operating assets and liabilities, excluding impact of acquisitions: | | | | | |
| Increase in accounts receivable | (74.9) | | | (63.7) | | | (53.3) | |
| (Increase) decrease in inventories | (177.8) | | | 18.4 | | | 28.8 | |
| Increase in accounts payable and accrued liabilities | 192.7 | | | 17.6 | | | 11.4 | |
| Change in other assets and liabilities | 79.4 | | | (16.7) | | | (13.1) | |
| Change in income tax payable | 14.8 | | | 17.4 | | | (40.5) | |
| | | | | |
| Net cash provided by operating activities | 2,842.7 | | | 1,916.5 | | | 1,543.8 | |
| Cash flows from investing activities: | | | | | |
| Purchases of available-for-sale investments | — | | | — | | | (2.0) | |
| | | | | |
| Sales of available-for-sale investments and marketable equity securities | — | | | — | | | 4.7 | |
| | | | | |
| | | | | |
| Proceeds from sales of assets | 14.1 | | | 8.3 | | | 3.2 | |
| Investments in other assets | (121.7) | | | (89.0) | | | (71.5) | |
| Capital expenditures | (370.1) | | | (92.6) | | | (67.6) | |
| Net cash used in investing activities | (477.7) | | | (173.3) | | | (133.2) | |
Cash flows from financing activities: (1) | | | | | |
| Proceeds from borrowings on Revolving Credit Facility | 4,176.0 | | | 3,966.0 | | | 1,026.0 | |
| Repayments of Revolving Credit Facility | (5,123.5) | | | (4,007.9) | | | (1,904.0) | |
| Proceeds from issuance of senior notes | 997.0 | | | 3,577.8 | | | — | |
| Repayment of senior notes | (1,000.0) | | | — | | | — | |
| Proceeds from borrowings on Bridge Loan Facility | — | | | — | | | 611.9 | |
| Repayment of Bridge Loan Facility | — | | | (615.0) | | | — | |
| | | | | |
| Repayments of Term Loan Facility | — | | | (1,723.5) | | | (188.0) | |
| Payments on settlement of convertible debt | (424.7) | | | (2,611.4) | | | (615.0) | |
| Deferred financing costs | (8.5) | | | (21.2) | | | (8.9) | |
| Purchase of capped call options | — | | | (35.8) | | | — | |
| Proceeds from sale of common stock | 70.5 | | | 60.3 | | | 58.8 | |
| Tax payments related to shares withheld for vested RSUs | (84.2) | | | (64.6) | | | (68.1) | |
| Repurchase of common stock | (425.6) | | | — | | | — | |
| Payment of cash dividends | (503.8) | | | (388.3) | | | (350.1) | |
| Capital lease payments | (0.8) | | | (0.6) | | | (0.8) | |
| Net cash used in financing activities | (2,327.6) | | | (1,864.2) | | | (1,438.2) | |
| | | | | |
| Net increase (decrease) in cash and cash equivalents | 37.4 | | | (121.0) | | | (27.6) | |
| Cash and cash equivalents, and restricted cash at beginning of period | 280.0 | | | 401.0 | | | 428.6 | |
| Cash and cash equivalents, and restricted cash at end of period | $ | 317.4 | | | $ | 280.0 | | | $ | 401.0 | |
| | | | | |
|
| | | | | | | | | | | |
| | Year ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 323,925 |
| | $ | 365,325 |
| | $ | 395,281 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 283,171 |
| | 278,298 |
| | 189,139 |
|
| Deferred income taxes | (60,425 | ) | | (32,811 | ) | | 5,321 |
|
| Share-based compensation expense related to equity incentive plans | 71,420 |
| | 58,596 |
| | 53,787 |
|
| Excess tax benefit from share-based compensation | (758 | ) | | (1,216 | ) | | (1,411 | ) |
| Loss on retirement of junior convertible debentures | — |
| | 50,631 |
| | — |
|
| Amortization of debt discount on convertible debentures | 48,022 |
| | 14,791 |
| | 8,970 |
|
| Amortization of debt issuance costs | 3,968 |
| | 2,463 |
| | 1,959 |
|
| Losses on equity method investments | 345 |
| | 317 |
| | 177 |
|
| (Gains) losses on sale of assets | (960 | ) | | — |
| | 244 |
|
| Loss on write-down of fixed assets | — |
| | 362 |
| | — |
|
| Impairment of intangible assets | 629 |
| | 1,881 |
| | 350 |
|
| Realized gain on available-for-sale investments | (13,727 | ) | | (18,469 | ) | | — |
|
| Realized gain on equity method investment | (2,225 | ) | | — |
| | — |
|
| Impairment of available-for-sale investment | 3,995 |
| | — |
| | — |
|
| Amortization of premium on available-for-sale investments | 9,044 |
| | 9,949 |
| | 10,754 |
|
| Special (income) charges | (819 | ) | | — |
| | (459 | ) |
| Gain on shares of acquired company | — |
| | — |
| | (2,438 | ) |
| Changes in operating assets and liabilities, excluding impact of acquisitions: | | | | | |
| Increase in accounts receivable | (2,150 | ) | | (15,893 | ) | | (12,508 | ) |
| Decrease (increase) in inventories | 48,245 |
| | 25,517 |
| | (18,500 | ) |
| Increase in deferred income on shipments to distributors | 16,962 |
| | 18,330 |
| | 8,846 |
|
| Decrease in accounts payable and accrued liabilities | (20,836 | ) | | (33,992 | ) | | (11,633 | ) |
| Change in other assets and liabilities | 36,657 |
| | (2,897 | ) | | 48,685 |
|
| Net cash provided by operating activities | 744,483 |
| | 721,182 |
| | 676,564 |
|
| Cash flows from investing activities: | |
| | |
| | |
| Purchases of available-for-sale investments | (1,573,867 | ) | | (959,318 | ) | | (1,337,482 | ) |
| Sales and maturities of available-for-sale investments | 2,824,231 |
| | 1,097,065 |
| | 951,296 |
|
| Sale of equity method investment | 2,667 |
| | — |
| | — |
|
| Acquisition of Micrel, net of cash acquired | (343,928 | ) | | — |
| | — |
|
| Acquisition of ISSC, net of cash acquired | — |
| | (252,469 | ) | | — |
|
| Purchase of additional controlling interest in ISSC | (18,051 | ) | | (32,095 | ) | | — |
|
| Acquisition of Supertex, net of cash acquired | — |
| | (375,365 | ) | | — |
|
| Other business acquisitions, net of cash acquired | — |
| | — |
| | (11,187 | ) |
| Investments in other assets | (7,056 | ) | | (6,663 | ) | | (9,069 | ) |
| Proceeds from sale of assets | 14,296 |
| | — |
| | 16,235 |
|
| Capital expenditures | (97,895 | ) | | (149,472 | ) | | (113,072 | ) |
| Net cash provided by (used in) investing activities | 800,397 |
| | (678,317 | ) | | (503,279 | ) |
| Cash flows from financing activities: | |
| | |
| | |
| Payments to retire junior convertible debentures | — |
| | (1,134,621 | ) | | — |
|
| Proceeds from issuance of senior convertible debentures | — |
| | 1,725,000 |
| | — |
|
| Repayments of revolving loan under previous credit facility | — |
| | — |
| | (650,000 | ) |
| Repayments of revolving loan under new credit facility | (1,614,452 | ) | | (1,697,642 | ) | | (453,500 | ) |
| Proceeds from borrowings on revolving loan under previous credit facility | — |
| | — |
| | 30,000 |
|
| Proceeds from borrowings on revolving loan under new credit facility | 2,204,500 |
| | 1,859,594 |
| | 753,500 |
|
| Proceeds from issuance of long-term borrowings | — |
| | — |
| | 350,000 |
|
| Repayments of long-term borrowings | — |
| | (350,000 | ) | | — |
|
| Deferred financing costs | (2,156 | ) | | (32,846 | ) | | (7,515 | ) |
| Payment of cash dividends | (291,087 | ) | | (286,478 | ) | | (281,204 | ) |
| Repurchase of common stock | (363,829 | ) | | — |
| | — |
|
| Proceeds from sale of common stock | 28,718 |
| | 34,433 |
| | 60,086 |
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Supplemental disclosure of cash flow information: | | | | | |
|
| | | | | |
| Restricted cash | $ | — | | | $ | — | | | $ | 25.0 | |
| Non-cash activities: | | | | | |
| ROU assets obtained in exchange of lease liabilities | $ | 27.5 | | | $ | 65.6 | | | $ | 24.8 | |
| Cash paid for: | | | | | |
| Interest | $ | 207.8 | | | $ | 265.4 | | | $ | 355.2 | |
| Income taxes | $ | 141.4 | | | $ | 87.3 | | | $ | 101.3 | |
| Operating lease payments in operating cash flows | $ | 45.7 | | | $ | 47.4 | | | $ | 46.5 | |
(1) During the fiscal year ended March 31, 2021, the Company completed the December 2020 settlement of $1,086.5 million principal amount of convertible debt in exchange for $428.9 million in cash, 8.4 million shares of common stock and $665.5 million principal amount of 2020 Senior Convertible Debt. Refer to Note 6 for further information. |
|
| | | | | | | | | | | |
| | Year ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Tax payments related to shares withheld for vested restricted stock units | (21,720 | ) | | (19,504 | ) | | (22,640 | ) |
| Contingent consideration payment | — |
| | — |
| | (14,700 | ) |
| Capital lease payments | (676 | ) | | (604 | ) | | (454 | ) |
| Excess tax benefit from share-based compensation | 758 |
| | 1,216 |
| | 1,411 |
|
| Net cash (used in) provided by financing activities | (59,944 | ) | | 98,548 |
| | (235,016 | ) |
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | (201 | ) | | — |
|
| Net increase (decrease) in cash and cash equivalents | 1,484,936 |
| | 141,212 |
| | (61,731 | ) |
| Cash and cash equivalents at beginning of period | 607,815 |
| | 466,603 |
| | 528,334 |
|
| Cash and cash equivalents at end of period | $ | 2,092,751 |
| | $ | 607,815 |
| | $ | 466,603 |
|
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Additional Paid-in-Capital | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Equity | | | | |
| Shares | | Amount | | Shares | | Amount | |
| | | | | | | | | | | | | | | | | |
| Balance at March 31, 2019 | 506.5 | | | $ | 2,679.8 | | | 31.3 | | | $ | (582.2) | | | $ | (20.7) | | | $ | 3,210.6 | | | $ | 5,287.5 | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 570.6 | | | 570.6 | | | | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 0.4 | | | — | | | 0.4 | | | | | |
| Adoption of ASU 2018-02, cumulative adjustment | — | | | — | | | — | | | — | | | (1.3) | | | 1.3 | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Proceeds from sales of common stock through employee equity incentive plans | 6.4 | | | 58.8 | | | — | | | — | | | — | | | — | | | 58.8 | | | | | |
| RSU and SAR withholdings | (1.2) | | | (68.1) | | | — | | | — | | | — | | | — | | | (68.1) | | | | | |
| Treasury stock used for new issuances | (5.2) | | | (81.6) | | | (5.2) | | | 81.6 | | | — | | | — | | | — | | | | | |
| Shares issued to settle convertible debt | 10.3 | | | 351.8 | | | — | | | — | | | — | | | — | | | 351.8 | | | | | |
| Settlement of convertible debt | — | | | (438.1) | | | — | | | — | | | — | | | — | | | (438.1) | | | | | |
| Share-based compensation | — | | | 172.7 | | | — | | | — | | | — | | | — | | | 172.7 | | | | | |
| Cash dividend | — | | | — | | | — | | | — | | | — | | | (350.1) | | | (350.1) | | | | | |
| Balance at March 31, 2020 | 516.8 | | | 2,675.3 | | | 26.1 | | | (500.6) | | | (21.6) | | | 3,432.4 | | | 5,585.5 | | | | | |
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| Net income | — | | | — | | | — | | | — | | | — | | | 349.4 | | | 349.4 | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (4.6) | | | — | | | (4.6) | | | | | |
| | | | | | | | | | | | | | | | | |
| Proceeds from sales of common stock through employee equity incentive plans | 5.4 | | | 60.3 | | | — | | | — | | | — | | | — | | | 60.3 | | | | | |
| RSU and SAR withholdings | (1.2) | | | (64.6) | | | — | | | — | | | — | | | — | | | (64.6) | | | | | |
| Treasury stock used for new issuances | (4.2) | | | (66.8) | | | (4.2) | | | 66.8 | | | — | | | — | | | — | | | | | |
| Shares issued to settle convertible debt | 52.2 | | | 3,171.1 | | | — | | | — | | | — | | | — | | | 3,171.1 | | | | | |
| Settlement of convertible debt | — | | | (3,622.1) | | | — | | | — | | | — | | | — | | | (3,622.1) | | | | | |
| Purchase of capped call options | — | | | (35.8) | | | — | | | — | | | — | | | — | | | (35.8) | | | | | |
| Issuance of 2020 Senior Convertible Debt | — | | | 87.7 | | | — | | | — | | | — | | | — | | | 87.7 | | | | | |
| Share-based compensation | — | | | 198.5 | | | — | | | — | | | — | | | — | | | 198.5 | | | | | |
| Cash dividend | — | | | — | | | — | | | — | | | — | | | (388.3) | | | (388.3) | | | | | |
| Balance at March 31, 2021 | 569.0 | | | 2,403.6 | | | 21.9 | | | (433.8) | | | (26.2) | | | 3,393.5 | | | 5,337.1 | | | | | |
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| Net income | — | | | — | | | — | | | — | | | — | | | 1,285.5 | | | 1,285.5 | | | | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 5.6 | | | — | | | 5.6 | | | | | |
| Proceeds from sales of common stock through employee equity incentive plans | 5.4 | | | 70.5 | | | — | | | — | | | — | | | — | | | 70.5 | | | | | |
| RSU and SAR withholdings | (1.2) | | | (84.2) | | | — | | | — | | | — | | | — | | | (84.2) | | | | | |
| Treasury stock used for new issuances | (4.2) | | | (63.1) | | | (4.2) | | | 63.1 | | | — | | | — | | | — | | | | | |
| Repurchase of common stock | | | | | 5.6 | | | (425.6) | | | | | | | (425.6) | | | | | |
| Shares issued to settle convertible debt | 8.8 | | | 670.7 | | | — | | | — | | | — | | | — | | | 670.7 | | | | | |
| Settlement of convertible debt | — | | | (668.5) | | | — | | | — | | | — | | | — | | | (668.5) | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Share-based compensation | — | | | 207.5 | | | — | | | — | | | — | | | — | | | 207.5 | | | | | |
| Cash dividend | — | | | — | | | — | | | — | | | — | | | (503.8) | | | (503.8) | | | | | |
| Balance at March 31, 2022 | 577.8 | | | $ | 2,536.5 | | | 23.3 | | | $ | (796.3) | | | $ | (20.6) | | | $ | 4,175.2 | | | $ | 5,894.8 | | | | | |
See accompanying notes to consolidated financial statements
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock and Additional Paid-in-Capital | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Income | | Retained Earnings | | Net Microchip Technology Stockholders' Equity | | Noncontrolling Interests | | Total Equity |
| | | Shares | | Amount | | Shares | | Amount | |
| Balance at April 1, 2013 | | 218,790 |
| | $ | 1,255,823 |
| | 22,317 |
| | $ | (682,220 | ) | | $ | 6,935 |
| | $ | 1,352,932 |
| | $ | 1,933,470 |
| | $ | — |
| | $ | 1,933,470 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 395,281 |
| | 395,281 |
| | — |
| | 395,281 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (5,884 | ) | | — |
| | (5,884 | ) | | — |
| | (5,884 | ) |
| Proceeds from sales of common stock through employee equity incentive plans | | 4,161 |
| | 60,086 |
| | — |
| | — |
| | — |
| | — |
| | 60,086 |
| | — |
| | 60,086 |
|
| Restricted stock unit and stock appreciation right withholdings | | (631 | ) | | (22,640 | ) | | — |
| | — |
| | — |
| | — |
| | (22,640 | ) | | — |
| | (22,640 | ) |
| Treasury stock used for new issuances | | (3,530 | ) | | (104,838 | ) | | (3,530 | ) | | 104,838 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Tax benefit from equity incentive plans | | — |
| | 1,411 |
| | — |
| | — |
| | — |
| | — |
| | 1,411 |
| | — |
| | 1,411 |
|
| Share-based compensation | | — |
| | 54,941 |
| | — |
| | — |
| | — |
| | — |
| | 54,941 |
| | — |
| | 54,941 |
|
| Cash dividend | | — |
| | — |
| | — |
| | — |
| | — |
| | (281,204 | ) | | (281,204 | ) | | — |
| | (281,204 | ) |
| Balance at March 31, 2014 | | 218,790 |
| | 1,244,783 |
| | 18,787 |
| | (577,382 | ) | | 1,051 |
| | 1,467,009 |
| | 2,135,461 |
| | — |
| | 2,135,461 |
|
| Acquisition of controlling interest in ISSC | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 52,467 |
| | 52,467 |
|
| Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 369,009 |
| | 369,009 |
| | (3,684 | ) | | 365,325 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 10,616 |
| | — |
| | 10,616 |
| | (866 | ) | | 9,750 |
|
| Other | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 240 |
| | 240 |
|
| Purchase of additional shares from noncontrolling interest | | — |
| | 345 |
| | — |
| | — |
| | (591 | ) | | — |
| | (246 | ) | | (31,849 | ) | | (32,095 | ) |
| Proceeds from sales of common stock through employee equity incentive plans | | 2,503 |
| | 34,369 |
| | — |
| | — |
| | — |
| | — |
| | 34,369 |
| | 64 |
| | 34,433 |
|
| Restricted stock unit and stock appreciation right withholdings | | (426 | ) | | (19,504 | ) | | — |
| | — |
| | — |
| | — |
| | (19,504 | ) | | — |
| | (19,504 | ) |
| Treasury stock used for new issuances | | (2,077 | ) | | (61,703 | ) | | (2,077 | ) | | 61,703 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Tax benefit from equity incentive plans | | — |
| | 1,220 |
| | — |
| | — |
| | — |
| | — |
| | 1,220 |
| | — |
| | 1,220 |
|
| Share-based compensation | | — |
| | 56,687 |
| | — |
| | — |
| | — |
| | — |
| | 56,687 |
| | — |
| | 56,687 |
|
| Non-cash consideration, exchange of employee stock awards - Supertex acquisition | | — |
| | 1,622 |
| | — |
| | — |
| | — |
| | — |
| | 1,622 |
| | — |
| | 1,622 |
|
| Convertible Debt - retirement of 2037 debentures | | — |
| | (606,926 | ) | | — |
| | — |
| | — |
| | — |
| | (606,926 | ) | | — |
| | (606,926 | ) |
| Convertible Debt - issuance of 2025 debentures | | — |
| | 348,824 |
| | — |
| | — |
| | — |
| | — |
| | 348,824 |
| | — |
| | 348,824 |
|
| Cash dividend | | — |
| | — |
| | — |
| | — |
| | — |
| | (286,478 | ) | | (286,478 | ) | | — |
| | (286,478 | ) |
| Balance at March 31, 2015 | | 218,790 |
| | 999,717 |
| | 16,710 |
| | (515,679 | ) | | 11,076 |
| | 1,549,540 |
| | 2,044,654 |
| | 16,372 |
| | 2,061,026 |
|
| Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 324,132 |
| | 324,132 |
| | (207 | ) | | 323,925 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (14,158 | ) | | — |
| | (14,158 | ) | | — |
| | (14,158 | ) |
| Purchase of additional shares from noncontrolling interest | | — |
| | (1,611 | ) | | — |
| | — |
| | (275 | ) | | — |
| | (1,886 | ) | | (16,165 | ) | | (18,051 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock and Additional Paid-in-Capital | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Income | | Retained Earnings | | Net Microchip Technology Stockholders' Equity | | Noncontrolling Interests | | Total Equity |
| | | Shares | | Amount | | Shares | | Amount | |
| Issuance of common stock - Micrel acquisition | | 8,627 |
| | 369,054 |
| | — |
| | — |
| | — |
| | — |
| | 369,054 |
| | — |
| | 369,054 |
|
| Non-cash consideration, exchange of employee stock awards - Micrel acquisition | | — |
| | 4,052 |
| | — |
| | — |
| | — |
| | — |
| | 4,052 |
| | — |
| | 4,052 |
|
| Purchase of treasury stock | | — |
| | — |
| | 8,627 |
| | (363,829 | ) | | — |
| | — |
| | (363,829 | ) | | — |
| | (363,829 | ) |
| Proceeds from sales of common stock through employee equity incentive plans | | 2,491 |
| | 28,718 |
| | — |
| | — |
| | — |
| | — |
| | 28,718 |
| | — |
| | 28,718 |
|
| Restricted stock unit and stock appreciation right withholdings | | (489 | ) | | (21,720 | ) | | — |
| | — |
| | — |
| | — |
| | (21,720 | ) | | — |
| | (21,720 | ) |
| Treasury stock used for new issuances | | (2,002 | ) | | (59,442 | ) | | (2,002 | ) | | 59,442 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Tax benefit from equity incentive plans | | — |
| | (567 | ) | | — |
| | — |
| | — |
| | — |
| | (567 | ) | | — |
| | (567 | ) |
| Share-based compensation | | — |
| | 73,556 |
| | — |
| | — |
| | — |
| | — |
| | 73,556 |
| | — |
| | 73,556 |
|
| Cash dividend | | — |
| | — |
| | — |
| | — |
| | — |
| | (291,087 | ) | | (291,087 | ) | | — |
| | (291,087 | ) |
| Balance at March 31, 2016 | | 227,417 |
| | $ | 1,391,757 |
| | 23,335 |
| | $ | (820,066 | ) | | $ | (3,357 | ) | | $ | 1,582,585 |
| | $ | 2,150,919 |
| | $ | — |
| | $ | 2,150,919 |
|
| See accompanying notes to consolidated financial statements |
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIESNote 1. Significant Accounting Policies
Nature of Business
Microchip Technology Incorporated (Microchip or the Company) develops, manufactures and sells specialized semiconductor productssmart, connected and secure embedded control solutions used by its customers for a wide variety of applications. The Company provides cost-effective embedded control applications. Microchip's product portfolio comprises general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, RF, timing, safety, security, wired connectivity and wireless connectivity devices, as well as serial EEPROMs, Serial Flash memories, Parallel Flash memories and serial SRAM memories. Microchip also licenses Flash-IP solutions that are incorporatedalso offer the advantages of small size, high performance, extreme low power usage, wide voltage range operation, mixed signal integration, and ease of development, thus enabling timely and cost-effective integration of the Company's solutions by its customers in a broad range oftheir end products.
Principles of Consolidation
The Company prepares its consolidated financial statements in accordance with U.S. GAAP. The consolidated financial statements include the accounts of Microchip Technology Incorporated and its majority-owned subsidiaries (Microchip or the Company). The Company owned 100% of the outstanding stock in all of its subsidiaries as of March 31, 2016. As further discussed in Note 2, the Company did not hold 100% of the outstanding common stock of ISSC Technologies Corporation (ISSC) for a period through June 30, 2015. The noncontrolling interest in the Company's net income from ISSC has been excluded from net income attributable to the Company in the Company's consolidated statements of income. All of the Company's subsidiaries are included in the consolidated financial statements.and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per share amounts, are stated in millions of U.S. dollars unless otherwise noted.
In August 2021, at our Annual Meeting of Stockholders, our stockholders approved a 2-for-one forward stock split and the amendment and restatement of the Company's Certificate of Incorporation to increase the number of authorized shares of common stock from 450.0 million shares to 900.0 million shares. As a result, each stockholder of record at the close of market on October 4, 2021 received 1 additional share of common stock for every share held. Such shares were distributed after the close of trading on October 12, 2021. All share, equity award, and per share amounts and related shareholders' equity balances presented herein have been adjusted to reflect the stock split.
Revenue Recognition
The Company generates revenue primarily from sales of semiconductor products to distributors and non-distributor customers (direct customers) and, to a lesser extent, from royalties paid by licensees of intellectual property. The Company applies the following five-step approach to determine the timing and amount of revenue recognition: (i) identify the contract with the customer, (ii) identify performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the performance obligations are satisfied.
Sales to distributors are governed by a distributor agreement, a purchase order, and an order acknowledgment. Sales to distributors do not meet the definition of a contract until the distributor has sent in a purchase order, the Company has acknowledged the order, the Company has deemed the collectability of the consideration to be probable, and legally enforceable rights and obligations have been created. As is customary in the semiconductor industry, the Company offers price concessions and stock rotation rights to many of its distributors. As these are forms of variable consideration, the Company estimates the amount of consideration to which they will be entitled using recent historical data and applying the expected value method. The transaction price is net of all taxes imposed on and concurrent with specific revenue-producing transactions. After the transaction price has been determined and allocated to the performance obligations, the Company recognizes revenue when the earnings processperformance obligations are satisfied. Substantially all of the revenue generated from contracts with distributors is complete, as evidencedrecognized at, or near to, the time risk and title of the inventory transfers to the distributor.
Sales to direct customers are generally governed by a purchase order and an agreementorder acknowledgment. Sales to direct customers usually do not meet the definition of a contract until the direct customer has sent in a purchase order, the Company has acknowledged the order, the Company has deemed the collectability of the consideration to be probable, and legally enforceable rights and obligations have been created. Generally, the transaction price associated with contracts with direct customers is set at the customer, transferstandalone selling price and is not variable. The transaction price is net of title as well as fixed or determinable pricingall taxes imposed on and when collectability is reasonably assured. Theconcurrent with specific revenue-producing transactions. After the transaction price has been determined and allocated to the performance obligations, the Company recognizes revenue when the performance obligations are satisfied. Substantially all of the revenue generated from product salescontracts with direct customers is recognized at, or near to, original equipment manufacturers (OEMs) upon shipmentthe time risk and records reserves for estimated customer returns.title of the inventory transfers to the customer.
Distributors worldwide generally have broadRevenue generated from licensees is governed by licensing agreements. The Company's primary performance obligation related to these agreements is to provide the licensee the right to use the intellectual property. The final transaction price protection and product return rights, sois
determined by multiplying the Company defers revenue recognition untilusage of the distributor sellslicense by the product to their customer.royalty, which is fixed in the licensing agreement. Revenue is recognized when the distributor sells the product to their end customer, at which time the sales price becomes fixed or determinable. Revenue is not recognized upon the Company's shipment to the distributors since, due to discounts from list price as well as price protection rights, the sales price is not substantially fixed or determinable at that time. At the time of shipment to these distributors, the Company records a trade receivable for the selling price as there is a legally enforceable right to payment, relieves inventory for the carrying value of goods shipped since legal title has passed to the distributor, and records the gross margin in deferred income on shipments to distributors on its consolidated balance sheets.
Deferred income on shipments to distributors effectively represents gross margin on the sale to the distributor at the initial shipment date; however, the amount of gross margin recognized by the Company in future periods will be less than the deferred margin as a result of credits granted to distributors on specifically identified products and customers to allow the distributors to earn a competitive gross margin on the saleusage of the Company's products to their end customers and price protection concessions related to market pricing conditions.license occurs.
The Company sells the majority of the items in its product catalog to its distributors worldwide at a uniform list price. However, distributors resell the Company's products to end customers at a very broad range of individually negotiated price points. The majority of the Company's distributors' resales require a reduction from the original list price paid. Often, under these circumstances, the Company remits back to the distributor a portion of their original purchase price after the resale transaction is completed in the form of a credit against the distributors' outstanding accounts receivable balance. The credits are on a per unit basis and are not given to the distributor until they provide information regarding the sale to their end customer. The price reductions vary significantly based on the customer, product, quantity ordered, geographic location and other factors and discounts to a price less than the Company's cost have historically been rare. The effect of granting these credits establishes the net selling price from the Company to its distributors for the product and results in the net revenue recognized by the Company when the product is sold by the distributors to their end customers. Thus, a portion of the "deferred income on shipments to distributors" balance represents the amount of distributors' original purchase price that will
be credited back to the distributor in the future. The wide range and variability of negotiated price concessions granted to distributors does not allow the Company to accurately estimate the portion of the balance in the deferred income on shipments
to distributors account that will be credited back to the distributors. Therefore, the Company does not reduce deferred income on shipments to distributors or accounts receivable by anticipated future price concessions; rather, price concessions are recorded against deferred income on shipments to distributors when incurred, which is generally at the time the distributor sells the product.
