MICROCHIP TECHNOLOGY INC
10-Ks and 10-Qs
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SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended December 31, 2009.
OR
|
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from __________ to __________
Commission
File Number:
0-21184
MICROCHIP
TECHNOLOGY INCORPORATED
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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86-0629024
|
|
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(State
or Other Jurisdiction of Incorporation or Organization)
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(IRS
Employer Identification No.)
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2355
W. Chandler Blvd., Chandler, AZ 85224-6199
(480)
792-7200
(Address,
Including Zip Code, and Telephone Number,
Including
Area Code, of Registrant’s
Principal
Executive Offices)
Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
x
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act:
|
Large
accelerated filer
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ý
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Accelerated
filer
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¨
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|
Non-accelerated
filer
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¨
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Smaller
reporting company
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¨
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(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). (Check One)
Yes
¨
No
x
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Shares
Outstanding of Registrant’s Common Stock
|
|
|
Class
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Outstanding
at
January
31, 2010
|
|
Common
Stock, $0.001 par value
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184,235,381
shares
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MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
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Page
|
||
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PART
I. FINANCIAL INFORMATION
|
||
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Item
1.
|
Financial
Statements (Unaudited)
|
|
| 17 | ||
| 34 | ||
| 35 | ||
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PART
II. OTHER INFORMATION
|
||
| 35 | ||
| 36 | ||
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CERTIFICATIONS
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||
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EXHIBITS
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||
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in
thousands, except share and per share amounts)
|
ASSETS
|
||||||||
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December
31,
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As
adjusted
March
31,
|
|||||||
|
2009
|
2009
|
|||||||
|
(Unaudited)
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(See
Notes 1 and 2)
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|||||||
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Cash
and cash equivalents
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$ | 361,291 | $ | 446,329 | ||||
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Short-term
investments
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716,683 | 943,616 | ||||||
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Accounts
receivable, net
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113,763 | 88,525 | ||||||
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Inventories
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112,784 | 131,510 | ||||||
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Prepaid
expenses
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14,124 | 11,447 | ||||||
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Deferred
tax assets
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73,744 | 75,681 | ||||||
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Other
current assets
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50,348 | 51,736 | ||||||
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Total current
assets
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1,442,737 | 1,748,844 | ||||||
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Property,
plant and equipment, net
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495,065 | 531,687 | ||||||
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Long-term
investments
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421,628 | 50,826 | ||||||
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Goodwill
|
36,165 | 36,165 | ||||||
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Intangible
assets, net
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28,996 | 25,718 | ||||||
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Other
assets
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19,016 | 18,526 | ||||||
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Total assets
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$ | 2,443,607 | $ | 2,411,766 | ||||
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LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
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Accounts
payable
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$ | 38,387 | $ | 29,228 | ||||
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Accrued
liabilities
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49,165 | 42,486 | ||||||
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Deferred
income on shipments to distributors
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97,583 | 83,931 | ||||||
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Total current
liabilities
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185,135 | 155,645 | ||||||
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Junior
convertible debentures
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339,000 | 334,184 | ||||||
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Long-term
income tax payable
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53,967 | 70,051 | ||||||
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Deferred
tax liability
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377,647 | 365,734 | ||||||
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Other
long-term liabilities
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3,983 | 3,834 | ||||||
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Stockholders’
equity:
|
||||||||
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Preferred
stock, $0.001 par value; authorized 5,000,000 shares; no shares issued or
outstanding
|
--- | --- | ||||||
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Common
stock, $0.001 par value; authorized 450,000,000 shares; 218,789,994 shares
issued and 184,234,148 shares outstanding at December 31, 2009;
218,789,994 shares issued and 182,769,124 shares outstanding at March 31,
2009
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184 | 183 | ||||||
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Additional
paid-in capital
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1,275,123 | 1,273,876 | ||||||
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Retained
earnings
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1,253,977 | 1,299,317 | ||||||
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Accumulated
other comprehensive income
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2,712 | 4,312 | ||||||
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Common
stock held in treasury: 34,555,846 shares at December 31, 2009; 36,020,870
shares at March 31, 2009
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(1,048,121 | ) | (1,095,370 | ) | ||||
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Total stockholders’
equity
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1,483,875 | 1,482,318 | ||||||
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Total liabilities and
stockholders’ equity
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$ | 2,443,607 | $ | 2,411,766 | ||||
|
See
accompanying notes to condensed consolidated financial
statements
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||||||||
3
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in
thousands, except per share amounts)
(Unaudited
)
|
Three
Months Ended December 31,
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Nine
Months Ended December 31,
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|||||||||||||||
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2009
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As
adjusted
2008
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2009
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As
adjusted
2008
|
|||||||||||||
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(See
Note 2)
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(See
Note 2)
|
|||||||||||||||
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Net
sales
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$ | 250,099 | $ | 192,166 | $ | 669,709 | $ | 730,044 | ||||||||
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Cost
of sales (1)
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104,103 | 87,379 | 303,938 | 297,507 | ||||||||||||
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Gross
profit
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145,996 | 104,787 | 365,771 | 432,537 | ||||||||||||
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Operating
expenses:
|
||||||||||||||||
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Research
and development (1)
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30,332 | 26,973 | 87,536 | 89,868 | ||||||||||||
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Selling,
general and administrative (1)
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43,096 | 36,840 | 120,525 | 127,882 | ||||||||||||
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Special
charges
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--- | 500 | 1,238 | 500 | ||||||||||||
| 73,428 | 64,313 | 209,299 | 218,250 | |||||||||||||
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Operating
income
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72,568 | 40,474 | 156,472 | 214,287 | ||||||||||||
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Other
income (expense):
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||||||||||||||||
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Interest
income
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4,946 | 7,410 | 12,727 | 27,761 | ||||||||||||
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Interest
expense
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(7,763 | ) | (7,096 | ) | (23,312 | ) | (21,608 | ) | ||||||||
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Other,
net
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128 | (20,378 | ) | 7,929 | (15,962 | ) | ||||||||||
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Income
before income taxes
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69,879 | 20,410 | 153,816 | 204,478 | ||||||||||||
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Income
tax provision (benefit)
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476 | (51,946 | ) | 12,560 | (19,145 | ) | ||||||||||
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Net
income
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$ | 69,403 | $ | 72,356 | $ | 141,256 | $ | 223,623 | ||||||||
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Basic
net income per common share
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$ | 0.38 | $ | 0.40 | $ | 0.77 | $ | 1.22 | ||||||||
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Diluted
net income per common share
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$ | 0.37 | $ | 0.39 | $ | 0.76 | $ | 1.19 | ||||||||
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Dividends
declared per common share
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$ | 0.340 | $ | 0.339 | $ | 1.018 | $ | 1.007 | ||||||||
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Basic
common shares outstanding
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183,856 | 181,963 | 183,301 | 183,414 | ||||||||||||
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Diluted
common shares outstanding
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187,861 | 183,999 | 186,770 | 187,661 | ||||||||||||
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(1)
Includes share-based compensation expense as follows:
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||||||||||||||||
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Cost
of sales
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$ | 1,266 | $ | 967 | $ | 4,845 | $ | 4,645 | ||||||||
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Research
and development
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3,108 | 2,948 | 9,205 | 8,023 | ||||||||||||
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Selling,
general and administrative
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4,463 | 4,250 | 13,285 | 11,689 | ||||||||||||
|
See
accompanying notes to condensed consolidated financial
statements
|
||||||||||||||||
4
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in
thousands)
(Unaudited)
|
Nine
Months Ended
December
31,
|
||||||||
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2009
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As
adjusted
2008
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|||||||
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Cash
flows from operating activities:
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(See
Note 2)
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|||||||
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Net
income
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$ | 141,256 | $ | 223,623 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
|
||||||||
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activities:
|
||||||||
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Depreciation
and amortization
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67,735 | 72,210 | ||||||
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Deferred
income taxes
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15,466 | 4,920 | ||||||
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Share-based
compensation expense related to equity incentive plans
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27,335 | 24,357 | ||||||
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Tax
benefit from equity incentive plans
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2,089 | 11,239 | ||||||
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Excess
tax benefit from share-based compensation
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(2,050 | ) | (10,453 | ) | ||||
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Convertible
debt derivatives - revaluation and amortization
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154 | (1,153 | ) | |||||
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Amortization
of convertible debenture issuance costs
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302 | 575 | ||||||
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Gain
on sale of assets
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(100 | ) | (100 | ) | ||||
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Special
charges
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1,238 | 500 | ||||||
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Sales/(purchases)
of trading securities, net
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86,970 | (79,319 | ) | |||||
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(Gain)
loss on trading securities
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(7,425 | ) | 12,166 | |||||
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Unrealized
impairment loss on available-for-sale investments
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2,170 | 2,548 | ||||||
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Changes
in operating assets and liabilities:
|
||||||||
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(Increase)
decrease in accounts receivable
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(25,238 | ) | 60,302 | |||||
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Decrease
(increase) in inventories
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19,216 | (10,966 | ) | |||||
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Increase
in deferred income on shipments to distributors
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13,652 | 2,980 | ||||||
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Increase
(decrease) in accounts payable and accrued liabilities
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14,600 | (18,446 | ) | |||||
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Change
in other assets and liabilities
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(13,351 | ) | (30,415 | ) | ||||
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Net
cash provided by operating activities
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344,019 | 264,568 | ||||||
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Cash
flows from investing activities:
|
||||||||
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Purchases
of available-for-sale investments
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(1,311,946 | ) | (751,140 | ) | ||||
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Sales
and maturities of available-for-sale investments
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1,083,146 | 768,553 | ||||||
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Investment
in other assets
|
(5,975 | ) | (15,023 | ) | ||||
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Proceeds
from sale of assets
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100 | 156 | ||||||
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Capital
expenditures
|
(28,416 | ) | (91,821 | ) | ||||
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Net
cash used in investing activities
|
(263,091 | ) | (89,275 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Payment
of cash dividend
|
(186,594 | ) | (184,835 | ) | ||||
|
Repurchase
of common stock
|
--- | (123,929 | ) | |||||
|
Proceeds
from sale of common stock
|
18,578 | 26,476 | ||||||
|
Excess
tax benefit from share-based compensation
|
2,050 | 10,453 | ||||||
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Net
cash used in financing activities
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(165,966 | ) | (271,835 | ) | ||||
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Net
decrease in cash and cash equivalents
|
(85,038 | ) | (96,542 | ) | ||||
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Cash
and cash equivalents at beginning of period
|
446,329 | 487,736 | ||||||
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Cash
and cash equivalents at end of period
|
$ | 361,291 | $ | 391,194 | ||||
|
See
accompanying notes to condensed consolidated financial
statements
|
||||||||
5
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(Unaudited)
|
(1)
|
Basis of
Presentation
|
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries
(the Company). All intercompany balances and transactions have been
eliminated in consolidation. The Company owns 100% of the outstanding
stock in all of its subsidiaries.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America, pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). In the opinion of
management, all adjustments of a normal recurring nature which are necessary for
a fair presentation have been included. Certain information and
footnote disclosures normally included in audited consolidated financial
statements have been condensed or omitted pursuant to such SEC rules and
regulations. It is suggested that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2009. The
results of operations for the three and nine months ended December 31, 2009 are
not necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2010 or for any other period.
Subsequent
events have been evaluated through February
9
, 2010, which is the date
the financial statements were issued.
|
(2)
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Adopted
and Recently Issued Accounting Pronouncements
|
Accounting Standards Codification.
Effective July 1, 2009, the Financial Accounting Standards Board's (FASB)
Accounting Standards Codification (ASC) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (GAAP)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the Securities and Exchange Commission. The codification
was effective for interim and annual reporting periods ending after September
15, 2009, except for certain nonpublic nongovernmental entities. The
Company's accounting policies were not affected by the conversion to
ASC. However, references to specific accounting standards in the
footnotes to the Company's consolidated financial statements have been changed
to refer to the appropriate section of ASC.
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion
. On
April 1, 2009, the Company adopted the Cash Conversion Subsections of ASC
Subtopic 470-20,
Debt with
Conversion and Other Options – Cash Conversion
(the Cash Conversion
Subsections), which clarify the accounting for convertible debt instruments that
may be settled in cash (including partial cash settlement) upon
conversion. The Cash Conversion Subsections require issuers to
account separately for the liability and equity components of certain
convertible debt instruments in a manner that reflects the issuer's
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. The Cash Conversion Subsections require 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 the Company's consolidated statements of
operations.
The Cash
Conversion Subsections require retrospective application to the terms of
instruments as they existed for all periods presented. The adoption
of the Cash Conversion Subsections affects the accounting for the Company's
2.125% junior subordinated convertible debentures issued in December 2007 and
due in December 2037. The retrospective application of this guidance
affects the Company's fiscal years 2008 and 2009.
The
following table sets forth the effect of the retrospective application of the
Cash Conversion Subsections on certain previously reported line items (in
thousands, except per share data):
6
|
Condensed
Consolidated Statements of Income:
|
||||||||||||||||
|
Three
Months Ended
December
31, 2008
|
Nine
Months Ended
December
31, 2008
|
|||||||||||||||
|
As
Reported
|
As
Adjusted
|
As
Reported
|
As
Adjusted
|
|||||||||||||
|
Interest
expense
|
$ | (5,775 | ) | $ | (7,096 | ) | $ | (17,758 | ) | $ | (21,608 | ) | ||||
|
Income
before income taxes
|
$ | 21,731 | $ | 20,410 | $ | 208,328 | $ | 204,478 | ||||||||
|
Income
tax benefit
|
$ | (51,438 | ) | $ | (51,946 | ) | $ | (17,663 | ) | $ | (19,145 | ) | ||||
|
Net
income
|
$ | 73,169 | $ | 72,356 | $ | 225,991 | $ | 223,623 | ||||||||
|
Basic
net income per common share
|
$ | 0.40 | $ | 0.40 | $ | 1.23 | $ | 1.22 | ||||||||
|
Diluted
net income per common share
|
$ | 0.40 | $ | 0.39 | $ | 1.20 | $ | 1.19 | ||||||||
|
Condensed
Consolidated Balance Sheet:
|
||||||||
|
March
31, 2009
|
||||||||
|
As Reported
|
As Adjusted
|
|||||||
|
Deferred
tax assets
|
$ | 69,626 | $ | 75,681 | ||||
|
Total
current assets
|
$ | 1,742,789 | $ | 1,748,844 | ||||
|
Other
assets
|
$ | 34,254 | $ | 18,526 | ||||
|
Total
assets
|
$ | 2,421,439 | $ | 2,411,766 | ||||
|
Junior
convertible debentures
|
$ | 1,149,184 | $ | 334,184 | ||||
|
Deferred
tax liability
|
$ | 51,959 | $ | 365,734 | ||||
|
Additional
paid-in capital
|
$ | 778,204 | $ | 1,273,876 | ||||
|
Retained
earnings
|
$ | 1,303,437 | $ | 1,299,317 | ||||
|
Total
stockholders' equity
|
$ | 990,766 | $ | 1,482,318 | ||||
|
Total
liabilities and stockholders' equity
|
$ | 2,421,439 | $ | 2,411,766 | ||||
Other-Than-Temporary
Impairments.
