2355 W. Chandler Blvd., Chandler, AZ 85224-6199
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 20182020 based upon the closing price of the common stock as reported by the NASDAQ Global Market on such date was approximately $18,239,644,611.$26.2 billion.
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Defined Terms(1)
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| Term | | Definition |
| 3.922% 2021 Notes | | 2021 Senior Secured Notes, maturing June 1, 2021 |
| 4.333% 2023 Notes | | 2023 Senior Secured Notes, maturing June 1, 2023 |
| 2.670% 2023 Notes | | 2023 Senior Secured Notes, maturing September 1, 2023 |
| 0.972% 2024 Notes | | 2024 Senior Secured Notes, maturing February 15, 2024 |
| 4.250% 2025 Notes | | 2025 Senior Unsecured Notes, maturing September 1, 2025 |
| 2015 Senior Convertible Debt | | 2015 Senior Convertible Debt, maturing February 15, 2025 |
| 2017 Senior Convertible Debt | | 2017 Senior Convertible Debt, maturing February 15, 2027 |
| 2020 Senior Convertible Debt | | 2020 Senior Convertible Debt, maturing November 15, 2024 |
| 2017 Junior Convertible Debt | | 2017 Junior Convertible Debt, maturing February 15, 2037 |
| ASU | | Accounting Standards Update |
| Bridge Loan Facility | | 364-Day Senior Secured bridge credit agreement which provides for a term loan facility |
| CEMs | | Client engagement managers |
| Convertible Debt | | 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, 2020 Senior Convertible Debt, and 2017 Junior Convertible Debt |
| Credit Agreement | | Credit agreement, dated as of May 29, 2018, as subsequently amended, among the Company, as borrower, the lenders from time to time party thereto, J.P.Morgan Chase Bank, N.A., as administrative agent, providing for the Revolving Credit Facility and the Term Loan Facility |
| EAR | | Export Administration Regulation |
| EEPROM | | Electrically erasable programmable read only memory |
| EERAM | | Electrically erasable random access memory |
| ESEs | | Embedded solutions engineers |
| Exchange Act | | Securities Exchange Act of 1934, as amended |
| FASB | | Financial Accounting Standards Board |
| FPGA | | Field-programmable gate array |
| LIBOR | | London Interbank Offered Rate |
| OEMs | | Original equipment manufacturers |
| R&D | | Research and development |
| Revolving Credit Facility | | $3.57 billion revolving credit facility created pursuant to the Credit Agreement |
| RF | | Radio frequency |
| ROU | | Right-of-use |
| RSUs | | Restricted stock units |
| SEC | | U.S. Securities and Exchange Commission |
| Senior Credit Facilities | | Revolving Credit Facility and Term Loan Facility |
| Senior Indebtedness | | Revolving Credit Facility, Term Loan Facility, Bridge Loan Facility, 3.922% 2021 Notes, 4.333% 2023 Notes, 2.670% 2023 Notes, 0.972% 2024 Notes, and 4.250% 2025 Notes |
| Senior Notes | | 3.922% 2021 Notes, 4.333% 2023 Notes, 2.670% 2023 Notes, 0.972% 2024 Notes, and 4.250% 2025 Notes |
| SRAM | | Static random access memory |
| SARs | | Stock appreciation rights |
| TCJA | | Tax Cuts and Jobs Act of 2017 |
| Term Loan Facility | | $3.0 billion term loan facility created pursuant to the Credit Agreement |
| U.S. GAAP | | U.S. Generally Accepted Accounting Principles |
(1) Certain terms used within this Form 10-K are defined in the above table.
PART I
This Form 10-K contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy and future financial performance and those statements identified under "Item 7 –7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Note Regarding Forward-looking Statements." Our actual results could differ materially from the results described in these forward-looking statements as a result of certain factors including those set forth under "Item 1A –1A. Risk Factors," beginning below at page 12, and elsewhere in this Form 10-K. Although we believe that the matters 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. In this Form 10-K, "we," "us," "our," and "Microchip" each refers to Microchip Technology Incorporated and its subsidiaries.
Item 1. BUSINESSBusiness
We develop, manufacture and sell specialized semiconductor productssmart, connected and secure embedded control solutions used by our customers for a wide variety of embedded control applications. OurWith over 30 years of technology leadership, our broad product portfolio comprises general purposeis a Total System Solution (TSS) for our customers that provides a large portion of the silicon requirements in their applications. TSS is a combination of hardware, software and specialized 8-bit, 16-bit,services which help our customers increase their revenue, reduce their costs and 32-bit microcontrollers, 32-bit microprocessors, field-programmable gate array (FPGA) products, a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, discrete diodes and Metal Oxide Semiconductor Field Effect Transistors (MOSFETS), radio frequency (RF), timing, timing systems, safety, security, wired connectivity and wireless connectivity devices, as well as Serial Electrically Erasable Programmable Read Only Memory (EEPROM), Serial Flash memories, Parallel Flash memories, Serial Electrically Erasable Random Access Memory (EERAM) and Serial Static Random Access Memory (SRAM). We also license Flash-IP solutions that are incorporated in a broad range of products.manage their risks compared to other solutions. Our synergistic product portfolio targets thousandsempowers disruptive growth trends, including 5G, artificial intelligence and machine learning, Internet of applications worldwideThings (IoT), advanced driver assist systems (ADAS) and a growing demand for high-performance designsautonomous driving, and electric vehicles, in thekey end markets such as automotive, aerospace, defense, space, communications, computing, consumer and industrial control markets. We comply with several quality systems, including: ISO9001 (2015 version), IATF16949 (2016 version), AS9100 (2016 version), and TL9000.
Microchip Technology Incorporated was incorporated in Delaware in 1989. Our executive offices are located at 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone number is (480) 792-7200.
Our Internet address is www.microchip.com. We post the following filings on our website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission:
our annual report on Form 10-K
our quarterly reports on Form 10-Q
our current reports on Form 8-K
our proxy statement
any amendments to the above-listed reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934
All of our SEC filings on our website are available free of charge. The information on our website is not incorporated into this Form 10-K.
Acquisition of Microsemi
On May 29, 2018, we completed our acquisition of Microsemi Corporation (Microsemi), a publicly traded company headquartered in Aliso Viejo, California. We paid an aggregate of approximately $8.19 billion in cash to the stockholders of Microsemi. The total consideration transferred in the acquisition, including approximately $53.9 million of non-cash consideration for the exchange of certain share-based payment awards of Microsemi for stock awards of Microchip, was approximately $8.24 billion. In addition to the consideration transferred, we recognized in our consolidated financial statements $3.23 billion in liabilities of Microsemi consisting of debt, taxes payable and deferred, pension obligations, restructuring, and contingent and other liabilities of which $2.06 billion of existing debt was paid off. We financed the purchase price using approximately $8.10 billion of borrowings consisting of $3.10 billion of loans under our revolving line of credit (the "Revolving Credit Facility"), $3.00 billion of term loans ("Term Loan Facility") provided under our amended and restated Credit Agreement, and $2.00 billion in newly issued senior secured notes. We incurred $22.0 million in costs related to the acquisition. As a result of the acquisition, Microsemi became a wholly owned subsidiary of Microchip. Microsemi offers a comprehensive portfolio of semiconductor and system solutions for aerospace and defense, communications, consumer, data centercenters and industrial markets.computing, and industrial.
Impact of COVID-19 on Our primary reason for this acquisition wasBusiness
In the first half of fiscal 2021, the COVID-19 pandemic resulted in a global disruption in economic activity by adversely affecting production, creating supply chain and market disruption, and adversely impacting businesses and individuals. In the second half of fiscal 2021, business conditions were unexpectedly strong as businesses and individuals adapted to expandthe effects of the pandemic. Supply chains, however, were stressed as they were not expecting the level of economic strength that occurred. The impact of the pandemic on individuals and in certain locations in which we operate remains uncertain and will depend on many factors, such as the effectiveness of the pandemic containment efforts including the use and effectiveness of vaccines. We regularly monitor new information regarding the severity of COVID-19 and the ability to contain, treat, or prevent it.
In response to the early indications of the COVID-19 pandemic, we took proactive measures to safeguard the health of our rangeemployees, contractors, customers, suppliers, visitors to our facilities, other business partners, and our communities. While our global manufacturing sites are fully operational, we strategically implemented plans intended to provide more assurance of solutions, productsbusiness continuity in the event severe outbreaks or government requirements were to impact our operations. We monitor governmental policies and capabilities by extending our served available market.CDC recommendations and take appropriate actions which are designed to prevent and control the spread of COVID-19.
Industry Background
Competitive pressures require original equipment manufacturers (OEM)OEMs of a wide variety of products to expand product functionality and provide differentiation while maintaining or reducing cost. To address these requirements, manufacturers often use integrated circuit-based embedded control systems that enable them to:
•differentiate their products
•replace less efficient electromechanical control devices
•reduce the number of components in their system
•add product functionality
•reduce the system level energy consumption
•make systems safer to operate
•add security to their products
•decrease time to market for their products
•significantly reduce product cost
Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of applications and markets worldwide, including:
•actuators
automotive comfort, safety, information and entertainment applications
remote control devices
handheld tools
large and small home appliances
portable computers and accessories
robotics
energy monitoring
thermostats
motor controls
security systems
smoke and carbon monoxide detectors
consumer electronics
power supplies
•applications needingrequiring touch buttons, touch screens and graphical user interfaces
•automotive access control
•automotive comfort, safety, information and entertainment applications
•avionics
•communication infrastructure systems
•consumer electronics
•defense and military hardware
•electric vehicles
•handheld tools
•home and building automation
•industrial automation
•large and small home appliances
•medical devices
avionics•motor controls
actuators•portable computers and accessories
satellite •power systemssupplies
•residential and commercial security systems
•robotics
•routers and video surveillance systems
•satellites
•smart home and IoT edge devices
•smart meters and energy monitoring
•storage and server systems
communication infrastructure systems•touch control
•wireless communication
Embedded control systems typically incorporate a microcontroller as the principal active, and sometimes sole, component. A microcontroller is a self-contained computer-on-a-chip consisting of a central processing unit, often with on-board non-volatile program memory for program storage, random access memory for data storage and various analog and digital input/output peripheral capabilities. In addition to the microcontroller, a complete embedded control system often incorporates application-specific software, various analog, mixed-signal, timing, connectivity, security and non-volatile memory components such as EEPROMs and Flash memory.
The increasing demand for embedded control systems has made the market for microcontrollers a significant segment of the semiconductor market at $19$17.5 billion in calendar year 2018.2020. Microcontrollers are primarily available in 8-bit through 32-bit architectures. 8-bit microcontrollers remain very cost-effective and easy to use for a wide range of high-volume embedded control applications and, as a result, continue to represent a significant portion of the overall microcontroller market. 16-bit and 32-bit microcontrollers provide higher performance and functionality, and are generally found in more complex embedded control applications. FPGAs are programmable integrated circuits that are used to implement complex logic functions and can be re-programmed at any time, allowing for multiple implementations and revisions during or after the end customer system is manufactured. Some versions of FPGAs also include a microcontroller or microprocessor core to provide additional system on chip functionality for compute intensive tasks. The analog and mixed-signal segment of the semiconductor market is very large at $56was $54.0 billion in calendar year 2018,2020, and this market is fragmented into a large number of sub segments.
Our Products
Our strategic focus is on embedded control solutions, including:
general purpose and specialized microcontrollers and 32-bit microprocessors
wired and wireless connectivity products
development tools and related software
FPGA products
analog, interface, mixed signal, timing, timing systems and security products
discrete diodes and MOSFETS
memory products
technology licensing
We provideproviding cost-effective embedded control solutions that also offer the advantages of small size, high performance, extreme low power usage, wide voltage range operation, mixed signal integration, and ease of development, thus enabling timely and cost-effective integration of our solutions by our customers in their end products.
Microcontrollers
We offer a broad family of proprietary general purpose microcontroller products marketed under multiple brand names. We believe that our microcontroller product families provide leading function and performance characteristics in the worldwide microcontroller market. With over 3,700 microcontrollers in our product portfolio, weWe target the 8-bit, 16-bit, and 32-bit microcontroller and 32-bit embedded microprocessor markets. We have shipped more than 2529.5 billion microcontrollers to customers worldwide since 1990. We also offer
specialized microcontrollers for automotive, industrial, computing, communications, lighting, power supplies, motor control, human machine interface, security, wired connectivity and wireless connectivity.connectivity applications.
We leverage our circuit design, process technologies, development tools, applications knowledge, and manufacturing experiences to enable our customers to implement various embedded control functions in their end systems with our microcontrollers.
Analog
Our analog product line consists of several families including power management, linear, mixed-signal, high voltage, thermal management, discrete diodes and MOSFETS, RF, drivers, safety, security, timing, USB, ethernet, wireless and other interface products.
We market and sell our analog product line into our microcontroller, microprocessor and FPGA customer base, and to customers who use microcontrollers and FPGA products from other suppliers and to customers who use other products that may not fit our traditional microcontroller, FPGA and memory products customer base.
Other
Our other product line includes FPGA products, royalties associated with licenses for the use of our SuperFlash and other technologies, sales of our intellectual property, fees for engineering services, memory products, timing systems, manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, and products for aerospace applications.
Our FPGA products were primarily acquired as a part of our acquisition of Microsemi Corporation (Microsemi) in May 2018. Our portfolio of non-volatile FPGAs are recognized for their low power, high security and extended reliability. We market and sell our FPGA products and related solutions into a broad range of applications within the industrial, automotive, defense, aviation, space and communications markets.
Our technology licensing business generates license fees and royalties associated with technology licenses for the use of our SuperFlash® embedded flash and Smartbits® one time programmable NVM technologies. We also generate fees for engineering services related to these technologies. We license our NVM technologies to foundries, integrated device manufacturers and design partners throughout the world for use in the manufacture of their advanced microcontroller products, gate array, RF, analog and neuromorphic compute products that require embedded non-volatile memory.
Our memory products consist of EEPROMs, Serial Flash memories, Parallel Flash memories, Serial SRAM memories and EERAM. Serial EEPROMs, Serial Flash memories, Serial SRAMs and EERAM have a very low I/O pin requirement, permitting production of very small footprint devices. We sell our memory products primarily into the embedded control
market, complementing our microcontroller offerings.
Microcontroller Development Tools
We offer a comprehensive set of low-cost and easy-to-learn application development tools. These tools enable system designers to quickly and easily program our microcontroller and microprocessor products for specific applications and, we believe, they are an important factor for facilitating design wins.
Our family of development tools for our microcontroller and microprocessor products range from entry-level systems, which include an assembler or a compilerand programmer or in-circuit debugging hardware, to fully configured systems that provide in-circuit emulation capability. We also offer a complete suite of compilers, software code configurators and simulators. Customers moving from entry-level designs to those requiring real-time emulation are able to preserve their investment in learning and tools as they migrate to future microcontroller devices in our portfolio.
Many independent companies also develop and market application development tools that support our microcontroller and microprocessor product architectures, including an extensive amount of third-party tool suppliers whose products support our microcontroller architectures.
We believe that familiarity with and adoption of development tools from Microchip as well as third-party development tool partners by an increasing number of product designers will be an important factor in the future selection of our embedded
control products. These development tools allow design engineers to develop thousands of application-specific products from our standard microcontrollers.
Field-Programmable Gate Array (FPGA) Products
Our FPGA product line was primarily acquired as a part of our acquisition of Microsemi. Our portfolio of non-volatile FPGAs range in densities from 100 to 481,000 logic elements and are recognized for their low power, high security and extended reliability. We market and sell our FPGA products and related solutions into a broad range of applications with the industrial, defense, aviation, space and communication markets.
We offer a comprehensive set of development tools for our FPGA products. These tools enable system designers to visualize, implement, simulate and program complex logic functions in the FPGA. Our development tool suite manages the entire design flow from design entry, simulation, synthesis, through place-and-route, timing, and power analysis. We also provide C/C++ development and debugging environment to support our FPGAs that implement embedded microcontrollers or microprocessor cores.
Analog, Power, Interface, Mixed Signal and Timing Products
Our analog, power, interface, mixed signal and timing products consist of several families with over 7,850 power management, linear, mixed-signal, high voltage, thermal management, discrete diodes and MOSFETS, radio frequency (RF), drivers, safety, security, timing, USB, ethernet, wireless and other interface products.
We market and sell our analog, power, interface, mixed signal and timing products into our microcontroller, microprocessor and FPGA customer base, and to customers who use microcontrollers and FPGA products from other suppliers and to customers who use other products that may not fit our traditional microcontroller, FPGA and memory products customer base.
Memory Products
Our memory products consist of EEPROMs, Serial Flash memories, Parallel Flash memories, Serial SRAM memories and EERAM. Serial EEPROMs, Serial Flash memories, Serial SRAMs and EERAM have a very low I/O pin requirement, permitting production of very small footprint devices. We sell our memory products primarily into the embedded control market, complementing our microcontroller offerings.
Technology Licensing
Our technology licensing business generates license fees and royalties associated with technology licenses for the use of our SuperFlash® embedded flash and Smartbits® one time programmable NVM technologies. We also generate fees for engineering services related to these technologies. We license our NVM technologies to foundries, integrated device manufacturers and design partners throughout the world for use in the manufacture of their advanced microcontroller products, gate array, RF, analog and neuromorphic compute products that require embedded non-volatile memory.
Multi-Market and Other
Our multi-market and other business offers manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, complex programmable logic devices, products for aerospace applications and timing systems.
Manufacturing
Our manufacturing operations include wafer fabrication, wafer probe, assembly and test. The ownership of a substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry. By owning wafer fabrication facilities and our assembly and test operations, and by employing statistical techniques (statistical process control, designed experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture a portion of the wafer manufacturing and assembly and testing profit margin. We do outsource a significant portion of our manufacturing requirements to third parties and the amount of our outsourced manufacturing has increased in recent years due to our acquisitions of Microsemi and other companies that outsource all or substantial portions of their manufacturing. We comply with several quality systems, including: ISO9001 (2015 version), IATF16949 (2016 version), AS9100 (2016 version), and TL9000.
OurRefer to "Item 2. Properties" for further information regarding the location and principal operations of our manufacturing facilities are located in:facilities.
United States
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◦ | Chandler, Arizona (wafer probe) |
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◦ | Colorado Springs, Colorado (Fab 5) |
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◦ | Garden Grove, California (manufacturing, R&D and administrative) |
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◦ | San Jose, California (design, R&D, and administrative) |
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◦ | Simsbury, Connecticut (manufacturing, R&D and administrative) |
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◦ | Beverly, Massachusetts (manufacturing) |
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◦ | Lawrence, Massachusetts (manufacturing and administrative) |
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◦ | Lowell, Massachusetts (wafer fabrication, assembly and test, R&D, warehousing and administrative) |
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◦ | Mt. Holly Springs, Pennsylvania (manufacturing, R&D and administrative) |
Thailand
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◦ | Chacherngsao (wafer probe, assembly and test) |
Philippines
| |
◦ | Calamba, Laguna (wafer probe and test) |
France
| |
◦ | Nantes, Loire-Atlantique (design, engineering, test, probe, administrative and warehousing) |
Ireland
| |
◦ | Ennis, County Clare (manufacturing) |
Germany
| |
◦ | Neckarbischofsheim, Baden-Württemberg (manufacturing and administrative) |
| |
◦ | Teltow, Brandenburg (wafer fabrication, assembly and test, wafer probe, R&D, warehousing and administrative) |
Wafer Fabrication
Fab 2 currently produces 8-inch wafers and supports various manufacturing process technologies, but predominantly utilizes our 0.50.25 microns to 1.0 microns processes. During fiscal 2019,2021, we increased Fab 2's capacity to support more advanced technologies by making process improvements, upgrading existing equipment, and adding equipment.
Fab 4 currently produces 8-inch wafers using predominantly 0.13 microns to 0.5 microns manufacturing processes. During fiscal 2019,2021, we increased Fab 4's capacity to support more advanced technologies by making process improvements, upgrading existing equipment, and adding equipment. A significant amount of additional clean room capacity in Fab 4 can be brought on line in the future to support incremental wafer fabrication capacity needs.
Fab 5 is a 6-inch wafer fabrication facility that currently utilizes processes from 0.25 microns to 1.0 microns. During fiscal 2019,2020, we made use of the existing capacity ofannounced our intention to re-purpose Fab 5 to support demand.manufacture discrete and specialty products in addition to a lower volume of a diversified set of standard products. In connection with these efforts, we reduced the clean room footprint and transferred certain higher volume products from Fab 5 to our 8-inch wafer fabrication facilities in Arizona and Oregon. These restructuring efforts were substantially completed as of March 31, 2021.
We believe the combined capacity of Fab 2, Fab 4, and Fab 5 will provide sufficient capacity to allow us to respond to increases in future demand over the next several years with modest incremental capital expenditures.
We continue to transition products to more advanced process technologies to reduce future manufacturing costs. We believe that our ability to successfully transition to more advanced process technologies is important for us to remain competitive.
We augment our internal manufacturing capabilities by outsourcing a portion of our wafer production requirements to third-party wafer foundries. As a result of our acquisitions in recent years, we have become more reliant on outside wafer foundries for our wafer fabrication requirements. In fiscal 2019, approximately 57% of our sales came from products that were produced at outside wafer foundries.
As a result of our acquisition of Microsemi, we acquired several smaller wafer fabrication facilities, which utilize older technologies that are appropriate for the discrete products they manufacture. We plan to operate these fabrication facilities with modest investment to keep them operational with the exception of the facility in Bend, Oregon,Santa Clara, California, which discontinuedwe plan to close by December 2021.
We continue to transition products to more advanced process technologies to reduce future manufacturing costs. We believe that our ability to successfully transition to more advanced process technologies is important for us to remain competitive.
We augment our internal manufacturing capabilities by outsourcing a significant portion of our wafer production requirements to third-party wafer foundries. As a result of our acquisitions in March 2019.recent years, we have become more reliant on outside wafer foundries for our wafer fabrication requirements. In fiscal 2021, approximately 61% of our sales came from products that were produced at outside wafer foundries.
Assembly and Test
We perform product assembly and test at various facilities located around the world. During fiscal 2019,2021, we increased capacity at our Thailand and Philippines facilities to support more technologies by making process improvements, upgrading existing equipment, and adding equipment. During fiscal 2019,2021, approximately 38%53% of our assembly requirements were being performed in our internal facilities and approximately 49%57% of our test requirements were performed in internal facilities. We
use third-party assembly and test contractors for the balance of our assembly and test requirements. Over time, we intend to continue to migrate a portion of the outsourced assembly and test activities to our internal facilities.
General Matters Impacting Our Manufacturing Operations
Due to the high fixed costs inherent in semiconductor manufacturing, consistently high manufacturing yields have significant positive effects on our gross profit and overall operating results. Our continuous focus on manufacturing productivity has allowed us to maintain excellent manufacturing yields at our facilities. Our manufacturing yields are primarily driven by a comprehensive implementation of statistical process control, extensive employee training and effective use of our manufacturing facilities and equipment. Maintenance of manufacturing productivity and yields are important factors in the achievement of our operating results. The manufacture of integrated circuits, particularly non-volatile, erasable complementary metal-oxide semiconductor (CMOS) memory and logic devices, such as those that we produce, are complex processes. These processes are sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and the performance of our manufacturing personnel and equipment. As is typical in the semiconductor industry, we have from time to time experienced lower than anticipated manufacturing yields. Our operating results will suffer if we are unable to maintain yields at or above approximately the current levels.
Historically, we have relied on our ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with relatively short delivery schedules. In order to respond to such requirements, we have historically maintained a significant work-in-process and finished goods inventory.
The following table summarizes Refer to Note 5 for a summary of our long-lived assets, (consistingconsisting of property, plant and equipment)equipment and right-of-use assets, by geography at the end of fiscal 2019, fiscal 2018 and fiscal 2017 (in millions).geography.
|
| | | | | | | | | | | |
| | March 31, |
| | 2019 | | 2018 | | 2017 |
| United States | $ | 521.1 |
| | $ | 393.3 |
| | $ | 388.5 |
|
| Thailand | 209.3 |
| | 215.5 |
| | 178.0 |
|
| Various other countries | 266.3 |
| | 159.1 |
| | 116.8 |
|
| Total long-lived assets | $ | 996.7 |
| | $ | 767.9 |
| | $ | 683.3 |
|
We have many suppliers of raw materials and subcontractors which provide our various materials and service needs. We generally seek to have multiple sources of supply for our raw materials and services, but, in some cases, we may rely on a single or limited number of suppliers.
Sales and Distribution
General
We market and sell our products worldwide primarily through a network of direct sales personnel and distributors.
Our direct sales force focuses on a wide variety of strategic accounts in three geographical markets: the Americas, Europe and Asia. We currently maintain sales and technical support centers in major metropolitan areas in all three geographic markets. We believe that a strong technical service presence is essential to the continued development of the embedded control market. Many of our client engagement managers, embedded system engineers (ESEs),CEMs, ESEs, and sales management have technical degrees or backgrounds and have been previously employed in high technology environments. We believe that the technical and business knowledge of our sales force is a key competitive advantage in the sale of our products. The primary mission of our ESE team is to provide technical assistance to customers and to conduct periodic training sessions for the balance of our sales team. ESEs also frequently conduct technical seminars and workshops in major cities around the world.world or through online webcasts.
Our licensing division has dedicated sales, technology, design, product, test and reliability personnel that support the requirements of our licensees.
In the fourth quarter of fiscal 2021, we launched our Preferred Supply Program, which provides our customers with prioritized capacity beginning 6 months after their order of 12 months of continuous, non-cancellable and non-reschedulable backlog.
For information regarding our revenue, results of operations, and total assets for each of our last three fiscal years, refer to our financial statements included in this Form 10-K.
Distribution
Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base. We believe that customers recognize us for our products and brand name and use distributors as an effective supply channel.
In each of fiscal 2019,2021 and fiscal 2020, we derived 51%50% of our net sales through distributors and 49% of our net sales from customers serviced directly by us. In fiscal 2018, we derived 54% of our net sales through distributors and 46% of our net sales from customers serviced directly by us. In fiscal 2017, we derived 55% of our net sales through distributors and 45%50% of our net sales from customers serviced directly by us. With the exception of Arrow Electronics, our largest distributor, which made upaccounted for 10%
of our net sales in fiscal 2020, no other distributor or end customer accounted for more than 10% of our net sales in fiscal 2019. In2021 or fiscal 2018 and fiscal 2017, no distributor or end customer accounted for more than 10% of our net sales.2020.
WeWith the exception of orders placed under our Preferred Supply Program, we do not have long-term agreements withpurchase commitments from our distributors and we, or our distributors, may each terminate our relationship 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.
Backlog
As of April 30, 2019, our backlog was approximately $2,378.9 million, compared to $1,833.9 million as of April 30, 2018. Our backlog includes all purchase orders scheduled for delivery within the subsequent 12 months.
We primarily produce standard products that can be shipped from inventory within a relatively short time after we receive an order. Our business and, to a large extent, that of the entire semiconductor industry, is characterized by short-term orders and shipment schedules. Orders constituting our current backlog are subject to changes in delivery schedules, or to cancellation at the customer's option without significant penalty. Thus, while backlog is useful for scheduling production, backlog as of any particular date may not be a reliable measure of our sales for any future period.
Competition
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, some of which have greater market recognition and greater financial, technical, marketing, distribution and other resources than we have with which to pursue engineering, manufacturing, marketing and distribution of their products. We also compete with a number of companies that we believe have copied, cloned, pirated or reverse engineered our proprietary product lines in such countries as China and Taiwan. We are continuing to take actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis.
We currently compete principally on the basis of the technical innovation and performance of our embedded control products, including the following product characteristics:
•performance
performance
•analog, digital and mixed signal functionality and level of functional integration
•field programmability
•memory density
•low power consumption
•extended voltage ranges
•reliability
•security and functional safety
•packaging alternatives
completeness•comprehensive suite of development tool linetools
We believe that other important competitive factors in the embedded control market include:
•ease of use
•functionality of application development systems
•hardware, software and tool compatibility within product families to increase migration flexibility
•dependable delivery, quality and availability
•technical and innovative service and support
•time to market
•price
We believe that we compete favorably with other companies on all of these factors, but we may be unable to compete successfully in the future, which could harm our business.
Patents, Licenses and Trademarks
We maintain a portfolio of U.S. and foreign patents, expiring on various dates from 2021 through 2038.2039. We also have numerous additional U.S. and foreign patent applications pending. We do not expect that the expiration of any particular patent will have a material impact on our business. While our intention is to continue to patent our technology and manufacturing processes, we believe that our continued success depends primarily on the technological skills and innovative capabilities of our personnel and our ability to rapidly commercialize new and enhanced products. As with any operating company, the scope and strength of our intellectual property assets, including our pending and existing patents, trademarks, copyrights, and other intellectual property rights may be insufficient to provide meaningful protection or commercial advantage. Moreover, pursuing violations of intellectual property rights on a worldwide basis is a complex challenge involving multinational patent, trademark, copyright and trade secret laws. Further, the laws of particular foreign countries often fail to protect our intellectual property rights to the same extent as the laws of the U.S.
We have also entered into certain in-bound and outbound intellectual property licenses and cross-licenses with other companies and those licenses relate to semiconductor products and manufacturing processes. As is typical in the semiconductor industry, we and our customers from time to time receive, and may continue to receive, demand letters from third parties
asserting infringement of patent and other intellectual property rights. We diligently investigate all such notices and respond as we believe appropriate. In most cases we believe that we can obtain necessary licenses on commercially reasonable terms, however, we cannot be certain that this would be the case, or that litigation or damages for any past infringement could be avoided. Licensees of our technology may become unable to pay, or dispute their obligations to pay us royalties or fees. Litigation, arbitration or other proceedings, which could result in substantial costs and require significant attention from management, may be necessary to enforce our intellectual property rights, or to defend against claimed infringement of the rights of others. The failure to obtain necessary licenses, or the necessity of engaging in defensive litigation,legal proceedings, or any negative results of these proceedings could harm our business.
Environmental Regulation
We must comply with many different federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of certain chemicals and gases used in our manufacturing processes. Our facilities have been designed to comply with these regulations and we believe that our activities are conducted in material compliance with such regulations. Any changes in such regulations or in their enforcement could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. Any failure by us to adequately control the storage, use, discharge and disposal of regulated substances could result in significant future liabilities.
Increasing public attention has been focused on the environmental impact of electronic manufacturing operations. While we have not experienced any materially adverse effects on our operations from recently adopted environmental regulations, our business and results of operations could suffer if for any reason we fail to control the storage or use of, or to adequately restrict the discharge or disposal of, hazardous substances under present or future environmental regulations.
Human Capital Resources
Our Employees
AsWe invest in our highly-skilled global workforce of March 31, 2019, we had 18,286 employees.approximately 19,500 people in accordance with our Guiding Value: employees are our greatest strength. We have never had a work stoppage and believe that our culture, values, and organizational development and training programs provide an inclusive work environment where our employees are empowered and engaged to deliver the best embedded control solutions to our customers.
Culture and Core Values
Before Microchip went public in 1993, Microchip created a cultural framework to unite its employees through shared workplace values, and to guide employees’ strategies, decisions, actions and job performance. Microchip’s culture is centered on a values-based, highly-empowered, continuous-improvement oriented approach. This corporate culture strengthens our business, and enables us to fulfill our purpose. Our focus on communication provides transparency among leadership, promotes trust among employees, and is a critical part of Microchip’s culture. Our culture is important to our employees, and is a key reason why we have had a strong worldwide retention rate for many years, and have a significant number of employees with long tenure with Microchip that have grown from individual contributors in the early stages of their careers into senior leadership positions today. This long tenure among our employee-base results in deep relationships and trust being built among colleagues, retention of our knowledge base, and continuation of our culture. More information on our Guiding Values can be found at www.microchip.com/en-us/about/investors/investor-information/mission-statement.
We promote employee relationsadoption of our culture through a number of methods including training, mentorship, values-based performance reviews, employee engagement surveys, company-wide quarterly meetings, town hall meetings with the President and Chief Executive Officer and other executive team members, and an open-door policy of communication where employees are good.encouraged to interact directly with management.
Training and Development
Microchip’s culture focuses on continuous improvement. We provide training on our culture, management skills, communication, technical skills, and personal improvement. Microchip also has a leadership program that provides for the growth and development of its future leaders. This program helps us develop leaders that serve as role models of Microchip culture, and support empowerment and open communication.
Compensation Programs
We strive to provide competitive pay and benefits, that help meet the varying needs of our employees. Our total compensation package includes base pay, broad-based stock grants and bonuses, healthcare and retirement plans, employee stock purchase plans, and paid time off and family leave.
Executive Officers of the Registrant
The following sets forth certain information regarding our executive officers as of April 30, 2019:
|
| | | | | | | | | | | | | |
| Name | | Age | | Position |
Steve SanghiGanesh Moorthy | | 6361 | | President, Chief Executive Officer, and Chairman of the BoardDirector |
Ganesh MoorthySteve Sanghi | | 5965 | | Executive Chair |
| J. Eric Bjornholt | | 50 | | Senior Vice President and Chief OperatingFinancial Officer |
J. Eric Bjornholt | | 48 | | Senior Vice President, Chief Financial Officer |
| Stephen V. Drehobl | | 5759 | | Senior Vice President, MCU8 and MCU16 Business Units |
| Mitchell R. Little | | 6769 | | Senior Vice President, Worldwide Client Engagement |
| Richard J. Simoncic | | 5557 | | Senior Vice President, Analog Power and Interface Business Units |
Mr. Sanghi
has served as Chief Executive Officer since October 1991, and as Chairman of the Board since October 1993. He served as President from August 1990 to February 2016 and has served as a director since August 1990. Mr. Sanghi holds an M.S. degree in Electrical and Computer Engineering from the University of Massachusetts and a B.S. degree in Electronics and Communication from Punjab University. In November 2016, Mr. Sanghi joined the Board of Directors of Myomo, Inc., a publicly traded commercial stage medical robotics company that offers expanded mobility for those suffering from neurological disorders and upper-limb paralysis. In February 2018, Mr. Sanghi joined the board of Mellanox Technologies Ltd., a publicly traded supplier of end-to-end Ethernet and InfiniBand intelligent interconnect solutions and services for servers, storage, and hyper-converged infrastructure.
Mr. Moorthy was appointed as Chief Executive Officer in March 2021 and to the Board of Directors in January 2021. Mr. Moorthy has served as President since February 2016 and as Chief Operating Officer since June 2009. He also served as Executive Vice President from October 2006 to August 2012 and as a Vice President in various roles since he joined Microchip in 2001. Prior to this time, he served in various executive capacities with other semiconductor companies. Mr. Moorthy holds an M.B.A. in Marketing from National University, a B.S. degree in Electrical Engineering from the University of Washington and a B.S. degree in Physics from the University of Mumbai, India. Mr. Moorthy was elected to the Board of Directors of Rogers Corporation in July 2013.2013 and serves on the Audit Committee of the Board and as the Nominating and Governance Committee Chairperson.
Mr. Sanghi transitioned to Executive Chair in March 2021. He served as Chief Executive Officer from October 1991 to March 2021 and as Chairman of the Board since October 1993. He served as President from August 1990 to February 2016 and has served as a director since August 1990. Mr. Sanghi holds an M.S. degree in Electrical and Computer Engineering from the University of Massachusetts and a B.S. degree in Electronics and Communication from Punjab University. Mr. Sanghi served on the Board of Directors of Myomo, Inc., a publicly traded commercial stage medical robotics company that offers expanded mobility for those suffering from neurological disorders and upper-limb paralysis, from November 2016 through October 2019. Mr. Sanghi served on the board of Mellanox Technologies Ltd., a publicly traded supplier of end-to-end Ethernet and InfiniBand intelligent interconnect solutions and services for servers, storage, and hyper-converged infrastructure, from February 2018 through April 2020. Mr. Sanghi was elected to the Board of Directors of Impinj, Inc. in March 2021.
Mr. Bjornholt was promoted to Senior Vice President in 2019 and has served as Vice President of Finance since 2008 and as Chief Financial Officer since January 2009. He has served in various financial management capacities since he joined Microchip in 1995. Mr. Bjornholt holds a Master's degree in Taxation from Arizona State University and a B.S. degree in Accounting from the University of Arizona.
Mr. Drehobl was promoted to Senior Vice President in 2019 and has served as Vice President of the MCU8 business unit and various other divisions and business units since July 2001. He has been employed by Microchip since August 1989 and has served as a Vice President in various roles since February 1997. Mr. Drehobl holds a Bachelor of Technology degree from the University of Dayton.
Mr. Little was promoted to Senior Vice President in 2019 and has served as Vice President of Worldwide Sales since July 2000. He has been employed by Microchip since 1989 and has served as a Vice President in various roles since September 1993. Mr. Little holds a B.S. degree in Engineering Technology from United Electronics Institute.
Mr. Simoncic was promoted to Senior Vice President in 2019 and has served as Vice President, Analog Power and Interface Business Units since September 1999. From October 1995 to September 1999, he served as Vice President in various roles. Since joining Microchip in 1990, Mr. Simoncic held various roles in Design, Device/Yield Engineering and Quality Systems. Mr. Simoncic holds a B.S. degree in Electrical Engineering Technology from DeVry Institute of Technology.
Available Information
Microchip Technology Incorporated was incorporated in Delaware in 1989. Our executive offices are located at 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone number is (480) 792-7200.
Our Internet address is www.microchip.com. We post the following filings on our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC:
•our annual report on Form 10-K
•our quarterly reports on Form 10-Q
•our current reports on Form 8-K
•our proxy statement
•any amendments to the above-listed reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act
All of our SEC filings on our website are available free of charge. The information on our website isnotincorporated into this Form 10-K.
Item 1A. Risk Factors
When evaluating Microchip and its business, you should give careful consideration to the factors listed below, in addition toas well as the information provided elsewhere in this Form 10-K and in other documents thatfilings we filemake with the Securities and Exchange Commission.SEC.
Risk Factor Summary
Risks Related to Our Business, Operations, and Industry
•impact of global economic conditions on our operating results, net sales and profitability;
•impact of economic conditions on the financial viability of our licensees, customers, distributors, or suppliers;
•impact of the COVID-19 pandemic, increased tariffs or other factors affecting our suppliers;
•dependence on foreign sales and operations, which exposes us to foreign political and economic risks;
•limited visibility to product shipments;
•dependency on wafer foundries and other contractors by our licensees and ourselves;
•intense competition in the markets we serve, leading to pricing pressures, reduced sales or market share;
•ineffective utilization of our manufacturing capacity or failure to maintain manufacturing yields;
•impact of seasonality and wide fluctuations of supply and demand in the industry;
•dependency on distributors;
•ability to introduce new products on a timely basis;
•business interruptions, including natural disasters, affecting our operations or that of key vendors, licensees or customers;
•technology licensing business exposes us to various risks;
•reliance on sales into governmental projects;
•risks related to grants from governments, agencies and research organizations;
•future acquisitions or divestitures;
•future impairments to goodwill or intangible assets;
•our failure to maintain proper and effective internal control and remediate future control deficiencies;
•customer demands to implement business practices that are more stringent than legal requirements;
•ability to attract and retain qualified personnel; and
•the occurrence of events for which we are self-insured, or which exceed our insurance limits.
Risks Related to Cybersecurity, Privacy, Intellectual Property, and Litigation
•attacks on our IT systems and data, interruptions in our IT systems, or improper handling of data;
•risks related to compliance with privacy and data protection laws and regulations;
•risks related to legal proceedings, investigations or claims;
•risks related to contractual relationships with our customers; and
•protecting and enforcing our intellectual property rights.
Risks Related to Taxation, Laws and Regulations
•impact of new accounting pronouncements or changes in existing accounting standards and practices;
•fines, restrictions or delay in our ability to export products, or increase costs associated with the manufacture or transfer of products;
•outcome of future examinations of our income tax returns;
•exposure to greater than anticipated income tax liabilities, changes in or the interpretation of tax rules and regulations including the TCJA, the American Rescue Plan Act of 2021 (ARPA), or unfavorable assessments from tax audits;
•impact of the legislative and policy changes implemented by the new administration;
•impact of stringent environmental, climate change, conflict-free minerals and other regulations or customer demands; and
•requirement to fund our foreign pension plans.
Risks Related to Capitalization and Financial Markets
•impact of various factors on our future trading price of our common stock;
•our ability to effectively manage current or future debt;
•our ability to generate sufficient cash flows or obtain access to external financing;
•impact of conversion of our convertible debt on the ownership interest of our existing stockholders; and
•fluctuations in foreign currency exchange rates.
Risks Related to Our Business, Operations, and Industry
Our operating results are impacted by global economic conditions and may fluctuate in the future due to a number of factors that could reduce our net sales and profitability.
Our operating results are affected by a wide variety of factors that could reduce our net sales and profitability, many of which are beyond our control. Some of the factors that may affect our operating results include:
•general economic, industry, public health or political conditions in the U.S. or internationally;internationally, including ongoing uncertainty surrounding the COVID-19 pandemic and its implications;
•disruptions in our business, our supply chain or our customers' businesses due to public health concerns (including viral outbreaks such as COVID-19), cybersecurity incidents, terrorist activity, armed conflict, war, worldwide oil prices and supply, fires, natural disasters or disruptions in the transportation system;
•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;
•our ability to increase our factory capacity to respond to changes in customer demand;
•our ability to secure sufficient wafer foundry, assembly and testing capacity;
•availability of raw materials, supplies and equipment;
•changes in demand or market acceptance of our products and products of our customers, and market fluctuations in the industries into which such products are sold;
changes in tax regulations and policies in •the U.S. and other countries in which we do business includinglevel of order cancellations or push-outs due to the impact of the Tax CutsCOVID-19 pandemic or other factors;
•trade restrictions and Jobs Act of 2017 (the "Act");increase in tariffs, including those on business in China, or focused on specific companies;
new accounting pronouncements or changes in existing accounting standards and practices;
our ability to continue to realize the expected benefits of our acquisitions including our acquisition of Microsemi;
our ability to ramp our factory capacity to meet customer demand;
our ability to secure sufficient wafer foundry, assembly and testing capacity;
changes or fluctuations in customer order patterns and seasonality;
changes in utilization of our manufacturing capacity and fluctuations in manufacturing yields;
•the mix of inventory we hold and our ability to satisfy orders from our inventory;
•our ability to continue to realize the expected benefits of our past or future acquisitions;
•changes in utilization of our manufacturing capacity and fluctuations in manufacturing yields;
•changes or fluctuations in customer order patterns and seasonality;
•changes in tax regulations in countries in which we do business;
•new accounting pronouncements or changes in existing accounting standards and practices;
•levels of inventories held by our customers;
•risk of excess and obsolete inventories;
•competitive developments including pricing pressures;
•unauthorized copying of our products resulting in pricing pressure and loss of sales;
availability of raw materials and equipment;
•our ability to successfully transition products to more advanced process technologies to reduce manufacturing costs;
•the level of orders that are received and can be shipped in a quarter, including the impact of product lead times;
•the level of sell-through of our products through distribution;
•fluctuations in our mix of product sales;
trade restrictions and changes in tariffs, including those impacting China;
•announcements of other significant acquisitions by us or our competitors;
disruptions in our business or our customers' businesses due to cybersecurity incidents, terrorist activity, armed conflict, war, worldwide oil prices and supply, public health concerns, fires, natural disasters or disruptions in the transportation system;
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;
•costs and outcomes of any current or future tax audits or any litigation, investigation or claims involving intellectual property, our Microsemi acquisition, customers or other issues;
•fluctuations in commodity or energy prices; and
•property damage or other losses, whether or not covered by insurance.
We believe that period-to-periodPeriod-to-period comparisons of our operating results are not necessarily meaningful and that you should not rely upon any such comparisons as indications of our 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. Uncertain global economic and public health conditions, such as the ongoing economic recovery and uncertainty surrounding the strength and duration of such recoveryCOVID-19 pandemic, have caused or may cause our operating results to fluctuate significantly and make comparabilitycomparisons between periods less meaningful.
Our operating results may be adversely impacted if economic conditions impact the financial viability of our licensees, customers, distributors, or suppliers.
We regularly review the financial performance of our licensees, customers, distributors and suppliers. Any downturn in global economic conditions, as a result of the COVID-19 pandemic or otherwise, may adversely impact their financial viability. The financial failure of a large licensee, customer or distributor, an important supplier, or a group thereof, could have an adverse impact on our operating results and could result in our inability to collect our accounts receivable balances, higher allowances for credit losses, and higher operating costs as a percentage of net sales.
We may lose sales if suppliers of raw materials, components or equipment fail to meet our or our customers' needs or increase costs due to the impact of the COVID-19 pandemic, increased tariffs or other factors.
Our manufacturing operations require raw and processed materials and equipment that must meet exacting standards. We generally have multiple sources for these supplies, but there may be a limited number of suppliers capable of meeting our standards. We have experienced supply shortages from time to time in the past, and on occasion our suppliers have told us they need more time to fill our orders or that they will no longer support certain equipment with updates or parts. In particular, we have recently experienced longer lead times for some assembly raw materials required for production purposes. An interruption of any materials or equipment sources, or the lack of supplier support for a particular piece of equipment, could harm our business. The supplies necessary for our business could become more difficult to obtain as worldwide use of semiconductors increases. Additionally, consolidation in our supply chain due to mergers and acquisitions may reduce the number of suppliers or change our relationships with them. Also, the impact of the COVID-19 pandemic or the application of trade restrictions or tariffs by the U.S. or other countries may adversely impact the industry supply chain. For example, in 2019, the U.S. government increased tariffs on U.S. imports with China as their country of origin. Likewise, the China government increased tariffs on China imports with U.S. as their country of origin. We have taken steps to attempt to mitigate the costs of these tariffs on our business. Although these increases in tariffs did not significantly increase the operating costs of our business, they did, however, adversely impact demand for our products during fiscal 2020 and fiscal 2019. The additional tariffs imposed on components or equipment that we or our suppliers source from China will increase our costs and could have an adverse impact on our operating results in future periods. We may also incur increases in manufacturing costs in mitigating the impact of tariffs on our operations. This could also impair sourcing flexibility.