At March 31, 2016, the Company had approximately $267.2 million of deferred revenue and $83.8 million in deferred cost of sales recognized as $183.4 million of deferred income on shipments to distributors. At March 31, 2015, the Company had approximately $260.9 million of deferred revenue and $94.8 million in deferred cost of sales recognized as $166.1 million of deferred income on shipments to distributors. The deferred income on shipments to distributors that will ultimately be recognized in the Company's income statement will be lower than the amount reflected on the balance sheet due to price credits to be granted to the distributors when the product is sold to their customers. These price credits historically have resulted in the deferred income approximating the overall gross margins that the Company recognizes in the distribution channel of its business.
The Company reduces product pricing through price protection based on market conditions, competitive considerations and other factors. Price protection is granted to distributors on the inventory they have on hand at the date the price protection is offered. When the Company reduces the price of its products, it allows the distributor to claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it has on hand as of the date of the price reduction. There is no immediate revenue impact from the price protection, as it is reflected as a reduction of the deferred income on shipments to distributors' balance.
Products returned by distributors and subsequently scrapped have historically been immaterial to the Company's consolidated results of operations. The Company routinely evaluates the risk of impairment of the deferred cost of sales component of the deferred income on shipments to distributors' account. Because of the historically immaterial amounts of inventory that have been scrapped, and historically rare instances where discounts given to a distributor result in a price less than the Company's cost, the Company believes the deferred costs have a low risk of material impairment.
Shipping charges billed to customers are included in net sales, and the related shipping costs are included in cost of sales. The Company collects and remits certain sales-related taxes on sales of inventory and reports such amounts under the net method in its consolidated statements of income.
For licenses or other technology arrangements without an upgrade period, non-royalty revenue from the license is recognized upon delivery of the technology if the fee is fixed or determinable and collection of the fee is reasonably assured. Royalties are recognized when reported to the Company, which generally coincides with the receipt of payment. In certain limited circumstances, the Company enters into license and other arrangements for technologies that the Company is continuing to enhance and refine or under which it is obligated to provide unspecified enhancements. Under these arrangements, non-royalty revenue is recognized over the lesser of (1) the estimated period that the Company has historically enhanced and developed refinements to the specific technology, typically one to three years (the "upgrade period"), and (2) the remaining portion of the upgrade period after the date of delivery of all specified technology and documentation, provided that the fee is fixed or determinable and collection of the fee is reasonably assured. Royalties received during the upgrade period are recognized as revenue based on an amortization calculation of the elapsed portion of the upgrade period compared to the entire estimated upgrade period. Royalties received after the upgrade period has elapsed are recognized when reported to the Company, which generally coincides with the receipt of payment.
Product Warranty
The Company typically warrants its products against defects in materials and workmanship and non-conformance to specifications for 12 to 24 months. The majority of the Company's product warranty claims are settled through the return of the defective product and the shipment of replacement product. Warranty returns are included within the Company's allowance for returns, which is based on historical return rates. Actual future returns could differ from the allowance established. In addition, the Company accrues a liability for specific warranty costs expected to be settled other than through product return and replacement, if a loss is probable and can be reasonably estimated. Product warranty expenses duringwere immaterial for the fiscal 2016, 2015,years ended March 31, 2022, 2021, and 2014 were immaterial.2020.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were immaterial for the fiscal years ended March 31, 2016, 20152022, 2021 and 2014.2020.
Research and Development
Research and development costs are expensed as incurred. Assets purchased to support the Company's ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their estimated useful lives. Renewals or extensions of these assets are expensed as incurred. Research and development expenses include expenditures for labor, share-based payments, depreciation, masks, prototype wafers, and expenses for development of process technologies, new packages, and software to support new products and design environments.
Restructuring Charges
Restructuring charges are included within special charges and other, net in the consolidated statements of income and are primarily comprised of employee separation costs, asset impairments, contract exit costs and costs of facility consolidation and closure, including the related gains or losses associated with the sale of owned facilities. Employee separation costs include one-time termination benefits that are recognized as a liability at estimated fair value at the time of communication to employees, unless future service is required, in which case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits are probable and reasonably estimable. Contract exit costs include contract termination fees and ROU asset impairments recognized on the cease-use date of leased facilities. A liability for contract termination fees is recognized in the period in which the Company terminates the contract.
Foreign Currency Translation
TheSubstantially all of the Company's foreign subsidiaries are considered to be extensions of the U.S. company and any translation gains and losses related to these subsidiaries are included in other (loss) income, (expense)net in the consolidated statements of income. As the U.S. dollar is utilized as the functional currency, gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the subsidiaries' functional currency) are also included in income. For a portion of fiscal 2015,2022, 2021 and 2020, certain foreign subsidiaries acquired as part of the Company's acquisition activities had the local currency as the functional currency. Once these entities were integrated into the Company's legal structure and intercompany agreements were executed, the U.S. dollar became the functional currency for such entities.
Income Taxes
TheAs part of the process of preparing its consolidated financial statements, the Company provides foris required to estimate its income taxes in accordanceeach of the jurisdictions in which it operates. This process involves estimating its actual current tax exposure together with principles containedassessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in ASC Topic 740, Income Taxes. Under these principles, the Company recognizes the amount of income tax payable or refundable for the current year and deferred tax assets and liabilities, forwhich are included within the future tax consequences of eventsCompany's consolidated balance sheets. The Company must then assess the likelihood that have been recognized in its consolidated financial statements or tax returns.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and liabilitiesto the extent the Company believes that recovery is not likely, it must establish a valuation allowance. The Company provided valuation allowances for certain of a change in tax rates is recognized in earnings in the period when the new rate is enacted. Deferredits deferred tax assets are evaluated for future realization and reduced by a valuation allowance ifwhere it is more likely than not that asome portion, or all of such assets, will not be realized. In assessing
Various taxing authorities in the U.S. and other countries in which the Company does business scrutinize the tax structures employed by businesses. Companies of a similar size and complexity as the Company are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. During the fiscal year ended March 31, 2022, various jurisdictions finalized their audits for certain periods. The close of these audits did not have an adverse impact on the financial statements. The Company is currently being audited by the tax authorities in the United States and various foreign jurisdictions for other periods. At this time, the Company does not know what the outcome of these audits will be. The Company records benefits for uncertain tax positions based on an assessment of whether it is more likely than not that deferredthe tax assetspositions will be realized,sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the Company considersrecognizes the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.
The accounting model related to the valuation of uncertain tax positions requires the Company to presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all available evidence, both positiverelevant information and negative, including its recent cumulative earnings experiencethat each tax position will be evaluated without consideration of the possibility of offset or aggregation with other positions. The recognition requirement for the liability exists even if the Company believes the possibility of examination by a taxing authority or discovery of the related risk matters is remote or where it has a long history of the taxing authority not performing an exam or overlooking an issue. The Company will record an adjustment to a previously recorded position if new information or facts related to the position are identified in a subsequent period. All adjustments to the positions are recorded through the income statement. Generally, adjustments will be recorded in periods subsequent to the initial recognition if the taxing authority has completed an audit of the period or if the statute of limitation expires. Due to the inherent uncertainty in the estimation process and expectationsin consideration of the criteria of the accounting model, amounts recognized in the financial statements in periods subsequent to the initial recognition may significantly differ from the estimated exposure of the position under the accounting model.
In December 2017, the TCJA was enacted into law and established a new provision designed to tax low-taxed income of foreign subsidiaries known as global intangible low-taxed income (GILTI). The FASB allows taxpayers to make an accounting policy election of either (i) treating taxes due on GILTI inclusions as a current-period expense when incurred or (ii) recognizing deferred taxes for temporary basis differences that are expected to reverse as GILTI in future availableyears. The Company has made a policy choice to include taxes due on the future GILTI inclusion in taxable income ofwhen incurred.
Beginning in fiscal 2023, the appropriate character by taxing jurisdiction, tax attribute carry back and carry forward periods availableTCJA eliminates the option to themcurrently deduct R&D costs in the year incurred for tax reporting purposes and prudentrequires that all U.S. and feasiblenon-U.S. based R&D expenditures be capitalized and amortized over a five-year and fifteen-year period, respectively. Although it is possible that the U.S. Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that the U.S. Congress will take any action with respect to this provision. Absent any changes to the legislation, cash taxes are expected to increase significantly for several years, and the Company’s effective tax planning strategies.
rate may be adversely impacted. The Company measures and recognizesactual impact on fiscal 2023 cash generated from operations will depend on the amount of tax benefit that should be recorded for financial statement purposes for uncertain tax positions taken or expected to be taken in a tax return. With respect to uncertain tax positions,R&D costs incurred by the Company, evaluateson whether the recognized tax benefits for de-recognition, classification, interestU.S. Congress modifies or repeals this provision, and penalties, interim period accountingon whether new guidance and disclosure requirements. Judgment is required in assessinginterpretive rules are issued by the future tax consequencesU.S. Department of events that have been recognized in its consolidated financial statements or tax returns.the Treasury, among other factors.
Cash and Cash Equivalents
All highly liquid investments, including marketable securities purchased with a remainingan original maturity to the Company of three months or less when acquired are considered to be cash equivalents.
Available-for-Sale Investments
The Company classifies its investments in debt and marketable equity securities as available-for-sale based upon management's intent with regard to the investments and the nature of the underlying securities.
The Company's available-for-sale investments consist of government agency bonds, municipal bonds, auction rate securities (ARS), corporate bonds and marketable equity securities. The Company's investments are carried at fair value with unrealized gains and losses reported in stockholders' equity unless losses are considered to be other than temporary impairments in which case the losses are recognized through the statement of income. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. Dividend and interest income are recognized when earned. The cost of available-for-sale debt securities sold is calculated using the first-in, first-out (FIFO) basis at the individual security level for sales from multiple lots. For sales of marketable equity securities, the Company uses an average cost basis at the individual security level.
The Company includes within short-term investments its income yielding available-for-sale securities that can be readily converted to cash and includes within long-term investments those income yielding available-for-sale securities with maturities of over one year that have unrealized losses attributable to them or those that cannot be readily liquidated. Except as discussed in Note 4, the Company intends and has the ability to hold its long-term investments with temporary impairments until such time as these assets are no longer impaired. Such recovery of unrealized losses is not expected to occur within the next year.
Derivative Instruments
Derivative instruments are required to be recorded at fair value as either assets or liabilities in the Company's consolidated balance sheet. The Company's accounting policies for derivative instruments depends on whether the instrument has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.
The Company does not apply hedge accounting to foreign currency forward contracts. Gains and losses associated with currency rate changes on forward contracts are recorded currently in income. These gains and losses have been immaterial to the Company's financial statements.
Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between the fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be highly effective, hedge accounting is discontinued. In February 2016, the Company terminated its interest rate derivative instruments.
Allowance for Doubtful Accounts
The Company maintains an allowanceis exposed to fluctuations in prices for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which is included in bad debt expense.energy that it consumes, particularly electricity and natural gas. The Company determinesalso enters into variable-priced contracts for some purchases of electricity and natural gas, on an index basis. The Company seeks, or may seek, to partially mitigate these exposures through fixed-price contracts. These contracts meet the adequacy
characteristics of derivative instruments, but generally qualify for the composition of its accounts receivable aging“normal purchases or normal sales” exception under authoritative guidance and evaluating individual customer receivables, considering such customer's financial condition, credit history and current economic conditions.require no mark-to-market adjustment.
Inventories
Inventories are valued at the lower of cost or marketnet realizable value using the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated marketnet realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. 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. In estimating reserves for obsolescence, the Company primarily evaluates estimates ofprojected demand over a 12-month periodperiods that align with demand forecasts used to develop manufacturing plans and inventory build decisions and provides reserves for inventory on hand in excess of the estimated 12-month demand. Estimates for projected 12-month demand are generally based on the average shipments of the prior three-month period, which are then annualized to adjust for any potential seasonality in the Company's business. The estimated 12-month demand is compared to the Company's most recently developed sales forecast to further reconcile the 12-month demand estimate. Management reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the extent any existing products are being replaced or discontinued.
In periods where the Company's production levels are substantially below normal operating capacity, unabsorbed overhead production costs associated with the reduced production levels of the Company's manufacturing facilities are charged directly to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. The Company's property and equipment accounting policies incorporate estimates, assumptions and judgments relative to the useful lives of its property and equipment. Depreciation is provided for assets placed in service on a straight-line basis over the estimated useful lives of the relative assets, which range from 10 to 4030 years
for buildings and building improvements and 35 to 7 years for machinery and equipment. The Company evaluates the carrying value of its property and equipment when events or changes in circumstances indicate that the carrying value of such assets may be impaired. Asset impairment evaluations are, by nature, highly subjective.
SeniorLeases
The Company determines if an arrangement is a lease at its inception. Operating lease arrangements are comprised primarily of real estate and Junior Subordinated equipment agreements for which the ROU assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued expenses and other current liabilities or other long-term liabilities in the consolidated balance sheets.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets also include any initial direct costs and prepayments less lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.
As the Company's leases generally do not provide an implicit rate, the Company uses its collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Lease expense for these leases is recognized on a straight-line basis over the lease term. The Company accounts for the lease and non-lease components as a single lease component.
Convertible DebenturesDebt
TheUpon issuance, the Company separately accounts for the liability and equity components of its seniorConvertible Debt by estimating the fair values of the i) liability component without a conversion feature and junior subordinated convertible debentures in a manner that reflects its nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized.ii) the conversion feature. This results in a bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in itsthe Company's consolidated statements of income. The Convertible Debt is presented as current portion of long-term debt on the balance sheet if the contractual maturity date is within 12 months of the balance sheet date or when the Convertible debt is convertible and the Company does not have the ability to settle the principal portion of its Convertible Debt upon conversion on a long-term basis. As of March 31, 2022, the Company has the ability to settle the principal portion of its Convertible Debt upon conversion on a long-term basis by utilizing proceeds from its Revolving Credit Facility.
Upon settlement of Convertible Debt instruments, the Company allocates the total consideration between the liability and equity components based on the fair value of the liability component without the conversion feature. The difference between the consideration allocated to the liability component and the net carrying value of the liability component is recognized as an extinguishment loss or gain. The remaining settlement consideration is allocated to the equity component and recognized as a reduction of additional paid-in capital in the Company's consolidated balance sheets. In addition, if the terms of the settlement are different from the contractual terms of the original instrument, the Company recognizes an inducement loss, which is measured as the difference between the fair value of the original terms of the instrument and the fair value of the settlement terms.
Determining the fair value of the liability component without the conversion feature upon issuance and settlement involves estimating the equivalent borrowing rate for a similar non-convertible instrument. Given the values of these transactions, fair value estimates are sensitive to changes in the equivalent borrowing rate conclusions. The measurement of the equivalent borrowing rate requires that the Company make estimates of volatility and credit spreads to align observable market inputs with the instrument being valued.
Lastly, the Company includes the dilutive effect of the shares of its common stock issuable upon conversion of the outstanding senior and junior subordinated convertible debenturesConvertible Debt in its diluted income per share calculation regardless of whether the market price triggers or other contingent conversion features have been met. The Company applies the treasury stock method as it has the intent and abilityhas adopted an accounting policy to settle the principal amountsamount of the senior and junior subordinated convertible debenturesConvertible Debt in cash. This method results in incremental dilutive shares when the average marketfair value of the Company's common stock for a reporting period exceeds the conversion prices per share which were $66.05 and $24.31 for the senior and junior subordinated convertible debentures, respectively, at March 31, 2016 and adjustadjusts as dividends are recorded in the future.
Upon a de-recognition event, the Company estimates the fair value of the liability component and compares that to the carrying amount in order to calculate the appropriate amount of gain or loss. The remaining amounts paid or issued (in the case of non cash consideration in the form of shares of common stock) are recognized as a reduction of additional paid-in-capital. The fair value of the liability component is estimated using the current comparable borrowing rate for an otherwise identical non-convertible debt instrument.Defined Benefit Pension Plans
Litigation
The Company's estimated rangeCompany maintains defined benefit pension plans, covering certain of liability related to pending litigation isits foreign employees. For financial reporting purposes, net periodic pension costs and pension obligations are determined based on claims that management believesupon a loss is probablenumber of actuarial assumptions, including discount rates for plan obligations, and assumed rates of compensation increases for which an amount or range of loss is estimable. employees participating in plans. These assumptions are based upon management's judgment and consultation with actuaries, considering all known trends and uncertainties.
Contingencies
In the event that a probable loss cannot be reasonably estimated,ordinary course of business, the Company does not accrue for such losses. Management makesis exposed to various liabilities as a determination as to when a potential loss is reasonably possible based on relevant accounting literatureresult of contracts, product liability, customer claims and then includes appropriate disclosure of the contingency. Asother matters. Additionally, the Company continuesis involved in a limited number of legal actions, both as plaintiff and defendant. Consequently, the Company could incur uninsured liability in any of those actions. The Company also periodically receives notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting reimbursement for various costs. With respect to monitor litigationpending legal actions to which the Company is a party and other claims, although the outcomes are generally not determinable, the Company believes that the ultimate resolution of these matters whether deemedwill not have a material asadverse effect on its financial position, cash flows or results of March 31, 2016 oroperations. Litigation and disputes relating to the semiconductor industry are not its determination could change,uncommon, and the Company is, from time to time, subject to such litigation and disputes. As a result, no assurances can be given with respect to the extent or outcome of any such litigation or disputes in the future.
The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may decide, at some future date,incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to establish an appropriate reserve.be a better estimate than any other, it uses the amount that is the low end of such range.
Business Combinations
All of the Company's business combinations are accounted for at fair value under the acquisition method of accounting. Under the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at fair value as an intangible asset at the acquisition date and amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation
allowances and income tax uncertainties after the acquisition date will be recognized through income tax expense or directly in contributed capital.expense. The aggregate amount of consideration paid by the Company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date. The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill. The measurement of fair value of assets acquired and liabilities assumed requires significant judgment. The valuation of intangible assets, and acquired investments, in particular, requires that the Company use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows. The valuation of non-marketable equity investments acquired also takes into account variables such as conditions reflected in the capital markets, recent financing activity by the investees, the investees' capital structure and the terms of the investees' issued interests.
Goodwill and Other Intangible Assets
The Company's intangible assets include goodwill and other intangible assets. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Other intangible assets include existing technologies, core and developed technology, in-process research and development, trademarks and trade names, distribution rights and customer-related intangibles. In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Indefinite-lived intangible assets consist of goodwill and in-process research and development intangible assets that have not yet been placed in service. All other intangible assets are definite-lived intangible assets, including in-process research and development assets that have been placed in service, and are amortized over their respective estimated lives, ranging from 1 to 15 years.
The Company is required to perform an impairment review of indefinite-lived intangible assets, including goodwill annually, and more frequently under certain circumstances. The goodwill isIndefinite-lived intangible assets are subjected to this annual impairment test during the fourth quarter of the Company's fiscal year. The Company engages primarily in the development, manufacture and sale of semiconductor products as well as technology licensing. As a result, the Company concluded there are two2 reporting units, semiconductor
products and technology licensing. Under theThe Company's impairment evaluation consists of a qualitative goodwill impairment assessment standard,in which management evaluates whether it is more likely than not that goodwill isthe indefinite-lived intangible assets are impaired. If it is determined that it is more likely than not, the Company proceeds with the next step of theperforms a quantitative impairment test, which compares the fair value of the reporting unit or indefinite-lived intangible asset to its carrying value. If the Company determines through the impairment process that goodwillthe indefinite-lived intangible asset has been impaired, the Company will record the impairment charge in its results of operation. Through March 31, 2016,2022, the Company has not had impaired goodwill. The Company's other intangible assets represent existing technologies, core and developed technology, in-process research and development, trademarks and trade names, and customer-related intangibles. Other intangible assets are amortized over their respective estimated lives, ranging from one year to ten years. In the event that facts and circumstances indicate intangibles or other long-liveddefinite-lived intangible assets may be impaired, the Company evaluates the recoverability and estimated useful lives of such assets. In-process researchIf such indicators are present, recoverability is evaluated based on whether the sum of the estimated undiscounted cash flows attributable to the asset (group) in question is less than their carrying value. If less, the Company measures the fair value of the asset (group) and development is capitalized until such timerecognizes an impairment loss if the related projects are completed or abandoned at which timecarrying amount of the capitalized amounts will begin to be amortized or written off.assets exceeds their respective fair values.
Impairment of Long-Lived Assets
The Company assesses whether indicators of impairment of long-lived assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss through a charge to operating results to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset's carrying value. The Company would depreciate the remaining value over the remaining estimated useful life of the asset.
Share-Based Compensation
The Company has equity incentive plans under which non-qualified stock options and restricted stock units (RSUs)RSUs have been granted to employees and non-employee members of the Board of Directors. In the second half of fiscal 2006, theThe Company adopteduses RSUs with a service condition as its primary equity incentive compensation instrument for employees and also grants market-based and performance-based PSUs to executive officers and employees. The Company also has employee stock purchase plans for eligible employees.
The Company estimates the fair value of share-based payment awards on the date of grantPSUs with a market condition using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense straight-line over the requisite service periods. The Company has estimated the fair value of each awarda Monte Carlo simulation model as of the date of grant using historical volatility. Share-based compensation cost for RSUs with a service condition or performance-based PSUs is measured on the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable.
Determining the appropriate fair-value model and calculating the fair value of share-based awards at thegrant date of grant requires judgment. The fair value of RSUs is based on the fair market value of the Company'sCompany’s common stock on the date of grant discounted for expected future dividends.dividends and is recognized as expense on a straight-line attribution method over the requisite service periods. Share-based compensation cost for performance-based PSUs is recognized if and when the Company concludes that it is probable that the
performance condition will be achieved. The Company usesreassess the Black-Scholes option pricing modelprobability of the performance condition at each reporting period and a cumulative catch-up adjustment is recorded to estimate the fair value of employee stock options and rights to purchase shares under stock purchase plans. Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The Company uses a blend of historical and implied volatility based on options freely tradedshare-based compensation cost for any change in the open market as it believes this is more reflective of market conditions and a better indicator of expected volatility than using purely historical volatility. The expected life of the awards is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the Company's awards. The dividend yield assumption is based on the Company's history and expectation of future dividend payouts. The Company estimates the number of share-based awards which will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate would affect share-based compensation, as the impactprobability assessment.
on prior period amortization for all unvested awards is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. If forfeiture adjustments are made, they would affect the Company's results of operations. The effect of forfeiture adjustments in the years ended March 31, 2016, 2015 and 2014 was immaterial.
The Company evaluates the assumptions used to value its awards on a quarterly basis. If factors change and the Company employs different assumptions, share-based compensation expense may differ significantly from what was recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to
accelerate or increase any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that the Company grants additional equity awards to employees or it assumes unvested equity awards in connection with acquisitions.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investments in debt securities and trade receivables. Investments in debt securities with original maturities of greater than six months consist primarily of AAA and AA rated financial instruments and counterparties. The Company's investments are primarily in direct obligations of the U.S. government or its agencies, corporate bonds, and municipal bonds.
Concentrations of credit risk with respect to accounts receivable are generally not significant due to the diversity of the Company's customers and geographic sales areas. The Company sells its products primarily to OEMs and distributors in the Americas, Europe and Asia. The Company performs ongoing credit evaluations of its customers' financial condition and, as deemed necessary, may require collateral, primarily letters of credit.
Distributor advances included in deferred income on shipments to distributors in the consolidated balance sheets, totaled $102.9$170.0 million and $104.8 million at March 31, 20162022 and $116.0 million at March 31, 2015.2021, respectively. On sales to distributors, the Company's payment terms generally require the distributor to settle amounts owed to the Company for an amount in excess of their ultimate cost. The Company's sales price to its distributors may be higher than the amount that the distributors will ultimately owe the Company because distributors often negotiate price reductions after purchasing the productproducts from the Company and such reductions are often significant. It is the Company's practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle receivable balances, on a current basis, generally within 30 days, for amounts originally invoiced. This practice has an adverse impact on the working capital of the Company's distributors. As such, the Company has entered into agreements with certain distributors whereby it advances cash to the distributors to reduce the distributor'sdistributors' working capital requirements. These advances are reconciled at least on a quarterly basis and are estimated based on the amount of ending inventory as reported by the distributor multiplied by a negotiated percentage. Such advances have no impact on revenue recognition or the Company's consolidated statements of income. The Company processes discounts taken by distributors against its deferred income on shipments to distributors' balance and trues-up the advanced amounts generally after the end of each completed fiscal quarter. The terms of these advances are set forth in binding legal agreements and are unsecured, bear no interest on unsettled balances and are due upon demand. The agreements governing these advances can be canceled by the Company at any time.
Use of Estimates
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare its consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles.GAAP. Actual results could differ from those estimates.
Business Segments
Operating segments are components of an enterprise about which separate financial information is regularly reviewed by the chief operating decision maker(s) ("CODM")maker (CODM) to assess the performance of the component and make decisions about the resources to be allocated to the component. The Company's ChairmanPresident and Chief Executive Officer and the Company's President and Chief Operating Officer havehas been identified as the CODMs as they jointly manage the Company's worldwide consolidated enterprise.CODM. Based on the Company's structure and manner in which the Company is managed and decisions are made, the Company's business is made up of two2 operating segments, semiconductor products and technology licensing.
In the semiconductor products segment, the Company designs, develops, manufactures and markets microcontrollers, development tools and analog, interface, mixed signalmixed-signal, timing, wired and timingwireless connectivity devices, and memory products. Under the leadership of the CODMs,CODM, the Company is structured and organized around standardized roles and responsibilities based on product groups and functional activities. The Company's product groups are responsible for product research, design and development. The Company's functional activities include sales, marketing, manufacturing, information technology, human resources, legal and finance.
The Company's product groups have similar products, production processes, types of customers and methods for distribution. In addition, the tools and technologies used in the design and manufacture of the Company's products are shared among the various product groups. The Company's product group leaders, under the direction of the CODMs,CODM, define the product roadmaps and team with sales personnel to achieve design wins and revenue and other performance targets. Product group leaders also interact with manufacturing and operational personnel who are responsible for the production, prioritization and planning of the Company's manufacturing capabilities to help ensure the efficiency of the Company's
operations and
fulfillment of customer requirements. This centralized structure supports a global operating strategy in which the CODMs assessCODM assesses performance and allocateallocates resources based on the Company's consolidated results.
Subsequent Events
The Company evaluated events after March 31, 2022, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
Recently IssuedAdopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under US GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In July 2015, the FASB delayed the effective date of the new standard by one year to December 15, 2017, for annual and interim reporting periods beginning after that date. In accordance with the delay, the new standard will be effective forOn April 1, 2021, the Company beginning no later than April 1, 2018. Early adoption is permitted, but not before the original effective date of December 15, 2016. The new standard allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. In March 2016, the FASB issuedadopted ASU 2016-08 - Revenue from Contracts with Customers2019-12-Income Taxes (Topic 606)740): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10 - Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations. In May 2016, the FASB issued ASU 2016-12 - Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which addresses implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group. As described in the Company's significant accounting policies, the Company defers the revenue and cost of sales on shipments to distributors until the distributor sells the product to their end customer. Upon adoption of ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, the Company will no longer defer revenue until sale by the distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to distributors and record revenue at the time of sale to the distributor. The Company is currently evaluating the impact that the adoption of the standards may have on its consolidated financial statements and additional changes may be identified. The Company has not elected a transition method.
In April 2015, the FASB issued ASU 2015-03-Simplifying the Presentation of Debt Issuance Costs. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 and requires retrospective application. The Company does not expect this standard to have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11-Simplifying the Measurement of Inventory. This standard requires that entities measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. The Company does not expect this standard to have a material impact on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16-Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period AdjustmentsIncome Taxes. This standard amends existing guidance enhances and simplifies various aspects of income tax accounting, including requirements related to require acquiring entitieshybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to recognize measurement-period adjustments intax, the reporting period in which the adjustment amounts are determined. The standard also requires entities to present separately on the face of the income statement (or disclose in the notesintraperiod tax allocation exception to the financial statements)incremental approach, ownership changes in investments, interim-period accounting for enacted changes in tax law, and the amount of the adjustment reflectedyear-to-date loss limitation in the current period earnings, by line item, that would have been recognized in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted.interim-period tax accounting. The standard is to be applied prospectively to measurement-period adjustments that occur after the effective date. The Company adopted this standard beginning in the second quarter of fiscal 2016 and the adoption of this standard did not have a material impact on itsthe Company's consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity, which simplifies the guidance for certain convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The Company plans to adopt the standard under the modified retrospective transition method for fiscal 2023. The adoption of this standard is estimated to result in an increase of approximately $105.8 million to our Convertible Debt, to reflect the full principal amount of the Convertible Debt outstanding net of issuance costs, a reduction to additional paid-in capital of approximately $133.6 million, net of estimated income tax effects, to remove the equity component separately recorded for the conversion features associated with the Convertible Debt, a decrease to deferred tax liabilities, and a cumulative-effect adjustment of approximately $52.0 million, net of estimated income tax effects, to increase the opening balance of retained earnings as of April 1, 2022. The adoption of this standard is expected to reduce interest expense by approximately $32.7 million in fiscal 2023. In addition, the required use of the if-converted method in calculating diluted earnings per share is not expected to increase the number of potentially dilutive shares in fiscal 2023 as the Company irrevocably elected cash settlement for the principal amount of its Convertible Debt on April 1, 2022. The Company intends to settle any excess value in shares of its common stock in the event of a conversion.