In April 2009, the FASB issued
guidance changing existing guidance for determining whether an impairment of
debt securities is other than temporary. This guidance requires other
than temporary impairments to be separated into the amount representing the
decrease in cash flows expected to be collected from a security (referred to as
credit losses) which is recognized in earnings and the amount related to other
factors which is recognized in other comprehensive income. This
noncredit loss component of the impairment may only be classified in other
comprehensive income if the holder of the security concludes that it does not
intend to sell and it will not more likely than not be required to sell the
security before it recovers its value. If these conditions are not
met, the noncredit loss must also be recognized in earnings. When
adopting this guidance, an entity is required to record a cumulative effect
adjustment as of the beginning of the period of adoption to reclassify the
noncredit component of a previously recognized other than temporary impairment
from retained earnings to accumulated other comprehensive income. The
Company adopted this guidance on April 1, 2009. The Company does not
meet the conditions necessary to recognize the noncredit loss component of its
auction rate securities in other comprehensive income. Accordingly,
the Company did not reclassify any previously recognized other-than-temporary
impairment losses from retained earnings to accumulated other comprehensive
income and the adoption of this guidance had no impact on the Company's
consolidated financial statements. Refer to Note 4 for further
discussion of the Company's investments in marketable
securities.
(3)
Special
Charges
During
the three months ended June 30, 2009, the Company agreed to the terms of a
patent license with an unrelated third-party and signed an agreement on July 9,
2009. The patent license settled alleged infringement claims. The
total payment made to the third-party in July 2009 was $1.4 million, $1.2
million of which was expensed in the first quarter of fiscal 2010 and the
remaining $0.2 million was recorded as a prepaid royalty that will be amortized
over the remaining life of the patent, which expires in June 2010.
On
October 15, 2008, the Company announced the acquisition of Hampshire Company, a
leader in the large format touch screen controller market. As a
result of the acquisition, the Company incurred a $0.5 million in-process
research and development charge in the third quarter of fiscal
2009.
7
(4)
Investments
The
Company's investments are intended to establish a high-quality portfolio that
preserves principal, meets liquidity needs, 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 and
trading securities at December 31, 2009 (amounts in thousands):
|
Available-for-sale
Securities
|
||||||||||||||||
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Government
agency bonds
|
$ | 417,264 | $ | 354 | $ | 1,381 | $ | 416,237 | ||||||||
|
Municipal
bonds
|
262,127 | 2,333 | --- | 264,460 | ||||||||||||
|
Auction
rate securities
|
16,731 | --- | --- | 16,731 | ||||||||||||
|
Corporate
bonds
|
409,515 | 3,304 | 1,136 | 411,683 | ||||||||||||
| $ | 1,105,637 | $ | 5,991 | $ | 2,517 | $ | 1,109,111 | |||||||||
|
Trading
Securities
|
||||||||||||||||
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Auction
rate securities
|
$ | 26,500 | $ | --- | $ | --- | $ | 26,500 | ||||||||
|
Put
option on auction rate securities
|
2,700 | --- | --- | 2,700 | ||||||||||||
| $ | 29,200 | $ | --- | $ | --- | $ | 29,200 | |||||||||
At
December 31, 2009, the Company's available-for-sale and trading securities are
presented on the condensed consolidated balance sheets as short-term investments
of $716.7
million
and long-term investments of $421.6 million.
Historically,
the Company has made certain strategic investments in publicly traded companies
which it classified as trading securities. During the three months ended
December 31, 2009, the Company sold its remaining small position in trading
securities with no recognized gain or loss. During the nine months ended
December 31, 2009, the Company recognized a gain in earnings of $7.5 million on
its trading securities. The Company had a net realized gain of $1.0
million on trading securities that it sold during the nine months ended December
31, 2009.
At
December 31, 2009, $43.2 million of the fair value of the Company's investment
portfolio was invested in auction rate securities (ARS). With the
continuing liquidity issues in the global credit markets, the Company's ARS have
experienced multiple failed auctions. In September 2007 and
February 2008, auctions for $24.9 million and $34.8 million, respectively,
of the original purchase value of the Company's investments in ARS first
failed. While the Company continues to earn interest on these investments
based on a pre-determined formula with spreads tied to particular interest rate
indices, the estimated market value for these ARS no longer approximates the
original purchase value.
The $24.9
million in failed auctions noted above have continued to fail through the filing
date of this Quarterly Report on Form 10-Q. The fair value of the
failed ARS of $16.7 million has been estimated based on market information
and estimates determined by management and could change significantly based on
future market conditions. The Company evaluated the impairments in the
value of these ARS, determining its intent to sell these securities prior to the
recovery of its amortized cost basis resulted in the securities being
other-than-temporarily impaired and has recognized an impairment charge on these
investments of $0.5
million and $2.2 million
in the three and nine months ended December 31, 2009, respectively.
8
The $34.8
million of ARS that failed during February 2008 are investments in student
loan-backed ARS. Approximately $1.3 million and $2.7 million of these
ARS were redeemed at par by the issuers in the three and nine months ended
December 31, 2009, respectively, reducing the Company’s overall position in
these ARS to $29.2 million. Based upon the Company's evaluation of
available information, it believes these investments are of high credit quality,
as all of the investments carry AAA credit ratings by one or more of the major
credit rating agencies and are largely backed by the federal government (Federal
Family Education Loan Program). The fair value of the failed ARS has
been estimated based on market information and estimates determined by
management and could change significantly based on future market
conditions.
In
November 2008, the Company executed an ARS rights agreement (the Rights) with
the broker through which the Company purchased the $29.2 million in ARS
that provides (1) the Company with the right to put these ARS back to the broker
at par anytime during the period from June 30, 2010 through July 2, 2012, and
(2) the broker with the right to purchase or sell the ARS at par on the
Company's behalf anytime through July 2, 2012. The Company accounted
for the acceptance of the Rights as the receipt of a put option for no
consideration and recognized a gain with a corresponding recognition as a
long-term investment. The Company expects any future changes in the
fair value of the ARS to be largely offset by changes in the fair value of the
related Rights without any significant net impact to the Company's income
statement. The Company will continue to measure the ARS and the
Rights at fair value (utilizing Level 3 inputs) until the earlier of maturity or
exercise. The Company intends and has the ability to hold the
$29.2 million of ARS until the market recovers or until June 30, 2010 when
it has the right to sell the ARS at par to the broker as it does not anticipate
having to sell these securities to fund the operations of its
business.
At
December 31, 2009, the Company evaluated other investments within its investment
portfolio and noted unrealized losses of $2.5 million which were due to
fluctuations in interest rates. Management does not believe any of
the unrealized losses represent other-than-temporary impairments based on its
evaluation of available evidence as of December 31, 2009. The
Company's intent is to hold these investments until these assets are no longer
impaired. For those investments not scheduled to mature until after
December 31, 2010, such recovery is not anticipated to occur in the next year
and these investments have been classified as long-term
investments.
The
amortized cost and estimated fair value of the available-for-sale securities at
December 31, 2009, by 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, and the Company views its
available-for-sale securities as available for current operations.
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
Due
in one year or less
|
$ | 380,558 | $ | 2,038 | $ | 31 | $ | 382,565 | ||||||||
|
Due
after one year and through five years
|
708,348 | 3,953 | 2,486 | 709,815 | ||||||||||||
|
Due
after five years and through ten years
|
--- | --- | --- | --- | ||||||||||||
|
Due
after ten years
|
16,731 | --- | --- | 16,731 | ||||||||||||
| $ | 1,105,637 | $ | 5,991 | $ | 2,517 | $ | 1,109,111 | |||||||||
During
the quarter ended December 31, 2009, the Company had no realized gains or losses
from sales of available-for-sale securities compared to a realized gain of
$7,000 in the quarter ended September 30, 2009.
9
(5)
Fair
Value Measurements
Accounting
rules for fair value clarify that fair 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.
|
Assets
and liabilities measured at fair value on a recurring basis at December 31, 2009
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
|
||||||||||||||||
|
Money
market fund deposits
|
$ | 67,740 | $ | --- | $ | --- | $ | 67,740 | ||||||||
|
Deposit
accounts
|
--- | 293,551 | --- | 293,551 | ||||||||||||
|
Government
agency bonds
|
--- | 416,237 | --- | 416,237 | ||||||||||||
|
Municipal
bonds
|
--- | 264,460 | --- | 264,460 | ||||||||||||
|
Auction
rate securities
|
--- | --- | 43,231 | 43,231 | ||||||||||||
|
Put
option on auction rate securities
|
--- | --- | 2,700 | 2,700 | ||||||||||||
|
Corporate
bonds
|
--- | 411,683 | --- | 411,683 | ||||||||||||
|
Total
assets measured at fair value
|
$ | 67,740 | $ | 1,385,931 | $ | 45,931 | $ | 1,499,602 | ||||||||
For Level
3 valuations, the Company estimated the fair value of its ARS 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 Company estimated the value of the put option on the
ARS by evaluating the estimated cash flows before and after the receipt of the
put option, discounted at rates reflecting the likelihood of default and lack of
liquidity, or in the case of the payment of the par value to be paid by the
broker at exercise of the put option, the counterparty credit
risk. The estimated fair values that are categorized as Level 3 as
well as the marketable securities and put options on publicly traded stock could
change significantly based on future market conditions. Refer to Note 4 for
further discussion of the Company's investments in ARS.
The
following table presents a reconciliation for all assets and liabilities
measured at fair value on a recurring basis, excluding accrued interest
components, using significant unobservable inputs (Level 3) for the three and
nine months ended December 31, 2009 (amounts in thousands):
|
Three
Months Ended December 31, 2009
|
Nine
Months Ended December 31, 2009
|
|||||||
|
Balance
at September 30, 2009 and March 31, 2009, respectively
|
$ | 47,784 | $ | 50,826 | ||||
|
Securities
redeemed at par
|
(1,325 | ) | (2,725 | ) | ||||
|
Impairment
losses included in interest income
|
(528 | ) | (2,170 | ) | ||||
|
Balance
at December 31, 2009
|
$ | 45,931 | $ | 45,931 | ||||
10
Assets
and liabilities measured at fair value on a recurring basis are
presented/classified on the condensed consolidated balance sheets at December
31, 2009 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
|
$ | 67,740 | $ | 293,551 | $ | --- | $ | 361,291 | ||||||||
|
Short-term
investments
|
--- | 687,483 | 29,200 | 716,683 | ||||||||||||
|
Long-term
investments
|
--- | 404,897 | 16,731 | 421,628 | ||||||||||||
|
Total
assets measured at fair value
|
$ | 67,740 | $ | 1,385,931 | $ | 45,931 | $ | 1,499,602 | ||||||||
|
(6)
|
Fair Value of
Financial Instruments
|
The
carrying amount of cash equivalents approximates fair value because their
maturity is less than three months. The carrying amount of short-term
and long-term investments approximates fair value as the securities are marked
to market as of each balance sheet date with any unrealized gains and losses
reported in stockholders' equity. The carrying amount of accounts
receivable, accounts payable and accrued liabilities approximates fair value due
to the short-term maturity of the amounts. The fair value of the
Company's junior subordinated convertible debentures was $1,167.1 million at
December 31, 2009, based on the trading price of the bonds, compared to the
carrying value of $339.0 million. See Note 11 for additional
information regarding the carrying value of the Company's junior subordinated
convertible debentures.
|
(7)
|
Accounts
Receivable
|
Accounts
receivable consists of the following (amounts in thousands):
|
December
31,
2009
|
March
31,
2009
|
|||||||
|
Trade
accounts receivable
|
$ | 116,326 | $ | 91,325 | ||||
|
Other
|
625 | 376 | ||||||
| 116,951 | 91,701 | |||||||
|
Less
allowance for doubtful accounts
|
3,188 | 3,176 | ||||||
| $ | 113,763 | $ | 88,525 | |||||
|
(8)
|
Inventories
|
The
components of inventories consist of the following (amounts in
thousands):
|
December
31,
2009
|
March
31,
2009
|
|||||||
|
Raw
materials
|
$ | 4,863 | $ | 3,693 | ||||
|
Work
in process
|
97,314 | 114,676 | ||||||
|
Finished
goods
|
10,607 | 13,141 | ||||||
| $ | 112,784 | $ | 131,510 | |||||
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.
11
|
(9)
|
Property, Plant and
Equipment
|
Property,
plant and equipment consists of the following (amounts in
thousands):
|
December
31,
2009
|
March
31,
2009
|
|||||||
|
Land
|
$ | 39,671 | $ | 39,671 | ||||
|
Building
and building improvements
|
347,625 | 334,717 | ||||||
|
Machinery
and equipment
|
1,166,684 | 1,148,588 | ||||||
|
Projects
in process
|
95,470 | 114,478 | ||||||
| 1,649,450 | 1,637,454 | |||||||
|
Less
accumulated depreciation
and
amortization
|
1,154,385 | 1,105,767 | ||||||
| $ | 495,065 | $ | 531,687 | |||||
Depreciation
expense attributed to property, plant and equipment was $65.0 million in
the nine months ended December 31, 2009 and $70.4 million in the nine
months ended December 31, 2008.