Our customers may also be adversely affected by these same issues. The supplies and equipment necessary for their businesses could become more difficult to obtain for various reasons not limited to business interruptions of suppliers, consolidation in their supply chain, the impact of the COVID-19 pandemic, or trade restrictions or tariffs that impair sourcing flexibility or increase costs. If our customers are not able to produce their products, then their need for our products will decrease. Such interruptions of our customers’ businesses could harm our business.
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 2021, approximately 77% of our net sales were made to foreign customers, including 22% in China and 16% in Taiwan. During fiscal 2020, approximately 78% of our net sales were made to foreign customers, including 21% in China and 15% in Taiwan.
A strong position in the Chinese market is a key component of our global growth strategy. Although our sales in the Chinese market have been strong in recent quarters, competition in China is intense. Also, during the first quarter of fiscal 2021, economic weakness in the Chinese market adversely impacted our sales volumes in China. As discussed in the risk factor above, the trade relationship between the U.S. and China remains challenging, economic conditions in China remain uncertain, and we are unable to predict whether such uncertainty will continue or worsen in future periods. Weakening of foreign markets could result in lower demand for our products, which could have a material adverse effect on our business, results of operations or financial conditions.
We purchase a substantial portion of our raw materials and equipment from foreign suppliers. In addition, we own product assembly and testing facilities, and finished goods warehouses near Bangkok, Thailand, which has experienced periods of political instability and severe flooding in the past. There can be no assurance that any future flooding or political instability in Thailand would not have a material adverse impact on our operations. We have a test facility in Calamba, Philippines. We use foundries and other foreign contractors for a significant portion of our assembly and testing and wafer fabrication requirements.
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:
•political, social and economic instability due to the COVID-19 pandemic or other factors;
•trade restrictions and changes in tariffs;
•potentially adverse tax consequences;
•economic uncertainty in the worldwide markets served by us;
•import and export license requirements and restrictions;
•changes in laws related to taxes, environmental, health and safety, technical standards and consumer protection;
•currency fluctuations and foreign exchange regulations;
•difficulties in staffing and managing international operations;
•employment regulations;
•disruptions due to cybersecurity incidents;
•disruptions in international transport or delivery;
•public health conditions (including viral outbreaks such as COVID-19); and
•difficulties in collecting receivables and longer payment cycles.
If any of these risks occur or are worse than we anticipate, our sales could decrease and our operating results could suffer, we could face an increase in the cost of components, production delays, business interruptions, delays in obtaining export licenses, tariffs and other restrictions, longer payment cycles, increased taxes, restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any of which could ultimately have a material adverse effect on our business. Further changes in trade policy, tariffs, additional taxes, or restrictions on supplies, equipment, and raw materials including rare earth minerals, may limit our ability to produce products, increase our selling and/or manufacturing costs, decrease margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary equipment and supplies, which could have a material adverse effect on our business, results of operations, or financial conditions.
We depend on orders that are received and shipped in the same quarter and have limited visibility to product shipments other than orders placed under our Preferred Supply Program.
Our net sales in any given quarter depend upon a combination of shipments from backlog, and orders that are both received and shipped in the same quarter, which we call 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, our ability to respond quickly to customer orders has been 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 visibility on future shipments. Turns orders correlate to overall semiconductor industry conditions and product lead times. Although our backlog has been very strong in recent periods due to favorable industry conditions and the impact of our Preferred Supply Program, turns orders remain important to our ability to meet our business objectives. Because turns orders can be difficult to predict, especially in times of economic volatility where customers may change order levels within the quarter, varying levels of turns orders make it more difficult to forecast net sales. As a significant portion of our products are manufactured at foundries, foundry lead times may affect our ability to satisfy certain turns orders. 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 will likely suffer.
In February 2021, we announced our Preferred Supply Program which offers our customers the ability to receive prioritized capacity in the second half of calendar 2021 and the first half of calendar 2022. To participate in the program, customers have to place 12 months of orders, which cannot be cancelled or rescheduled. The capacity priority will begin for shipments in July 2021. The program is not a guarantee of supply; however, it will provide the highest priority for those orders which are under this program, and the capacity priority will be on a first-come, first-served basis until the available capacity is booked. A significant portion of our capacity is booked under this new program. We believe this program will enable us to be in a stronger position to make capacity and raw material commitments to our suppliers, buy capital equipment with confidence, hire employees and ramp up manufacturing and manufacture products more efficiently. Since this is a new program, there can be no assurance that the program will be successful or that it will benefit our business. In the event that customers under this program attempt to cancel or reschedule orders, we may have to take legal or other action to enforce the terms of the program, and any such actions could result in damage to our customer relationships or cause us to incur significant costs.
We are dependent on wafer foundries and other contractors, as are our SuperFlash and other licensees.
We rely on outside wafer foundries for a significant portion of our wafer fabrication needs. Specifically, during each of fiscal 2021 and fiscal 2020, approximately 61% of our net sales came from products that were produced at outside wafer foundries. We also use several contractors located primarily in Asia for a portion of the assembly and testing of our products. Specifically, during fiscal 2021, approximately 47% of our assembly requirements and 43% of our test requirements were performed by third party contractors compared to approximately 55% of our assembly requirements and 46% of our test requirements during fiscal 2020. Due to increased demand for our products, we have recently taken actions to increase our capacity allocation from our wafer fabrication, assembly and test subcontractors. However, we expect foundry capacity to continue to be tight due to strong demand for wafers across the industry and there can be no assurance that we will be able to secure further additional capacity or that such capacity will be available on acceptable terms. We expect that our reliance on third party contractors may increase over time as our business grows.
Our use of third parties reduces our control over the subcontracted portions of our business. Our future operating results could suffer if a significant contractor were to experience production difficulties, insufficient capacity, decreased manufacturing, assembly and test yields, or increased costs due to disruptions from the COVID-19 pandemic, political upheaval
or infrastructure disruption. If third parties do not timely deliver products or services in accordance with our quality standards, we may be unable to qualify alternate manufacturing sources in a timely manner on favorable terms, or at all. Additionally, these subcontractors could abandon processes that we need, or fail to adopt technologies that we desire to control costs. In such event, we could experience an interruption in production, an increase in manufacturing costs or a decline in product reliability, and our business and operating results could be adversely affected. Further, use of subcontractors increases the risks of misappropriation of our intellectual property.
Certain of our SuperFlash and other technology licensees rely on wafer foundries. If our licensees experienced disruption in supply at such foundries, this would reduce the revenue from our technology licensing business and would harm our operating results.
Intense competition in the markets we serve may lead to pricing pressures, reduced sales or reduced market share.
The semiconductor industry is intensely competitive and faces 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. The semiconductor industry has experienced significant consolidation in recent years which has resulted in several of our competitors becoming much larger in terms of revenue, product offerings and scale. 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, including, but not limited to:
•the relative impact of the COVID-19 pandemic on us relative to our competitors;
•changes in demand in the markets that we serve and the overall rate of growth or contraction of such markets, including but not limited to the automotive, personal computing and consumer electronics markets;
•our ability to obtain adequate foundry and assembly and test capacity and supplies at acceptable prices;
•the quality, performance, reliability, features, ease of use, pricing and diversity of our products;
•our success in designing and manufacturing new products including those implementing new technologies;
•the rate at which customers incorporate our products into their applications and the success of such applications;
•the rate at which the markets that we serve redesign and change their own products;
•our ability to ramp production and increase capacity, at our wafer fabrication and assembly and test facilities;
•product introductions by our competitors;
•the number, nature and success of our competitors in a given market;
•our ability to protect our products and processes by effective utilization of intellectual property rights;
•our ability to address the needs of our customers; and
•general market and economic conditions.
Historically, average selling prices in the semiconductor industry decrease over the life of a product. The average selling prices of our microcontroller, FPGA products, and proprietary products in our analog product line have remained relatively constant over time, while average selling prices of our memory and non-proprietary products in our analog product line have declined over time. The overall average selling price of our products is affected by these trends; however, variations in our product and geographic mix of sales can cause wider fluctuations in our overall average selling price in any given period. Generally, the selling prices of our products increased during fiscal 2021 compared to fiscal 2020 due to increased material costs and increased functionality of products.
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 moderated average selling price declines in many of our proprietary product lines by introducing new products with more features and higher prices. However, we may not be able to do so in the future. We have experienced in the past, and expect to continue to experience, competitive pricing pressures in our memory and non-proprietary products in our analog product line. We may be unable to maintain average selling prices due to increased pricing pressure, which could adversely impact our operating results.
Our operating results will suffer if we ineffectively utilize our manufacturing capacity or fail to maintain manufacturing yields.
Integrated circuits manufacturing processes are complex and sensitive to many factors, including contaminants in the manufacturing environment or materials used, the performance of our personnel and equipment, and other quality issues. As is typical in the industry, we have from time to time experienced lower than anticipated manufacturing yields. Our operating results will suffer if we are unable to maintain yields at or above approximately the current levels. This could include delays in the recognition of revenue, loss of revenue, and penalties for failure to meet shipment deadlines. Our operating results are adversely affected when we operate below optimal capacity. In fiscal 2021 and fiscal 2020, we operated at below normal capacity levels resulting in unabsorbed capacity charges of $29.6 million and $47.2 million, respectively.
Our operating results are impacted by seasonality and wide fluctuations of supply and demand in the industry.
The semiconductor industry is characterized by seasonality and wide fluctuations of supply and demand. Historically, since a significant portion of our revenue is from consumer markets and international sales, our business generates stronger revenues in the first half and comparatively weaker revenues in the second half of our fiscal year. However, broad fluctuations in our business, changes in semiconductor industry and global economic conditions (including the impact of the COVID-19 pandemic or trade tensions) and our acquisition activity (including our acquisition of Microsemi) have had and can have a more significant impact on our results than seasonality. In periods when broad fluctuations, changes in business conditions or acquisitions occur, it is difficult to assess the impact of seasonality on our business. The semiconductor industry has had significant economic downturns, characterized by diminished product demand and production over-capacity. We have sought to reduce our exposure to this industry cyclicality by selling proprietary products, that cannot be quickly replaced, to a geographically diverse customer base 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.
Our business is dependent on distributors to service our end customers.
Sales to distributors accounted for approximately 50% of our net sales in each of fiscal 2021 and fiscal 2020, and our largest distributor accounted for approximately 10% of our net sales in fiscal 2020. We do not have long-term purchase agreements with our distributors, and we and our distributors may each terminate our relationship with little or no advance notice.
Future adverse conditions in the U.S. or global economies (including the impact of the COVID-19 pandemic) or credit markets could materially impact distributor operations. Any deterioration in the financial condition, or 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 or economic downturn, there may be an oversupply and decrease in demand for our products, which could reduce our net sales in a given period and increase inventory returns. Violations of the Foreign Corrupt Practices Act, or similar laws, by our distributors could have a material adverse impact on our business.
Our success depends on our ability to introduce new products on a timely basis.
Our future operating results depend on our ability to develop and timely introduce new products that 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:
•effective new product selection;
•timely completion and introduction of new product designs;
•procurement of licenses for intellectual property rights from third parties under commercially reasonable terms;
•timely filing and protection of intellectual property rights for new product designs;
•availability of development and support tools and collateral literature that make complex new products easy for engineers to understand and use; and
•market acceptance of our customers' end products.
Because our products are complex, we have experienced delays from time to time in completing new product development. New products may not receive or maintain substantial market acceptance. We may be unable to timely design, develop and introduce competitive products, 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 others in the industry have, from time to time, experienced difficulties in transitioning to advanced process technologies and 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.
Business interruptions to our operations or those of our key vendors, licensees or customers could harm our business.
Operations at any of our facilities, at the facilities of any of our wafer fabrication or assembly and test subcontractors, or at any of our significant vendors, licensees or customers may be disrupted due to public health concerns (including outbreaks such as COVID-19), work stoppages, power loss, insufficient water, cyber attacks, computer network compromises, incidents of terrorism or security risk, political instability, telecommunications, transportation or other infrastructure failure, radioactive
contamination, or fire, earthquake, floods, droughts, volcanic eruptions or other natural disasters. We have taken steps to mitigate the impact of some of these events should they occur; however, we cannot be certain that we will avoid a significant impact on our business in the event of a business interruption. For example, in the first quarter of fiscal 2021, restrictions on travel adversely impacted our manufacturing operations in the Philippines and our subcontractors' manufacturing operations in Malaysia and China. Similar challenges arose for our logistics service providers, which adversely impacted their ability to ship product to our customers. The pandemic could adversely impact our business in future periods if the impact of COVID-19 increases. In the future, local governments could require us to temporarily reduce production further or cease operations at any of our facilities and we could experience constraints in fulfilling customer orders.
Additionally, operations at our customers and licensees may be disrupted for a number of reasons. In April and May 2020, we received a greater number of order cancellations and requests by our customers to reschedule deliveries to future dates. Some customers requested order cancellations within our firm order window and claimed applicability of force majeure clauses. Likewise, if our licensees are unable to manufacture and ship products incorporating our technology, or if there is a decrease in product demand due to a business disruption, our royalty revenue may decline.
Also, Thailand has experienced periods of severe flooding in recent years. While our facilities in Thailand have continued to operate normally, there can be no assurance that future flooding in Thailand would not have a material adverse impact on our operations. If operations at any of our facilities, or our subcontractors' facilities are interrupted, we may not be able to timely shift production to other facilities, and we may need to spend significant amounts to repair or replace our facilities and equipment. Business interruptions would likely cause 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, cancellation of orders, or loss of customers. Although we maintain business interruption insurance, such insurance will likely not compensate us for any losses or damages, and business interruptions could significantly harm our business.
Our technology licensing business exposes us to various risks.
Our technology licensing business is based on our SuperFlash and other technologies. The success of our licensing business depends on the continued market acceptance of these technologies and on our ability to further develop such technologies and to introduce new technologies. To be successful, any such technology must be able to be repeatably implemented by licensees, provide satisfactory yield rates, address licensee and customer requirements, and perform competitively. The success of our technology licensing business depends on various other factors, including, but not limited to:
•proper identification of licensee requirements;
•timely development and introduction of new or enhanced technology;
•our ability to protect and enforce our intellectual property rights for our licensed technology;
•our ability to limit our liability and indemnification obligations to licensees;
•availability of development and support services to assist licensees in their design and manufacture of products;
•availability of foundry licensees with sufficient capacity to support OEM production; and
•market acceptance of our customers' end products.
Because our licensed technologies are complex, there may be delays from time to time in developing and enhancing such technologies. There can be no assurance that our existing or any enhanced or new technology will achieve or maintain substantial market acceptance. Our licensees may experience disruptions in production or reduced production levels which would adversely affect the revenue that we receive. Our technology license agreements generally include a clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from certain intellectual property matters. We could be exposed to substantial liability for claims or damages related to intellectual property matters or indemnification claims. Any claim could result in significant legal fees and require significant attention from our management. These issues may adversely impact the success of our licensing business and adversely affect our future operating results.
Reliance on sales into governmental projects could have a material adverse effect on our results of operations.
A significant portion of the sales of Microsemi, which we acquired in May 2018, are from or are derived from government agencies or customers who sell to U.S. government agencies. Such sales are subject to uncertainties regarding governmental spending levels, spending priorities, regulatory and policy changes. Future sales into U.S. government projects are subject to uncertain government appropriations and national defense policies and priorities, including the budgetary process, changes in the timing and spending priorities, the impact of any past or future government shutdowns, contract terminations or renegotiations, future sequestrations, or the impact of the COVID-19 pandemic. For example, as a result of the COVID-19 pandemic, we have experienced suspensions and stop work orders for some of our subcontracts. Although such actions have not yet had a material adverse impact on our business, there can be no assurance as to the future costs or implications of such actions. Sales into government projects are also subject to uncertainties related to monetary, regulatory, tax and trade policies
implemented by current or future administrations or by the U.S. Congress.
In the past, Microsemi has experienced delays and reductions in appropriations on programs that included its products. For example, in 2018 there were two federal government shutdowns. Further delays, reductions in or terminations of government contracts or subcontracts, including those caused by any past or future shutdown of the U.S. federal government, could materially and adversely affect our operating results. If the U.S. government fails to complete its annual budget process or to provide for a continuing resolution to fund government operations, another federal government shutdown may occur, during which we may experience further delays, reductions in or terminations of government contracts or subcontracts, which could materially and adversely affect our operating results. While we generally function as a subcontractor in these type of transactions, further changes in U.S. government procurement regulations and practices, particularly surrounding initiatives to reduce costs or increase compliance obligations (such as the Cybersecurity Maturity Model Certification), may adversely impact the contracting environment and our operating results.
The U.S. government and its contractors may terminate their contracts with us at any time. For example, in 2014, the U.S. government terminated a $75 million contract with Microsemi. Uncertainty in government spending and termination of contracts for government related projects could have a material adverse impact on the revenue from our Microsemi acquisition. Our contracts with U.S. governmental agencies or prime customers requires us to comply with the contract terms, and governmental regulations, particularly for our facilities, systems and personnel that service such customers. Complying with these regulations, including audit requirements, requires that we devote significant resources to such matters in terms of training, personnel, information technology and facilities. Any failure to comply with these requirements may result in fines and penalties and loss of current or future business that may materially and adversely affect our operating results.
From time to time we receive grants from governments, agencies and research organizations. If we are unable to comply with the terms of those grants, we may not be able to receive or recognize grant benefits or we may be required to repay grant benefits and recognize related charges, which would adversely affect our operating results and financial position.
From time to time, we receive economic incentive grants and allowances from European governments, agencies and research organizations targeted at increasing employment at specific locations. The subsidy grant agreements typically contain economic incentive, headcount, capital and research and development expenditures and other covenants that must be met to receive and retain grant benefits, and these programs can be subjected to periodic review by the relevant governments. Noncompliance with the conditions of the grants could result in our forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts received to date.
We may not fully realize the anticipated benefits of our completed or future acquisitions or divestitures including our acquisition of Microsemi.divestitures.
We have acquired, and expect in the future to acquire, additional businesses that we believe will complement or augment our existing businesses. OnIn May 29, 2018, we completed our acquisition ofacquired Microsemi, which was our largest and most complex acquisition ever. In addition, in April 2016, we completed our acquisitionIntegration of Atmel; and in August 2015, we
completed our acquisition of Micrel. The integration process for our acquisitions is complex and may be costly and time consuming and include unanticipated issues, expenses and liabilities. We may not be able to successfully or profitably integrate, operate, maintain and manage any newly acquired operations or employees. We may not be able to maintain uniform standards, procedures and policies and wepolicies. We may be unable tonot realize the expected synergies and cost savings from the integration. There may be increased risk due to integrating financial reporting and internal control systems. WeIt may have difficulty in developing, manufacturingbe difficult to develop, manufacture and marketingmarket the products of a newly acquired company, or in growinggrow the business at the rate we anticipate. Following an acquisition, we may not achieve the revenue or net income levels that justify the acquisition. We may suffer loss of key employees, customers and strategic partners of acquired companies and it may be difficult to implement our corporate culture at acquired companies. We have been and may in the future be subject to claims from terminated employees, shareholders of Microchip or the acquired companies and other third parties related to the transaction. In particular, in connection with our Microsemi and Atmel acquisitions, we became involved with third-party claims, litigation, governmental investigations and disputes related to such businesses and transactions. See Note 1312 to our consolidated financial statements for information regarding pending litigation.such matters. Acquisitions may also result in charges (such as acquisition-related expenses, write-offs, restructuring charges, or future impairment of goodwill), contingent liabilities, adverse tax consequences, additional share-based compensation expense and other charges that adversely affect our operating results. To fund our acquisition of Microsemi, we used a significant portion of our cash balances and incurred approximately $8.10 billion of additional debt. We may fund future acquisitions of new businesses or strategic alliances by utilizing cash, borrowings under our Revolving Credit Facility, raising debt, issuing shares of our common stock, or other mechanisms.
Further, if we decide to divest assets or a business, weit may encounter difficulty in findingbe difficult to find or completingcomplete divestiture opportunities or alternative exit strategies, which may include site closures, timely or on acceptable terms or in a timely manner.terms. These circumstances could delay the achievement of our strategic objectives or cause us to incur additional expenses with respect to assetsthe desired divestiture, or a business that we want to dispose of, or we may dispose of assets or a business at athe price or on terms that areof the divestiture may be less favorable than we had anticipated. Even following a divestiture or other exit
strategy, we may be contractually obligated with respect tohave certain continuing obligations to former employees, customers, vendors, landlords or other third parties. We may also have continuing obligations for pre-existing liabilities related to theformer employees, assets or businesses. Such obligations may have a material adverse impact on our results of operations and financial condition.
In addition to acquisitions, we have in the past, and expect in the future, to enter into joint development agreements or other business or strategic relationships with other companies. These transactions are subject to a number of risks similar to those we face with our acquisitions including our ability to realize the expected benefits of any such transaction, to successfully market and sell any products resulting from such transactions or to successfully integrate any technology developed through such transactions.
Our financial condition and results of operations could be adversely affected if we do not effectively manage our current or future debt.
As of March 31, 2019, the principal amount of our outstanding indebtedness was $11.66 billion. In connection with our acquisition of Microsemi, which closed on May 29, 2018, we incurred debt consisting of $3.10 billion under our revolving line of credit, $3.00 billion under our new term loan facility, and $2.00 billion in newly issued senior secured notes. At March 31, 2019, we had $3.27 billion in outstanding borrowings under our revolving line of credit which provides $3.60 billion of revolving loan commitments that terminate in 2023. At March 31, 2019, we had $1.91 billion of outstanding borrowings under the term loan facility. In February 2017, we issued $2.65 billion of aggregate principal value of senior and junior convertible debt.
As a result of such transactions, we have a substantially greater amount of debt than we had 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 our convertible debt, senior debt, term loan debt or any other future indebtedness and there can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms, if at all.
Servicing our current debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to fund future payments.
Our ability to make scheduled payments of principal, to pay interest on or to refinance our indebtedness, including our outstanding convertible debt and debt incurred to finance our acquisition of Microsemi, depends on our future performance, which is subject to economic, financial, competitive and other factors. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and to fund capital expenditures, dividend payments, share repurchases or acquisitions. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time.
We are dependent on orders that are received and shipped in the same quarter and therefore have limited visibility to future product shipments.
Our net sales in any given quarter depend upon a combination of shipments from backlog and customer orders that are both received and shipped in that same 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 it more difficult to forecast net sales. As a significant portion of our products are manufactured at foundries, foundry lead times may affect our ability to satisfy certain turns orders. 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 will likely 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. The semiconductor industry has experienced significant merger and acquisition activity and consolidation in recent years which has resulted in several of our competitors becoming much larger in terms of revenue, product offerings and scale. 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:
the quality, performance, reliability, features, ease of use, pricing and diversity of our products;
our success in designing and manufacturing new products including those implementing new technologies;
our ability to ramp production and increase capacity, as needed, at our wafer fabrication and assembly and test facilities;
the rate at which customers incorporate our products into their own applications and the success of such applications;
the rate at which the markets that we serve redesign and change their own products;
our ability to obtain adequate foundry and assembly and test capacity and supplies of raw materials and other supplies at acceptable prices;
changes in demand in the markets that we serve and the overall rate of growth or contraction of such markets, including but not limited to the automotive, personal computing and consumer electronics markets;
product introductions by our competitors;
the number, nature and success of our competitors in a given market;
our ability to protect our products and processes by effective utilization of intellectual property rights;
our ability to remain price competitive against companies that have copied our proprietary product lines, especially in countries where intellectual property rights protection is difficult to achieve and maintain;
our ability to address the needs of our customers; and
general market and economic conditions.
Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. The average selling prices of our microcontroller and proprietary analog, interface, mixed signal and timing products have remained relatively constant, while average selling prices of our memory and non-proprietary analog, interface, mixed signal and timing products have declined over time. The overall average selling price of our products is affected by these trends; however, variations in our product and geographic mix of sales can cause wider fluctuations in our overall average selling price in any given period.
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 memory and non-proprietary analog, interface, mixed signal and timing 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.
We are dependent on wafer foundries and other contractors to perform key manufacturing functions for us, and our licensees of our SuperFlash and other technologies also rely on foundries and other contractors.
We rely on outside wafer foundries for a significant portion of our wafer fabrication needs. Specifically, during fiscal 2019 and fiscal 2018, approximately 57% and 42%, respectively, of our net sales came from products that were produced at outside wafer foundries. We also use several contractors located primarily in Asia for a portion of the assembly and testing of our products. Specifically, during fiscal 2019, approximately 62% of our assembly requirements and 51% of our test requirements were performed by third party contractors compared to approximately 58% of our assembly requirements and 36% of our test requirements during fiscal 2018. Our reliance on third party contractors and foundries increased as a result of our acquisitions of Microsemi, Atmel, Micrel, SMSC, Supertex and ISSC. The disruption or termination of any of our contractors could harm our business and operating results.
Our use of third parties somewhat reduces our control over the subcontracted portions of our business. Our future operating results could suffer if any contractor were to experience financial, operational 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 the countries in which such contractors are located were to experience political upheaval or infrastructure disruption. 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 on terms favorable to us, or at all. Additionally, these subcontractors could abandon fabrication processes that are important to us, or fail to adopt advanced manufacturing technologies that we desire to control costs. In any such event, we could experience an interruption in production, an increase in manufacturing and production costs or a decline in product reliability, and our business and operating results could be adversely affected. Further, our use of subcontractors increases the risks of potential misappropriation of our intellectual property.
Certain of our SuperFlash and other technology licensees also rely on outside wafer foundries for wafer fabrication services. If our licensees were to experience any disruption in supply from outside wafer foundries, this would reduce the revenue we receive in our technology licensing business and would harm our operating results.
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 and assembly and test personnel and equipment, and other quality issues. As is typical in the semiconductor industry, we have from time to time experienced lower than anticipated manufacturing yields. Our operating results will suffer if we are unable to maintain yields at or above approximately the current levels. This could include delays in the recognition of revenue, loss of revenue or future orders, and customer-imposed penalties for our failure to meet contractual shipment deadlines. Our operating results are also adversely affected when we operate at less than optimal capacity. In fiscal 2019, we operated at below normal capacity levels resulting in an unabsorbed capacity charge of $19.0 million. We operated at normal capacity levels during fiscal 2018.
Our operating results are 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. Historically, since a significant portion of our revenue is from consumer markets and international sales, our business tends to generate stronger revenues in the first and second quarters and comparatively weaker revenues in the third and fourth quarters of our fiscal year. Broad fluctuations in our overall business, changes in semiconductor industry and global economic conditions, and our acquisition activity (including our acquisition of Microsemi) have had and can have a more significant impact on our results than seasonality. As a result, in periods when these broad fluctuations, changes in business conditions or acquisitions occur, it is difficult to assess the impact of seasonal factors on our business. The semiconductor 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 customer base 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.
Our business is dependent on distributors to service our end customers.
Sales to distributors accounted for approximately 51% of our net sales in fiscal 2019 and approximately 54% of our net sales in fiscal 2018. 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.
Any future adverse conditions in the U.S. or global economies or in the U.S. or 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 or economic downturn, it is possible there will be an oversupply of products and a decrease in demand for our products from our distributors, which could reduce our net sales in a given period and result in an increase in inventory returns. Violations of the Foreign Corrupt Practices Act, or similar laws, by our distributors or other channel partners could have a material adverse impact on our business.
Our success depends on our ability to introduce new products on a timely basis.
Our future operating results depend on our ability to develop and timely introduce new products that 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:
effective new product selection;
timely completion and introduction of new product designs;
procurement of licenses for intellectual property rights from third parties under commercially reasonable terms;
timely filing and protection of intellectual property rights for new product designs;
availability of development and support tools and collateral literature that make complex new products easy for engineers to understand and use; and
market acceptance of our customers' end products.
Because our products are complex, we have experienced delays from time to time in completing new product development. In addition, our new products may not receive or maintain substantial market acceptance. We may be unable to timely design, develop and introduce competitive products, 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 may lose sales if suppliers of raw materials, components or equipment fail to meet our or our customers' needs or increase costs due to increased tariffs or other factors.
Our semiconductor manufacturing operations require raw and processed materials and equipment that must meet exacting standards. We generally have more than one source for these supplies, but there are only a limited number of suppliers capable of delivering various materials and equipment that meet our standards. The materials and equipment necessary for our business could become more difficult to obtain as worldwide use of semiconductors in product applications increases. Additionally, consolidation in our supply chain due to mergers and acquisitions may reduce the number of suppliers or change the relationships that we have with our suppliers. Also, the application of trade restrictions or tariffs by the U.S. or other countries may adversely impact the industry supply chain. For example, the U.S. government has recently increased tariffs on products that have China as their country of origin and which are imported into the U.S. Likewise, the China government has increased tariffs on products that have the U.S. as their country of origin and which are imported into China. We have taken steps to mitigate the costs of these tariffs on our business. Although these increases in tariffs did not result in significant increases to the operating costs of our business, they did, however, adversely impact demand for our products during fiscal 2019. The recent additional tariffs imposed on components or equipment that we or our suppliers source from China will increase our costs and could have a material adverse impact on our operating results in the three months ending June 30, 2019 or future periods. We may also incur increases in manufacturing costs in mitigating the impact of tariffs on our operations. This could also impair sourcing flexibility. 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. In particular, we have recently experienced longer lead times for equipment which we need for capacity expansion at certain of our manufacturing facilities. An interruption of any materials or equipment sources, or the lack of supplier support for a particular piece of equipment, could harm our business.
Our customers may also be adversely affected by these same issues. The materials, components and equipment necessary for their businesses could become more difficult to obtain for various reasons not limited to business interruptions of suppliers, consolidation in their supply chain due to mergers and acquisitions, or application of trade restrictions or tariffs that impair sourcing flexibility or increase costs. If our customers are not able to produce their products, then their need for our products will decrease. Such interruptions of our customers’ businesses could harm our business.
Interruptions in our IT systems, unauthorized access to our IT systems or improper handling of data, could adversely affect our business.
We rely on the efficient and uninterrupted operation of complex IT systems and networks to operate our business. Any significant disruption to our systems or networks, including, but not limited to, new system implementations, computer viruses, security breaches, facility issues, natural disasters, terrorism, war, telecommunication failures or energy blackouts could have a material adverse impact on our operations, sales and operating results. Such disruption could result in a loss of our intellectual property or the release of sensitive competitive information or supplier, customer or employee personal data. Any loss of such information could harm our competitive position, result in a loss of customer confidence, and cause us to incur significant costs to remedy the damages caused by any such disruptions or security breaches. Additionally, any failure to properly manage the collection, handling, transfer or disposal of personal data of employees and customers may result in regulatory penalties, enforcement actions, remediation obligations, litigation, fines and other sanctions.
From time to time, we have experienced verifiable attacks on our data, attempts to breach our security and attempts to introduce malicious software into our IT systems. For example, we have learned of an ongoing compromise of our computer networks by what is believed to be sophisticated hackers. We have engaged experienced legal counsel and a leading forensic investigatory firm with experience in such matters. We have taken steps to identify malicious activity on our network including a compromise of our network and, as of the date of this filing, we are implementing a containment plan. We are continuing to evaluate the effectiveness of the containment plan and the amount and content of the information that was compromised and to implement additional remedial actions. At this time, we do not believe that this IT system compromise has had a material adverse effect on our business or resulted in any material damage to us. However, we are still evaluating the amount and type of data that was compromised and there can be no assurance as to what the impact of this IT system compromise will be. As a result of the IT system compromise, our management, including our chief executive officer and our chief financial officer, has concluded that our internal controls related to IT system access were not effective as of March 31, 2019 resulting in a material weakness in our internal controls. For additional information, refer to Item 9A "Controls and Procedures."
Were any future attacks to be successful, we may be unaware of the incident, its magnitude, or its effects until significant harm is done. In recent years, we have implemented improvements to our protective measures which include, but are not limited to, the following: firewalls, antivirus measures, patches, log monitors, event correlation tools, routine backups with offsite retention of storage media, system audits, data partitioning and routine password modifications. As a result of the
material weakness in our internal controls resulting from the IT systems compromise, we have taken remediation actions and implemented additional controls. There can be no assurance that such system improvements will be sufficient to prevent or limit the damage from any future cyber attacks or disruptions. Any such attack or disruption could result in additional costs related to rebuilding of our internal systems, defending litigation, responding to regulatory actions, or paying damages. Such attacks or disruptions could have a material adverse impact on our business, operations and financial results.
Third-party service providers, such as wafer foundries, assembly and test contractors, distributors, credit card processors and other vendors have access to certain portions of our and our customers' sensitive data. In the event that these service providers do not properly safeguard the data that they hold, security breaches and loss of data could result. Any such loss of data by our third-party service providers could negatively impact our business, operations and financial results, as well as our relationship with our customers.
If we fail to remediate our recently identified material weaknesses and achieve and maintain proper and effective internal control and remediate current or future deficiencies, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors' views of us.
As discussed in Item 9A “Controls and Procedures” in this report on Form 10-K, in the fourth quarter of fiscal 2019, we identified a material weakness in our internal controls related to accounting for income taxes and we also identified a material weakness in our internal controls related to IT system access. Internal controls related to such matters are important to accurately reflect our financial position and results of operations in our financial reports. We are in the process of remediating the material weaknesses, but our efforts may not be successful. If we are unable to remediate the material weaknesses in an appropriate and timely manner, or if we identify additional control deficiencies that individually or together constitute significant deficiencies or material weaknesses, our ability to accurately record, process, and report financial information and consequently, our ability to prepare financial statements within required time periods, could be adversely affected. Failure to maintain effective internal controls could result in violations of applicable securities laws, stock exchange listing requirements, and the covenants under our debt agreements, subject us to litigation and investigations, negatively affect investor confidence in our financial statements, and adversely impact our stock price and ability to access capital markets.
Ensuring that we have adequate internal financial and accounting controls and procedures so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with United States generally accepted accounting principles. We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 which requires an annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent auditors. In addition to the recently identified material weaknesses related to accounting for income taxes and to IT system access, we have from time to time identified significant deficiencies related to other matters. If we fail to remediate our material weaknesses or significant deficiencies or to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, harm our ability to operate our business and reduce the trading price of our 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 Financial Accounting Standards Board (FASB) and the SEC. New accounting pronouncements and varying interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future. New accounting pronouncements or a change in the interpretation of existing accounting standards or practices may have a significant effect on our reported financial results and may even affect our reporting of transactions completed before the change is announced or effective.
Business interruptions to our operations or the operations of our key vendors, subcontractors, licensees or customers, whether due to natural disasters, cybersecurity incidents, or other events, could harm our business.
Operations at any of our facilities, at the facilities of any of our wafer fabrication or assembly and test subcontractors, or at any of our significant vendors or customers may be disrupted for reasons beyond our control. These reasons may include work stoppages, power loss, cyber attacks, incidents of terrorism or security risk, political instability, public health issues, telecommunications, transportation or other infrastructure failure, radioactive contamination, fire, earthquake, floods, volcanic eruptions or other natural disasters. We have taken steps to mitigate the impact of some of these events should they occur;
however, we cannot be certain that our actions will be effective to avoid a significant impact on our business in the event of a disaster or other business interruption.
In particular, Thailand has experienced periods of severe flooding in recent years. While our facilities in Thailand have continued to operate normally, there can be no assurance that any future flooding in Thailand would not have a material adverse impact on our operations. 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, and we may need to spend significant amounts to repair or replace our facilities and equipment. If we experienced business interruptions, 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. Although we maintain business interruption insurance, such insurance will likely not be enough to compensate us for any losses that may occur and any losses or damages incurred by us as a result of business interruptions could significantly harm our business.
Additionally, operations at our customers and licensees may be disrupted for a number of reasons. In the event of customer disruptions, sales of our products may decline and our revenue, profitability and financial condition could suffer. Likewise, if our licensees are unable to manufacture and ship products incorporating our technology, or if there is a decrease in product demand due to a business disruption, our royalty revenue may decline.
Our technology licensing business exposes us to various risks.
Our technology licensing business is based on our SuperFlash and other technologies. The success of our licensing business depends on the continued market acceptance of these technologies and on our ability to further develop and enhance such technologies and to introduce new technologies in the future. To be successful, any such technology must be able to be repeatably implemented by licensees, provide satisfactory yield rates, address licensee and customer requirements, and perform competitively. The success of our technology licensing business depends on various other factors, including, but not limited to:
proper identification of licensee requirements;
timely development and introduction of new or enhanced technology;
our ability to protect and enforce our intellectual property rights for our licensed technology;
our ability to limit our liability and indemnification obligations to licensees;
availability of sufficient development and support services to assist licensees in their design and manufacture of products integrating our technology;
availability of foundry licensees with sufficient capacity to support OEM production; and
market acceptance of our customers' end products.
Because our licensed technologies are complex, there may be delays from time to time in developing and enhancing such technologies. There can be no assurance that our existing or any enhanced or new technology will achieve or maintain substantial market acceptance. Our licensees may experience disruptions in production or lower than expected production levels which would adversely affect the revenue that we receive from them. Our technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from intellectual property matters. We could be exposed to substantial liability for claims or damages related to intellectual property matters or indemnification claims. Any claim, with or without merit, could result in significant legal fees and require significant attention from our management. Any of the foregoing issues may adversely impact the success of our licensing business and adversely affect our future operating results.
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, other intellectual property rights, product failures, our Microsemi acquisition, contracts and other matters. As is typical in the semiconductor industry, we receive notifications from third parties from time to time who believe that we owe them indemnification or other obligations related to claims made against us, our direct or indirect customers or our licensees. These legal proceedings and claims, even if meritless, could result in substantial costs 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, provide a cost-effective remedy, or successfully prosecute or defend our position, we could incur uninsured liability in any of them, be required to take an 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 manufacture, performance or use of our products. These claims may be due to injuries, economic damage or environmental exposures related to manufacturing, a product's nonconformance to our specifications or specifications agreed upon with the customer, changes in our manufacturing processes, or unexpected customer system issues due to the integration of our products or insufficient design or testing by our customers. We could incur significant expenses related to such matters, including, but not limited to:
costs related to writing off the value of our inventory of nonconforming products;
recalling nonconforming products;
providing support services, product replacements, or modifications to products and the defense of such claims;
diversion of resources from other projects;
lost revenue or a delay in the recognition of revenue due to cancellation of orders or unpaid receivables;
customer imposed fines or penalties for failure to meet contractual requirements; and
a requirement to pay damages or penalties.
Because the systems into which our products are integrated have a higher cost of goods than the products we sell, the expenses and damages we are asked to pay may be significantly higher than the sales and profits we received from the products involved. While we specifically exclude consequential damages in our standard terms and conditions, certain of our contracts may not exclude such liabilities. Further, our ability to avoid such liabilities may be limited by applicable law. We do have liability insurance which covers certain damages arising out of product defects, but we do not expect that insurance will cover all claims or be of a sufficient amount to fully protect against such claims. Costs or payments we may make in connection with these customer claims may adversely affect the results of our operations.
Further, we sell to customers in industries such as automotive, aerospace, defense, safety, security, and medical, where failure of the systems in which our products are integrated could cause damage to property or persons. We may be subject to claims if our products, or the integration of our products, cause system failures. We will face increased exposure to claims if there are substantial increases in either the volume of our sales into these applications or the frequency of system failures integrating our products.
Failure to adequately protect our intellectual property could result in lost revenue or market opportunities.
Our ability to obtain patents, licenses and other intellectual property rights covering our products and manufacturing processes is important for our success. To that end, we have acquired certain patents and patent licenses and intend to continue to seek patents on our technology and manufacturing processes. The process of seeking patent protection can be long and expensive, and patents may not be issued from currently pending or future applications. In addition, our existing and new patents, trademarks and copyrights that issue may not have sufficient scope or strength to provide meaningful protection or commercial advantage to us. We may be subject to, or may ourselves initiate, interference proceedings in the U.S. Patent and Trademark Office, patent offices of a foreign country or U.S. or foreign courts, which can require significant financial and management resources. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of the U.S. Infringement of our intellectual property rights by a third party could result in uncompensated lost market and revenue opportunities for us. Although we continue to vigorously and aggressively defend and protect our intellectual property on a worldwide basis, there can be no assurance that we will be successful in our endeavors.
Our operating results may be adversely impacted if economic conditions impact the financial viability of our licensees, customers, distributors, or suppliers.
We regularly review the financial performance of our licensees, customers, distributors and suppliers. However, any downturn in global economic conditions may adversely impact the financial viability of our licensees, customers, distributors or suppliers. The financial failure of a large licensee, customer or distributor, an important supplier, or a group thereof, could have an adverse impact on our operating results and could result in our not being able to collect our accounts receivable balances, higher reserves for doubtful accounts, write-offs for accounts receivable, and higher operating costs as a percentage of net sales.
We are highly dependent on foreign sales and operations, which exposes us to foreign political and economic risks including risks from recent increases in tariffs.
Sales to foreign customers account for a substantial portion of our net sales. During fiscal 2019, approximately 80% of our net sales were made to foreign customers, including 22% in China and 13% in Taiwan. During fiscal 2018, approximately 85% of our net sales were made to foreign customers, including 30% in China and 11% in Taiwan. In fiscal 2019, our acquisition of Microsemi and our transition to sell-in revenue recognition contributed to the changes in net sales by country.
A strong position in the Chinese market is a key component of our global growth strategy. The market for integrated circuit products in China is highly competitive, and both international and domestic competitors are aggressively seeking to increase their market share. Increased competition or economic weakness in the China market may make it difficult for us to achieve our desired sales volumes in China. In particular, the trade relationship between the U.S. and China has worsened, economic conditions in China remain uncertain, and we are unable to predict whether such uncertainty will continue or worsen in future periods. The U.S. government has increased tariffs on products that have China as their country of origin and which are imported into the U.S. Likewise, the China government has increased tariffs on products that have the U.S. as their country of origin and which are imported into China. We have taken steps to mitigate the costs of these tariffs on our business. Although these increases in tariffs did not result in significant increases to the operating costs of our business, they did, however, adversely impact demand for our products during fiscal 2019. The recent additional tariffs imposed on components or equipment that we or our suppliers source from China will increase our costs and could have a material adverse impact on our operating results in the three months ending June 30, 2019 or future periods. Additionally, tariffs on our customers' products could impact their sales of such end products, resulting in lower demand for our products. We may also incur increases in manufacturing costs in mitigating the impact of tariffs on our customers.
We purchase a substantial portion of our raw materials and equipment from foreign suppliers. In addition, we own product assembly and testing facilities near Bangkok, Thailand, which has experienced periods of political instability in the past. A large portion of our finished goods inventory is maintained in Thailand. From time to time, Thailand has also experienced periods of severe flooding. There can be no assurance that any future flooding or political instability in Thailand would not have a material adverse impact on our operations. As part of our Atmel acquisition, we acquired a test facility in Calamba, Philippines. We use various foundries and other foreign contractors for a significant portion of our assembly and testing and wafer fabrication requirements.
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:
political, social and economic instability;
trade restrictions and changes in tariffs;
potentially adverse tax consequences;
economic uncertainty in the worldwide markets served by us;
import and export license requirements and restrictions;
changes in rules and laws related to taxes, environmental, health and safety, technical standards and consumer protection in various jurisdictions;
currency fluctuations and foreign exchange regulations;
difficulties in staffing and managing international operations;
employment regulations;
disruptions due to cybersecurity incidents;
disruptions in international transport or delivery;
public health conditions; and
difficulties in collecting receivables and longer payment cycles.
If any of these risks materialize, or are worse than we anticipate, our sales could decrease and our operating results could suffer, we could face an increase in the cost of components, production delays, general business interruptions, delays from difficulties in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, longer payment cycles, increased taxes, restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any of which could ultimately have a material adverse effect on our business.
Further changes in trade policy, tariffs, additional taxes, or restrictions on supplies, equipment, and raw materials including rare earth minerals, may limit our ability to produce products, increase our selling and/or manufacturing costs, decrease margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary equipment and supplies, which could have a material adverse effect on our business, results of operations, or financial conditions.
Our contractual relationships with our customers expose us to risks and liabilities.
We do not typically enter into long-term contracts with our non-distributor customers, and therefore we cannot be certain about future order levels from our customers. When we do enter into customer contracts, the contract is generally cancelable at the convenience of the customer. Even though we had over 121,000 customers and our ten largest direct customers made up approximately 11% of our total revenue for fiscal 2019 and six of our top ten direct customers are contract manufacturers that
perform manufacturing services for many customers, cancellation of customer contracts could have an adverse impact on our revenue and profits.