In November 2015,2021, the FASB issued ASU 2015-17-Income Taxes2021-10-Government Assistance (Topic 740)832): Balance Sheet ClassificationDisclosure by Business Entities about Government Assistance which aims at increasing the transparency of Deferred Taxes. government assistance received by most business entities. The new guidancestandard requires that all deferred tax assetsbusiness entities to make annual disclosures about the nature of the transactions and liabilities, along with anythe related valuation allowance, be classified as noncurrentaccounting policy used to account for the transactions, the line items and applicable amounts on the balance sheet. The guidancesheet and income statement that are affected by the transactions, and significant terms and conditions of the transactions, including commitments and contingencies. If an entity omits any required disclosures because it is legally prohibited, it must disclose that fact. ASU 2021-10 is effective for annual periods, and interim periods within thosefinancial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. The new guidance was adopted by the Company on a prospective basis in the third quarter for the fiscal year ended March 31, 2016. Prior period amounts in the Company's consolidated balance sheet within this Annual Report on Form 10-K were not adjusted to conform to the new
accounting standard. The adoption of this accounting standard was not material to the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01-Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted.2021. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
Note 2. Net Sales
The following table represents the FASB issued ASU 2016-02, Leases. This standard requires lessees to recognize a lease liability and a right-of-use asset onCompany's net sales by product line (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| Microcontrollers | $ | 3,814.8 | | | $ | 2,961.0 | | | $ | 2,817.9 | | | | | | | | | |
| Analog | 1,939.1 | | | 1,519.8 | | | 1,511.1 | | | | | | | | | |
| | | | | | | | | | | | | |
| Other | 1,067.0 | | | 957.6 | | | 945.2 | | | | | | | | | |
| Total net sales | $ | 6,820.9 | | | $ | 5,438.4 | | | $ | 5,274.2 | | | | | | | | | |
The product lines listed above are included entirely in the balance sheet and aligns manyCompany's semiconductor product segment with the exception of the underlying principles ofother product line, which includes products from both the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for annual periods,semiconductor product and interim periods within those annual periods, beginning after December 15, 2018. technology licensing segments.
The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, Improvements to Employee Share-Based payment Accounting (Topic 718). This standard is intended to provide simplification of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
2. BUSINESS ACQUISITIONS
Acquisition of Micrel
On August 3, 2015, the Company acquired Micrel, a publicly traded company based in San Jose, California. The Company paid an aggregate of approximately $430.0 million in cash and issued an aggregate of 8,626,795 shares of its common stock to Micrel shareholders. The number of shares issued in the transaction was subsequently repurchased in the open market during the year ended March 31, 2016. The total consideration transferred in the acquisition, including approximately $4.1 million of non cash consideration for the exchange of certain share-based payment awards of Micrel for stock awards of the Company, and approximately $13.1 million of cash consideration for the payout of vested employee stock awards, was approximately $816.2 million. The Company financed the cash portion of the purchase price using borrowings under its existing credit agreement. As a result of the acquisition, Micrel became a wholly owned subsidiary of the Company. Micrel's business is to design, develop, manufacture and market a range of high-performance analog, power and mixed-signal integrated circuits. Micrel's products address a wide range of end markets including industrial and automotive, wireline communications, enterprise and cloud infrastructure and mobility. Micrel also manufactures custom analog and mixed-signal circuits and provides wafer foundry services for customers which produce electronic systems utilizing semiconductor manufacturing processes as well as micro-electrical mechanical system technologies. The Company's primary reason for this acquisition was to expandfollowing table represents the Company's rangenet sales by contract type (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| Distributors | $ | 3,248.7 | | | $ | 2,737.4 | | | $ | 2,626.9 | | | | | | | | | |
| Direct customers | 3,450.2 | | | 2,598.1 | | | 2,550.4 | | | | | | | | | |
| Licensees | 122.0 | | | 102.9 | | | 96.9 | | | | | | | | | |
| Total net sales | $ | 6,820.9 | | | $ | 5,438.4 | | | $ | 5,274.2 | | | | | | | | | |
Distributors are customers that buy products with the intention of solutions, products and capabilities by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting,reselling them. Distributors generally have a distributor agreement with the Company identified asto govern the acquirer,terms of the relationship. Direct customers are non-distributor customers, which generally do not have a master sales agreement with the Company. The Company's direct customers primarily consist of OEMs and, to a lesser extent, contract manufacturers. Licensees are customers of the operating resultsCompany's technology licensing segment, which include purchasers of Micrelintellectual property and customers that have beenlicensing agreements to use the Company's SuperFlash® embedded flash technology. All of the contract types listed in the table above are included in the Company's consolidated financial statements assemiconductor product segment with the exception of licenses, which is included in the technology licensing segment.
Substantially all of the closing dateCompany's net sales are recognized from contracts with customers.
Semiconductor Product Segment
For contracts related to the purchase of semiconductor products, the Company satisfies its performance obligation when control of the acquisition. Underordered product transfers to the acquisition methodcustomer. The timing of accounting, the aggregatetransfer of control depends on the agreed upon shipping terms with the customer, but generally occurs upon shipment, which is when physical possession of the product has been transferred and legal title of the product transfers to the customer. Payment is generally due within 30 days of the ship date. Payment is generally collected after the Company satisfies its performance obligation. Also, the Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a contract asset. Refer to Note 9 for the opening and closing balances of the Company's receivables.
The consideration received from customers is fixed, with the exception of consideration from certain distributors. Certain of the Company's distributors are granted price concessions and return rights, which result in variable consideration. The amount of consideration paid by the Company was allocatedrevenue recognized for sales to Micrel's net tangible assets and intangible assets based on their estimated fair values as of August 3, 2015. The excessthese certain distributors is adjusted for estimates of the purchase price over the value of the net tangible assetsconcessions and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefitsreturn rights that are expected to be realized fromclaimed. These estimates are based on the acquisition. The goodwill hasrecent history of price concessions and stock rotations.
As of March 31, 2022, the Company had approximately $117.6 million of deferred revenue in the semiconductor product segment, of which $73.2 million is included within accrued liabilities and the remaining is included within other long-term liabilities on the balance sheet. As of March 31, 2021, the Company had an immaterial amount of deferred revenue in the semiconductor product segment. Deferred revenue represents amounts that have been allocatedinvoiced in advance which are expected to be recognized as revenue in future periods.
Many of the Company’s customer contracts have a duration of less than 12 months, however, a portion of the Company's customer contracts in the semiconductor products reporting segment. Noneproduct segment contain firmly committed orders beyond 12 months at the time of order. The transaction price the Company expects to receive for non-cancelable commitments in such contracts with remaining performance obligations as of March 31, 2022 for orders with initial durations in excess of 12 months approximates the Company’s fiscal 2022 net sales of which approximately 60.0% is expected to be recognized as net sales over the next 12 months. This is inherently uncertain because the transaction prices include variable consideration which is subject to change based upon market conditions at the time of the goodwillsale and may not be indicative of net sales in future periods.
Technology Licensing Segment
The technology licensing segment includes sales and licensing of the Company's intellectual property. For contracts related to the Micrel acquisitionsale of the Company's intellectual property, the Company satisfies its performance obligation and recognizes revenue when control of the intellectual property transfers to the customer. For contracts related to the licensing of the Company's technology, the Company satisfies its performance obligation and recognizes revenue as usage of the license occurs. The transaction price is deductible for tax purposes.fixed by the license agreement. Payment is collected after the Company satisfies its performance obligation, and therefore no contract liabilities are recorded. The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation hasdoes not been finalized. This could result in adjustmentsrecord contract assets due to the fair valuesfact that the Company has an unconditional right to payment upon satisfaction of the assets acquiredperformance obligation, and liabilities assumed,therefore, the useful livesCompany recognizes a receivable instead of intangible assets,a contract asset. Refer to Note 9 for the residual amount allocated to goodwillopening and deferredclosing balances of the Company's receivables.
Note 3. Geographic and Segment Information
The Company's reportable segments are semiconductor products and technology licensing. The Company does not allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income taxes recognized. The preliminary allocation ofto these segments for internal reporting purposes, as the purchase priceCompany does not believe that allocating these expenses is based onbeneficial in evaluating segment performance. Additionally, the best estimates of management and is subjectCompany does not allocate assets to revision based on the final valuations and estimates of useful lives.segments for internal reporting purposes as it does not manage its segments by such metrics.
The following table below represents net sales and gross profit for each segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| Net Sales | | Gross Profit | | Net Sales | | Gross Profit | | Net Sales | | Gross Profit |
| Semiconductor products | $ | 6,698.9 | | | $ | 4,327.6 | | | $ | 5,335.5 | | | $ | 3,275.9 | | | $ | 5,177.3 | | | $ | 3,145.2 | |
| Technology licensing | 122.0 | | | 122.0 | | | 102.9 | | | 102.9 | | | 96.9 | | | 96.9 | |
| Total | $ | 6,820.9 | | | $ | 4,449.6 | | | $ | 5,438.4 | | | $ | 3,378.8 | | | $ | 5,274.2 | | | $ | 3,242.1 | |
The Company sells its products to distributors and OEMs in a broad range of market segments, performs on-going credit evaluations of its customers and, as deemed necessary, may require collateral, primarily letters of credit. The Company's operations outside the preliminary allocationU.S. consist of product assembly and final test facilities in Thailand, and sales and support centers and design centers in certain foreign countries. Domestic operations are responsible for the purchase price, including adjustments to the purchase price allocation from the originally reported figures at September 30, 2015, to the net assets acquired based on their estimated fair values asdesign, development and wafer fabrication of August 3, 2015,products, as well as the associated estimated useful livescoordination of production planning and shipping to meet worldwide customer commitments. The Company's Thailand assembly and test facility is reimbursed in relation to value added with respect to assembly and test operations and other functions performed, and certain foreign sales offices receive compensation for sales within their territory. Accordingly, for financial statement purposes, it is not meaningful to segregate sales or operating profits for the assembly and test and foreign sales office operations. Identifiable long-lived assets (consisting of property, plant and equipment net of accumulated depreciation and ROU assets) by geographic area are as follows (in millions):
| | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
| United States | $ | 595.5 | | | $ | 516.6 | |
| Thailand | 207.9 | | | 178.1 | |
| Various other countries | 317.8 | | | 314.3 | |
| Total long-lived assets | $ | 1,121.2 | | | $ | 1,009.0 | |
Sales to unaffiliated customers located outside the U.S., primarily in Asia and Europe, aggregated approximately 78%, 77% and 78% of consolidated net sales for fiscal 2022, fiscal 2021 and fiscal 2020, respectively. Sales to customers in Europe represented approximately 20%, 19% and 22% of consolidated net sales for fiscal 2022, fiscal 2021 and fiscal 2020,
respectively. Sales to customers in Asia represented approximately 55% of consolidated net sales for each of fiscal 2022 and fiscal 2021 and approximately 52% of consolidated net sales for fiscal 2020. Within Asia, sales into China represented approximately 22% of consolidated net sales for each of fiscal 2022 and fiscal 2021 and 21% of consolidated net sales for fiscal 2020. Sales into Taiwan represented approximately 15%, 16% and 15% of consolidated net sales for fiscal 2022, 2021 and 2020, respectively. Sales into any other individual foreign country did not exceed 10% of the acquired intangible assets at that date (amounts in thousands):
|
| | | | | | | | | | | |
| Assets acquired | Previously Reported September 30, 2015 | | Adjustments | | March 31, 2016 |
| Cash and cash equivalents | $ | 99,196 |
| | $ | — |
| | $ | 99,196 |
|
| Accounts receivable, net | 12,296 |
| | 1,800 |
| | 14,096 |
|
| Inventories | 78,967 |
| | (5,499 | ) | | 73,468 |
|
| Prepaid expenses and other current assets | 10,548 |
| | 104 |
| | 10,652 |
|
| Property, plant and equipment, net | 38,566 |
| | — |
| | 38,566 |
|
| Goodwill | 437,060 |
| | 3,932 |
| | 440,992 |
|
| Purchased intangible assets | 274,800 |
| | (1,300 | ) | | 273,500 |
|
| Other assets | 4,268 |
| | — |
| | 4,268 |
|
| Total assets acquired | 955,701 |
| | (963 | ) | | 954,738 |
|
| | | | | | |
| Liabilities assumed | | | | | |
| Accounts payable | (11,068 | ) | | — |
| | (11,068 | ) |
| Other current liabilities | (30,241 | ) | | (1,400 | ) | | (31,641 | ) |
| Deferred tax liabilities | (88,796 | ) | | 761 |
| | (88,035 | ) |
| Long-term income tax payable | (9,239 | ) | | 1,602 |
| | (7,637 | ) |
| Other long-term liabilities | (127 | ) | | — |
| | (127 | ) |
| Total liabilities assumed | (139,471 | ) | | 963 |
| | (138,508 | ) |
| Purchase price allocated | $ | 816,230 |
| | $ | — |
| | $ | 816,230 |
|
|
| | | | | |
| Purchased Intangible Assets | Useful Life | | August 3, 2015 |
| | (in years) | | (in thousands) |
| Core/developed technology | 10 | | $ | 175,800 |
|
| In-process technology | 10 | | 21,000 |
|
| Customer-related | 5 | | 71,100 |
|
| Backlog | 1 | | 5,600 |
|
| Total purchased intangible assets | | | $ | 273,500 |
|
Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles and acquisition-date backlog. The estimated fair valuesCompany's net sales for any of the corethree years presented.
With the exception of Arrow Electronics, the Company's largest distributor, which accounted for 10% of net sales in fiscal 2020, no other distributor or end customer accounted for more than 10% of net sales in each of fiscal 2022, fiscal 2021 and developed technologyfiscal 2020.
Note 4. Net Income Per Common Share
The following table sets forth the computation of basic and in-process research and development were determineddiluted net income per common share (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| Net income | $ | 1,285.5 | | | $ | 349.4 | | | $ | 570.6 | | | | | | | | | |
| Basic weighted average common shares outstanding | 552.3 | | | 519.2 | | | 477.7 | | | | | | | | | |
| Dilutive effect of stock options and RSUs | 7.1 | | | 7.0 | | | 7.0 | | | | | | | | | |
| | | | | | | | | | | | | |
| Dilutive effect of 2015 Senior Convertible Debt | 2.6 | | | 9.4 | | | 27.4 | | | | | | | | | |
| Dilutive effect of 2017 Senior Convertible Debt | 3.1 | | | 3.4 | | | 0.1 | | | | | | | | | |
| | | | | | | | | | | | | |
| Dilutive effect of 2017 Junior Convertible Debt | 0.8 | | | 2.2 | | | 0.2 | | | | | | | | | |
| Diluted weighted average common shares outstanding | 565.9 | | | 541.2 | | | 512.4 | | | | | | | | | |
| Basic net income per common share | $ | 2.33 | | | $ | 0.67 | | | $ | 1.19 | | | | | | | | | |
| Diluted net income per common share | $ | 2.27 | | | $ | 0.65 | | | $ | 1.11 | | | | | | | | | |
The Company computed basic net income per common share based on the present valueweighted average number of common shares outstanding during the expected cash flows to be generated by the respective existing technology or future technology.period. The core and developed technology intangible assets are being amortized commensurate with the expected cash flows used in the initial determination of fair value. In-process technology is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.
Customer-related intangible assets consist of Micrel's contractual relationships and customer loyalty related to its distributor and end-customer relationships, and the fair values of the customer-related intangibles were determined based on Micrel's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from Micrel's historical customer information. Customer relationships are being amortized in a manner consistent with the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by Micrel at the acquisition date, and the preliminary fair values wereCompany computed diluted net income per common share based on the estimated profit associated with those orders. Backlog related assetsweighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares from employee equity incentive plans are being recognized commensurate with recognitiondetermined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of outstanding RSUs. The Company's Convertible Debt has no impact on diluted net income per common share unless the average price of the revenue forCompany's common stock exceeds the orders on whichconversion price because the backlog intangible assets were determined. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $99.7 million was established as a net deferred tax liability forCompany intends to settle the future amortizationprincipal amount of the intangible assets offset by $11.4 millionConvertible Debt in cash upon conversion. Prior to conversion, the Company will include, in the diluted net income per common share calculation, the effect of net deferred tax assets.the additional shares that may be issued when the Company's common stock price exceeds the conversion price using the treasury stock method. The following is the weighted average conversion price per share used in calculating the dilutive effect (see Note 6 for details on the Convertible Debt):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 30.10 | | | $ | 30.45 | | | $ | 30.90 | | | | | | | | | |
| 2017 Senior Convertible Debt | $ | 46.93 | | | $ | 47.48 | | | $ | 48.19 | | | | | | | | | |
| 2020 Senior Convertible Debt | $ | 93.34 | | | $ | 93.43 | | | $ | — | | | | | | | | | |
| 2017 Junior Convertible Debt | $ | 46.10 | | | $ | 46.65 | | | $ | 47.34 | | | | | | | | | |
Note 5. Special Charges and Other, Net
The amount of Micrel net salesfollowing table summarizes activity included in the "special charges and other, net" caption on the Company's consolidated statements of income (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| Restructuring | | | | | | | | | | | | | |
| Employee separation costs | $ | 0.6 | | | $ | (1.3) | | | $ | 6.0 | | | | | | | | | |
| Gain on sale of assets | (7.9) | | | (5.8) | | | (1.5) | | | | | | | | | |
| Impairment charges | — | | | — | | | 0.7 | | | | | | | | | |
| Contract exit costs | 5.0 | | | (1.6) | | | 5.2 | | | | | | | | | |
| Wafer fabrication restructuring | 21.1 | | | 15.0 | | | 18.0 | | | | | | | | | |
| Other | (0.3) | | | 0.1 | | | 2.6 | | | | | | | | | |
| Legal contingencies | 12.5 | | | 0.2 | | | 15.7 | | | | | | | | | |
| | | | | | | | | | | | | |
| Contingent consideration revaluation | (1.5) | | | (4.9) | | | — | | | | | | | | | |
| | | | | | | | | | | | | |
| Total | $ | 29.5 | | | $ | 1.7 | | | $ | 46.7 | | | | | | | | | |
The Company continuously evaluates its existing operations in an attempt to identify and realize cost savings opportunities and operational efficiencies. This same approach is applied to businesses that are acquired by the Company and often the operating models of acquired companies are not as efficient as the Company's operating model which enables the Company to realize significant savings and efficiencies. As a result, following an acquisition, the Company will from time to time incur restructuring expenses; however, the Company is often not able to estimate the timing or amount of such costs in advance of the period in which they occur. The primary reason for this is that the Company regularly reviews and evaluates each position, contract and expense against the Company's strategic objectives, long-term operating targets and other operational priorities. Decisions related to restructuring activities are made on a "rolling basis" during the course of the integration of an acquisition whereby department managers, executives and other leaders work together to evaluate each of these expenses and make recommendations. As a result of this approach, at the time of an acquisition, the Company is not able to estimate the future amount of expected employee separation or exit costs that it will incur in connection with its restructuring activities.
The Company incurred costs of $21.1 million, $15.0 million and $18.0 million associated with restructuring certain of its wafer fabrication operations and other acquired operations during the fiscal years ended March 31, 2022, 2021 and 2020, respectively. These wafer fabrication restructuring efforts were substantially completed as of March 31, 2022. The Company's other restructuring activities during the fiscal years ended March 31, 2022, 2021 and 2020 were primarily related to the Company's most recent business acquisitions, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. Additional costs will be incurred in the future as additional synergies or operational efficiencies are identified in connection with the Microsemi transaction, other previous acquisitions, or the restructuring of wafer fabrication operations. The Company is not able to estimate the amount of other such future expenses at this time.
During the fiscal years ended March 31, 2022 and 2020, the Company incurred $12.5 million and $15.7 million, respectively, of net charges related to legal settlements.
All of the Company's restructuring activities occurred in its semiconductor products segment. The Company incurred $70.6 million in costs since the start of the fiscal year ended March 31, 2016 was approximately $116.4 million.2019 in connection with employee separation activities and $3.9 million in connection with contract exit activities. The operationsCompany could incur future expenses as additional synergies or operational efficiencies are identified. Beyond what is already accrued, the Company is not able to estimate future expenses, if any, to be incurred.
The liability for restructuring and other exit costs of Micrel were fully integrated into$16.0 million is included in accrued liabilities and other long-term liabilities, on the Company's operationsconsolidated balance sheet as of November 1, 2015 and as such, cost of sales and operating expenses were no longer segregated as of that date.
The following unaudited pro-forma consolidated results of operations for the years ended March 31, 2016 and 2015 assume the Micrel acquisition occurred as2022.
|
| | | | | | | |
| | Year ended March 31, |
| | 2016 | | 2015 |
| Net sales | $ | 2,283,517 |
| | $ | 2,352,727 |
|
| Net income | $ | 365,654 |
| | $ | 278,673 |
|
| Basic earnings per share | $ | 1.80 |
| | $ | 1.39 |
|
| Diluted earnings per share | $ | 1.68 |
| | $ | 1.25 |
|
Acquisition of ISSC
On July 17, 2014, the Company acquired an 83.5% interestDebt obligations included in Taiwan-based ISSC, a leading provider of low power Bluetooth and advanced wireless solutions for the Internet of Things (IoT) market. The Company acquired the 83.5% ownership interest through a tender offer process. After the completion of the tender offer, the Company continued to acquire additional shares of ISSC, and as of June 30, 2015, the Company had completed the acquisition of 100% of the outstanding shares of ISSC.
The acquisition was accounted for under the acquisition method of accounting. The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values as of July 17, 2014 as well as the associated estimated useful lives of the acquired intangible assets at that date. The purchase price allocation was finalized as of June 30, 2015 (amounts in thousands):
|
| | | |
| Assets acquired | June 30, 2015 |
| Cash and cash equivalents | $ | 15,120 |
|
| Short-term investments | 27,063 |
|
| Accounts receivable, net | 8,792 |
|
| Inventories | 16,542 |
|
| Prepaid expenses and other current assets | 2,501 |
|
| Property, plant and equipment, net | 2,637 |
|
| Goodwill | 154,788 |
|
Purchased intangible assets (1) | 147,800 |
|
| Other assets | 1,370 |
|
| Total assets acquired | 376,613 |
|
| | |
| Liabilities assumed | |
| Accounts payable | (9,860 | ) |
| Other current liabilities | (16,535 | ) |
| Long-term income tax payable | (4,791 | ) |
| Deferred tax liability | (25,126 | ) |
| Other long-term liabilities | (245 | ) |
| Total liabilities assumed | (56,557 | ) |
| Net assets acquired including noncontrolling interest | 320,056 |
|
| Less: noncontrolling interest | (52,467 | ) |
| Net assets acquired | $ | 267,589 |
|
|
| | | | | |
(1) Purchased Intangible Assets | Useful Life | | July 17, 2014 |
| | (in years) | | (in thousands) |
| Core/developed technology | 10 | | $ | 68,900 |
|
| In-process technology | 10 | | 27,200 |
|
| Customer-related | 3 | | 51,100 |
|
| Backlog | 1 | | 600 |
|
| | | | $ | 147,800 |
|
Acquisition of Supertex
On April 1, 2014, the Company acquired Supertex Inc., a publicly traded company based in Sunnyvale, California. Supertex is a leader in high voltage analog and mixed signal technologies, with a strong position in the medical, lighting and industrial control markets.
The acquisition was accounted for under the acquisition method of accounting. The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values as of April 1, 2014 as well as the associated estimated useful lives of the acquired intangible assets at that date. The purchase price allocation was finalized on March 31, 2015 (amounts in thousands):
|
| | | |
| Assets acquired | March 31, 2015 |
| Cash and cash equivalents | $ | 14,790 |
|
| Short-term investments | 140,984 |
|
| Accounts receivable, net | 7,047 |
|
| Inventories | 27,630 |
|
| Prepaid expenses | 1,493 |
|
| Deferred tax assets | 2,456 |
|
| Other current assets | 12,625 |
|
| Property, plant and equipment, net | 15,679 |
|
| Goodwill | 143,160 |
|
Purchased intangible assets (1) | 89,600 |
|
| Other assets | 325 |
|
| Total assets acquired | 455,789 |
|
| | |
| Liabilities assumed | |
| Accounts payable | (8,481 | ) |
| Accrued liabilities | (19,224 | ) |
| Long-term income tax payable | (3,796 | ) |
| Deferred tax liability | (32,511 | ) |
| Total liabilities assumed | (64,012 | ) |
| Net assets acquired | $ | 391,777 |
|
|
| | | | | |
(1) Purchased Intangible Assets | Useful Life | | April 1, 2014 |
| | (in years) | | (in thousands) |
| Core/developed technology | 10 | | $ | 68,900 |
|
| In-process technology | 10 | | 1,900 |
|
| Customer-related | 2 | | 17,700 |
|
| Backlog | 1 | | 1,100 |
|
| | | | $ | 89,600 |
|
3. SPECIAL CHARGES
During fiscal 2016, the Company incurred special charges of $4.0 million comprised of $11.2 million related to severance, office closing and other costs associated with the Company's acquisition activity and legal settlement costs of approximately $4.3 million partially offset by special income of $11.5 million related to an insurance settlement for reimbursement of funds Microchip previously paid to settle a lawsuit in the second quarter of fiscal 2013. During fiscal 2015 and fiscal 2014, the Company incurred special charges of $2.8 million and $3.0 million, respectively, related to severance, office closing and other costs associated with its acquisition activity.
The Company's investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to the Company's investment guidelines and market conditions. The following is a summary of available-for-sale securities at March 31, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | Available-for-sale Securities |
| | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Government agency bonds | $ | 468,290 |
| | $ | 439 |
| | $ | (99 | ) | | $ | 468,630 |
|
| Corporate bonds and debt | 1,000 |
| | — |
| | — |
| | 1,000 |
|
| Marketable equity securities | 2,195 |
| | 8 |
| | — |
| | 2,203 |
|
| Total | $ | 471,485 |
| | $ | 447 |
| | $ | (99 | ) | | $ | 471,833 |
|
The following is a summary of available-for-sale securities at March 31, 2015 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | Available-for-sale Securities |
| | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Government agency bonds | $ | 741,780 |
| | $ | 676 |
| | $ | (200 | ) | | $ | 742,256 |
|
| Municipal bonds | 41,552 |
| | 155 |
| | (9 | ) | | 41,698 |
|
| Auction rate securities | 9,825 |
| | — |
| | — |
| | 9,825 |
|
Time deposits (1) | 506 |
| | — |
| | — |
| | 506 |
|
| Corporate bonds and debt | 924,818 |
| | 2,376 |
| | (265 | ) | | 926,929 |
|
| Marketable equity securities | 1,362 |
| | 11,804 |
| | — |
| | 13,166 |
|
| Total | $ | 1,719,843 |
| | $ | 15,011 |
| | $ | (474 | ) | | $ | 1,734,380 |
|
(1) Time deposits in various financial institutions with maturities greater than three months that will mature within one year.