(
10
)
Income
Taxes
The
provision for income taxes reflects tax on foreign earnings and federal and
state tax on U.S. earnings. The Company had an effective tax rate of
8.2% for the nine-month period ended December 31, 2009 and an effective tax rate
benefit of 9.4% for the nine-month period ended December 31,
2008. During the three and nine months ended December 31, 2009, the
Company settled an IRS examination of fiscal 2002, 2003 and 2004 which resulted
in a one-time tax benefit of $8.5 million. During the three and nine
months ended December 31, 2008, the Company settled an IRS examination of fiscal
2005 which resulted in a one-time tax benefit of $16.9 million. Also,
during the three and nine months ended December 31, 2008, the IRS issued revised
Treasury Regulations that provided a clarification of the tax treatment of
certain items that the Company had previously established a tax accrual
for. As a result of this clarification, the Company recognized a
$33.0 million tax benefit. During the three and nine months ended
December 31, 2008, the Company recognized a U.S. tax benefit of $7.4 million
from a loss incurred on its trading securities as these are U.S. investments
taxed at a higher rate than the Company's overall effective tax
rate. Additionally, in October 2008, the U.S. Congress passed the
Emergency Economic Stabilization Act of 2008 which included a provision to
extend the research and development tax credit retroactively from January 1,
2008. As a result, the Company recognized a one-time tax benefit of
$1.5 million in three and nine months ended December 31, 2008. The
Company's effective tax rate is lower than statutory rates in the U.S. due
primarily to its mix of earnings in foreign jurisdictions with lower tax
rates.
At
March 31, 2009, the Company had $70.1 million of unrecognized tax
benefits. Unrecognized tax benefits decreased by $16.1
million in the nine
months ended December 31, 2009 compared to the March 31, 2009 balances as a
result of the accrual for uncertain tax positions, the accrual of deficiency
interest on these positions and a release of the accrual related to the
settlement of an IRS audit.
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
2006 through fiscal 2009 tax years remain open for examination by tax
authorities. The U.S. IRS is currently auditing the Company's fiscal years
ended March 31, 2006, 2007 and 2008. For foreign tax returns, the
Company is generally no longer subject to income tax examinations for years
prior to fiscal 2002.
The
Company recognizes liabilities for anticipated tax audit issues in the U.S. and
other tax jurisdictions based on its estimate of whether, and the extent to
which, additional tax payments are more likely than not. The Company
believes that it has appropriate support for the income tax positions 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 law applied to the facts of each matter.
12
The
Company believes that it maintains adequate 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 would 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 of the resolution and/or closure on
audits is highly uncertain, the Company does not believe it is reasonably
possible that its unrecognized tax benefits would materially change in the next
12 months.
(11)
2.125%
Junior Subordinated Convertible Debentures
The
Company's $1.15 billion 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 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 shares of the Company's common stock 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 December 31, 2009, none of the
conditions allowing holders of the debentures to convert had been
met. As a result of a cash dividend of $0.34 per share paid in
December 2009, the conversion rate was adjusted to 32.5417 shares of common
stock per $1,000 of principal amount of debentures, representing a conversion
price of approximately $30.73 per share of common stock.
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 initially recorded at fair value. The carrying value of the
equity component at December 31, 2009 and at March 31, 2009 was $822.4
million. The estimated fair value of the liability component of the
debentures at the issuance date was $327.6 million, resulting in a debt discount
of $822.4 million. The unamortized debt discount was $810.3 million
at December 31, 2009 and $815.0 million at March 31, 2009. The
carrying value of the debentures was $339.0 million at December 31, 2009 and
$334.2 million at March 31, 2009. The remaining period over which the
unamortized debt discount will be recognized as non-cash interest expense is 28
years. In the three and nine months ended December 31, 2009, the
Company recognized $1.6 million and $4.7 million, respectively, in
non-cash interest expense related to the amortization of the debt
discount. In the three and nine months ended December 31, 2008, the
Company recognized $1.3 million and $3.9 million, respectively, in
non-cash interest expense related to the amortization of the debt
discount. The Company recognized $6.1 million and $18.3 million
of interest expense related to the 2.125% coupon on the debentures in each of
the three and nine months ended December 31, 2009 and 2008.
The
debentures also include certain embedded features related to the contingent
interest payments, the Company making specific types of distributions (e.g.,
extraordinary dividends), the redemption feature in the event of changes in tax
law, and penalty interest in the event of a failure to maintain an effective
registration. These features qualify as derivatives and are bundled as a
compound embedded derivative that is measured at fair value. The fair
value of the derivative as of December 31, 2009 was $0.6 million, compared
to the value at March 31, 2009 of $0.5 million, resulting in an
increase of interest expense in the first nine months of fiscal 2010 of
$0.1
million. The
balance of the debentures on the Company's condensed consolidated balance sheet
at December 31, 2009 of $339.0 million
includes the fair value
of the embedded derivative.
(12)
Derivative
Instruments
The
Company has international operations and is thus subject to foreign currency
rate fluctuations. To 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. To date, the exposure related to foreign exchange rate
volatility has not been material to the Company's operating
results. As of December 31, 2009 and March 31, 2009, the Company had
no foreign currency derivatives outstanding. The Company recognized
an immaterial amount of net realized gains on foreign currency derivatives in
the nine months ended December 31, 2009.
13
|
(13)
|
Comprehensive
Income
|
Comprehensive
income consists of net income offset by net unrealized gains and losses on
available-for-sale investments. The components of other comprehensive
income and related tax effects were as follows (amounts in
thousands):
|
Three
Months Ended
December
31,
|
Nine
Months Ended
December
31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Change
in unrealized gains and losses on investments, net of tax effect of $641,
($2,403), $1,616 and ($1,462), respectively
|
$ | 1,637 | $ | (5,968 | ) | $ | 1,600 | $ | (2,766 | ) | ||||||
Comprehensive
income was $67.8 million
and $139.7 million for the three and nine months ended December 31, 2009,
respectively, and $78.3 million and $226.4 million for the three and nine
months ended December 31, 2008, respectively.
|
(14)
|
Employee Benefit
Plans
|
Share-Based
Compensation Expense
The
following table presents details of share-based compensation expense (amounts in
thousands):
|
Three
Months Ended
December
31,
|
Nine
Months Ended
December
31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Cost
of sales
|
$ | 1,266 | (1) | $ | 967 | (1) | $ | 4,845 | (1) | $ | 4,645 | (1) | ||||
|
Research
and development
|
3,108 | 2,948 | 9,205 | 8,023 | ||||||||||||
|
Selling,
general and administrative
|
4,463 | 4,250 | 13,285 | 11,689 | ||||||||||||
|
Pre-tax
effect of share-based compensation
|
8,837 | 8,165 | 27,335 | 24,357 | ||||||||||||
|
Income
tax benefit
|
1,180 | 1,454 | 3,585 | 4,384 | ||||||||||||
|
Net
income effect of share-based compensation
|
$ | 7,657 | $ | 6,711 | $ | 23,750 | $ | 19,973 | ||||||||
|
|
(1)
During the three and nine months ended December 31, 2009, $1.8 million and
$5.3 million, respectively, was capitalized to inventory and $1.3
million and $4.8
million, respectively, of previously capitalized inventory was
sold. During the three and nine months ended December 31, 2008,
$1.8
million
and $4.9 million, respectively, was capitalized to inventory and $1.0
million and $4.6 million, respectively, of previously capitalized
inventory was sold.
|
The
amount of unearned share-based compensation currently estimated to be expensed
in the remainder of fiscal 2010 through fiscal 2014 related to unvested
share-based payment awards at December 31, 2009 is
$49.9 million. The weighted average period over which the
unearned share-based compensation is expected to be recognized is approximately
2.28 years.
Combined
Incentive Plan Information
The total
intrinsic value of restricted stock units (RSUs) which vested during the three
and nine months ended December 31, 2009 was $5.3 million and $12.0 million,
respectively. The aggregate intrinsic value of RSUs outstanding at
December 31, 2009 was $122.9 million, calculated based on the closing price
of the Company's common stock of $29.05 per share on December 31,
2009. At December 31, 2009, the weighted average remaining expense
recognition period was 2.34
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 the three and nine
months ended December 31, 2009 was $20.77 and $18.85,
respectively. The weighted average fair value per share of RSUs
awarded in the three and nine months ended December 31, 2008 was $20.72 and
$25.42, respectively.
14
The total
intrinsic value of options exercised during the three and nine months ended
December 31, 2009 was $2.4 million and $4.7 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 outstanding and options exercisable at December 31, 2009 was
$43.7 million and $42.3 million, respectively. The aggregate
intrinsic values were calculated based on the closing price of the Company's
common stock of $29.05 per share on December 31, 2009.
For the
three-month periods ended December 31, 2009 and 2008, the number of option
shares exercisable was 8,768,254 and 8,572,398, respectively, and the weighted
average exercise price per share was $24.36 and $23.25,
respectively.
The
weighted average fair value per share of stock options granted in the nine
months ended December 31, 2009 was $5.90. The weighted average
fair value per share of stock options granted in the nine months ended December
31, 2008 was $10.39. There were no stock options granted in the
three-month periods ended December 31, 2009 and 2008.
|
(15)
|
Net Income Per Common
Share
|
The
following table sets forth the computation of basic and diluted net income per
common share (in thousands, except per share amounts):
|
Three
Months Ended
December
31,
|
Nine
Months Ended
December
31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
income
|
$ | 69,403 | $ | 72,356 | $ | 141,256 | $ | 223,623 | ||||||||
|
Weighted
average common shares outstanding
|
183,856 | 181,963 | 183,301 | 183,414 | ||||||||||||
|
Dilutive
effect of stock options and RSUs
|
4,005 | 2,036 | 3,469 | 3,854 | ||||||||||||
|
Dilutive
effect of convertible debt
|
--- | --- | --- | 393 | ||||||||||||
|
Weighted
average common and potential common shares outstanding
|
187,861 | 183,999 | 186,770 | 187,661 | ||||||||||||
|
Basic
net income per common share
|
$ | 0.38 | $ | 0.40 | $ | 0.77 | $ | 1.22 | ||||||||
|
Diluted
net income per common share
|
$ | 0.37 | $ | 0.39 | $ | 0.76 | $ | 1.19 | ||||||||
Diluted
net income per common share for the three and nine months ended December 31,
2009 does not include any incremental shares issuable upon the exchange of the
debentures (see Note 11). The nine-month period ended December 31,
2008 includes 392,594 incremental shares issuable upon the exchange of the
debentures. 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 amount of the debentures will be settled
in cash upon conversion. Prior to conversion, the Company will
include, in the diluted net income per common share calculation, the effect of
the additional shares that may be issued when the Company's common 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 the three and nine months ended December 31,
2009 was $30.94 and $31.37, respectively.
Weighted
average common shares exclude the effect of anti-dilution option
shares. As of the three and nine-month periods ended December 31,
2009, the number of option shares that were antidilutive was 3,552,862 and
5,289,097, respectively. As of the three and nine-month periods ended
December 31, 2008, the number of option shares that were antidilutive was
7,608,287 and 617,023, respectively.
15
|
(16)
|
Stock
Repurchase
|
During
the three and nine months ended December 31, 2009, the Company did not
repurchase any of its shares of common stock. During the nine months
ended December 31, 2008, the Company purchased 4.0 million of its common stock
for a total of $123.9 million. The Company did not purchase any of
its shares of common stock in the three months ended December 31,
2008. The timing and amount of future repurchases will depend upon
market conditions, interest rates, and corporate considerations.
As of
December 31, 2009, the Company held approximately 34.6
million shares as
treasury shares.
|
(17)
|
Dividends
|
A
quarterly cash dividend of $0.34 per share was paid on December 2, 2009 in the
aggregate amount of $62.5 million. A quarterly cash dividend of
$0.341 per share was declared on February 3, 2010 and will be paid on March 4,
2010 to shareholders of record as of February 18, 2010. The Company
expects the March 2010 payment of its quarterly cash dividend to be
approximately $62.9 million.
|
(18)
|
Subsequent
Event
|
On
February 2, 2010, the Company signed a definitive agreement to acquire Silicon
Storage Technology, Inc. for $2.85 per share in cash or approximately $275
million. The Company currently expects the transaction to close in
the first quarter of fiscal 2011.
16
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
This report, including “Part I –
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations” and “Part II - Item 1A Risk Factors" contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties, including statements regarding
our strategy, financial performance and revenue sources. We use words
such as “anticipate,” “believe,” “plan,” “expect,” “future,” “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
36
and elsewhere in this Form
10-Q
.
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:
|
·
|
The
effects that adverse 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;
|
|
|
·
|
Our
ability to moderate future average selling price
declines;
|
|
|
·
|
The
effect of product mix, capacity utilization, yields, and fixed cost
absorption on gross margin;
|
|
|
·
|
The
amount of changes in demand for our products and those of our
customers;
|
|
|
·
|
The
level of orders that will be received and shipped within a
quarter;
|
|
|
·
|
The
effect that distributor and customer inventory holding patterns will have
on us;
|
|
|
·
|
Our
belief that deferred cost of sales will have low risk of material
impairment;
|
|
|
·
|
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 and interface
product lines and the effect of such an increase;
|
|
|
·
|
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 and planned expansion activities provide
sufficient capacity to respond to increases in demand;
|
|
|
·
|
That
manufacturing costs will be reduced by transition to advanced process
technologies;
|
|
|
·
|
Our
expectation that our wafer fabs will operate at high levels with no
under-absorption of fixed costs;
|
|
|
·
|
Our
ability to maintain manufacturing yields;
|
|
|
·
|
Continuing
our investments in new and enhanced products;
|
|
|
·
|
Our
ability to attract and retain qualified personnel;
|
|
|
·
|
The
cost effectiveness of using our own assembly and test
operations;
|
|
|
·
|
Our
anticipated level of capital expenditures;
|
|
|
·
|
Continuation
and amount of quarterly cash dividends;
|
|
|
·
|
The
sufficiency of our existing sources of liquidity;
|
|
|
·
|
The
impact of seasonality on our business;
|
|
|
·
|
The
accuracy of our estimates used in valuing employee equity
awards;
|
|
|
·
|
That
the resolution of legal actions will not harm our business, and the
accuracy of our assessment of the probability of loss and range of
potential loss;
|
|
|
·
|
That
the idling of assets will not impair the value of such
assets;
|
|
|
·
|
The
recoverability of our deferred tax
assets;
|
17
|
·
|
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 the expiration of any tax holidays will not have a material
impact;
|
|
|
·
|
The
accuracy of our estimates of the useful life and values of our property,
assets, and other liabilities;
|
|
|
·
|
The
adequacy of our patent strategy;
|
|
|
·
|
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;
|
|
|
·
|
The
amount of labor unrest, public health issues, political instability,
governmental interference and changes in general economic conditions that
we experience;
|
|
|
·
|
The
effect of fluctuations in market interest rates on income and/or cash
flows;
|
|
|
·
|
The
effect of fluctuations in currency rates;
|
|
|
·
|
Our
ability to collect accounts receivable;
|
|
|
·
|
Our
belief that our investments in student loan auction rate municipal bond
offerings are of high credit quality;
|
|
|
·
|
Our
ability to hold our fixed income investments and certain ARS until the
market recovers, and the immaterial impact this will have on our
liquidity;
|
|
|
·
|
Our
belief that unrealized losses in our investment portfolio do not represent
other-than-temporary impairment;
|
|
|
·
|
Our
belief that any future changes in the fair value of the ARS associated
with the ARS rights agreement will be largely offset by changes in the
fair value of the related rights without any significant net impact to our
income statement;
|
|
|
·
|
The
accuracy of our estimation of the cost effectivity of our insurance
coverage;
|
|
|
·
|
Our
belief that our activities are conducted in compliance with various
regulations not limited to environmental and export
compliance;
|
|
|
·
|
Our
ability and intent to settle the principal amount of the junior
subordinated convertible debentures in cash; and
|
|
|
·
|
The
accuracy of our estimates used in valuing our available-for-sale
securities.
|
We begin
our Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) with a summary of Microchip's 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. We then discuss our Results of Operations
for the three and nine months ended December 31, 2009 compared to the three and
nine months ended December 31, 2008. We then provide an analysis of
changes in our balance sheet and cash flows, and discuss our financial
commitments in sections titled "Liquidity and Capital Resources," "Contractual
Obligations" and "Off-Balance Sheet Arrangements."