We have contracts with certain customers that differ from our standard terms of sale. For several of the significant markets that we sell into, such as the automotive and personal computer markets, our current or potential customers may possess significant leverage over us in negotiating the terms and conditions of supply as a result of their market size and position. For example, under certain contracts we may commit to supply specific quantities of products on scheduled delivery dates, or agree to extend our obligations for certain liabilities such as warranties or indemnification for quality issues or claims of intellectual property infringement. If we are unable to supply the customer as required under the contract, the customer may incur additional production costs, lost revenues due to subsequent delays in their own manufacturing schedule, or quality-related issues. We may be liable for the customer's costs, expenses and damages associated with their claims and we may be obligated to defend the customer against claims of intellectual property infringement and pay the associated legal fees. While we try to minimize the number of contracts which contain such provisions, manage the risks underlying such liabilities, and set caps on our liability exposure, sometimes we are not able to do so. In order to win important designs, avoid losing business to competitors, maintain existing business, or be permitted to bid on new business, we have been, and may in the future be, forced to agree to uncapped liability for such items as intellectual property infringement, product failure, or confidentiality. Such provisions expose us to risk of liability far exceeding the purchase price of the products we sell under such contracts, the lifetime revenues we receive from such products, or various forms of potential consequential damages. Further, where we do not have negotiated contracts with our customers, the terms of our customer's orders may govern the transaction and contain terms that are not favorable to us. These significant additional risks could result in a material adverse impact on our results of operations and financial condition.
Reliance on government contracts and sales to governmental agencies could have a material adverse effect on our results of operations.
A significant portion of the sales of Microsemi (which we acquired in May 2018) are from or are derived from government agencies or customers whose principal sales are to U.S. government agencies. Such sales are subject to uncertainties regarding governmental spending levels, spending priorities and policy changes. Future sales to U.S. government agencies or customers are also subject to uncertain government appropriations and national defense policies and priorities, including the constraints of the budgetary process, changes in the timing and potential spending priorities and the impact of any past or future government shutdowns, contract terminations or renegotiations, or future sequestrations. Such sales are also subject to uncertainties related to monetary, regulatory, tax and trade policies implemented by current or future administrations or by the U.S. Congress.
In the past, Microsemi has experienced delays and reductions in appropriations on programs that included its products. For example, there were federal government shutdowns from January 20, 2018 to January 23, 2018 and from December 22, 2018 through January 25, 2019. Further delays, reductions in or terminations of government contracts or subcontracts, including those caused by any past or future shutdown of the U.S. federal government, could materially and adversely affect our operating results. If the U.S. government fails to complete its annual budget process or to provide for a continuing resolution to fund government operations, another federal government shutdown may occur, during which time we may experience further delays and reductions in appropriations or reductions in or terminations of government contracts or subcontracts, which could materially and adversely affect our operating results. While we generally function as a subcontractor in these type of transactions, further changes in U.S. government procurement regulations and practices, particularly surrounding initiatives to reduce costs, may adversely impact the contracting environment and our operating results.
The U.S. government and its contractors may terminate their contracts with Microsemi or us at any time. For example, in 2014, Microsemi had a $75 million contract terminated for convenience by the U.S. government. Uncertainty with respect to government spending and termination of contracts associated with government related projects could have a material adverse impact on the revenue and other benefits we achieve from our Microsemi acquisition. Our business related to U.S. governmental agencies or customers requires us to comply with applicable governmental regulations, particularly for our facilities, systems and personnel that service such customers. Maintaining compliance with these regulations, including any audit requirements, requires that we devote significant resources to such matters in terms of training, personnel, information technology and facilities. Any failure to maintain compliance with these requirements may result in fines and penalties and loss of current or future business that may materially and adversely affect our operating results.
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, manufacturing 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. The loss of, or any inability to attract personnel, even if not key personnel, if experienced in sufficient numbers could harm our business. We have no employment agreements with any member of our senior management team.
Fluctuations in foreign currency exchange rates could adversely impact our operating results.
We use forward currency exchange contracts in an attempt to reduce the adverse earnings impact from the effect of exchange rate fluctuations on our non-U.S. dollar net balance sheet exposures. Nevertheless, in periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in which we transact business, the value of our non-U.S. dollar transactions can have an adverse effect on our results of operations and financial condition. In particular, in periods when a foreign currency significantly declines in value in relation to the U.S. dollar, customers transacting in that foreign currency may find it more difficult to fulfill their previously committed contractual obligations or to undertake new obligations to make payments or purchase products. In periods when the U.S. dollar is significantly declining in relation to the British pound, Euro, Thai baht, Taiwan dollar and Malaysian ringgit, the operational costs in our European and Thailand subsidiaries are adversely affected. Although our business has not been materially adversely impacted by recent changes in the value of the U.S. dollar, there can be no assurance as to the future impact that any weakness or strength in the U.S. dollar will have on our business or results of operations.
The occurrence of events for which we are self-insured, or which exceed our insurance limits, may adversely affect our profitability and liquidity.
We have insurance contracts with independent insurance companies related to many different types of risk; however, we self-insure for some potentially significant risks and obligations. In these circumstances, we believe that it is more cost effective for us to self-insure certain risks than to pay the high premium costs. The risks and exposures that we self-insure include, but are not limited to certain property, product defects, cybersecurity matters, employment risks, environmental matters, political risks, and intellectual property matters. Should there be a loss or adverse judgment or other decision in an area for which we are self-insured, then our financial condition, results of operations and liquidity may be adversely affected.
We are subject to stringent environmental and other regulations, which may force us to incur significant expenses.
We must comply with all applicable federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous substances used in our products and manufacturing processes. Our failure to comply with applicable regulations could result in fines, suspension of production, cessation of operations or future liabilities. Such environmental regulations have required us in the past, and could require us in the future, to buy costly equipment or to incur significant expenses to comply with such regulations. Our failure to control the use of, or adequately restrict the discharge of, hazardous substances could impact the health of our employees and others and could impact our ability to operate. Such failure could also restrict our ability to ship certain products to certain countries, require us to modify our operations' logistics, or require us to incur other significant costs and expenses. There is a continuing expansion in environmental laws with a focus on reducing or eliminating hazardous substances and substances of high concern in electronic products and shipping materials. These and other future environmental regulations could require us to reengineer certain of our existing products and may make it more expensive for us to manufacture, sell and ship our products. In addition, the number and complexity of laws focused on the energy efficiency of electronic products and accessories, the recycling of electronic products, and the reduction in the quantity and the recycling of packing materials have expanded significantly. It may be difficult for us to timely comply with these laws and we may not have sufficient quantities of compliant products to meet customers' needs, thereby adversely impacting our sales and profitability. We may also have to write off inventory in the event that we hold unsaleable inventory as a result of changes to regulations or customer requirements. We expect these risks and trends to continue. In addition, we anticipate increased customer requirements to meet voluntary criteria related to the reduction or elimination of substances of high concern in our products, energy efficiency measures, and supplier practices associated with sourcing and manufacturing. These requirements may increase our own costs, as well as those passed on to us by our supply chain.
Customer demands for us to implement business practices that are more stringent than existing legal requirements may reduce our revenue opportunities or cause us to incur higher costs.
Some of our customers and potential customers are requiring that we implement operating practices that are more stringent than what is required by applicable laws with respect to workplace and labor requirements, the type of materials we use in our products, environmental matters or other items. To comply with such requirements, we may have to pass these same operating practices on to our suppliers. Our suppliers may refuse to implement these operating practices, or may charge us more for complying with them. The cost to implement such practices may cause us to incur higher costs and reduce our profitability, and
if we choose not to implement such practices, such customers may disqualify us as a supplier, resulting in decreased revenue opportunities. Developing, administering, monitoring and auditing these customer-requested practices at our own sites and those in our supply chain will increase our costs and may require that we hire more personnel.
Customer demands and regulations related to conflict-free minerals may force us to incur additional expenses.
As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012, the SEC released investigation, disclosure and reporting requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries and which are necessary to the functionality or production of products. We filed a report on Form SD with the SEC regarding such matters on May 23, 2018. Other countries are considering similar regulations. If we cannot certify that we are using conflict-free minerals, customers may demand that we change the sourcing of minerals and other materials used in the manufacture of our products, even if the costs for compliant minerals and materials significantly increases and availability is limited. If we make changes to materials or suppliers, there will likely be costs associated with qualifying new suppliers and production capacity and quality could be negatively impacted. Our relationships with customers and suppliers may be adversely affected if we are unable to certify that our products are "conflict-free." We have incurred, and expect in the future to incur, additional costs associated with complying with these new disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict free in a materially different manner than advocated by the Responsible Minerals Initiative or the Dodd-Frank Wall Street Reform and Consumer Protection Act. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier and we may have to write off inventory in the event that it cannot be sold.
Regulatory authorities in jurisdictions into or from which we ship our products could levy fines, restrict or delay our ability to export or transfer products, or increase costs associated with the manufacture or transfer of products.
A significant portion of our sales are made through the exporting and importing of products. In addition to local jurisdictions' trade regulations, our U.S.-manufactured products or products based on U.S. technology are subject to U.S. laws and regulations governing international trade, including, but not limited to the Foreign Corrupt Practices Act, Export Administration Regulations, International Traffic in Arms Regulations and trade sanctions against embargoed countries and denied entities administered by the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC). Licenses or proper license exceptions are required for the shipment of our products to certain countries. A determination by the U.S. or foreign government that we have failed to comply with trade or export regulations or anti-bribery regulations can result in penalties which may include denial of export privileges, fines, civil or criminal penalties, and seizure of products. Such penalties could have a material adverse effect on our business, sales and earnings. Further, a change in these laws and regulations could restrict our ability to transfer product to previously permitted countries, customers, distributors or other third parties. Any one or more of these sanctions or a change in laws or regulations could have a material adverse effect on our business, financial condition and results of operations.
For certain of our products associated with our Microsemi acquisition, we rely on U.S. export licenses to ship our products to non-U.S. customers. In 2018, there was a federal government shutdown from January 20, 2018 to January 23, 2018 and a second shutdown from December 22, 2018 through January 25, 2019. Due to the U.S. federal government shutdown, the agency that approves these export licenses was temporarily closed. This resulted in a delay in certain shipments that were scheduled to ship within the quarter. Although this delay did not result in a material adverse impact on our revenue in previous quarters, it could have a material adverse impact on our revenue within the quarter of any future government shutdown, and in the following quarter depending on the ability of the governmental agency to expedite processing of licenses delayed during the shutdown.
The U.S. and other countries have levied tariffs and taxes on certain goods. Trade tensions between the U.S. and China escalated in 2018 and 2019, including the U.S. increasing tariffs on Chinese origin goods, and China increasing tariffs on U.S. goods. Some of our products were affected and are continuing to be affected by the increased tariffs. Higher duties on existing tariffs and further rounds of tariffs have been recently announced or threatened by the U.S. and Chinese administrations. We have taken steps to mitigate the costs of these tariffs on our business. Although these increases in tariffs did not result in significant increases to the operating costs of our business, they did, however, adversely impact demand for our products during fiscal 2019. The recent additional tariffs imposed on components or equipment that we or our suppliers source from China will increase our costs and could have a material adverse impact on our operating results in the three months ending June 30, 2019 or future periods. Increased tariffs on our customers' products could impact their sales of their products, and increased tariffs on our products in comparison to those of our competitors, could each result in lower demand for our products. Further changes in trade policy, tariffs, additional taxes, restrictions on exports or other trade barriers, may limit our ability to produce products,
increase our selling and/or manufacturing costs, decrease margins, reduce the competitiveness of our products, or inhibit our ability to sell products, which could have a material adverse effect on our business, results of operations or financial conditions.
The outcome of future examinations of our income tax returns could have an adverse effect on our results of operations.
We are subject to examination of our income tax returns by the IRS and other tax authorities for fiscal 2007 and later. We are subject to certain income tax examinations in foreign jurisdictions for fiscal 2007 and later.
We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. There can be no assurance that the final determination of any of these or any future examinations will not have an adverse effect on our effective tax rates, financial position and results of operations.
Exposure to greater than anticipated income tax liabilities, changes in tax rules and regulations (including the Act), changes in the interpretation of tax rules and regulations, or unfavorable assessments from tax audits could affect our effective tax rates, financial condition and results of operations
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our income tax obligations could be affected by many factors, including but not limited to changes to our corporate operating structure, intercompany arrangements and tax planning strategies.
Our income tax expense is computed based on tax rates at the time of the respective financial period. Our future effective tax rates, financial condition and results from operations could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in the tax rules and regulations or the interpretation of tax rules and regulations in the jurisdictions in which we do business or by changes in the valuation of our deferred tax assets.
Currently, a majority of our revenue is generated from customers located outside the U.S., and a substantial portion of our assets, including employees, are located outside of the U.S. The adoption of the Act significantly changed the taxation of U.S.-based multinational corporations, by, among other things, reducing the U.S. corporate income tax rate, adopting elements of a territorial tax system, assessing a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creating new taxes on certain foreign-sourced earnings. The new legislation is unclear in some respects and will require interpretations and implementing regulations by the Internal Revenue Service, as well as state tax authorities, and the legislation could be subject to potential amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the legislation. A significant portion of our earnings are earned by our subsidiaries outside the U.S. Changes to the taxation of certain foreign earnings resulting from the Act, along with the state tax impact of these changes and potential future cash distributions, will likely have an adverse effect on our effective tax rate. Furthermore, changes to the taxation of undistributed foreign earnings could change our future intentions regarding reinvestment of such earnings. The foregoing items could have a material adverse effect on our business, cash flow, results of operations or financial conditions.
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate in the future. The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of which are beyond our control, including, but not limited to:
quarterly variations in our operating results or the operating results of other technology companies;
our ability to continue to realize the expected benefits of our acquisition of Microsemi;
general conditions in the semiconductor industry;
global economic and financial conditions;
changes in our financial guidance or our failure to meet such guidance;
changes in analysts' estimates of our financial performance or buy/sell recommendations;
any other acquisitions we pursue or complete; and
actual or anticipated announcements of technical innovations or new products by us or our competitors.
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for many companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations and other factors have harmed and may harm the market price of our common stock. Some or all of the foregoing factors could also cause the market price of our convertible debentures to decline or fluctuate substantially.
Anti-takeover defenses in our charter documents and under Delaware law could discourage takeover attempts, which could also reduce the market price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of Microchip. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:
the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;
the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
the requirement that a special meeting of stockholders may be called only by the holders of 50% or more of the combined voting power of all classes of our capital stock, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquiror to amend the bylaws to facilitate an unsolicited takeover attempt; and
advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders' meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror's own slate of directors or otherwise attempting to obtain control of us.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. The application of Section 203 also could have the effect of delaying or preventing a change in control of us.
Any of these provisions could, under certain circumstances, depress the market price of our common stock.
As a result of our acquisition activity, our goodwill and intangible assets have increased significantly in recent years and we may in the future incur impairments to goodwill or intangible assets.
When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. As of March 31, 2019,2021, we had goodwill of $6.66$6.67 billion and net intangible assets of $6.69$4.79 billion. In connection with the completion of our acquisition of Microsemi in May 2018, our balance of goodwill and intangible assets increased significantly. We review our indefinite-lived intangible assets, including goodwill, for impairment annually in the fourth fiscal quarter or whenever events or changes in circumstances indicate that the carrying amount of those assets is more likely than not impaired. Factors that may be considered in assessing whether goodwill or intangible assets may be impaired include a decline in our stock price or market capitalization, reduced estimates of future cash flows and slower growth rates in our industry. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. Because we operate in highly competitive environments, projections of our future operating results and cash flows may vary significantly from our actual results. No goodwill impairment charges were recorded in fiscal 20192021 or fiscal 2018. In fiscal 2019, we recognized $3.1 million of intangible asset impairment charges.2020. No material intangible asset impairment charges were recorded in fiscal 2018.2021 compared to $2.2 million in fiscal 2020. If in future periods, we determine that our goodwill or intangible assets are impaired, we will be required to write down these assets which would have a negative effect on our consolidated financial statements.
If we fail to maintain proper and effective internal control and remediate any future control deficiencies, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and our reputation with investors.
As discussed in Item 9A “Controls and Procedures” in our annual report on Form 10-K for the fiscal year ended March 31, 2019, we identified a material weakness in our internal controls related to accounting for income taxes and we also identified a material weakness in our internal controls related to IT system access. Although such material weaknesses were remediated in fiscal 2020, there can be no assurance that similar control issues will not be identified in the future. If we cannot remediate future material weaknesses or significant deficiencies in a timely manner, or if we identify additional control deficiencies that individually or together constitute significant deficiencies or material weaknesses, our ability to accurately record, process, and report financial information and our ability to prepare financial statements within required time periods, could be adversely affected. Failure to maintain effective internal controls could result in violations of applicable securities laws, stock exchange listing requirements, and the covenants under our debt agreements, subject us to litigation and investigations, negatively affect investor confidence in our financial statements, and adversely impact our stock price and our ability to access capital markets.
Ensuring that we have adequate internal financial and accounting controls and procedures so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 which requires an annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent auditors. In addition to the identified material weaknesses related to accounting for income taxes and to IT system access, which were remediated as of March 31, 2020, we have from time to time identified other significant deficiencies. If we fail to remediate any future material weaknesses or significant deficiencies or to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, harm our ability to operate our business and reduce the trading price of our stock.
Customer demands for us to implement business practices that are more stringent than legal requirements may reduce our revenue opportunities or cause us to incur higher costs.
Some of our customers require that we implement practices that are more stringent than those required by applicable laws
with respect to labor requirements, the materials contained in our products, energy efficiency, environmental matters or other items. To comply with such requirements, we also require our suppliers to adopt such practices. Our suppliers may in the future refuse to implement these practices, or may charge us more for complying with them. If certain of our suppliers refuse to implement the practices, we may be forced to source from alternate suppliers. The cost to implement such practices may cause us to incur higher costs and reduce our profitability, and if we do not implement such practices, such customers may disqualify us as a supplier, resulting in decreased revenue opportunities. Developing, enforcing, and auditing customer-requested practices at our own sites and in our supply chain will increase our costs and may require more personnel.
We must attract and retain qualified personnel to be successful, and competition for qualified personnel can be intense.
Our success depends upon our personnel. The loss of or inability to attract key personnel, or the loss of or inability to attract sufficient numbers of non-key personnel, particularly production specialists in our manufacturing operations, could harm our business. We have no employment agreements with any member of our senior management team.
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 coverage related to many different types of risk; however, we self-insure for some potentially significant risks and obligations, because we believe that it is more cost effective for us to self-insure than to pay the high premium costs. The risks and exposures that we self-insure include, but are not limited to, employee health matters, certain property matters, product defects, cybersecurity matters, employment risks, environmental matters, political risks, and intellectual property matters. Should there be a loss or adverse judgment in an area for which we are self-insured, then our financial condition, results of operations and liquidity may be materially adversely affected.
Risks Related to Cybersecurity, Privacy, Intellectual Property, and Litigation
We continue to be the target of attacks on our IT systems and data and interruptions in our IT systems, unauthorized access to our IT systems, or improper handling of data, could adversely affect our business.
We rely on the uninterrupted operation of complex IT systems and networks to operate our business. Any significant disruption to our systems or networks, including, but not limited to, new system implementations, computer viruses, security breaches, facility issues, natural disasters, terrorism, war, telecommunication failures or energy blackouts could have a material adverse impact on our business, operations, supply chain, sales and operating results. Such disruption could result in an unauthorized release of our, our suppliers’ or our customers’ intellectual property or confidential, proprietary or sensitive information, or the release of personal data. Any release of such information or data could harm our business or competitive position, result in a loss of customer confidence, and cause us to incur significant costs to remedy the damages. In addition, any release of such information or data or the failure to properly manage the collection, handling, transfer or disposal of such information may result in regulatory inquiries or penalties, enforcement actions, remediation obligations, claims for damages, litigation, and other sanctions.
From time to time, we have experienced verifiable attacks on our IT systems and data, including network compromises, attempts to breach our security measures and attempts to introduce malicious software into our IT systems. For example, in fiscal 2019, we learned of an ongoing compromise of our computer networks by what is believed to be sophisticated hackers. We engaged experienced legal counsel and a leading forensic investigatory firm with experience in such matters. We took various steps to identify malicious activity on our network including a compromise of our network and, in May 2019, we began implementing a containment plan. We routinely evaluate the effectiveness of the containment mechanisms that were implemented and continue to implement additional measures from time to time. We have analyzed and continue to analyze the amount and content of the information that was compromised. We do not believe that this IT system compromise has had a material adverse effect on our business or resulted in any material damage to us. As a result of the IT system compromise, our management, including our chief executive officer and our chief financial officer, concluded that our internal controls related to IT system access were not effective resulting in a material weakness in our internal controls for fiscal 2019. Although this material weakness in our internal control was remediated in fiscal 2020, there can be no assurance that similar control issues will not be identified in future periods.
Due to the types of products we sell and the significant amount of sales we make to government agencies or customers whose principal sales are to U.S. government agencies, we have experienced and expect to continue to experience in the future, attacks on our IT systems and data, including attempts to breach our security, network compromises and attempts to introduce malicious software into our IT systems. Were any future attacks to be successful, we may be unaware of the incident, its magnitude, or its effects until significant harm is done. In recent years, we have regularly implemented improvements to our
protective measures which include, but are not limited to, implementation of the following: firewalls, endpoint intrusion detection and response software, patches, log monitors, event correlation tools, routine backups with offsite retention of storage media, system audits, dual factor identification, data partitioning and routine password modifications. As a result of the material weakness in our internal controls resulting from the IT systems compromise in 2019, we have taken remediation actions and implemented additional controls and we are continuing to take actions to attempt to address evolving threats. However, recent system improvements have not been fully effective in preventing attacks on our IT systems and data, including breaches of our security measures, and there can be no assurance that any future system improvements will be effective in preventing future cyber-attacks or disruptions or limiting the damage from any future cyber-attacks or disruptions. Such system improvements have resulted in increased costs to us and any future improvements, attacks or disruptions could result in additional costs related to rebuilding our internal systems, defending litigation, complaints or other claims, providing notices to regulatory agencies or other third parties, responding to regulatory actions, or paying damages. Such attacks or disruptions could have a material adverse impact on our business, operations and financial results.
Third-party service providers, such as wafer foundries, assembly and test contractors, distributors, credit card processors and other vendors have access to portions of our and our customers' data. In the event that these service providers do not properly safeguard the data that they hold, security breaches and loss of data could result. Any such breach or loss of data by our third-party service providers could negatively impact our business, operations and financial results, as well as our relationship with our customers.
Our failure to comply with federal, state, or international privacy and data protection laws and regulations may materially adversely affect our business, results of operations and financial condition.
We are subject to numerous laws and regulations in the U.S. and internationally regarding privacy and data protection such as the European Union’s (EU) General Data Protection Regulation (GDPR), the U.K. equivalent to the GDPR, the California Consumer Privacy Act, and the California Privacy Rights Act. The scope of these laws and regulations is rapidly evolving, subject to differing interpretations, and may be inconsistent among jurisdictions. Some of these laws create a broad definition of personal information, establish data privacy rights, impose data breach notification requirements, and create potentially severe statutory damages frameworks and private rights of action for certain data breaches. Some of the laws and regulations also place restrictions on our ability to collect, store, use, transmit and process personal information and other data across our business. For example, the GDPR restricts the ability of companies to transfer personal data from the European Economic Area (EEA) to the U.S. and other countries. Further, such laws and regulations have resulted and will continue to result in significantly greater compliance burdens and costs for companies such as us that have employees, customers, and operations in the EEA.
In order to comply with the GDPR, we have relied mainly on the European Commission’s Standard Contractual Clauses (SCCs), for transfers of personal information from the EEA to the U.S. or other countries. However, the Court of Justice of the EU in a July 2020 decision (Schrems II) invalidated the EU-U.S. Privacy Shield Framework, and also called for stricter conditions in the use of the SCCs. Following the Schrems II decision, certain data protection authorities in the EU have issued statements advising companies within their jurisdiction not to transfer personal data to the U.S. under the SCCs. At present, there are few, if any, viable alternatives to the SCCs. If we are unable to implement sufficient safeguards to ensure that our transfers of personal information from the EEA are lawful, we may face increased exposure to regulatory actions and substantial fines and injunctions against processing personal information from the EEA. The loss of our ability to lawfully transfer personal data out of the EEA may cause reluctance or refusal by European customers to communicate with us as they are currently, and we may be required to increase our data processing capabilities in the EEA at significant expense. Additionally, other countries outside of the EEA have passed or are considering passing laws requiring local data residency which could increase the cost and complexity of providing our products in those jurisdictions.
Furthermore, the GDPR and the U.K. equivalent of the GDPR expose us to two parallel data protection regimes in Europe, each of which potentially authorizes fines and enforcement actions for certain violations. Substantial fines may be imposed for breaches of data protection requirements, which can be up to 4% of a company’s worldwide revenue or 20 million Euros, whichever is greater. Although the U.K. data protection regime currently permits data transfers from the U.K. to the EEA and other third countries, covered by a European Commission 'adequacy decision' through the continued use of SCCs and binding corporate rules, these laws and regulations are subject to change, and any such changes could have adverse implications for our transfer of personal data from the U.K. to the EEA and other third countries.
While we plan to continue to undertake efforts to conform to current regulatory obligations and evolving best practices, such efforts may be unsuccessful or result in significant costs. We may also experience reluctance, or refusal by European or multi-national customers to continue to provide us with personal data due to the potential risk exposure of personal data transfers and the current data protection obligations imposed on them by applicable data protection laws or by certain data
protection authorities. These and any other data privacy laws and their interpretations continue to develop and their uncertainty and inconsistency may increase the cost of compliance, cause compliance challenges, restrict our ability to offer products in certain locations in the same way that we have been, potentially adversely affect certain third-party service providers, or subject us to sanctions by data protection regulators, all of which could adversely affect our business, financial condition and results of operations.
We are exposed to various risks related to legal proceedings, investigations or claims.
We are currently, and in the future may be, involved in legal proceedings, investigations or claims regarding intellectual property rights, product failures, our Microsemi acquisition, contracts and other matters. As is typical in the semiconductor industry, we receive notifications from third parties from time to time who believe that we owe them indemnification or other obligations related to claims made against us, our direct or indirect customers, or our licensees. These legal proceedings and claims, even if meritless, have in the past and could in the future result in substantial costs to us. If we are unable to resolve or settle a matter, obtain necessary licenses on reasonable terms, reengineer products or processes to avoid infringement, provide a cost-effective remedy, or successfully prosecute or defend our position, we could incur uninsured liability in any of them, be required to take a charge to operations, be enjoined from selling a material portion of our products or using certain processes, suffer a reduction or elimination in the value of our inventories, and our business, financial condition or results of operations could be harmed.
It is also possible that from time to time we may be subject to claims related to the manufacture, performance, or use of our products. These claims may be due to injuries, economic damage or environmental exposures related to manufacturing, a product's nonconformance to our or our customer’s specifications, changes in our manufacturing processes, or unexpected customer system issues due to the integration of our products or insufficient design or testing by our customers. We could incur significant expenses related to such matters, including, but not limited to:
•costs related to writing off the value of our inventory of nonconforming products;
•recalling nonconforming products;
•providing support services, product replacements, or modifications to products and the defense of such claims;
•diversion of resources from other projects;
•lost revenue or a delay in the recognition of revenue due to cancellation of orders or unpaid receivables;
•customer imposed fines or penalties for failure to meet contractual requirements; and
•a requirement to pay damages or penalties.
Because the systems into which our products are integrated have a higher cost of goods than the products we sell, the expenses and damages we are asked to pay may be significantly higher than the revenue and profits we received. While we exclude consequential damages in our standard terms and conditions, certain of our contracts may not exclude such liabilities. Further, our ability to avoid such liabilities may be limited by law. We have liability insurance which covers certain damages arising out of product defects, but we do not expect that insurance will fully protect against such claims. Payments we may make in connection with these customer claims may adversely affect the results of our operations.
Further, we sell to customers in industries such as automotive, aerospace, defense, safety, security, and medical, where failure of the application could cause damage to property or persons. We may be subject to claims if our products, or the integration of our products, cause system failures. We will face increased exposure to claims if there are substantial increases in either the volume of our sales into these applications or the frequency of system failures integrating our products.
Our contractual relationships with our customers expose us to risks and liabilities.
With the exception of orders placed under our Preferred Supply Program, we do not typically enter into long-term contracts with our non-distributor customers, and therefore we cannot be certain about future order levels from our customers. When we do enter into customer contracts, the contract is generally cancelable at the customer’s convenience. While we had approximately 114,000 customers, and our ten largest direct customers accounted for approximately 11% of our total revenue for fiscal 2021, and five of our top ten direct customers are contract manufacturers that perform manufacturing services for many customers, cancellation of customer contracts could have an adverse impact on our revenue and profits. For example, due to uncertainty related to the COVID-19 pandemic, we experienced an increase in order cancellations and requests to reschedule deliveries to future dates in the first quarter of fiscal 2021.
Certain customer contracts differ from our standard terms of sale. For some of the markets that we sell into, such as the automotive and personal computer markets, our customers may have negotiating leverage over us as a result of their market size. For example, under certain contracts we may commit to supply products on scheduled delivery dates, or extend our obligations for liabilities such as warranties or indemnification for quality issues or intellectual property infringement. If we are
unable to supply the customer as contractually required, the customer may incur additional production costs, lost revenues due to delays in their manufacturing schedule, or quality-related issues. We may be liable for costs and damages associated with customer claims, and we may be obligated to defend the customer against claims of intellectual property infringement and pay associated legal fees. While we try to minimize the number of contracts which contain such provisions, manage the risks of such liabilities, and set caps on our liability exposure, sometimes we are unable to do so. In order to win important designs, avoid losing business to competitors, maintain existing business, or be permitted to bid on new business, we have, and may in the future, have to agree to uncapped liability for such items as intellectual property infringement or product failure. This exposes us to risk of liability far exceeding the purchase price of the products sold under such contracts, the lifetime revenues we receive under such contracts, or potential consequential damages. Further, where we do not have negotiated customer contracts, our customer's order terms may govern the transaction and contain terms unfavorable to us. These risks could result in a material adverse impact on our results of operations and financial condition.
Failure to adequately protect our intellectual property could result in lost revenue or market opportunities.
Our ability to obtain patents, licenses and other intellectual property rights covering our products and manufacturing processes is important for our success. To that end, we have acquired certain patents and licenses and intend to continue to seek patents on our technology and manufacturing processes. The process of seeking patent protection can be expensive, and patents may not be issued from currently pending or future applications. In addition, our existing and new patents, trademarks and copyrights that are issued may not have sufficient scope or strength to provide meaningful protection or commercial advantage to us. We may be subject to, or may initiate, interference proceedings in the U.S. Patent and Trademark Office, patent offices of a foreign country or U.S. or foreign courts, which can require significant financial 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. Although we continue to aggressively defend and protect our intellectual property on a worldwide basis, there can be no assurance that we will be successful.
Risks Related to Taxation, Laws and Regulations
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 U.S. GAAP. These accounting principles are subject to interpretation or changes by the FASB and the SEC. New accounting pronouncements and interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future. New accounting pronouncements or a change in the interpretation of accounting standards or practices may have a significant effect on our reported financial results and may affect our reporting of transactions completed before the change is effective.
Regulatory authorities in jurisdictions into or from which we ship our products could levy fines, restrict or delay our ability to export products, or increase costs associated with the manufacture or transfer of products.
A significant portion of our sales require export and import activities. Our U.S.-manufactured products or products based on U.S. technology are subject to laws and regulations on international trade, including but not limited to the Foreign Corrupt Practices Act, EARs, International Traffic in Arms Regulations and trade sanctions against embargoed countries and denied entities, including those administered by the U.S. Department of the Treasury, Office of Foreign Assets Control. Licenses or license exceptions are required for the shipment of our products to certain countries. Our inability to timely obtain a license, for any reason, including a delay in license processing due to a federal government shutdown like that which occurred in 2018, could cause a delay in scheduled shipments which could have a material adverse impact on our revenue within the quarter of a shutdown, and in following quarters depending on the extent that license processing is delayed. Further, determination by a government that we have failed to comply with trade regulations or anti-bribery regulations can result in penalties which may include denial of export privileges, fines, penalties, and seizure of products, any of which could have a material adverse effect on our business, sales and earnings. A change in laws and regulations could restrict our ability to transfer product to previously permitted countries, customers, distributors or others. For example, in fiscal 2019, the U.S. Commerce Department banned U.S. companies from selling products or transferring technology to ZTE, a Chinese company, and certain subsidiaries. This ban was lifted in July 2018. In fiscal 2020, the U.S. Commerce Department banned U.S. companies from selling products or transferring technology to certain Chinese companies, including Huawei and certain subsidiaries. In fiscal 2020, the U.S. Federal Acquisition Regulation prohibited U.S. governmental agencies from buying equipment using covered telecommunications equipment as a substantial component or critical technology where the technology came from certain Chinese companies. On July 14, 2020, this was expanded to prohibit U.S. governmental agencies from entering into a contract with any company that uses covered telecommunications equipment whether or not the Chinese technology is related to the
procurement. Effective June 2020, amendments to the EAR regarding prohibitions of sales of items with a “military end use” into China, Russia, and Venezuela, and elimination of an EAR License Exception, apply to more of our products than the previous regulations. Any of the foregoing changes could adversely impact our operational costs due to the administrative impacts of complying with these regulations, and may limit those with whom we conduct business. Any one or more of these sanctions, future sanctions, a change in laws or regulations, or a prohibition on shipment of our products or transfer of our technology to significant customers could have a material adverse effect on our business, financial condition and results of operations.
The U.S. and other countries have levied tariffs and taxes on certain goods, implemented trade restrictions, and introduced national security protection policies. Trade tensions between the U.S. and China, which escalated in 2018, have continued and include the U.S. increasing tariffs on Chinese origin goods and China increasing tariffs on U.S. origin goods. Some of our products were adversely affected and are continuing to be affected by the increased tariffs. We took steps to mitigate the costs of these tariffs on our business by making adjustments in operations and supply. Although these tariff increases did not result in a material adverse impact on our operating costs in fiscal 2019 or fiscal 2020, they did reduce demand for our products during fiscal 2019 and fiscal 2020. Increased tariffs on our customers' products could adversely impact their sales, and increased tariffs on our products in comparison to those of our competitors could each result in lower demand for our products.
Further changes in trade or national security protection policy, tariffs, additional taxes, restrictions on exports or other trade barriers, may limit our ability to produce products, increase our selling and/or manufacturing costs, decrease margins, reduce the competitiveness of our products, or reduce our ability to sell products, which could have a material adverse effect on our business, results of operations or financial conditions.
The outcome of future examinations of our income tax returns could have an adverse effect on our results of operations.
We are subject to examination of our U.S. and certain foreign income tax returns for fiscal 2007 and later. We regularly assess the likelihood of adverse outcomes of these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from current or future examinations. There can be no assurance that the final determination of any of these or any future examinations will not have an adverse effect on our effective tax rates, financial position and results of operations.
Exposure to greater than anticipated income tax liabilities, changes in tax rules and regulations, changes in the interpretation of tax rules and regulations, or unfavorable assessments from tax audits could affect our effective tax rates, financial condition and results of operations.
We are a U.S.-based multinational company subject to tax in many U.S. and foreign jurisdictions. Our income tax obligations could be affected by many factors, including changes to our operating structure, intercompany arrangements and tax planning strategies.
Our income tax expense is computed based on tax rates at the time of the respective financial period. Our future effective tax rates, financial condition and results from operations could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in the tax rules and regulations or the interpretation of tax rules and regulations in the jurisdictions in which we do business or by changes in the valuation of our deferred tax assets.
Currently, a majority of our revenue is generated from customers located outside the U.S., and a substantial portion of our assets, including employees, are located outside of the U.S. The adoption of the TCJA significantly changed the taxation of U.S.-based multinational corporations, by, among other things, reducing the U.S. corporate income tax rate, adopting elements of a territorial tax system, assessing a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creating new taxes on certain foreign-sourced earnings. The TCJA is unclear in some respects and will require interpretations and implementing regulations by the Internal Revenue Service (IRS), as well as state tax authorities, and the legislation could be subject to potential amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the legislation. Changes to the taxation of certain foreign earnings resulting from the TCJA, along with the state tax impact of these changes and potential future cash distributions, will likely have an adverse effect on our effective tax rate. Furthermore, changes to the taxation of undistributed foreign earnings could change our future plans regarding reinvestment of such earnings. The foregoing items could have a material adverse effect on our business, cash flow, results of operations or financial conditions.
The Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Shifting Project, and issued a report in 2015, an interim report in 2018, and is expected to continue to issue guidelines and proposals that may change aspects of the existing framework under which our tax obligations are determined in many of the countries where
we do business. Similarly, the European Commission and several countries have issued proposals that would change aspects of the current tax framework under which we are taxed. These proposals include changes to the existing income tax framework, and proposals to change or impose new types of non-income taxes, including taxes based on a percentage of revenue.
Our business, financial condition and operating results may be adversely impacted by policies implemented by the new administration.
As a result of the outcome of the 2020 U.S. elections, the new administration could make significant legislative and policy changes in areas including but not limited to tax, trade, labor and the environment. If implemented, these changes could increase our effective tax rate, and increase our selling and/or manufacturing costs, which could have a material adverse effect on our business, results of operations or financial conditions. Changes in tax policy, trade regulations or other matters, and any uncertainty surrounding the scope or timing of such changes, could negatively impact the stock market, and reduce the trading price of our stock.
We are subject to stringent environmental and other regulations, which may force us to incur significant expenses.
We must comply with federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of hazardous substances used in our products and manufacturing processes. Our failure to comply, or the failure of entities that we have acquired over time to have complied, with regulations could result in significant fines, liability for clean-up, suspension of production, cessation of operations or future liabilities. Such regulations have required us in the past, and could require us in the future, to incur significant expenses to comply with such regulations. Our failure to control the use of, or adequately restrict the discharge of, hazardous substances could impact the health of our employees and others and could impact our ability to operate. Such failure could also restrict our ability to ship certain products to certain countries, require us to modify our logistics, or require us to incur other significant costs and expenses. Environmental laws continue to expand with a focus on reducing or eliminating hazardous substances in electronic products and shipping materials. Future environmental regulations could require us to reengineer certain of our existing products and may make it more expensive for us to manufacture, sell and ship our products. In addition, the number and complexity of laws focused on the energy efficiency of electronic products, the recycling of electronic products, and the reduction in the amount and the recycling of packing materials have expanded significantly. It may be difficult for us to timely comply with these laws and we may have insufficient quantities of compliant products to meet customers' needs, thereby adversely impacting our sales and profitability. We may have to write off inventory if we hold unsaleable inventory as a result of changes to regulations. We expect these risks to continue. These requirements may increase our own costs, as well as those passed on to us by our supply chain.
Climate change regulations and sustained adverse climate change pose risks that could harm our results of operations.
Climate change regulations could require us to limit emissions, change manufacturing processes, substitute materials which may cost more or be less available, fund offset projects, obtain new permits or undertake other costly activities. Failure to obtain permits could result in fines, suspension or cessation of production. Restrictions on emissions could result in significant costs such as higher energy costs, carbon taxes, and emission cap and trade programs. The cost of compliance with such regulations could restrict our manufacturing operations, and have an adverse effect on our operating results.
Further, sustained adverse change in climate could have a direct adverse economic impact on us, such as utility shortages, and higher costs of utilities. Certain of our operations are located in arid or tropical regions, which some experts believe may become vulnerable to fires, storms, severe floods and droughts. While our business recovery plans are intended to allow us to recover from natural disasters or other disruptive events, our plans may not protect us from all events.
Customer demands and regulations related to conflict-free minerals may force us to incur additional expenses.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012, the SEC released investigation, and disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries. We filed a Form SD with the SEC regarding such matters on May 29, 2020. Other countries are considering similar regulations. If we cannot certify that our supply chain is free from the risk of irresponsible sourcing, customers may demand that we change the sourcing of materials used in the manufacture of our products, even if the costs for compliant materials significantly increases or availability is limited. If we change materials or suppliers, there will likely be costs associated with qualifying new suppliers and production capacity and quality could be negatively impacted. Our relationships with customers and suppliers may be adversely affected if we are unable to certify that our products are free from the risk of irresponsible sourcing. We have incurred, and expect in the future to incur, additional costs associated with complying with these disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. We may be unable to satisfy customers who require that all of the components of our products be certified as
conflict free in a materially different manner than advocated by the Responsible Minerals Initiative or the Dodd-Frank Wall Street Reform and Consumer Protection Act. If we are unable to meet customer requirements, customers may disqualify us as a supplier and we may have to write off inventory if it cannot be sold.
In addition to concerns over “conflict” minerals mined from the Democratic Republic of Congo, our customers may require that other minerals and substances used within our supply chain be evaluated and reported on. An increase in reporting obligations will increase associated operating costs. This could have negative effects on our overall operating profits.
A requirement to fund our foreign pension plans are unfunded, and any requirement to fund these plans in the future could negatively affect our cash position and operating capital.
In connection with our acquisitions of Microsemi and Atmel, we assumed defined benefit pension plans that cover certain of our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. The projected benefit obligation totaled $72.7 million at March 31, 2019. Most of these plans are unfunded in compliance with local statutory regulations,requirements, and we have no immediate
intention of funding these plans. The projected benefit obligation totaled $83.0 million at March 31, 2021. Benefits are paid when amounts become due, commencing when participants retire.due. We expect to pay approximately $1.3$1.6 million in fiscal 20202022 for benefits earned. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively affect our cash position and operating capital.
From timeRisks Related to timeCapitalization and Financial Markets
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The market price of our common stock has fluctuated significantly in the recent past and is likely to fluctuate in the future. The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of which are beyond our control, including, but not limited to:
•global economic and financial uncertainty due to the COVID-19 pandemic or other factors;
•quarterly variations in our operating results or the operating results of other technology companies;
•changes in our financial guidance or our failure to meet such guidance;
•changes in analysts' estimates of our financial performance or buy/sell recommendations;
•general conditions in the semiconductor industry;
•our ability to realize the expected benefits of our completed or future acquisitions; and
•actual or anticipated announcements of technical innovations or new products by us or our competitors.
In addition, the stock market has recently and in the past experienced significant price and volume fluctuations that have affected the market prices for many companies and that often have been unrelated to their operating performance. These broad market fluctuations and other factors have harmed and may harm the market price of our common stock. The foregoing factors could also cause the market price of our Convertible Debt to decline or fluctuate substantially.
Our financial condition and results of operations could be adversely impacted if we receive grants from governments, agenciesdo not effectively manage current or future debt.
As of March 31, 2021, the principal amount of our outstanding indebtedness was $9.21 billion. As a result of our acquisition of Microsemi, we have substantially more debt than we had prior to May 2018. At March 31, 2021, we had $2.35 billion in outstanding borrowings under our Revolving Credit Facility which provides up to $3.57 billion of revolving loan commitments that terminate in 2023. At March 31, 2021, we had $5.6 billion in aggregate principal amount of Senior Notes and research organizations.$1.26 billion in aggregate principal of Convertible Debt outstanding. In fiscal 2021 and fiscal 2020, we repurchased $3.27 billion and $615.0 million, respectively, in principal amount of our convertible debt and repaid all amounts outstanding under our Term Loan Facility primarily through borrowings under our Revolving Credit Facility, issuance of senior notes, and issuance of convertible debt.
Our maintenance of substantial levels of debt could adversely affect our ability to take advantage of opportunities and could adversely affect our financial condition and results of operations. We may need or desire to refinance our current or future debt and there can be no assurance that we will be able to do so on reasonable terms, if at all.
Servicing our debt requires a significant amount of cash, we may not have sufficient cash to fund payments and adverse changes in our credit ratings could increase our borrowing costs and adversely affect our ability to access the debt markets.
Our ability to make scheduled payments of principal, interest, or to refinance our indebtedness, including our outstanding Convertible Debt and Senior Notes, depends on our future performance, which is subject to economic, competitive and other factors including those related to the COVID-19 pandemic. Our business may not continue to generate sufficient cash flow to service our debt and to fund capital expenditures, dividend payments, share repurchases or acquisitions. If we are unable to comply with the terms of those grants, we may not be able to receive or recognize grant benefits orgenerate such cash flow, we may be required to repay grant benefits previously paidundertake alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on onerous or highly dilutive terms. Our ability to usrefinance our indebtedness will depend on the capital markets and recognize related charges, which wouldour financial condition at such time. Our senior secured notes are rated by certain major credit rating agencies. These credit ratings impact our cost of borrowing and our ability to access the capital markets and are based on our financial performance and financial metrics including debt levels. There is no assurance that we will maintain our current credit ratings. A downgrade of our credit rating by a major credit rating agency could result in increased borrowing costs and could adversely affect our operating results and financial position.ability to access the debt markets to refinance our existing debt or finance future debt.
From time to time, we receive economic incentive grants and allowances from European governments, agencies and research organizations targeted at increasing employment at specific locations. The subsidy grant agreements typically contain economic incentive, headcount, capital and research and development expenditure and other covenants that must be met to receive and retain grant benefits, and these programs can be subjected to periodic review by the relevant governments. Noncompliance by us with the conditions of the grants could result in our forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts received to date.
Conversion of our debenturesConvertible Debt will dilute the ownership interest of our existing stockholders.