At March 31, 2016, the Company's available-for-sale debt securities and marketable equity securities are presented on the consolidated balance sheets as short-term investmentsconsisted of $353.3 millionthe following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Coupon Interest Rate | | Effective Interest Rate | | Fair Value of Liability Component at Issuance(1) | | | | | | | | |
| | | | | | March 31, |
| | | | | | | | 2022 | | 2021 |
| Revolving Credit Facility | | | | | | | | | | | $ | 1,399.1 | | | $ | 2,346.6 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
3.922% 2021 Notes(2) | 3.922% | | 4.5% | | | | | | | | — | | | 1,000.0 | |
4.333% 2023 Notes(2) | 4.333% | | 4.7% | | | | | | | | 1,000.0 | | | 1,000.0 | |
2.670% 2023 Notes(2) | 2.670% | | 2.8% | | | | | | | | 1,000.0 | | | 1,000.0 | |
0.972% 2024 Notes(2) | 0.972% | | 1.1% | | | | | | | | 1,400.0 | | | 1,400.0 | |
0.983% 2024 Notes(2) | 0.983% | | 1.1% | | | | | | | | 1,000.0 | | | — | |
4.250% 2025 Notes(2) | 4.250% | | 4.6% | | | | | | | | 1,200.0 | | | 1,200.0 | |
Total Senior Indebtedness(3) | | | | | | | | | | | 6,999.1 | | | 7,946.6 | |
| Senior Subordinated Convertible Debt - Principal Outstanding | | | | | | | | |
| 2015 Senior Convertible Debt | 1.625% | | 5.9% | | $ | 30.4 | | | | | | | 34.4 | | | 141.4 | |
| 2017 Senior Convertible Debt | 1.625% | | 6.0% | | $ | 104.2 | | | | | | | 128.1 | | | 333.3 | |
| 2020 Senior Convertible Debt | 0.125% | | 5.1% | | $ | 555.5 | | | | | | | 665.5 | | | 665.5 | |
| Junior Subordinated Convertible Debt - Principal Outstanding | | | | | | | | |
| 2017 Junior Convertible Debt | 2.250% | | 7.4% | | $ | 5.4 | | | | | | | 10.1 | | | 122.6 | |
| | | | | | | | | | | | | |
| Total Convertible Debt | | | | | | | | | | | 838.1 | | | 1,262.8 | |
| | | | | | | | | | | | | |
| Gross long-term debt including current maturities | | | | | | | | | | | 7,837.2 | | | 9,209.4 | |
Less: Debt discount(4) | | | | | | | | | | | (124.6) | | | (273.0) | |
Less: Debt issuance costs(5) | | | | | | | | | | | (25.2) | | | (32.3) | |
| Net long-term debt including current maturities | | | | | | | | | | | 7,687.4 | | | 8,904.1 | |
Less: Current maturities(6) | | | | | | | | | | | — | | | (1,322.9) | |
| Net long-term debt | | | | | | | | | | | $ | 7,687.4 | | | $ | 7,581.2 | |
(1)As each of the Convertible Debt instruments may be settled in cash upon conversion, for accounting purposes, they were bifurcated into a liability component and long-term investmentsan equity component. The amount allocated to the equity component is the difference between the principal value of $118.5 million. At the instrument and the fair value of the liability component at issuance. As of March 31, 2022, the amount allocated to the equity component is $11.3 million, $41.7 million, $110.0 million, and $5.4 million for the 2015, Senior Convertible Debt, 2017 Senior Convertible Debt, 2020 Senior Convertible Debt, and 2017 Junior Convertible Debt, respectively. The resulting debt discount is being amortized to interest expense at the respective effective interest rate over the contractual term of the debt.
(2) The 3.922% 2021 Notes matured on June 1, 2021 and interest accrued at a rate of 3.922% per annum, payable semi-annually in arrears on June 1 and December 1 of each year. The 4.333% 2023 Notes mature on June 1, 2023 and interest accrues at a rate of 4.333% per annum, payable semi-annually in arrears on June 1 and December 1 of each year. The 2.670% 2023 Notes mature on September 1, 2023 and interest accrues at a rate of 2.670% per annum, payable semi-annually in arrears on March 1 and September 1 of each year. The 0.972% 2024 Notes mature on February 15, 2024 and interest accrues at a rate of 0.972% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The 0.983% 2024 Notes mature on September 1, 2024, and interest is payable semi-annually in arrears on March 1 and September 1 of each year. The 4.250% 2025 Notes mature on September 1, 2025 and interest accrues at a rate of 4.250% per annum, payable semi-annually in arrears on March 1 and September 1 of each year.
(3) All outstanding Senior Notes and the Revolving Credit Facility are senior unsecured debt. Prior to the December 2021 amendment, these debt obligations, with the exception of the 4.250% 2025 Notes, were senior secured debt.
(4) The unamortized discount consists of the following (in millions):
| | | | | | | | | | | | | | | |
| | | March 31, |
| | | | | 2022 | | 2021 |
| | | | | | | |
| 3.922% 2021 Notes | | | | | $ | — | | | $ | (0.3) | |
| 4.333% 2023 Notes | | | | | (1.3) | | | (2.4) | |
| 2.670% 2023 Notes | | | | | (1.3) | | | (2.3) | |
| 0.972% 2024 Notes | | | | | (2.5) | | | (3.8) | |
| 0.983% 2024 Notes | | | | | (2.2) | | | — | |
| 4.250% 2025 Notes | | | | | (10.2) | | | (12.8) | |
| 2015 Senior Convertible Debt | | | | | (3.7) | | | (20.1) | |
| 2017 Senior Convertible Debt | | | | | (23.4) | | | (71.3) | |
| 2020 Senior Convertible Debt | | | | | (75.3) | | | (101.6) | |
| 2017 Junior Convertible Debt | | | | | (4.7) | | | (58.4) | |
| Total unamortized discount | | | | | $ | (124.6) | | | $ | (273.0) | |
(5)Debt issuance costs consist of the following (in millions):
| | | | | | | | | | | | | | | |
| | | March 31, |
| | | | | 2022 | | 2021 |
| Revolving Credit Facility | | | | | $ | (10.6) | | | $ | (10.0) | |
| | | | | | | |
| | | | | | | |
| 3.922% 2021 Notes | | | | | — | | | (0.7) | |
| 4.333% 2023 Notes | | | | | (2.9) | | | (5.3) | |
| 2.670% 2023 Notes | | | | | (0.8) | | | (1.3) | |
| 0.972% 2024 Notes | | | | | (1.3) | | | (2.0) | |
| 0.983% 2024 Notes | | | | | (1.4) | | | — | |
| 4.250% 2025 Notes | | | | | (1.3) | | | (1.7) | |
| 2015 Senior Convertible Debt | | | | | (0.1) | | | (0.7) | |
| 2017 Senior Convertible Debt | | | | | (0.6) | | | (1.8) | |
| 2020 Senior Convertible Debt | | | | | (6.2) | | | (8.3) | |
| 2017 Junior Convertible Debt | | | | | — | | | (0.5) | |
| Total debt issuance costs | | | | | $ | (25.2) | | | $ | (32.3) | |
(6) As of March 31, 2022, the liability component of the 2015 Senior Convertible Debt, the 2017 Senior Convertible Debt and the 2017 Junior Convertible Debt are excluded from current maturities as the Company has the intent and ability to utilize proceeds from its Revolving Credit Facility to settle the principal portion of its Convertible Debt upon conversion. As of March 31, 2021, current maturities consisted of the liability component of the 2017 Senior Convertible Debt and the 2017 Junior Convertible Debt, and the 3.922% 2021 Notes which matured on June 1, 2021.
Expected maturities relating to the Company’s available-for-sale debt securitiesobligations as of March 31, 2022 are as follows (in millions):
| | | | | | | | |
| Fiscal year ending March 31, | | Amount |
| 2023 | | $ | — | |
| 2024 | | 3,400.0 | |
| 2025 | | 1,700.0 | |
| 2026 | | 1,200.0 | |
| 2027 | | 1,527.1 | |
| Thereafter | | 10.1 | |
| Total | | $ | 7,837.2 | |
Ranking of Convertible Debt - Each series of Convertible Debt is an unsecured obligation which is subordinated in right of payment to the amounts outstanding under the Company's Senior Indebtedness. The 2017 Junior Convertible Debt is expressly subordinated in right of payment to any existing and marketable equity securities are presentedfuture senior debt of the Company (including the Senior Indebtedness and the Senior Subordinated Convertible Debt) and is structurally subordinated in right of payment to the liabilities of the Company's subsidiaries. The Senior Subordinated Convertible Debt is subordinated to the Senior Indebtedness; ranks senior to the Company's indebtedness that is expressly subordinated in right of payment to it, including
the 2017 Junior Convertible Debt; ranks equal in right of payment to any of the Company's unsubordinated indebtedness that does not provide that it is senior to the Senior Subordinated Convertible Debt; ranks junior in right of payment to any of the Company's secured and unsecured unsubordinated indebtedness to the extent of the value of the assets securing such indebtedness; and is structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries.
Summary of Conversion Features - Each series of Convertible Debt is convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at specified conversion rates (see table below), adjusted for certain events including the declaration of cash dividends. Except during the three-month period immediately preceding the maturity date of the applicable series of Convertible Debt, each series of Convertible Debt is convertible only upon the occurrence of (i) such time as the closing price of the Company's common stock exceeds the applicable conversion price (see table below) by 130% for 20 days (whether or not consecutive) during a period of 30 consecutive trading days ending on the consolidated balance sheetslast trading day of the immediately preceding fiscal quarter or (ii) during the 5 business day period after any 10 consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of notes of a given series for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such trading day or (iii) upon the occurrence of certain corporate events specified in the indenture of such series of Convertible Debt. In addition, for each series, with the exception of the 2020 Senior Convertible Debt, if at the time of conversion the applicable price of the Company's common stock exceeds the applicable conversion price at such time, the applicable conversion rate will be increased by up to an additional maximum incremental shares rate, as short-term investmentsdetermined pursuant to a formula specified in the indenture for the applicable series of $1,351.1 millionConvertible Debt, and long-term investmentsas adjusted for cash dividends paid since the issuance of $383.3 millionsuch series of Convertible Debt. However, in no event will the applicable conversion rate exceed the applicable maximum conversion rate specified in the indenture for the applicable series of Convertible Debt (see table below). On April 1, 2022, the Company irrevocably elected cash settlement for the principal amount of its Convertible Debt. See Note 1 for further information.
The Company sold available-for-sale investmentsfollowing table sets forth the applicable conversion rates adjusted for proceedsdividends declared since issuance of $1,501.5 million, $273.9 millionsuch series of Convertible Debt and $135.3 millionthe applicable incremental share factors and maximum conversion rates as adjusted for dividends paid since the applicable issuance date:
| | | | | | | | | | | | | | | | | | | | | | | |
| Dividend adjusted rates as of March 31, 2022 |
| Conversion Rate | | Approximate Conversion Price | | Incremental Share Factor | | Maximum Conversion Rate |
2015 Senior Convertible Debt(1) | 33.4459 | | | $ | 29.90 | | | 16.7229 | | | 46.8241 | |
2017 Senior Convertible Debt(1) | 21.4475 | | | $ | 46.63 | | | 10.7237 | | | 30.5627 | |
2020 Senior Convertible Debt(1) | 10.7292 | | | $ | 93.20 | | | — | | | 15.0208 | |
2017 Junior Convertible Debt(1) | 21.8305 | | | $ | 45.81 | | | 10.9154 | | | 30.5627 | |
| | | | | | | |
(1) As of March 31, 2022, the 2020 Senior Convertible Debt was not convertible. As of March 31, 2022, the holders of each of the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2017 Junior Convertible Debt have the right to convert their notes between April 1, 2022 and June 30, 2022 because the Company's common stock price has exceeded the applicable conversion price for such series by 130% for the specified period of time during the yearsquarter ended March 31, 2016,2022. As of March 31, 2022, the adjusted conversion rate for the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2014,2017 Junior Convertible Debt would be increased to 43.5146 shares of common stock, 25.5170 shares of common stock, and 26.0916 shares of common stock, respectively, per $1,000 principal amount of notes based on the closing price of $75.14 per share of common stock to include an additional maximum incremental share rate per the terms of the applicable indenture. As of March 31, 2022, each of the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2017 Junior Convertible Debt had a conversion value in excess of par of $78.2 million, $117.5 million, and $9.8 million, respectively.
With the exception of the 2020 Senior Convertible Debt, which may be redeemed by the Company on or after November 20, 2022, the Company may not redeem any series of Convertible Debt prior to the relevant maturity date and no sinking fund is provided for any series of Convertible Debt. Under the terms of the applicable indenture, the Company may repurchase any series of Convertible Debt in the open market through privately negotiated exchange offers. Upon the occurrence of a fundamental change, as defined in the applicable indenture of such series of Convertible Debt, holders of such series may require the Company to purchase all or a portion of their Convertible Debt for cash at a price equal to 100% of the principal amount plus any accrued and unpaid interest.
Interest expense consists of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| Debt issuance cost amortization | $ | 9.1 | | | $ | 14.7 | | | $ | 13.2 | | | | | | | | | |
| Debt discount amortization | 7.0 | | | 6.6 | | | 2.9 | | | | | | | | | |
| Interest expense | 187.1 | | | 227.4 | | | 277.6 | | | | | | | | | |
| Total interest expense on Senior Indebtedness | 203.2 | | | 248.7 | | | 293.7 | | | | | | | | | |
| Debt issuance cost amortization | 2.4 | | | 2.4 | | | 3.9 | | | | | | | | | |
| Debt discount amortization | 37.9 | | | 64.5 | | | 118.8 | | | | | | | | | |
| Coupon interest expense | 8.1 | | | 37.6 | | | 77.2 | | | | | | | | | |
| Total interest expense on Convertible Debt | 48.4 | | | 104.5 | | | 199.9 | | | | | | | | | |
| Other interest expense | 5.4 | | | 3.7 | | | 3.7 | | | | | | | | | |
| Total interest expense | $ | 257.0 | | | $ | 356.9 | | | $ | 497.3 | | | | | | | | | |
The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 2.9 years, 4.9 years, 2.6 years, and 14.9 years for the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, 2020 Senior Convertible Debt, and 2017 Junior Convertible Debt, respectively.
The Company's debt settlement transactions consists of the following (in millions)(1):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal Amount Settled | | Consideration | | Fair Value Settled(2) | | Equity Component(2) | | Net Loss on Inducements and Settlements |
| | Cash Paid | | | | Value of Shares Issued | | Debt Issued | | Total | | | |
February 2022(3) | | | | | | | | | | | | | | | | | |
| 2017 Senior Convertible Debt | $ | 64.9 | | | $ | 64.9 | | | | | $ | 74.6 | | | $ | — | | | $ | 139.5 | | | $ | 60.0 | | | $ | 75.5 | | | $ | 11.8 | |
| December 2021 | | | | | | | | | | | | | | | | | |
2015 Senior Convertible Debt(3) | $ | 36.6 | | | $ | 36.6 | | | | | $ | 103.9 | | | $ | — | | | $ | 140.5 | | | $ | 36.2 | | | $ | 104.2 | | | $ | 4.1 | |
2017 Senior Convertible Debt(3) | $ | 39.7 | | | $ | 39.7 | | | | | $ | 61.4 | | | $ | — | | | $ | 101.1 | | | $ | 37.4 | | | $ | 63.0 | | | $ | 6.3 | |
2017 Junior Convertible Debt(3) | $ | 19.9 | | | $ | 19.9 | | | | | $ | 31.6 | | | $ | — | | | $ | 51.5 | | | $ | 15.7 | | | $ | 35.9 | | | $ | 5.1 | |
Revolving Credit Facility(4) | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 0.6 | |
August 2021(5) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 70.4 | | | $ | 70.4 | | | | | $ | 159.9 | | | $ | — | | | $ | 230.3 | | | $ | 71.0 | | | $ | 158.9 | | | $ | 10.6 | |
| 2017 Senior Convertible Debt | $ | 100.7 | | | $ | 100.7 | | | | | $ | 123.5 | | | $ | — | | | $ | 224.2 | | | $ | 100.0 | | | $ | 113.0 | | | $ | 31.5 | |
| 2017 Junior Convertible Debt | $ | 92.5 | | | $ | 92.5 | | | | | $ | 115.8 | | | $ | — | | | $ | 208.3 | | | $ | 87.7 | | | $ | 116.6 | | | $ | 43.1 | |
June 2021(6) | | | | | | | | | | | | | | | | | |
| 3.922% 2021 Notes | $ | 1,000.0 | | | $ | 1,000.0 | | | | | $ | — | | | $ | — | | | $ | 1,000.0 | | | $ | — | | | $ | — | | | $ | 0.3 | |
February 2021(5) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 81.0 | | | $ | 81.0 | | | | | $ | 206.5 | | | $ | — | | | $ | 287.5 | | | $ | 79.2 | | | $ | 208.1 | | | $ | 10.7 | |
| 2017 Senior Convertible Debt | $ | 122.2 | | | $ | 122.2 | | | | | $ | 166.4 | | | $ | — | | | $ | 288.6 | | | $ | 115.9 | | | $ | 168.2 | | | $ | 25.5 | |
| 2017 Junior Convertible Debt | $ | 156.0 | | | $ | 156.0 | | | | | $ | 217.9 | | | $ | — | | | $ | 373.9 | | | $ | 129.8 | | | $ | 243.9 | | | $ | 49.4 | |
December 2020(7) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 90.0 | | | $ | 48.5 | | | | | $ | 221.0 | | | $ | — | | | $ | 269.5 | | | $ | 79.4 | | | $ | 184.5 | | | $ | 9.4 | |
| 2017 Senior Convertible Debt | $ | 588.8 | | | $ | 155.4 | | | | | $ | 408.7 | | | $ | 601.5 | | | $ | 1,165.6 | | | $ | 486.7 | | | $ | 655.3 | | | $ | 57.0 | |
| 2017 Junior Convertible Debt | $ | 407.7 | | | $ | 225.0 | | | | | $ | 530.4 | | | $ | 64.0 | | | $ | 819.4 | | | $ | 246.3 | | | $ | 547.1 | | | $ | 62.8 | |
| Term Loan Facility | $ | 1,705.7 | | | $ | 1,705.7 | | | | | $ | — | | | $ | — | | | $ | 1,705.7 | | | $ | — | | | $ | — | | | $ | 12.9 | |
August 2020(5) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 414.3 | | | $ | 414.3 | | | | | $ | 547.6 | | | $ | — | | | $ | 961.9 | | | $ | 351.7 | | | $ | 592.3 | | | $ | 25.0 | |
| 2017 Senior Convertible Debt | $ | 381.8 | | | $ | 381.8 | | | | | $ | 221.1 | | | $ | — | | | $ | 602.9 | | | $ | 299.0 | | | $ | 292.2 | | | $ | 20.1 | |
June 2020(8) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 383.3 | | | $ | 383.3 | | | | | $ | 405.1 | | | $ | — | | | $ | 788.4 | | | $ | 314.4 | | | $ | 464.4 | | | $ | 7.8 | |
| 2017 Senior Convertible Debt | $ | 643.9 | | | $ | 643.9 | | | | | $ | 246.4 | | | $ | — | | | $ | 890.3 | | | $ | 481.0 | | | $ | 390.9 | | | $ | 13.7 | |
| Term Loan Facility | $ | 17.8 | | | $ | 17.8 | | | | | $ | — | | | $ | — | | | $ | 17.8 | | | $ | — | | | $ | — | | | $ | — | |
| Bridge Loan Facility | $ | 615.0 | | | $ | 615.0 | | | | | $ | — | | | $ | — | | | $ | 615.0 | | | $ | — | | | $ | — | | | $ | 5.3 | |
March 2020(9) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 615.0 | | | $ | 615.0 | | | | | $ | 351.8 | | | $ | — | | | $ | 966.8 | | | $ | 460.4 | | | $ | 461.1 | | | $ | 3.4 | |
(1) The Company sold available-for-sale investments duringsettled portions of its convertible debt in privately negotiated transactions that are accounted for as induced conversions.
(2) The total consideration for the fourth quarter of fiscal 2016convertible debt settlements was allocated to the liability and equity components using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt instrument prior to the settlement.
(3) The Company used cash generated from operations to finance a portion of such settlement.
(4) In connection with the purchase priceamendment and restatement of its Atmel acquisition which closedCredit Agreement, the Company recognized a loss on April 4, 2016.settlement of debt of $0.6 million.
(5) The Company had net realized gainsused borrowings under its Revolving Credit Facility to finance a portion of $13.7 million and $18.5 million from sales of available-for-sale marketable equity and debt securities during the years ended March 31, 2016 and 2015, respectively.such settlement.
(6) The Company had no material realized gains or lossesused proceeds from the saleissuance of available-for-sale equity and debt securities during the year ended March 31, 2014.0.983% 2024 Notes to finance a portion of such settlement.
(7) The Company determinesused proceeds from the costissuance of available-for-sale debt securities sold$665.5 million principal amount of 2020 Senior Convertible Debt and used borrowings under its Revolving Credit Facility to finance a portion of such settlement. The Company also issued $1.40 billion aggregate principal amount of 0.972% 2024 Notes and used the proceeds in addition to $213.0 million in borrowings under its Revolving Credit Facility, and cash on hand to repay all amounts outstanding under its Term Loan Facility.
(8) The Company used a FIFO basis atportion of the individual security levelproceeds from the issuance of the 2.670% 2023 Notes and the 4.250% 2025 Notes to (i) finance a portion of such settlement, and (ii) repay a portion of the amount outstanding under the Company's existing Revolving Credit Facility as well as for sales from multiple lots. For salesgeneral corporate purposes.
(9) The Company entered into a Bridge Loan Facility (which has since been repaid in full), for an aggregate principal amount of marketable equity securities,$615.0 million to finance a portion of such settlement.
In December 2020, in connection with the issuance of the 2020 Senior Convertible Debt, the Company uses an average cost basis atincurred issuance costs of $10.8 million, of which $9.0 million was recorded as debt issuance costs and will be amortized using the individual security level. Gains and losses recognizedeffective interest method over the term of the debt. The remainder of $1.8 million in earnings are credited or chargedfees was recorded to other income (expense)equity. The debt discount on the consolidated statements of income.
At March 31, 2016,2020 Senior Convertible Debt was the Company's marketable equity securities consisted of an investment in Adesto Technologies Corporation, which effected its initial public offering ondifference between the NASDAQ stock exchange on October 26, 2015. This investment was previously classified as available-for-sale corporate debt as of March 31, 2015. At March 31, 2015, the Company's marketable equity securities consisted of an investment in Hua Hong Semiconductor Limited (Hua Hong), which effected its initial public offering on the Hong Kong stock exchange on October 15, 2014. The Company sold all of its remaining shares of Hua Hong in the three months ended June 30, 2015.
The following tables show all investments in an unrealized loss position for which an other-than-temporary impairment has not been recognizedpar value and the related gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2016 |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| Government agency bonds | $ | 148,562 |
| | $ | (99 | ) | | $ | — |
| | $ | — |
| | $ | 148,562 |
| | $ | (99 | ) |
| Corporate bonds and debt | — |
| | — |
| | 1,000 |
| | — |
| | 1,000 |
| | — |
|
| Total | $ | 148,562 |
| | $ | (99 | ) | | $ | 1,000 |
| | $ | — |
| | $ | 149,562 |
| | $ | (99 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2015 |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| Government agency bonds | $ | 162,948 |
| | $ | (142 | ) | | $ | 29,942 |
| | $ | (58 | ) | | $ | 192,890 |
| | $ | (200 | ) |
| Municipal bonds | 13,318 |
| | (9 | ) | | — |
| | — |
| | 13,318 |
| | (9 | ) |
| Corporate bonds and debt | 163,095 |
| | (219 | ) | | 19,021 |
| | (46 | ) | | 182,116 |
| | (265 | ) |
| Total | $ | 339,361 |
| | $ | (370 | ) | | $ | 48,963 |
| | $ | (104 | ) | | $ | 388,324 |
| | $ | (474 | ) |
Management does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of March 31, 2016 and the Company's intent is to hold these investments until these assets are no longer impaired. For those debt securities not scheduled to mature until after March 31, 2017, such recovery is not anticipated to occur in the next year and these investments have been classified as long-term investments on the consolidated balance sheet.
The amortized cost and estimated fair value of the available-for-sale securitiesdebt resulting in a debt discount of $110.0 million which will be amortized to interest expense using the effective interest method over the term of the debt. Interest on the 2020 Senior Convertible Debt is payable semi-annually in arrears on May 15 and November 15 of each year. In connection with the issuance of the 2020 Senior Convertible Debt, the Company entered into capped call option transactions with several financial institutions at a cost of $35.8 million. The capped call options cover, subject to anti-dilution adjustments, the number of shares of the Company’s common stock initially underlying the 2020 Senior Convertible Debt. Upon conversion of the 2020 Senior Convertible Debt, the Company may exercise the capped call options subject to a cap strike price of $116.79 per share which would reduce the potential dilution to the Company’s common stock or offset any cash payments the Company is required to make in excess of the principal amount of converted notes. Upon conversion of the 2020 Senior Convertible Debt, there will be no economic dilution from the notes until the average market price of the Company’s common stock exceeds the cap price of $116.79 per share as the exercise of the capped call options will offset any dilution from the 2020 Senior Convertible Debt from the conversion price up to the cap price. As these transactions meet certain accounting criteria, the capped call options are recorded as a reduction of stockholders' equity and are not accounted for as derivatives.
Senior Notes
The Company may, at its option, redeem some or all of the applicable series of Senior Notes in the manner set forth in the indenture governing the applicable series of Senior Notes. If the Company experiences a specified change of control triggering event set forth in the indenture governing the applicable series of Senior Notes, the Company must offer to repurchase each of the notes of such series at a price equal to 101% of the principal amount of each note of such series repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
The indenture governing each series of Senior Notes contains certain customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, create or incur certain liens, and enter into sale and leaseback transactions, and consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets, to another person. These covenants are subject to a number of limitations and exceptions set forth in the indenture governing the applicable series of Senior Notes.
Each series of Senior Notes is guaranteed by certain of the Company's subsidiaries that have also guaranteed the obligations under the Credit Agreement and under the Company’s existing Senior Indebtedness. In the future, each subsidiary of the Company that is a guarantor or other obligor of the Credit Agreement is required to guarantee each series of Senior Notes.
Senior Credit Facilities
In December 2021, the Company amended and restated the Company's Credit Agreement in its entirety. In connection therewith, the collateral securing the Credit Agreement prior to such amendment and restatement was released. The amended and restated Credit Agreement provides for an unsecured revolving loan facility up to $2.75 billion that terminates on December 16, 2026. The Credit Agreement also permits the Company, subject to certain conditions, to add one or more incremental term loan facilities or increase the revolving loan commitments up to $750.0 million.
The revolving loans bear interest, at the Company’s option, at the base rate plus a spread of 0.125% to 0.50%, an adjusted daily simple SOFR rate (or SONIA rate in the case of loans denominated in pounds sterling) plus a spread of 1.125% to 1.50%, or an adjusted term SOFR or adjusted EURIBOR rate (based on one, three or six-month interest periods) plus a spread of 1.125% to 1.50%, in each case, with such spread being determined based on the credit ratings for certain of the Company’s senior, unsecured debt. The base rate means the highest of the prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted term SOFR rate for a 1-month interest period plus a margin equal to 1.00%. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each
three-month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted term SOFR or adjusted EURIBOR rates.
The Company's obligations under the Credit Agreement are guaranteed by certain of its subsidiaries meeting materiality thresholds. The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, incur subsidiary indebtedness, grant liens, merge or consolidate, dispose of substantially all assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, repurchase stock, enter into restrictive agreements, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also required to maintain compliance with a total leverage ratio and an interest coverage ratio, all measured quarterly and calculated on a consolidated basis. As of March 31, 2016, by contractual maturity, excluding marketable equity securities of $2.2 million, which have no contractual maturity, are shown below (amounts in thousands). Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and2022, the Company views its available-for-sale securities as available for current operations.was in compliance with these financial covenants.