Strategy
Our goal
is 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 products, which include microcontrollers,
high-performance linear and mixed signal devices, power management and thermal
management devices, interface devices, Serial EEPROMs, and our patented K
ee
L
oq
®
security devices. We provide highly cost-effective embedded
control products that also offer the advantages of small size, high performance,
low voltage/power operation and ease of development, enabling timely and
cost-effective embedded control product integration by our
customers.
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. Beginning with the third quarter
of fiscal 2009, the downturn in the U.S. and global economies adversely impacted
our key markets resulting in adverse fluctuations in our business; however, in
the first three quarters of fiscal 2010 we saw an upturn in our key markets,
resulting in improvements to our business, though not to earlier levels of
revenue and profitability equal to those we achieved in the first and second
quarters of fiscal 2009.
18
Our
manufacturing operations include wafer fabrication and assembly and
test. The ownership 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 our wafer fabrication
facilities and our assembly and test operations, and by employing statistical
process control techniques, 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 the wafer manufacturing and a portion of the assembly and
test profit margin.
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, and 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 focus on the design of new microcontrollers, digital
signal controllers, memory and mixed-signal products, new 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.
We market
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 field sales engineers
(FSEs), field application engineers (FAEs), and sales management 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 FAE team is to provide technical assistance to strategic
accounts and to conduct periodic training sessions for FSEs and distributor
sales teams. FAEs 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.
Critical
Accounting Policies and Estimates
General
Our
discussion and analysis of Microchip's financial condition and results of
operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. 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, share-based compensation,
inventories, investments, income taxes, property plant and equipment, impairment
of property, plant and equipment, junior subordinated convertible debentures and
litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
19
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 condensed consolidated financial
statements. We also have other policies that we consider key accounting
policies, such as our policy regarding revenue recognition to OEMs; however, we
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 recognition until the distributor sells the product
to their customer. Revenue is recognized when the distributor sells
the product to an end-customer, 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 a legally enforceable right
to payment, relieve inventory for the carrying value of goods shipped since
legal title has passed to the distributor, and record the gross margin in
deferred income on shipments to distributors on our condensed 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 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 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
negotiated price concessions granted 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
December 31, 2009, we had approximately $143.6 million of deferred revenue and
$46.0 million in deferred cost of sales recognized as $97.6 million of deferred
income on shipments to distributors. At March 31, 2009, we had
approximately $118.2 million of deferred revenue and $34.3 million in
deferred cost of sales recognized as $83.9 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.
20
Distributor
advances, reflected as a reduction of deferred income on shipments to
distributors on our condensed consolidated balance sheets, totaled
$51.8 million at December 31, 2009 and $37.6 million at March 31,
2009. 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 the product 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 capital of our distributors. As such, 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 on the amount of ending inventory as reported by
the distributor multiplied by a negotiated percentage. Such advances
have no impact on our revenue recognition or our condensed consolidated
statements of income. We process discounts taken by distributors
against our deferred income on shipments to distributors' balance 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 cancelled
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 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 our consolidated results of operations. We routinely
evaluate 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 our cost, we believe the deferred costs are recorded at their
approximate carrying value.
Share-Based
Compensation
We
measure at fair value and recognize compensation expense for all share-based
payment awards, including grants of employee stock options, RSUs and employee
stock purchase rights, to be recognized in our financial statements based on
their respective grant date fair values. Total share-based
compensation during the nine months ended December 31, 2009 was
$27.8 million, of which $22.5 million was reflected in operating
expenses. Total share-based compensation reflected in cost of sales
during the nine months ended December 31, 2009 was
$4.8 million. Total share-based compensation included in our
inventory balance was $3.7 million at December 31, 2009.
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. We use the Black-Scholes
option pricing model to estimate the fair value of employee stock options and
rights to purchase shares under stock participation 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. We use a blend of
historical and implied volatility based on options freely traded in the open
market as we believe 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
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 effect of
21
adjusting
the rate for all expense amortization after April 1, 2006 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 through
the third quarter of fiscal 2010 was immaterial.
We
evaluate the assumptions used to value our awards on a quarterly
basis. If factors change and we employ different assumptions,
share-based compensation expense may differ significantly from what we have
recorded in the past. 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 market 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 market 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 inventory obsolescence, we primarily
evaluate estimates of demand over a 12-month period and record impairment
charges for inventory on hand in excess of the estimated 12-month
demand.
In
periods where our production levels are substantially below our normal operating
capacity, such as in the second half of fiscal 2009 and the first half of fiscal
2010, the reduced production levels of our manufacturing facilities are charged
directly to cost of sales.
Investments
We
classify our investments as trading securities or available-for-sale securities
based upon management's intent with regard to the investments and the nature of
the underlying securities.
Our
trading securities have consisted of strategic investments in shares of publicly
traded common stock and ARS that we intend to dispose of through the exercise of
a put option. (See Note 4 to our condensed consolidated financial
statements for further discussion of the put option.) Our investments in
trading securities are carried at fair value with unrealized gains and losses
reported in Other, net, in our consolidated statements of income.
Our
available-for-sale securities consist of government agency bonds, municipal
bonds, ARS, and corporate bonds. Our investments in available-for-sale
securities are carried at fair value with unrealized gains and losses reported
in stockholders' equity. 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
securities sold is calculated using the specific identification
method.
We
include within our short-term investments our trading securities, as well as our
income yielding available-for-sale securities that can be readily converted to
cash and include 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. We have the ability to hold our 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.
Due to
the lack of availability of observable market quotes on certain of our
investment portfolio of ARS, we utilize valuation models including those that
are based on expected cash flow streams and collateral values, including
assessments of counterparty credit quality, default risk underlying the
security, discount rates and overall capital market liquidity. The valuation of
our ARS investment portfolio is subject to uncertainties that are difficult to
predict. Factors that may impact our ARS valuation include changes to
credit ratings of the securities as well as to the underlying assets supporting
those securities, rates of default of the underlying assets, underlying
collateral value, discount rates, counterparty risk, the ongoing strength and
quality of the credit markets and market liquidity.
22
The
credit markets experienced significant deterioration and uncertainty beginning
in the second half of fiscal 2008. If these conditions continue, or we
experience any additional ratings downgrades on any investments in our portfolio
(including our ARS), we may incur additional impairments to our investment
portfolio, which could negatively affect our financial condition, cash flow and
reported earnings.
Income
Taxes
As part
of the process of preparing our condensed 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
condensed 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 not provided for a valuation allowance because we believe that it is more
likely than not that our deferred tax assets will be recovered from future
taxable income. 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 December 31, 2009, our gross deferred tax
asset was $73.7 million.
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 audit by the United States Internal Revenue Service (IRS) for
our fiscal years ended March 31, 2006, 2007 and 2008. We
recognize liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional tax payments are probable. We believe 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 prove to be unnecessary, the
resulting reversal of such reserves would result in tax benefits being recorded
in 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 would be recorded in the period in which the assessment is
determined.
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. At December 31, 2009, the carrying value of our property
and equipment totaled $495.1 million, which represented 20.3% of our total
assets. This carrying value reflects the application of our property
and equipment accounting policies, which incorporate estimates, assumptions and
judgments relative to the useful lives of our property and
equipment. Depreciation is provided on a straight-line basis over the
estimated useful lives of the related assets, which range from 5 to 7 years on
manufacturing equipment, from 10 to 15 years on leasehold improvements and
approximately 30 years on buildings.
We began
production activities at Fab 4 on October 31, 2003. We began to depreciate
the Fab 4 assets as they were placed in service for production purposes.
As of December 31, 2009, all of the buildings and supporting facilities were
being depreciated as well as the manufacturing equipment that had been placed in
service. All manufacturing equipment that was not being used in production
activities was maintained in projects in process and is not being depreciated
until it is placed into service since management believes there will be no
change to its utility from the present time until it is placed into productive
service. The lives to be used for depreciating this equipment at Fab 4
will be evaluated at such time as the assets are placed in service. We do
not believe that the temporary idling of such assets has impaired the estimated
life or carrying values of the underlying assets.
23
The
estimates, assumptions and judgments we use in the application of our property
and equipment policies reflect both historical experience and expectations
regarding future industry conditions and operations. The use of different
estimates, assumptions and judgments regarding the useful lives of our property
and equipment and expectations regarding future industry conditions and
operations, could result in materially different carrying values of assets and
results of operations.
Impairment
of Property, Plant and Equipment
We assess
whether indicators of impairment of long-lived assets are present. If
such indicators are present, we determine whether the sum of the estimated
undiscounted cash flows attributable to the assets in question is less than
their carrying value. If less, we recognize 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, we recognize an impairment loss through a charge to our
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, which we
depreciate over the remaining estimated useful life of the asset. We may incur
impairment losses, or additional losses on already impaired assets, in future
periods if factors influencing our estimates change.
Junior
Subordinated Convertible Debentures
We
separately account for the liability and equity components of our junior
subordinated convertible debentures in a manner that reflects our nonconvertible
debt (unsecured debt) borrowing rate when interest cost is
recognized. 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 operations. Additionally, certain embedded
features of the debentures qualify as derivatives and are bundled as a compound
embedded derivative that is measured at fair value. Lastly,
we include the dilutive effect of the shares of our common stock
issuable upon conversion of the outstanding junior subordinated convertible
debentures in our diluted income per share calculation regardless of whether the
market price trigger or other contingent conversion feature has been
met. We apply the treasury stock method as we have the intent and
current ability to settle the principal amount of the junior subordinated
convertible debentures 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 price per share which was $30.73 at
December 31, 2009 and adjusts as dividends are recorded in the
future.
Litigation
Our
current estimated range of liability related to pending litigation is based on
the probable loss of claims for which we can estimate the amount and range of
loss. Recorded reserves were immaterial at December 31,
2009.
Because
of the uncertainties related to both the probability of loss and the amount and
range of loss on our pending litigation, we are unable to make a reasonable
estimate of the liability that could result from an unfavorable
outcome. As additional information becomes available, we will assess
the potential liability related to our pending litigation and revise our
estimates. Revisions in our estimates of the potential liability
could materially impact our results of operation and financial
position.
Results
of Operations
The
following table sets forth certain operational data as a percentage of net sales
for the periods
|
|
indicated:
|
|
Three
Months Ended
December
31,
|
Nine
Months Ended
December
31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of sales
|
41.6 | 45.5 | 45.4 | 40.7 | ||||||||||||
|
Gross
profit
|
58.4 | 54.5 | 54.6 | 59.3 | ||||||||||||
|
Research
and development
|
12.1 | 14.0 | 13.0 | 12.3 | ||||||||||||
|
Selling,
general and administrative
|
17.3 | 19.2 | 18.0 | 17.5 | ||||||||||||
|
Special
charge
|
--- | 0.2 | 0.2 | 0.1 | ||||||||||||
|
Operating
income
|
29.0 | % | 21.1 | % | 23.4 | % | 29.4 | % | ||||||||
24
Net
Sales
We
operate in one industry segment and engage primarily in the design, development,
manufacture and marketing of semiconductor products. We sell our
products to distributors and original equipment manufacturers, referred to as
OEMs, in a broad range of market segments, 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 provided primarily by letters of
credit.