The conversion of some or all of our outstanding debenturesConvertible Debt will dilute the ownership interest of our existing stockholders to the extent we deliver common stock upon conversion of the debentures.such debt. 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,Convertible Debt, 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 debenturethe Convertible Debt exceeds the principal amount, of the debenture, we may also elect to deliver cash in lieu of common stock for the conversion value in excess of the one thousand dollars principal amount (i.e., the conversion spread). There would be no adjustment to the numerator in the net income per common share computation for the cash settled portion of the debenturesConvertible Debt as that portion of the debt instrument will always be settled in cash. The conversion spread will be included in the denominator for the computation of diluted net income per common share. Any sales in the public market of any common stock issuable upon conversion of our debenturesConvertible Debt could adversely affect prevailing market prices of our common stock. In addition, the existence of the debenturesConvertible Debt may encourage short selling by market participants because the conversion of the debenturesConvertible Debt could be used to satisfy short positions, or anticipated conversion of the debenturesConvertible Debt into shares of our common stock could depress the price of our common stock.
Climate change regulations and sustainedFluctuations in foreign currency exchange rates could adversely impact our operating results.
We use forward currency exchange contracts in an attempt to reduce the adverse climate change pose regulatory and physical risks that could harmearnings impact from the effect of exchange rate fluctuations on our resultsnon-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 operations or affect the way we conduct business.
Climate change regulations at the federal, state or local level or in international jurisdictions could require us to limit emissions, change our manufacturing processes, obtain substitute materials which may cost more or be less available, increase our investment in control technology for greenhouse gas emissions, fund offset projects or undertake other costly activities. These regulations could significantly increase our costs and restrict our manufacturing operations by virtue of requirements for new equipment. New permits may be required for our current operations, or expansions thereof. Failure to timely receive permits could result in fines, suspension of production, or cessation of operations at one or more facilities. In addition, restrictions on carbon dioxide or other greenhouse gas emissions could result in significant costs such as higher energy costs, and utility companies passing down carbon taxes, emission cap and trade programs and renewable portfolio standards. The cost of complying, or of failing to comply, with these and other climate change and emissions regulations couldnon-U.S. dollar transactions can have an adverse effect on our operating results.
Further, any sustained adverse changeresults of operations and financial condition. In particular, in climate could haveperiods when the value of a direct adverse economic impact on us, such as waternon-U.S. currency significantly declines relative to the U.S. dollar, customers transacting in that currency may be unable to fulfill their contractual obligations or to undertake new obligations to make payments or purchase products. In periods when the U.S. dollar declines significantly relative to the British pound, Euro, Thai baht and power shortages,Taiwan dollar, the operational costs in our European and higher costs of water or energy to control the temperature of our facilities. Certain of our operationsThailand subsidiaries are located in arid or tropical regions, such as Arizona, Thailand, and the Philippines. Some environmental experts predict that these regions may become vulnerable to storms, severe floods and droughts due to climate change. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can interruptadversely affected. Although our business we cannothas not been materially adversely impacted by recent changes in the value of the U.S. dollar, there can be certainno assurance as to the future impact that any weakness or strength in the U.S. dollar will have on our plans will protect us from all such disastersbusiness or events. results of operations.
Item 1B. UNRESOLVED STAFF COMMENTSUnresolved Staff Comments
None.
Item 2. PROPERTIESProperties
At March 31, 2019,2021, we owned and used the facilities described below:
|
| | | | | | | | | | | | | |
| Location | | Approximate
Total Sq. Ft.
| | UsesPrincipal Operations |
| Gresham, Oregon | | 826,500 | | Wafer Fabricationfabrication (Fab 4);, R&D Center; Administrative Offices;center, warehousing and Warehousingadministrative offices |
| Chandler, Arizona | | 687,000 | | Executive and Administrative Offices; Wafer Probe;administrative offices, wafer probe, R&D Center; Salescenter, sales and Marketing;marketing, and Computercomputer and Service Functionsservice functions |
| Chacherngsao, Thailand | | 489,000 | | Assembly and Test; Wafer Probe; Sample Center; Warehousing;test, wafer probe, sample center, warehousing and Administrative Officesadministrative offices |
| Colorado Springs, Colorado | | 480,000 | | Manufacturing, Test, ResearchWafer fabrication (Fab 5), test and Development, Computer and Service Functions, Design and EngineeringR&D |
| Calamba, Philippines | | 460,000 | | Wafer Probe, Test, Warehousingprobe, test, warehousing and Administrative Officesadministrative offices |
| Tempe, Arizona | | 457,000 | | Wafer Fabricationfabrication (Fab 2);, R&D Center; Administrative Offices;center, warehousing and Warehousingadministrative offices |
| Bangalore, India | | 294,000 | | ResearchR&D center, sales and Development; Salesmarketing support and Marketing Support, and Administrative Officesadministrative offices |
| Chacherngsao, Thailand | | 215,000 | | Assembly and Test; Warehousing;test, warehousing and Administrative Officesadministrative offices |
Rousset, FranceChennai, India | | 170,000187,000 | | Design, Engineering, Test and AdministrativeR&D center |
| Rousset, France | | 170,000 | | Test, R&D and administrative offices |
| Lawrence, Massachusetts | | 160,000 | | Manufacturing and Administrativeadministrative offices |
| Mount Holly Springs, Pennsylvania | | 100,000 | | Manufacturing, R&D and Administrativeadministrative offices |
| Garden Grove, California | | 98,100 | | Manufacturing, R&D and Administrativeadministrative offices |
| San Jose, California | | 98,000 | | Design, Engineering,R&D and Administrativeadministrative offices |
Chennai, IndiaNeckarbischofsheim, Germany | | 91,00080,000 | | DesignManufacturing and Engineeringadministrative offices |
Neckarbischofsheim, GermanyNantes, France | | 80,00077,000 | | ManufacturingWafer probe, test, R&D, warehousing and Administrativeadministrative offices |
Nantes, France | | 77,000 | | Design, Engineering, Test and Probe, Administrative and Warehousing |
| San Jose, California | | 71,000 | | Design, Engineering,R&D and Administrativeadministrative offices |
| San Jose, California | | 57,000 | | Design, Engineering,R&D and Administrativeadministrative offices |
| Beverly, Massachusetts | | 52,103 | | Manufacturing |
| Heilbronn, Germany | | 46,000 | | Design, EngineeringR&D and Administrativeadministrative offices |
| Karlsruhe, Germany | | 43,000 | | Design, EngineeringR&D and Administrativeadministrative offices |
| Ennis County, Ireland | | 40,000 | | Manufacturing |
Simsbury, Connecticut | | 32,500 | | Manufacturing, R&D and Administrativeadministrative offices |
Shanghai, ChinaSimsbury, Connecticut | | 21,00032,500 | | ResearchManufacturing, R&D and Development; Marketing Support, and Administrative Officesadministrative offices |
| Shanghai, China | | 21,000 | | R&D, sales and marketing support and administrative offices |
| Hsinchu, Taiwan | | 15,000 | | Design, EngineeringR&D and Administrativeadministrative offices |
Our Chennai, India facility is currently under construction which will add 96,000 square feet of office space.
In addition to the facilities we own, we lease several manufacturing, research and development facilities and sales offices in North America, Europe and Asia. Our aggregate monthly rental payment for our leased facilities is approximately $4.6 million.
We currently believe that our existing facilities are suitable and will be adequate to meet our requirements for at least the next 12 months.
See page 4642 for a discussion of the capacity utilization of our manufacturing facilities.
Item 3. LEGAL PROCEEDINGSLegal Proceedings
Refer to Note 1312 to our consolidated financial statements for information regarding legal proceedings.
Item 4. MINE SAFETY DISCLOSURESMine Safety Disclosures
Not applicable.
PART II
| |
Item 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Market under the symbol "MCHP."
Stock Price Performance Graph
The following graph and table show a comparison of the five-year cumulative total stockholder return, calculated on a dividend reinvestment basis, for Microchip Technology Incorporated, the Standard & Poor's (S&P) 500 Stock Index, and the Philadelphia Semiconductor Index.
Comparison of 5 year Cumulative Total Return*
*$100 invested on March 31, 20142016 in stock or index, including reinvestment of dividends
Fiscal year ending March 31.
Copyright © 2017 S&P,2021 Standard & Poor's, a division of McGraw Hill Financial.S&P Global. All rights reserved.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Total Return |
| | March 2016 | | March 2017 | | March 2018 | | March 2019 | | March 2020 | | March 2021 |
| Microchip Technology Incorporated | | 100.00 | | 156.77 | | 197.49 | | 182.47 | | 151.54 | | 351.41 |
| S&P 500 Stock Index | | 100.00 | | 117.17 | | 133.57 | | 146.25 | | 136.05 | | 212.71 |
| Philadelphia Semiconductor Index | | 100.00 | | 152.17 | | 203.28 | | 217.73 | | 240.33 | | 504.64 |
|
| | | | | | | | | | | | |
| | | Cumulative Total Return |
| | | March 2014 | | March 2015 | | March 2016 | | March 2017 | | March 2018 | | March 2019 |
| Microchip Technology Incorporated | | 100.00 | | 105.55 | | 107.37 | | 168.33 | | 212.04 | | 195.92 |
| S&P 500 Stock Index | | 100.00 | | 112.73 | | 114.74 | | 134.45 | | 153.26 | | 167.81 |
| Philadelphia Semiconductor Index | | 100.00 | | 120.57 | | 119.69 | | 182.14 | | 243.30 | | 260.60 |
Data acquired by Research Data Group, Inc. (www.researchdatagroup.com)
On May 14, 2019,7, 2021, there were approximately 564567 holders of record of our common stock. This figure does not reflect beneficial ownership of shares held in nominee names.
For a description of our dividend policies, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," included herein.
Refer to "Item 12 -12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters," at page 5849 below, for the information required by Item 201(d) of Regulation S-K with respect to securities authorized for issuance under our equity compensation plans at March 31, 2019.2021.
Issuer Purchases of Equity Securities
In May 2015,From time to time, our Board of Directors has authorized the repurchase of up to 20.0 million shares of our common stock in the open market or in privately negotiated transactions. As of March 31, 2016, we had repurchased 8.6 million shares under this authorization for approximately $363.8 million. In January 2016, our Board of Directors authorized an increase in the then existing share repurchase program to 15.0 million shares of common stock from the approximately 11.4 million shares remaining under the prior authorization.stock. There were no repurchases of common stock during fiscal 2019.2021. There is no expiration date associated with this repurchase program.
Item 6. SELECTED FINANCIAL DATASelected Financial Data
You should readPart II, Item 6 is no longer required as the following selected consolidated financial data forCompany has elected to early adopt the five-year period ended March 31, 2019change to Item 301 of Regulation S-K contained in conjunction with our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Items 7 and 8 of this Form 10-K. Our consolidated statements of income data for each of the years in the three-year period ended March 31, 2019, and the balance sheet data as of March 31, 2019 and 2018, are derived from our audited consolidated financial statements, included in Item 8 of this Form 10-K. The statement of income data for the years ended March 31, 2016 and 2015 and balance sheet data as of March 31, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements not included herein (in the tables below all amounts are in millions, except per share data).
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended March 31, |
| | | 2019 (1) | | 2018 | | 2017 (1) | | 2016 | | 2015 |
| Consolidated Statements of Income data: | | | | | | | | | | |
| Net sales | | $ | 5,349.5 |
| | $ | 3,980.8 |
| | $ | 3,407.8 |
| | $ | 2,173.3 |
| | $ | 2,147.0 |
|
Special charges and other, net (2) | | $ | 33.7 |
| | $ | 17.5 |
| | $ | 98.6 |
| | $ | 4.0 |
| | $ | 2.8 |
|
Loss on settlement of debt (3) | | $ | (12.6 | ) | | $ | (16.0 | ) | | $ | (43.9 | ) | | $ | — |
| | $ | (50.6 | ) |
| Net income from continuing operations | | $ | 355.9 |
| | $ | 255.4 |
| | $ | 170.6 |
| | $ | 323.9 |
| | $ | 365.3 |
|
| Basic net income per common share from continuing operations | | $ | 1.51 |
| | $ | 1.10 |
| | $ | 0.79 |
| | $ | 1.59 |
| | $ | 1.84 |
|
| Diluted net income per common share from continuing operations | | $ | 1.42 |
| | $ | 1.03 |
| | $ | 0.73 |
| | $ | 1.49 |
| | $ | 1.65 |
|
| Dividends declared per common share | | $ | 1.457 |
| | $ | 1.449 |
| | $ | 1.441 |
| | $ | 1.433 |
| | $ | 1.425 |
|
| Consolidated Balance Sheets data: | | | | | | | | | | |
| Total assets | | $ | 18,350.0 |
| | $ | 8,257.2 |
| | $ | 7,686.9 |
| | $ | 5,537.9 |
| | $ | 4,780.7 |
|
Net long-term debt and capital lease obligations, less current maturities (3) | | $ | 8,956.0 |
| | $ | 1,769.1 |
| | $ | 2,912.1 |
| | $ | 2,465.8 |
| | $ | 1,840.0 |
|
| Microchip Technology stockholders' equity | | $ | 5,287.5 |
| | $ | 3,279.8 |
| | $ | 3,270.7 |
| | $ | 2,150.9 |
| | $ | 2,044.7 |
|
| |
(1)
| Refer to Note 2 to our consolidated financial statements for an explanation of our material business combinations during fiscal 2019 and fiscal 2017. |
(3) Refer to Note 12 Debt and Credit Facility for further discussion.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Note Regarding Forward-looking Statements
This report, including "Item 1 – Business," "Item 1A – Risk Factors," and "Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations"
Note Regarding Forward-looking Statements
This report, including “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance and revenue sources. We use words such as "anticipate," "believe," "plan," "expect," "future," "continue," "intend" and similar expressions to identify forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under "Risk Factors," beginning at page 12 and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement. These forward-looking statements include, without limitation, statements regarding the following:
•Our expectation that certain supply chain constraints will continue through the remainder of calendar year 2021 and possibly into calendar year 2022;
•That if the impact of COVID-19 cases continues or worsens, the pandemic could adversely impact our business in future periods;
•That local governments could require us or our suppliers to temporarily reduce production further or cease operations and we could experience constraints in fulfilling customer orders;
•Our belief that our actions to combat the spread of COVID-19 will help preserve the health of our team members, customers, suppliers, visitors to our facilities, people with whom we conduct business and our communities, and allow us to safely continue operations;
•Our inability to predict how the COVID-19 pandemic, and actions taken by others in response to it, will affect our business;
•The effects that uncertain global economic conditions and fluctuations in the global credit and equity markets may have on our financial condition and results of operations;
•The effects and amount of competitive pricing pressure on our product lines and modest pricing declines in certain of our more mature proprietary product lines;
•Our ability to moderate future average selling price declines;
•The effect of product mix, capacity utilization, yields, fixed cost absorption, competition and economic conditions on gross margin;
•The amount of, and changes in, demand for our products and those of our customers;
•The impact of national security protections, trade restrictions and changes in tariffs, including those impacting China;
•Our expectation that in the future we will acquire additional businesses that we believe will complement our existing businesses;
•Our expectation that in the future we will enter into joint development agreements or other business or strategic relationships with other companies;
•The level of orders that will be received and shipped within a quarter, including the impact of our product lead times;
•Our expectation that our June 2019 days of inventory levelsat June 30, 2021 will be flat to down 8 days to up 115 days compared to the March 2019 levels. Our belief that our existing level of inventory will allow us to maintain competitive lead times and provide strong delivery performance to our customers;31, 2021 levels;
The effect that distributor and customer inventory holding patterns will have on us;
•Our belief that customers recognize our products and brand name and use distributors as an effective supply channel;
Anticipating increased customer requirements to meet voluntary criteria related to the reduction or elimination of substances in our products;
Our belief that deferred cost of sales are recorded at their approximate carrying value and 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;
•The accuracy of our estimates of the useful life and values of our property, assets and other liabilities;
•Our ability to increase the proprietary portion of our analog and interface product linesline and the effect of such an increase;
Our belief that our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new product designs;
•The impact of any supply disruption we may experience;
•Our ability to effectively utilize our facilities at appropriate capacity levels and anticipated costs;
•That we adjust capacity utilization to respond to actual and anticipated business and industry-related conditions;
That our existing facilities will provide sufficient capacity to respond to increases in demand with modest incremental capital expenditures;
•That manufacturing costs will be reduced by transition to advanced process technologies;
•Our ability to maintain manufacturing yields;
•Continuing our investments in new and enhanced products;
•The cost effectiveness of using our own assembly and test operations;
•Our expectation that foundry capacity will continue to be tight due to strong demand for wafers across the industry;
•Our expectation that we will continue to operate our manufacturing facilities at or above normal capacity if the current supply constraints relative to demand continue through fiscal 2022;
•Our anticipated level of capital expenditures;
•Continuation and amount of quarterly cash dividends;
That the Atmel acquisition was structured in a manner that enabled us to utilize a substantial portion of the cash, cash equivalents, short-term investments and long-term investments held by certain of our foreign subsidiaries in a tax efficient manner and that our determinations with respect to the tax consequences of the acquisition are reasonable;
•The sufficiency of our existing sources of liquidity to finance anticipated capital expenditures and otherwise meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on them;
•The impact of seasonality on our business;
•Our belief that our IT system compromise has not had a material adverse effect on our business or resulted in any material damage to us;
•Our expectation that we will continue to be the target of cyber-attacks, computer viruses, unauthorized access and other attempts to breach or otherwise compromise the security of our IT systems and data;
•The accuracy of our estimates used in valuing employee equity awards;
•That the resolution of legal actions will not have a material effect on our business, and the accuracy of our assessment of the probability of loss and range of potential loss;
•The recoverability of our deferred tax assets;
The adequacy of our tax reserves to offset any potential tax liabilities, having the appropriate support for our income tax positions and the accuracy of our estimated tax rate;
That we intend to pay the one-time transition tax over a period of eight years;
Our belief that our determinations with respect to the tax consequences of the Atmel acquisition are reasonable;
•Our belief that the expiration of any tax holidays will not have a material impact on our overall tax expense or effective tax rate;
•The impact of the geographical dispersion of our earnings and losses on our effective tax rate;
•That we expect to be able to realize the future tax benefit resulting from certain intra-group asset transfers;
•Our belief that the estimates used in preparing our consolidated financial statements are reasonable;
•Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis;
•Our ability to obtain patents and intellectual property licenses and minimize the effects of litigation;
•The level of risk we are exposed to for product liability claims or indemnification claims;
•The effect of fluctuations in market interest rates on our income and/or cash flows;
•The effect of fluctuations in currency rates;
•That we could determineincrease our borrowings or seek additional equity or debt financing to repatriate some ofmaintain or expand our offshore earnings in future periodsfacilities, or to fund stockholdercash dividends, share repurchases, acquisitions or other corporate activities;activities, and that the timing and amount of such financing requirements will depend on a number of factors;
•Our intention to satisfy the lesser of the principal amount or the conversion value of our debenturesConvertible Debt in cash;
•Our intention to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts. amounts;
•Changes to the taxation of undistributed foreign earnings could change our future intentions regarding reinvestment of such earnings;
•Our beliefexpectation that the effect the new tax laws will haveour reliance on low-taxed income of foreign subsidiaries will have the most significant, adverse impact;third party contractors may increase over time as our business grows;
Our intent to maintain a high-quality investment portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield; and
•Our ability to collect accounts receivable.receivable; and
•The impact of the legislative and policy changes implemented or which may be implemented by the new administration, on our business and the trading price of our stock.
Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth in "Item 1A –1A. Risk Factors," and elsewhere in this Form 10-K. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update the information contained in any forward-looking statement.
Introduction
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document, as well as with other sections of this Annual Report on Form 10-K, including "Item 1 – Business;" "Item 6 – Selected Financial Data;" and "Item 8 –“Item 8. Financial Statements and Supplementary Data." For an overview of our business, refer to “Part I Item 1. Business."
We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a summary of our overall business strategy to give the reader an overview of the goals of our business and the overall direction of our business and products. This isCOVID-19 developments 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 Resultsresults of Operationsoperations for fiscal 20192021 compared to fiscal 2018, and for fiscal 2018 compared to fiscal 2017. We then provide2020, followed by an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in sectionsthe section titled "Liquidity“Liquidity and Capital Resources," "Contractual Obligations"Resources.” Our liquidity and "Off-Balance Sheet Arrangements."
Acquisitioncapital resources section generally discusses fiscal 2021 compared to fiscal 2020. For our discussion of Microsemi
On May 29, 2018, we completed our acquisitionfiscal 2020 results compared to fiscal 2019 for both our results of Microsemi Corporation, a publicly traded company headquartered in Aliso Viejo, California. We paid an aggregateoperations and our liquidity and capital resources sections, refer to “Item 7. Management’s Discussion and Analysis of approximately $8.19 billion in cash to the stockholdersFinancial Condition and Results of Microsemi. The total consideration transferred in the acquisition, including approximately $53.9 million of non-cash consideration for the exchange of certain share-based payment awards of Microsemi for stock awards of Microchip, was approximately $8.24 billion. In addition to the consideration transferred, we recognizedOperations” in our consolidated financial statements $3.23 billion in liabilities of Microsemi consisting of debt, taxes payable and deferred, pension obligations, restructuring, and contingent and other liabilities of which $2.06 billion of existing debt was paid off. We financed the purchase price using approximately $8.10 billion of borrowings consisting of $3.10 billion of loans under our revolving line of credit (the "Revolving Credit Facility"), $3.00 billion of term loans ("Term Loan Facility") provided under our amended and restated Credit Agreement, and $2.00 billion in newly issued senior secured notes. We incurred $22.0 million in costs related to the acquisition. As a result of the acquisition, Microsemi became a wholly owned subsidiary of Microchip. Microsemi offers a comprehensive portfolio of semiconductor and system solutions for aerospace and defense, communications, data center and industrial markets. Our primary reason for this acquisition was to expand our range of solutions, products and capabilities by extending our served available market.
For further details, see the discussion in Note 2 of our financial statements included in this report.
Material Weaknesses in Internal Controls
As discussed in Item 9A “Controls and Procedures” in this reportAnnual Report on Form 10-K infor the fourth quarterfiscal year ended March 31, 2020 filed with the SEC on May 22, 2020, which is incorporated by reference herein.
COVID-19 Developments
In the first half of fiscal 2019, we identified2021, the COVID-19 pandemic resulted in a material weaknessglobal disruption in our internal controls related to accounting for income taxeseconomic activity by adversely affecting production, creating supply chain and we also identified a material weakness in our internal controls related to IT system access. Internal controls related to such matters are important to accurately reflect our financial position and results of operations in our financial reports. We are in the process of remediating the material weaknesses, but our efforts may not be successful. If we are unable to remediate the material weaknesses in an appropriate and timely manner, or if we identify additional control deficiencies that individually or together constitute significant deficiencies or material weaknesses, our ability to accurately record, process, and report financial information and consequently, our ability to prepare financial statements within required time periods, could be adversely affected. Failure to maintain effective internal controls could result in violations of applicable securities laws, stock exchange listing requirements, and the covenants under our debt agreements, subject us to litigation and investigations, negatively affect investor confidence in our financial statements,market disruption, and adversely impact our stock priceimpacting businesses and abilityindividuals. In the second half of fiscal 2021, business conditions were unexpectedly strong as businesses and individuals adapted to access capital markets. For additional information, refer to Item 9A "Controls and Procedures."
IT System Compromise
We have learned of an ongoing compromise of our computer networks by what is believed to be sophisticated hackers. We have engaged experienced legal counsel and a leading forensic investigatory firm with experience in such matters. We have taken steps to identify malicious activity on our network including a compromise of our network and, asthe effects of the datepandemic. Supply chains, however, were stressed as they were not expecting the level of this filing,economic strength that occurred. The impact of the pandemic on individuals and in certain locations in which we are implementing a containment plan. We are continuing to evaluateoperate remains uncertain and will depend on many factors, such as the effectiveness of containment efforts including the containment planuse and effectiveness of vaccines. We regularly monitor new information regarding the severity of COVID-19 and the amountability to contain, treat, or prevent it.
Demand for our products that serve certain markets, such as consumer, automotive, and contentindustrial increased in the second half of fiscal 2021, offsetting the informationadverse demand fluctuations in the early part of fiscal 2021 caused by the COVID-19 pandemic. Additionally, the markets that was compromisedbenefited earlier in fiscal 2021 from the stay-at-home economy, such as datacenters and communications reverted to implement additional remedial actions. At this time, we do not believe that this IT system compromise has had a material adverse effect on our business or resulted in any material damage to us. However, we are still evaluatingnormal demand levels by the amountsecond half of fiscal 2021 and typeremained at such levels at the end of data that was compromised and there can be no assurance as to what the impact of this IT system compromise will be. As described above, in connection with the IT system compromise, our management has concluded thatfiscal 2021. While we have a material weakness in our internal controls.
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 solutions, including general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, 32-bit microprocessors, field-programmable gate array (FPGA) products, a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, discrete diodes and MOSFETS, radio frequency (RF), timing, timing systems, safety, security, wired connectivity and wireless connectivity devices, as well as Serial Electrically Erasable Programmable Read Only Memory (EEPROM), Serial Flash memories, Parallel Flash memories, Serial Electrically Erasable Random Access Memory (EERAM) and Serial Static Random Access Memory (SRAM). We also license Flash-IP solutions that are incorporated in a broad range of products. We provide highly cost-effective embedded control solutions that also offer the advantages of small size, high performance, extreme low power usage, wide voltage range operation, mixed signal integration and ease of development, thus enabling timely and cost-effective integration of our solutions by our customers in their end products. We license our SuperFlash technology and other technologies to wafer
foundries, integrated device manufacturers and design partners throughout the world for use in the manufacture of advanced microcontroller products, gate array, radio frequency (RF) and analog products that require embedded non-volatile memory.
We sell our products to a broad base of domestic and international customers across a variety of industries. The principal markets that we serve include consumer, automotive, industrial, aerospace, office communication, and computing. Our business is subject to fluctuations based on economic conditions within these markets.
Our manufacturing operations include wafer fabrication, wafer probe and assembly and test. The ownership of a substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control resulting in us being one of the lowest cost producers in the embedded control industry. By owning wafer fabrication facilities and 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 a portion of the wafer manufacturing and the assembly and test profit margin. We do outsource a significant portion of our manufacturing requirements to third parties. Our acquisition of Microsemi significantly increased the amount of our outsourced manufacturing requirements.
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 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, analog and mixed-signal products, FPGAs, timing systems, Flash-IP, 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 and sell our products worldwide primarily through a network of direct sales personnel and distributors. Our distributors focus primarily on servicing the product and technical support requirements of a broad base of diverse customers. We believe that our direct sales personnel combined with our distributors provide an effective means of reaching this broad and diverse customer base. Our direct sales force focuses primarily on major strategic accountsbase operating in three geographical markets:diverse industries, the Americas, Europe and Asia. We currently maintain sales and support centers in major metropolitan areas in North America, Europe and Asia. We believe that a strong technical service presence is essential to the continued development of the embedded control market. Many of our client engagement managers (CEMs), embedded system engineers (ESEs), and sales management personnel have technical degrees and have been previously employed in an engineering environment. We believe that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The primary mission of our ESE team is to provide technical assistance to strategic accounts and to conduct periodic training sessions for CEMs and distributor sales teams. ESEs also frequently conduct technical seminars for our customers in major cities around the world, and work closely with our distributors to provide technical assistance and end-user support.
See "Our operating results are impacted by both seasonality and the wide fluctuation of supply and demand in the semiconductor industry," on page 16 for discussionextent of the impact of seasonalitythe COVID-19 pandemic on demand for our products depends on unpredictable future developments.
At this time, our global manufacturing sites and our logistics channels are fully operational and local restrictions related to the COVID-19 pandemic that impacted us in the first quarter of fiscal 2021 have eased. During the second half of fiscal 2021, we experienced strong demand and low levels of inventory on our business.balance sheet and at our external distribution channel partners, and we continued to experience constraints in all our internal and external factories and their related manufacturing supply chains. We started ramping up production at our internal factories in September 2020, as well as investing in capital additions to expand our internal capacity. We also worked closely with our wafer fabrication, assembly and test subcontractors to secure additional capacity. While we expect our overall capacity to grow every quarter in calendar 2021, we expect the wafer fabrication, assembly and test constraints to persist through the remainder of calendar 2021 and possibly into calendar 2022. As a result, lead times continue to increase for many of our products. If the impact of COVID-19 continues or worsens, the pandemic could adversely impact our business in future periods. In the future, local governments could require us or our suppliers to temporarily reduce production or cease operations and we could experience constraints in fulfilling customer orders.
In response to the early indications of the COVID-19 pandemic, we took proactive measures to safeguard the health of our employees, contractors, customers, suppliers, visitors to our facilities, other business partners, and our communities. We strategically implemented plans intended to ensure business continuity in the event severe outbreaks or government requirements were to impact our operations. We monitor governmental policies and CDC recommendations and take appropriate actions which are designed to prevent and control the spread of COVID-19.
We continuously assess our efforts to combat the COVID-19 pandemic which have included the following:
•We require social distancing, and have established distancing protocols at our facilities. We have suspended attendance at conferences and other gatherings and recently began to allow limited business travel. We generally require team members to work from home to the extent possible. Where work from home is not possible, all on-site team members are requested to take their temperatures before arriving to work, stay home if they do not feel well, stay home if they have been exposed to someone with COVID-19 or its symptoms, maintain a safe distance
from others, wash their hands frequently, and wear a mask if they choose. We clean high touch surfaces at least daily.
•In partnership with our suppliers, we have evaluated our supply chain to identify gaps or weak points. In order to ensure continuity, in some cases, we have qualified alternative suppliers and increased our inventory of raw materials.
•We have added and continue to add assembly and test capacity to provide redundant manufacturing capability through our network of subcontractors.
•We implemented measures to help prepare for economic uncertainty, such as employee salary cuts, limiting hiring, reducing business travel costs, reducing discretionary spending, and limiting capital expenditures. In December 2020, we restored previous reductions in compensation, resumed hiring, and increased spending for certain capital expenditures to help meet business demands.
•We are working with government authorities in the areas where we have a significant footprint. We continue to update ourselves on government requirements, relevant regulations, industry standards, and best practices to help safeguard our team members across the globe.
We believe these actions are important and will help preserve the health of our team members, customers, suppliers, visitors to our facilities, people with whom we conduct business and our communities, and allow us to safely continue operations. However, we cannot predict how these actions, or the actions taken by government entities, suppliers, or customers in response to the COVID-19 pandemic will impact our business, revenues, or results of operations.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. GAAP. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, business combinations, share-based compensation, inventories, income taxes, senior and junior subordinated
convertible debtConvertible Debt and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We review these estimates and judgments on an ongoing basis. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition (subsequent to our adoption of ASU 2014-09-Revenue from Contracts with Customers (ASC 606) on April 1, 2018)
We generate revenue primarily from sales of our semiconductor products to distributors and non-distributor customers (direct customers) and, to a lesser extent, from royalties paid by licensees of our intellectual property. We apply the following five-step approach to determine the timing and amount of revenue recognition: (1)(i) identify the contract with the customer, (2)(ii) identify performance obligations in the contract, (3)(iii) determine the transaction price, (4)(iv) allocate the transaction price to the performance obligations in the contract, and (5)(v) recognize revenue when the performance obligation is satisfied.
Sales to our distributors are governed by a distributor agreement, a purchase order, and an order acknowledgment. Sales to distributors do not meet the definition of a contract as defined by ASC 606, until the distributor has sent in a purchase order, we have acknowledged the order, we have deemed the collectability of the consideration to be probable, and legally enforceable rights and obligations have been created; this generally occurs 30 days prior to the estimated ship date. As is customary in the semiconductor industry, we offer price concessions and stock rotation rights to many of our distributors. As these are forms of variable consideration, we estimate the amount of consideration to which we will be entitled using recent historical data and applying the expected value method. Usually, there is only a single performance obligation in the contract, and therefore the entire transaction price is allocated to the single performance obligation. After the transaction price has been allocated, we recognize revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with distributors is recognized at the time risk and title of the inventory transfers to the distributor.
Sales to our direct customers are generally governed by a purchase order and an order acknowledgment. Sales to direct customers usually do not meet the definition of a contract as defined by ASC 606, until shipment of the product occurs. Generally, the transaction price associated with contracts with direct customers is set at the standalone selling price and is not variable. Usually, there is only a
single performance obligation in the contract, and therefore the entire transaction price is allocated to the single performance obligation. After the transaction price has been allocated, we recognize revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with direct customers is recognized at the time risk and title of the inventory transfers to the customer.
Revenue generated from our licensees is governed by licensing agreements. Our primary performance obligation related to these agreements is to provide the licensee the right to use the intellectual property. The final transaction price is determined by multiplying the usage of the license by the royalty, which is fixed in the licensing agreement. Revenue is recognized as usage of the license occurs.
Revenue Recognition - Distributors (prior to our adoption of ASC 606 on April 1, 2018)
Our distributors worldwide generally had broad price protection and product return rights which prevented the sales pricing from being fixed or determinable at the time of shipment to our distributors. Therefore, revenue recognition was deferred until the pricing uncertainty was resolved, which generally occurred when the distributor sold the product to their customer. At the time of shipment to these distributors, we recorded a trade receivable for the selling price as there was a legally enforceable right to payment, relieved inventory for the carrying value of goods shipped since legal title had passed to the distributor, and recorded the gross margin in deferred income on shipments to distributors on our consolidated balance sheets.
Deferred income on shipments to distributors effectively represented the gross margin on the sale to the distributor; however, the amount of gross margin that we recognized in the subsequent periods was 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 sold the majority of the items in our product catalog to our distributors worldwide at a uniform list price. However, distributors resold our products to end customers at a broad range of individually negotiated price points. The majority of our distributors' resales required a reduction from the original list price paid. Often, under these circumstances, we remitted back to
the distributor a portion of their original purchase price after the resale transaction was completed in the form of a credit against the distributors' outstanding accounts receivable balance. The credits were on a per unit basis and were not given to the distributor until they provided information to us regarding the sale to their end customer. The price reductions varied significantly based on the customer, product, quantity ordered, geographic location and other factors. Discounts to a price less than our cost have historically been rare. The effect of granting these credits established the net selling price to our distributors for the product and resulted in the net revenue recognized by us when the product was sold by the distributors to their end customers. Thus, a portion of the "deferred income on shipments to distributors" balance represented the amount of distributors' original purchase price that was credited back to the distributors in the subsequent periods. We did not reduce deferred income on shipments to distributors or accounts receivable by anticipated concessions; rather, price concessions were typically recorded against deferred income on shipments to distributors and accounts receivable when incurred, which was generally at the time the distributor sold the product. At March 31, 2018, we had approximately $479.6 million of deferred revenue and $145.8 million in deferred cost of sales recognized as $333.8 million of deferred income on shipments to distributors. The deferred income on shipments to distributors that was ultimately recognized in our income statement was lower than the amount reflected on the balance sheet at March 31, 2018 due to additional price credits that were granted to the distributors when the product was sold to their customers. These additional price credits historically have resulted in the deferred income approximating the overall gross margins that we recognized in the distribution channel of our business.
Distributor advances, reflected as a reduction of deferred income on shipments to distributors on our consolidated balance sheets, totaled $203.9 million at March 31, 2018. On sales to distributors, our payment terms generally require the distributor to settle amounts owed to us for an amount in excess of their ultimate cost. The sales price to our distributors may be higher than the amount that the distributors will ultimately owe us because distributors often negotiate price reductions after purchasing products from us and such reductions are often significant. It is our practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle receivable balances, on a current basis, generally within 30 days, for amounts originally invoiced. This practice has an adverse impact on the working capital of our distributors. As such, we have entered into agreements with certain distributors whereby we advance cash to the distributors to reduce the distributors' 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 had no impact on our revenue recognition or our consolidated statements of income. We processed 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 canceled by us at any time.
We reduced product pricing through price protection based on market conditions, competitive considerations and other factors. Price protection was granted to distributors on the inventory they had on hand at the date the price protection was offered. When we reduced the price of our products, it allowed the distributor to claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it had on hand as of the date of the price reduction. There was no immediate revenue impact from the price protection, as it was 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 evaluated 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 resulted in a price less than our cost, we believe the deferred costs were recorded at their approximate carrying value.
Business Combinations
All of our business combinations are accounted for at fair value under the acquisition method of accounting. Under the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at fair value as an intangible asset at the acquisition date and amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will be recognized through income tax expense. The measurement of the fair value of assets acquired and liabilities assumed requires significant judgment. The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows. Under the
acquisition method of accounting, the aggregate amount of consideration we pay for a company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date. The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill. On an annual basis, we test goodwill for impairment and through March 31, 2019,2021, we have never recorded an impairment charge against our goodwill balance.related to goodwill.
Share-based Compensation
We measure at fair value and recognize compensation expense for all share-based payment awards, including grants of employee stock options, restricted stock units (RSUs)RSUs and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. For the past several years, we have utilizedWe utilize RSUs as our primary equity incentive compensation instrument for employees. Share-based compensation cost is measured on the grant date based on the fair market value of our common stock discounted for expected future dividends and is recognized as expense on a straight-line basis over the requisite service periods. Total share-based compensation expense recognized induring the fiscal 20192021 was $166.4$198.3 million, of which $151.5$171.7 million was reflected in operating expenses and $14.9$26.6 million was reflected in cost of sales. Total share-based compensation included in our inventory balance was $12.4$10.2 million at March 31, 2019.2021.
During the year ended March 31, 2017, we elected to early adopt ASU 2016-09, Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting (Topic 718). Under this standard, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. We have elected to recognize forfeitures as they occur. Prior to the adoption of ASU 2016-09, we estimated the number of share-based awards to be forfeited due to employee turnover.
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 net realizable value using the first-in, first-out method. We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those we projected, additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable. In estimating our 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. Estimates for projected 12-month demand are generally based on the average shipments of the prior three-month period, which are then annualized to adjust for any potential seasonality in our business. The estimated 12-month demand is compared to our most recently developed sales forecast to further reconcile the 12-month demand estimate. Management reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the extent any existing products are being replaced or discontinued.
In periods where our production levels are substantially below our normal operating capacity, the reduced production levels of our manufacturing facilities are charged directly to cost of sales. As a result of production being below normal operating levels in our wafer fabrication facilities, approximately $19.0$29.6 million and $47.2 million was charged to cost of sales in fiscal 2019. There was no charge to cost of sales for reduced production levels in2021 and fiscal 2018 or fiscal 2017.2020, respectively.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and to the extent we believe that recovery is not likely, we must establish a valuation allowance. We provided valuation allowances for certain of our deferred tax assets, where it is more likely than not that some portion, or all of such assets, will not be realized.
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. During the year ended March 31, 2019, various foreign jurisdictions finalized their audits. The close of these audits did not have an adverse impact on our financial statements. We are currently being audited by the tax authorities in the United StatesU.S. and in various foreign jurisdictions. At this time, we do not know what the outcome of these audits will be. We record benefits for uncertain tax positions based on an assessment of whether it is more likely than not that the tax positions will be sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, we recognize the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.
The accounting model as defined in Accounting Standards Codification ("ASC") 740 related to the valuation of uncertain tax positions requires us to presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information and that each tax position will be evaluated without consideration of the possibility of offset or aggregation with other positions. The recognition requirement for the liability exists even if we believe the possibility of examination by a taxing authority or discovery of the related risk matters is remote or where we have a long history of the taxing authority not performing an exam or overlooking an issue. We will record an adjustment to a previously recorded position if new information or facts related to the position are identified in a subsequent period. All adjustments to the positions are recorded through the income statement. Generally, adjustments will be recorded in periods subsequent to the initial recognition if the taxing authority has completed an audit of the period that results in the position being effectively settled or if the statute of limitation expires. Due to the inherent uncertainty in the estimation process and in consideration of the criteria of the accounting model, amounts recognized in the financial statements in periods subsequent to the initial recognition may significantly differ from the estimated exposure of the position under the accounting model.
On December 22, 2017, the Act was enacted into law. The Act provides for numerous significant tax law changes and modifications including the reduction of the U.S. federal corporate income tax rate from 35.0% to 21.0%, the requirement for companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-sourced earnings. As a fiscal year-end taxpayer, certain provisions of the Act began to impact us in our third quarter of fiscal 2018, while other provisions have become effective for us in fiscal 2019.
In addition to the impacts of tax reform on fiscal 2018, the Act also establishes new tax laws that are effective for fiscal 2019, including, but not limited to, (1) a new provision designed to tax low-taxed income of foreign subsidiaries ("GILTI"), which allows for the possibility of using foreign tax credits ("FTCs") and a deduction of up to 50% to offset the income tax liability (subject to some limitations); (2) limitations on the deductibility of certain executive compensation; (3) limitations on the deductibility of interest expense; and (4) limitations on the use of FTCs to reduce the U.S. income tax liability. While each of these provisions is expected to have an impact on our tax expense in future periods, the increase in tax expense for GILTI is the most significant.
Generally accepted accounting principles in the United States of America (US GAAP) allows taxpayers to make an accounting policy election of either (1) treating taxes due on GILTI inclusions as a current-period expense when incurred or (2) recognizing deferred taxes for temporary basis differences that are expected to reverse as GILTI in future years. We are making a policy choice to include taxes due on the future GILTI inclusion in taxable income when incurred.
Senior and Junior Subordinated Convertible Debt
WeUpon issuance, we separately account for the liability and equity components of our seniorConvertible Debt by estimating the fair values of the i) liability component without a conversion feature and junior subordinated convertible debt in a manner that reflects our nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized.ii) the conversion feature. This results in a bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statements of income.
Upon settlement of our Convertible Debt instruments, we allocate the total consideration between the liability and equity components based on the fair value of the liability component without the conversion feature. The difference between the consideration allocated to the liability component and the net carrying value of the liability component is recognized as an extinguishment loss or gain. The remaining settlement consideration is allocated to the equity component and recognized as a reduction of additional paid-in capital in our consolidated balance sheets. In addition, if the terms of the settlement are different from the contractual terms of the original instrument, we recognize an inducement loss, which is measured as the difference between the fair value of the original terms of the instrument and the fair value of the settlement terms.
Determining the fair value of the liability component without the conversion feature upon issuance and settlement involves estimating the equivalent borrowing rate for a similar non-convertible instrument. Given the values of these transactions, fair value estimates are sensitive to changes in the equivalent borrowing rate conclusions. The measurement of the equivalent borrowing rate requires that we make estimates of volatility and credit spreads to align observable market inputs with the instrument being valued.
Lastly, we include the dilutive effect of the shares of our common stock issuable upon conversion of the outstanding senior and junior subordinated convertible debtConvertible Debt in our diluted income per share calculation regardless of whether the market price triggers or other contingent conversion features have been met. We apply the treasury stock method as we have the intent and have adopted an accounting policy to settle the principal amount of the senior and junior subordinated convertible debenturesConvertible Debt in cash. This method results in incremental dilutive shares when the average fair value of our common stock for a reporting period exceeds the conversion prices per share and adjusts as dividends are recorded in the future.
Contingencies
In the ordinary course of our business, we are exposed to various liabilities as a result of contracts, product liability, customer claims, governmental investigations and other matters. Additionally, we are involved in a limited number of legal actions, both as plaintiff and defendant. Consequently, we could incur uninsured liability in any of those actions. We also periodically receive notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting reimbursement for various costs. With respect to pending legal actions to which we are a party and other claims, although the outcomes are generally not determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of operations. Litigation, governmental investigations and disputes relating to the semiconductor industry are not uncommon, and we are, from time to time, subject to such litigation, governmental investigations and disputes. As a result, no assurances can be given with respect to the extent or outcome of any such litigation, governmental investigations or disputes in the future.
We accrue for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, we review each of our matters and, where it is probable that a liability has been or will be incurred, we accrue for all probable and reasonably estimable losses. Where we can reasonably estimate a range of losses we may incur regarding such a matter, we record an accrual for the amount within the range that constitutes our best estimate. If we can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, we use the amount that is the low end of such range. Contingencies of an acquired company that exist as of the date of the acquisition are measured at fair value if determinable, which generally is based on a probability weighted model. If fair value is not determinable, contingencies of an acquired company are recognized when they become probable and reasonably estimable.
Results of Continuing Operations
The following table sets forth certain operational data as a percentage of net sales for the fiscal years indicated:2021 and fiscal 2020:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Fiscal Year Ended March 31, |
| | | | | | | | | | | 2021 | | 2020 |
| Net sales | | | | | | | | | | | 100.0 | % | | 100.0 | % |
| Cost of sales | | | | | | | | | | | 37.9 | | | 38.5 | |
| Gross profit | | | | | | | | | | | 62.1 | | | 61.5 | |
| | | | | | | | | | | | | |
| Research and development | | | | | | | | | | | 15.4 | | | 16.6 | |
| Selling, general and administrative | | | | | | | | | | | 11.2 | | | 12.8 | |
| Amortization of acquired intangible assets | | | | | | | | | | | 17.1 | | | 18.9 | |
| Special charges and other, net | | | | | | | | | | | — | | | 0.9 | |
| Operating income | | | | | | | | | | | 18.4 | % | | 12.3 | % |
|
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2019 | | 2018 | | 2017 |
| Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | | 45.2 |
| | 39.2 |
| | 48.4 |
|
| Gross profit | | 54.8 |
| | 60.8 |
| | 51.6 |
|
| | | | | | | |
| Research and development | | 15.4 |
| | 13.3 |
| | 16.0 |
|
| Selling, general and administrative | | 12.8 |
| | 11.4 |
| | 14.7 |
|
| Amortization of acquired intangible assets | | 12.6 |
| | 12.2 |
| | 9.9 |
|
| Special charges and other, net | | 0.6 |
| | 0.4 |
| | 2.9 |
|
| Operating income | | 13.4 | % | | 23.5 | % | | 8.1 | % |
Net Sales
We operate in two industry segments and engage primarily in the design, development, manufacture and sale of semiconductor products as well as the licensing of our SuperFlash and other technologies. We sell our products to distributors and original equipment manufacturers, referred to as OEMs in a broad range of markets, perform ongoing credit evaluations of our customers and generally require no collateral. In certain circumstances, a customer's financial condition may require collateral, and, in such cases, the collateral would be typically provided byin the form of letters of credit.