Note 7. Fair Value of Financial Instruments
|
| | | | | | | | | | | | | | | |
| | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Available-for-sale | | | | | | | |
| Due in one year or less | $ | 41,078 |
| | $ | 5 |
| | $ | (5 | ) | | $ | 41,078 |
|
| Due after one year and through five years | 428,212 |
| | 434 |
| | (94 | ) | | 428,552 |
|
| Due after five years and through ten years | — |
| | — |
| | — |
| | — |
|
| Due after ten years | — |
| | — |
| | — |
| | — |
|
| Total | $ | 469,290 |
| | $ | 439 |
| | $ | (99 | ) | | $ | 469,630 |
|
The amortized cost and estimated fair value of the available-for-sale securities at March 31, 2015, by maturity, excluding marketable equity securities of $13.2 million and corporate debt of $6.2 million, which have no contractual maturity, are shown below (amounts in thousands).
|
| | | | | | | | | | | | | | | |
| | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Available-for-sale | | | | | | | |
| Due in one year or less | $ | 224,531 |
| | $ | 512 |
| | $ | (34 | ) | | $ | 225,009 |
|
| Due after one year and through five years | 1,395,685 |
| | 2,648 |
| | (330 | ) | | 1,398,003 |
|
| Due after five years and through ten years | 82,250 |
| | 47 |
| | (110 | ) | | 82,187 |
|
| Due after ten years | 9,825 |
| | — |
| | — |
| | 9,825 |
|
| Total | $ | 1,712,291 |
| | $ | 3,207 |
| | $ | (474 | ) | | $ | 1,715,024 |
|
5. FAIR VALUE MEASUREMENTS
Accounting rules for fair value clarify that fairFair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| |
Level 1- | Observable inputs such as quoted prices in active markets; |
| |
Level 2- | Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
| |
Level 3- | Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Marketable Debt Instruments
Marketable debt instruments include instruments such as corporate bonds and debt, government agency bonds, bank deposits, municipal bonds, and money market mutual funds. When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroborates non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market1-Observable inputs such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.quoted prices in active markets;
Derivatives
The Company's derivative assets include interest rate swaps that are classified as Level 2 as the Company uses inputs2-Inputs, other than the quoted prices in active markets, that are observable for the assets. The either directly or indirectly; and
Level 2 derivative assets are primarily valued using standard calculations and models that use readily observable3-Unobservable inputs in which there is little or no market data, as their basis.
Assets Measured at Fair Value on a Recurring Basiswhich require the reporting entity to develop its own assumptions.
Assets measured at fair value on a recurring basis at March 31, 2016 are as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Instruments (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Balance |
| Assets | | | | | | | |
| Cash and cash equivalents: | | | | | | | |
| Money market mutual funds | $ | 1,787,446 |
| | $ | — |
| | $ | — |
| | $ | 1,787,446 |
|
| Deposit accounts | — |
| | 305,305 |
| | — |
| | 305,305 |
|
| Short-term investments: | | | | | | | |
| Marketable equity securities | 2,203 |
| | — |
| | — |
| | 2,203 |
|
| Corporate bonds and debt | — |
| | 1,000 |
| | — |
| | 1,000 |
|
| Government agency bonds | — |
| | 350,081 |
| | — |
| | 350,081 |
|
| Long-term investments: | | | | | | | |
| Government agency bonds | — |
| | 118,549 |
| | — |
| | 118,549 |
|
| Total assets measured at fair value | $ | 1,789,649 |
| | $ | 774,935 |
| | $ | — |
| | $ | 2,564,584 |
|
Assets measured at fair value on a recurring basis at March 31, 2015 are as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Instruments (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Balance |
| Assets | | | | | | | |
| Cash and cash equivalents: | | | | | | | |
| Money market mutual funds | $ | 279,833 |
| | $ | — |
| | $ | — |
| | $ | 279,833 |
|
| Deposit accounts | — |
| | 327,982 |
| | — |
| | 327,982 |
|
| Short-term investments: | | | | | | | |
| Marketable equity securities | 13,166 |
| | — |
| | — |
| | 13,166 |
|
| Corporate bonds and debt | — |
| | 756,664 |
| | — |
| | 756,664 |
|
Time deposits (1) | — |
| | 506 |
| | — |
| | 506 |
|
| Government agency bonds | — |
| | 549,737 |
| | — |
| | 549,737 |
|
| Municipal bonds | — |
| | 30,981 |
| | — |
| | 30,981 |
|
| Long-term investments: | | | | | | | |
| Corporate bonds and debt | — |
| | 164,075 |
| | 6,190 |
| | 170,265 |
|
| Government agency bonds | — |
| | 192,519 |
| | — |
| | 192,519 |
|
| Municipal bonds | — |
| | 10,717 |
| | — |
| | 10,717 |
|
| Auction rate securities | — |
| | — |
| | 9,825 |
| | 9,825 |
|
| Other assets | | | | | | | |
| Derivative assets | — |
| | 8,928 |
| | — |
| | 8,928 |
|
| Total assets measured at fair value | $ | 292,999 |
| | $ | 2,042,109 |
| | $ | 16,015 |
| | $ | 2,351,123 |
|
(1) Time deposits in various financial institutions with maturities greater than three months that will mature within one year.
There were no transfers between Level 1 and Level 2 during fiscal 2016 or fiscal 2015.
The following table presents a reconciliation for all assets measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the year ended March 31, 2016. There were no changes in the fair value of these assets measured on a recurring basis during fiscal 2015 (amounts in thousands):
|
| | | | | | | | | | | |
| Year ended March 31, 2016 | Auction Rate Securities | | Corporate Debt | | Total Gains (Losses) |
| Balance at March 31, 2015 | $ | 9,825 |
| | $ | 6,190 |
| | $ | — |
|
| Total gains (losses) (realized): | | | | | |
| Included in earnings | 2,780 |
| | (3,995 | ) | | (1,215 | ) |
| Purchases, sales, issuances, and settlements, net | (12,605 | ) | | — |
| | — |
|
| Transfers out of Level 3 | — |
| | (2,195 | ) | | — |
|
| Balance at March 31, 2016 | $ | — |
| | $ | — |
| | $ | (1,215 | ) |
Transfers into or out of Level 3 are made if the inputs used in the financial models measuring the fair values of the assets became unobservable or observable, respectively, in the current marketplace. During the year ended March 31, 2016, the Company transferred $2.2 million of corporate debt assets out of Level 3 as the inputs used to value these assets became observable in the current marketplace and are classified as Level 1 as of March 31, 2016. This transfer was effective on October 26, 2015.
During the fourth quarter of fiscal 2016, the Company sold its ARS for proceeds of $12.6 million. At March 31, 2015, the Company's ARS for which auctions were unsuccessful were made up of securities related to the insurance industry valued at $9.8 million with a par value of $22.4 million. During the period the Company held the ARS, the Company estimated the fair value of its ARS, which were classified as Level 3 securities, based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security. The significant unobservable inputs used in the fair value measurement of the ARS were estimated risk free discount rates, liquidity risk premium, and the liquidity horizon. The risk free discount rate applied to these securities was 2.0% to 2.5% adjusted for the liquidity risk premium which ranged from 9.1% to 29.5%. The anticipated liquidity horizon ranged from 7 to 10 years.
Gains and losses recognized in earnings are credited or charged to other income (expense) on the consolidated statements of income.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
The Company's non-marketable equity, cost method investments, and non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment, are recorded at fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.
The Company's non-marketable and cost method investments are monitored on a quarterly basis for impairment charges. The fair values of these investments have been determined as Level 3 fair value measurements because the valuations use unobservable inputs that require management's judgment due to the absence of quoted market prices. There were no impairment charges recognized on these investments during the years ended March 31, 2016 or March 31, 2015. During the year ended March 31, 2014, the Company recognized impairment charges of $0.7 million on these investments. These investments are included in other assets on the consolidated balance sheets.
The fair value measurements related to the Company's non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment are based on available market prices at the measurement date based on transactions of similar assets and third-party independent appraisals, less costs to sell where appropriate. The Company classifies these measurements as Level 2.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months. Management believes the carrying amount of the equity and cost-method investments materially approximated fair value at March 31, 20162022 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair value measurements. The fair values of the Company's line of credit borrowings are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements and approximate carrying value. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the Company's line of credit borrowings at March 31, 2016 approximated book value and are considered Level 2 in the fair value hierarchy described in Note 5. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy.
Fair ValueThe fair value of Subordinated Convertible Debentures
the Company's Revolving Credit Facility is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the Company's Revolving Credit Facility at March 31, 2022 approximated the carrying value excluding debt discounts and debt issuance costs and are considered Level 2 in the fair value hierarchy. The Company measures the fair value of its seniorConvertible Debt and junior subordinated convertible debenturesSenior Notes for disclosure purposes. These fair values are based on observable market prices for these debentures,this debt, which areis traded in less active markets and are therefore classified as a Level 2 fair value measurement, and excludemeasurement.
The following table shows the impacts of derivative activity.
The carrying amounts and fair values of the Company’s senior and junior subordinated convertible debentures as of March 31, 2016 and 2015 are as follows (amounts in thousands)Company's debt obligations (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
| Carrying Amount(1) | | Fair Value | | Carrying Amount(1) | | Fair Value |
| Revolving Credit Facility | $ | 1,388.5 | | | $ | 1,399.1 | | | $ | 2,336.6 | | | $ | 2,346.6 | |
| | | | | | | |
| | | | | | | |
| 3.922% 2021 Notes | — | | | — | | | 999.0 | | | 1,004.3 | |
| 4.333% 2023 Notes | 995.8 | | | 1,017.1 | | | 992.3 | | | 1,022.4 | |
| 2.670% 2023 Notes | 997.9 | | | 997.7 | | | 996.4 | | | 1,040.8 | |
| 0.972% 2024 Notes | 1,396.2 | | | 1,343.9 | | | 1,394.2 | | | 1,394.0 | |
| 0.983% 2024 Notes | 996.4 | | | 946.3 | | | — | | | — | |
| 4.250% 2025 Notes | 1,188.5 | | | 1,213.6 | | | 1,185.5 | | | 1,252.6 | |
| 2015 Senior Convertible Debt | 30.6 | | | 115.4 | | | 120.6 | | | 485.4 | |
| 2017 Senior Convertible Debt | 104.1 | | | 285.6 | | | 260.2 | | | 731.4 | |
| 2020 Senior Convertible Debt | 584.0 | | | 765.5 | | | 555.6 | | | 778.3 | |
| 2017 Junior Convertible Debt | 5.4 | | | 21.7 | | | 63.7 | | | 272.9 | |
| Total | $ | 7,687.4 | | | $ | 8,105.9 | | | $ | 8,904.1 | | | $ | 10,328.7 | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | March 31, 2016 | | March 31, 2015 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| 1.625% Senior Subordinated Convertible Debentures | $ | 1,234,733 |
| | $ | 1,762,088 |
| | $ | 1,174,036 |
| | $ | 1,787,531 |
|
| 2.125% Junior Subordinated Convertible Debentures | $ | 196,304 |
| | $ | 1,143,117 |
| | $ | 190,870 |
| | $ | 1,124,125 |
|
7. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
|
| | | | | | | |
| | March 31, 2016 | | March 31, 2015 |
| Trade accounts receivable | $ | 289,013 |
| | $ | 269,844 |
|
| Other | 3,710 |
| | 6,714 |
|
| Total accounts receivable, gross | 292,723 |
| | 276,558 |
|
| Less allowance for doubtful accounts | 2,540 |
| | 2,621 |
|
| Total accounts receivable, net | $ | 290,183 |
| | $ | 273,937 |
|
8. INVENTORIES
(1) The components of inventories consist of the following (amounts in thousands):
|
| | | | | | | |
| | March 31, 2016 | | March 31, 2015 |
| Raw materials | $ | 12,179 |
| | $ | 13,263 |
|
| Work in process | 208,283 |
| | 197,565 |
|
| Finished goods | 86,353 |
| | 68,628 |
|
| Total inventories | $ | 306,815 |
| | $ | 279,456 |
|
Inventories are valued at the lower of cost or market using the first-in, first-out method. 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 presented are recoverable.net of debt discounts and debt issuance costs (see Note 6 for further information).
During the year ended March 31, 2015, the Company began to actively market real property it acquired in the Supertex acquisition. As of March 31, 2015, the Company classified the property as held for sale on its consolidated balance sheet at its fair value of approximately $14.0 million. The Company sold the property on July 22, 2015 for $14.3 million.Note 8. Intangible Assets and Goodwill
| |
10. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consists of the following (amounts in thousands):
|
| | | | | | | |
| | March 31, 2016 | | March 31, 2015 |
| Land | $ | 63,907 |
| | $ | 55,624 |
|
| Building and building improvements | 458,379 |
| | 434,403 |
|
| Machinery and equipment | 1,645,617 |
| | 1,576,074 |
|
| Projects in process | 99,370 |
| | 76,315 |
|
| Total property, plant and equipment, gross | 2,267,273 |
| | 2,142,416 |
|
| Less accumulated depreciation and amortization | 1,657,877 |
| | 1,560,844 |
|
| Total property, plant and equipment, net | $ | 609,396 |
| | $ | 581,572 |
|
Depreciation expense attributed to property, plant and equipment was $103.9 million, $97.3 million and $89.7 million for the fiscal years ending March 31, 2016, 2015 and 2014, respectively.
11. NONCONTROLLING INTERESTS
The following table presents the changes in the components of noncontrolling interests for the years ended March 31, 2016 and March 31, 2015 (amounts in thousands):
|
| | | |
| Noncontrolling Interests |
Balance at March 31, 2014 | $ | — |
|
Additions due to acquisition of controlling interest in ISSC | 52,467 |
|
Net loss attributable to noncontrolling interests | (3,684 | ) |
Other comprehensive loss attributable to noncontrolling interests | (866 | ) |
Purchase of additional interests | (31,849 | ) |
Other | 304 |
|
Balance at March 31, 2015 | 16,372 |
|
Net loss attributable to noncontrolling interests | (207 | ) |
Purchase of additional interests | (16,165 | ) |
Balance at March 31, 2016 | $ | — |
|
The following table presents the effect of changes in the Company's ownership interest in ISSC on the Company's stockholders' equity (amounts in thousands):
|
| | | | | | | |
| | Year ended March 31, |
| | 2016 | | 2015 |
| Net income attributable to Microchip Technology stockholders | $ | 324,132 |
| | $ | 369,009 |
|
| (Decrease) increase in paid-in capital for purchase of additional interests | (1,611 | ) | | 345 |
|
| Increase in paid-in capital for converted stock options | — |
| | 1,094 |
|
| Net transfers (to) from noncontrolling interest | (1,611 | ) | | 1,439 |
|
| Change from net income attributable to Microchip Technology stockholders and transfers (to) from noncontrolling interest | $ | 322,521 |
| | $ | 370,448 |
|
The Company acquired the remaining noncontrolling interest in ISSC during the first quarter of fiscal 2016.
12. INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of the following (amounts in thousands)(in millions):
| | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | Gross Amount | | Accumulated Amortization | | Net Amount |
| Core and developed technology | | $ | 7,390.2 | | | $ | (3,571.5) | | | $ | 3,818.7 | |
| Customer-related | | 200.3 | | | (112.4) | | | 87.9 | |
| | | | | | |
| | | | | | |
| In-process research and development | | 6.4 | | | — | | | 6.4 | |
| Software licenses | | 191.2 | | | (61.2) | | | 130.0 | |
| Distribution rights and other | | 0.4 | | | (0.3) | | | 0.1 | |
| Total | | $ | 7,788.5 | | | $ | (3,745.4) | | | $ | 4,043.1 | |
|
| | | | | | | | | | | | |
| | | March 31, 2016 |
| | | Gross Amount | | Accumulated Amortization | | Net Amount |
| Core and developed technology | | $ | 724,883 |
| | $ | (255,460 | ) | | $ | 469,423 |
|
| Customer-related | | 278,542 |
| | (200,331 | ) | | 78,211 |
|
| Trademarks and trade names | | 11,700 |
| | (7,571 | ) | | 4,129 |
|
| In-process technology | | 54,308 |
| | — |
| | 54,308 |
|
| Distribution rights | | 5,580 |
| | (5,302 | ) | | 278 |
|
| Total | | $ | 1,075,013 |
| | $ | (468,664 | ) | | $ | 606,349 |
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Gross Amount | | Accumulated Amortization | | Net Amount |
| Core and developed technology | | $ | 7,371.3 | | | $ | (2,771.0) | | | $ | 4,600.3 | |
| Customer-related | | 835.2 | | | (702.6) | | | 132.6 | |
| | | | | | |
| | | | | | |
| In-process research and development | | 7.7 | | | — | | | 7.7 | |
| Software licenses | | 124.6 | | | (70.9) | | | 53.7 | |
| Distribution rights and other | | 5.6 | | | (5.1) | | | 0.5 | |
| Total | | $ | 8,344.4 | | | $ | (3,549.6) | | | $ | 4,794.8 | |
|
| | | | | | | | | | | | |
| | | March 31, 2015 |
| | | Gross Amount | | Accumulated Amortization | | Net Amount |
| Core and developed technology | | $ | 549,415 |
| | $ | (189,149 | ) | | $ | 360,266 |
|
| Customer-related | | 262,769 |
| | (192,283 | ) | | 70,486 |
|
| Trademarks and trade names | | 13,180 |
| | (6,979 | ) | | 6,201 |
|
| In-process technology | | 67,142 |
| | — |
| | 67,142 |
|
| Distribution rights | | 5,580 |
| | (5,258 | ) | | 322 |
|
| Total | | $ | 898,086 |
| | $ | (393,669 | ) | | $ | 504,417 |
|
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years. During the year ended March 31, 2016, as a result of the acquisition of Micrel, the Company acquired $175.8 million of core and developed technology which has a weighted average amortization period of 10 years, $71.1 million of customer-related intangible assets which have a weighted average amortization period of 5 years, $5.6 million of intangible assets related to backlog with an amortization period of 1 year and $21.0 million of in-process technology which has a weighted average amortization period of 10 years and will begin amortization once the technology reaches technological feasibility. In fiscal 2016, $33.8 million of in-process technology reached technological feasibility and was reclassified as core and developed technology and began being amortized over its estimated useful life.
The following is an expected amortization schedule for the intangible assets for fiscal 20172023 through fiscal 2021,2027, absent any future acquisitions or impairment charges (amounts in thousands)(in millions):
| | | | | | | | |
| Fiscal Year Ending March 31, | | Amortization Expense |
| 2023 | | $ | 746.1 | |
| 2024 | | $ | 667.1 | |
| 2025 | | $ | 533.1 | |
| 2026 | | $ | 462.6 | |
| 2027 | | $ | 377.2 | |
|
| |
Year ending March 31, | Projected Amortization Expense |
| 2017 | $137,321 |
| 2018 | 110,811 |
| 2019 | 94,573 |
| 2020 | 76,683 |
| 2021 | 50,974 |
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years. Amortization expense attributed to intangible assets was $179.3 million, $181.0 million and $99.4 million for fiscal years 2016, 2015 and 2014, respectively. In fiscal 2016, $3.6 million was chargedare assigned to cost of sales and $175.7 million was charged to operating expenses. In fiscal 2015, $3.8 million was charged to cost of sales and $177.2 million was charged to operating expenses. In fiscal 2014, $4.7 million was charged to cost of sales and $94.7 million was charged to operating expenses. expenses as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | |
| Amortization expense charged to cost of sales | $ | 12.4 | | | $ | 9.4 | | | $ | 8.9 | | | | | | | | | |
| Amortization expense charged to operating expense | 922.0 | | | 983.3 | | | 1,037.8 | | | | | | | | | |
| Total amortization expense | $ | 934.4 | | | $ | 992.7 | | | $ | 1,046.7 | | | | | | | | | |
The Company recognized impairment charges of $0.6 million, $1.9 million and $0.4$3.0 million in fiscal years 2016, 20152022 and 2014, respectively.$2.2 million in fiscal 2020. There were no impairment charges in fiscal 2021.
Goodwill activity for fiscal years 2016 and 2015by segment was as follows (amounts in thousands)(in millions):
|
| | | | | | | |
| | Semiconductor Products Reporting Unit | | Technology Licensing Reporting Unit |
| Balance at March 31, 2014 | $ | 256,897 |
| | $ | 19,200 |
|
| Additions due to the acquisition of Supertex | 143,160 |
| | — |
|
| Additions due to acquisition of controlling interest in ISSC | 154,399 |
| | — |
|
| Adjustments due to other acquisitions | 624 |
| | — |
|
| Foreign currency translation adjustments | (3,009 | ) | | — |
|
| Balance at March 31, 2015 | 552,071 |
| | 19,200 |
|
| Additions due to the acquisition of Micrel | 440,992 |
| | — |
|
| Adjustments due to the acquisition of ISSC | 389 |
| | — |
|
| Balance at March 31, 2016 | $ | 993,452 |
| | $ | 19,200 |
|
| | | | | | | | | | | |
| | Semiconductor Products Reporting Unit | | Technology Licensing Reporting Unit |
| Balance at March 31, 2020 | $ | 6,645.6 | | | $ | 19.2 | |
| Additions | 5.8 | | | — | |
| Balance at March 31, 2021 | $ | 6,651.4 | | | $ | 19.2 | |
| Additions | 3.0 | | | — | |
| Balance at March 31, 2022 | $ | 6,654.4 | | | $ | 19.2 | |
At March 31, 2016,2022, the Company applied a qualitative goodwill impairment screentest to its two2 reporting units, concluding it was not more likely than not that goodwill was impaired. Through March 31, 2016,2022, the Company has never recorded an impairment charge againstcharge.
Note 9. Other Financial Statement Details
Accounts Receivable
Accounts receivable consists of the following (in millions):
| | | | | | | | | | | |
| | March 31, |
| 2022 | | 2021 |
| Trade accounts receivable | $ | 1,069.5 | | | $ | 991.6 | |
| Other | 9.3 | | | 11.3 | |
| Total accounts receivable, gross | 1,078.8 | | | 1,002.9 | |
| Less: allowance for expected credit losses | 6.2 | | | 5.2 | |
| Total accounts receivable, net | $ | 1,072.6 | | | $ | 997.7 | |
The Company sells certain of its goodwill balance.trade accounts receivable on a non-recourse basis to a third-party financial institution pursuant to a factoring arrangement. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring arrangement were $485.5 million and $141.9 million during fiscal 2022 and fiscal 2021. Factoring fees for the sales of receivables were recorded in other income (loss), net and were not material for any of the periods presented. After the sale of its trade accounts receivable, the Company will collect payment from the customer and remit it to the third-party financial institution. The amount of trade accounts receivable sold for which cash has not been collected from the customer is immaterial as of March 31, 2022 and 2021.
Inventories
The components of inventories consist of the following (in millions):
| | | | | | | | | | | |
| | March 31, |
| 2022 | | 2021 |
| Raw materials | $ | 163.0 | | | $ | 115.7 | |
| Work in process | 482.8 | | | 412.8 | |
| Finished goods | 208.6 | | | 136.5 | |
| Total inventories | $ | 854.4 | | | $ | 665.0 | |
Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
| | | | | | | | | | | |
| | March 31, |
| 2022 | | 2021 |
| Land | $ | 88.2 | | | $ | 83.2 | |
| Building and building improvements | 674.4 | | | 659.7 | |
| Machinery and equipment | 2,471.6 | | | 2,251.1 | |
| Projects in process | 182.4 | | | 102.7 | |
| Total property, plant and equipment, gross | 3,416.6 | | | 3,096.7 | |
| Less: accumulated depreciation and amortization | 2,448.7 | | | 2,242.0 | |
| Total property, plant and equipment, net | $ | 967.9 | | | $ | 854.7 | |
Depreciation expense attributed to property, plant and equipment was $209.1 million, $160.6 million and $168.9 million for the fiscal years ended March 31, 2022, 2021 and 2020, respectively. The increase in depreciation expense in the fiscal year ended March 31, 2022 includes the impact of current production levels, manufacturing expansion activities and moving and repurposing floor space and equipment.
The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount of such assets may not be recoverable. For the three years ended March 31, 2022, the Company’s evaluation of its property, plant and equipment did not result in any material impairments.
Accrued Liabilities
Accrued liabilities consists of the following (in millions):
| | | | | | | | | | | |
| | March 31, |
| 2022 | | 2021 |
| Accrued compensation and benefits | $ | 213.7 | | | $ | 166.7 | |
| Income taxes payable | 121.5 | | | 43.4 | |
| Sales related reserves | 408.1 | | | 350.7 | |
| Current portion of lease liabilities | 33.8 | | | 39.8 | |
| Accrued expenses and other liabilities | 277.2 | | | 193.7 | |
| Total accrued liabilities | $ | 1,054.3 | | | $ | 794.3 | |
Note 10. Leases
Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the ROU assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued liabilities or other long-term liabilities in the consolidated balance sheets. There are certain immaterial finance leases recorded in the consolidated balance sheets. The Company has elected to account for the lease and non-lease components as a single lease component.
The Company's leases are included as a component of the following balance sheet lines (in millions):
| | | | | | | | | | | | |
| | March 31, |
| 2022 | | 2021 |
| Other assets: | | | |
| ROU assets | $ | 153.3 | | | $ | 154.3 | |
| Total lease assets | $ | 153.3 | | | $ | 154.3 | |
| Accrued liabilities: | | | |
| Current portion of lease liabilities | $ | 33.8 | | | $ | 39.8 | |
| Other long-term liabilities: | | | |
| Non-current portion of lease liabilities | 128.9 | | | 125.4 | |
| Total lease liabilities | $ | 162.7 | | | $ | 165.2 | |
The following table presents the maturities of lease liabilities as of March 31, 2022 (in millions):
| | | | | | | | |
| Fiscal year ending March 31, | | Operating Leases |
| 2023 | | $ | 41.0 | |
| 2024 | | 31.1 | |
| 2025 | | 26.5 | |
| 2026 | | 21.1 | |
| 2027 | | 19.0 | |
| Thereafter | | 47.6 | |
| Total lease payments | | 186.3 | |
| Less: Imputed lease interests | | 23.6 | |
| Total lease liabilities | | $ | 162.7 | |
The Company's weighted-average remaining lease-term and weighted-average discount rate at March 31, 2022 are as follows:
| | | | | |
| |
13.Weighted average remaining lease-term (years) | INCOME TAXES6.62 |
| Weighted average discount rate | 4.23 | % |
| |
| |
The details of the Company's total lease expense are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fiscal Year Ended March 31, |
| | | | | | | | | | | 2022 | | 2021 | 2020 |
| Operating lease expense | | | | | | | | | | | $ | 58.4 | | | $ | 63.1 | | $ | 70.4 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Note 11. Commitments and Contingencies
Purchase Obligations
The Company has agreements for the purchase of property, plant and equipment and other goods and services including outstanding purchase commitments with the Company's wafer foundries. Commitments for construction or purchases of property, plant and equipment totaled $395.0 million as of March 31, 2022, all of which will be due within the next year. Other purchase obligations and commitments totaled approximately $230.0 million, which includes outstanding purchase commitments with the Company's wafer foundries and other suppliers, for delivery in the fiscal year ended March 31, 2023.
Indemnification Contingencies
The Company's technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or trade secret infringement by the Company's proprietary technology. The terms of these indemnification provisions approximate the terms of the outgoing technology license agreements, which are typically perpetual unless terminated by either party for breach. The possible amount of future payments the Company could be required to make based on agreements that specify indemnification limits, if such indemnifications were required on all of these agreements, is approximately $178.5 million. There are some licensing agreements in place that do not specify indemnification limits. As of March 31, 2022, the Company had not recorded any liabilities related to these indemnification obligations and the Company believes that any amounts that
it may be required to pay under these agreements in the future will not have a material adverse effect on its financial position, cash flows or results of operations.
Warranty Costs and Product Liabilities
The Company accrues for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability. Historically, the Company has experienced a low rate of payments on product claims. Although the Company cannot predict the likelihood or amount of any future claims, the Company does not believe these claims will have a material adverse effect on its financial condition, results of operations or liquidity.
Legal Matters
In the ordinary course of the Company's business, it is exposed to various liabilities as a result of contracts, product liability, customer claims, governmental investigations and other matters. Additionally, the Company is involved in a limited number of legal actions, both as plaintiff and defendant. Consequently, the Company could incur uninsured liability in any of those actions. The Company also periodically receives notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting reimbursement for various costs. With respect to pending legal actions to which the Company is a party and other claims, although the outcomes are generally not determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations. Litigation, governmental investigations and disputes relating to the semiconductor industry are not uncommon, and the Company is, from time to time, subject to such litigation, governmental investigations and disputes. As a result, no assurances can be given with respect to the extent or outcome of any such litigation, governmental investigations or disputes in the future.