Our net
sales for the quarter ended December 31, 2009 were $250.1 million, an
increase of 10.3% from the previous quarter's sales of $226.7
million, and an increase
of 30.1% from net sales of $192.2 million in the quarter ended December 31,
2008. Our net sales for the nine months ended December 31, 2009 were
$669.7 million, a decrease of 8.3% from net sales of $730.0 million in the
nine months ended December 31, 2008. The increases in net sales in
the quarter ended December 31, 2009 over the previous quarter, and over the
quarter ended December 31, 2008, were due primarily to improving semiconductor
industry conditions and market share gains in our strategic product
lines. The decrease in net sales for the nine months ended December
31, 2009 compared to the nine months ended December 31, 2008, resulted primarily
from adverse changes in global economic and end-market conditions across all of
our product lines. Average selling prices for our products were down
approximately 11% and 7% for the three and nine-month periods ended December 31,
2009 over the corresponding periods of the previous fiscal year. The
number of units of our products sold was up approximately 44% and down
approximately 2% for the three and nine-month periods ended December 31, 2009
over the corresponding periods of the previous fiscal year. 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 related to the amount of net sales during the three and nine-month
periods ended December 31, 2009 include:
|
|
·
|
global
economic conditions in the markets we
serve;
|
|
|
·
|
semiconductor
industry conditions;
|
|
|
·
|
inventory
holding patterns of our customers;
|
|
|
·
|
increasing
semiconductor content in our customers'
products;
|
|
|
·
|
customers'
increasing needs for the flexibility offered by our programmable
solutions;
|
|
|
·
|
our
new product offerings that have increased our served available market;
and
|
|
|
·
|
continued
market share gains.
|
Sales by
product line for the three and nine months ended December 31, 2009 and 2008 were
as follows (dollars in thousands):
|
Three
Months Ended
December
31,
(unaudited)
|
Nine
Months Ended
December
31,
(unaudited)
|
|||||||||||||||||||||||||||||||
|
2009
|
%
|
2008
|
%
|
2009
|
%
|
2008
|
%
|
|||||||||||||||||||||||||
|
Microcontrollers
|
$ | 202,416 | 80.9 | % | $ | 155,866 | 81.1 | % | $ | 544,477 | 81.3 | % | $ | 590,558 | 80.9 | % | ||||||||||||||||
|
Memory
products
|
21,182 | 8.5 | 17,341 | 9.0 | 56,999 | 8.5 | 73,671 | 10.1 | ||||||||||||||||||||||||
|
Analog
and interface products
|
26,501 | 10.6 | 18,959 | 9.9 | 68,233 | 10.2 | 65,815 | 9.0 | ||||||||||||||||||||||||
|
Total
sales
|
$ | 250,099 | 100.0 | % | $ | 192,166 | 100 .0 | % | $ | 669,709 | 100.0 | % | $ | 730,044 | 100.0 | % | ||||||||||||||||
25
Microcontrollers
Our
microcontroller product line represents the largest component of our total net
sales. Microcontrollers and associated application development
systems accounted for approximately 80.9% of our total net sales for the
three-month period ended December 31, 2009 and approximately 81.3% of our total
net sales for the nine-month period ended December 31, 2009 compared to
approximately 81.1% of our total net sales for the three-month period ended
December 31, 2008 and approximately 80.9% of our total net sales for the
nine-month period ended December 31, 2008.
Net sales
of our microcontroller products increased approximately 29.9% in the three-month
period ended December 31, 2009 and decreased approximately 7.8% in the
nine-month period ended December 31, 2009 compared to the three and nine-month
periods ended December 31, 2008. The sales increase in the
three-month period ended December 31, 2009 over the same period last year
resulted primarily from improving semiconductor industry conditions, market
share gains and other factors described above. The sales decrease in
the nine-month period over the same period last year were primarily due to
adverse global economic conditions in the markets we serve and the other factors
described above. The end markets that we serve include the consumer,
automotive, industrial control, communications and computing
markets.
Historically,
average selling prices in the semiconductor industry decrease over the life of
any particular product. The overall average selling prices of our
microcontroller products have remained relatively constant over time due to the
proprietary nature of these products. We have experienced, and expect
to continue to experience pricing pressure in certain microcontroller product
lines, primarily due to competitive conditions. We have been able in
the past, and expect to be able in the future, 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 of increased pricing
pressure in the future, which would adversely affect our operating
results.
Memory
Products
Sales of
our memory products accounted for approximately 8.5% of our total net sales for
each of the three and nine-month periods ended December 31, 2009 compared to
approximately 9.0% of our total net sales for the three-month period ended
December 31, 2008 and 10.1%
of our total net sales
in the nine-month period ended December 31, 2008.
Net sales
of our memory products increased approximately 22.1% in the three-month period
ended December 31, 2009 and decreased approximately 22.6% in the nine-month
period ended December 31, 2009 compared to the three and nine-month periods
ended December 31, 2008. The sales increase in the three-month period
ended December 31, 2009 over the same period last year resulted primarily from
improving semiconductor industry conditions. The sales decrease in
the nine-month period over the same period last year were driven primarily by
adverse global economic conditions leading to reduced customer demand within the
Serial EEPROM market which products comprise substantially all of our memory
product net sales.
Serial
EEPROM 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 Serial EEPROM
products. We may be unable to maintain the average selling prices of
our Serial EEPROM products as a result of increased pricing pressure in the
future, which could adversely affect our operating results.
Analog and Interface
Products
Sales of
our analog and interface products accounted for approximately
10.6% of our total net
sales for the three-month period ended December 31, 2009 and 10.2% of our total
net sales for the nine-month period ended December 31, 2009 compared to
approximately 9.9% of our total net sales for the three-month period ended
December 31, 2008 and 9.0% of our total net sales for the nine-month period
ended December 31, 2008.
Net sales
of our analog and interface products increased approximately 39.8% in the
three-month period ended December 31, 2009 and 3.7% in the nine-month period
ended December 31, 2009 compared to the three and nine-month periods ended
December 31, 2008. These sales increases were driven primarily by
improving semiconductor industry conditions and market share gains achieved
within the analog and interface market.
26
Analog
and interface products can be proprietary or non-proprietary in
nature. Currently, we consider more than half of our analog and
interface product mix 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 and interface
business 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 and interface products as a result of
increased pricing pressure in the future, which would adversely affect our
operating results. We anticipate the proprietary portion of our
analog and interface products will continue to increase over time.
Distribution
Distributors
accounted for approximately 60% of our net sales in the three-month period ended
December 31, 2009 and approximately 66% of our net sales in the three-month
period ended December 31, 2008. Distributors accounted for
approximately 61% of our net sales in the nine-month period ended December 31,
2009 and approximately 64% of our net sales in the nine-month period ended
December 31, 2008.
Our
largest distributor accounted for approximately 12% of our net sales in each of
the three and nine-month periods ended December 31, 2009. Our largest
distributor accounted for approximately 14% of our net sales in the three-month
period ended December 31, 2008, and approximately 13% of our net sales in the
nine-month period ended December 31, 2008.
Generally,
we do not have long-term agreements with our distributors and we, or our
distributors, may terminate our relationships with each other with little or no
advanced notice. 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
December 31, 2009, our distributors maintained 40
days of
inventory of our
products compared to 35 days at March 31, 2009. Over the past three
fiscal years, the days of inventory maintained by our distributors have
fluctuated between 31 days and 42 days. We do not believe that
inventory holding patterns at our distributors will materially impact our net
sales, due to the fact that we recognize revenue based on sell-through for all
our distributors.
Sales by
Geography
Sales by
geography for the three and nine-month periods ended December 31, 2009 and 2008
were as follows (dollars in thousands):
|
Three
Months Ended
December
31,
(unaudited)
|
Nine
Months Ended
December
31,
(unaudited)
|
|||||||||||||||||||||||||||||||
|
2009
|
%
|
2008
|
%
|
2009
|
%
|
2008
|
%
|
|||||||||||||||||||||||||
|
Americas
|
$ | 59,311 | 23.7 | % | $ | 50,836 | 26.4 | % | $ | 164,678 | 24.6 | % | $ | 181,587 | 24.9 | % | ||||||||||||||||
|
Europe
|
60,059 | 24.0 | 52,802 | 27.5 | 164,062 | 24.5 | 203,955 | 27.9 | ||||||||||||||||||||||||
|
Asia
|
130,729 | 52.3 | 88,528 | 46.1 | 340,969 | 50.9 | 344,502 | 47.2 | ||||||||||||||||||||||||
|
Total
sales
|
$ | 250,099 | 100.0 | % | $ | 192,166 | 100.0 | % | $ | 669,709 | 100.0 | % | $ | 730,044 | 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 78% and 77% of our net sales in
the three and nine-month periods ended December 31, 2009, respectively, compared
to 74% in the three-month period ended December 31, 2008 and 76% in the
nine-month period ended December 31, 2008. Substantially all of our
foreign sales are U.S. Dollar denominated. Sales to customers in Asia
have generally increased over time due to many of our customers transitioning
their manufacturing operations to Asia and growth in demand from the emerging
Asian market. Our sales force in the Americas and Europe supports a
significant portion of the design activity for products which are ultimately
shipped to Asia.
27
Gross
Profit
Our gross
profit was $146.0
million in the three
months ended December 31, 2009 and $104.8 million in the three months ended
December 31, 2008. Our gross profit was $365.8 million in the nine
months ended December 31, 2009 and $432.5 million in the nine months ended
December 31, 2008. Gross profit as a percentage of sales was 58.4% in
the three months ended December 31, 2009 and 54.5% in the three months ended
December 31, 2008. Gross profit as a percentage of sales was 54.6% in
the nine months ended December 31, 2009 and 59.3% in the nine months ended
December 31, 2008.
The most
significant factors affecting our gross profit percentage in the periods covered
by this Quarterly Report on Form 10-Q were:
|
|
·
|
production
levels being below the range of our normal capacity resulting in under
absorption of fixed costs; and
|
|
|
·
|
continual
cost reductions in wafer fabrication and assembly and test manufacturing,
such as new manufacturing technologies and more efficient manufacturing
techniques.
|
Other
factors that impacted gross profit percentage in the periods covered by this
Quarterly Report on Form 10-Q include:
|
|
·
|
inventory
write-downs partially offset by sales of inventory that was previously
written down;
|
|
|
·
|
lower
depreciation as a percentage of cost of sales;
and
|
|
|
·
|
fluctuations
in the product mix of microcontrollers, proprietary and non-proprietary
analog products and Serial EEPROM products resulting in lower overall
average selling prices for our
products.
|
During
the three-month period ended December 31, 2009, we operated at significantly
higher levels of capacity utilization compared to the levels in the three-month
period ended December 31, 2008. We adjust our capacity utilization as required
to respond to actual and anticipated business and industry-related conditions.
We operated at or above normal capacity levels, which we typically consider to
be the range of 90 to 95% of the actual capacity of the installed equipment
during fiscal 2007, fiscal 2008 and the first half of fiscal 2009. However,
during the third and fourth quarters of fiscal 2009, we reduced wafer starts at
both Fab 2 and Fab 4 and implemented rotating unpaid time off at both
fabrication facilities. The reduction in wafer starts and rotating unpaid time
off were implemented to help control inventory levels due to adverse economic
conditions in the markets we serve. Reduced levels of production continued into
the third quarter of fiscal 2010, however, we increased the production output
from our wafer fabs in the second and third quarters of fiscal 2010 to support
increasing demand for our products and during the latter part of the third
quarter of fiscal 2010, we operated our wafer fabs at close to peak levels.
During the fourth quarter of fiscal 2010, we expect our wafer fabs to operate at
high levels with no under-absorption of fixed costs.
As a
result of reductions in demand and decreased production in our wafer fabs,
approximately $1.7 million and $22.3 million was charged to cost of sales in the
three and nine-month periods ended December 31, 2009, as our production levels
for the periods were below the range of normal capacity. In the
three-month period ended December 31, 2008, approximately $6.5 million was
charged to cost of sales as a result of decreased production levels. In
the future, if production levels are below normal capacity, we will charge cost
of sales for the unabsorbed capacity.
The
process technologies utilized impact our gross margins. Fab 2
currently utilizes various manufacturing process technologies, but predominantly
utilizes our 0.5 to 1.0 micron processes. Fab 4 predominantly
utilizes our 0.22 to 0.5 micron processes. We continue to transition
products to more advanced process technologies to reduce future manufacturing
costs. All of our production has been on 8-inch wafers for the
periods covered by this report.
Our
overall inventory levels were $112.8 million at December 31, 2009 compared to
$131.5 million at March 31, 2009. We had 99
days of inventory on our
balance sheet at December 31, 2009 compared to 134 days at March 31, 2009
and 143 days at December 31, 2008. The reduction of our inventory
levels was a result of our efforts to manage inventory through this period of
adverse global economic conditions and was impacted by net sales levels in the
most recent quarters exceeding our initial expectations when entering those
periods. Our inventory levels at December 31, 2009 were at the low
end of the range we have experienced over the past three years. Our
goal is to grow our inventory balances to more normalized levels over
time.
28
We
anticipate that our gross margins will fluctuate over time, driven primarily by
capacity utilization levels, the overall product mix of microcontroller, analog
and interface and memory products 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.
At
December 31, 2009, approximately 67% of our assembly requirements were being
performed in our Thailand facility, compared to approximately 75% at December
31, 2008. The percentage of our assembly work that is performed
internally fluctuates over time based on supply and demand conditions in the
semiconductor industry and our internal capacity
constraints. Third-party contractors located in Asia perform the
balance of our assembly operations. Substantially all of our test
requirements were being performed in our Thailand facility as of December 31,
2009 and December 31, 2008. We believe that the assembly and test
operations performed at our Thailand facility provide us with significant cost
savings when compared to contractor assembly and test costs, as well as
increased control over these portions of the manufacturing process.
We rely
on outside wafer foundries for a portion of our wafer fabrication
requirements.
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 the three months ended December 31, 2009 were $30.3 million,
or 12.1% of net sales, compared to $27.0 million, or 14.0% of net sales,
for the three months ended December 31, 2008. R&D expenses for
the nine months ended December 31, 2009 were $87.5 million, or 13.0% of net
sales, compared to $89.9 million, or 12.3% of net sales for the nine months
ended December 31, 2008. 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 $3.4 million, or 12.5%, for the three months ended
December 31, 2009 over the same period last year. R&D expenses
decreased $2.3
million, or 2.6%, for
the nine months ended December 31, 2009 over the same period last
year. The primary reasons for the dollar increase over the
three-month periods were higher salary and bonus costs related to restoring
previous reductions in compensation programs due to improving business
conditions. The primary reasons for the dollar decrease in R&D
costs over the nine-month periods were cost-cutting actions that began in the
second half of fiscal 2009, including broad-based reductions in salary and other
compensation levels, lower travel costs, and reductions in other variable
expenses, offset by higher salary and bonus costs in the three months ended
December 31, 2009.
Selling,
General and Administrative
Selling,
general and administrative expenses for the three months ended December 31, 2009
were $43.1
million,
or 17.3% of net sales, compared to $36.8 million, or 19.2% of net sales,
for the three months ended December 31, 2008. Selling, general
and administrative expenses for the nine months ended December 31, 2009 were
$120.5 million, or 18.0% of net sales, compared to $127.9 million, or 17.5% of
net sales, for the nine months ended December 31, 2008. Selling,
general and administrative expenses include salary and other expenses related to
field sales, marketing and administrative personnel, advertising and promotional
expenditures and legal expenses. Selling, general and administrative
expenses also include costs related to our direct sales force and FAEs who work
in sales offices worldwide to stimulate demand by assisting customers in the
selection and use of our products.