The following table summarizes our net sales for the periods covered by this reportfiscal 2021 and fiscal 2020 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | Fiscal Year Ended March 31, | | |
| | | | | | | | | | | | | | | | | 2021 | | 2020 | | Change |
| Net sales | | | | | | | | | | | | | | | | | $ | 5,438.4 | | | $ | 5,274.2 | | | 3.1 | % |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | % Change | | 2018 | | % Change | | 2017 |
| Net sales | $ | 5,349.5 |
| | 34.4 | % | | $ | 3,980.8 |
| | 16.8 | % | | $ | 3,407.8 |
|
The increase in net sales in fiscal 20192021 compared to fiscal 20182020 was primarily due primarily to strength in our acquisitionmicrocontroller product line. The net sales value of Microsemiinventory at our distributor customers decreased $10.4 million during fiscal 2021 compared to a decrease of $68.2 million during fiscal 2020. Excluding the impact of changes in distributor inventory levels on net sales, net sales increased by 2.0% in fiscal 2021 compared to fiscal 2020 and was partially offsetpositively impacted by strength in our adoptionmicrocontroller product line. Due to the size, complexity and diversity of ASC 606 andour customer base, we are not able to quantify any material factor contributing to the change other than net demand fluctuations in the end markets that we serve. Revenue earned from Microsemi products accounted for a 39.4% increase
Other factors that we believe contributed to changes in our reported net sales infor fiscal 20192021 compared to fiscal 2018. This increase was partially offset2020 and which are drivers of long-term trends in our net sales but which factors we are not able to quantify include:
•semiconductor industry conditions;
•our various new product offerings that have increased our served available market;
•customers’ increasing needs for the flexibility offered by our adoption of ASC 606 on April 1, 2018, which affected the timing of revenue recognition withprogrammable solutions; and
•increasing semiconductor content in our distributors ascustomers’ products through our Total Systems Solutions.
discussed further in the Critical Accounting Policies and Estimates section of this Form 10-K on page 36. To a lesser extent than the adoption of ASC 606, net sales and demand were also negatively impacted by general economic conditions, trade restrictions and changes in tariffs. We sell a large number of products to a large and diverse customer base and excluding the impacts of our Microsemi acquisition and the adoption of ASC 606, there was not any single product customer or marketcustomer that accounted for a material portion of the change.change in our net sales in fiscal 2021 or fiscal 2020. The overall average selling price of our products is affected by pricing declines over the life of individual products; however, variations in our product and geographic mix of sales can cause wider fluctuations in our overall average selling price in any given period. The overall averageGenerally, selling priceprices of our products increased significantly during fiscal 20192021 compared to fiscal 20182020 due to our acquisitionincreased material costs and increased functionality of Microsemi, whose average selling price is higher than the average selling price of our historical business due to the types of products they offer and the types of customers and markets they serve.products.
The increase in net sales in fiscal 2018 compared to fiscal 2017 was impacted by the following two accounting factors, which occurred in fiscal 2017:
an amount of revenue that could not be recognized under generally accepted accounting principles in the United States relating to Atmel's inventory in the distribution channel on the acquisition date; and
the impact of the change in timing of revenue recognition for some of Atmel's distributors from shipment to the distributor to upon sale by the distributor to their customers.
Excluding the impact of the two accounting factors described above, net sales for fiscal 2018 compared to fiscal 2017 increased 14.0%. This increase was primarily due to growth in our business driven by favorable economic and semiconductor industry conditions. Approximately 6% of the increase in net sales during this period was due to increases in the overall average selling price of products sold as a result of favorable market conditions and product and geographic mix. The remaining sales growth was primarily due to a net increase in the volume of products sold. We sell a large number of products to a large and diverse customer base and there was not any product, customer or market that accounted for a material portion of the increase. The overall average selling price of our products is affected by pricing declines over the life of individual products; however, variations in our product and geographic mix of sales can cause wider fluctuations in our overall average selling price in any given period.
As discussed in the following paragraphs, there were revenue increases across many of our product lines. Key factors impacting the amount of net sales during the last three fiscal years include:
our acquisition of Microsemi, which closed on May 29, 2018;
our acquisition of Atmel, which closed on April 4, 2016;
global economic conditions in the markets we serve;
trade restrictions and changes in tariffs;
semiconductor industry conditions;
adoption of the new revenue recognition standard (ASC 606) on April 1, 2018;
our new product offerings that have increased our served available market;
customers' increasing needs for the flexibility offered by our programmable solutions;
inventory holding patterns of our customers, including distributors;
increasing semiconductor content in our customers' products; and
continued market share gains in the segments of the markets we address.
Net sales by product line for fiscal 2019, 20182021 and 20172020 were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Year Ended March 31, |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 2021 | | % | | 2020 | | % |
| Microcontrollers | | | | | | | | | | | | | | | | | | | | $ | 2,961.0 | | | 54.5 | | $ | 2,817.9 | | | 53.4 |
| Analog | | | | | | | | | | | | | | | | | | | | 1,519.8 | | | 27.9 | | 1,511.1 | | | 28.7 |
| Other | | | | | | | | | | | | | | | | | | | | 957.6 | | | 17.6 | | 945.2 | | | 17.9 |
| Total net sales | | | | | | | | | | | | | | | | | | | | $ | 5,438.4 | | | 100.0 | | $ | 5,274.2 | | | 100.0 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | % | | 2018 | | % | | 2017 | | % |
| Microcontrollers | $ | 2,921.9 |
| | 54.6 | | $ | 2,619.1 |
| | 65.9 | | $ | 2,147.3 |
| | 63.0 |
| Analog, interface, mixed signal and timing products | 1,530.7 |
| | 28.6 | | 952.0 |
| | 23.9 | | 888.9 |
| | 26.1 |
| Field-programmable gate array products | 303.8 |
| | 5.7 | | — |
| | — | | — |
| | — |
| Memory products | 184.0 |
| | 3.4 | | 199.7 |
| | 5.0 | | 184.1 |
| | 5.4 |
| Technology licensing | 132.4 |
| | 2.5 | | 104.8 |
| | 2.6 | | 91.2 |
| | 2.7 |
| Multi-market and other | 276.7 |
| | 5.2 | | 105.2 |
| | 2.6 | | 96.3 |
| | 2.8 |
| Total net sales | $ | 5,349.5 |
| | 100.0 | | $ | 3,980.8 |
| | 100.0 | | $ | 3,407.8 |
| | 100.0 |
Microcontrollers
Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and associated application development systems accounted for approximately 54.6%, 65.9%54.5% and 63.0%53.4% of our net sales in fiscal 2019, 20182021 and 2017,fiscal 2020, respectively. The decrease in fiscal 2019 compared to fiscal 2018 is due to our acquisition of Microsemi, whose microcontroller product line accounted for a relatively low percentage of its total net sales.
Net sales of our microcontroller products increased approximately 11.6%5.1% in fiscal 20192021 compared to fiscal 2018, and increased approximately 22.0% in fiscal 2018 compared to fiscal 2017.2020. The increase in net sales was due primarily to strength in fiscal 2019 compared to fiscal 2018 resulted primarily fromdemand for our acquisition of Microsemi. The increasemicrocontroller products in net sales in fiscal 2018 compared to fiscal 2017 resulted primarily from growth in our business driven by general economic and semiconductor industry conditions and market share gains.end markets that we serve.
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, moderate pricing pressure in certain microcontroller product lines, primarily due to competitive conditions. We have in the past been able to, and expect in the future to be able to, moderate average selling price declines in our microcontroller product lines by introducing new products with more features and higher prices. We may be unable to maintain average selling prices for our microcontroller products as a result of increased pricing pressure in the future, which would adversely affect our operating results. The average selling price of our microcontroller products is affected by these trends; however, variations in our product and geographic mix of sales can cause wider fluctuations in the average selling price of our microcontroller products in any given period.
Analog Interface, Mixed Signal and Timing Products
Sales of ourOur analog product line includes analog, interface, mixed signal and timing productsproducts. Our analog product line accounted for approximately 28.6%, 23.9%27.9% and 26.1%28.7% of our net sales in fiscal 2019, 20182021 and 2017,fiscal 2020, respectively. The increase
Net sales from our analog product line increased approximately 0.6% in fiscal 20192021 compared to fiscal 2018 is due to our acquisition of Microsemi, whose analog, interface, mixed signal and timing product line accounted for a relatively high percentage of its total net sales.
Net sales of our analog, interface, mixed signal and timing products increased approximately 60.8% in fiscal 2019 compared to fiscal 2018 and increased approximately 7.1% in fiscal 2018 compared to fiscal 2017.2020. The increase in net sales was primarily due to strength in fiscal 2019 compared to fiscal 2018 resulted primarily fromdemand for our acquisition of Microsemi. The increaseanalog products in net sales in fiscal 2018 compared to fiscal 2017 resulted primarily from growth in our business drivenend markets that we serve, partially offset by adverse general economic and semiconductor industry conditions and market share gains. Additionally, some new analog products, which are integrated with a microcontroller core, are classified as microcontrollers, rather than analog. This classification adversely impacted somethe impact of the increases in net sales of analog products during fiscal 2019 compared to fiscal 2018 and during fiscal 2018 compared to fiscal 2017.COVID-19 pandemic.
Analog, interface, mixed signal and timing products can be proprietary or non-proprietary in nature. Currently, we
We consider a majority of the products in our analog interface, mixed signal and timing productsproduct line to be proprietary in nature, where prices are relatively stable, similar to the pricing stability experienced in our microcontroller products. The non-proprietary portion of our analog interface, mixed signal and timing businessproduct line will experience price fluctuations, driven primarily by the current supply and demand for those products. We may be unable to maintain the average selling prices of our analog interface, mixed signal and timing productsproduct line 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, interface, mixed signal and timing products will increase over time.
Field-Programmable Gate Array (FPGA) ProductsOther
Our FPGAother product line was primarily acquired as part of our acquisition of Microsemi on May 29, 2018. Sales of ourincludes FPGA products, accounted for approximately 5.7% of our net sales in fiscal 2019.
FPGA product pricing has historically been relatively stable because they are proprietary products with significant design in complexity and they are frequently designed into long-lived end applications.
Memory Products
Sales of our memory products accounted for approximately 3.4%, 5.0%, and 5.4% of our net sales in fiscal 2019, 2018 and 2017, respectively. The decrease in fiscal 2019 compared to fiscal 2018 is due to our acquisition of Microsemi, whose product portfolio did not include memory products.
Net sales of our memory products decreased approximately 7.9% in fiscal 2019 compared to fiscal 2018, and increased approximately 8.5% in fiscal 2018 compared to fiscal 2017. The decrease in memory product net sales in fiscal 2019 compared to fiscal 2018 resulted primarily from customer demand conditions. The increase in memory product net sales in fiscal 2018 compared to fiscal 2017 resulted primarily from growth in our business driven by general economic and semiconductor industry conditions.
Memory product pricing has historically been cyclical in nature, with steep price declines followed by periods of relative price stability, driven by changes in industry capacity at different stages of the business cycle. We have experienced, and expect to continue to experience, varying degrees of competitive pricing pressures in our memory products. We may be unable to maintain the average selling prices of our memory products as a result of increased pricing pressure in the future, which could adversely affect our operating results.
Technology Licensing
Technology licensing revenue includes a combination of royalties associated with licenses for the use of our SuperFlash and other technologies, sales of our intellectual property, and fees for engineering services. Technology licensing accounted for approximately 2.5%, 2.6% and 2.7% of our net sales in fiscal 2019, 2018 and 2017, respectively.
Net sales related to our technology licensing increased approximately 26.3% in fiscal 2019 compared to fiscal 2018 and increased approximately 14.9% in fiscal 2018 compared to fiscal 2017. Revenue from technology licensing can fluctuate over time based on the production activities of our licensees, the sale of patents and other intellectual property, and general economic and semiconductor industry conditions.
Multi-market and Other
Multi-market and Other (MMO) consists ofservices, memory products, timing systems, manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, and products for aerospace applications. Revenue from these services and products accounted for approximately 5.2%, 2.6%17.6% and 2.8%17.9% of our net sales in fiscal 2019, 20182021 and 2017,fiscal 2020, respectively.
Net sales related to these servicesproducts and productsservices increased approximately $171.5 million1.3% in fiscal 20192021 compared to fiscal 2018 and increased approximately $8.9 million in fiscal 2018 compared to fiscal 2017. The increase in MMO net2020. Net sales in fiscal 2019 compared to fiscal 2018 resulted primarily fromof our acquisition of Microsemi, which significantly increased our portfolio of timing systems products. The increase in MMO net sales in fiscal 2018 compared to fiscal 2017 resulted primarily from growth in our business driven by general economic and semiconductor industry conditions. MMO net salesother product line can fluctuate over time based on general economic and semiconductor industry conditions as well as changes in demand for our FPGA products, licenses, engineering services, memory products, and manufacturing services (wafer foundry and assembly and test subcontracting).
Distribution
Distributors accounted for approximately 51%50% of our net sales in each of fiscal 2019, approximately 54% of our net sales in2021 and fiscal 2018 and approximately 55% of our net sales in fiscal 2017. The decrease in this percentage in fiscal 2019 compared to fiscal 2018 is due to our acquisition of Microsemi, whose distributors accounted for a smaller portion of net sales than Microchip's historical business.2020. With the exception of Arrow Electronics, our largest distributor, which made uprepresented 10% of our net sales in fiscal 2020, no other distributor or end customer accounted for more than 10% of our net sales in fiscal 2019. In2021 or fiscal 2018 and fiscal 2017, no distributor or end customer accounted for more than 10% of our net sales.2020. Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base. We believe that customers recognize Microchip for its products and brand name and use distributors as an effective supply channel.
Generally, we do not have long-term agreements with our distributors and we, or our distributors, may terminate our relationships with each other with little or no advance 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 March 31, 2019,2021, our distributors maintained 3522 days of inventory of our products compared to 3629 days at March 31, 2018 and 33 days at March 31, 2017.2020. Over the past ten fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 2722 days and 47 days. Prior to our adoption of ASC 606 on April 1, 2018, we did not believe thatOur distributor inventory holding patternsdays were at our distributors materially impacted our net saleshistoric lows due to the fact that we recognized revenue based on whenimbalance between the distributor sellssupply of and the product to their customer. Upon our adoption of ASC 606 commencing on April 1, 2018, we are required to recognize revenue from distributors at the timedemand for our products are sold toin the distributor. As a result, beginning April 1, 2018, inventory holding patterns at our distributors may have a material impact on our net sales.current supply-constrained environment.
Sales by Geography
Sales by geography for fiscal 2019, 20182021 and 20172020 were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fiscal Year Ended March 31, |
| | | | | | | | | | | | | | | | | | | | | 2021 | | % | | 2020 | | % |
| Americas | | | | | | | | | | | | | | | | | | | | | $ | 1,389.1 | | | 25.5 | | | $ | 1,365.0 | | | 25.9 | |
| Europe | | | | | | | | | | | | | | | | | | | | | 1,042.9 | | | 19.2 | | | 1,163.1 | | | 22.1 | |
| Asia | | | | | | | | | | | | | | | | | | | | | 3,006.4 | | | 55.3 | | | 2,746.1 | | | 52.0 | |
| Total net sales | | | | | | | | | | | | | | | | | | | | | $ | 5,438.4 | | | 100.0 | | | $ | 5,274.2 | | | 100.0 | |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | % | | 2018 | | % | | 2017 | | % |
| Americas | $ | 1,353.6 |
| | 25.3 | | $ | 717.4 |
| | 18.0 | | $ | 641.8 |
| | 18.8 |
| Europe | 1,225.2 |
| | 22.9 | | 962.1 |
| | 24.2 | | 808.6 |
| | 23.7 |
| Asia | 2,770.7 |
| | 51.8 | | 2,301.3 |
| | 57.8 | | 1,957.4 |
| | 57.5 |
| Total net sales | $ | 5,349.5 |
| | 100.0 | | $ | 3,980.8 |
| | 100.0 | | $ | 3,407.8 |
| | 100.0 |
Americas sales include sales to customers in the U.S., Canada, Central America and South America. Sales to foreign customers accounted for approximately 80%, 85%77% and 84%78% of our total net sales in fiscal 2019, 20182021 and 2017,fiscal 2020, respectively. Substantially all of our foreign sales are U.S. dollar denominated. In fiscal 2021, the COVID-19 pandemic and the responses to it significantly affected our net sales by geography. 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; however, sales to AsiaEurope as a percentage of our total net sales decreased in fiscal 20192021 compared to fiscal 20182020 primarily due to our acquisition of Microsemi, whose sales to customers in Asia accounted for a smaller portion of their total net sales than Microchip's historical business,high COVID-19 infection rates and to a lesser extent, tradeextensive governmental restrictions, and changes in tariffs. Sales to customerswhich constrained demand at various times during the fiscal year. High infection rates also constrained demand in the Americas increasedat various times during fiscal 2021, however, less stringent governmental restrictions resulted in only a slight decrease in Americas sales as a percentage of total sales in fiscal 20192021 compared to fiscal 2018 due2020. Sales to customers in Asia as a percentage of total sales increased significantly in fiscal 2021 compared to fiscal 2020 as the COVID-19 pandemic was largely under control in China and Taiwan in early fiscal 2021 and China and Taiwan represent the highest percentage of our acquisitionnet sales
in the aerospace and defense industry in the Americas.Asia. Our sales force in the Americas and Europe supports a significant portion of the design activity for products which are ultimately shipped to Asia.
Sales to customers in China accounted for approximately 22%, 30% and 32% of our net sales in fiscal 2019, 2018 and 2017, respectively. Sales to customers in Taiwan accounted for approximately 13%, 11% and 9% of our net sales in fiscal 2019, 2018 and 2017, respectively. We did not have sales into any other foreign countries that exceeded 10% of our net sales during fiscal 2019, 2018 or 2017. In fiscal 2019, our acquisition of Microsemi and our transition to sell-in revenue recognition contributed to the changes in net sales by country. Our transition from sell-through revenue recognition to sell-in revenue recognition contributed to the changes in net sales by country because under sell-through revenue recognition we assigned revenue to the country of our distributor's end customer and under sell-in revenue recognition we assigned revenue to the country of our distributor. For additional information on our transition from sell-through to sell-in revenue recognition, refer to Note 1 of our consolidated financial statements.
Gross Profit
Our gross profit was $2,931.3 million in fiscal 2019, $2,420.7 million2021 was $3.38 billion or 62.1% of net sales, compared to $3.24 billion, or 61.5% of net sales, in fiscal 20182020. The following table summarizes the material and $1,757.2 millionprimary drivers of our change in fiscal 2017. Grossgross profit as a percentage of net sales, was 54.8%with the material factors discussed in fiscal 2019, 60.8%more detail below the table (dollars in fiscal 2018 and 51.6% in fiscal 2017.millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | |
| | | | Gross Profit | | %
of Net Sales | | | | |
| | | | $ | 3,242.1 | | | 61.5 | | | Fiscal Year Ended March 31, 2020 | | |
| | | | 98.0 | | | — | | | Increase in semiconductor net sales at prior year gross margins and excluding the impact of other factors quantified in this table | | |
| | | | 17.6 | | | 0.3 | | | Impact of unabsorbed capacity charges | | |
| | | | 9.6 | | | 0.1 | | | Net impact of product mix and average costs per unit | | |
| | | | 6.0 | | | 0.1 | | | Increase in net sales to licensing customers, which has no associated cost of sales | | |
| | | | 5.5 | | | 0.1 | | | Net impact of excess and obsolete inventories | | |
| | | | | | | | | | |
| | | | $ | 3,378.8 | | | 62.1 | | | Fiscal Year Ended March 31, 2021 | | |
The most significant factors affecting our gross profit percentage in the periods covered by this Form 10-K were:
charges of approximately $365.7 million in fiscal 2019 and approximately $186.7 million in fiscal 2017 related to the recognition of acquired inventory at fair value as a result of our acquisitions which increased the value of our acquired inventory and subsequently increased our cost of sales and reduced our gross margins when the related revenue was recognized;
for each of fiscal 2019 and fiscal 2017, inventory write-downs being higher than the gross margin impact of sales of inventory that was previously written down; and
for fiscal 2018, inventory write-downs being lower than the gross margin impact of sales of inventory that was previously written down;
unabsorbedUnabsorbed capacity charges due to operating at below normal capacity in fiscal 2019; and
fluctuations in the product mix of microcontrollers, analog, interface, mixed signal and timing products, FPGA products, memory products and technology licensing.
Other factors that impacted our gross profit percentage in the periods covered by this Form 10-K include:
continual cost reductions in wafer fabrication and assembly and test manufacturing, such as new manufacturing technologies and more efficient manufacturing techniques;
lower depreciation as a percentage of cost of sales; and
economic market conditions and product mix.
We adjust our wafer fabrication and assembly and test capacity utilization as required to respond to actual and anticipated business and industry-related conditions. - When production levels are below normal capacity, which we measure as a percentage of the capacity of the installed equipment, we charge cost of sales for the unabsorbed capacity. In fiscal 2019, we operated at below normal capacity levels resulting in an unabsorbed capacity charge of $19.0 million. During fiscal 2018 and fiscal 2017, our wafer fabrication facilities and assembly and test facilities operated at normal capacity levels.
The process technologies utilized in our wafer fabrication facilities impact our gross margins. Our wafer fabrication facility located in Tempe, Arizona (Fab 2) currently utilizes various manufacturing process technologies, but predominantly utilizes our 0.5 micron to 1.0 micron processes. Our wafer fabrication facility located in Gresham, Oregon (Fab 4) predominantly utilizes our 0.13 micron to 0.5 micron processes. We continue to transition products to more advanced process technologies to reduce future manufacturing costs. All of our production in Fab 2 and Fab 4 has been on 8-inch wafers during the periods covered by this report. We consider normal capacity at Fab 2 and Fab 4 to be 90% to 95%. Our wafer fabrication facility in Colorado Springs, Colorado (Fab 5) currently utilizes processes between 0.25 micron and 1.0 micron that run on 6-inch wafers. We consider normal capacity at Fab 5 to be 70% to 75%. As a resultDuring fiscal 2021, we operated at below normal capacity levels primarily due to adverse general economic conditions and uncertainty from the COVID-19 pandemic resulting in unabsorbed capacity charges of our acquisition$29.6 million, compared to unabsorbed capacity charges of Micrel$47.2 million in August 2015, we acquired a 6-inchfiscal 2020. We adjust our wafer fabrication facilityand assembly and test capacity utilization as required to respond to actual and anticipated business and industry-related conditions. By the end of fiscal 2021, our manufacturing facilities were operating at or above normal capacity and we expect this to continue if the current supply constraints relative to demand continue through fiscal 2022.
Net impact of product mix and average cost per unit - The net impact of product mix and average cost per unit may fluctuate over time due to sales volumes of lower or higher margin products, changes in San Jose, Californiaselling prices, and have since transitioned products previously manufactured at this facilityfluctuations in product costs. During fiscal 2021, product mix resulted in a decrease of $9.6 million in cost of goods sold and an increase in gross profit compared to our Fab 2, Fab 4 and Fab 5 facilities. During the quarter ended December 31, 2016, we decommissioned this San Jose facility and, in June 2017, we completed the sale of these assets for proceeds of $10.0 million.fiscal 2020.
Our overall inventory levels were $711.7$665.0 million at March 31, 2019,2021, compared to $476.2$685.7 million at March 31, 2018 and $417.2 million at March 31, 2017. Our overall inventory levels increased since March 31, 2018 because of our acquisition of Microsemi, which had $150.8 million of inventory as of March 31, 2019.2020. We maintained 128112 days of inventory on our balance sheet at March 31, 20192021 compared to 112122 days of inventory at March 31, 2018 and 103 days at March 31, 2017.2020. We expect our days of inventory levels in theat June 2019 quarter30, 2021 to be flat to down 8 days to up 115 days compared to the March 201931, 2021 levels. We believe our existing level of inventory will allow us to maintain competitive lead times and provide strong delivery performance to our customers.
We anticipate that our gross margins will fluctuate over time, driven primarily by capacity utilization levels, the overall product mix of microcontroller, analog, interface, mixed signal and timing products, FPGA products, memory products, and technology licensing revenue and the percentage of net sales of each of these products in a particular quarter, as well as manufacturing yields, fixed cost absorption, and competitive and economic conditions in the markets we serve. We continue to transition products to more advanced process technologies to reduce future manufacturing costs.
During fiscal 2020, we announced our intention to re-purpose Fab 5 to manufacture discrete and specialty products in addition to a lower volume of a diversified set of standard products. In connection with these efforts, we reduced the clean room footprint and transferred certain higher volume products from Fab 5 to our 8-inch wafer fabrication facilities in Arizona and Oregon. During fiscal 2021 and fiscal 2020, we incurred $8.0 million and $18.0 million, respectively, in costs associated with these actions all of which have been recorded within the special charges and other, net line item in our statements of income. These restructuring efforts were substantially completed as of March 31, 2021, and we anticipate that these actions will result in significant cost savings over the next several years.
We operate assembly and test facilities in Thailand, the Philippines, and other locations throughout the world. During fiscal 2019,2021, approximately 38%53% of our assembly requirements were performed in our internal assembly facilities, compared to approximately 42%45% during fiscal 2018 and approximately 36% during fiscal 2017.2020. During fiscal 2019,2021, approximately 49%57% of our test requirements were performed in our internal test facilities, compared to approximately 64%54% during fiscal 20182020. The increases in the percentage of assembly and approximately 60% duringtest operations that were performed internally in fiscal 2017.2021 compared to fiscal 2020 are primarily due to our investments in
assembly and test equipment, which increased our internal capacity capabilities. Third-party contractors located primarily in Asia perform the balance of our assembly and test operations. The percentage of our assembly and test operations that are performed internally fluctuates over time based on supply and demand conditions in the semiconductor industry, our internal capacity capabilities and our acquisition activities.
The decreases in the percentages of assembly and test operations performed internally in fiscal 2019 compared to fiscal 2018 were primarily due to our acquisition of Microsemi, which outsources the majority of its assembly and test requirements. The increases in the percentages of assembly and test operations performed internally in fiscal 2018 compared to fiscal 2017 were primarily due to investments in assembly and test equipment, which increased our internal capacity capabilities. We believe that the assembly and test operations performed at our internal facilities provide us with significant cost savings compared to contractor assembly and test costs, as well as increased control over these portions of the manufacturing process. We plan to continue to transition certain outsourced assembly and test capacity to our internal facilities.
We rely on outside wafer foundries for a significant portion of our wafer fabrication requirements. During fiscal 2019, approximately 57%Approximately 61% of our total net sales came from products that were produced at outside wafer foundries compared to approximately 42% duringin each of fiscal 20182021 and approximately 41% during fiscal 2017. The increases were primarily due to our acquisition of Microsemi, which outsources the majority of its wafer fabrication requirements.2020.
Our use of third parties involves some reduction in our level of control over the portions of our business that we subcontract. While we review the quality, delivery and cost performance of our third-party contractors, our future operating results could suffer if any third-party contractor is unable to maintain manufacturing yields, assembly and test yields and costs at approximately their current levels.
Research and Development (R&D)
R&D expenses for fiscal 20192021 were $826.3$836.4 million, or 15.4% of net sales, compared to $529.3$877.8 million, or 13.3%16.6% of net sales, for fiscal 2018 and $545.3 million, or 16.0% of sales, for fiscal 2017.2020. 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 $297.0decreased $41.4 million, or 56.1%4.7%, for fiscal 20192021 compared to fiscal 2018 primarily due to additional costs from our acquisition of Microsemi.2020. The primary reason for the decrease in R&D expenses decreased $16.0 million, or 2.9%, forin fiscal 20182021 compared to fiscal 2017 primarily2020 was due to management of discretionary spending, including reduced headcount costs due to reductions in personnelcompensation and associated coststravel expenses, in connection with synergies realized from our Atmel acquisition and lower share-based compensation expense dueresponse to accelerated vesting of equity awards held by terminated Atmel employees during fiscal 2017. uncertainty surrounding the COVID-19 pandemic.
R&D expenses fluctuate over time, primarily due to revenue and operating expense investment levels.
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 20192021 were $682.9$610.3 million, or 11.2% of net sales, compared to $676.6 million, or 12.8% of sales, compared to $452.1 million, or 11.4% ofnet sales, for fiscal 2018, and $499.8 million, or 14.7% of sales, for fiscal 2017.2020. Our goal is to continue to be more efficient with our operating expenses as our revenue increases.selling, general and administrative expenses. Selling, general and administrative expenses include salary expenses related to field sales, marketing and administrative personnel, advertising and promotional expenditures and legal expenses. Selling, general and administrative expenses also includeas well as costs related to our direct sales force, CEMs and ESEs who work inremotely from sales offices worldwide to stimulate demand by assisting customers in the selection and use of our products.
Selling, general and administrative expenses increased $230.8decreased $66.3 million, or 51.1%9.8%, for fiscal 20192021 compared to fiscal 2018 primarily due to additional costs from our acquisition of Microsemi, including approximately $41.7 million of acquisition-related legal and professional service expenses. Selling,2020. The primary reasons for the decrease in selling, general and administrative expenses decreased $47.7 million, or 9.5%, for fiscal 2018 comparedwere due to fiscal 2017management of discretionary spending, including reduced headcount costs due primarily to reductions in personnelcompensation and travel expenses, in response to uncertainty surrounding the COVID-19 pandemic as well as lower professional services and legal costs associated with our acquisitions and security remediation costs in connection with synergies realized from our Atmel acquisition and lower share-based compensation expense duerelated to accelerated vesting of equity awards held by terminated Atmel employees during fiscal 2017.network compromises.
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense investment levels.
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets in fiscal 20192021 was $674.1$932.3 million compared to $485.5$993.9 million in fiscal 2018 and $337.7 million in fiscal 2017.2020. The primary reason for the increasedecrease in acquired intangible asset amortization for fiscal 2019 compared to fiscal 2018 was our acquisition of Microsemi. The primary reason for the increase in acquired intangible assetlower amortization for fiscal 2018 compared to fiscal 2017 was amortization of in-process R&D assets from our acquisition of Atmel.Microsemi and from our prior acquisitions.
Special Charges and Other, Net
During fiscal 2019,2021, we incurred special charges and other, net of $33.7$1.7 million primarily related to the restructuring of our wafer fabrication operations partially offset by asset sales and other acquisition related activity. During fiscal 2020, we incurred special charges and other, net of $46.7 million comprised primarily of restructuring charges of $63.9$31.0 million offset by $30.2and legal contingencies of $15.7 million. Restructuring expenses incurred during fiscal 2021 and fiscal 2020 include $15.0 million in legal contingencies. Ourand $18.0 million, respectively, related to the restructuring of our wafer fabrication operations. Other restructuring expenses incurred during the fiscal year ended March 31, 20192021 and fiscal 2020 were related to our most recent business acquisitions, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. During fiscal 2018, we incurred special charges and other, net of $17.5 million comprised primarily of a $19.5 million charge for fees associated with transitioning from a public utility provider in Oregon to a lower cost direct access provider. During fiscal 2017, we
incurred special charges and other, net of $98.6 million comprised primarily of restructuring charges. These restructuring charges included employee separation costs, contract exit costs, other operating expenses and intangible asset impairment losses recognized as a result of changes in the combined product roadmaps after our acquisition of Atmel that affected the use and life of these assets.
Other Income (Expense)
Interest income in fiscal 20192021 was $8.1$1.7 million compared to $22.0$2.8 million in fiscal 2018 and $3.12020.
Interest expense in fiscal 2021 was $356.9 million compared to $497.3 million in fiscal 2017.2020. The primary reason for the decrease in interest incomeexpense in fiscal 20192021 compared to fiscal 20182020 relates to the cumulative pay down of our debt and lower average cash and investment balances asinterest rates on our outstanding variable rate debt.
During fiscal 2021, we usedrecognized losses of $299.6 million related to the settlement of a substantial portion of our cash to help financeoutstanding 2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, and our 2017 Junior Convertible Debt as well as the purchase pricepayment of our acquisition of Microsemi. The primary reason for the increase in interest income in fiscal 2018 compared to fiscal 2017 relates to higher cash and investment balances.
Interest expense in fiscal 2019 was $502.9 million compared to $199.0 million in fiscal 2018 and $146.3 million in fiscal 2017. The primary reason for the increase in interest expense in fiscal 2019 compared to fiscal 2018 relates to our additional borrowings to help finance our acquisition of Microsemi. The primary reasons for the increase in interest expense in fiscal 2018 compared to fiscal 2017 relates to our issuance of $2,645.0 million of convertible notes in February 2017 partially offset by lower interest expense onall amounts borrowedoutstanding under our credit facility.
Loss on settlement of debt inBridge Loan Facility, and our Term Loan Facility. During fiscal 2019 was $12.6 million compared to $16.0 million in fiscal 2018 and $43.9 million in fiscal 2017. In fiscal 2019,2020, we recognized a losslosses of $12.6$5.4 million, consisting of $2.0 million primarily related to the voluntary prepayment of a portion of the outstanding balance on our Term Loan Facility. In fiscal 2018Facility and fiscal 2017, we settled $143.8$3.4 million and $431.3related to the settlement of $615.0 million respectively, in principal of our 2007 Junior Subordinated2015 Senior Convertible Debt. The net losses recognized on the settlement of our Convertible Debt (2007 Junior Debt). Total conversions for fiscal 2018 were for a principal amountare comprised of $32.5 million fortwo components (i) the inducement loss, which we settledis the principal amount in cash and issued 0.5 million shares of our common stock in respect of the conversion value in excess of the principal amount forfair value of the conversions occurring priorconsideration provided to the call notice and $41.0 million in cash forholder over the conversionfair value in excess of the principal amount fordebt and (ii) the conversion requests received afterextinguishment loss or gain, which is the call notice. In June 2017, we exchanged in privately negotiated transactions $111.3 million aggregate principal amount of our 2007 Junior Debt for (i) $111.3 million principal amount of our 2017 Junior Subordinated Convertible Debt (2017 Junior Debt) with a marketdifference between the fair value of $119.3 million plus (ii) the issuance of 3.2 million shares of our common stock with adebt component and the carrying value of $254.6 million. Inon the case of the fiscal 2017 settlement the principal value of $431.3 million was settled in cash and we issued shares of our common stock in respect of the conversion value in excess of the principal amount plus a cash inducement fee of $5.0 million.date.
Other loss, net, in fiscal 20192021 was $2.2$3.8 million compared to other loss,income, net of $5.8$3.2 million in fiscal 2018 and other income, net of $1.3 million in fiscal 2017.2020. The primary reasonsreason for the change in other loss(loss) income, net during fiscal 20192021 compared to fiscal 2018 relates2020 related to lower losses on investments offset by lower net gains on foreign currency exchange rate fluctuations. The primary reasons for the change in other income (loss) during fiscal 2018 compared to fiscal 2017 relates to impairments on available for sale investments partially offset by gains on foreign currency exchange rate fluctuations. The impairments on the available for sale investments were due to the anticipated liquidation of these investments in the first quarter of fiscal 2019 to fund our acquisition of Microsemi.
Provision for Income Taxes
Our provision or benefit for income taxes reflects tax onis attributable to U.S. federal, state, and foreign earnings and federal and state tax on U.S. earnings. Ourincome taxes. A comparison of our effective tax rates for thein fiscal years ended March 31, 20192021 and March 31, 2018 werefiscal 2020 is not meaningful due to the amount of pre-tax income, and theincome tax benefits recorded during the period. Excluding certain tax events described below, our effective tax rates were lower than statutory rates in the U.S. primarily due to our mix of earnings in foreign jurisdictions with lower tax rates.
Our effective tax rate in fiscal 20192021 includes a $27.5$48.4 million tax benefit received from current year generated R&D credits, which reduced our effective tax rate by 13.4%. Our effective tax rate in fiscal 2019 includes14.3%; a $13.3$12.3 million tax benefit for share-based compensation deductions, which reduced our effective tax rate by 6.5%. Our effective tax rate in fiscal 2019 includes3.6%; a $75.1$4.4 million tax benefit related to audit closures and expirations of the statute of limitations on various tax reserves, which reduced our effective tax rate by 36.7%. Our effective tax rate in fiscal 2019 includes $95.41.3%; a $101.8 million tax expense for GILTI,global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII), net of credits, which increased our effective tax rate by 46.7%. Our effective tax rate in fiscal 2019 includes30.0%; a $90.6$48.1 million tax benefit for business realignment,related to the settlement of convertible debt, which reduced our effective tax rate by 44.3%14.2%; and a $63.8 million tax benefit related to intra-group transfers of certain intellectual property rights, which reduced our effective tax rate by 18.8%. The tax benefit for the intra-group asset transfers primarily consisted of $155.5 million recorded as a deferred tax asset which represents the book and tax basis difference on the transferred assets measured based on the new applicable statutory tax rate, as well as, the reversal of the pre-existing deferred tax asset of $90.3 million, which represents the book and tax basis difference on the transferred assets measured based on the applicable statutory tax rate prior to the transfer. Over the next 15 years, we expect to be able to realize the future tax benefit of the deferred tax assets resulting from the intra-group asset transfers. It is not uncommon for taxing authorities of different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied with respect to the valuation of intellectual property rights. The taxing authorities of jurisdictions in which we operate may challenge our methodologies for valuing the intellectual property rights transferred, which could increase our future effective income tax rate and harm our future results of operations.
Our effective tax rate in fiscal 2018 includes $644.7 million of tax expense estimated on a provisional basis, calculated under SAB 118, related to the one-time transition tax on certain foreign earnings, $136.7 million of tax benefit estimated on a provisional basis related to the revaluation of our deferred tax assets and liabilities to the newly enacted U.S. statutory tax rate
of 21.0%, and $20.5 million of tax benefit estimated on a provisional basis related to the release of valuation allowances against our foreign tax credit carryforwards. These three adjustments increased (reduced) our effective tax rate by 87.4%, (18.5%), and (2.8%), respectively. Our effective tax rate in fiscal 2018 also2020 includes a $17.0$40.8 million tax benefit received from current year generated R&D credits, which reduced our effective tax rate by 2.3%. Our effective tax rate in fiscal 2018 also includes a $27.227.2%; an $11.1 million tax benefit for share-based compensation deductions, which reduced our effective tax rate by 3.7%. Our effective7.4%; a $28.5 million tax rate in fiscal 2018 also includes a $11.3 million benefit related to audit closures and expirations of the statute of
limitations on various tax reserves, which reduced our effective tax rate by 1.5%.
Our19.0%; a $54.7 million tax expense for GILTI and FDII, net of credits, which increased our effective tax rate in fiscal 2017 included $36.3by 36.4%; and a $334.8 million of benefitstax benefit related to audit closures and expirationsintra-group transfers of the statute of limitations on various tax reserves and $7.9 million of expense related to intercompany prepaid tax amortization,certain intellectual property rights, which reduced our effective tax rate by 40.4%222.9%. The tax benefit for the intra-group asset transfers primarily consisted of $78.0 million recorded as a deferred tax asset which represents the book and increased our effectivetax basis difference on the transferred assets measured based on the new applicable statutory tax rate, by 8.8%, respectively. Our effectiveas well as, the reversal of the pre-existing deferred tax liability of $259.9 million, which represents the book and tax basis difference on the transferred assets measured based on the applicable statutory tax rate in fiscal 2017 included a $12.8 million benefit received from current year generated R&D credits, which reduced our effective tax rate by 14.3%. Our effective tax rate in fiscal 2017 also included a $25.0 million benefit for share-based compensation deductions, which reduced our effective tax rate by 27.8%.prior to the transfer.
We are also subject to taxation in many other jurisdictions wherein which we have operations. The effective tax rates that we pay in these jurisdictions vary widely, but they are generally lower than our combined U.S. federal and state effective tax rate. Our domestic statutory tax rate for thein each of fiscal year ended March 31, 20192021 and fiscal 2020 was approximately 22% and our domestic statutory tax rate for fiscal 2018 was approximately 33%. Our non-U.S. blended statutory tax rates forin fiscal 20192021 and fiscal 20182020 were much lower than this amount. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, historical loss carry-forwards,tax holidays, financing arrangements and other factors. Our effective tax rate has been, and will continue to be impacted by the geographical dispersion of our earnings and losses.
Our foreign tax rate differential benefit primarily relates to our operations and assets in Thailand, Malta and Ireland. Our Thailand manufacturing operations are currently subject to numerous tax holidays granted to us based on our investment in property, plant and equipment in Thailand. Our tax holiday periods in Thailand expire at various times in the future; however, we actively seek to obtain new tax holidays, orotherwise we will be subject to tax at the statutory tax rate of 20%. We do not expect the future expiration of any of our tax holiday periods in Thailand to have a material impact on our effective tax rate. Our Microsemi operations in Malaysia are also subject to a tax holiday that effectively reduces Microsemi’s income tax rate in that jurisdiction. Microsemi’s tax holiday in Malaysia was granted in 2009 and is effective through December 2019, subject to continued compliance with the tax holiday’s requirements. The remaining material components of foreign income taxed at a rate lower than the U.S. are earnings accrued in Ireland at a 12.5% statutory tax rate and earnings accrued in Malta at a 0% to 5% tax rate.
Various taxing authorities in the U.S. and other countries in which we do business are increasing their scrutiny of the tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. For U.S. federal, and in general for U.S. state tax returns, our fiscal 2007 and later tax returns remain effectively open for examination by the taxing authorities. We are currently being audited by the tax authorities in the United StatesU.S. and in various foreign jurisdictions. At this time, we do not know what the outcome of these audits will be. We record benefits for uncertain tax positions based on an assessment of whether it is more likely than not that the tax positions will be sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, we recognize the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.
ResultsIn July 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of Discontinued Operations
Discontinued operations representstock-based compensation expense in an intercompany cost-sharing arrangement. In the mobile touch operationsJuly 2015 ruling, the Tax Court concluded that we acquired as part of our acquisition of Atmel. On November 10, 2016, we completed the salesharing of the mobile touch assets to Solomon Systech (Limited) International,cost of employee stock compensation in a Hong Kong based semiconductor company. The transaction includedcompany’s cost-sharing arrangement was invalid under the sale of certain semiconductor products, equipment, customer list, backlog, patents, andU.S. Administrative Procedures Act. In June 2019, a license to certain other intellectual property and patents related to Atmel's mobile touch product line. We also agreed to provide certain transition services to Solomon Systech. For financial statement purposes, the results of operations for this discontinued business have been segregated from thosepanel of the continuing operations and are presented in our consolidated financial statements as discontinued operations. Net loss from discontinued operationsNinth Circuit of the U.S. Court of Appeals reversed this decision. In July 2019, Altera petitioned U.S. Court of Appeals for the year ended March 31, 2017Ninth Circuit to hold an en banc rehearing of the case. In November 2019, the en banc rehearing petition was $6.0denied, and Altera asked the U.S. Supreme Court for a judicial review. In June 2020, the U.S. Supreme Court declined to issue a writ of certiorari in Altera v Commissioner, leaving intact the decision reached by the Ninth Circuit of the U.S. Court of Appeals. Based on the Ninth Circuit Opinion, we recorded a cumulative income tax expense of $23.3 million consistingin fiscal 2021.
Liquidity and Capital Resources
We had $430.9$282.0 million in cash, cash equivalents and short-term investments at March 31, 2019,2021, a decrease of $1.77 billion$121.0 million from the March 31, 20182020 balance. The decrease in cash, cash equivalents and short-term investments over this time period is primarily attributable to our acquisition of Microsemi.
Net cash provided by operating activities was $1.67$1.92 billion for fiscal 2019, $1.422021 compared to $1.54 billion for fiscal 2018 and $1.06 billion for fiscal 2017.2020. The increase in net cash provided by operating activities in fiscal 20192021 compared to fiscal 20182020 was primarily due to cash provided by our acquisition of Microsemi in fiscal 2019. The increase in net cash provided by operating activities in fiscal 2018 compared to fiscal 2017 was primarily due to higher net sales as well as operating cash flows resulting from synergies realized from our process efficienciesefforts focused on working capital and restructuring efforts related to our acquisition of Atmel.discretionary spending management.
Net cash used in investing activities was $6.81 billion$173.3 million for fiscal 20192021 compared to $1.01 billion$133.2 million for fiscal 20182020. Fiscal 2021 and $2.84 billion in fiscal 2017. Fiscal 2019 investing cash flows included net cash and cash equivalents used to finance our acquisition of Microsemi of $7.85 billion net of $340.0 million of cash and cash equivalents acquired, offset by net cash inflows of $1.29 billion due to the sale and maturity of available-for-sale debt securities to fund our acquisition of Microsemi, and capital expenditures of $228.9 million. Fiscal 20182020 investing cash flows primarily result from the net increase in investments of $808.1 million duerelated to cash from operations as well as capital purchases. Fiscal 2017 investing cash flows include net cash and cash equivalents used to finance our acquisition of Atmel of $2.75 billion. Excluding cash flows used in acquisitions, net investing activities resulted in net cash provided of $1.04 billion in fiscal 2019 and a use of $90.5 million in fiscal 2017, and represented primarily the net change in our investments, capital purchases and sale ofinvestments in other assets.
Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions. Capital expenditures were $228.9 million, $206.8$92.6 million and $75.3$67.6 million in fiscal 2019, 20182021 and 2017,fiscal 2020, respectively. Capital expenditures, which were comparatively lower in fiscal 2020 and through the first half of fiscal 2021, related primarily forto the expansion of production capacity and the addition of research and development equipmentequipment. Towards the second half of fiscal 2021 we started to invest more significantly to expand manufacturing capacity in response to supply constraints relative to current demand levels and new office buildings. Capital expenditureswe expect this to continue in fiscal 2017 were relatively less than we had experienced in recent years as we delayed certain purchases until we had finalized and developed plans following our acquisition of Atmel regarding technology platforms and other manufacturing activities.2022. We currently intend to spendinvest between $130$225 million and $150$275 million in equipment and facilities during the next twelve months to invest in equipment and facilities.months. We believe that the capital expenditures anticipated to be incurred over the next twelve months will provide sufficient manufacturing capacity to support the growth of our production capabilities for our new products and technologies and to bring in-house more of the assembly and test operations that are currently outsourced. We expect to finance our capital expenditures through our existing cash balances and cash flows from operations.
Net cash provided byused in financing activities was $4.66$1.86 billion for fiscal 20192021 compared to net cash used in financing activities of $415.3 million$1.44 billion for fiscal 2018 and net cash provided by financing activities of $595.5 million for fiscal 2017. Fiscal 2018 financing cash outflows were primarily the result of dividend payments and payments on the settlement of our convertible debt. Fiscal 2019 and fiscal 2017 cash flows were favorably impacted by the net proceeds from amounts borrowed to fund our acquisitions of Microsemi and Atmel, respectively.2020. Significant transactions affecting our net financing cash flows include:
In•in fiscal 2019, proceeds of $3.0 billion from term loans made under the Term Loan Facility, net proceeds of $3.27 billion from borrowings under our Revolving Credit Facility, net proceeds of $1.99 billion from the issuance of our Senior Secured Notes, $2.06 billion of cash used to repay Microsemi's existing debt, and $1.092021, $1.41 billion of cash used to pay down thecertain principal of our debt, including our Revolving Credit Facility, Term Loan Facility and Bridge Loan Facility, and the cash portion of the settlement of our 2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, and our 2017 Junior Convertible Debt, partially funded by the issuance of our senior notes,
In•in fiscal 2017, we issued $2.652020, $1.07 billion of debt, of which $2.12 billion wascash used to settlepay down certain principal of our debt, including our Revolving Credit Facility, our Term Loan Facility and reduce borrowings onthe cash portion of the settlement of our credit facility,2015 Senior Convertible Debt, partially funded by term loans made under the Bridge Loan Facility, and
In•in fiscal 2019, fiscal 20182021 and fiscal 2017,2020, we paid cash dividends to our stockholders of $344.4 million, $337.5$388.3 million and $315.4$350.1 million, respectively. The amount of dividends paid has increased due to an increase in the amount of dividends declared per share
In March 2020 and in the number of shares outstanding.
OnSeptember 2019, we amended our Credit Agreement dated May 29, 2018, we completedto, among other things, reduce the acquisition of Microsemi Corporation, a publicly traded company headquartered in Aliso Viejo, California. We paid an aggregate of approximately $8.19 billion in cashmargin added to the stockholders of Microsemi. The total consideration transferred in the acquisition, including approximately $53.9 million of non-cash consideration for the exchange of certain share-based payment awards of Microsemi for stock awards for our common stock, was approximately $8.24 billion. In addition to the consideration transferred, we recognized $3.23 billion in liabilities in our consolidated financial statements of Microsemi consisting of debt, taxes payable and deferred, pension obligations, restructuring, and contingent and other liabilities of which $2.06 billion of existing debt was paid off. We financed the purchase price using approximately $8.10 billion of borrowings consisting of $3.10 billion ofinterest rate on revolving loans under the Credit Agreement and amend certain negative covenants, including covenants that restrict our Revolving Credit Facility, $3.00 billion underand our subsidiaries’ ability to, among other things, incur subsidiary indebtedness, grant liens and enter into certain restrictive agreements. The amendments also allow us the Term Loan Facility,option to factor receivables and $2.00 billion in newly issued senior secured notes. We incurred $22.0 million in acquisition costscertain related to the acquisition. During fiscal 2019, we voluntarily prepaid $1.09 billion of principal
under the Term Loan Facility, of which $500.0 million was from funds borrowed under our Revolving Credit Facility. At March 31, 2019, we had $1.91 billion of outstanding borrowings under our Term Loan Facility.
In May 2018, we entered into an amended and restated credit agreement (the "Credit Agreement") which provides forassets. The amendments lowered the Revolving Credit Facility in an aggregate principal amount of approximately $3.84thereunder to $3.57 billion which was reduced tofrom $3.60 billion in the second quarter of fiscal 2019 through the termination of the 2020 Tranche, with a $250.0 million foreign currency sublimit, a $50.0 million letter of credit sublimit and a $25.0 million swingline loan sublimit.billion. The Credit Agreement also provides for the Term Loan Facility. The Revolving Credit Facility consists of $3.60 billion of revolving loan commitments (the "2023 Revolving Loans") that terminate onin May 18, 2023 (the "2023 Maturity Date"). The 2023 Revolving Loansand bear interest, at our option, at the base rate plus a spread of 0.00% to 1.00%0.75% or an adjusted LIBOR rate plus a spread of 1.00% to 2.00%1.75%, in each case, with such spread being determined based on the consolidated senior leverage ratio for the preceding four fiscal quarter period.
As of March 31, 2021, the principal amount of our outstanding indebtedness was $9.21 billion. At March 31, 2019,2021, we had $3.27$2.35 billion of outstanding borrowings under the Revolving Credit Facility and no borrowingscompared to $2.39 billion at March 31, 2018.2020. During fiscal 2021, we used borrowings under our Revolving Credit Facility and proceeds from the issuance of our 0.972% 2024 Notes to repay all amounts outstanding under our Term Loan Facility. See Note 127 of the notes to our consolidated financial statements for more information regarding our Credit Agreement.contractual obligations related to our long-term debt.
In June 2017, in connection with the settlement of $111.3 million of our convertible debt, we amended our credit agreement to (i) extend the time period during which we are permitted to repurchase, redeem or exchange our 2007 Junior Convertible Debt and (ii) amend the maximum total leverage ratio covenant to extend the time period for permitted refinancings or exchanges of the 2007 Junior Convertible Debt that may be excluded from the calculation of the ratio, subject to certain conditions.
In February 2017, we amended our credit agreement to, among other things, increase certain covenant compliance ratios. The February 2017 amendment included a new collateral agreement that secures our borrowings with all assets of our guarantor subsidiaries with the exception of real property. Proceeds of loans made under our credit agreement may be used for working capital and general corporate purposes.
The enactment of the Act in December 2017TCJA imposed a tax on all previously untaxed earnings of non-U.S. subsidiaries of U.S. corporations. Due to this change, the jurisdiction in which our cash is at any given point in time no longer has a significant impact on our liquidity. Future distributions of a significant portion of our non-U.S. assets to the U.S. will no longer be subject to U.S. federal taxation. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts. As a result of the Act, as of March 31,During fiscal 2018, we recognized a one-time provisional transition tax expense of $644.7 million on accumulated unrepatriated foreign earnings. As we concluded with our measurement period in accordance with SEC Staff Accounting Bulletin ("SAB") 118, we finalized our calculations of the transition tax expense during the period ended December 31, 2018. As such, we increased our March 31, 2018 provisional amount by $13.1 million to $657.8 million,earnings, of which we expectexpected cash payments of approximately $280.7 million after offsets by the utilization of various tax attribute carryforwards in the United States.$290.3 million. This tax is to be paidpayable over a period of eight years, with 8% of the transition tax paidpayable each year for fiscal 2019 through fiscal 2023, and 15%, 20%, and 25%,
respectively, to be paidpayable during fiscal 2024, fiscal 2025, and fiscal 2026. As of March 31, 2021, our transition tax payable was $220.6 million, of which $23.2 million is payable within the next 12 months.
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 March 31, 2019,2021, we had no foreign currency forward contracts outstanding.
On April 4, 2016, we completed our acquisition of Atmel. Under the terms of the merger agreement executed on January 19, 2016, Atmel stockholders received $8.15 per share consisting of $7.00 per share in cash and $1.15 per share in shares of Microchip common stock. We financed the purchase price of our Atmel acquisition using approximately $2.04 billion of cash held by certain of our foreign subsidiaries, approximately $0.94 billion from additional borrowings under our credit agreement and approximately $486.1 million through the issuance of an aggregate of 10.1 million shares of our common stock. The acquisition price represented a total equity value of approximately $3.47 billion, and a total enterprise value of approximately $3.44 billion, after excluding Atmel's cash and investments net of debt on its balance sheet of approximately $39.3 million. The acquisition was structured in a manner that enabled us to utilize a substantial portion of the cash, cash equivalents, short-term investments and long-term investments held by certain of our foreign subsidiaries in a tax efficient manner. Although we believe our determinations with respect to the tax consequences of the acquisition are reasonable, we are regularly audited by the IRS and may be audited by other taxing authorities, and there can be no assurance as to the outcome of any such audit.
There were no repurchases of common stock duringin fiscal 2019, 2018, or 2017.2021 and fiscal 2020. As of March 31, 2019,2021, we held approximately 15.611.0 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. The initial quarterly dividend of $0.02 per share was paid on December 6, 2003 in the amount of $4.1 million. To date, our cumulative dividend payments have totaled approximately $3.8$4.5 billion. Cash dividends paid per share were $1.457, $1.449$1.494 and $1.441$1.465 during fiscal 2019, fiscal 20182021 and fiscal 2017,2020, respectively. Total dividend payments amounted to $344.4$388.3 million $337.5 million, $315.4and $350.1 million during fiscal 2019, fiscal 20182021 and fiscal 2017,2020, respectively. A quarterly cash dividend of $0.3655$0.413 per share was declared on May 7, 20196, 2021 and will be paid on June 4, 2019,2021 to stockholders of record as of May 21, 2019.2021. We expect the aggregate cash dividend for the June 4, 20192021 quarter to be approximately $87.0$113.0 million. Our Board is free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend on our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and other factors deemed relevant by our Board. Our current intent is to provide for ongoing quarterly cash dividends depending upon market conditions, our results of operations, and potential changes in tax laws.
We believe that our existing sources of liquidity combined with cash generated from operations and borrowings under our Revolving Credit Facility 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 increase our borrowings under our Revolving Credit Facility or seek additional equity or debt financing from time to time to maintain or expand our wafer fabrication and product assembly and test facilities, for cash dividends, for share repurchases or for acquisitions or other purposes. The timing and amount of any such financing requirements will depend on a number of factors, including our level of dividend payments, changes in tax laws and regulations regarding the repatriation of offshore cash, (including the impact of the Act), demand for our products, changes in industry conditions, product mix, competitive factors and our ability to identify suitable acquisition candidates. We may from time to time seek to refinance certain of our outstanding notes or Convertible Debt through issuances of new notes or convertible debt, tender offers, exchange transactions or open market repurchases. Such issuances, tender offers or exchanges or purchases, if any, will depend on prevailing market conditions, our ability to negotiate acceptable terms, our liquidity position and other factors. There can be no assurance that suchany financing will be available on acceptable terms due to uncertainties resulting from the COVID-19 pandemic or other factors, and any additional equity financing would result in incremental ownership dilution to our existing stockholders.
Contractual Obligations
The following table summarizes our significant contractual obligations at March 31, 2019, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less than 1 year | | 1 – 3 years | | 3 – 5 years | | More than 5 years |
Operating lease obligations (1) | $ | 167.1 |
| | $ | 49.0 |
| | $ | 68.4 |
| | $ | 27.1 |
| | $ | 22.6 |
|
Capital purchase obligations (2) | 18.8 |
| | 18.8 |
| | — |
| | — |
| | — |
|
Other purchase obligations and commitments (3) | 205.6 |
| | 194.9 |
| | 10.5 |
| | 0.2 |
| | — |
|
Term Loan Facility (4) | 2,435.4 |
| | 72.5 |
| | 174.7 |
| | 174.4 |
| | 2,013.8 |
|
Revolving Credit Facility (5) | 3,879.0 |
| | 147.0 |
| | 294.0 |
| | 3,438.0 |
| | — |
|
| 2023 and 2021 Senior Notes | 2,293.0 |
| | 82.5 |
| | 1,145.5 |
| | 1,065.0 |
| | — |
|
2017 Senior Convertible Debt (6) | 2,339.1 |
| | 33.6 |
| | 67.3 |
| | 67.3 |
| | 2,170.9 |
|
2015 Senior Convertible Debt (7) | 1,893.2 |
| | 28.0 |
| | 56.1 |
| | 56.1 |
| | 1,753.0 |
|
2017 Junior Convertible Debt (8) | 964.0 |
| | 15.4 |
| | 30.9 |
| | 30.9 |
| | 886.8 |
|
Pension obligations (9) | 20.7 |
| | 1.3 |
| | 3.4 |
| | 4.1 |
| | 11.9 |
|
Transition tax obligation (10) | 245.7 |
| | 9.9 |
| | 44.9 |
| | 64.6 |
| | 126.3 |
|
Total contractual obligations (11) | $ | 14,461.6 |
| | $ | 652.9 |
| | $ | 1,895.7 |
| | $ | 4,927.7 |
| | $ | 6,985.3 |
|
(1) Operating lease obligations include $18.1 million of future lease payments which is recorded as a liability on the balance sheet as of March 31, 2019. This obligation is due under an operating lease from our acquisition of Atmel for a building in San Jose, California.
| |
(2)
| Capital purchase obligations represent commitments for construction or purchases of property, plant and equipment. These obligations were not recorded as liabilities on our balance sheet as of March 31, 2019, as we have not yet received the related goods or taken title to the property. |
| |
(3)
| Other purchase obligations and commitments include payments due under various types of licenses and outstanding purchase commitments with our wafer foundries. |
| |
(4)
| The Term Loan Facility matures on May 29, 2025. |
| |
(5)
| For purposes of this table, we have assumed that the principal of our 2023 revolving loans outstanding at March 31, 2019 will be paid on May 18, 2023, which is the maturity date of such borrowings. |
| |
(6)
| For purposes of this table, we have assumed that the principal of our 2017 senior convertible debt will be paid on February 15, 2027, which is the maturity date of such debt. |
| |
(7)
| For purposes of this table, we have assumed that the principal of our 2015 Senior Convertible Debt will be paid on February 15, 2025, which is the maturity date of such debt. |
| |
(8)
| For purposes of this table, we have assumed that the principal of our 2017 Junior Convertible Debt will be paid on February 15, 2037, which is the maturity date of such debt. |
| |
(9)
| For purposes of this table, pension obligations due in more than 5 years represent the expected pension payments from 2025 through 2029. It excludes pension obligations subsequent to 2029. |
(10) During fiscal 2018, we recognized a provisionary one-time transition tax on accumulated unrepatriated foreign earnings, estimated at $644.7 million, as a result of the recent U.S. tax reform. As of December 31, 2018, with the conclusion of the measurement period in accordance with SAB 118, we increased this amount by $13.1 million to $657.8 million, of which we expect cash payments of approximately $280.7 million after offsets by the utilization of various tax attribute carryforwards in the United States. Our first payment on this obligation of $35.0 million was made in the quarter ended September 30, 2018 and we expect future cash payments of approximately $245.7 million. This tax is to be paid over a period of eight years, with 8% of the transition tax paid each year for fiscal 2019 through fiscal 2023, and 15%, 20%, and 25%, respectively, to be paid during fiscal 2024, 2025, and 2026.
(11) The contractual obligations do not include amounts related to uncertain tax positions because reasonable estimates cannot be made.
Purchase orders or contracts for the purchase of raw materials and other goods and services, with the exception of commitments to our wafer foundries, are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For the purpose of this table, contractual obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors with short time horizons. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.
The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
Off-Balance Sheet Arrangements (Including Guarantees)
As of March 31, 2019, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K with the exception of various operating leases for buildings and equipment entered into in the ordinary course of business. Additionally, we may provide standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by us or our subsidiaries. We have not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, we believe we will not be required to make any payments under these guarantee arrangements. For our operating leases, we expect to make cash payments and incur expenses throughout the lives of the operating leases. We have not recorded any liability in connection with these operating leases. We will record the associated lease obligations as a liability when we adopt the provisions of the Accounting Standard Update 2016-02-Leases. Refer to Note 1 to our consolidated financial statements for additional information regarding the adoption of this accounting standard.
Recently Issued Accounting Pronouncements
Refer to Note 1 to our consolidated financial statements regarding recently issued accounting pronouncements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
As of March 31, 2019,2021, our long-term debt totaled $11.66$9.21 billion. We have no interest rate exposure to rate changes on our fixed rate debt, which totaled $6.48$6.86 billion as of March 31, 2019.2021. We do have interest rate exposure with respect to the $5.18$2.35 billion balance of our variable interest rate debt outstanding as of March 31, 2019.2021. A 50 basis point increase in interest rates would impact our expected annual interest expense for the next 12 months by approximately $26.0$11.7 million.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements and Supplementary Data
The consolidated financial statements listed in the index appearing under Item 15(a)(1) hereof are filed as part of this Form 10-K. See also Index to Financial Statements below.
| |
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. CONTROLS AND PROCEDURESControls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act, of 1934, as amended (the "Exchange Act"), we evaluated under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act.Act). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that because of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange CommissionSEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
In reviewing the accounting for certain transactions completed in fiscal 2019 as part of the realignment of our legal structure and other significant transactions, our management identified deficiencies in the operating effectiveness of controls intended to properly document and review relevant facts used to determine and apply the appropriate tax accounting under accounting standards generally accepted in the United States. Additionally, our controls did not operate to validate the completeness and accuracy of information used in the execution of certain key tax controls. These control deficiencies impacted the deferred tax, long-term income tax payable, and income tax benefit accounts and related disclosures and resulted in adjustments to our annual financial statements as of and for the year ended March 31, 2019. The errors arising from the underlying deficiencies are not material to the financial statements reported in any interim or annual period and therefore, did not result in a revision to previously filed financial statements. However, the control deficiencies could result in a failure to timely prevent or detect misstatements of the aforementioned accounts and disclosures that could be material to the annual or interim consolidated financial statements. Accordingly, our management has concluded that the deficiencies, in the aggregate, constitute a material weakness in our internal control over financial reporting.
In the fourth quarter of fiscal 2019, we also identified deficiencies in the design of our internal control over financial reporting as our management determined that there were not sufficient controls to prevent, detect and respond to unauthorized access to our IT systems in a timely manner. Network authentication, segmentation and monitoring were in place, but were not sufficiently designed to address changes in the current risk environment. Our management has concluded that these deficiencies, in the aggregate, constitute a material weakness in our internal control over financial reporting
Management Report on Internal Control Over Financial Reporting
Our management, including our principal executive officer and our principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Management assessed our internal control over financial reporting as of March 31, 2019,2021, the end of our fiscal year. Management based its assessment on criteria established in Internal Control – Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included an evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our finance organization.
In accordance with guidance issued by the Securities and Exchange Commission, registrants are permitted to exclude material business combinations from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Our management’s evaluation of internal control over financial reporting excluded the internal control activities of Microsemi, which we acquired on May 29, 2018 as discussed in Note 2 of the consolidated financial statements. We have included the financial results of Microsemi in our consolidated financial statements from the date of acquisition. Total revenues excluded from our assessment of internal control over financial reporting represented approximately 28% of our consolidated revenues for the fiscal year ended March 31, 2019. Total Microsemi assets excluded from our assessment of internal control over financial reporting represented approximately 4% of our consolidated total assets as of March 31, 2019.
Based on our assessment, and the existence of a material weakness related to accounting for income taxes and the existence of a material weakness related to IT system access, management has concluded that our internal control over financial reporting was not effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.U.S. GAAP. We reviewed the results of management's assessment with the Audit Committee of our Board of Directors.
Ernst & Young LLP, an independent registered public accounting firm, who audited our consolidated financial statements included in this Form 10-K has issued an attestation report on our internal control over financial reporting as of March 31, 2019,2021, which is included on page F-2.F-5.
Remediation Plans and Other Information
Our management has begun implementing a remediation plan to address the control deficiencies that led to the material weakness related to accounting for income taxes as described above. The remediation plan includes:
strengthening our income tax control with improved documentation standards, technical oversight and training; and
hiring additional qualified accounting and/or tax professionals.
With respect to the foregoing material weakness, we currently plan to have our enhanced review procedures and documentation standards in place in the first quarter of fiscal 2020. Our goal is to remediate this material weakness by the end of fiscal 2020, subject to there being sufficient opportunities to conclude, through testing, that the enhanced control is operating effectively.
Our management has also begun implementing a remediation plan to address the control deficiencies that led to the material weakness related to IT system access as described above. The remediation plan includes:
hiring additional qualified information services professionals;
strengthening technical access controls by implementing additional multi-factor authentication mechanisms;
redesigning and implementing network structure to contain and isolate relevant systems; and
implementing additional controls related to on-going incident response and monitoring.
With respect to the foregoing material weakness related to IT system access, we currently plan to have implemented additional multi-factor authentication and implemented additional controls in the first quarter of fiscal 2020. Our goal is to remediate this material weakness by the end of fiscal 2020, subject to there being sufficient opportunities to conclude, through testing, that the enhanced controls are operating effectively.
Changes in Internal Control over Financial Reporting
On May 29, 2018, we completed our acquisition of Microsemi which operated under its own set of systems and internal controls. During the three months ended March 31, 2019,2021, we transitioned certain of Microsemi's processes to our internal control processes and we expect to transition more of such processes throughout the remainder of calendar year 2019.
In connection with the identified material weaknesses related to accounting for income taxes and to IT system access, we have taken steps to remediate the material weaknesses as described above. However, other2021. Other than with respect to our transition of Microsemi to our systems and control environment as describedescribed above, during the three months ended March 31, 2019,2021, 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.
Item 9B. OTHER INFORMATIONOther Information
J. Eric Bjornholt, our Senior Vice President, Chief Financial Officer, Mitch Little, our Senior Vice President, Worldwide Client Engagement, Steve Drehobl, our Senior Vice President, MCU8 and MCU16 Business Units, and Rich Simoncic, our Senior Vice President, Analog Power and Interface Business Units, Esther Johnson, our Board Member, L.B. Day, our Board Member, and Matthew W. Chapman, our Board Member, have entered into trading plans as contemplated by Rule 10b-5-1 under the Exchange Act and periodic sales of our common stock have occurred and are expected to occur under such plans.
The foregoing disclosure is being made on a voluntary basis and not pursuant to any specific requirement under Form 10‑K, Form 8‑K or otherwise.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEDirectors, Executive Officers and Corporate Governance
Information on the members of our Board of Directors is incorporated herein by reference to our proxy statement for our 20192021 annual meeting of stockholders under the captions "The Board of Directors," and "Proposal One – Election of Directors."
Information on the composition of our audit committee and the members of our audit committee, including information on our audit committee financial experts, is incorporated by reference to our proxy statement for our 20192021 annual meeting of stockholders under the caption "The Board of Directors – Committees of the Board of Directors – Audit Committee."
Information on our executive officers is provided in Item 1, Part I of this Form 10-K under the caption "Executive Officers of the Registrant" at page 10,11, above.
Information with respect to compliance with Section 16(a) of the Exchange Act, is incorporated herein by reference to our proxy statement for our 2019 annual meeting of stockholders under the caption "Delinquent Section 16(a) Reports."
Information with respect to our code of ethics that applies to our directors, executive officers (including our principal executive officer and our principal financial and accounting officer) and employees is incorporated by reference to our proxy statement for our 20192021 annual meeting of stockholders under the caption "Code of Business Conduct and Ethics." A copy of our Code of Business Conduct and Ethics is available on our website at the Investor Relations section under Mission Statement/Corporate Governance on www.microchip.com.www.microchip.com.
Information regarding material changes, if any, to procedures by which security holders may recommend nominees to our Board of Directors is incorporated by reference to our proxy statement for the 20192021 annual meeting of stockholders under the caption "Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the 20192021 Annual Meeting of Stockholders; Discretionary Authority to Vote on Stockholder Proposals."
Item 11. EXECUTIVE COMPENSATIONExecutive Compensation
Information with respect to executive compensation is incorporated herein by reference to the information under the caption "Executive Compensation" in our proxy statement for our 20192021 annual meeting of stockholders.
Information with respect to director compensation is incorporated herein by reference to the information under the caption "The Board of Directors – Director Compensation" in our proxy statement for our 20192021 annual meeting of stockholders.
Information with respect to compensation committee interlocks and insider participation in compensation decisions is incorporated herein by reference to the information under the caption "The Board of Directors – Compensation Committee Interlocks and Insider Participation" in our proxy statement for our 20192021 annual meeting of stockholders.
Our Board compensation committee report on executive compensation is incorporated herein by reference to the information under the caption "Executive Compensation – Compensation Committee Report on Executive Compensation" in our proxy statement for our 20192021 annual meeting of stockholders.
| |
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information with respect to securities authorized for issuance under our equity compensation plans is incorporated herein by reference to the information under the caption "Executive Compensation – Equity Compensation Plan Information" in our proxy statement for our 20192021 annual meeting of stockholders.
Information with respect to security ownership of certain beneficial owners, members of our Board of Directors and management is incorporated herein by reference to the information under the caption "Security Ownership of Principal Stockholders, Directors and Executive Officers" in our proxy statement for our 20192021 annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCECertain Relationships and Related Transactions, and Director Independence
The information required by this Item pursuant to Item 404 of Regulation S-K is incorporated by reference to the information under the caption "Certain Transactions" contained in our proxy statement for our 20192021 annual meeting of stockholders.
The information required by this Item pursuant to Item 407(a) of Regulation S-K regarding the independence of our directors is incorporated by reference to the information under the caption "Meetings of the Board of Directors" contained in our proxy statement for our 20192021 annual meeting of stockholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPrincipal Accountant Fees and Services
The information required by this Item related to principal accountant fees and services as well as related pre-approval policies is incorporated by reference to the information under the caption "Independent Registered Public Accounting Firm" contained in our proxy statement for our 20192021 annual meeting of stockholders.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESExhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Form 10-K:
| | | | | | | | |
| | Page |
| (1) | | Page No.Financial Statements: | |
(1) | Financial Statements: | |
| Report of Independent Registered Public Accounting Firm | F-1 |
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | F-2 |
| Consolidated Balance Sheets as of March 31, 20192021 and 20182020 | F-3 |
| Consolidated Statements of Income for each of the three years in the period ended March 31, 20192021 | F-4 |
| Consolidated Statements of Comprehensive Income for each of the three years in the period ended March 31, 20192021 | F-5 |
| Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 20192021 | F-6 |
| Consolidated Statements of Changes in Equity for each of the three years in the period ended March 31, 20192021 | F-8 |
| Notes to Consolidated Financial Statements | F-10 |
| (2) | | Financial Statement Schedules | None |
| (3) | | The Exhibits filed with this Form 10-K or incorporated herein by reference are set forth in the Exhibit Index beginning on page 6451 hereof, which Exhibit Index is incorporated herein by this reference. | |
(b) See Item 15(a)(3) above.
(c) See "Index to Financial Statements" included under Item 8 to this Form 10-K.
Item 16. Form 10-K Summary
Not applicable.
SIGNATURES
| | | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| | | | | | | |
| 2.1 | | 8-K | 000-21184 | | 2.1 | March 2, 2018 | |
| | | | | | | |
| 3.1 | | 10-Q | 000-21184 | | 3.1 | November 12, 2002 | |
| | | | | | | |
| 3.2** | | | | | | | X |
| | | | | | | |
| 4.1 | | 8-K | 000-21184 | | 4.1 | February 11, 2015 | |
| | | | | | | |
| 4.2 | | 8-K | 000-21184 | | 4.1 | February 15, 2017 | |
| | | | | | | |
| 4.3 | | 8-K | 000-21184 | | 4.3 | February 15, 2017 | |
| | | | | | | |
| 4.4 | | 10-K | 000-21184 | | 4.4 | May 22, 2020 | |
| | | | | | | |
| 4.5 | | 8-K | 000-21184 | | 4.1 | June 3, 2020 | |
| | | | | | | |
| 4.6 | | 8-K | 000-21184 | | 4.2 | June 3, 2020 | |
| | | | | | | |
| 4.7 | | 8-K | 000-21184 | | 4.3 | June 3, 2020 | |
| | | | | | | |
| 4.8 | | 8-K | 000-21184 | | 4.4 | June 3, 2020 | |
| | | | | | | |
| 4.9 | | 8-K | 000-21184 | | 4.1 | December 2, 2020 | |
| | | | | | | |
| 4.10 | | 8-K | 000-21184 | | 4.2 | December 2, 2020 | |
| | | | | | | |
| 4.11 | | 8-K | 000-21184 | | 4.1 | December 18, 2020 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| | | | | | | |
| 4.12 | | 8-K | 000-21184 | | 4.2 | December 18, 2020 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| 10.1 | | 8-K | 000-21184 | | 10.2 | November 20, 2020 | |
| | | | | | | |
| 10.2 | | 8-K | 000-21184 | | 10.1 | November 13, 2017 | |
| | | | | | | |
| 10.3 | | 8-K | 000-21184 | | 10.1 | September 1, 2017 | |
| | | | | | | |
| 10.4 | | 10-K | 000-21184 | | 10.1 | May 27, 2015 | |
| | | | | | | |
| 10.5 | | 8-K | 000-21184 | | 10.1 | May 29, 2018 | |
| | | | | | | |
| 10.6 | | 8-K | 000-21184 | | 10.1 | October 1, 2019 | |
| | | | | | | |
| 10.7 | | 8-K | 000-21184 | | 10.1 | March 24, 2020 | |
| | | | | | | |
| 10.8 | | 8-K | 000-21184 | | 10.2 | February 8, 2017 | |
| | | | | | | |
| 10.9 | | 8-K | 000-21184 | | 10.2 | May 29, 2018 | |
| | | | | | | |
| 10.10 | | 8-K | 000-21184 | | 10.2 | March 27, 2020 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| | | | | | | |
| 10.11 | | 8-K | 000-21184 | | 10.1 | December 18, 2020 | |
| | | | | | | |
| 10.12 | | 8-K | 000-21184 | | 10.3 | May 29, 2018 | |
| | | | | | | |
| 10.13 | Form of Indemnification Agreement between Registrant and its directors and certain of its officers [Paper filing not on SEC website] | S-1 | 33-57960 | | 10.1 | February 5, 1993 | |
| | | | | | | |
| 10.14 | | S-8 | 333-183074 | | 4.8 | August 3, 2012 | |
| | | | | | | |
| 10.15* | | 8-K | 000-21184 | | 10.1 | April 7, 2021 | |
| | | | | | | |
| 10.16* | | S-8 | 333-192273 | | 10.2 | November 12, 2013 | |
| | | | | | | |
| 10.17* | | S-8 | 333-192273 | | 10.3 | November 12, 2013 | |
| | | | | | | |
| 10.18* | | S-8 | 333-119939 | | 4.5 | October 25, 2004 | |
| | | | | | | |
| 10.19* | | 10-K | 000-21184 | | 10.6 | May 31, 2006 | |
| | | | | | | |
| 10.20* | | 10-Q | 000-21184 | | 10.3 | November 7, 2007 | |
| | | | | | | |
| 10.21* | | 10-Q | 000-21184 | | 10.4 | November 7, 2007 | |
| | | | | | | |
| 10.22* | | 8-K | 000-21184 | | 10.1 | September 27, 2010 | |
| | | | | | | |
| 10.23* | | 10-K | 000-21184 | | 10.17 | May 30, 2019 | |
| | | | | | | |
| 10.24* | | 10-K | 000-21184 | | 10.18 | May 30, 2019 | |
| | | | | | | |
| 10.25* | | 10-K | 000-21184 | | 10.19 | May 30, 2019 | |
| | | | | | | |
| 10.26* | | 10-K | 000-21184 | | 10.20 | May 30, 2019 | |
| | | | | | | |
| 10.27* | | 8-K | 000-21184 | | 10.1 | January 7, 2020 | |
| | | | | | | |
| 10.28* | | 10-K | 000-21184 | | 10.21 | May 30, 2019 | |
| | | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| | | | | | | |
| | | | | | | |
| 10.29* | | 10-K | 000-21184 | | 10.22 | May 30, 2019 | |
| | | | | | | |
| 10.30* | | 8-K | 000-21184 | | 10.1 | August 18, 2016 | |
| | | | | | | |
| 10.31* | | 8-K | 000-21184 | | 10.3 | August 24, 2006 | |
| | | | | | | |
| 10.32* | | 8-K | 000-21184 | | 10.1 | March 2, 2021 | |
| | | | | | | |
| 10.33* | | S-8 | 333-101696 | | 4.1.1 | December 6, 2002 | |
| | | | | | | |
| 10.34* | | S-8 | 333-101696 | | 4.1.3 | December 6, 2002 | |
| | | | | | | |
| 10.35* | | S-8 | 333-101696 | | 4.1.4 | December 6, 2002 | |
| | | | | | | |
| 10.36* | | 10-K | 000-21184 | | 10.28 | June 5, 2003 | |
| | | | | | | |
| 10.37* | | 10-Q | 000-21184 | | 10.1 | February 9, 2006 | |
| | | | | | | |
| 10.38* | | 10-K | 000-21184 | | 10.28 | May 24, 2016 | |
| | | | | | | |
| 10.39* | | 8-K | 000-21184 | | 10.1 | December 18, 2008 | |
| | | | | | | |
| 10.40* | | 8-K | 000-21184 | | 10.2 | December 18, 2008 | |
| | | | | | | |
| 10.41 | | 10-Q | 000-21184 | | 10.1 | February 13, 1998 | |
| | | | | | | |
| 10.42 | | 10-K | 000-21184 | | 10.14 | May 15, 2001 | |
| | | | | | | |
| 10.43 | | 10-Q | 000-21184 | | 10.2 | February 13, 1998 | |
| | | | | | | |
| 10.44 | | 8-K | 000-21184 | | 10.1 | June 3, 2020 | |
| | | | | | | |
| 21.1** | | | | | | | X |
| | | | | | | |
| 23.1** | | | | | | | X |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | Incorporated by Reference | |
| Exhibit Number | Exhibit Description | Form | File Number | | Exhibit | Filing Date | Included Herewith |
| | | | | | | |
| 24.1** | | | | | | | X |
| | | | | | | |
| 31.1** | | | | | | | X |
| | | | | | | |
| 31.2** | | | | | | | X |
| | | | | | | |
| 32** | | | | | | | X |
| | | | | | | |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive File because its XBRL tags are embedded within the Inline XBRL document | | | | | | X |
| | | | | | | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | | | | | | X |
| | | | | | | |
| 101.CAL | Taxonomy Extension Calculation Linkbase Document | | | | | | X |
| | | | | | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | X |
| | | | | | | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | | X |
| | | | | | | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document | | | | | | X |
| | | | | | | |
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. | | | | | | X |
| | | | | | | |
| *Compensation plans or arrangements in which directors or executive officers are eligible to participate | | | | | | |
| ** Furnished herewith | | | | | | |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | |
| MICROCHIP TECHNOLOGY INCORPORATED |
| (Registrant) |
| |
May 30, 201917, 2021 | By: /s/ Steve SanghiGanesh Moorthy |
| Steve SanghiGanesh Moorthy |
| President, Chief Executive Officer, and Chairman of the BoardDirector |
POWER OF ATTORNEY
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned officer or director of Microchip Technology Incorporated, a Delaware corporation (the "Company")Company), does hereby constitute and appoint each of STEVE SANGHIGANESH MOORTHY and J. ERIC BJORNHOLT, with full power to each of them to act alone, as the true and lawful attorneys and agents of the undersigned, with full power of substitution and resubstitution to each of said attorneys to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto relating to this annual report on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign such person's name individually and on behalf of the Company as an officer or director (as indicated below opposite such person's signature) to the Company's annual report on Form 10-K or any amendments or supplements thereto; and each of the undersigned does hereby fully ratify and confirm all that said attorneys and agents or any of them, shall do or cause to be done by virtue hereof. This Power of Attorney revokes any and all previous powers of attorney granted by any of the undersigned which such power would have entitled said attorneys and agents, or any of them, to sign such person's name, individually or on behalf of the Company, to any Form 10-K.
IN WITNESS WHEREOF, each of the undersigned has executed the foregoing power of attorney on this 30th17th day of May, 2019.2021.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | |
Name and Signature | | | Title | | Date |
| | | | | |
/s/ Steve Sanghi | | | Chief Executive Officer and Chairman of the Board | | May 30, 2019 |
Steve Sanghi | | | (Principal Executive Officer) | | |
| | | | | |
| | | | | |
/s/ Matthew W. Chapman | | | Director | | May 30, 2019 |
Matthew W. Chapman | | | | | |
| | | | | |
| | | | | |
/s/ L.B. Day | | | Director | | May 30, 2019 |
L.B. Day | | | | | |
| | | | | |
| | | | | |
/s/ Esther L. Johnson | | | Director | | May 30, 2019 |
Esther L. Johnson | | | | | |
| | | | | |
| | | | | |
/s/ Wade F. Meyercord | | | Director | | May 30, 2019 |
Wade F. Meyercord | | | | | |
| | | | | |
| | | | | |
/s/ J. Eric Bjornholt | | | Senior Vice President and Chief Financial Officer | | May 30, 2019 |
J. Eric Bjornholt | | | (Principal Financial and Accounting Officer) | | |
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Included Herewith |
| 2.1 | | | | 8-K | | 000-21184 | | 2.1 | | 1/19/2016 | | |
| 2.2 | | | | 8-K | | 000-21184 | | 2.1 | | 3/2/2018 | | |
| 3.1 | | | | 10-Q | | 000-21184 | | 3.1 | | 11/12/2002 | | |
| 3.2 | | | | 8-K | | 000-21184 | | 3.1 | | 5/24/2019 | | |
| 4.1 | | | | 8-K | | 000-21184 | | 4.1 | | 2/11/2015 | | |
| 4.2 | | | | 8-K | | 000-21184 | | 4.1 | | 2/15/2017 | | |
| 4.3 | | | | 8-K | | 000-21184 | | 4.3 | | 2/15/2017 | | |
| 10.1 | | | | 8-K | | 000-21184 | | 10.1 | | 11/13/2017 | | |
| 10.2 | | | | 8-K | | 000-21184 | | 10.1 | | 9/1/2017 | | �� |
| 10.3 | | | | 10-K | | 000-21184 | | 10.1 | | 5/27/2015 | | |
| 10.4 | | | | 8-K | | 000-21184 | | 10.1 | | 5/18/2018 | | |
| 10.5 | | | | 8-K | | 000-21184 | | 10.2 | | 2/8/2017 | | |
| 10.6 | | | | 8-K | | 000-21184 | | 10.1 | | 3/2/2018 | | |
| 10.7 | | Form of Indemnification Agreement between Registrant and its directors and certain of its officers [Paper filing not on SEC website.] | | S-1 | | 33-57960 | | 10.1 | | 2/5/1993 | | |
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Included Herewith |
| 10.8 | | | | S-8 | | 333-183074 | | 4.8 | | 8/3/2012 | | |
| 10.9* | | | | 8-K | | 000-21184 | | 10.1 | | 5/24/2019 | | |
| 10.10* | | | | S-8 | | 333-192273 | | 10.2 | | 11/12/2013 | | |
| 10.11 | | | | S-8 | | 333-192273 | | 10.3 | | 11/12/2013 | | |
| 10.12* | | | | S-8 | | 333-119939 | | 4.5 | | 10/25/2004 | | |
| 10.13* | | | | 10-K | | 000-21184 | | 10.6 | | 5/31/2006 | | |
| 10.14* | | | | 10-Q | | 000-21184 | | 10.3 | | 11/7/2007 | | |
| 10.15 | | | | 10-Q | | 000-21184 | | 10.4 | | 11/7/2007 | | |
| 10.16* | | | | 8-K | | 000-21184 | | 10.1 | | 9/27/2010 | | |
| 10.17 | | | | | | | | | | | | X |
| 10.18* | | | | | | | | | | | | X |
| 10.19* | | | | | | | | | | | | X |
| 10.20* | | | | | | | | | | | | X |
| 10.21* | | | | | | | | | | | | X |
| 10.22 | | | | | | | | | | | | X |
| 10.23* | | | | 8-K | | 000-21184 | | 10.1 | | 8/18/2016 | | |
| 10.24* | | | | 8-K | | 000-21184 | | 10.3 | | 8/24/2006 | | |
| 10.25 | | | | 10-K | | 000-21184 | | 10.21 | | 5/30/2013 | | |
| 10.26* | | | | S-8 | | 333-101696 | | 4.1.1 | | 12/6/2002 | | |
| 10.27* | | | | S-8 | | 333-101696 | | 4.1.3 | | 12/6/2002 | | |
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Included Herewith |
| 10.28* | | | | S-8 | | 333-101696 | | 4.1.4 | | 12/6/2002 | | |
| 10.29* | | | | 10-K | | 000-21184 | | 10.28 | | 6/5/2003 | | |
| 10.30* | | | | 10-Q | | 000-21184 | | 10.1 | | 2/9/2006 | | |
| 10.31* | | | | 10-K | | 000-21184 | | 10.28 | | 5/24/2016 | | |
| 10.32* | | | | 8-K | | 000-21184 | | 10.1 | | 12/18/2008 | | |
| 10.33* | | | | 8-K | | 000-21184 | | 10.2 | | 12/18/2008 | | |
| 10.34 | | | | 10-Q | | 000-21184 | | 10.1 | | 2/13/1998 | | |
| 10.35 | | | | 10-K | | 000-21184 | | 10.14 | | 5/15/2001 | | |
| 10.36 | | | | 10-Q | | 000-21184 | | 10.2 | | 2/13/1998 | | |
| 21.1 | | | | | | | | | | | | X |
| 23.1 | | | | | | | | | | | | X |
| 24.1 | | | | | | | | | | | | X |
| 31.1 | | | | | | | | | | | | X |
| 31.2 | | | | | | | | | | | | X |
| 32** | | | | | | | | | | | | X |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | | | X |
| 101.CAL | | Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X |
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| Name and Signature | | | Title | Incorporated by Reference | | Date |
Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Included Herewith |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
101.PRE/s/ Ganesh Moorthy | | XBRL Taxonomy Presentation Linkbase Document | President, Chief Executive Officer, and Director | | | | | | | | | XMay 17, 2021 |
| Ganesh Moorthy | | *Compensation plans or arrangements in which directors or executive officers are eligible to participate | (Principal Executive Officer) | | | | | | | | | |
| | **Furnished herewith. | | | |
| | | | | |
| /s/ Steve Sanghi | | | Executive Chair | | May 17, 2021 |
| Steve Sanghi | | | | | |
| | | | | |
| | | | | |
| /s/ Matthew W. Chapman | | | Director | | May 17, 2021 |
| Matthew W. Chapman | | | | | |
| | | | | |
| | | | | |
| /s/ L.B. Day | | | Director | | May 17, 2021 |
| L.B. Day | | | | | |
| | | | | |
| | | | | |
| /s/ Esther L. Johnson | | | Director | | May 17, 2021 |
| Esther L. Johnson | | | | | |
| | | | | |
| | | | | |
| | | Director | | |
| Karlton D. Johnson | | | | | |
| | | | | |
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| /s/ Wade F. Meyercord | | | Director | | May 17, 2021 |
| Wade F. Meyercord | | | | | |
| | | | | |
| | | | | |
| /s/ Karen M. Rapp | | | Director | | May 17, 2021 |
| Karen M. Rapp | | | | | |
| | | | | |
| | | | | |
| /s/ J. Eric Bjornholt | | | Senior Vice President and Chief Financial Officer | | May 17, 2021 |
| J. Eric Bjornholt | | | (Principal Financial and Accounting Officer) | | |
Annual Report on Form 10-K
Item 8, Item 15(a)(1) and (2), (b) and (c)
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
YEAR ENDED MARCH 31, 20192021
MICROCHIP TECHNOLOGY INCORPORATED
AND SUBSIDIARIES
CHANDLER, ARIZONA
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
| | | | | |
| Page |
| Page Number |
| |
| Report of Independent Registered Public Accounting Firm | |
| |
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | |
| |
Consolidated Balance Sheets as of March 31, 20192021 and 20182020 | |
| |
Consolidated Statements of Income for each of the three years in the period ended March 31, 20192021 | |
| |
Consolidated Statements of Comprehensive Income for each of the three years in the period ended March 31, 20192021 | |
| |
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 20192021 | |
| |
Consolidated Statements of Changes in Equity for each of the three years in the period ended March 31, 20192021 | |
| |
| Notes to Consolidated Financial Statements | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Microchip Technology Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Microchip Technology Incorporated (the Company) as of March 31, 20192021 and 2018,2020, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended March 31, 2019,2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2019,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2019,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 30, 201917, 2021 expressed an adverseunqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Estimating variable consideration for distributor sales
| | | | | | | | |
| Description of the Matter | | The Company's sales arrangements provide certain distributors with price concessions, which results in variable consideration. During the year ended March 31, 2021, approximately $2,737.4 million of the Company's total $5,438.4 million in net sales represents sales to distributors, which has been adjusted for estimates of the price concessions that are expected to be claimed. As explained in Note 1 to the consolidated financial statements, the Company estimates the amount of consideration to which it will be entitled using recent, observable experience from the prior quarter and applying the expected value method. The Company records a reduction of the original sale amount for the estimated variable consideration resulting from price concessions. At March 31, 2021, such reserves totaled $350.7 million.