In connection with its acquisition of Microsemi, which closed on May 29, 2018, the Company became involved with the following legal matters:
Federal Shareholder Class Action Litigation. Beginning on September 14, 2018, the Company and certain of its officers were named in 2 putative shareholder class action lawsuits filed in the United States District Court for the District of Arizona, captioned Jackson v. Microchip Technology Inc., et al., Case No. 2:18-cv-02914-ROS and Maknissian v. Microchip Technology Inc., et al., Case No. 2:18-cv-02924-JJT. On November 13, 2018, the Maknissian complaint was voluntarily dismissed. On December 11, 2018, the Court issued an order appointing the lead plaintiff in the Jackson matter. An amended complaint was filed on February 22, 2019. The complaint is allegedly brought on behalf of a putative class of purchasers of Microchip common stock between March 2, 2018 and August 9, 2018. The complaint asserts claims for alleged violations of the federal securities laws and alleges that the defendants issued materially false and misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects during the putative class period. The complaint seeks, among other things, compensatory damages and attorneys’ fees and costs on behalf of the putative class. Defendants filed a motion to dismiss the amended complaint on April 1, 2019, which motion was granted in part and denied in part on March 11, 2020. Plaintiff filed a motion for class certification, which was granted by the Court. Discovery is ongoing. The Company and its officers have reached an agreement to settle the litigation. On March 11, 2022, the Court entered an order granting preliminary approval of the proposed settlement. The settlement remains subject to final court approval, and a settlement hearing is scheduled for June 22, 2022.
Derivative Litigation. On January 22, 2019, a shareholder derivative lawsuit was filed against certain of the Company’s officers and directors in the Superior Court of Arizona for Maricopa County, captioned Reid v. Sanghi, et al., Case No. CV2019-002389. The Company is named as a nominal defendant. The complaint generally alleges that defendants breached their fiduciary duties by, among other things, purportedly failing to conduct adequate due diligence regarding Microsemi prior to its acquisition, misrepresenting the Company’s business prospects and health, and engaging in improper practices, and further alleges that certain defendants engaged in insider trading. The complaint asserts causes of action for breach of fiduciary duty, waste, and unjust enrichment and seeks unspecified monetary damages, corporate governance reforms, equitable and/or injunctive relief, restitution, and attorneys’ fees and costs. An amended complaint was filed on February 28, 2020, and a second amended complaint was filed on July 27, 2020. The Company’s Audit Committee filed a motion to dismiss.On April 4, 2022, the Court entered an order denying the Audit Committee’s motion to dismiss. The case is proceeding. On August 5, 2021, a second shareholder derivative lawsuit was filed against certain of the Company’s officers and directors in the Superior Court of Arizona for Maricopa County, captioned Dutrisac v. Sanghi, et al., Case No. CV2021-012459. The Company is named as a nominal defendant. The complaint asserts substantially the same allegations as those in the Reid case. The complaint asserts causes of action for breaches of fiduciary duty, insider selling, unjust
enrichment, waste of corporate assets, indemnification, and contribution and seeks unspecified monetary damages, equitable and/or injunctive relief, disgorgement, corporate governance reforms, and attorneys’ fees and costs. The Company's Audit Committee filed a motion to dismiss. On April 7, 2022, the Court entered an order denying the Audit Committee’s motion to dismiss. The case is proceeding.
Governmental Investigations. The SEC informed the Company in October 2018 that it was investigating matters relating to the Company's acquisition of Microsemi. The Company believes that the investigation relates to distribution channel issues and business practices at Microsemi and the allegations made by the plaintiffs in the Peterson v. Sanghi lawsuit which was described in the Company’s prior filings on Form 10-Q and Form 10-K and which lawsuit has been settled and dismissed. The Department of Justice, which was also investigating those matters, informed the Company in February 2021 that its investigation is closed and that no further action will be taken.
As a result of its acquisition of Atmel, which closed April 4, 2016, the Company became involved with the following legal matters:
Continental Claim ICC Arbitration. On December 29, 2016, Continental Automotive GmbH ("Continental") filed a Request for Arbitration with the ICC, naming as respondents the Company's subsidiaries Atmel Corporation, Atmel SARL, Atmel Global Sales Ltd., and Atmel Automotive GmbH (collectively, "Atmel"). The Request alleges that a quality issue affecting Continental airbag control units in certain recalled vehicles stems from allegedly defective Atmel application specific integrated circuits ("ASICs"). Continental seeks to recover from Atmel all current and future costs and damages incurred as a result of the vehicle manufacturers’ airbag control unit-related recalls, with current costs and damages alleged to be about $82.0 million to date. The Company's Atmel subsidiaries intend to defend this action vigorously.
Southern District of New York Action by LFoundry Rousset ("LFR") and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, individually and on behalf of a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York (the "District Court") against the Company's Atmel subsidiary, French subsidiary, Atmel Rousset S.A.S. ("Atmel Rousset"), and LFoundry GmbH ("LF"), LFR's German parent. The case purports to relate to Atmel Rousset's June 2010 sale of its wafer manufacturing facility in Rousset, France to LF, and LFR's subsequent insolvency, and later liquidation, more than three years later. The District Court dismissed the case on August 21, 2015, and the United States Court of Appeals for the Second Circuit affirmed the dismissal on June 27, 2016. On July 25, 2016, the plaintiffs filed a notice of appeal from the District Court's June 27, 2016 denial of their motion for relief from the dismissal judgment. On May 19, 2017, the United States Court of Appeals for the Second Circuit affirmed the June 27, 2016 order dismissing the case.
Individual Labor Actions by former LFR Employees. In June 2010, Atmel Rousset sold its wafer manufacturing business in Rousset, France to LFoundry GmbH ("LF"), the German parent of LFoundry Rousset ("LFR"). LFR then leased the Atmel Rousset facility to conduct the manufacture of wafers. More than three years later, LFRbecame insolvent and later liquidated. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR filed individual labor actions against Atmel Rousset in a French labor court, and in 2019 a French labor court dismissed all of the employees’ claims against Atmel Rousset. Plaintiffs have filed appeals requesting reconsideration of the earlier dismissals. Furthermore, these same claims have been filed by this same group of employees in a regional court in France against Microchip Technology Incorporated and Atmel Corporation. The Company, and the other defendant entities, believe that each of these actions is entirely devoid of merit, and, further, that any assertion by any of the Claimants of a co-employment relationship with any of these entities is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. The defendant entitiestherefore intend to defend vigorously against each of these claims. Additionally, complaints have been filed in a regional court in France on behalf of the same group of employees against Microchip Technology Rousset, Atmel Switzerland Sarl, Atmel Corporation and Microchip Technology Incorporated alleging that the sale of the Atmel Rousset production unit to LF was fraudulent and should be voided. These claims are specious and the defendant entities therefore intend to defend vigorously against these claims.
The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, the Company accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, the Company records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, the Company uses the amount that is the low end of such range. As of March 31, 2022, the Company's estimate of the aggregate potential liability that is possible but not probable is approximately $100.0 million in excess of amounts accrued.
Note 12. Income Taxes
The income tax provision consists of the following (amounts in thousands)millions):
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Pretax (loss) income: | | | | | |
| U.S. | $ | 132.2 | | | $ | (301.7) | | | $ | (485.2) | |
| Foreign | 1,350.3 | | | 641.2 | | | 635.6 | |
| $ | 1,482.5 | | | $ | 339.5 | | | $ | 150.4 | |
| Current expense (benefit): | | | | | |
| U.S. Federal | $ | 191.6 | | | $ | 54.8 | | | $ | 21.1 | |
| State | 3.7 | | | 2.0 | | | 1.0 | |
| Foreign | (6.2) | | | 72.2 | | | 48.0 | |
| Total current expense (benefit) | $ | 189.1 | | | $ | 129.0 | | | $ | 70.1 | |
| Deferred expense (benefit): | | | | | |
| U.S. Federal | $ | (78.7) | | | $ | (215.4) | | | $ | (127.8) | |
| State | (9.1) | | | (22.9) | | | (13.2) | |
| Foreign | 95.7 | | | 99.4 | | | (349.3) | |
| Total deferred benefit | 7.9 | | | (138.9) | | | (490.3) | |
| Total income tax provision (benefit) | $ | 197.0 | | | $ | (9.9) | | | $ | (420.2) | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Pretax Income: | | | | | |
| U.S. | $ | (75,515 | ) | | $ | (944 | ) | | $ | 28,245 |
|
| Foreign | 356,808 |
| | 346,851 |
| | 404,109 |
|
| | $ | 281,293 |
| | $ | 345,907 |
| | $ | 432,354 |
|
| Current expense (benefit): | | | | | |
| U.S. Federal | $ | (3,966 | ) | | $ | (3,185 | ) | | $ | 992 |
|
| State | (188 | ) | | (24 | ) | | 64 |
|
| Foreign | 21,947 |
| | 16,602 |
| | 30,697 |
|
| Total current | $ | 17,793 |
| | $ | 13,393 |
| | $ | 31,753 |
|
| Deferred expense (benefit): | |
| | |
| | |
|
| U.S. Federal | $ | (42,207 | ) | | $ | (22,641 | ) | | $ | 14,445 |
|
| State | (1,990 | ) | | (1,562 | ) | | 929 |
|
| Foreign | (16,228 | ) | | (8,608 | ) | | (10,054 | ) |
| Total deferred | (60,425 | ) | | (32,811 | ) | | 5,320 |
|
| Total | $ | (42,632 | ) | | $ | (19,418 | ) | | $ | 37,073 |
|
The tax benefit associated with the Company's equity incentive plans reduced taxes currently payable by $0.8 million, $1.2 million and $1.4 million for the years ended March 31, 2016, 2015 and 2014, respectively. These amounts were credited to additional paid-in capital in each of these fiscal years.
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to income before income taxes. The sources and tax effects of the differences in the total income tax provision are as follows (amounts in thousands)millions):
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Computed expected income tax provision | $ | 311.3 | | | $ | 71.3 | | | $ | 31.5 | |
| State income taxes, net of federal benefit | 3.5 | | | (3.8) | | | (5.4) | |
| Effects of foreign operations - rate differential | (96.8) | | | (37.7) | | | (67.4) | |
| Effects of foreign operations - other, net of foreign tax credits | 139.9 | | | 122.5 | | | 62.1 | |
| | | | | |
| Foreign-derived intangible income ("FDII") | (27.3) | | | (10.5) | | | (10.8) | |
| Business realignment of intellectual property rights | (3.1) | | | (63.8) | | | (334.8) | |
| | | | | |
| Change in uncertain tax positions | (47.1) | | | 28.1 | | | (8.4) | |
| Share-based compensation | (17.6) | | | (12.3) | | | (11.1) | |
| R&D tax credits | (49.5) | | | (47.6) | | | (40.8) | |
| | | | | |
| Income tax holidays | (22.5) | | | (11.1) | | | (11.4) | |
| | | | | |
| | | | | |
| Convertible debt settlement | (25.5) | | | (48.1) | | | — | |
| | | | | |
| Other | 31.7 | | | 16.4 | | | 4.9 | |
| Change in valuation allowance | — | | | (13.3) | | | (28.6) | |
| Total income tax provision (benefit) | $ | 197.0 | | | $ | (9.9) | | | $ | (420.2) | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Computed expected income tax provision | $ | 98,453 |
| | $ | 121,067 |
| | $ | 151,324 |
|
| State income taxes, net of federal benefits | (1,246 | ) | | (20 | ) | | 686 |
|
| Research and development tax credits - current year | (13,542 | ) | | (9,703 | ) | | (4,875 | ) |
| Research and development tax credits - prior years | (2,511 | ) | | (1,789 | ) | | 1,600 |
|
| Foreign income taxed at lower than the federal rate | (114,497 | ) | | (106,939 | ) | | (116,003 | ) |
| Increases related to current and prior year tax positions | 14,462 |
| | 19,769 |
| | 16,809 |
|
Decreases related to prior year tax positions (1) | (12,103 | ) | | (33,100 | ) | | (14,581 | ) |
| Withholding taxes | 5,970 |
| | 5,218 |
| | 6,212 |
|
| Change in valuation allowance | (2,482 | ) | | (14,286 | ) | | — |
|
| Intercompany prepaid tax asset amortization | (15,493 | ) | | (1,089 | ) | | — |
|
| Other | 357 |
| | 1,454 |
| | (4,099 | ) |
| Total | $ | (42,632 | ) | | $ | (19,418 | ) | | $ | 37,073 |
|
(1) The release of prior year tax positions during fiscal 2016 increased each of the basic and diluted net income per common share by $0.06. The release of prior year tax positions during fiscal 2015 increased the basic and diluted net income per common share by $0.16 and $0.15, respectively. The release of prior year tax positions during fiscal 2014 increased each of the basic and diluted net income per common share by $0.07.
The foreign tax rate differential benefit primarily relates to the Company's operations in Thailand Cayman and Ireland. The Company's Thailand manufacturing operations are currently subject to numerous tax holidays granted to the Company based on its investment in property, plant, and equipment in Thailand. The Company's tax holiday periods in Thailand expire at various times in the future,between fiscal 2023 and 2030, however, the Company actively seeks to obtain new tax holidays. The Company does not expect the future expiration of any of its tax holiday periods in Thailand to have a material impact on its effective tax rate. The aggregate dollar benefitsbenefit derived from these tax holidays approximated $6.0 million, $12.4$22.5 million and $16.8$11.1 million in fiscal 2016, 20152022 and 2014,fiscal 2021, respectively.
No U.S. income taxes have been provided on substantially all The impact of the filing basis undistributed foreign earnings and profits of approximately $3.4 billion as of March 31, 2016 since the Company has the ability and intent to permanently reinvest these amounts. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable.
During the year ended March 31, 2016, the Company effectively settled several open tax positions related to the examination ofholidays during fiscal years 2012 and 2011 by the U.S. Internal Revenue Service (IRS). In addition, the Company benefited from the expiration2022 increased each of the statutebasic and diluted net income per common share by $0.04. The impact of limitationsthe tax holidays during fiscal 2021 increased each of the basic and other releases related to previously accrued tax reserves. The total tax benefit associated with these items resulted in a reductiondiluted net income per common share by $0.04.
The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and deferred tax liabilities are as follows (amounts in thousands)millions):
| | | | March 31, | | March 31, |
| | 2016 | | 2015 | | 2022 | | 2021 |
| Deferred tax assets: | | | | Deferred tax assets: | | | |
| Deferred intercompany profit | $ | 12,642 |
| | $ | 10,865 |
| |
| Deferred income on shipments to distributors | 34,830 |
| | 34,493 |
| |
| Accrued expenses | | Accrued expenses | $ | 81.6 | | | $ | 83.6 | |
| Capital loss carryforward | | Capital loss carryforward | 9.8 | | | 6.3 | |
| Deferred revenue | | Deferred revenue | 90.4 | | | — | |
| Income tax credits | | Income tax credits | 306.6 | | | 331.1 | |
| Intangible assets | | Intangible assets | 1,479.9 | | | 1,581.5 | |
| Inventory valuation | 12,082 |
| | 9,605 |
| Inventory valuation | 26.8 | | | 46.0 | |
| Lease liabilities | | Lease liabilities | 36.1 | | | 37.1 | |
| Net operating loss carryforward | 63,209 |
| | 105,756 |
| Net operating loss carryforward | 77.0 | | | 68.0 | |
| Capital loss carryforward | 5,707 |
| | 4,582 |
| |
| Property, plant and equipment | | Property, plant and equipment | 40.8 | | | 32.7 | |
| Share-based compensation | 31,410 |
| | 26,780 |
| Share-based compensation | 45.8 | | | 46.5 | |
| Income tax credits | 100,294 |
| | 115,893 |
| |
Property, plant and equipment, principally due to differences in depreciation
| 16,262 |
| | 2,236 |
| |
| Accrued expenses and other | 7,559 |
| | 671 |
| |
| Other | | Other | 5.5 | | | 17.4 | |
| Gross deferred tax assets | 283,995 |
| | 310,881 |
| Gross deferred tax assets | 2,200.3 | | | 2,250.2 | |
| Valuation allowances | (161,834 | ) | | (116,482 | ) | Valuation allowances | (290.3) | | | (290.3) | |
| Deferred tax assets, net of valuation allowances | 122,161 |
| | 194,399 |
| Deferred tax assets, net of valuation allowances | 1,910.0 | | | 1,959.9 | |
| Deferred tax liabilities: | |
| | |
| Deferred tax liabilities: | | | |
| Convertible debentures | (496,626 | ) | | (493,897 | ) | |
| Convertible debt | | Convertible debt | (22.7) | | | (53.9) | |
| Intangible assets | | Intangible assets | (92.4) | | | (158.1) | |
| ROU assets | | ROU assets | (33.6) | | | (34.5) | |
| Other | (9,922 | ) | | (10,649 | ) | Other | (4.0) | | | (8.1) | |
| Deferred tax liabilities | (506,548 | ) | | (504,546 | ) | Deferred tax liabilities | (152.7) | | | (254.6) | |
| Net deferred tax liability | $ | (384,387 | ) | | $ | (310,147 | ) | |
| Net deferred tax asset | | Net deferred tax asset | $ | 1,757.3 | | | $ | 1,705.3 | |
| | | | | | | | |
| Reported as: | | | | Reported as: | |
| Current deferred tax assets | $ | — |
| | $ | 71,045 |
| |
| | Non-current deferred tax assets | 14,831 |
| | — |
| Non-current deferred tax assets | $ | 1,797.1 | | | $ | 1,749.2 | |
| Non-current deferred tax liability | (399,218 | ) | | (381,192 | ) | Non-current deferred tax liability | (39.8) | | | (43.9) | |
| Net deferred tax liability | $ | (384,387 | ) | | $ | (310,147 | ) | |
| Net deferred tax asset | | Net deferred tax asset | $ | 1,757.3 | | | $ | 1,705.3 | |
In addition to the deferred tax assets listed above, the Company has unrecorded tax benefits of $47.3 million attributable to the difference between the amount of the financial statement expense and the allowable tax deduction associated with share-based compensation. As a result of net operating loss (NOL) carryforwards, the Company was not able to recognize the excess tax benefits of share-based compensation deductions because the deductions did not reduce income tax payable. Although not recognized for financial reporting purposes, this unrecorded tax benefit is available to reduce future income and is incorporated into the disclosed amounts of the Company's federal and state NOL carryforwards, discussed below. If subsequently realized, the benefit will be recorded to contributed capital.
In assessing whether it is more likely than not that deferred tax assets will be realized, the Company considers all available evidence, both positive and negative, including its recent cumulative earnings experience and expectations of future available taxable income of the appropriate character by taxing jurisdiction, tax attribute carryback and carryforward periods available to them for tax reporting purposes, and prudent and feasible tax planning strategies.
A summary of additions and deductions related to the valuation allowance for deferred tax asset accounts for the years ended March 31, 2022, 2021 and 2020 follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Year | | Additions Charged to Costs and Expenses | | | | Deductions | | Balance at End of Year |
| Fiscal 2022 | $ | 290.3 | | | $ | 7.1 | | | | | $ | (7.1) | | | $ | 290.3 | |
| Fiscal 2021 | $ | 303.5 | | | $ | 8.1 | | | | | $ | (21.3) | | | $ | 290.3 | |
| Fiscal 2020 | $ | 332.1 | | | $ | 26.0 | | | | | $ | (54.6) | | | $ | 303.5 | |
The Company had federal, state and foreign NOL carryforwards with an estimated tax effect of $99.5$77.0 million available at March 31, 2016.2022. The federal, state and stateforeign NOL carryforwards expire at various times between 2016fiscal 2023 and 2035.fiscal 2042, of which a portion of the NOL carryforwards do not expire. The Company believes that it is more likely than not that the benefit from certain foreign and state NOL carryforwards will not be realized. In recognition of this risk, at March 31, 2016, the Company has provided a valuation allowance of $53.2 million. The Company also hashad state tax credits with an estimated tax effect of $80.5$164.4 million available at March 31, 2016.2022. These state tax credits expire at various times between 2016fiscal 2023 and 2036.fiscal 2042. The Company believes that it is more likely than not that the full benefit from these state tax credits will not be realized, and therefore has provided a valuation allowance of $55.6 million. The Company hashad capital loss carryforwards with an estimated tax effect of $5.7$9.8 million available at March 31, 2016.2022. These capital loss carryforwards begin to expire in 2020. The Company believes that it is more likely than not that the full benefit from these capital losses will not be realized, and therefore has provided a valuation allowance of $5.7 million.fiscal 2023. The Company had U.S foreign tax credits with an estimated tax effect of $25.8$0.7 million that expire available at various times between 2016 and 2026. The
Company believes it is more likely than not that the benefit from these credits will not be fully realized and has provided a valuation allowance of $25.2 million. At March 31, 2016, the2022. These foreign tax credits begin to expire in fiscal 2023. The Company had credits for increasing research activity in the amount of $72.7$79.5 million that available at March 31, 2022. These credits begin to expire in fiscal 2023. The Company had U.S. prior year minimum tax credits in the amount of $0.1 million available at March 31, 2022. The Company had refundable tax credits in foreign
jurisdictions of $42.0 million available at March 31, 2022. The Company had withholding tax credits in foreign jurisdictions of $19.9 million available at March 31, 2022. These credits expire at various times between 2022fiscal 2023 and 2036. Atfiscal 2025.
The Company intends to invest substantially all of its foreign subsidiary earnings, as well as its capital in its foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which the Company would incur significant, additional costs upon repatriation of such amounts. It is not practical to estimate the additional tax that would be incurred, if any, if the permanently reinvested earnings were repatriated.
The enactment of the TCJA imposed a tax on all previously untaxed earnings of non-U.S. subsidiaries of U.S. corporations. Due to this change, the jurisdiction in which our cash is at any given point in time no longer has a significant impact on our liquidity. Future distributions of a significant portion of our non-U.S. assets to the U.S. will no longer be subject to U.S. federal taxation. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts. During fiscal 2018, we recognized a one-time transition tax on accumulated unrepatriated foreign earnings, of which we expected cash payments of approximately $290.3 million. This tax is payable over a period of eight years, with 8% of the transition tax payable each year for fiscal 2019 through fiscal 2023, and 15%, 20%, and 25%, respectively, payable during fiscal 2024, fiscal 2025, and fiscal 2026. As of March 31, 2016, the Company had $4.3 million of alternative minimum2022, our transition tax credits that do not expire. In addition, the Company had $20.0payable was $197.4 million, of withholding tax credits that expire at various times between 2022 and 2024 in foreign jurisdictions. The Company believes itwhich $23.2 million is more likely than not thatpayable within the benefit from these credits will not be fully realized and has provided a valuation allowance of $20.0 million.next 12 months.
During the year ended March 31, 2016, the H.R. 2029 "Protecting Americans from Tax Hikes Act of 2015" was signed into law which extended certain business tax provisions through December 31, 2019, including IRC section 954(c)(6) dealing with the application of Subpart F to certain inter-company payments among controlled foreign corporations. The expiration of section 954(c)(6) and the other expired provisions could have a material impact on the Company's consolidated results of operations subsequent to the year ended March 31, 2020.
The Company recognizes interest and penalties related to unrecognized tax benefits through income tax expense. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. The Company files U.S. federal, U.S. state, and foreign income tax returns. For U.S. federal, and in general for U.S. state tax returns, the fiscal 20112007 and later tax years remain effectively open for examination by tax authorities. The IRS is currently auditing Microchip's 2011 and 2012 tax years. For foreign tax returns, the Company is generally no longer subject to income tax examinations for years prior to fiscal 2008.2007.
Significant judgment is required in evaluating the Company's uncertain tax positions and determining its provision for income taxes. Although the Company believes that it has appropriately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different than expectations. The Company will adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate, the closing of a statutory audit period or changes in applicable tax law. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences couldwould impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to the reserves that are considered appropriate, as well as related net interest.
The Company recognizes liabilities for anticipated tax audit issues in the U.S. and other domestic and international tax jurisdictions based on its estimate of whether, and the extent to which, additionalthe tax paymentspositions are more likely than not.not to be sustained based on the technical merits. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax lawlaws applied to the facts of each matter.
The Company believes it maintains appropriate reserves to offset any potential income tax liabilities that may arise upon final resolution of matters for open tax years. If such reserve amounts ultimately prove to be unnecessary, the resulting reversal of such reserves could result in tax benefits being recorded in the period the reserves are no longer deemed necessary. If such amounts 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. Although the timing
The following table summarizes the activity related to the Company's gross unrecognized tax benefits from April 1, 20132019, to March 31, 20162022 (amounts in thousands)millions):
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 826.3 | | | $ | 757.3 | | | $ | 763.4 | |
| | | | | |
| Decreases related to settlements with tax authorities | (0.4) | | | (6.0) | | | (1.2) | |
| Decreases related to statute of limitation expirations | (12.6) | | | (10.9) | | | (30.9) | |
| Increases related to current year tax positions | 28.2 | | | 35.4 | | | 30.2 | |
| Increases (decreases) related to prior year tax positions | (37.4) | | | 50.5 | | | (4.2) | |
| Ending balance | $ | 804.1 | | | $ | 826.3 | | | $ | 757.3 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Beginning balance | $ | 170,654 |
| | $ | 149,878 |
| | $ | 152,845 |
|
| Increases related to acquisitions | 46,245 |
| | 8,381 |
| | 341 |
|
| Decreases related to settlements with tax authorities | (7,954 | ) | | (20,197 | ) | | (15,016 | ) |
| Decreases related to statute of limitation expirations | (4,591 | ) | | (9,031 | ) | | (4,069 | ) |
| Increases related to current year tax positions | 16,315 |
| | 23,179 |
| | 14,669 |
|
| Increases related to prior year tax positions | — |
| | 18,444 |
| | 1,108 |
|
| Ending balance | $ | 220,669 |
| | $ | 170,654 |
| | $ | 149,878 |
|
As of March 31, 2016,2022 and March 31, 2021, the Company had accrued approximately $2.4 million related to the potential payment of interest on the Company's uncertain tax positions. As of March 31, 2015, the Company had accrued approximately $0.7 million related to the potential payment of interest on the Company's uncertain tax positions. Interest was included in the provision for income taxes. The Company has accrued for approximately $27.6 million inand penalties related to its uncertain tax positions related to its international locations ascontingencies of $72.7 million and $83.9 million, respectively. During the fiscal year ended March 31, 20162022, the Company released previously accrued interest and March 31, 2015. Interestpenalties of $11.2 million, compared to interest and penalties charged or (credited) to operations of $9.3 million during the yearsfiscal year ended March 31, 2016, 20152021, and 2014 related toreleased previously accrued interest and penalties of $13.5 million during the Company's uncertain tax positions were $1.7 million, $(1.8) million and $0.2 million, respectively. The increase related to priorfiscal year tax positions forended March 31, 2015 related primarily to a balance sheet reclassification from a valuation allowance to a reserve in the amount of $15.7 million.2020.
14. 1.625% SENIOR SUBORDINATED CONVERTIBLE DEBENTURES
In February 2015, the Company issued $1,725.0 million principal amount of 1.625% senior subordinated convertible debentures due February 15, 2025. The debentures are subordinated to the Company's senior debt, including amounts borrowed under its amended credit facility, but are senior to the Company's outstanding 2.125% junior subordinated convertible debentures. The debentures are convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at an initial base conversion rate of 14.5654 shares of common stock per $1,000 principal amount of debentures, representing an initial base conversion price of approximately $68.66 per share of common stock. As a result of cash dividends paid since the issuance of the debentures, the conversion rate has been adjusted to 15.1396 shares of common stock per $1,000 of principal amount of debentures, representing a base conversion price of approximately $66.05 per share of common stock. In addition, if at the time of conversion the applicable price of the Company's common stock exceeds the base conversion price, the conversion rate will be increased by up to an additional initial base conversion rate of 7.2827 shares of common stock per $1,000 principal amount of debentures, as determined pursuant to a specified formula. As a result of cash dividends paid since the issuance of the debentures, the maximum number of additional shares that may be issued if the stock price of the Company's common stock exceeds the base conversion price has been adjusted to 7.5698 shares of common stock per $1,000 principal amount of debentures. However, in no event will the conversion rate exceed 20.3915 (adjusted to 21.1954 as a result of cash dividends paid since the issuance of the debentures) shares of common stock per $1,000 principal amount of debentures. The Company received net proceeds of approximately $1,694.7 millionis currently under income tax examination in various tax jurisdictions in which it operates. The years under examination range from the issuance of its senior subordinated convertible debentures after deduction of issuance costs of approximately $30.3 million. The $30.3 million in issuance costs was split between a debt component of $20.4 million and an equity component of $9.9 million. The $20.4 million in debt issuance costs is recorded in other assets and is being amortized using the effective interest method over the term of the debentures.
Prior to the close of business on the business day immediately preceding November 15, 2024, the debentures will be convertible at the option of the debenture holders only upon the satisfaction of specified conditions and during certain periods. Thereafter until close of business on the second scheduled trading day immediately preceding February 15, 2025, the debentures will be convertible at the option of the debenture holders at any time regardless of these conditions. Accrued and unpaid interest will be considered fully paid upon settlement of shares.