29
Selling,
general and administrative expenses increased $6.3 million, or 17.0%, for
the three months ended December 31, 2009 over the same period last
year. Selling, general and administrative expenses decreased
$7.4 million, or 5.8%, for the nine months ended December 31, 2009 over the
same period last year. The primary reasons for the dollar increase
over the three-month periods were higher salary and bonus costs related to
restoring previous reductions in compensation programs due to improving business
conditions. The primary reasons for the dollar decrease in selling,
general and administrative costs over the nine-month periods were cost-cutting
actions that began in the second half of fiscal 2009, including broad-based
reductions in salary and other compensation levels, lower travel costs, and
reductions in other variable expenses, offset by higher salary and bonus costs
in the three months ended December 31, 2009.
Special
Charges
During
the June 2009 quarter, we agreed to the terms of a patent license with an
unrelated third-party and signed an agreement on July 9, 2009. The patent
license settled alleged infringement claims. The total payment made to the
third-party in July 2009 was $1.4 million, $1.2 million of which was expensed in
the first quarter of fiscal 2010 and the remaining $0.2 million was recorded as
a prepaid royalty that will be amortized over the remaining life of the
patent.
On
October 15, 2008, we announced the acquisition of Hampshire Company, a leader in
the large format touch screen controller market. As a result of the
acquisition, we incurred a $0.5 million in-process research and development
charge in the third quarter of fiscal 2009.
Other
Income (Expense)
Interest
income in the three-month period ended December 31, 2009 decreased to $4.9
million from $7.4 million in the three-month period ended December 31,
2008. Interest income in the nine-month period ended December 31,
2009 decreased to $12.7 million from $27.8 million in the nine-month period
ended December 31, 2008. The primary reason for the reductions in
interest income was lower interest rates applying to our invested cash balances
in the three and nine-month periods ended December 31, 2009 compared to the
prior year periods. Interest expense related to our 2.125% junior
subordinated convertible debentures in the three and nine-month periods ended
December 31, 2009 was $7.8 million and $23.3 million, respectively,
compared to $7.1 million and $21.6 million, respectively, in the three and
nine-month periods ended December 31, 2008. Other income, net in the
three-month period ended December 31, 2009 was $0.1 million compared to other
expense, net of $20.4 million in the three-month period ended December 31,
2008. Other income, net in the nine-month period ended December 31,
2009 was $7.9 million compared to other expense, net of $16.0 million in the
nine-month period ended December 31, 2008. The increase in other
income, net in the three-month period ended December 31, 2009 over the same
period last year primarily relates to a $19.3 million loss on trading securities
during the three months ended December 31, 2008 as a result of market
fluctuations in our trading securities and put options as described in Note 4 to
our condensed consolidated financial statements. The increase in
other income, net in the nine-month period ended December 31, 2009 over the same
period last year primarily relates to a $7.5 million gain on trading securities
during the nine months ended December 31, 2009 as a result of market
fluctuations in the value of our trading securities and put options and sales of
trading securities as described in Note 4 to our condensed consolidated
financial statements.
Provision
for Income Taxes
The
provision for income taxes reflects tax on foreign earnings and federal and
state tax on U.S. earnings. We had an effective tax rate of 0.7% for
the three-month period ended December 31, 2009 and 8.2% for the nine-month
period ended December 31, 2009. We had an effective tax rate benefit
of 254.7% for the three-month period ended December 31, 2008 and 9.4% for the
nine-month period ended December 31, 2008. Our effective tax
rates for the three and nine months ended December 31, 2009 were higher than our
effective tax rates for the three and nine months ended December 31, 2008, and
lower than the statutory rates in the U.S. for the three and nine months ended
December 31, 2009 and 2008, primarily due to IRS audit settlements in these
periods and a favorable clarification of tax regulations in the three and nine
months ended December 31, 2008. Additionally, our effective tax rate
is lower than statutory rates in the U.S. due to our mix of earnings in foreign
jurisdictions with lower tax rates. See Note 10 to our condensed
consolidated financial statements for additional information on our tax
items.
30
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. We are currently under audit by the IRS for
our fiscal years ended March 31, 2006, 2007 and 2008. We recognize
liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional tax payments are probable. We believe 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 prove to be unnecessary, the
resulting reversal of such reserves would result in tax benefits being recorded
in the period the reserves are no longer deemed necessary. If such
amounts ultimately prove to be less than any final assessment, a future charge
to expense would be recorded in the period in which the assessment is
determined.
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 is 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
$1,499.6 million in cash, cash equivalents and short-term and long-term
investments at December 31, 2009, an increase of $58.8 million from the
March 31, 2009 balance. The increase in cash, cash equivalents and
short-term and long-term investments over this time period is primarily
attributable to cash generated from operating activities being offset by
dividend payments in the nine months ended December 31, 2009.
Net cash
provided from operating activities was $344.0 million for the nine-month period
ended December 31, 2009 compared to $264.6 million for the nine-month
period ended December 31, 2008. The increase in cash flow from
operations in the nine-month period ended December 31, 2009 compared to the
nine-month period ended December 31, 2008 was primarily due to sales of trading
securities, which provided approximately $87.0 million of operating cash flow in
the nine-month period ended December 31, 2009, compared to sales and purchases
of trading securities which used $79.3 million of operating cash flow in the
nine-month period ended December 31, 2008, offset by the decline in net income
from $233.6 million to $141.3 million.
During
the nine months ended December 31, 2009, net cash used in investing activities
was $263.1 million. During the nine months ended December 31,
2008, net cash used in investing activities was
$89.3 million. The increase in net cash used in investing
activities was primarily due to changes in our net purchases, sales and
maturities of short-term and long-term investments, offset by lower capital
expenditures in the nine-month period ended December 31, 2009.
Net cash
used in financing activities was $166.0 million for the nine months ended
December 31, 2009 compared to net cash used in financing activities of
$271.8 million for the nine months ended December 31,
2008. Proceeds from the exercise of stock options and employee
purchases under our employee stock purchase plans were $18.6 million for the
nine months ended December 31, 2009 and $26.5 million for the nine months
ended December 31, 2008. We paid cash dividends to our stockholders
of $186.6 million in the nine months ended December 31, 2009 and
$184.8 million in the nine months ended December 31, 2008. We
did not repurchase any of our shares of common stock during the nine months
ended December 31, 2009. We purchased 4.0 million shares of our
common stock for $123.9 million during the nine months ended December 31,
2008. Excess tax benefits from share-based payment arrangements were
$2.1 million in the nine months ended December 31, 2009 and $10.5 million
in the nine months ended December 31, 2008.
Our level
of capital expenditures varies from time to time as a result of actual and
anticipated business conditions. Capital expenditures in the nine
months ended December 31, 2009 were $28.4
million compared to
$91.8 million for the nine months ended December 31,
2008. Capital expenditures are primarily for the expansion of
production capacity and the addition of research and development
equipment. We currently intend to spend approximately
$60 million during the next twelve months to invest in equipment and
facilities to maintain, and selectively increase, capacity to meet our currently
anticipated needs.
31
We expect
to finance capital expenditures through our existing cash balances and cash
flows from operations. We believe that the capital expenditures
anticipated to be incurred over the next twelve months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
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 has 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 December 31, 2009, we had no foreign currency forward
contracts outstanding.
On
December 11, 2007, we announced that our Board of Directors had authorized the
repurchase of up to an additional 10.0 million shares of our common stock in the
open market or in privately negotiated transactions. As of December 31, 2009, we
had repurchased 7.5 million shares under this 10.0 million share
authorization for a total of $234.7
million. There
is no expiration date associated with this program. The timing and
amount of future repurchases will depend upon market conditions, interest rates,
and corporate considerations.
As of
December 31, 2009, we held approximately 34.6 million shares as treasury
shares.
On
October 28, 2002, we announced that our Board of Directors had approved and
instituted a quarterly cash dividend on our common stock. A quarterly
dividend of $0.34 per share was paid on December 2, 2009 in the aggregate amount
of $62.5 million. A quarterly dividend of $0.341 per share was
declared on February 3, 2010 and will be paid on March 4, 2010 to stockholders
of record as of February 18, 2010. We expect the aggregate March 2010
cash dividend to be approximately $62.9 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.
We
believe that our existing sources of liquidity combined with cash generated from
operations will be sufficient to meet our currently anticipated cash
requirements for at least the next 12 months. However, the
semiconductor industry is capital intensive. 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 seek additional equity or debt financing from
time to time to maintain or expand our wafer fabrication and product assembly
and test facilities, or for acquisitions or other purposes. The
timing and amount of any such financing requirements will depend on a number of
factors, including demand for our products, changes in industry conditions,
product mix, competitive factors and our ability to identify suitable
acquisition candidates. There can be no assurance that such financing
will be available on acceptable terms, and any additional equity financing would
result in incremental ownership dilution to our existing
stockholders.
Contractual
Obligations
There
have not been any material changes in our contractual obligations from what we
disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31,
2009.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, 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
Business Combinations.
On
April 1, 2009, we adopted new accounting guidance for business combinations
as issued by the FASB. The new accounting guidance establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interests in the acquiree,
as well as the goodwill acquired. Significant changes from previous
guidance resulting from this new guidance include the expansion of the
definitions of a "business" and a "business combination." For all
business combinations (whether partial, full or step acquisitions),
32
the
acquirer will record 100% of all assets and liabilities of the acquired
business, including goodwill, generally at their fair values; contingent
consideration will be recognized at its fair value on the acquisition date and;
for certain arrangements, changes in fair value will be recognized in earnings
until settlement; and acquisition-related transaction and restructuring costs
will be expensed rather than treated as part of the cost of the
acquisition. The new accounting guidance also establishes disclosure
requirements to enable users to evaluate the nature and financial effects of the
business combination. Because the majority of the provisions of the
new accounting guidance are applicable to future transactions, the adoption
of this guidance did not have a material impact on our consolidated financial
statements.
On
April 1, 2009, we adopted new accounting guidance for assets acquired and
liabilities assumed in a business combination as issued by the
FASB. The new guidance amends the provisions previously issued by the
FASB related to the initial recognition and measurement, subsequent measurement
and accounting and disclosures for assets and liabilities arising from
contingencies in business combinations. The new guidance eliminates
the distinction between contractual and non-contractual contingencies, including
the initial recognition and measurement. The adoption of this
accounting guidance did not have a material impact on our consolidated financial
statements.
Transfers of Financial
Assets.
In June 2009, the FASB issued guidance that changes
the information a reporting entity provides in its financial statements about
the transfer of financial assets and continuing interests held in transferred
financial assets. The standard amends previous accounting guidance by
removing the concept of qualified special purpose entities. This
accounting standard is effective for us for transfers occurring on or after
April 1, 2010. We do not expect the adoption of this accounting
standard to have a material effect on our consolidated financial statements and
related disclosures.
Variable Interest
Entities.
In June 2009, the FASB issued guidance to change
financial reporting by enterprises involved with variable interest entities
(VIEs). The standard replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a VIE with an approach focused on identifying which enterprise has
the power to direct the activities of a VIE and the obligation to absorb losses
of the entity or the right to receive the entity's residual
returns. This accounting standard is effective for us beginning April
1, 2010. We do not expect the adoption of this accounting standard to
have a material effect on our consolidated financial statements and related
disclosures.
Multiple Element
Arrangements.
In September 2009, the FASB issued new
accounting guidance related to the revenue recognition of multiple element
arrangements. The new guidance states that if vendor specific
objective evidence or third party evidence for deliverables in an arrangement
cannot be determined, companies will be required to develop a best estimate of
the selling price to separate deliverables and allocate arrangement
consideration using the relative selling price method. This guidance
is effective for us beginning April 1, 2011, but may be early adopted if we so
choose. We are currently evaluating the impact of this accounting guidance on
our consolidated financial statements.
Certain Revenue Arrangements that
include Software Elements.
In September 2009, the FASB issued
new accounting guidance related to certain revenue arrangements that include
software elements. Previously, companies that sold tangible products
with "more than incidental" software were required to apply software revenue
recognition guidance. This guidance often delayed revenue recognition
for the delivery of the tangible product. Under the new guidance,
tangible products that have software components that are "essential to the
functionality" of the tangible product will be excluded from the software
revenue recognition guidance. The new guidance includes factors to
help companies determine what is "essential to the
functionality." Software-enabled products will now be subject to
other revenue guidance including that for multiple deliverable arrangements
issued by the FASB in September 2009. This guidance is
effective for us beginning April 1, 2011, but may be early adopted if we so
choose. We are currently evaluating the impact of this accounting guidance on
our consolidated financial statements.
33
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Our
investment portfolio, consisting of fixed income securities, money market funds,
and cash deposits that we hold on an available-for-sale basis, was $1,471.2
million as of December 31, 2009 compared to $1,318.3 million as of March
31, 2009, and our trading securities totaled $29.2 million as of December 31,
2009 compared to $122.5 million as of March 31, 2009. The
available-for-sale 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.
At
December 31, 2009, $43.2 million of the fair value of our investment portfolio
was invested in ARS. Historically, the carrying value of ARS
approximated due to the frequent resetting of the interest rates. If an
auction fails for amounts we have invested, our investment will not be
liquid. With the continuing liquidity issues experienced in the global
credit and capital markets, our ARS have experienced multiple failed
auctions. In September 2007 and February 2008, auctions for
$24.9 million and $34.8 million, respectively, of the original purchase value of
our investments in ARS had failed. While we continue to earn interest on
these investments based on a pre-determined formula with spreads tied to
particular interest rate indices, the estimated market value for a portion of
these ARS no longer approximates the original purchase value.
At
December 31, 2009, the $24.9 million of ARS that failed during
September 2007 carried ratings between A- and CCC by Standard & Poors
compared to ratings between A- and CC at September 30, 2009. All but
$2.5 million of the securities possess credit enhancement in the form of
insurance for principal and interest. The underlying characteristics
of $22.4 million of these ARS relate to servicing statutory requirements in the
life insurance industry and $2.5 million relate to a specialty finance
company. Subsequent to our investment in these ARS, the ARS have
experienced multiple rating downgrades by the major rating
agencies. All such rating change actions have been factored into the
fair value estimates of the ARS for the period ending December 31,
2009.