Auditing management's estimates of variable consideration resulting from price concessions under the distributor contracts involved subjective auditor judgment because the estimates rely on a number of factors that could be affected by future economic and market conditions. The estimated concession rates are made using recent, observable experience from the prior quarter. The concession rates are evaluated to determine whether adjustments are needed for changes in pricing terms and economic and market conditions. Changes in those assumptions can have a material effect on the amount of variable consideration recognized.
|
| | |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's process to calculate the variable consideration resulting from price concessions, including management's assessment of the price concession assumptions and data underlying the estimate.
Our audit procedures included, among others, evaluating the significant assumptions and the accuracy and completeness of the underlying data used in management's estimate. This included comparing management’s accrual for future price concessions at a disaggregated level to historical results and testing the value of the inventory held by distributors at the end of the period through confirmations with the distributors. We confirmed contractual terms and conditions directly with a selection of distributor customers. We evaluated whether recent, observable experience from the prior quarter is a reasonable approximation for expected future concessions in consideration of the current contractual terms and economic and market conditions. In addition, we assessed the historical accuracy of management's estimates for variable consideration resulting from price concessions and the related assumptions by performing a retrospective review on the accuracy of prior period estimates.
|
Unrecognized tax benefits
| | | | | | | | |
| Description of the Matter | | As more fully described in Note 13 to the consolidated financial statements, the Company operates in a number of tax jurisdictions and its income tax returns are subject to examination by tax authorities in those jurisdictions that may challenge any tax position on these returns. Because the matters challenged by authorities are typically complex and subject to interpretation, their ultimate outcome is uncertain. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more-likely-then-not to be sustained, and (2) measuring the amount of tax benefit that qualifies for recognition. As of March 31, 2021, the Company recognized accrued liabilities for unrecognized tax benefits associated with various tax positions totaling $826.3 million.
Because of the complexity of tax laws and regulations, auditing the recognition and measurement of unrecognized tax benefits requires a high degree of auditor judgment and increased extent of effort, including the involvement of our tax professionals.
|
| | |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting process for unrecognized tax benefits. This included testing controls over management’s review of the technical merits of tax positions, including the process to measure the financial statement impact of these tax matters.
Our audit procedures included, among others, evaluating the assumptions the Company used to develop its tax positions and related unrecognized tax benefit amounts by jurisdiction and testing the completeness and accuracy of the underlying data used by the Company to calculate its uncertain tax positions. We involved our tax professionals located in the respective jurisdictions to assess the technical merits of the Company’s tax positions and to evaluate the application of relevant tax laws in the Company’s recognition determination. We assessed the Company’s correspondence with the relevant tax authorities and evaluated tax or legal opinions or other third-party advice obtained by the Company. We also evaluated the adequacy of the Company’s disclosures included in Note 13 in relation to these tax matters.
|
Convertible debt transactions
| | | | | | | | |
| Description of the Matter | | As described in Note 7 to the consolidated financial statements, the Company privately negotiated several transactions to settle an aggregate of (1) $968.6 million principal amount of its 2015 Senior Convertible Debt, (2) $1,736.7 million principal amount of its 2017 Senior Convertible Debt and (3) $563.7 million principal amount of its 2017 Junior Convertible Debt. Through these transactions the Company provided holders an aggregate of (1) $2,611.4 million of cash, (2) 26.1 million shares of the Company’s common stock and (3) $665.5 million principal amount of its 2020 Senior Convertible Debt. The transactions were complex because the Company used significant judgment to estimate the current comparable borrowing rates for otherwise identical non-convertible debt instruments to determine the fair value of the liability components at each transaction date.
Auditing the valuation of the liability components was challenging because the Company used complex valuation methodologies and subjective assumptions, including the expected volatility and credit spread.
|
| | |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to estimate the fair value of the liability components of the convertible debt instruments, including controls over management’s review of the valuation model and the significant assumptions used in the calculation.
Our audit procedures included, among others, inspecting the transaction agreements and involving our internal valuation specialist to assist in evaluating the reasonableness of valuation methodologies, models and significant assumptions. We also performed sensitivity analyses to evaluate the reasonableness of certain significant assumptions, including the current comparable borrowing rates. We tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We also evaluated the Company’s financial statement disclosures related to these matters included in Note 7 to the consolidated financial statements.
|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2001.
Phoenix, Arizona
May 30, 201917, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTINGReport of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Microchip Technology Incorporated
Opinion on Internal Control overOver Financial Reporting
We have audited Microchip Technology Incorporated'sIncorporated’s internal control over financial reporting as of March 31, 2019,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria Microchip Technology Incorporated (the Company) has not maintained, in all material respects, effective internal control over financial reporting as of March 31, 2019,2021, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified a material weakness in the operating effectiveness of controls related to the Company’s income tax process. Management has also identified a material weakness in the design effectiveness of certain IT general controls relating to system access.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Microsemi Corporation, which is included in the March 31, 2019 consolidated financial statements of Microchip Technology Incorporated and constituted approximately four percent of consolidated total assets as of March 31, 2019, and twenty eight percent of consolidated total revenues for the year then ended. Our audit of internal control over financial reporting of Microchip Technology Incorporated also did not include an evaluation of the internal control over financial reporting of Microsemi Corporation.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 20192021 and 2018,2020, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended March 31, 2019,2021, and the related notes. The material weaknesses were considered in determining the nature, timingnotes and extent of audit tests applied in our audit of the fiscal 2019 consolidated financial statements, and this report does not affect our report dated May 30, 2019, which17, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 30, 201917, 2021
| |
Item1. | Financial Statements |
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
| | | | | | | | | | | |
| ASSETS |
| March 31, |
| | 2021 | | 2020 |
| Cash and cash equivalents | $ | 280.0 | | | $ | 401.0 | |
| Short-term investments | 2.0 | | | 2.0 | |
| Accounts receivable, net | 997.7 | | | 934.0 | |
| Inventories | 665.0 | | | 685.7 | |
| Other current assets | 200.5 | | | 194.5 | |
| Total current assets | 2,145.2 | | | 2,217.2 | |
| Property, plant and equipment, net | 854.7 | | | 876.1 | |
| | | |
| Goodwill | 6,670.6 | | | 6,664.8 | |
| Intangible assets, net | 4,794.8 | | | 5,702.3 | |
| Long-term deferred tax assets | 1,749.2 | | | 1,748.5 | |
| Other assets | 264.3 | | | 217.2 | |
| Total assets | $ | 16,478.8 | | | $ | 17,426.1 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY |
| Accounts payable | $ | 292.4 | | | $ | 246.8 | |
| Accrued liabilities | 794.3 | | | 781.8 | |
| Current portion of long-term debt | 1,322.9 | | | 608.8 | |
| Total current liabilities | 2,409.6 | | | 1,637.4 | |
| Long-term debt | 7,581.2 | | | 8,873.4 | |
| Long-term income tax payable | 689.9 | | | 668.4 | |
| Long-term deferred tax liability | 43.9 | | | 318.5 | |
| Other long-term liabilities | 417.1 | | | 342.9 | |
| Stockholders' equity: | | | |
| Preferred stock, $0.001 par value; authorized 5,000,000 shares; 0 shares issued or outstanding | 0 | | | 0 | |
| Common stock, $0.001 par value; authorized 450,000,000 shares; 284,479,079 shares issued and 273,528,594 shares outstanding at March 31, 2021; 258,391,231 shares issued and 245,325,643 shares outstanding at March 31, 2020 | 0.3 | | | 0.2 | |
| Additional paid-in capital | 2,403.3 | | | 2,675.1 | |
| Common stock held in treasury: 10,950,485 shares at March 31, 2021; 13,065,588 shares at March 31, 2020 | (433.8) | | | (500.6) | |
| Accumulated other comprehensive loss | (26.2) | | | (21.6) | |
| Retained earnings | 3,393.5 | | | 3,432.4 | |
| Total stockholders' equity | 5,337.1 | | | 5,585.5 | |
| Total liabilities and stockholders' equity | $ | 16,478.8 | | | $ | 17,426.1 | |
See accompanying notes to consolidated financial statements
|
| | | | | | | |
| ASSETS |
| | March 31, |
| | 2019 | | 2018 |
| Cash and cash equivalents | $ | 428.6 |
| | $ | 901.3 |
|
| Short-term investments | 2.3 |
| | 1,295.3 |
|
| Accounts receivable, net | 880.6 |
| | 563.7 |
|
| Inventories | 711.7 |
| | 476.2 |
|
| Other current assets | 191.6 |
| | 119.8 |
|
| Total current assets | 2,214.8 |
| | 3,356.3 |
|
| Property, plant and equipment, net | 996.7 |
| | 767.9 |
|
| Goodwill | 6,663.9 |
| | 2,299.0 |
|
| Intangible assets, net | 6,685.6 |
| | 1,662.0 |
|
| Long-term deferred tax assets | 1,677.2 |
| | 100.2 |
|
| Other assets | 111.8 |
| | 71.8 |
|
| Total assets | $ | 18,350.0 |
| | $ | 8,257.2 |
|
| LIABILITIES AND STOCKHOLDERS' EQUITY |
| Accounts payable | $ | 226.4 |
| | $ | 144.1 |
|
| Accrued liabilities | 787.3 |
| | 229.6 |
|
| Deferred income on shipments to distributors | — |
| | 333.8 |
|
| Current portion of long-term debt | 1,360.8 |
| | 1,309.9 |
|
| Total current liabilities | 2,374.5 |
| | 2,017.4 |
|
| Long-term debt | 8,946.2 |
| | 1,758.4 |
|
| Long-term income tax payable | 756.2 |
| | 754.9 |
|
| Long-term deferred tax liability | 706.1 |
| | 205.8 |
|
| Other long-term liabilities | 279.5 |
| | 240.9 |
|
| Stockholders' equity: | | | |
| Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued or outstanding | — |
| | — |
|
| Common stock, $0.001 par value; authorized 450,000,000 shares; 253,232,909 shares issued and 237,589,501 shares outstanding at March 31, 2019; 253,232,909 shares issued and 235,027,767 shares outstanding at March 31, 2018 | 0.2 |
| | 0.2 |
|
| Additional paid-in capital | 2,679.6 |
| | 2,562.5 |
|
| Common stock held in treasury: 15,643,408 shares at March 31, 2019; 18,205,142 shares at March 31, 2018 | (582.2 | ) | | (662.6 | ) |
| Accumulated other comprehensive loss | (20.7 | ) | | (17.6 | ) |
| Retained earnings | 3,210.6 |
| | 1,397.3 |
|
| Total stockholders' equity | 5,287.5 |
| | 3,279.8 |
|
| Total liabilities and stockholders' equity | $ | 18,350.0 |
| | $ | 8,257.2 |
|
| See accompanying notes to consolidated financial statements |
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
| | | | Year ended March 31, | | Fiscal Year Ended March 31, | |
| | 2019 | | 2018 | | 2017 | | 2021 | | 2020 | | 2019 | |
| Net sales | $ | 5,349.5 |
| | $ | 3,980.8 |
| | $ | 3,407.8 |
| Net sales | $ | 5,438.4 | | | $ | 5,274.2 | | | $ | 5,349.5 | | |
| Cost of sales (1) | 2,418.2 |
| | 1,560.1 |
| | 1,650.6 |
| |
| Cost of sales | | Cost of sales | 2,059.6 | | | 2,032.1 | | | 2,418.2 | | |
| Gross profit | 2,931.3 |
| | 2,420.7 |
| | 1,757.2 |
| Gross profit | 3,378.8 | | | 3,242.1 | | | 2,931.3 | | |
| | |
| | |
| | | | | |
| Research and development (1) | 826.3 |
| | 529.3 |
| | 545.3 |
| |
| Selling, general and administrative (1) | 682.9 |
| | 452.1 |
| | 499.8 |
| |
| Research and development | | Research and development | 836.4 | | | 877.8 | | | 826.3 | | |
| Selling, general and administrative | | Selling, general and administrative | 610.3 | | | 676.6 | | | 682.9 | | |
| Amortization of acquired intangible assets | 674.1 |
| | 485.5 |
| | 337.7 |
| Amortization of acquired intangible assets | 932.3 | | | 993.9 | | | 674.1 | | |
| Special charges and other, net (1) | 33.7 |
| | 17.5 |
| | 98.6 |
| |
| Special charges and other, net | | Special charges and other, net | 1.7 | | | 46.7 | | | 33.7 | | |
| Operating expenses | 2,217.0 |
| | 1,484.4 |
| | 1,481.4 |
| Operating expenses | 2,380.7 | | | 2,595.0 | | | 2,217.0 | | |
| | | | | | | | |
| Operating income | 714.3 |
| | 936.3 |
| | 275.8 |
| Operating income | 998.1 | | | 647.1 | | | 714.3 | | |
| Losses on equity method investments | (0.2 | ) | | (0.2 | ) | | (0.2 | ) | Losses on equity method investments | 0 | | | 0 | | | (0.2) | | |
| Other income (expense): | | | | | | Other income (expense): | | |
| Interest income | 8.1 |
| | 22.0 |
| | 3.1 |
| Interest income | 1.7 | | | 2.8 | | | 8.1 | | |
| Interest expense | (502.9 | ) | | (199.0 | ) | | (146.3 | ) | Interest expense | (356.9) | | | (497.3) | | | (502.9) | | |
| Loss on settlement of debt | (12.6 | ) | | (16.0 | ) | | (43.9 | ) | Loss on settlement of debt | (299.6) | | | (5.4) | | | (12.6) | | |
| Other (loss) income, net | (2.2 | ) | | (5.8 | ) | | 1.3 |
| Other (loss) income, net | (3.8) | | | 3.2 | | | (2.2) | | |
| Income before income taxes | 204.5 |
| | 737.3 |
| | 89.8 |
| Income before income taxes | 339.5 | | | 150.4 | | | 204.5 | | |
| Income tax (benefit) provision | (151.4 | ) | | 481.9 |
| | (80.8 | ) | |
| Net income from continuing operations | 355.9 |
| | 255.4 |
| | 170.6 |
| |
| Discontinued operations: | | | | | | |
| Loss from discontinued operations | — |
| | — |
| | (7.6 | ) | |
| Income tax benefit | — |
| | — |
| | (1.6 | ) | Income tax benefit | (9.9) | | | (420.2) | | | (151.4) | | |
| Net loss from discontinued operations | — |
| | — |
| | (6.0 | ) | |
| Net Income | $ | 355.9 |
| | $ | 255.4 |
| | $ | 164.6 |
| |
| | | | | | | |
| | | | | | | |
| Basic net income per common share from continuing operations | $ | 1.51 |
| | $ | 1.10 |
| | $ | 0.79 |
| |
| Basic net loss per common share from discontinued operations | $ | — |
| | $ | — |
| | $ | (0.03 | ) | |
| | Net income | | Net income | $ | 349.4 | | | $ | 570.6 | | | $ | 355.9 | | |
| | | | Basic net income per common share | $ | 1.51 |
| | $ | 1.10 |
| | $ | 0.76 |
| Basic net income per common share | $ | 1.35 | | | $ | 2.39 | | | $ | 1.51 | | |
| | | | | | | |
| Diluted net income per common share from continuing operations | $ | 1.42 |
| | $ | 1.03 |
| | $ | 0.73 |
| |
| Diluted net loss per common share from discontinued operations | $ | — |
| | $ | — |
| | $ | (0.02 | ) | |
| | Diluted net income per common share | $ | 1.42 |
| | $ | 1.03 |
| | $ | 0.71 |
| Diluted net income per common share | $ | 1.29 | | | $ | 2.23 | | | $ | 1.42 | | |
| Dividends declared per common share | $ | 1.457 |
| | $ | 1.449 |
| | $ | 1.441 |
| Dividends declared per common share | $ | 1.494 | | | $ | 1.465 | | | $ | 1.457 | | |
| Basic common shares outstanding | 236.2 |
| | 232.9 |
| | 217.2 |
| Basic common shares outstanding | 259.6 | | | 238.9 | | | 236.2 | | |
| Diluted common shares outstanding | 249.9 |
| | 248.9 |
| | 234.8 |
| Diluted common shares outstanding | 270.6 | | | 256.2 | | | 249.9 | | |
| | | | | | | |
| (1) Includes share-based compensation expense as follows: | | | | | | |
| Cost of sales | $ | 14.9 |
| | $ | 13.8 |
| | $ | 18.7 |
| |
| Research and development | $ | 72.0 |
| | $ | 42.5 |
| | $ | 46.8 |
| |
| Selling, general and administrative | $ | 62.3 |
| | $ | 36.9 |
| | $ | 62.6 |
| |
| Special charges and other, net | $ | 17.2 |
| | $ | — |
| | $ | — |
| |
|
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended March 31, |
| | | | | 2021 | | 2020 | | 2019 |
| Net income | | | | | $ | 349.4 | | | $ | 570.6 | | | $ | 355.9 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Components of other comprehensive (loss) income: | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | |
| Unrealized holding losses, net of tax effect | | | | | 0 | | | 0 | | | (5.6) | |
| Reclassification of realized transactions, net of tax effect | | | | | 0 | | | 0 | | | 5.6 | |
| Defined benefit plans: | | | | | | | | | |
| Actuarial (losses) gains related to defined benefit pension plans, net of tax effect | | | | | (9.4) | | | 1.4 | | | 2.9 | |
| Reclassification of realized transactions, net of tax effect | | | | | 1.1 | | | 0.8 | | | 1.0 | |
| Change in net foreign currency translation adjustment | | | | | 3.7 | | | (1.8) | | | (5.3) | |
| Other comprehensive (loss) income, net of tax effect | | | | | (4.6) | | | 0.4 | | | (1.4) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Comprehensive income | | | | | $ | 344.8 | | | $ | 571.0 | | | $ | 354.5 | |
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Net income | $ | 355.9 |
| | $ | 255.4 |
| | $ | 164.6 |
|
| Components of other comprehensive (loss) income: | | | | | |
| Available-for-sale securities: | | | | | |
| Unrealized holding losses, net of tax effect | (5.6 | ) | | (13.6 | ) | | (1.5 | ) |
| Reclassification of realized transactions, net of tax effect | 5.6 |
| | 15.2 |
| | 1.5 |
|
| Defined benefit plans: | | | | | |
| Actuarial gains (losses) related to defined benefit pension plans, net of tax (provision) benefit | 2.9 |
| | (5.6 | ) | | (5.3 | ) |
| Reclassification of realized transactions, net of tax effect | 1.0 |
| | 0.8 |
| | — |
|
| Change in net foreign currency translation adjustment | (5.3 | ) | | — |
| | (5.7 | ) |
| Other comprehensive loss, net of tax effect | (1.4 | ) | | (3.2 | ) | | (11.0 | ) |
| Comprehensive income | $ | 354.5 |
| | $ | 252.2 |
| | $ | 153.6 |
|
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Year ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 355.9 |
| | $ | 255.4 |
| | $ | 164.6 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 876.4 |
| | 615.9 |
| | 469.2 |
|
| Deferred income taxes | (62.2 | ) | | 51.2 |
| | (126.9 | ) |
| Share-based compensation expense related to equity incentive plans | 166.4 |
| | 93.2 |
| | 128.1 |
|
| Loss on settlement of debt | 12.6 |
| | 16.0 |
| | 43.9 |
|
| Amortization of debt discount | 114.6 |
| | 106.1 |
| | 56.1 |
|
| Amortization of debt issuance costs | 16.5 |
| | 6.6 |
| | 4.5 |
|
| Losses on equity method investments | 0.2 |
| | 0.2 |
| | 0.2 |
|
| Gains on sale of assets | — |
| | (5.9 | ) | | (0.1 | ) |
| Losses on write-down of fixed assets | 0.8 |
| | 0.1 |
| | 2.6 |
|
| Impairment of intangible assets | 3.1 |
| | 0.5 |
| | 11.9 |
|
| Losses on available-for-sale investments and marketable equity securities, net | — |
| | — |
| | 0.1 |
|
| Realized gain on equity method investment | — |
| | — |
| | (0.4 | ) |
| Impairment of available-for-sale investment | 6.0 |
| | 15.5 |
| | 1.4 |
|
| Amortization of premium on available-for-sale investments | (0.2 | ) | | 0.3 |
| | — |
|
| Changes in operating assets and liabilities, excluding impact of acquisitions: | | | | | |
| Decrease (increase) in accounts receivable | 238.8 |
| | (85.3 | ) | | (46.8 | ) |
| Decrease (increase) in inventories | 341.6 |
| | (59.2 | ) | | 223.7 |
|
| Increase in deferred income on shipments to distributors | — |
| | 41.0 |
| | 109.4 |
|
| Decrease in accounts payable and accrued liabilities | (180.7 | ) | | (13.9 | ) | | (14.8 | ) |
| Change in other assets and liabilities | (24.2 | ) | | 14.0 |
| | 25.7 |
|
| Change in income tax payable | (190.8 | ) | | 367.9 |
|
| (2.2 | ) |
| Operating cash flows related to discontinued operations | — |
| | — |
| | 9.3 |
|
| Net cash provided by operating activities | 1,674.8 |
| | 1,419.6 |
| | 1,059.5 |
|
| Cash flows from investing activities: | |
| | |
| | |
| Purchases of available-for-sale investments | (167.7 | ) | | (1,594.8 | ) | | (500.3 | ) |
| Maturities of available-for-sale investments | 78.0 |
| | 786.7 |
| | 0.4 |
|
| Sales of available-for-sale investments | 1,376.6 |
| | — |
| | 470.2 |
|
| Sale of equity method investment | — |
| | — |
| | 1.7 |
|
| Acquisition of Atmel, net of cash acquired | — |
| | — |
| | (2,747.5 | ) |
| Acquisition of Microsemi, net of cash acquired | (7,850.6 | ) | | — |
| | — |
|
| Investments in other assets | (18.6 | ) | | (7.1 | ) | | (10.2 | ) |
| Proceeds from sale of assets | 0.2 |
| | 10.3 |
| | 23.0 |
|
| Capital expenditures | (228.9 | ) | | (206.8 | ) | | (75.3 | ) |
| Net cash used in investing activities | (6,811.0 | ) | | (1,011.7 | ) | | (2,838.0 | ) |
Cash flows from financing activities: (1) | |
| | |
| | |
| Proceeds from issuance of 2017 Senior Convertible Debt | — |
| | — |
| | 2,070.0 |
|
| Proceeds from issuance of 2017 Junior Convertible Debt | — |
| | — |
| | 575.0 |
|
| Payments on settlement of convertible debt | — |
| | (73.4 | ) | | (436.2 | ) |
| Proceeds from issuance of 2023 and 2021 Senior Notes | 1,989.5 |
| | — |
| | — |
|
| Proceeds from borrowings on term loan facility | 3,000.0 |
| | — |
| | — |
|
| Repayments of term loan facility | (1,088.5 | ) | | — |
| | — |
|
| Proceeds from borrowings on revolving loan under credit facility | 4,416.5 |
| | 187.0 |
| | 1,537.0 |
|
| Repayments of revolving loan under credit facility | (1,150.0 | ) | | (187.0 | ) | | (2,781.0 | ) |
| Repayment of debt assumed in Microsemi acquisition | (2,056.9 | ) | | — |
| | — |
|
| Deferred financing costs | (72.7 | ) | | (1.2 | ) | | (36.9 | ) |
| Payment of cash dividends | (344.4 | ) | | (337.5 | ) | | (315.4 | ) |
| Proceeds from sale of common stock | 42.6 |
| | 42.0 |
| | 42.2 |
|
| Tax payments related to shares withheld for vested restricted stock units | (71.8 | ) | | (44.4 | ) | | (58.4 | ) |
| Capital lease payments | (0.8 | ) | | (0.8 | ) | | (0.8 | ) |
| Net cash provided by (used in) financing activities | 4,663.5 |
| | (415.3 | ) | | 595.5 |
|
|
| | | | | | | | | | | |
| | Year ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | — |
| | (1.0 | ) |
| Net decrease in cash and cash equivalents | (472.7 | ) | | (7.4 | ) | | (1,184.0 | ) |
Cash and cash equivalents, and restricted cash at beginning of period (2) | 901.3 |
| | 908.7 |
| | 2,092.7 |
|
Cash and cash equivalents, and restricted cash at end of period (2) | $ | 428.6 |
| | $ | 901.3 |
| | $ | 908.7 |
|
Schedule of significant non-cash financing activity:
(1) During the fiscal year ended March 31, 2018, the Company issued $111.3 million principal amount of 2017 Junior Convertible Notes and 3.2 million shares of common stock in exchange for $111.3 million principal amount of 2007 Junior Convertible Notes. Refer to Note 12 Debt and Credit Facility for further discussion.
Schedule of restricted cash:
(2) During the fiscal year ended March 31, 2019, the Company adopted ASU 2016-18 - Statement of Cash Flows: Restricted Cash. The following table presents the balance of restricted cash which consists of cash denominated in a foreign currency and restricted in use due to a foreign taxing authority requirement (in millions):
|
| | | | | | | | | | | |
| | Year ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Restricted cash | $ | 38.4 |
| | $ | 42.1 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2021 | | 2020 | | | | | | 2019 |
| Cash flows from operating activities: | | | | | | | | | |
| Net income | $ | 349.4 | | | $ | 570.6 | | | | | | | $ | 355.9 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
| Depreciation and amortization | 1,153.3 | | | 1,215.6 | | | | | | | 876.4 | |
| Deferred income taxes | (138.9) | | | (490.3) | | | | | | | (62.2) | |
| Share-based compensation expense related to equity incentive plans | 198.3 | | | 170.2 | | | | | | | 166.4 | |
| Loss on settlement of debt | 299.6 | | | 5.4 | | | | | | | 12.6 | |
| Amortization of debt discount | 71.1 | | | 121.7 | | | | | | | 114.6 | |
| Amortization of debt issuance costs | 17.1 | | | 17.1 | | | | | | | 16.5 | |
| Losses on equity method investments | 0 | | | 0 | | | | | | | 0.2 | |
| Gains on sale of assets | (7.1) | | | (2.2) | | | | | | | 0 | |
| Losses on write-down of fixed assets | 0.9 | | | 2.7 | | | | | | | 0.8 | |
| Impairment of intangible assets | 0 | | | 2.2 | | | | | | | 3.1 | |
| Gains on equity investments | (0.2) | | | (2.5) | | | | | | | 0 | |
| | | | | | | | | |
| Impairment of available-for-sale investments | 0 | | | 0 | | | | | | | 6.0 | |
| Amortization of premium on available-for-sale investments | 0 | | | 0 | | | | | | | (0.2) | |
| | | | | | | | | |
| Changes in operating assets and liabilities, excluding impact of acquisitions: | | | | | | | | | |
| (Increase) decrease in accounts receivable | (63.7) | | | (53.3) | | | | | | | 238.8 | |
| Decrease in inventories | 18.4 | | | 28.8 | | | | | | | 341.6 | |
| | | | | | | | | |
| Increase (decrease) in accounts payable and accrued liabilities | 17.6 | | | 11.4 | | | | | | | (180.7) | |
| Change in other assets and liabilities | (16.7) | | | (13.1) | | | | | | | (24.2) | |
| Change in income tax payable | 17.4 | | | (40.5) | | | | | | | (190.8) | |
| | | | | | | | | |
| Net cash provided by operating activities | 1,916.5 | | | 1,543.8 | | | | | | | 1,674.8 | |
| Cash flows from investing activities: | | | | | | | | | |
| Purchases of available-for-sale investments | 0 | | | (2.0) | | | | | | | (167.7) | |
| Maturities of available-for-sale investments | 0 | | | 0 | | | | | | | 78.0 | |
| Sales of available-for-sale investments and marketable equity securities | 0 | | | 4.7 | | | | | | | 1,376.6 | |
| | | | | | | | | |
| | | | | | | | | |
| Acquisition of Microsemi, net of cash acquired | 0 | | | 0 | | | | | | | (7,850.6) | |
| Investments in other assets | (89.0) | | | (71.5) | | | | | | | (18.6) | |
| Proceeds from sale of assets | 8.3 | | | 3.2 | | | | | | | 0.2 | |
| Capital expenditures | (92.6) | | | (67.6) | | | | | | | (228.9) | |
| Net cash used in investing activities | (173.3) | | | (133.2) | | | | | | | (6,811.0) | |
Cash flows from financing activities: (1) | | | | | | | | | |
| | | | | | | | | |
| Proceeds from borrowings on revolving loan under credit facility | 3,966.0 | | | 1,026.0 | | | | | | | 4,416.5 | |
| Repayments of revolving loan under credit facility | (4,007.9) | | | (1,904.0) | | | | | | | (1,150.0) | |
| Proceeds from issuance of senior notes | 3,577.8 | | | 0 | | | | | | | 1,989.5 | |
| Proceeds from borrowings on bridge loan facility | 0 | | | 611.9 | | | | | | | 0 | |
| Repayment of bridge loan facility | (615.0) | | | 0 | | | | | | | 0 | |
| Proceeds from borrowings on term loan facility | 0 | | | 0 | | | | | | | 3,000.0 | |
| Repayments of term loan facility | (1,723.5) | | | (188.0) | | | | | | | (1,088.5) | |
| Payments on settlement of convertible debt | (2,611.4) | | | (615.0) | | | | | | | 0 | |
| Repayment of debt assumed in Microsemi acquisition | 0 | | | 0 | | | | | | | (2,056.9) | |
| Deferred financing costs | (21.2) | | | (8.9) | | | | | | | (72.7) | |
| Purchase of capped call options | (35.8) | | | 0 | | | | | | | 0 | |
| Payment of cash dividends | (388.3) | | | (350.1) | | | | | | | (344.4) | |
| | | | | | | | | |
| Proceeds from sale of common stock | 60.3 | | | 58.8 | | | | | | | 42.6 | |
| | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2021 | | 2020 | | | | | | 2019 |
| Tax payments related to shares withheld for vested restricted stock units | (64.6) | | | (68.1) | | | | | | | (71.8) | |
| Capital lease payments | (0.6) | | | (0.8) | | | | | | | (0.8) | |
| Net cash (used in) provided by financing activities | (1,864.2) | | | (1,438.2) | | | | | | | 4,663.5 | |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | (121.0) | | | (27.6) | | | | | | | (472.7) | |
| Cash and cash equivalents, and restricted cash at beginning of period | 401.0 | | | 428.6 | | | | | | | 901.3 | |
| Cash and cash equivalents, and restricted cash at end of period | $ | 280.0 | | | $ | 401.0 | | | | | | | $ | 428.6 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | | |
|
| | | | | | | | | |
| Restricted cash | $ | 0 | | | $ | 25.0 | | | | | | | $ | 38.4 | |
| Non-cash activities: | | | | | | | | | |
ROU assets obtained in exchange of lease liabilities (2) | $ | 65.6 | | | $ | 24.8 | | | | | | | 0 |
| Cash paid for: | | | | | | | | | |
| Interest | $ | 265.4 | | | $ | 355.2 | | | | | | | $ | 347.9 | |
| Income taxes | $ | 87.3 | | | $ | 101.3 | | | | | | | $ | 77.6 | |
Operating lease payments in operating cash flows (2) | $ | 47.4 | | | $ | 46.5 | | | | | | | |
(1) During the fiscal year ended March 31, 2021, the Company completed the December 2020 settlement of $1,086.5 million principal amount of convertible debt in exchange for $428.9 million in cash, 8.4 million shares of common stock and $665.5 million principal amount of 2020 Senior Convertible Debt. Refer to Note 7 for further information. |
(2) During the fiscal year ended March 31, 2020, the Company adopted Accounting Standards Codification Topic 842, Leases, using the retrospective cumulative effect adjustment transition method. The disclosures are not applicable for the fiscal year ended March 31, 2019. |
See accompanying notes to consolidated financial statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Additional Paid-in-Capital | | Common Stock Held
in Treasury | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Equity | | | | |
| Shares | | Amount | | Shares | | Amount | |
| Balance at March 31, 2018 | 253.2 | | | $ | 2,562.7 | | | 18.2 | | | $ | (662.6) | | | $ | (17.6) | | | $ | 1,397.3 | | | $ | 3,279.8 | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 355.9 | | | 355.9 | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (1.4) | | | — | | | (1.4) | | | | | |
| Adoption of ASU 2016-01, cumulative adjustment | — | | | — | | | — | | | — | | | (1.7) | | | 1.7 | | | — | | | | | |
| Adoption of ASC 606, cumulative adjustment | — | | | — | | | — | | | — | | | — | | | 242.0 | | | 242.0 | | | | | |
| Adoption of ASU 2016-16, cumulative adjustment | — | | | — | | | — | | | — | | | — | | | 1,558.1 | | | 1,558.1 | | | | | |
| Non-cash consideration, exchange of employee stock awards - Microsemi acquisition | — | | | 53.9 | | | — | | | — | | | — | | | — | | | 53.9 | | | | | |
| Proceeds from sales of common stock through employee equity incentive plans | 3.4 | | | 42.6 | | | — | | | — | | | — | | | — | | | 42.6 | | | | | |
| Restricted stock unit and stock appreciation right withholdings | (0.8) | | | (71.8) | | | — | | | — | | | — | | | — | | | (71.8) | | | | | |
| Treasury stock used for new issuances | (2.6) | | | (80.4) | | | (2.6) | | | 80.4 | | | — | | | — | | | — | | | | | |
| Share-based compensation | — | | | 172.8 | | | — | | | — | | | — | | | — | | | 172.8 | | | | | |
| Cash dividend | — | | | — | | | — | | | — | | | — | | | (344.4) | | | (344.4) | | | | | |
| | | | | | | | | | | | | | | | | |
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| Balance at March 31, 2019 | 253.2 | | | 2,679.8 | | | 15.6 | | | (582.2) | | | (20.7) | | | 3,210.6 | | | 5,287.5 | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 570.6 | | | 570.6 | | | | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 0.4 | | | — | | | 0.4 | | | | | |
| Adoption of ASU 2018-02, cumulative adjustment | — | | | — | | | — | | | — | | | (1.3) | | | 1.3 | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Proceeds from sales of common stock through employee equity incentive plans | 3.2 | | | 58.8 | | | — | | | — | | | — | | | — | | | 58.8 | | | | | |
| Restricted stock unit and stock appreciation right withholdings | (0.7) | | | (68.1) | | | — | | | — | | | — | | | — | | | (68.1) | | | | | |
| Treasury stock used for new issuances | (2.5) | | | (81.6) | | | (2.5) | | | 81.6 | | | — | | | — | | | — | | | | | |
| Shares issued to settle convertible debt | 5.2 | | | 351.8 | | | — | | | — | | | — | | | — | | | 351.8 | | | | | |
| Settlement of convertible debt | — | | | (438.1) | | | — | | | — | | | — | | | — | | | (438.1) | | | | | |
| Share-based compensation | — | | | 172.7 | | | — | | | — | | | — | | | — | | | 172.7 | | | | | |
| Cash dividend | — | | | — | | | — | | | — | | | — | | | (350.1) | | | (350.1) | | | | | |
| Balance at March 31, 2020 | 258.4 | | | 2,675.3 | | | 13.1 | | | (500.6) | | | (21.6) | | | 3,432.4 | | | 5,585.5 | | | | | |
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| Net income | — | | | — | | | — | | | — | | | — | | | 349.4 | | | 349.4 | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (4.6) | | | — | | | (4.6) | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Proceeds from sales of common stock through employee equity incentive plans | 2.6 | | | 60.3 | | | — | | | — | | | — | | | — | | | 60.3 | | | | | |
| Restricted stock unit and stock appreciation right withholdings | (0.5) | | | (64.6) | | | — | | | — | | | — | | | — | | | (64.6) | | | | | |
| Treasury stock used for new issuances | (2.1) | | | (66.8) | | | (2.1) | | | 66.8 | | | — | | | — | | | — | | | | | |
| Shares issued to settle convertible debt | 26.1 | | | 3,171.1 | | | — | | | — | | | — | | | — | | | 3,171.1 | | | | | |
| Settlement of convertible debt | — | | | (3,622.1) | | | — | | | — | | | — | | | — | | | (3,622.1) | | | | | |
| Purchase of capped call options | — | | | (35.8) | | | — | | | — | | | — | | | — | | | (35.8) | | | | | |
| Issuance of 2020 Senior Convertible Debt | — | | | 87.7 | | | — | | | — | | | — | | | — | | | 87.7 | | | | | |
| Share-based compensation | — | | | 198.5 | | | — | | | — | | | — | | | — | | | 198.5 | | | | | |
| Cash dividend | — | | | — | | | — | | | — | | | — | | | (388.3) | | | (388.3) | | | | | |
| Balance at March 31, 2021 | 284.5 | | | $ | 2,403.6 | | | 11.0 | | | $ | (433.8) | | | $ | (26.2) | | | $ | 3,393.5 | | | $ | 5,337.1 | | | | | |
See accompanying notes to consolidated financial statements
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock and Additional Paid-in-Capital | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Equity |
| | | Shares | | Amount | | Shares | | Amount | |
| Balance at March 31, 2016 | | 227.4 |
| | $ | 1,391.9 |
| | 23.4 |
| | $ | (820.1 | ) | | $ | (3.4 | ) | | $ | 1,582.6 |
| | $ | 2,151.0 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 164.6 |
| | 164.6 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (11.0 | ) | | — |
| | (11.0 | ) |
| Issuance of common stock - Atmel acquisition | | 10.1 |
| | 486.2 |
| | — |
| | — |
| | — |
| | — |
| | 486.2 |
|
| Non-cash consideration, exchange of employee stock awards - Atmel acquisition | | — |
| | 7.5 |
| | — |
| | — |
| | — |
| | — |
| | 7.5 |
|
| Proceeds from sales of common stock through employee equity incentive plans | | 4.0 |
| | 42.2 |
| | — |
| | — |
| | — |
| | — |
| | 42.2 |
|
| Restricted stock unit and stock appreciation right withholdings | | (1.0 | ) | | (58.4 | ) | | — |
| | — |
| | — |
| | — |
| | (58.4 | ) |
| Adoption of ASU 2016-09, cumulative adjustment | | — |
| | 2.0 |
| | — |
| | — |
| | — |
| | 47.6 |
| | 49.6 |
|
| Treasury stock used for new issuances | | (3.0 | ) | | (88.2 | ) | | (3.0 | ) | | 88.2 |
| | — |
| | — |
| | — |
|
| Share-based compensation | | — |
| | 127.3 |
| | — |
| | — |
| | — |
| | — |
| | 127.3 |
|
| Shares issued to settle convertible debt | | 12.0 |
| | 862.7 |
| | — |
| | — |
| | — |
| | — |
| | 862.7 |
|
| Settlement of convertible debt | | — |
| | (850.8 | ) | | — |
| | — |
| | — |
| | — |
| | (850.8 | ) |
| Convertible Debt - issuance of 2017 senior and junior debt | | — |
| | 615.2 |
| | — |
| | — |
| | — |
| | — |
| | 615.2 |
|
| Cash dividend | | — |
| | — |
| | — |
| | — |
| | — |
| | (315.4 | ) | | (315.4 | ) |
| Balance at March 31, 2017 | | 249.5 |
| | 2,537.6 |
| | 20.4 |
| | (731.9 | ) | | (14.4 | ) | | 1,479.4 |
| | 3,270.7 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 255.4 |
| | 255.4 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (3.2 | ) | | — |
| | (3.2 | ) |
| Proceeds from sales of common stock through employee equity incentive plans | | 2.7 |
| | 42.0 |
| | — |
| | — |
| | — |
| | — |
| | 42.0 |
|
| Restricted stock unit and stock appreciation right withholdings | | (0.5 | ) | | (44.4 | ) | | — |
| | — |
| | — |
| | — |
| | (44.4 | ) |
| Treasury stock used for new issuances | | (2.2 | ) | | (69.3 | ) | | (2.2 | ) | | 69.3 |
| | — |
| | — |
| | — |
|
| Share-based compensation | | — |
| | 93.1 |
| | — |
| | — |
| | — |
| | — |
| | 93.1 |
|
| Shares issued to settle convertible debt | | 3.7 |
| | 298.5 |
| | — |
| | — |
| | — |
| | — |
| | 298.5 |
|
| Settlement of convertible debt | | — |
| | (337.7 | ) | | — |
| | — |
| | — |
| | — |
| | (337.7 | ) |
| Convertible Debt - exchange of 2017 junior debt | | — |
| | 42.9 |
| | — |
| | — |
| | — |
| | — |
| | 42.9 |
|
| Cash dividend | | — |
| | — |
| | — |
| | — |
| | — |
| | (337.5 | ) | | (337.5 | ) |
| Balance at March 31, 2018 | | 253.2 |
| | 2,562.7 |
| | 18.2 |
| | (662.6 | ) | | (17.6 | ) | | 1,397.3 |
| | 3,279.8 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock and Additional Paid-in-Capital | | Common Stock Held in Treasury | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Equity |
| | | Shares | | Amount | | Shares | | Amount | |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 355.9 |
| | 355.9 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (1.4 | ) | | — |
| | (1.4 | ) |
| Adoption of ASU 2016-01, cumulative adjustment | | — |
| | — |
| | — |
| | — |
| | (1.7 | ) | | 1.7 |
| | — |
|
| Adoption of ASC 606, cumulative adjustment | | — |
| | — |
| | — |
| | — |
| | — |
| | 242.0 |
| | 242.0 |
|
| Adoption of ASU 2016-16, cumulative adjustment | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,558.1 |
| | 1,558.1 |
|
| Non-cash consideration, exchange of employee stock awards - Microsemi acquisition | | — |
| | 53.9 |
| | — |
| | — |
| | — |
| | — |
| | 53.9 |
|
| Proceeds from sales of common stock through employee equity incentive plans | | 3.4 |
| | 42.6 |
| | — |
| | — |
| | — |
| | — |
| | 42.6 |
|
| Restricted stock unit and stock appreciation right withholdings | | (0.8 | ) | | (71.8 | ) | | — |
| | — |
| | — |
| | — |
| | (71.8 | ) |
| Treasury stock used for new issuances | | (2.6 | ) | | (80.4 | ) | | (2.6 | ) | | 80.4 |
| | — |
| | — |
| | — |
|
| Share-based compensation | | — |
| | 172.8 |
| | — |
| | — |
| | — |
| | — |
| | 172.8 |
|
| Cash dividend | | — |
| | — |
| | — |
| | — |
| | — |
| | (344.4 | ) | | (344.4 | ) |
| Balance at March 31, 2019 | | 253.2 |
| | $ | 2,679.8 |
| | 15.6 |
| | $ | (582.2 | ) | | $ | (20.7 | ) | | $ | 3,210.6 |
| | $ | 5,287.5 |
|
| | | | | | | | | | | | | | | |
| See accompanying notes to consolidated financial statements |
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Nature of Business
Microchip Technology Incorporated ("Microchip"(Microchip or the "Company")Company) develops, manufactures and sells specialized semiconductor productssmart, connected and secure embedded control solutions used by its customers for a wide variety of applications. The Company provides cost-effective embedded control applications. Microchip's product portfolio comprises general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, 32-bit microprocessors, field-programmable gate array (FPGA) products, a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, discrete diodes and Metal Oxide Semiconductor Field Effect Transistors (MOSFETS), radio frequency (RF), timing, timing systems, safety, security, wired connectivity and wireless connectivity devices, as well as Serial Electrically Erasable Programmable Read Only Memory (EEPROM), Serial Flash memories, Parallel Flash memories, Serial Electrically Erasable Random Access Memory (EERAM), and Serial Static Random Access Memory (SRAM) memories. Microchip also licenses Flash-IP solutions that are incorporatedalso offer the advantages of small size, high performance, extreme low power usage, wide voltage range operation, mixed signal integration, and ease of development, thus enabling timely and cost-effective integration of the Company's solutions by its customers in a broad range oftheir end products.
Principles of Consolidation
The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (US GAAP).U.S. GAAP. The consolidated financial statements include the accounts of Microchip and its majority-owned and controlled subsidiaries. As further discussed in Note 2, on May 29, 2018, the Company completed its acquisition of Microsemi Corporation (Microsemi) and the Company's financial results include Microsemi's results beginning as of such acquisition date. All of the Company's subsidiaries are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per share amounts, are stated in millions of U.S. dollars unless otherwise noted. As further discussed in Note 2, on May 29, 2018, the Company completed its acquisition of Microsemi Corporation (Microsemi) and the Company's financial results include Microsemi's results beginning as of such acquisition date.
Revenue Recognition (subsequent to the adoption of ASC 606)
The Company generates revenue primarily from sales of semiconductor products to distributors and non-distributor customers (direct customers) and, to a lesser extent, from royalties paid by licensees of intellectual property. The Company applies the following five-step approach to determine the timing and amount of revenue recognition: (1)(i) identify the contract with the customer, (2)(ii) identify performance obligations in the contract, (3)(iii) determine the transaction price, (4)(iv) allocate the transaction price to the performance obligations in the contract, and (5)(v) recognize revenue when the performance obligation is satisfied.