As the debentures can be settled in cash upon conversion, for accounting purposes, the debentures were bifurcated into a liability component and an equity component, which are both initially recorded at fair value. The carrying value of the equity component at March 31, 2016 and March 31, 2015 was $564.9 million. The estimated fair value of the liability component of the debentures at the issuance date was $1,160.1 million resulting in a debt discount of $564.9 million. The unamortized debt discount was $490.3 million at March 31, 2016 and $559.3 million at March 31, 2015. The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 8.87 years.fiscal 2007 through fiscal 2020. In fiscal 2016, the Company recognized $42.6 million in non-cash interest expense related to the amortization of the debt discount compared to $5.7 million in fiscal 2015. The Company recognized $28.0 million of interest expense related to the 1.625% coupon on the debentures in fiscal 2016 compared to $3.8 million in fiscal 2015. The effective interest rate of the debentures is 5.9%.
15. 2.125% JUNIOR SUBORDINATED CONVERTIBLE DEBENTURES
In February 2015, the Company acquired $575.0 million in aggregate principal amount of its 2.125% junior subordinated convertible debentures for an aggregate purchase price of $1,134.6 million, based on market value. The payment was allocated between the liability ($238.3 million) and equity ($896.3 million) components of the convertible debentures, using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt prior to the retirement. The transaction resulted in a loss on retirement of convertible debentures of approximately $50.6 million, which represented the difference between the fair value of the liability component at time of repurchase and the sum of the carrying values of the debt component and any unamortized debt issuance costs.
The Company's remaining $575.0 million principal amount of 2.125% junior subordinated convertible debentures due December 15, 2037, are subordinated in right of payment to any future senior debt of the Company (including the Company's senior subordinated convertible debentures) and are effectively subordinated in right of payment to the liabilities of the Company's subsidiaries. The debentures are convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at an initial conversion rate of 29.2783 shares of common stock per $1,000 principal amount of debentures, representing an initial conversion price of approximately $34.16 per share of common stock. As of March 31, 2016, the holders of the debentures had the right to convert their debentures between April 1, 2016 and June 30, 2016 because for at least 20 trading days during the 30 consecutive trading day period ending on March 31, 2016, the Company's common stock had a last reported sale price greater than 130% of the conversion price. As of March 31, 2016,some jurisdictions, the Company has classifiedreceived tax assessments in excess of established reserves. The Company is contesting these tax assessments, and will continue to do so, including pursuing all available remedies such as appeals and litigation, if necessary. During fiscal 2022, additional assessments were received for these issues and the junior subordinated convertible debentures as long-term on the consolidated balance sheets as the Company has the intent and ability to refinance the obligation on a long-term basis. As of March 31, 2016, a holder could realize more economic value by selling its debentures in the over the counter market than from converting its debentures. As a result of cash dividends paid since the issuance of the debentures, the conversion rate has been adjusted to 41.1350 shares of common stock per $1,000 of principalCompany’s position remains unchanged.
The total amount of debentures, representing a conversion price of approximately $24.31 per share of common stock. The if-converted value of the debentures exceeded the principal amount by $565.1 million at March 31, 2016. The debentures include a contingent interest mechanism that begins in December 2017. The terms of the contingent interest include a 0.25% additional interest rate if the debentures are trading at less than $400 and a 0.5% additional interest rate if the debentures are trading at greater than $1,500. Based on the current trading price of the debentures, the contingent interest rate beginning in December 2017 would be 0.5% of the average trading price.
As the debentures can be settled in cash upon conversion, for accounting purposes, the debentures were bifurcated into a liability component and an equity component, which were both initially recorded at fair value. The carrying value of the equity component at March 31, 2016 and March 31, 2015gross unrecognized tax benefits was $411.2 million. The estimated fair value of the liability component of the debentures at the issuance date was $163.8 million, resulting in a debt discount of $411.2 million. The unamortized debt discount was $378.3 million at March 31, 2016 and $383.7 million at March 31, 2015. The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 21.75 years. In the years ended March 31, 2016, 2015 and 2014, the Company recognized $5.4 million, $9.1$804.1 million and $9.0 million, respectively, in non-cash interest expense related to the amortization of the debt discount. The Company recognized $12.2 million, $22.8 million and $24.4 million of interest expense related to the 2.125% coupon on the debentures in fiscal 2016, 2015 and 2014, respectively. The effective interest rate of the debentures is 9.1%.
In February 2015, the Company amended its existing $2.0 billion credit agreement by increasing the revolving credit facility to $2.555 billion and removing the term loan portion of the agreement. The new credit agreement includes two tranches. One tranche consists of bank commitments through February 2020 and another tranche consists of bank commitments through June 2018, the maturity date of the original credit agreement. The increase option permitting the Company, subject to certain requirements, to arrange with existing lenders or new lenders to provide up to an aggregate of $300 million in additional commitments, was also adjusted to $249.4 million. The credit agreement provides for a $125 million foreign currency sublimit, a $25 million letter of credit sublimit and a $25 million swingline loan sublimit. The amended credit agreement was accounted for as a modification and as such any remaining unamortized deferred costs associated with the prior credit agreement was associated with the new agreement since the borrowing capacity was increased. At March 31, 2016, $1,052.0 million of revolving credit facility borrowings were outstanding under the credit agreement compared to $462.0 million at March 31, 2015.
In December 2015, the Company secured additional revolving credit commitments of $219 million from various banks in the February 2020 tranche under the increase option of the credit agreement, bringing its revolving credit facility to $2.774 billion. The remaining increase option was $30.4$826.3 million as of March 31, 2016.
In December 2015,2022, and March 31, 2021, respectively, of which $692.3 million and $720.5 million is estimated to impact the Company amendedCompany's effective tax rate, if recognized. Unrecognized tax benefits may change in the Maximum Total Leverage Rationext 12 months due to expiration of statutes of limitation, changes in Section 6.11the Company’s judgment about the level of its existing credit agreement to allow the Total Leverage Ratio to be temporarily increased to 5.00 to 1.00 for a perioduncertainty, status of four consecutive quarters in conjunction with a Permitted Acquisition occurring during the first of the four quarters. The Total Leverage Ratio then decreases to 4.75 to 1.00 for three consecutive quarters, finally returning to the stated 4.50 to 1.00 Total Leverage Ratio of the credit agreement after a period of seven consecutive fiscal periods.tax examinations, and legislative changes. The Company can elect to use this special feature, also referred to as an Adjusted Covenant Period, no more than two times during the term of the credit agreement and also can terminate an Adjusted Covenant Period earlier than the seven consecutive quarters allowed.
The loans under the credit agreement bear interest, at the Company's option, at the base rate plus a spread of 0.25% to 1.25% or an adjusted LIBOR rate (based on one, two, three, or six-month interest periods) plus a spread of 1.25% to 2.25%, in each case with such spread being determined based on the consolidated leverage ratio for the preceding four fiscal quarters (in the case of the 2018 tranche revolving loans) or the consolidated senior leverage ratio (in the case of the 2020 tranche revolving loans). The base rate means the highest of JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 1-month interest period plus a margin equal to 1.00%. Swingline loans accrue interest at a per annum rate based on the base rate plus the applicable margin for base rate loans. Base rate loans may only be made in U.S. Dollars. The Companyestimates that it is also obligated to pay other customary administration fees and letter of credit fees for a credit facility of this size and type.
Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three-month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Interest expense related to the credit agreement was approximately $18.9 million in fiscal 2016, approximately $19.9 million in fiscal 2015 and approximately $14.6 million in fiscal 2014. Principal, together with all accrued and unpaid interest, is due and payable on the respective tranche maturity date, which is June 27, 2018 and February 4, 2020. The weighted average interest rate on short-term borrowings outstanding at March 31, 2016 related to the credit agreement was 1.94%. The Company also pays a quarterly commitment fee on the available but unused portion of its line of credit which is calculated on the average daily available balance during the period. The Company may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions and reimbursement of certain costs in the case of prepayments of LIBOR loans.
The Company's obligations under the credit agreement are guaranteed by certain of its subsidiaries meeting materiality thresholds set forth in the credit agreement. To secure the Company's obligations under the credit agreement, the Company and its domestic subsidiaries are required to pledge the equity securities of certain of their respective material subsidiaries, subject to certain exceptions and limitations.
The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, incur subsidiary indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, repurchase stock, enter into restrictive agreements and enter into sale and leaseback transactions, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also required to maintain compliance with consolidated senior and total leverage ratios and a consolidated interest coverage ratio. At March 31, 2016, the Company was in compliance with these covenants.
The credit agreement includes customary events of default that include, among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the credit agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the credit agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts.
In the ordinary course of the Company's business, the Company is involved in a limited number of legal actions, both as plaintiff and defendant. Consequently, the Company could incur uninsured liability in any of those actions. The Company also periodically receives notifications from various third parties alleging infringement of patents or other intellectual property rights. With respect to pending legal actions to which the Company is a party, although the outcomes of these actions are generally not determinable, the Company believes that the ultimate resolution of these matters will not harm its business and will not have a material adverse effect on its financial position, cash flows or results of operations. However, if an unfavorable ruling were to occur in any of the legal proceedings described in Note 28 or in other legal proceedings that were not deemed material to the Company as of the date hereof, then such legal proceedings could have a material adverse effect on the Company's financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon, and the Company is, from time to time, subject to such litigation. As a result, no assurances can be given with respect to the extent or outcome of any such litigation in the future.
The Company's technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or trade secret infringement by the Company's proprietary technology. The terms of these indemnification provisions approximate the terms of the outgoing technology license agreements, which are typically perpetual unless terminated by either party for breach. Thereasonably possible amount of future payments the Company could be required to make based on agreements that specify indemnification limits, if such indemnifications were required on all of these agreements, is approximately $142.7 million. There are some licensing agreements in place that do not specify indemnification limits. The Company had not recorded any liabilities related to these indemnification obligationsunrecognized tax benefits as of March 31, 2016.2022, could decrease by approximately $10.0 million in the next 12 months. Positions that may be resolved include various U.S. and non-U.S. matters.
18.STOCK REPURCHASE ACTIVITY
In December 2007,July 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. In the July 2015 ruling, the Tax Court concluded that the sharing of the cost of employee stock compensation in a company’s cost-sharing arrangement was invalid under the U.S. Administrative Procedures Act. In June 2019, a panel of the Ninth Circuit of the U.S. Court of Appeals reversed this decision. In July 2019, Altera petitioned the U.S. Court of Appeals for the Ninth Circuit to hold an en banc rehearing of the case. In November 2019, the en banc rehearing petition was denied, and Altera has asked the Supreme Court for a judicial review. In June 2020, the U.S. Supreme Court declined to issue a writ of certiorari in Altera v Commissioner, leaving intact the decision reached by the Ninth Circuit of the U.S. Court of Appeals. Based on the Ninth Circuit Opinion, the Company announced that its Boardrecorded a cumulative income tax expense of Directors had authorized the repurchase of up to 10.0$22.2 million shares of its common stock in the open market or in privately negotiated transactions. Asas of March 31, 2015, the Company had repurchased 7.5 million shares under this authorization for $234.7 million. In May 2015, the Company's Board of Directors authorized an increase to the existing share repurchase program to 20.0 million shares of common stock from the approximately 2.5 million shares remaining under the prior authorization. During fiscal 2016, the Company repurchased 8.6 million shares under this authorization for $363.8 million. In January 2016, the Company's Board of Directors authorized an increase to the existing share repurchase program to 15.0 million shares of common stock from the approximately 11.4 million shares remaining under the prior authorization. There is no expiration date associated with this repurchase program. During the years ended March 31, 2015 and 2014, the Company did not purchase any of its shares of common stock. 2022.
19.EMPLOYEE BENEFIT PLANSNote 13. Employee Benefit Plans
The Company maintains a contributory profit-sharing plan for its domestic employees meeting certain eligibility and service requirements. The plan qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended, and allows employees to contribute up to 60% of their base salary, subject to maximum annual limitations prescribed by the IRS. Defined Benefit Plans
The Company has a discretionary matching contribution program. All matchesdefined benefit pension plans that cover certain French and German employees. Most of these defined pension plans, which were acquired in prior acquisitions, are unfunded. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on a quarterly basisyears of service and requireemployee compensation levels. Pension liabilities and charges are based upon various assumptions, updated annually, including discount rates, future salary increases, employee turnover, and mortality rates. The Company’s French pension plan provides for termination benefits paid to covered French employees only at retirement, and consists of approximately one to five months of salary. The Company's German pension plan provides for defined benefit payouts for covered German employees following retirement.
The change in projected benefit obligation and the participantaccumulated benefit obligation, were as follows (in millions):
| | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 |
| Projected benefit obligation at the beginning of the year | $ | 83.0 | | | $ | 70.0 | |
| | | |
| Service cost | 1.8 | | | 1.6 | |
| Interest cost | 0.7 | | | 1.0 | |
| | | |
| Actuarial (gains) losses | (5.4) | | | 8.2 | |
| Benefits paid | (1.5) | | | (1.5) | |
| Foreign currency exchange rate changes | (4.0) | | | 3.7 | |
| Projected benefit obligation at the end of the year | $ | 74.6 | | | $ | 83.0 | |
| Accumulated benefit obligation at the end of the year | $ | 68.0 | | | $ | 76.3 | |
| Weighted average assumptions: | | | |
| Discount rate | 1.59 | % | | 0.93 | % |
| Rate of compensation increase | 3.03 | % | | 3.01 | % |
The Company's pension liability represents the present value of estimated future benefits to be an active employee at the end of the applicable quarter. During fiscal 2016, 2015 and 2014, the Company's matching contributions to the plan totaled $4.4 million, $3.9 million and $3.6 million, respectively.
paid. The Company's 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) became effective on March 1, 2002. Under the 2001 Purchase Plan, eligible employees of the Company may purchase shares of common stock at semi-annual intervals through periodic payroll deductions. The purchase price in general will be 85% of the lower of the fair market value of the common stock on the first day of the participant's entry date into the offering period or of the fair market value on the semi-annual purchase date. Depending upon a participant's entry date into the 2001 Purchase Plan, purchase periods under the 2001 Purchase Plan consist of overlapping periods of either 24, 18, 12 or 6 months in duration. In May 2003 and August 2003, the Company's Board and stockholders, respectively, each approved an annual automatic increase in the number of shares reserved under the 2001 Purchase Plan. The automatic increase took effect on January 1, 2005, and on each January 1 thereafter during the term of the plan, anddiscount rate is equal to the lesser of (i) 1,500,000, (ii) one half of one percent (0.5%) of the then outstanding shares of the Company's common stock, or (iii) such lesser amount as is approved by Board of Directors. On January 1, 2016, an additional 1,017,492 shares were reserved under the 2001 Purchase Plan based on the automatic increase. Upon the approvalquarterly average yield for Euros treasuries with a duration of the Board of Directors, there were no shares added under the 2001 Purchase Plan on January 1, 2015 or 2014 based on the automatic increase provision. Since the inception of the 2001 Purchase Plan, 12,295,354 shares of common stock have been reserved30 years, plus a supplement for issuance and 6,651,710 shares have been issued under this purchase plan.
During fiscal 1995, a purchase plan was adopted for employeescorporate bonds (Euros, AA rating). Net actuarial (gains) losses, which are included in non-U.S. locations. Such plan provided for the purchase price per share to be 100% of the lower of the fair market value of the common stock at the beginning or end of the semi-annual purchase plan period. Effective May 1, 2006,accumulated other comprehensive loss in the Company's Boardconsolidated balance sheets, will be recognized as a component of Directors approved a purchase price per share equal to 85% ofnet periodic cost over the lower of the fair market value of the common stock at the beginning or end of the semi-annual purchase planaverage remaining service period. On May 1, 2006, the Company's Board of Directors approved an annual automatic increase in the number of shares reserved under the plan. The automatic increase took effect on January 1, 2007, and on each January 1 thereafter during the term of the plan, and is equal to one tenth of one percent (0.1%) of the then outstanding shares of the Company's common stock. On January 1, 2016, an additional 203,498 shares were reserved under the plan based on the automatic increase. Upon the approval of the Board of Directors, there were no shares added under the plan on January 1, 2015 or 2014, based on the automatic increase provision. Since the inception of this purchase plan, 1,703,783 shares of common stock have been reserved for issuance and 1,063,360 shares have been issued under this purchase plan.
Effective January 1, 1997, the Company adopted a non-qualified deferred compensation arrangement. This plan is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of highly compensated employees as defined in ERISA Sections 201, 301 and 401. There are no Company matching contributions made under this plan.
In connection with the acquisition of SMSC in August 2012, the Company assumed an unfunded Supplemental Executive Retirement Plan ("SERP"), which provides former SMSC senior management with retirement, disability and death benefits. An amendment to the SERP was executed on November 3, 2009, freezing the benefit level for existing participants as of February 28, 2010 and closing the SERP to new participants. As of March 31, 2016, the projected benefit obligation is $5.2 million. AnnualFuture estimated expected benefit payments and contributions under this planfor fiscal year 2023 through 2032 are as follows (in millions):
| | | | | | | | |
| Fiscal Year Ending March 31, | | Amount |
| 2023 | | $ | 1.6 | |
| 2024 | | 1.9 | |
| 2025 | | 2.1 | |
| 2026 | | 2.4 | |
| 2027 | | 2.2 | |
| 2028 through 2032 | | 14.9 | |
| Total | | $ | 25.1 | |
The Company's net periodic pension cost for fiscal 2023 is expected to be approximately $0.7 million in fiscal 2017 and approximately $3.8 million cumulatively in fiscal 2018 through fiscal 2026.$3.1 million.
Note 14. Share-Based Compensation
The Company has management incentive compensation plans which provide for bonus payments, based on a percentage of base salary, from an incentive pool created from operating profits of the Company, at the discretion of the Board of Directors. During fiscal 2016, 2015 and 2014, $19.1 million, $24.2 million and $24.4 million were charged against operations for these plans, respectively.
The Company also has a plan that, at the discretion of the Board of Directors, provides a cash bonus to all employees of the Company based on the operating profits of the Company. During fiscal 2016, 2015 and 2014, $14.2 million, $15.9 million and $15.2 million, respectively, were charged against operations for this plan.
20. EQUITY INCENTIVE PLANS
Share-Based Compensation Expense
The following table presents the details of the Company's share-based compensation expense (amounts in thousands)(in millions):
| | | | | | | | | | | | | | | Fiscal Year Ended March 31, |
| | Year Ended March 31, | | 2022 | | 2021 | | 2020 |
| | 2016 | | 2015 | | 2014 | | |
| Cost of sales | $ | 8,252 |
| (1) | $ | 9,010 |
| (1) | $ | 7,340 |
| (1) | |
Cost of sales (1) | | Cost of sales (1) | $ | 34.3 | | | $ | 26.6 | | | $ | 20.9 | |
| Research and development | 32,022 |
| | 28,164 |
| | 24,554 |
| | Research and development | 97.9 | | | 96.8 | | | 82.9 | |
| Selling, general and administrative | 31,146 |
| | 21,422 |
| | 21,893 |
| | Selling, general and administrative | 78.0 | | | 74.9 | | | 66.4 | |
| | Pre-tax effect of share-based compensation | 71,420 |
| | 58,596 |
| | 53,787 |
| | Pre-tax effect of share-based compensation | 210.2 | | | 198.3 | | | 170.2 | |
| Income tax benefit | 23,012 |
| | 10,640 |
| | 5,722 |
| | Income tax benefit | 44.6 | | | 42.3 | | | 36.9 | |
| Net income effect of share-based compensation | $ | 48,408 |
| | $ | 47,956 |
| | $ | 48,065 |
| | Net income effect of share-based compensation | $ | 165.6 | | | $ | 156.0 | | | $ | 133.3 | |
(1) During the fiscal year ended March 31, 2016, $7.92022, $21.2 million of share-based compensation expense was capitalized to inventory and $8.3$34.3 million of previously capitalized share-based compensation expense in inventory was sold. During the fiscal year ended March 31, 2015, $6.82021, $16.7 million of share-based compensation expense was capitalized to inventory and $9.0$26.6 million of previously capitalized share-based compensation expense in inventory was sold. During the fiscal year ended March 31, 2014, $7.42020, $19.8 million of share-based compensation expense was capitalized to inventory and $7.3$20.9 million of previously capitalized share-based compensation expense in inventory was sold.
Combined Incentive Plan Information
The Company has granted RSUs and stock options to employees and non-employee members of the Board of Directors under the Company’s 2004 Equity Incentive Plan (the 2004 plan). The Company grants RSUs with a service condition and PSUs under the 2004 plan. The Company uses RSUs with a service condition as its primary equity incentive compensation instrument for employees. The Company grants PSUs to a group of executive officers and employees. For the market-based PSUs, the number of shares of our common stock expected to be received at vesting will range from 0% to 200% of the target grant amount based on the TSR of our common stock measured against the TSR of a defined peer group of companies over the applicable two-year or three-year measurement period. TSR is a measure of the stock price appreciation plus any dividends paid in the performance period. For the performance-based PSUs, the number of shares of our common stock expected to vest will range from 0% to 200% of the target grant amount based on our three-year cumulative non-GAAP operating margin percentage. Under the 2004 plan, 64,389,717 shares of common stock have been authorized for issuance and 11,091,259 shares of common stock remain available for future grants as of March 31, 2022.
RSUs and PSUs share activity is set forth below:
| | | | | | | | | | | |
| Number of
Shares | | Weighted Average Grant Date Fair Value |
| Nonvested shares at March 31, 2019 | 12,583,924 | | | $ | 32.41 | |
| Granted | 4,364,088 | | | $ | 44.09 | |
| | | |
| Forfeited | (681,318) | | | $ | 37.75 | |
| Vested | (4,782,588) | | | $ | 28.74 | |
| Nonvested shares at March 31, 2020 | 11,484,106 | | | $ | 38.06 | |
| Granted | 4,678,494 | | | $ | 50.69 | |
| Forfeited | (514,110) | | | $ | 41.69 | |
| Vested | (3,764,672) | | | $ | 32.07 | |
| Nonvested shares at March 31, 2021 | 11,883,818 | | | $ | 44.77 | |
| Granted | 2,995,991 | | | $ | 74.36 | |
| | | |
| Forfeited | (978,325) | | | $ | 51.17 | |
| Vested | (3,795,469) | | | $ | 43.77 | |
| Nonvested shares at March 31, 2022 | 10,106,015 | | | $ | 53.30 | |
The total intrinsic value of RSUs and PSUs which vested during the fiscal years ended March 31, 2022, 2021 and 2020 was $287.6 million, $218.5 million and $223.9 million, respectively. The aggregate intrinsic value of RSUs and PSUs outstanding at March 31, 2022 was $759.4 million, calculated based on the closing price of the Company's common stock of $75.14 per share on March 31, 2022. The amount of unearned share-based compensation currently estimated to be expensed in the remainder of fiscal 20172023 through fiscal 20212027 related to unvested share-based payment awards at March 31, 20162022 is $134.5 million.$303.8 million. The weighted average period over which the unearned share-based compensation is expected to be recognized is approximately 2.301.92 years.
Combined Incentive Plan Information
RSU share activity under the 2004 Plan is set forth below:
|
| | |
| Number of Shares |
Nonvested shares at April 1, 2013 | 6,009,831 |
|
Granted | 1,616,632 |
|
Forfeited/expired | (282,964 | ) |
Vested | (1,813,465 | ) |
Nonvested shares at March 31, 2014 | 5,530,034 |
|
Granted | 1,446,968 |
|
Forfeited/expired | (266,415 | ) |
Vested | (1,441,671 | ) |
Nonvested shares at March 31, 2015 | 5,268,916 |
|
Granted | 2,479,729 |
|
Assumed upon acquisition
| 525,442 |
|
Forfeited/expired | (360,072 | ) |
Vested | (1,606,273 | ) |
Nonvested shares at March 31, 2016 | 6,307,742 |
|
The total intrinsic valuenumber of RSUs which vested during thePSUs granted in fiscal years ended March 31, 2016, 20152022, 2021 and 20142020 was $72.1 million, $67.6 million145,188 shares, 140,160 shares and $74.6 million,32,734 shares, respectively. The aggregate intrinsic value of RSUs outstanding at March 31, 2016 was $304.0 million, calculated based on the closing price of the Company's common stock of $48.20 per share on March 31, 2016. At March 31, 2016, the weighted average remaining expense recognition period was 2.35 years.
The weighted average fair value per share of the RSUs awarded is calculated based on the fair market value of the Company's common stock on the respective grant dates discounted for the Company's expected dividend yield. The weighted average fair value per share of RSUs awarded in fiscal 2016, 2015 and 2014 was $38.92, $42.02 and $34.24, respectively.
Stock option and stock appreciation right (SAR)SARs activity under the Company's stock incentive plans in the three years ended March 31, 20162022 is set forth below:
| | | | | | | | | | | |
| Number of
Shares | | Weighted Average Exercise Price per Share |
| Outstanding at March 31, 2019 | 563,764 | | | $ | 15.08 | |
| | | |
| | | |
| Exercised | (260,838) | | | $ | 14.36 | |
| Forfeited or expired | (4,906) | | | $ | 10.01 | |
| Outstanding at March 31, 2020 | 298,020 | | | $ | 15.80 | |
| | | |
| | | |
| Exercised | (155,768) | | | $ | 15.74 | |
| Forfeited or expired | (1,258) | | | $ | 9.74 | |
| Outstanding at March 31, 2021 | 140,994 | | | $ | 15.91 | |
| | | |
| | | |
| Exercised | (39,874) | | | $ | 13.96 | |
| Forfeited or expired | (1,788) | | | $ | 17.82 | |
| Outstanding at March 31, 2022 | 99,332 | | | $ | 16.65 | |
|
| | | | | | |
| | Number of Shares | | Weighted Average Exercise Price per Share |
| Outstanding at April 1, 2013 | 2,269,803 |
| | $ | 25.58 |
|
| Granted | — |
| | — |
|
| Exercised | (1,675,663 | ) | | 25.91 |
|
| Canceled | (20,529 | ) | | 22.78 |
|
| Outstanding at March 31, 2014 | 573,611 |
| | 24.75 |
|
| Granted | 27,654 |
| | 46.66 |
|
Assumed upon acquisition
| 666,586 |
| | 29.33 |
|
| Exercised | (477,618 | ) | | 26.42 |
|
| Canceled | (105,934 | ) | | 28.17 |
|
| Outstanding at March 31, 2015 | 684,299 |
| | 28.41 |
|
| Granted | 244 |
| | 41.09 |
|
| Assumed upon acquisition | 604,900 |
| | 35.03 |
|
| Exercised | (221,987 | ) | | 25.30 |
|
| Canceled | (153,948 | ) | | 31.52 |
|
| Outstanding at March 31, 2016 | 913,508 |
| | $ | 33.00 |
|
The total intrinsic value of options and SARs exercised during the fiscal years ended March 31, 2016, 20152022, 2021 and 20142020 was $4.7$2.6 million,, $9.6 $6.5 million and $25.5$8.4 million,, respectively. This intrinsic value represents the difference between the fair market value of the Company's common stock on the date of exercise and the exercise price of each equity award.
The aggregate intrinsic value of options and SARs outstanding and exercisable at March 31, 20162022 was $13.9 million. The aggregate intrinsic value of options and SARS exercisable at March 31, 2016 was $8.8 million.$7.5 million. The aggregate intrinsic values were calculated based on the closing price of the Company's common stock of $48.20$75.14 per share on March 31, 2016.2022. As of March 31, 2022, the weighted average remaining contractual term for options and SARs outstanding and exercisable was 1.37 years.
As of March 31, 20162022 and 2015,March 31, 2021, the number of option and SAR shares exercisable was 553,84499,332 and 283,133,140,994, respectively, and the weighted average exercise price per share was $32.33$16.65 and $26.90,$15.91, respectively.
Employee Stock Purchase Plan
The weighted average fair values per share of stock options granted inCompany’s 2001 Employee Stock Purchase Plan and the years ended March 31, 2016 and 2015 was $8.85 and $9.00, respectively. The fair values per share of stock options granted in the years ended March 31, 2016 and 2015 were estimated utilizing the following assumptions:
|
| | | | | |
| | Year Ended March 31, |
| | 2016 | | 2015 |
| Expected term (in years) | 6.5 |
| | 6.5 |
|
| Volatility | 29.50 | % | | 26.65 | % |
| Risk-free interest rate | 1.54 | % | | 1.59 | % |
| Dividend yield | 3.00 | % | | 3.00 | % |
There were no stock options granted in the year ended March 31, 2014.