The $24.9
million in failed auctions noted above have continued to fail through the filing
date of this Quarterly Report on Form 10-Q. As a result, we will not
be able to access such funds until a future auction on these investments is
successful. The fair value of the failed ARS has been estimated based
on market information and estimates determined by management and could change
significantly based on future market conditions. We evaluated the
impairments in the value of these ARS and determined our intent to sell these
securities prior to the recovery of our amortized cost basis which resulted in
the securities being other-than-temporarily impaired, and we have recognized an
impairment charge on these investments of $0.5 million and $2.2 million,
respectively, in the three and nine months ended December 31, 2009.
The $34.8
million of ARS that failed during February 2008 are investments in student
loan-backed ARS. Approximately $2.7 million and $2.9 million of these
ARS were redeemed at par by the issuers in the first nine months of fiscal 2010
and fiscal 2009, respectively, reducing our overall position to $29.2
million. Based upon our evaluation of available information, we
believe these investments are of high credit quality, as all of the investments
carry AAA credit ratings by one or more of the major credit rating agencies and
are largely backed by the federal government (Federal Family Education Loan
Program). The fair value of the failed ARS has been estimated based
on market information and estimates determined by management and could change
significantly based on future market conditions. If the issuers are
not able to successfully close future auctions or over time are not able to
obtain more favorable financing options for their debt issuance needs, including
refinancing these obligations into lower rate securities, the market value of
these investments could be negatively impacted.
In
November 2008, we executed an ARS rights agreement (the Rights) with the broker
through which we purchased the $29.2 million in ARS that provides (1) us
with the right to put these ARS back to the broker at par anytime during the
period from June 30, 2010 through July 2, 2012, and (2) the broker with the
right to purchase or sell the ARS at par on our behalf anytime through July 2,
2012. We accounted for the acceptance of the Rights as the receipt of
a put option for no consideration and recognized a gain with a corresponding
recognition as a long-term investment. We elected to measure the
Rights at fair value and will record changes in the fair value of the Rights in
earnings, as the Rights do not provide for net settlement and therefore are not
otherwise marked to fair value as derivatives. We simultaneously
recognized an other-than-temporary impairment loss of $5.5 million
34
as we no
longer intend to hold these ARS until the fair value recovers, which was
recorded in other comprehensive loss in prior quarters. We have
reclassified the ARS from available-for-sale to trading securities and future
changes in fair value are being recorded in earnings. During the
third quarter of fiscal 2010, we estimated the fair value of the ARS decreased
by $0.2 million offset by an increase in the fair value of the related Rights of
$0.2 million, with no net impact to our income statement. We expect
any future changes in the fair value of the ARS to be largely offset by changes
in the fair value of the related Rights without any significant net impact to
our income statement. We will continue to measure the ARS and the
Rights at fair value (utilizing Level 3 inputs) until the earlier of its
maturity or exercise.
We
continue to monitor the market for ARS and consider its impact, if any, on the
fair market value of our investments. If the market conditions
deteriorate further, we may be required to record additional impairment
charges. We intend to sell the $24.9 million of ARS. We
intend and have the ability to hold the $29.2 million of ARS until June 30,
2010 when we have the right to sell the auction rates at par to the
broker. We do not anticipate having to sell these securities to fund
the operations of our business. We believe that, based on our current
unrestricted cash, cash equivalents and short-term investment balances, the
current lack of liquidity in the credit markets will not have a material impact
on our liquidity, cash flow or ability to fund our operations.
We had no
investments in marketable equity securities at December 31, 2009.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Quarterly Report on Form 10-Q, as required by
paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of
1934, as amended, 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
Securities Exchange Act of 1934, as amended). Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission 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 control 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.
Changes
in Internal Control over Financial Reporting
During
the three months ended December 31, 2009, 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.
|
Legal
Proceedings
|
In the ordinary course of our business,
we are involved in a limited number of legal actions, both as plaintiff and
defendant, and could incur uninsured liability in any one or more of them.
We also periodically receive notifications from various third parties alleging
infringement of patents, intellectual property rights or other matters.
With respect to pending legal actions to which we are a party, although the
outcome of these actions is not presently 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. Litigation relating to the semiconductor industry is
not uncommon, and we are, and from time to time have been, subject to such
litigation. No assurances can be given with respect to the extent or
outcome of any such litigation in the future.
35
|
Item 1A
.
|
Risk
Factors
|
When
evaluating Microchip and its business, you should give careful consideration to
the factors listed below, in addition to the information provided elsewhere in
this Form 10-Q and in other documents that we file with the Securities and
Exchange Commission.
Our
operating results have been adversely impacted by global economic conditions and
may fluctuate due to a number of other 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:
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|
·
|
changes
in demand or market acceptance of our products and products of our
customers;
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|
·
|
levels
of inventories at our customers;
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|
|
·
|
the
mix of inventory we hold and our ability to satisfy orders from our
inventory;
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|
|
·
|
changes
in utilization of our manufacturing capacity and fluctuations in
manufacturing yields;
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|
|
·
|
our
ability to secure sufficient assembly and testing
capacity;
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|
|
·
|
availability
of raw materials and equipment;
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|
|
·
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competitive
developments including pricing
pressures;
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|
|
·
|
the
level of orders that are received and can be shipped in a
quarter;
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·
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the
level of sell-through of our products through
distribution;
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·
|
fluctuations
in the mix of products;
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·
|
changes
or fluctuations in customer order patterns and
seasonality;
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·
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constrained
availability from other electronic suppliers impacting our customers'
ability to ship their products, which in turn may adversely impact our
sales to those customers;
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·
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costs
and outcomes of any current or future tax audits or any litigation
involving intellectual property, customers or other
issues;
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·
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changes
in tax regulations and policies in the U.S. and other countries in which
we do business;
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·
|
disruptions
in our business or our customers' businesses due to terrorist activity,
armed conflict, war, worldwide oil prices and supply, public health
concerns or disruptions in the transportation
system;
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·
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fluctuations
in commodity prices;
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·
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general
economic, industry or political conditions in the U.S. or
internationally.
|
We
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and that you should not rely upon any such comparisons as
indications of future performance. In future periods our operating results may
fall below our public guidance or the expectations of public market analysts and
investors, which would likely have a negative effect on the price of our common
stock. Adverse global economic conditions have adversely impacted our
operating results and make comparability between periods less
meaningful.
Our
operating results will suffer if we ineffectively utilize our manufacturing
capacity or fail to maintain manufacturing yields.
The
manufacture and assembly of integrated circuits, particularly non-volatile,
erasable 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, the performance of our wafer fabrication
personnel and equipment, and other quality issues. As is
36
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 approximately the current levels. This
could include delays in the recognition of revenue, loss of revenue or future
orders, and customer-imposed penalties for failure to meet contractual shipment
deadlines. Our operating results are also adversely affected when we
operate at less than optimal capacity. In the quarter ended March 31,
2009, we reduced wafer starts in both Fab 2 and Fab 4, implemented rotating
unpaid time off and had multiple planned shutdowns in our Thailand facility to
help control inventory levels in response to adverse economic
conditions. This lower capacity utilization resulted in certain costs
being charged directly to expense and lower gross margins. In the
quarter ended December 31, 2009, we increased our production output in our
factories and did not have any shutdowns in our Thailand operation and reduced
the amount of rotating unpaid time off in Fab 2 and Fab 4. In the
March 2010 quarter, we expect to return to a more optimal level of capacity
utilization.
We
are dependent on orders that are received and shipped in the same quarter and
are therefore limited in our visibility of future product
shipments.
Our net
sales in any given quarter depend upon a combination of shipments from backlog
and orders received in that quarter for shipment in that quarter, which we refer
to as turns orders. We measure turns orders at the beginning of a
quarter based on the orders needed to meet the shipment targets that we set
entering the quarter. 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. Shorter lead times generally mean that turns orders as a
percentage of our business are relatively high in any particular quarter and
reduce our backlog visibility on future product shipments. Turns orders
correlate to overall semiconductor industry conditions and product lead
times. Because turns orders are difficult to predict, varying levels of
turns orders make our net sales more difficult to forecast. If we do not
achieve a sufficient level of turns orders in a particular quarter relative to
our revenue targets, our revenue and operating results may suffer.
Intense
competition in the markets we serve may lead to pricing pressures, reduced sales
of our products or reduced market share.
The
semiconductor industry is intensely competitive and has been characterized by
price erosion and rapid technological change. We compete with major
domestic and international semiconductor companies, many of which have greater
market recognition and substantially greater financial, technical, marketing,
distribution and other resources than we do. We may be unable to compete
successfully in the future, which could harm our business. Our
ability to compete successfully depends on a number of factors both within and
outside our control, including, but not limited to:
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·
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the
quality, performance, reliability, features, ease of use, pricing and
diversity of our products;
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·
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our
success in designing and manufacturing new products including those
implementing new technologies;
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·
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the
rate at which customers incorporate our products into their own
applications;
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·
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product
introductions by our competitors;
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·
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the
number, nature and success of our competitors in a given
market;
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·
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our
ability to obtain adequate supplies of raw materials and other supplies at
acceptable prices;
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·
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our
ability to protect our products and processes by effective utilization of
intellectual property rights;
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·
|
our
ability to address the needs of our customers;
and
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·
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general
market and economic conditions.
|
Historically,
average selling prices in the semiconductor industry decrease over the life of
any particular product. The overall average selling prices of our
microcontroller and proprietary analog and interface products have remained
relatively constant, while average selling prices of our Serial EEPROM and
non-proprietary analog and interface products have declined over
time.
We have
experienced, and expect to continue to experience, modest pricing declines in
certain of our more mature proprietary product lines, primarily due to
competitive conditions. We have been able to moderate average selling
price declines in many of our proprietary product lines by continuing to
introduce new products with more features and higher prices. However,
there can be no assurance that we will be able to do so in the future. We
have experienced in the past, and expect to continue to experience in the
future, varying degrees of competitive pricing pressures in our Serial EEPROM
and non-proprietary analog products. We may be unable to maintain
average selling prices for our products as a result of increased pricing
pressure in the future, which could adversely impact our operating
results.
37
Our
business is dependent on selling through distributors.
Sales
through distributors accounted for approximately 64% of our net sales in fiscal
2009 and approximately 61% of our net sales in the first nine months of fiscal
2010. Our largest distributor accounted for approximately 14% of our
net sales in fiscal 2009 and approximately 12% of our net sales in the first
nine months of fiscal 2010. We do not have long-term agreements with
our distributors and we and our distributors may each terminate our relationship
with little or no advance notice.
Adverse conditions in the U.S. and global
economies and in the U.S. and global credit markets could materially impact the
operations of our distributors. Any deterioration in the financial
condition of our distributors or any disruption in the operations of our
distributors could adversely impact the flow of our products to our end
customers and adversely impact our results of operation. In addition,
during an industry and/or economic downturn, it is possible there will be an
oversupply of products and a decrease in sell-through of our products by our
distributors which could reduce our net sales in a given period and result in an
increase in inventory returns.
Recent
credit market conditions have adversely impacted our holdings of auction rate
securities.
At
December 31, 2009, $43.2
million of the fair
value of our investment portfolio was invested in ARS. Historically,
the carrying value of ARS approximated fair value due to the frequent resetting
of the interest rates. With the continuing liquidity issues in the global
credit markets, our ARS have experienced multiple failed auctions. As a
result, we will not be able to access such funds until a future auction on these
investments is successful. In November 2008, we executed an ARS
rights agreement (the Rights) with the broker through which we purchased the
$29.2 million in ARS that provides (1) us with the right to put these ARS
back to the broker at par anytime during the period from June 30, 2010 through
July 2, 2012, and (2) the broker with the right to purchase or sell the ARS at
par on our behalf anytime through July 2, 2012. We accounted for the
acceptance of the Rights as the receipt of a put option for no consideration and
recognized a gain with a corresponding recognition as a long-term
investment. We will record changes in the fair value of the Rights in
earnings, as the Rights do not provide for net settlement and therefore are not
otherwise marked to fair value as derivatives. We simultaneously
recognized an other-than-temporary impairment loss of $5.5 million as we no
longer intend to hold the ARS to a time where the fair value recovers, which was
recorded in other comprehensive loss in prior quarters. We have
reclassified the ARS from available-for-sale to trading securities and future
changes in fair value will be recorded in earnings. We expect any
future changes in the fair value of the ARS to be largely offset by changes in
the fair value of the related Rights without any significant net impact to our
income statement. We will continue to measure the ARS and the Rights
at fair value (utilizing Level 3 inputs) until the earlier of its maturity or
exercise.
The fair
value of the failed ARS has been estimated based on market information and
estimates determined by management and could change significantly based on
future market conditions. Based on the estimated values, we concluded
these investments were other than temporarily impaired and recognized an
impairment charge on these investments of $0.5
million and $2.2
million, respectively, in the three and nine months ended December 31,
2009. If the issuers are unable to successfully close future auctions
or if their credit ratings deteriorate further, we may be required to further
adjust the carrying value of the investments through an additional impairment
charge to earnings.
The
substantial majority of our short and long-term investments are in highly rated
government agency bonds and municipal bonds. Other than with respect
to our holdings of ARS, we have not experienced any liquidity or impairment
issues with such investments. However, the credit markets have
continued to be highly volatile and there can be no assurance that these
conditions will not in the future adversely affect the liquidity or value of our
investments in government agency bonds or municipal bonds.
38
Our
success depends on our ability to introduce new products on a timely
basis.
Our
future operating results will depend on our ability to develop and introduce new
products on a timely basis that can compete effectively on 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:
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proper
new product selection;
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timely
completion and introduction of new product
designs;
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availability
of development and support tools and collateral literature that make
complex new products
easy
for engineers to understand and use;
and
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market
acceptance of our customers' end
products.
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Because
our products are complex, we have experienced delays from time to time in
completing development of new products. In addition, our new products
may not receive or maintain substantial market acceptance. We may be
unable to design, develop and introduce competitive products on a timely basis,
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.
We
must attract and retain qualified personnel to be successful and competition for
qualified personnel can be intense.
Our
success depends upon the efforts and abilities of our senior management,
engineering and other personnel. The competition for qualified engineering
and management personnel can be intense. We may be unsuccessful in
retaining our existing key personnel or in attracting and retaining additional
key personnel 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. We have no employment agreements with any member of our
senior management team.
We
are dependent on several contractors to perform key manufacturing functions for
us.
We use
several contractors located in Asia for a portion of the assembly and testing of
our products. We also rely on outside wafer foundries for a portion of our wafer
fabrication. Although we own the majority of our manufacturing resources,
the disruption or termination of any of our contractors could harm our business
and operating results.
Our use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. Our future operating results
could suffer if any contractor were to experience financial, operations or
production difficulties or situations when demand exceeds capacity, or if they
were unable to maintain manufacturing yields, assembly and test yields and costs
at approximately their current levels, or if due to their locations in foreign
countries they were to experience political upheaval or infrastructure
disruption. Further, procurement of required products and services from
third parties is done by purchase order and contracts. If these third
parties are unable or unwilling to timely deliver products or services
conforming to our quality standards, we may not be able to qualify additional
manufacturing sources for our products in a timely manner or at all, and such
arrangements, if any, may not be on favorable terms to us. In such event,
we could experience an interruption in production, an increase in manufacturing
and production costs, decline in product reliability, and our business and
operating results could be adversely affected.
We
may lose sales if our suppliers of raw materials and equipment fail to meet our
needs.
Our
semiconductor manufacturing operations require raw 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 raw materials and equipment that meet our standards.
The raw materials and equipment necessary for our business could become more
difficult to obtain as worldwide use of semiconductors in product applications
increases. 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 raw materials or equipment sources, or the lack of supplier support for a
particular piece of equipment, could harm our business.
39
Our
operating results may be impacted by both seasonality and the wide fluctuations
of supply and demand in the semiconductor industry.
The
semiconductor industry is characterized by seasonality and wide fluctuations of
supply and demand. Since a significant portion of our revenue is from
consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal
year. However, fluctuations in our overall business in certain recent
periods, semiconductor industry conditions and global economic conditions have
had a more significant impact on our results than seasonality, and have made it
difficult to assess the impact of seasonal factors on our business. The
industry has also experienced significant economic downturns, characterized by
diminished product demand and production over-capacity. We have sought to
reduce our exposure to this industry cyclically by selling proprietary products
that cannot be easily or quickly replaced to a geographically diverse base of
customers across a broad range of market segments. However, we have
experienced substantial period-to-period fluctuations in operating results and
expect, in the future, to experience period-to-period fluctuations in operating
results due to general industry or economic conditions. In
particular, our business and operating results have been adversely impacted by
global economic conditions.
We
are exposed to various risks related to legal proceedings or
claims.
We are
currently, and in the future may be, involved in legal proceedings or claims
regarding patent infringement, intellectual property rights, contracts and other
matters. As is typical in the semiconductor industry, we receive
notifications from customers from time to time who believe that we owe them
indemnification or other obligations related to infringement claims made against
the customers by third parties. These legal proceedings and claims,
whether with or without merit, could result in substantial cost to us and divert
our resources. If we are not able to resolve a claim, settle a matter,
obtain necessary licenses on commercially reasonable terms, reengineer our
products or processes to avoid infringement, and/or successfully prosecute or
defend our position, we could incur uninsured liability in any of them, be
required to take an appropriate 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
performance or use of our products. These claims may be due to
products' nonconformance to our specifications, or specifications agreed upon
with the customer, changes in our manufacturing processes, and unexpected end
customer system issues due to the interaction with our products or insufficient
design or testing by our customers. We could incur significant
expenses related to such matters, including, but not limited to,
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costs
related to writing off the value of inventory of nonconforming
products;
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recalling
nonconforming products;
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providing
support services, product replacements, or modifications to products and
the defense of such claims;
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diversion
of resources from other projects;
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lost
revenue or a delay in the recognition of revenue due to cancellation of
orders and unpaid receivables;
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customer
imposed fines or penalties for failure to meet contractual requirements;
and
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a
requirement to pay damages.
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Because
the systems into which our products are integrated have a higher cost of goods
than the products we sell, these expenses and damages may be significantly
higher than the sales and profits we received from the products involved.
While we specifically exclude consequential damages in our standard terms and
conditions, our ability to avoid such liabilities may be limited by applicable
law. We do have liability insurance which covers 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
payments we may make in connection with these customer claims may adversely
affect the results of our operations.
40
Further,
we sell to customers in industries such as automotive, aerospace, and medical,
where failure of the systems in which our products are integrated could cause
damage to property or persons. We may be subject to claims if our
products, or interactions with our products, cause the 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.
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 inventions 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 patents and any new patents
that are issued may not be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. We may be subject to or may
ourselves initiate interference proceedings in the U.S. Patent and Trademark
Office and foreign patent offices, 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
party could result in uncompensated lost market and revenue opportunities for
us.
Our
operating results may be adversely impacted if economic conditions impact the
financial viability of our customers, distributors, or suppliers.
We
regularly review the financial performance of our customers, distributors and
suppliers. However, global economic conditions may adversely impact
the financial viability of our customers, distributors or suppliers. The
financial failure of a large customer or distributor, an important supplier, or
a group thereof, could have an adverse impact on our operating results and could
result in us not being able to collect our accounts receivable
balances.
We
do not typically have long-term contracts with our customers.
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 have over 60,000 customers and our ten
largest direct customers made up approximately 10% of our total revenue for the
nine months ended December 31, 2009, cancellation of customer contracts
could have an adverse financial impact on our revenue and profits.
Further,
as the practice has become more commonplace in the industry, we have entered
into contracts with certain customers that differ from our standard terms of
sale. Under these contracts we commit to supply quantities of products on
scheduled delivery dates. If we become unable to supply the customer as
required under the contract, the customer may incur additional production costs,
lost revenues due to subsequent delays in their own manufacturing schedule, or
quality related issues. Under these contracts, we may be liable for the
costs the customer has incurred. While we try to limit such liabilities,
if they should arise, there may be a material adverse impact on our results of
operation and financial condition.
Business
interruptions could harm our business.
Operations
at any of our facilities, or at any of our wafer fabrication or assembly and
test subcontractors, may be disrupted for reasons beyond our control, including
work stoppages, power loss, incidents of terrorism or security risk, political
instability, public health issues, telecommunications, transportation or other
infrastructure failure, fire, earthquake, floods, or other natural
disasters. If operations at any of our facilities, or our subcontractors'
facilities are interrupted, we may not be able to shift production to other
facilities on a timely basis. If this occurs, we would likely experience
delays in shipments of products to our customers and alternate sources for
production may be unavailable on acceptable terms. This could result in
reduced revenues and profits and the cancellation of orders or loss of
customers. In addition, business interruption 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.
41
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 substantial portion of our net
sales. During fiscal 2009, approximately 75% of our net sales were
made to foreign customers. During the first nine months of fiscal
2010, approximately 77% of our net sales were made to foreign
customers. We purchase a substantial portion of our raw materials and
equipment from foreign suppliers. In addition, we own product assembly and
testing facilities located near Bangkok, Thailand, which has experienced periods
of political uncertainty in the past. We also use various foreign
contractors for a portion of our assembly and testing and for a portion of our
wafer fabrication requirements. Substantially all of our finished goods
inventory is maintained in Thailand.
Our
reliance on foreign operations, foreign suppliers, maintenance of substantially
all of our finished goods inventory at foreign locations and significant foreign
sales exposes us to foreign political and economic risks, including, but not
limited to:
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political,
social and economic instability;
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public
health conditions;
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trade
restrictions and changes in
tariffs;
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import
and export license requirements and
restrictions;
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difficulties
in staffing and managing international
operations;
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employment
regulations;
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disruptions
in international transport or
delivery;
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difficulties
in collecting receivables;
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economic
slowdown in the worldwide markets served by us;
and
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potentially
adverse tax consequences.
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If any of
these risks materialize, our sales could decrease and/or our operating results
could suffer.
Fluctuations
in foreign currency could impact our operating results. We use
forward currency exchange contracts 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.
Interruptions
in our information technology systems 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 system or
network disruption, including but not limited to new system implementations,
computer viruses, security breaches, or energy blackouts could have a material
adverse impact on our operations, sales and operating results. We have
implemented measures to manage our risks related to such disruptions, but such
disruptions could still occur and negatively impact our operations and financial
results. In addition, we may incur additional costs to remedy the damages
caused by these disruptions or security breaches.
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 have determined
that it is more cost effective 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, political risks, and
patent infringement. Should there be a loss or adverse judgment or
other decision in an area for which we are self-insured, then our financial
condition, result of operations and liquidity may be adversely
affected.
42
We
are subject to stringent environmental regulations, which may force us to incur
significant expenses.
We
must comply with many different 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 the imposition of 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 acquire costly
equipment or to incur other significant expenses to comply with such
regulations.
Over
the past several years, there has been an expansion in environmental laws
focusing on reducing or eliminating hazardous substances in electronic
products. The European Union and countries such as the U.S., China and
Korea, have enacted or may enact such laws or regulations. 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 and sell our
products. In addition, over the last several years, 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 quantity
and the recycling of packaging 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 inventory that
is not saleable as a result of changes to regulations. 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 hazardous substances in our products and energy
efficiency measures.
Sustained
adverse climate change poses both regulatory and physical risks that could harm
our results of operations or affect the way we conduct our
business.
Any
sustained adverse change in climate could have a direct adverse economic impact
on us such as water shortages or higher costs for water or to control the
temperature inside of our facilities. In addition to these direct costs,
adverse climate change could require us to implement climate change mitigation
programs and comply with new regulations such as limitations on emissions.
These items could significantly increase our costs and restrict our
manufacturing operations by virtue of requirements for new equipment, the
purchase of emissions allowances, funding offset projects and the like. We
also see the potential for higher energy costs driven by climate change
regulations as our costs are likely to increase if utility companies are able to
pass on their costs, such as those associated with carbon taxes, emission cap
and trade programs, or renewable portfolio standards.
Certain
of our operations are located in tropical regions, such as Thailand. Some
environmental experts predict that these regions may become vulnerable to
storms, 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 be disruptive to our business, we cannot be
certain that our plans will protect us from all such disasters or
events.
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 Export Administration Regulations (EAR)
when exported and re-exported to and from international jurisdictions.
Licenses or proper license exceptions may be required for the shipment of our
products to certain countries. Non-compliance with EAR or other export
regulations can result in penalties including denial of export privileges,
fines, criminal penalties, and seizure of products. Such penalties could
have a material adverse effect on our business including our ability to meet our
net sales and earnings targets.
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 2006 and later. We are currently being audited
by the IRS for fiscal 2006 through fiscal 2008. We are subject to certain
income tax examinations in foreign jurisdictions for fiscal 2002 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.
43
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:
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quarterly
variations in our operating results and the operating results of other
technology companies;
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actual
or anticipated announcements of technical innovations or new products by
us or our competitors;
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changes
in analysts' estimates of our financial performance or buy/sell
recommendations;
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changes
in our financial guidance or our failure to meet such
guidance;
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any
acquisitions we pursue or complete;
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general
conditions in the semiconductor industry;
and
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global
economic and financial conditions.
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In
addition, the stock market has recently 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.
In
the event we make acquisitions, we may not be able to successfully integrate
such acquisitions or attain the anticipated benefits of such transactions and
such acquisitions could have a negative impact on our future operating
results.
We may
consider strategic acquisitions if such opportunities arise, such as our
recently announced acquisition of Silicon Storage Technology, Inc. Any
transactions that we consider may involve a number of risks including the
diversion of our management's attention from our existing business or possible
adverse effects on our operating results during the integration process for
those transactions that we complete. Such acquisitions could require us to
take certain one-time charges to our operating results and also could result in
future charges to operating results if the acquisitions don’t achieve their
expected benefits. In addition, 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, controls,
procedures and policies, which may lead to operational
inefficiencies.
Our
financial condition and results of operations could be adversely affected if we
do not effectively manage our liabilities.
As a
result of our sale of $1.15 billion of 2.125% junior subordinated
convertible debentures in December 2007, we have a substantially greater amount
of long-term debt than we have maintained in the past. Our maintenance of
substantial levels of debt could adversely affect our ability to take advantage
of corporate opportunities and could adversely affect our financial condition
and results of operations. We may need or desire to refinance all or
a portion of our debentures or any other future indebtedness that we incur on or
before the maturity of the debentures. There can be no assurance that
we will be able to refinance any of our indebtedness on commercially reasonable
terms, if at all.
44
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 one thousand dollars principal
amount (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 such conversion 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 and may 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.
Recently
proposed 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 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 fiscal 2009,
President Obama's administration announced initiatives that 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. If any
of these proposals become law, they could have a material negative impact on our
financial position and results of operations.
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2.1
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Agreement
and Plan of Merger, dated as of February 2, 201, by and among Microchip
Technology Incorporated,
Sun Acquisition Corporation and Silicon Storage Technology,
Inc.
(1)
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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32
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Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
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This
agreement has been included to provide information regarding its terms and is
not intended to provide any other factual information about Silicon Storage
Technology, Inc. ("SST") and contains representations and warranties of each of
SST, Microchip Technology Incorporated and Merger Sub. The assertions embodied
in those representations and warranties were made for purposes of the merger
agreement and are subject to qualifications and limitations agreed to by the
respective parties in connection with negotiating the terms of the merger
agreement, including information contained in confidential disclosure schedules
that the parties exchanged in connection with signing the merger agreement.
Accordingly, you should not rely on such representations and warranties as
characterizations of the actual state of facts or circumstances, since they were
only made as of a specific date and are modified in important part by the
underlying disclosure schedules. In addition, certain representations and
warranties may be subject to a contractual standard of materiality different
from what might be viewed as material to you, or may have been used for purposes
of allocating risk between the respective parties rather than establishing
matters of fact. Moreover, information concerning the subject matter of such
representations and warranties may change after the date of the merger
agreement, which subsequent information may or may not be fully reflected in our
public disclosures.
45
Pursuant
to the requirements 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.
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MICROCHIP
TECHNOLOGY INCORPORATED
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|
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Date: February
9,
2010
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By:
/s/ J.
Eric
Bjornholt
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J. Eric
Bjornholt
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Vice President and Chief
Financial Officer
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(Duly Authorized Officer,
and
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Principal Financial
and Accounting Officer)
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46
TABLE OF CONTENTS
Item 1. Financial StatementsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 6. Exhibits