21.COMMITMENTS
The Company leases office space, a manufacturing facility, and transportation and other equipment under operating leases which expire at various dates through March 31, 2022. The future minimum lease commitments under these operating leases at March 31, 2016 were as follows (amounts in thousands):
|
| | | | |
| Year Ending March 31, | | Amount |
| 2017 | | $ | 16,370 |
|
| 2018 | | 12,350 |
|
| 2019 | | 7,677 |
|
| 2020 | | 3,098 |
|
| 2021 | | 1,000 |
|
| Thereafter | | 667 |
|
| Total minimum payments | | $ | 41,162 |
|
Rental expense under operating leases totaled $23.3 million, $23.8 million and $21.5 million for fiscal 2016, 2015 and 2014, respectively.
Commitments for construction or purchase of property, plant and equipment totaled $30.2 million as of March 31, 2016, all of which will be due within the next year. Other purchase obligations and commitments totaled approximately $57.6 million as of March 31, 2016. Other purchase obligations and commitments include payments due under various types of licenses and approximately $52.4 million of outstanding purchase commitments with the Company's wafer foundries for delivery in fiscal 2017.
| |
22. | GEOGRAPHIC AND SEGMENT INFORMATION |
The Company's reporting segments include semiconductor products and technology licensing. The Company does not allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income taxes1994 International Employee Stock Purchase Plan (collectively referred to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is beneficial in evaluating segment performance. Additionally, the Company does not allocate assetsemployee stock purchase plans) allows eligible employees to segments for internal reporting purposes as it does not manage its segments by such metrics.
The following table represents revenues and gross profit for each segment (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended March 31, |
| | 2016 | | 2015 | | 2014 |
| | Net Sales | | Gross Profit | | Net Sales | | Gross Profit | | Net Sales | | Gross Profit |
| Semiconductor products | $ | 2,084,210 |
| | $ | 1,116,340 |
| | $ | 2,057,443 |
| | $ | 1,139,971 |
| | $ | 1,836,639 |
| | $ | 1,034,165 |
|
| Technology licensing | 89,124 |
| | 89,124 |
| | 89,593 |
| | 89,593 |
| | 94,578 |
| | 94,578 |
|
| Total | $ | 2,173,334 |
| | $ | 1,205,464 |
| | $ | 2,147,036 |
| | $ | 1,229,564 |
| | $ | 1,931,217 |
| | $ | 1,128,743 |
|
The Company sells its products to distributors and original equipment manufacturers (OEMs) in a broad range of market segments, performs on-going credit evaluations of its customers and, as deemed necessary, may require collateral, primarily letters of credit. The Company's operations outside the U.S. consist of product assembly and final test facilities in Thailand, and sales and support centers and design centers in certain foreign countries. Domestic operations are responsible for the design, development and wafer fabrication of products, as well as the coordination of production planning and shipping to meet worldwide customer commitments. The Company's Thailand assembly and test facility is reimbursed in relation to value added with respect to assembly and test operations and other functions performed, and certain foreign sales offices receive compensation for sales within their territory. Accordingly, for financial statement purposes, it is not meaningful to segregate sales or operating profits for the assembly and test and foreign sales office operations. Identifiable long-lived assets (consisting of property, plant and equipment net of accumulated amortization) by geographic area are as follows (amounts in thousands):
|
| | | | | | | |
| | March 31, |
| | 2016 | | 2015 |
| United States | $ | 373,860 |
| | $ | 331,372 |
|
| Thailand | 182,813 |
| | 197,981 |
|
| Various other countries | 52,723 |
| | 52,219 |
|
| Total long-lived assets | $ | 609,396 |
| | $ | 581,572 |
|
Sales to unaffiliated customers located outside the U.S., primarily in Asia and Europe, aggregated approximately 84% of consolidated net sales for each of fiscal 2016, 2015 and 2014. Sales to customers in Europe represented approximately 22% of consolidated net sales for fiscal 2016 and approximately 21% of consolidated net sales for each of fiscal 2015 and 2014. Sales to customers in Asia represented approximately 59% of consolidated net sales for each of fiscal 2016 and 2015, and approximately 60% of consolidated net sales for fiscal 2014. Within Asia, sales into China, including Hong Kong, represented approximately 30%, 28% and 29% of consolidated net sales for fiscal 2016, 2015 and 2014, respectively. Sales into Taiwan represented approximately 12%, 14% and 13% of consolidated net sales for fiscal 2016, 2015 and 2014, respectively. Sales into any other individual foreign country did not exceed 10% of the Company's net sales for any of the three years presented.
No single end customer or distributor accounted for 10% or more of the Company's net sales during fiscal 2016, 2015 or 2014.
| |
23. | DERIVATIVE INSTRUMENTS |
Freestanding Derivative Forward Contracts
The Company has international operations and is thus subject to foreign currency rate fluctuations. To help manage the risk of changes in foreign currency rates, the Company periodically enters into derivative contracts comprised of foreign currency forward contracts to hedge its asset and liability foreign currency exposure and a portion of its foreign currency operating expenses. Approximately 99% of the Company's sales are U.S. Dollar denominated. Net gains due to foreign exchange rate fluctuations after the effects of hedging activity were $0.7 million during fiscal 2016, compared to net losses of
$7.7 million during fiscal 2015 and net gains of $0.4 million during fiscal 2014. As of March 31, 2016 and 2015, the Company had no foreign currency forward contracts outstanding. The Company recognized an immaterial amount of net
realized gains and losses on foreign currency forward contracts in the years ended March 31, 2016, 2015 and 2014. Gains and losses from changes in the fair value of these foreign currency forward contracts and foreign currency exchange rate fluctuations are credited or charged to other income (expense). The Company does not apply hedge accounting to its foreign currency derivative instruments.
Fair Value Hedges
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between the fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
In March 2015, the Company entered into ten-year fixed-to-floating interest rate swap agreements designated as fair value hedges of the changes in fair value of a portion of the Company's fixed-rate 1.625% senior subordinated convertible debentures due to changes in the LIBOR swap rate, the designated benchmark interest rate. The Company pays variable interest equal to the three-month LIBOR minus 53.6 basis points and it receives a fixed interest rate of 1.625%. The notional amount of these contracts outstanding at March 31, 2015 was $431.3 million, representing 25% of the principal amount of the senior subordinated convertible debentures.
In February 2016, the Company terminated its interest rate swap agreements. Upon termination, the contracts were in an asset position, resulting in cash receipts of approximately $25.7 million, which included $3.7 million of accrued interest. The gain from terminating the interest rate swap agreements increased the outstanding balance of the 1.625% senior convertible debentures and is being amortized as a reduction of interest expense over the remaining life of the debentures. The cash flows from the termination of these interest rate swap agreements have been reported as operating activities in the consolidated statements of cash flows.
The following table summarizes the location and fair value amounts of derivative instruments reported in the consolidated balance sheets at March 31, 2015 (amounts in thousands):
|
| | | | | | |
| | | Asset Derivatives |
| Derivatives designated as hedging instruments | | Balance Sheet Location | | Fair Value |
| Interest rate contracts | | Other assets | | $ | 8,928 |
|
The following table summarizes the location and amount of the gain or loss on the hedged item attributable to the changes in the LIBOR swap rate and the offsetting gain or loss on the related interest rate swap agreements for the years ended March 31, 2016 and 2015. The difference represents hedge ineffectiveness (amounts in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Year ended March 31, |
| | | 2016 | | 2015 |
| Income Statement Classification | | Gain (Loss) on Senior Subordinated Convertible Debentures | | Gain (Loss) on Interest Rate Swap | | Gain (Loss) on Senior Subordinated Convertible Debentures | | Gain (Loss) on Interest Rate Swap |
| Other income (expense) | | $ | (18,060 | ) | | $ | 16,345 |
| | $ | (8,302 | ) | | $ | 8,928 |
|
| |
24. | NET INCOME PER COMMON SHARE ATTRIBUTABLE TO MICROCHIP TECHNOLOGY STOCKHOLDERS |
The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):
|
| | | | | | | | | | | |
| | Year ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Net income attributable to Microchip Technology | $ | 324,132 |
| | $ | 369,009 |
| | $ | 395,281 |
|
| Weighted average common shares outstanding | 203,384 |
| | 200,937 |
| | 198,291 |
|
| Dilutive effect of stock options and RSUs | 3,350 |
| | 3,642 |
| | 3,910 |
|
| Dilutive effect of 2037 junior subordinated convertible debentures | 10,654 |
| | 18,982 |
| | 15,429 |
|
| Weighted average common and potential common shares outstanding | 217,388 |
| | 223,561 |
| | 217,630 |
|
| Basic net income per common share attributable to Microchip Technology stockholders | $ | 1.59 |
| | $ | 1.84 |
| | $ | 1.99 |
|
| Diluted net income per common share attributable to Microchip Technology stockholders | $ | 1.49 |
| | $ | 1.65 |
| | $ | 1.82 |
|
The Company computed basic earnings per common share attributable to its stockholders using net income available to common stockholders and the weighted average number of commonpurchase shares outstanding during the period. The Company computed diluted earnings per common share attributable to its stockholders using net income available to stockholders and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of outstanding RSUs.
Diluted net income per common share attributable to stockholders for fiscal 2016, 2015, and 2014 includes 10,654,070, 18,982,440 and 15,429,003 shares, respectively, issuable upon the exchange of the Company's 2.125% junior subordinated convertible debentures due December 15, 2037 (see Note 15). The debentures have no impact on diluted net income per common share unless the average price of the Company's common stock exceeds the conversion price because the principal amountat 85% of the debenturesvalue of its common stock on specific dates. Since the inception of the employee stock purchase plans, 35,000,572 shares of common stock have been authorized for issuance and 10,929,886 shares remain available for future purchases as of March 31, 2022.
Employees purchased 1,485,477 shares of common stock in the fiscal year ended March 31, 2022 for a purchase price of $70.0 million under the employee stock purchase plans compared to 1,424,440 shares of common stock for a purchase price of $57.7 million in the fiscal year ended March 31, 2021 and 1,574,568 shares of common stock for a purchase price of $55.6 million in the fiscal year ended March 31, 2020. As of March 31, 2022, unrecognized share-based compensation costs related to the employee stock plans totaled $7.2 million, which will be settled in cash upon conversion. Prior to conversion, the Company will include, in the diluted net income per common share calculation, the effectrecognized over a period of the additional shares that may be issued whenapproximately five months.
Note 15. Stock Repurchase Activity
In November 2021, the Company's commonBoard of Directors approved a new stock price exceeds the conversion price using the treasury stock method. The weighted average conversion price per share used in calculating the dilutive effect of the convertible debt for fiscal 2016, 2015 and 2014 was $24.73, $25.48 and $26.32, respectively.
There were no shares issuable upon the exchange of the Company's 1.625% senior subordinated convertible debentures due February 15, 2025 (see Note 14). The debentures have no impact on diluted net income per common share unless the average pricerepurchase program to repurchase up to $4.00 billion of the Company's common stock exceedsin the conversion price becauseopen market or in privately negotiated transactions. There is no expiration date associated with the principal amount ofrepurchase program. During the debentures will be settled in cash upon conversion. Prior to conversion,fiscal year ended March 31, 2022, the Company will include, in the diluted net income per common share calculation, the effectpurchased approximately 5.6 million shares of the additional shares that may be issued when the Company'sits common stock price exceedsfor a total of $425.6 million under the conversion price usingnew authorization. As of March 31, 2022, approximately $3.57 billion remained available for repurchases under the treasury stock method. The weighted average conversion price per share used in calculating the dilutive effect of the convertible debt for fiscal 2016 and 2015 was $67.19 and $68.25, respectively.
Weighted average common shares exclude the effect of option shares which are not dilutive. For fiscal 2016 and 2015, the number of option shares that were antidilutive was 298,015 and 19,305, respectively.program. There were no antidilutive option shares for fiscal 2014.
| |
25. | QUARTERLY RESULTS (UNAUDITED) |
The following table presents the Company's selected unaudited quarterly operating results for the eight quarters ended March 31, 2016. The Company believes that all adjustmentsrepurchases of a normal recurring nature have been made to present fairly the related quarterly results (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | |
| Fiscal 2016 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total |
| Net sales | | $ | 533,952 |
| | $ | 541,391 |
| | $ | 540,344 |
| | $ | 557,647 |
| | $ | 2,173,334 |
|
| Gross profit | | 309,017 |
| | 300,950 |
| | 292,718 |
| | 302,779 |
| | 1,205,464 |
|
| Operating income | | 121,319 |
| | 74,948 |
| | 76,132 |
| | 79,946 |
| | 352,345 |
|
| Net income | | 130,460 |
| | 64,899 |
| | 61,211 |
| | 67,355 |
| | 323,925 |
|
| Less: Net loss attributable to noncontrolling interests | | 207 |
| | — |
| | — |
| | — |
| | 207 |
|
| Net income attributable to Microchip Technology | | 130,667 |
| | 64,899 |
| | 61,211 |
| | 67,355 |
| | 324,132 |
|
| Diluted net income per common share attributable to Microchip Technology stockholders | | 0.60 |
| | 0.30 |
| | 0.28 |
| | 0.31 |
| | 1.49 |
|
| | | | | | | | | | | |
| Fiscal 2015 | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total |
| Net sales | | $ | 528,876 |
| | $ | 546,243 |
| | $ | 528,710 |
| | $ | 543,207 |
| | $ | 2,147,036 |
|
| Gross profit | | 306,519 |
| | 307,454 |
| | 301,959 |
| | 313,632 |
| | 1,229,564 |
|
| Operating income | | 115,946 |
| | 101,318 |
| | 98,009 |
| | 110,347 |
| | 425,620 |
|
| Net income | | 89,909 |
| | 92,038 |
| | 84,798 |
| | 98,580 |
| | 365,325 |
|
| Less: Net loss attributable to noncontrolling interests | | — |
| | 1,603 |
| | 1,259 |
| | 822 |
| | 3,684 |
|
| Net income attributable to Microchip Technology | | 89,909 |
| | 93,641 |
| | 86,057 |
| | 99,402 |
| | 369,009 |
|
| Diluted net income per common share attributable to Microchip Technology stockholders | | 0.40 |
| | 0.42 |
| | 0.39 |
| | 0.45 |
| | 1.65 |
|
Refer to Note 3, Special Charges, for an explanation of the special charges included in operating income in fiscal 2016 and fiscal 2015. Refer to Note 15, 2.125% Junior Subordinated Convertible Debentures, for an explanation of the loss on retirement of convertible debentures of approximately $50.6 million included in net income (loss)common stock during the fourth quarter of fiscal 2015. Refer to Note 4, Investments, for an explanation of the net realized gain from sales of available-for-sale marketable equity securities included in net income during the fourth quarter of fiscal 2015 and the first quarter of fiscal 2016.
26.SUPPLEMENTAL FINANCIAL INFORMATION
Cash paid for income taxes amounted to $25.4 million, $25.5 million and $25.7 million during fiscal 2016, 2015 and 2014, respectively. Cash paid for interest on borrowings amounted to $52.9 million in fiscal 2016, $40.2 million in fiscal 2015 and $34.6 million in fiscal 2014.
A summary of additions and deductions related to the valuation allowance for deferred tax asset accounts for the years ended March 31, 2016, 20152021 and 2014 follows (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Year | | Additions Charged to Costs and Expenses | | Additions Charged to Other Accounts | | Deductions | | Balance at End of Year |
| Valuation allowance for deferred tax assets: | | | | | | | | | |
| Fiscal Year 2016 | $ | 116,482 |
| | $ | 5,535 |
| | $ | 47,834 |
| | $ | (8,017 | ) | | $ | 161,834 |
|
| Fiscal Year 2015 | 93,811 |
| | — |
| | 36,957 |
| | (14,286 | ) | | 116,482 |
|
| Fiscal Year 2014 | 88,637 |
| | — |
| | 5,174 |
| | — |
| | 93,811 |
|
A summary2020. Shares repurchased are recorded as treasury shares and are used to fund share issuance requirements under the Company's equity incentive plans. As of additions and deductions related to the allowance for doubtful accounts for the years ended March 31, 2016, 2015 and 2014 follows (amounts in thousands):2022, the Company had approximately 23.3 million treasury shares.
Note 16. Accumulated Other Comprehensive Loss
|
| | | | | | | | | | | | | | | |
| | Balance at Beginning of Year | | Additions Charged to Costs and Expenses | | Deductions (1) | | Balance at End of Year |
| Allowance for doubtful accounts: | | | | | | | |
| Fiscal Year 2016 | $ | 2,621 |
| | $ | 59 |
| | $ | (140 | ) | | $ | 2,540 |
|
| Fiscal Year 2015 | 2,918 |
| | 104 |
| | (401 | ) | | 2,621 |
|
| Fiscal Year 2014 | 2,764 |
| | 245 |
| | (91 | ) | | 2,918 |
|
(1) Deductions represent uncollectible accounts written off, net of recoveries.
The following tables presenttable presents the changes in the components of accumulated other comprehensive incomeloss, net of tax, (AOCI) for the years ended March 31, 2016 and March 31, 2015:(in millions):
| | | | | | | | | | | | | | | | | | | |
| | | Minimum Pension Liability | | Foreign Currency | | Total |
| Balance at March 31, 2021 | | | $ | (13.4) | | | $ | (12.8) | | | $ | (26.2) | |
| | | | | | | |
| | | | | | | |
| Other comprehensive income (loss) before reclassifications | | | 6.9 | | | (2.2) | | | 4.7 | |
| Reclassification of realized transactions | | | 0.9 | | | — | | | 0.9 | |
| Net other comprehensive income (loss) | | | 7.8 | | | (2.2) | | | 5.6 | |
| | | | | | | |
| Balance at March 31, 2022 | | | $ | (5.6) | | | $ | (15.0) | | | $ | (20.6) | |
| | | | | | | |
| Balance at March 31, 2020 | | | $ | (5.1) | | | $ | (16.5) | | | $ | (21.6) | |
| | | | | | | |
| | | | | | | |
| Other comprehensive (loss) income before reclassifications | | | (9.4) | | | 3.7 | | | (5.7) | |
| Reclassification of realized transactions | | | 1.1 | | | — | | | 1.1 | |
| Net other comprehensive (loss) income | | | (8.3) | | | 3.7 | | | (4.6) | |
| | | | | | | |
| Balance at March 31, 2021 | | | $ | (13.4) | | | $ | (12.8) | | | $ | (26.2) | |
|
| | | | | | | | | | | | | | | |
| Year ended March 31, 2016 | Unrealized Holding Gains (Losses) Available-for-sale Securities | | Minimum Pension Liability | | Foreign Currency | | Total |
| Balance at March 31, 2015 | $ | 14,537 |
| | $ | 13 |
| | $ | (3,474 | ) | | $ | 11,076 |
|
| Other comprehensive (loss) income before reclassifications | (3,241 | ) | | 31 |
| | — |
| | (3,210 | ) |
| Amounts reclassified from accumulated other comprehensive (loss) income | (10,948 | ) | | — |
| | — |
| | (10,948 | ) |
| Net other comprehensive (loss) income | (14,189 | ) | | 31 |
| | — |
| | (14,158 | ) |
| Purchase of shares from noncontrolling interest | — |
| | — |
| | (275 | ) | | (275 | ) |
| Balance at March 31, 2016 | $ | 348 |
| | $ | 44 |
| | $ | (3,749 | ) | | $ | (3,357 | ) |
|
| | | | | | | | | | | | | | | |
| Year ended March 31, 2015 | Unrealized Holding Gains (Losses) Available-for-sale Securities | | Minimum Pension Liability | | Foreign Currency | | Total |
| Balance at March 31, 2014 | $ | (528 | ) | | $ | 140 |
| | $ | 1,439 |
| | $ | 1,051 |
|
| Other comprehensive income (loss) before reclassifications | 33,759 |
| | (127 | ) | | (4,322 | ) | | 29,310 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | (18,694 | ) | | — |
| | — |
| | (18,694 | ) |
| Net other comprehensive income (loss) | 15,065 |
| | (127 | ) | | (4,322 | ) | | 10,616 |
|
| Purchase of shares from noncontrolling interest | — |
| | — |
| | (591 | ) | | (591 | ) |
| Balance at March 31, 2015 | $ | 14,537 |
| | $ | 13 |
| | $ | (3,474 | ) | | $ | 11,076 |
|
The table below details where reclassifications of realized transactions out of AOCI are recorded on the consolidated statements of income.
|
| | | | | | | | | | | | | |
| | Year ended March 31, | | |
| Description of AOCI Component | 2016 | | 2015 | | 2014 | | Related Statement of Income Line |
| Unrealized gains on available-for-sale securities | $ | 10,948 |
| | $ | 18,706 |
| | $ | 2,371 |
| | Other income |
| Taxes | — |
| | (12 | ) | | (776 | ) | | Provision for income taxes |
| Reclassification of realized transactions, net of taxes | $ | 10,948 |
| | $ | 18,694 |
| | $ | 1,595 |
| | Net Income |
27. DIVIDENDS
OnIn October 28, 2002, the Company announced that its Board of Directors had approved and instituted a quarterly cash dividend on its common stock. The Company has continued to pay quarterly dividends and has increased the amount of such dividends on a regular basis. Cash dividends paid per share were $1.433, $1.425$0.910, $0.747 and $1.417$0.733 during fiscal 2016, 20152022, 2021 and 2014,2020, respectively. Total dividend payments amounted to $291.1$503.8 million, $286.5$388.3 million and $281.2$350.1 million during fiscal 2016, 20152022, 2021 and 2014,2020, respectively.
28. SUBSEQUENT EVENTS
Acquisition of Atmel
On April 4, 2016, the Company acquired Atmel, a publicly traded company based in San Jose, California. The Company paid an aggregate of approximately $2.98 billion in cash and issued an aggregate of 10.1 million shares of its common stock to Atmel stockholders. The total consideration transferred in the acquisition, including approximately $6.7 million of non-cash consideration for the exchange of certain share-based payment awards of Atmel for stock awards of the Company, was approximately $3.47 billion. The Company financed the cash portion of the purchase price using approximately $2.04 billion of cash, cash equivalents, short-term investments and long-term investments held by certain of its foreign subsidiaries, and approximately $0.94 billion from additional borrowings under its existing credit agreement. As a result of the acquisition, Atmel became a wholly owned subsidiary of the Company. Atmel is a worldwide leader in the design and manufacture of microcontrollers, capacitive touch solutions, advanced logic, mixed-signal, nonvolatile memory and RF components. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Atmel have been included in the Company's consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Atmel's net tangible assets and intangible assets based on their estimated fair values as of April 4, 2016. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's semiconductor products reporting segment. None of the goodwill related to the Atmel acquisition is deductible for tax purposes. The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. This could result in adjustments to the fair values of the assets acquired and liabilities assumed, the useful lives of intangible assets, the residual amount allocated to goodwill and deferred income taxes recognized. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuations and estimates of useful lives.
The table below represents the preliminary allocation of the purchase price to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (amounts in thousands). Such amounts were estimated using the most recent audited financial statements of Atmel as of December 31, 2015. The Company does not believe the allocation as of April 4, 2016 will be materially different, however, certain amounts, such as the balances of cash and cash equivalents, accounts receivable, inventories, accounts payable and other current liabilities may vary based upon changes in Atmel’s balances between December 31, 2015 and April 4, 2016, with offsetting changes to goodwill. The Company’s consolidated financial statements as of June 30, 2016 will include updated amounts reflecting the April 4, 2016 estimated fair values.
|
| | | |
| Assets acquired | April 4, 2016 |
| Cash and cash equivalents | $ | 210,252 |
|
| Accounts receivable, net | 195,481 |
|
| Inventories | 403,708 |
|
| Prepaid expenses and other current assets | 35,299 |
|
| Property, plant and equipment, net | 131,154 |
|
| Goodwill | 1,400,814 |
|
| Purchased intangible assets | 1,551,100 |
|
| Long-term deferred tax assets | 157,929 |
|
| Other assets | 45,747 |
|
| Total assets acquired | 4,131,484 |
|
| | |
| Liabilities assumed | |
| Accounts payable | (59,470 | ) |
| Other current liabilities | (133,012 | ) |
| Long-term line of credit | (192,300 | ) |
| Deferred tax liabilities | (155,553 | ) |
| Long-term income tax payable | (49,965 | ) |
| Other long-term liabilities | (67,577 | ) |
| Total liabilities assumed | (657,877 | ) |
| Purchase price allocated | $ | 3,473,607 |
|
|
| | | | | |
| Purchased Intangible Assets | Useful Life | | April 4, 2016 |
| | (in years) | | (in thousands) |
| Core/developed technology | 10-15 | | $ | 988,400 |
|
| In-process technology | 10-15 | | 114,500 |
|
| Customer-related | 5 | | 435,900 |
|
| Backlog | 1-2 | | 12,300 |
|
| Total purchased intangible assets | | | $ | 1,551,100 |
|
Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles and acquisition-date backlog. The estimated fair values of the core and developed technology and in-process research and development were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized commensurate with the expected cash flows used in the initial determination of fair value. In-process technology is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.
Customer-related intangible assets consist of Atmel's contractual relationships and customer loyalty related to its distributor and end-customer relationships, and the fair values of the customer-related intangibles were determined based on Atmel's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from Atmel's historical customer information. Customer relationships are being amortized in a manner consistent with the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by Atmel at the acquisition date, and the preliminary fair values were based on the estimated profit associated with those orders. Backlog related assets are being recognized commensurate with recognition of the revenue for the orders on which the backlog intangible assets were determined. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $143.2 million was established as a net deferred tax liability for the future amortization of the intangible assets.
No sales or expenses of Atmel were included in the Company’s consolidated statements of income for the year ended March 31, 2016.
The following unaudited pro-forma consolidated results of operations for the years ended March 31, 2016 and 2015 assume the Atmel acquisition occurred as of April 1, 2014. The pro-forma adjustments are mainly comprised of acquired inventory fair value costs and amortization of purchased intangible assets. The pro-forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2014 or of results that may occur in the future (amounts in thousands except per share data):
|
| | | | | | | |
| | Year ended March 31, |
| | 2016 | | 2015 |
| Net sales | $ | 3,345,790 |
| | $ | 3,560,370 |
|
| Net income | $ | 167,705 |
| | $ | 116,618 |
|
| Basic earnings per share | $ | 0.79 |
| | $ | 0.55 |
|
| Diluted earnings per share | $ | 0.74 |
| | $ | 0.50 |
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As a result of the Company's acquisition of Atmel, the Company became involved with the following lawsuits.
In re: Continental Airbag Products Liability Litigation. On May 11, 2016, an Amended and Consolidated Class Action Complaint ("Complaint") was filed in the United States District Court for the Southern District of Florida (Miami Division) against Atmel, Continental Automotive Systems, Inc., Honda Motor Co., Ltd. and an affiliate, and Daimler AG and an affiliate. The Complaint which includes claims arising under federal law and Florida, California, New Jersey, Michigan and Louisiana state law-alleges that class members unknowingly purchased or leased vehicles containing defective airbag control units (allegedly incorporating defective application specific integrated circuits manufactured by Atmel between 2006 and 2010), and thereby suffered financial harm, including a loss in the value of their purchased or leased vehicles. The plaintiffs are seeking unspecified compensatory and exemplary damages, statutory penalties, pre- and post-judgment interest, attorneys’ fees, and injunctive and other relief. Atmel intends to contest plaintiffs' claims vigorously.
Southern District of New York Action by LFoundry Rousset ("LFR") and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, individually and on behalf of a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York (the "District Court") against Atmel, its French subsidiary, Atmel Rousset S.A.S. ("Atmel Rousset"), and LFoundry GmbH ("LF"), LFR's German parent. The case purports to relate to Atmel Rousset's June 2010 sale of its wafer manufacturing facility in Rousset, France to LF, and LFR's subsequent insolvency, and later liquidation, more than three years later. The District Court dismissed the case on August 21, 2015, and plaintiffs are appealing the dismissal.
Individual Labor Actions by former LFR Employees. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in a French labor court. Atmel Rousset believes that each of these actions is entirely devoid of merit, and, further, that any assertion by any of the Claimants of a co-employment relationship with Atmel Rousset is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. Atmel Rousset therefore intends to defend vigorously against each of these claims.