Sales to distributors are governed by a distributor agreement, a purchase order, and an order acknowledgment. Sales to distributors do not meet the definition of a contract as defined by ASC 606, until the distributor has sent in a purchase order, the Company has acknowledged the order, the Company has deemed the collectability of the consideration to be probable, and legally enforceable rights and obligations have been created; this generally occurs 30 days prior to the estimated ship date. As is customary in the semiconductor industry, the Company offers price concessions and stock rotation rights to many of theirits distributors. As these are forms of variable consideration, the Company estimates the amount of consideration to which they will be entitled using recent historical data and applying the expected value method. Usually, there is only a single performance obligation in the contract, and therefore the entire transaction price is allocated to the single performance obligation. After the transaction price has been allocated, the Company recognizes revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with distributors is recognized at the time risk and title of the inventory transfers to the distributor.
Sales to direct customers are generally governed by a purchase order and an order acknowledgment. Sales to direct customers usually do not meet the definition of a contract as defined by ASC 606, until shipment of the product occurs. Generally, the transaction price associated with contracts with direct customers is set at the standalone selling price and is not variable. Usually, there is only a single performance obligation in the contract, and therefore the entire transaction price is allocated to the single performance obligation. After the transaction price has been allocated, the Company recognizes revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with direct customers is recognized at the time risk and title of the inventory transfers to the customer.
Revenue generated from licensees is governed by licensing agreements. The Company's primary performance obligation related to these agreements is to provide the licensee the right to use the intellectual property. The final transaction price is
determined by multiplying the usage of the license by the royalty, which is fixed in the licensing agreement. Revenue is recognized as usage of the license occurs.
Revenue Recognition (prior to the adoption of ASC 606)
The Company recognized revenue when the earnings process was complete, as evidenced by an agreement with the customer, transfer of title had occurred, the pricing was fixed or determinable and collectability was reasonably assured. The Company recognized revenue from product sales to original equipment manufacturers (OEMs) upon shipment and recorded reserves for estimated customer returns.
Distributors worldwide generally had broad price protection and product return rights which prevented the sales pricing from being fixed or determinable at the time of the Company's shipment to the distributors. Therefore, revenue recognition was deferred until the pricing uncertainty was resolved, which generally occurred when the distributor sold the product to their customer. At the time of shipment to these distributors, the Company recorded a trade receivable for the selling price as there was a legally enforceable right to payment, relieved inventory for the carrying value of goods shipped since legal title had passed to the distributor, and recorded the gross margin in deferred income on shipments to distributors on its consolidated balance sheets.
In connection with its acquisition of Atmel, the Company acquired certain distributor relationships where revenue was recognized upon shipment to the distributors based on certain contractual terms or prevailing business practices that resulted in the price being fixed and determinable at such time. Following an acquisition, the Company undertook efforts to align the contract terms and business practices of the acquired entity with its own. Once these efforts were complete, the related revenue recognition was changed. With respect to such distributor relationships acquired in the Atmel acquisition, as of October 1, 2016, these business practices were conformed to those of the Company’s other distributors, which beginning in October 2016 resulted in the deferral of revenue recognition until the distributor sold the product to their customers.
Deferred income on shipments to distributors effectively represented gross margin on the sale to the distributor at the initial shipment date; however, the amount of gross margin recognized by the Company in future periods was 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 the Company's products to their end customers and price protection concessions related to market pricing conditions.
The Company sold the majority of the items in its product catalog to its distributors worldwide at a uniform list price. However, distributors resold the Company's products to end customers at a broad range of individually negotiated price points. The majority of the Company's distributors' resales required a reduction from the original list price paid. Often, under these circumstances, the Company remitted back to the distributor a portion of their original purchase price after the resale transaction was completed in the form of a credit against the distributors' outstanding accounts receivable balance. The credits were on a per unit basis and were not given to the distributor until they provided information regarding the sale to their end customer. The price reductions varied significantly based on the customer, product, quantity ordered, geographic location and other factors and discounts to a price less than the Company's cost have historically been rare. The effect of granting these credits established the net selling price from the Company to its distributors for the product and resulted in the net revenue recognized by the Company when the product was sold by the distributors to their end customers. Thus, a portion of the "deferred income on shipments to distributors" balance represented the amount of distributors' original purchase price that was
to be credited back to the distributors in the future. The Company did not reduce deferred income on shipments to distributors or accounts receivable by anticipated future price concessions; rather, price concessions are recorded against deferred income on shipments to distributors when incurred, which is generally at the time the distributor sold the product.
At March 31, 2018, the Company had approximately $479.6 million of deferred revenue and $145.8 million in deferred cost of sales recognized as $333.8 million of deferred income on shipments to distributors. The deferred income on shipments to distributors that was ultimately to be recognized in the Company's income statement was lower than the amount reflected on the balance sheet due to price credits to be granted to the distributors when the product is sold to their customers. These price credits historically have resulted in the deferred income approximating the overall gross margins that the Company recognizes in the distribution channel of its business.
The Company reduced product pricing through price protection based on market conditions, competitive considerations and other factors. Price protection was granted to distributors on the inventory they have on hand at the date the price
protection was offered. When the Company reduced the price of its products, it allowed 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 was no immediate revenue impact from the price protection, as it was reflected as a reduction of the deferred income on shipments to distributors' balance.
Products returned by distributors and subsequently scrapped have historically been immaterial to the Company's consolidated results of operations. The Company routinely evaluated 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 resulted in a price less than the Company's cost, the Company believed the deferred costs have a low risk of material impairment.
Shipping charges billed to customers were included in net sales, and the related shipping costs were included in cost of sales. The Company collected and remitted certain sales-related taxes on a portion of its sales of inventory and reported such amounts under the net method in its consolidated statements of income.
For licenses or other technology arrangements without an upgrade period, non-royalty revenue from the license was recognized upon delivery of the technology if the fee was fixed or determinable and collection of the fee was reasonably assured. Royalties were recognized when reported to the Company, which generally coincided with the receipt of payment. In certain limited circumstances, the Company entered into license and other arrangements for technologies that the Company was continuing to enhance and refine or under which it was obligated to provide unspecified enhancements. Under these arrangements, non-royalty revenue is recognized over the lesser of (1) the estimated period that the Company has historically enhanced and developed refinements to the specific technology, typically one to three years (the "upgrade period"), and (2) the remaining portion of the upgrade period after the date of delivery of all specified technology and documentation, provided that the fee is fixed or determinable and collection of the fee is reasonably assured. Royalties received during the upgrade period were recognized as revenue based on an amortization calculation of the elapsed portion of the upgrade period compared to the entire estimated upgrade period. Royalties received after the upgrade period has elapsed were recognized when reported to the Company, which generally coincided with the receipt of payment.
Product Warranty
The Company typically warrants its products against defects in materials and workmanship and non-conformance to specifications for 12 to 24 months. The majority of the Company's product warranty claims are settled through the return of the defective product and the shipment of replacement product. Warranty returns are included within the Company's allowance for returns, which is based on historical return rates. Actual future returns could differ from the allowance established. In addition, the Company accrues a liability for specific warranty costs expected to be settled other than through product return and replacement, if a loss is probable and can be reasonably estimated. Product warranty expenses were immaterial for the fiscal years ended March 31, 2019, 2018,2021, 2020, and 2017.2019.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were immaterial for the fiscal years ended March 31, 2019, 20182021, 2020 and 2017.2019.
Research and Development
Research and development costs are expensed as incurred. Assets purchased to support the Company's ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their estimated useful lives. Renewals or extensions of these assets are expensed as incurred. Research and development expenses include expenditures for labor, share-based payments, depreciation, masks, prototype wafers, and expenses for development of process technologies, new packages, and software to support new products and design environments.
Restructuring Charges
The Company recognizes a liability measured at fair value for restructuring costs when the liability is incurred. Restructuring charges are included within special charges and other, net in the consolidated statements of income and are primarily comprised of employee separation costs, asset impairments, contract exit costs and costs of facility consolidation and closure, including the related gains or losses associated with the sale of owned facilities. Employee separation costs includes one-time termination benefits that are recognized as a liability at estimated fair value, at the time of communication to
employees, unless future service is required, in which case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits are probable and reasonably estimable. Contract exit costs includes contract termination fees and future contractual commitments for lease payments.ROU asset impairments recognized on the cease-use date of leased facilities. A liability for contract exit coststermination fees is recognized in the period in which the Company terminates the contract or on the cease-use date for leased facilities.contract.
Foreign Currency Translation
TheSubstantially all of the Company's foreign subsidiaries are considered to be extensions of the U.S. company and any translation gains and losses related to these subsidiaries are included in other (loss) income, (expense)net in the consolidated statements of income. As the U.S. dollar is utilized as the functional currency, gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the subsidiaries' functional currency) are also included in income. For a portion of fiscal 20192021, 2020 and 2017,2019, certain foreign subsidiaries acquired as part of the Company's acquisition activities had the local currency as the functional currency. For subsidiaries acquired as part of the Company's acquisition of Microsemi, the U.S. dollar is expected towill become the functional currency for such entities once integrated into the Company's legal structure and intercompany agreements are executed.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating its 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 the Company's consolidated balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and to the extent the Company believes that recovery is not likely, it must establish a valuation allowance. The Company provided valuation allowances for certain of its deferred tax assets where it is more likely than not that some portion, or all of such assets, will not be realized.
Various taxing authorities in the U.S. and other countries in which the Company does business scrutinize the tax structures employed by businesses. Companies of a similar size and complexity as the Company are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. During the fiscal year ended March 31, 2019,2021, various foreign jurisdictions finalized their audits. The close of these audits did not have an adverse impact on the financial statements. The Company is currently being audited by the tax authorities in the United States and various foreign jurisdictions. At this time, the Company does not know what the outcome of these audits will be. The Company records benefits for uncertain tax positions based on an assessment of whether it is more likely than not that the tax positions will be sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the Company recognizes the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.
The accounting model as defined in Accounting Standards Codification ("ASC") 740 related to the valuation of uncertain tax positions requires the Company to presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information and that each tax position will be evaluated without consideration of the possibility of offset or aggregation with other positions. The recognition requirement for the liability exists even if the Company believes the possibility of examination by a taxing authority or discovery of the related risk matters is remote or where it has a long history of the taxing authority not performing an exam or overlooking an issue. The Company will record an adjustment to a previously recorded position if new information or facts related to the position are identified in a subsequent period. All adjustments to the positions are recorded through the income statement. Generally, adjustments will be recorded in periods subsequent to the initial recognition if the taxing authority has completed an audit of the period or if the statute of limitation expires. Due to the inherent uncertainty in the estimation process and in consideration of the criteria of the accounting model, amounts recognized in the financial statements in periods subsequent to the initial recognition may significantly differ from the estimated exposure of the position under the accounting model.
On December 22, 2017, the ActTCJA was enacted into law. The Act provides for numerous significant tax law changes and modifications including the reduction of the U.S. federal corporate income tax rate from 35.0% to 21.0%, the requirement for companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-sourced earnings. As a fiscal year-end taxpayer, certain provisions of the Act began to impact the Company in the third quarter of fiscal 2018, while other provisions have become effective for the Company in fiscal 2019.
In addition to the impacts of tax reform on fiscal 2018, the Act establishes new tax laws that are effective for fiscal 2019, including, but not limited to, (1)established a new provision designed to tax low-taxed income of foreign subsidiaries (“GILTI”), which allows for the possibility of using foreign tax credits ("FTCs") and a deduction of up to 50% to offset theknown as global intangible low-taxed income tax liability (subject to some limitations); (2) limitations on the deductibility of certain executive compensation; (3) limitations on the deductibility of interest expense; and (4) limitations on the use of FTCs to reduce the U.S. income tax liability. While each of these provisions is expected to have an impact on the Company's tax expense for future periods, the increase in tax expense for GILTI is the most significant.
(GILTI). The FASB allows taxpayers to make an accounting policy election of either (1)(i) treating taxes due on GILTI inclusions as a current-period expense when incurred or (2)(ii) recognizing deferred taxes for temporary basis differences that are expected to reverse as GILTI in future years. The Company is makinghas made a policy choice to include taxes due on the future GILTI inclusion in taxable income when incurred.
On March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) was enacted into law in the U.S. The ARPA, among other things, includes provisions to extend the $1.0 million limitation on deductions for compensation to executive offices to include the eight highest paid individuals rather than the top three in addition to the Chief Executive Officer and Chief Financial Officer, extends the period for which companies may claim an employee retention credit and repeals the election under which a U.S. affiliated group may allocate interest expense on a worldwide basis. The Company continues to examine the impacts the ARPA may have on its business.
Cash and Cash Equivalents
All highly liquid investments, including marketable securities with an original maturity to the Company of three months or less when acquired are considered to be cash equivalents.
Available-for-Sale Investments
The Company classifies its investments in debt and marketable equity securities as available-for-sale based upon management's intent with regard to the investments and the nature of the underlying securities.
The Company's available-for-sale debt securities consist of government agency bonds, municipal bonds and corporate bonds. The Company's available-for-sale debt securities are carried at fair value with unrealized gains and losses reported in stockholders' equity unless losses are considered to be other than temporary impairments in which case the losses are recognized through the statement of income. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. Dividend and interest income are recognized when earned. The cost of available-for-sale debt securities sold is calculated using the first-in, first-out (FIFO) basis at the individual security level for sales from multiple lots.
Marketable equity securities are equity securities with a readily determinable fair value that are measured and recorded at fair value on a recurring basis with changes in fair value, whether realized or unrealized, recorded through the statement of income. Prior to fiscal 2019, these securities were classified as available-for-sale securities and measured and recorded at fair value with unrealized changes in fair value reported in stockholders' equity.
The Company includes within short-term investments its income yielding available-for-sale securities that can be readily converted to cash and includes within long-term investments those income yielding available-for-sale securities with maturities of over one year that have unrealized losses attributable to them or those that cannot be readily liquidated. As discussed in Note 5, if the Company anticipates that investments will be liquidated in anticipation of a pending merger or otherwise, any unrealized losses are recognized as other-than-temporary impairments. If the anticipated liquidity event is within 12 months, the securities are classified as short-term investments. In the normal course of business, the Company intends and has the ability to hold its long-term investments with temporary impairments until such time as these assets are no longer impaired.
Derivative Instruments
Derivative instruments are required to be recorded at fair value as either assets or liabilities in the Company's consolidated balance sheet. The Company's accounting policies for derivative instruments depends on whether the instrument has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.
The Company does not apply hedge accounting to foreign currency forward contracts. Gains and losses associated with currency rate changes on forward contracts are recorded currently in income. These gains and losses have been immaterial to the Company's financial statements.
The Company is exposed to fluctuations in prices for energy that it consumes, particularly electricity and natural gas. The Company also enters into variable-priced contracts for some purchases of electricity and natural gas, on an index basis. The Company seeks, or may seek, to partially mitigate these exposures through fixed-price contracts. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales” exception under authoritative guidance and require no mark-to-market adjustment.
Allowance for Doubtful Accounts
Inventories
Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable. In estimating reserves for obsolescence, the Company primarily evaluates estimates of demand over a 12-month period and provides reserves for inventory on hand in excess of the estimated 12-month demand. Estimates for projected 12-month demand are generally based on the average shipments of the prior three-month period, which are then annualized to adjust for any potential seasonality in the Company's business. The estimated 12-month demand is compared to the Company's most recently developed sales forecast to further reconcile the 12-month demand estimate. Management reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the extent any existing products are being replaced or discontinued.
In periods where the Company's production levels are substantially below normal operating capacity, unabsorbed overhead production costs associated with the reduced production levels of the Company's manufacturing facilities are charged directly to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. The Company's property and equipment accounting policies incorporate estimates, assumptions and judgments relative to the useful lives of its property and equipment. Depreciation is provided for assets placed in service on a straight-line basis over the estimated useful lives of the relative assets, which range from 10 to 4030 years for buildings and building improvements and 35 to 7 years for machinery and equipment. The Company evaluates the carrying value of its property and equipment when events or changes in circumstances indicate that the carrying value of such assets may be impaired. Asset impairment evaluations are, by nature, highly subjective.
SeniorLeases
The Company determines if an arrangement is a lease at its inception. Operating lease arrangements are comprised primarily of real estate and Junior Subordinated equipment agreements for which the ROU assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued expenses and other current liabilities or other long-term liabilities in the condensed consolidated balance sheets.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets also include any initial direct costs and prepayments less lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.
As the Company's leases generally do not provide an implicit rate, the Company uses its collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Lease expense for these leases is recognized on a straight-line basis over the lease term. The Company accounts for the lease and non-lease components as a single lease component.
Convertible Debt
TheUpon issuance, the Company separately accounts for the liability and equity components of its seniorConvertible Debt by estimating the fair values of the i) liability component without a conversion feature and junior subordinated convertible debt in a manner that reflects its nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized.ii) the conversion feature. This results in a bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in itsthe Company's consolidated statements of income.
Upon settlement of Convertible Debt instruments, the Company allocates the total consideration between the liability and equity components based on the fair value of the liability component without the conversion feature. The difference between the consideration allocated to the liability component and the net carrying value of the liability component is recognized as an extinguishment loss or gain. The remaining settlement consideration is allocated to the equity component and recognized as a
reduction of additional paid-in capital in the Company's consolidated balance sheets. In addition, if the terms of the settlement are different from the contractual terms of the original instrument, the Company recognizes an inducement loss, which is measured as the difference between the fair value of the original terms of the instrument and the fair value of the settlement terms.
Determining the fair value of the liability component without the conversion feature upon issuance and settlement involves estimating the equivalent borrowing rate for a similar non-convertible instrument. Given the values of these transactions, fair value estimates are sensitive to changes in the equivalent borrowing rate conclusions. The measurement of the equivalent borrowing rate requires that the Company make estimates of volatility and credit spreads to align observable market inputs with the instrument being valued.
Lastly, the Company includes the dilutive effect of the shares of its common stock issuable upon conversion of the outstanding senior and junior subordinated convertible debtConvertible Debt in its diluted income per share calculation regardless of whether the market price triggers or other contingent conversion features have been met. The Company applies the treasury stock method as it has the intent and abilityhas adopted an accounting policy to settle the principal amountsamount of the senior and junior subordinated convertible debenturesConvertible Debt in cash. This method results in incremental dilutive shares when the average marketfair value of the Company's common stock for a reporting period exceeds the conversion prices per share and adjustadjusts as dividends are recorded in the future.
Upon a de-recognition event such as a settlement or conversion, the Company estimates the fair value of the liability component and compares that to the carrying amount in order to calculate the appropriate amount of gain or loss. The remaining amounts paid or issued (in the case of non cash consideration in the form of shares of common stock) are recognized as a reduction of additional paid-in-capital. The fair value of the liability component is estimated using the current comparable borrowing rate for an otherwise identical non-convertible debt instrument.
Defined Benefit Pension Plans
The Company maintains defined benefit pension plans, covering certain of its foreign employees. For financial reporting purposes, net periodic pension costs and pension obligations are determined based upon a number of actuarial assumptions, including discount rates for plan obligations, and assumed rates of compensation increases for employees participating in plans. These assumptions are based upon management's judgment and consultation with actuaries, considering all known trends and uncertainties.
Contingencies
In the ordinary course of business, the Company is exposed to various liabilities as a result of contracts, product liability, customer claims and other matters. Additionally, the Company is involved in a limited number of legal actions, both as plaintiff and defendant. Consequently, the Company could incur uninsured liability in any of those actions. The Company also periodically receives notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting reimbursement for various costs. With respect to pending legal actions to which the Company is a party and other claims, although the outcomes are generally not determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations. Litigation and disputes relating to the semiconductor industry are not uncommon, and the Company is, from time to time, subject to such litigation and disputes. As a result, no assurances can be given with respect to the extent or outcome of any such litigation or disputes in the future.
The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it uses the amount that is the low end of such range.
Business Combinations
All of the Company's business combinations are accounted for at fair value under the acquisition method of accounting. Under the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at fair value as an intangible asset at the acquisition date and amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will be recognized through income tax expense. The aggregate amount of consideration paid by the Company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date. The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill. The measurement of fair value of assets acquired and liabilities assumed requires significant judgment. The valuation of intangible assets, in particular, requires that the Company use valuation techniques such as the income
approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows.
Goodwill and Other Intangible Assets
The Company's intangible assets include goodwill and other intangible assets. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Other intangible assets include existing technologies, core and developed technology, in-process research and development, trademarks and trade names, distribution rights and customer-related intangibles. In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Indefinite-lived intangible assets consist of goodwill and in-process research and development intangible assets that have not yet been placed in service. All other intangible assets are definite-lived intangible assets, including in-process research and development assets that have been placed in service, and are amortized over their respective estimated lives, ranging from 1 to 15 years.
The Company is required to perform an impairment review of indefinite-lived intangible assets, including goodwill annually, and more frequently under certain circumstances. Indefinite-lived intangible assets are subjected to this annual
impairment test during the fourth quarter of the Company's fiscal year. The Company engages primarily in the development, manufacture and sale of semiconductor products as well as technology licensing. As a result, the Company concluded there are two2 reporting units, semiconductor products and technology licensing. Under theThe Company's impairment evaluation consists of a qualitative indefinite-lived intangible asset impairment assessment standard,in which management evaluates whether it is more likely than not that the indefinite-lived intangible assets are impaired. If it is determined that it is more likely than not, the Company proceeds with the next step of theperforms a quantitative impairment test, which compares the fair value of the reporting unit or indefinite-lived intangible asset to its carrying value. If the Company determines through the impairment process that the indefinite-lived intangible asset has been impaired, the Company will record the impairment charge in its results of operation. Through March 31, 2019,2021, the Company has not had impaired goodwill. In the event that facts and circumstances indicate definite-lived intangible assets may be impaired, the Company evaluates the recoverability and estimated useful lives of such assets. If such indicators are present, recoverability is evaluated based on whether the sum of the estimated undiscounted cash flows attributable to the asset (group) in question is less than their carrying value. If less, the Company measures the fair value of the asset (group) and recognizes an impairment loss if the carrying amount of the assets exceeds their respective fair values.
Impairment of Long-Lived Assets
The Company assesses whether indicators of impairment of long-lived assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss through a charge to operating results to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset's carrying value. The Company would depreciate the remaining value over the remaining estimated useful life of the asset.
Share-Based Compensation
The Company has equity incentive plans under which non-qualified stock options and restricted stock units (RSUs)RSUs have been granted to employees and non-employee members of the Board of Directors. The Company uses RSUs as its primary equity incentive compensation instrument for employees. The Company also has employee stock purchase plans for eligible employees. Share-based compensation cost is measured on the grant date based on the fair market value of the Company’s common stock discounted for expected future dividends and is recognized as expense on a straight-line basis over the requisite service periods.
If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate or increase any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that the Company grants additional equity awards to employees or it assumes unvested equity awards in connection with acquisitions.
During fiscal 2017, the Company elected to early adopt ASU 2016-09-Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting (Topic 718). See "Recently Adopted Accounting Pronouncements" for additional information on the new guidance.Table of ContentsConcentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investments in debt securities and trade receivables. Investments in debt securities with original maturities of greater than six months consist primarily of AAA and AA rated financial instruments and counterparties. The Company's investments are primarily in direct obligations of the U.S. government or its agencies, corporate bonds, and municipal bonds.
Concentrations of credit risk with respect to accounts receivable are generally not significant due to the diversity of the Company's customers and geographic sales areas. The Company sells its products primarily to OEMs and distributors in the Americas, Europe and Asia. The Company performs ongoing credit evaluations of its customers' financial condition and, as deemed necessary, may require collateral, primarily letters of credit.
Distributor advances in the consolidated balance sheets, totaled $170.7$104.8 million and $203.9$141.0 million at March 31, 20192021 and March 31, 2018,2020, respectively. On sales to distributors, the Company's payment terms generally require the distributor to settle amounts owed to the Company for an amount in excess of their ultimate cost. The Company's sales price to its distributors may be higher than the amount that the distributors will ultimately owe the Company because distributors often negotiate price
reductions after purchasing the products from the Company and such reductions are often significant. It is the Company's practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle receivable balances, on a current basis, generally within 30 days, for amounts originally invoiced. This practice has an adverse impact on the working capital of the Company's distributors. As such, the Company has entered into agreements with certain distributors whereby it advances cash to the distributors to reduce the distributors' working capital requirements. These advances are reconciled at least on a quarterly basis and are estimated based on the amount of ending inventory as reported by the distributor multiplied by a negotiated percentage. Such advances have no impact on revenue recognition or the Company's consolidated statements of income. The Company processes discounts taken by distributors against its deferred income on shipments to distributors' balance and trues-up the advanced amounts generally after the end of each completed fiscal quarter. The terms of these advances are set forth in binding legal agreements and are unsecured, bear no interest on unsettled balances and are due upon demand. The agreements governing these advances can be canceled by the Company at any time.
Use of Estimates
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare its consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles.GAAP. Actual results could differ from those estimates.
Business Segments
Operating segments are components of an enterprise about which separate financial information is regularly reviewed by the chief operating decision makers ("CODMs")maker (CODM) to assess the performance of the component and make decisions about the resources to be allocated to the component. The Company's ChairmanPresident and Chief Executive Officer and the Company's President and Chief Operating Officer havehas been identified as the CODMs as they jointly manage the Company's worldwide consolidated enterprise.CODM. Based on the Company's structure and manner in which the Company is managed and decisions are made, the Company's business is made up of two2 operating segments, semiconductor products and technology licensing.
In the semiconductor products segment, the Company designs, develops, manufactures and markets microcontrollers, development tools and analog, interface, mixed-signal, timing, wired and wireless connectivity devices, and memory products. Under the leadership of the CODMs,CODM, the Company is structured and organized around standardized roles and responsibilities based on product groups and functional activities. The Company's product groups are responsible for product research, design and development. The Company's functional activities include sales, marketing, manufacturing, information technology, human resources, legal and finance.
The Company's product groups have similar products, production processes, types of customers and methods for distribution. In addition, the tools and technologies used in the design and manufacture of the Company's products are shared among the various product groups. The Company's product group leaders, under the direction of the CODMs,CODM, define the product roadmaps and team with sales personnel to achieve design wins and revenue and other performance targets. Product group leaders also interact with manufacturing and operational personnel who are responsible for the production, prioritization and planning of the Company's manufacturing capabilities to help ensure the efficiency of the Company's operations and fulfillment of customer requirements. This centralized structure supports a global operating strategy in which the CODMs assessCODM assesses performance and allocateallocates resources based on the Company's consolidated results.
Subsequent Events
The Company evaluated events after March 31, 2021, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
Recently Adopted Accounting Pronouncements
On April 1, 2018, theThe Company adopted ASU 2014-09-Revenue from Contracts with Customers (ASC 606) and all related amendments (“New Revenue Standard”) using the modified retrospective method. The Company has applied the new revenue standard to all contracts that were entered into after adoption and to all contracts that were open asfollowing Accounting Standards Updates in fiscal 2021, none of the initial date of adoption. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the new standard impacts the Company's net sales on an ongoing basis depending on the relative amount of revenue sold through its distributors, the change in inventory held by its distributors, and the changes in price concessions granted to its distributors. Previously, the Company deferred revenue and cost of sales on shipments to distributors until the distributor sold the product to their end customer. As required by the new revenue standard, the Company no longer defers revenue and cost of sales, but rather, estimates the effects of returns and allowances provided to distributors and records revenue at the time of sale to the distributor. Sales to non-distributor customers, under both the previous and new revenue standards, are generally recognized upon the Company’s shipment of the product. The cumulative effect of the changes made to the consolidated April 1, 2018 balance sheet for the adoption of the new revenue standard is summarized in the table of opening balance sheet adjustments below. In accordance with the new revenue standard
requirements, the disclosure of the impact of adoption on the consolidated income statement and balance sheet for the period ended March 31, 2019 was as follows (in millions):
|
| | | | | | | | | | | | |
| Income Statement | | For the year ended March 31, 2019 |
| | As reported | | Balances without adoption of New Revenue Standard | | Effect of Change Higher / (Lower) |
| Net sales | | $ | 5,349.5 |
| | $ | 5,380.1 |
| | $ | (30.6 | ) |
| Cost of sales | | $ | 2,418.2 |
| | $ | 2,434.0 |
| | $ | (15.8 | ) |
| Gross profit | | $ | 2,931.3 |
| | $ | 2,946.1 |
| | $ | (14.8 | ) |
| Income before income taxes | | $ | 204.5 |
| | $ | 219.3 |
| | $ | (14.8 | ) |
| Income tax (benefit) provision | | $ | (151.4 | ) | | $ | (149.0 | ) | | $ | (2.4 | ) |
| Net income from continuing operations | | $ | 355.9 |
| | $ | 368.3 |
| | $ | (12.4 | ) |
|
| | | | | | | | | | | | |
| Balance Sheet | | As of March 31, 2019 |
| | As reported | | Balances without adoption of New Revenue Standard | | Effect of Change Higher / (Lower) |
| ASSETS | | | | | | |
| Accounts receivable, net | | $ | 880.6 |
| | $ | 556.1 |
| | $ | 324.5 |
|
| Inventories | | $ | 711.7 |
| | $ | 724.2 |
| | $ | (12.5 | ) |
| Other current assets | | $ | 191.6 |
| | $ | 154.7 |
| | $ | 36.9 |
|
| Other assets | | $ | 111.8 |
| | $ | 106.3 |
| | $ | 5.5 |
|
| Long-term deferred tax assets | | $ | 1,677.2 |
| | $ | 1,700.7 |
| | $ | (23.5 | ) |
| | | | | | | |
| LIABILITIES | | | | | | |
| Accrued liabilities | | $ | 787.3 |
| | $ | 420.3 |
| | $ | 367.0 |
|
| Deferred income on shipments to distributors | | $ | — |
| | $ | 288.2 |
| | $ | (288.2 | ) |
| Long-term deferred tax liability | | $ | 706.1 |
| | $ | 689.3 |
| | $ | 16.8 |
|
| | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | |
| Retained Earnings | | $ | 3,210.6 |
| | $ | 2,975.3 |
| | $ | 235.3 |
|
The significant changes in the financial statements noted in the table above are primarily due to the transition from sell-through revenue recognition to sell-in revenue recognition as required by the New Revenue Standard, which eliminated the balance of deferred income on shipments to distributors, significantly reduced accounts receivable, and significantly increased retained earnings. Prior to the acquisition of Microsemi, Microsemi already recognized revenue on a sell-in basis, so the impact of the adoption of the New Revenue Standard was primarily driven by Microchip's historical business excluding Microsemi.
During the three months ended June 30, 2018, the Company adopted ASU 2016-01-Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard requires available-for-sale equity investments to be measured at fair value with changes in fair value recognized in net income. The adoption of this standard did not havehad a material impact on the Company'sits consolidated financial statements.
During the three months ended June 30, 2018, the Company adopted ASU 2016-16-Intra-Entity Transfers of Assets Other Than Inventory. This standard addresses the recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset other than inventory. This standard has been applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The adoption of this standard resulted in a cumulative-effect increase in the Company's deferred tax assets of approximately $1.58 billion, a decrease to the Company's deferred tax
liabilities of $1.1 million, a decrease to other assets of $24.1 million, and a decrease of $1.7 million to other long-term liabilities.
During the three months ended June 30, 2018, the Company adopted ASU 2016-18-Statement of Cash Flows: Restricted Cash. This standard requires that the statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard has been applied using a retrospective transition method to each period presented. The adoption of this standard did not have a material impact on the Company's financial statements.
The following table summarizes the opening balance sheet adjustments related to the adoption of the New Revenue Standard, ASU 2016-01-Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2016-16-Intra-Entity Transfers of Assets Other Than Inventory (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Balance as of | | Adjustments from | | Balance as of |
| | | March 31, 2018 | | ASC 606 | | ASU 2016-01 | | ASU 2016-16 | | April 1, 2018 |
| ASSETS | | | | | | | | | | |
| Accounts receivable, net | | $ | 563.7 |
| | $ | 340.1 |
| | $ | — |
| | $ | — |
| | $ | 903.8 |
|
| Inventories | | $ | 476.2 |
| | $ | (5.1 | ) | | $ | — |
| | $ | — |
| | $ | 471.1 |
|
| Other current assets | | $ | 119.8 |
| | $ | 17.2 |
| | $ | — |
| | $ | — |
| | $ | 137.0 |
|
| Long-term deferred tax assets | | $ | 100.2 |
| | $ | (23.1 | ) | | $ | — |
| | $ | 1,579.4 |
| | $ | 1,656.5 |
|
| Other assets | | $ | 71.8 |
| | $ | — |
| | $ | — |
| | $ | (24.1 | ) | | $ | 47.7 |
|
| | | | | | | | | | | |
| LIABILITIES | | | | | | | | | | |
| Accrued liabilities | | $ | 229.6 |
| | $ | 404.2 |
| | $ | — |
| | $ | — |
| | $ | 633.8 |
|
| Deferred income on shipments to distributors | | $ | 333.8 |
| | $ | (333.8 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Long-term deferred tax liability | | $ | 205.8 |
| | $ | 16.8 |
| | $ | — |
| | $ | (1.1 | ) | | $ | 221.5 |
|
| Other long-term liabilities | | $ | 240.9 |
| | $ | — |
| | $ | — |
| | $ | (1.7 | ) | | $ | 239.2 |
|
| | | | | | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | | | | | |
| Accumulated other comprehensive loss | | $ | (17.6 | ) | | $ | — |
| | $ | (1.7 | ) | | $ | — |
| | $ | (19.3 | ) |
| Retained earnings | | $ | 1,397.3 |
| | $ | 241.9 |
| | $ | 1.7 |
| | $ | 1,558.1 |
| | $ | 3,199.0 |
|
| | | | | | | | |
| Accounting Standards Updates | | Description |
| ASU 2020-04 | | Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting |
| ASU 2018-15 | | Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract |
| ASU 2018-13 | | Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement |
| ASU 2017-04 | | Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment |
| ASU 2016-13 | | Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2017,2020, the FASB issued ASU 2017-12-2020-06-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting- Contracts in Entity's Own Equity, which simplifies the guidance for Hedging Activities. The update expands an entity's ability to apply hedgecertain convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, convertible debt instruments will be reported as a single liability instrument with no separate accounting for nonfinancial and financial risk components and allows for a simplified approach for fair value hedging of interest rate risk. The update eliminates the need to separately measure and report hedge ineffectiveness and generallyembedded conversion features. Additionally, ASU 2020-06 requires the entire change in fair valueapplication of a hedging instrument tothe if-converted method for calculating diluted earnings per share and the treasury stock method will be presented in the same income statement line as the hedged item. Additionally, the update simplifies the hedge documentation and effectiveness assessment requirements under the previous guidance.no longer available. The effective dateprovisions of this standard isASU 2020-06 are applicable for fiscal years beginning after December 15, 2018 and2021, with early adoption is permitted. Adoptionpermitted no earlier than fiscal years beginning after December 15, 2020. The Company expects the primary impacts of this new standard will be applied through a cumulative-effect adjustmentto increase the carrying value of its Convertible Debt and reduce its reported interest expense. In addition, the Company will be required to use the if-converted method for cash flow and net investment hedges existing at the date of adoption and prospectively for presentation and disclosure.calculating diluted earnings per share. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In January 2017,December 2019, the FASB issued ASU 2017-04-2019-12-Intangibles - Goodwill and OtherIncome Taxes (Topic 350)740): Simplifying the TestAccounting for Goodwill ImpairmentIncome Taxes., which This guidance enhances and simplifies various aspects of the income tax accounting, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intraperiod tax allocation exception to the incremental approach, ownership changes in investments, interim-period accounting for goodwill impairment.enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendment isamendments are effective for annual periods and interim periods within those annual periods,public business entities for fiscal years beginning after December 15, 2019, and early2020, including interim periods therein. Early adoption is permitted. The Company does not expect this standard to have an impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13-Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which required waiting to recognize a loss until it is probable of having been incurred. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually and can include forecasted information. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU 2016-13 is effective forpermitted, including adoption in interim andor annual periods beginning after December 15, 2019, and permits early adoption, butfor which financial statements have not before December 15, 2018. The standard is to be applied using a modified retrospective approach.yet been issued. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02-Leases. This standard requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company will adopt Topic 842 using the retrospective cumulative effect adjustment transition method and record a cumulative effect adjustment as of the adoption date. The Company currently plans to apply the package of practical expedients to leases that commenced before the effective date whereby the Company will elect to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company is continuing to assess the potential impacts of the new leasing standard. The Company expects the adoption of this standard will result in the inclusion of a significant component of the Company’s future minimum lease commitments, as disclosed in Note 17 on its consolidated balance sheets, as right-of-use assets and lease liabilities with no material impact to its consolidated statements of income and comprehensive income.
Note 2. Business Acquisitions
Acquisition of Microsemi
On May 29, 2018, the Company completed its acquisition of Microsemi Corporation, a publicly traded company headquartered in Aliso Viejo, California. The Company paid an aggregate of approximately $8.19 billion in cash to the stockholders of Microsemi. The total consideration transferred in the acquisition, including approximately $53.9 million of non-cash consideration for the exchange of certain share-based payment awards of Microsemi for stock awards of the Company, was approximately $8.24 billion. In addition to the consideration transferred, the Company recognized in its consolidated financial statements $3.23 billion in liabilities of Microsemi consisting of debt, taxes payable and deferred, restructuring, and contingent and other liabilities of which $2.06 billion of existing debt was paid off. The Company financed the purchase price using approximately $8.10 billion of borrowings consisting of $3.10 billion under its amended and restated revolving line of credit (the "RevolvingRevolving Credit Facility"),Facility, $3.00 billion of term loans ("under its Term Loan Facility")Facility provided under the Company's amended and restated credit agreement (the "Credit Agreement"),Credit Agreement, and $2.00 billion in newly issued senior secured notes. The Company incurred $22.0 million in acquisition costs related to the acquisition. As a result of the acquisition, Microsemi became a wholly owned subsidiary of the Company. Microsemi offers a comprehensive portfolio of semiconductor and system solutions for aerospace and defense,
communications, data center and industrial markets. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Microsemi have been included in the Company's consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Microsemi's net tangible assets and intangible assets based on their estimated fair values as of May 29, 2018. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's semiconductor products reporting segment. NoneNaNne of the goodwill related to the Microsemi acquisition is deductible for tax purposes. The Company retained independent third-party appraisers to assist management in its valuation of the acquired assets and liabilities.
The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (in millions).
| | | | | | | | | |
| | | | | |
| Assets Acquired |
| Cash and cash equivalents | | | | | $ | 340.0 | |
| Accounts receivable | | | | | 215.6 | |
| Inventories | | | | | 576.2 | |
| Other current assets | | | | | 85.2 | |
| | | | | |
| Property, plant and equipment | | | | | 201.5 | |
| Goodwill | | | | | 4,364.9 | |
| Purchased intangible assets | | | | | 5,634.5 | |
| Long-term deferred tax assets | | | | | 5.9 | |
| Other assets | | | | | 53.3 | |
| Total assets acquired | | | | | 11,477.1 | |
| | | | | |
| Liabilities Assumed |
| Accounts payable | | | | | (233.8) | |
| Other current liabilities | | | | | (149.3) | |
| Long-term debt | | | | | (2,056.9) | |
| Deferred tax liabilities | | | | | (565.1) | |
| Long-term income tax payable | | | | | (177.7) | |
| Other long-term liabilities | | | | | (49.8) | |
| Total liabilities assumed | | | | | (3,232.6) | |
| Purchase price allocated | | | | | $ | 8,244.5 | |
|
| | | | | | | | | | | |
| | Previously reported December 31, 2018 | | Adjustments | | March 31, 2019 |
| Assets acquired | | | | | |
| Cash and cash equivalents | $ | 340.0 |
| | $ | — |
| | $ | 340.0 |
|
| Accounts receivable | 216.1 |
| | (0.5 | ) | | 215.6 |
|
| Inventories | 571.5 |
| | 4.7 |
| | 576.2 |
|
| Other current assets | 85.2 |
| | — |
| | 85.2 |
|
| Property, plant and equipment | 201.9 |
| | (0.4 | ) | | 201.5 |
|
| Goodwill | 4,483.0 |
| | (118.1 | ) | | 4,364.9 |
|
| Purchased intangible assets | 5,466.9 |
| | 167.6 |
| | 5,634.5 |
|
| Long-term deferred tax assets | 6.0 |
| | (0.1 | ) | | 5.9 |
|
| Other assets | 57.2 |
| | (3.9 | ) | | 53.3 |
|
| Total assets acquired | 11,427.8 |
| | 49.3 |
| | 11,477.1 |
|
| | | | | | |
| Liabilities assumed | | | | | |
| Accounts payable | (233.8 | ) | | — |
| | (233.8 | ) |
| Other current liabilities | (169.4 | ) | | 20.1 |
| | (149.3 | ) |
| Long-term debt | (2,056.9 | ) | | — |
| | (2,056.9 | ) |
| Deferred tax liabilities | (604.7 | ) | | 39.6 |
| | (565.1 | ) |
| Long-term income tax payable | (87.2 | ) | | (90.5 | ) | | (177.7 | ) |
| Other long-term liabilities | (31.3 | ) | | (18.5 | ) | | (49.8 | ) |
| Total liabilities assumed | (3,183.3 | ) | | (49.3 | ) | | (3,232.6 | ) |
| Purchase price allocated | $ | 8,244.5 |
| | $ | — |
| | $ | 8,244.5 |
|
|
| | | | | |
| Purchased Intangible Assets | Weighted Average | | |
| | Useful Life | | May 29, 2018 |
| | (in years) | | (in millions) |
| Core and developed technology | 15 | | $ | 4,569.1 |
|
| In-process research and development | — | | 847.1 |
|
| Customer-related | 12 | | 200.2 |
|
| Backlog | 1 | | 12.3 |
|
| Other | 4 | | 5.8 |
|
| Total purchased intangible assets | | | $ | 5,634.5 |
|
| | | | | | | | | | | | | | |
| | Weighted Average Useful Life
(in years) | | May 29, 2018
(in millions) |
| Purchased Intangible Assets | | |
| Core and developed technology | | 15 | | $ | 4,569.1 | |
| In-process research and development | | — | | 847.1 | |
| Customer-related | | 12 | | 200.2 | |
| Backlog | | 1 | | 12.3 | |
| Other | | 4 | | 5.8 | |
| Total purchased intangible assets | | | | $ | 5,634.5 | |
Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles, acquisition-date backlog and other intangible assets.
The estimated fair values of the core and developed technology and in-process research and development are beingwere determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized in a manner based on the expected cash flows used in the initial determination of fair value.
In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.
Customer-related intangible assets consist of Microsemi's contractual relationships and customer loyalty related to its distributor and end-customer relationships. The fair values of the customer-related intangibles were determined using the distributor method, a form of the income approach based on distributor margin and expected attrition and revenue growth for Microsemi's existing customers as of the acquisition date. Customer relationships are being amortized in a manner based on the estimated cash flows associated with the existing customers and anticipated retention rates.
Backlog relates to the value of orders not yet shipped by Microsemi at the acquisition date, and the fair values are beingwere determined based on the estimated profit associated with those orders. Backlog related assets have a one year useful life and are being amortized on a straight-line basis over that period.
The total weighted average amortization period of intangible assets acquired as a result of the Microsemi transaction is 13 years. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $856.7 million was established as a net deferred tax liability for the future amortization of the intangible assets.
The amount of Microsemi net sales and net loss included in the Company's consolidated statements of income for the fiscal year ended March 31, 2019 was approximately $1,568.6 million and $570.8 million, respectively.
The following unaudited pro-forma consolidated results of operations for the fiscal year ended March 31, 2019 and 2018 assume the closing of the Microsemi acquisition occurred as of April 1, 2017. The pro-forma adjustments are mainly comprised of acquired inventory fair value costs and amortization of purchased intangible assets. The pro-forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2017 or of results that may occur in the future (in millions except per share data):
|
| | | | | | | |
| | Year Ended March 31, |
| | 2019 | | 2018 |
| Net sales | $ | 5,563.7 |
| | $ | 5,875.0 |
|
| Net income (loss) | $ | 542.0 |
| | $ | (762.3 | ) |
| Basic net income (loss) per common share | $ | 2.29 |
| | $ | (3.27 | ) |
| Diluted net income (loss) per common share | $ | 2.17 |
| | $ | (3.27 | ) |
Acquisition of Atmel
On April 4, 2016, the Company acquired Atmel, a publicly traded company based in San Jose, California. The Company paid an aggregate of approximately $2.98 billion in cash and issued an aggregate of 10.1 million shares of its common stock to Atmel stockholders valued at $486.1 million based on the closing price of the Company's common stock on April 4, 2016 and incurred transaction and other fees of approximately $14.9 million. The total consideration transferred in the acquisition, including approximately $7.5 million of non-cash consideration for the exchange of certain share-based payment awards of Atmel for stock awards of the Company, was approximately $3.47 billion. In addition to the consideration transferred, the Company recognized in its consolidated financial statements $653.0 million in liabilities of Atmel consisting of debt, taxes payable and deferred, pension obligations, restructuring, and contingent and other liabilities. The Company financed the cash portion of the purchase price using approximately $2.04 billion of cash held by certain of its foreign subsidiaries and approximately $0.94 billion from additional borrowings under its existing credit agreement. As a result of the acquisition, Atmel became a wholly owned subsidiary of the Company. Atmel is a worldwide leader in the design and manufacture of microcontrollers, capacitive touch solutions, advanced logic, mixed-signal, nonvolatile memory and radio frequency components. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Atmel have been included in the Company's consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Atmel's net tangible assets and intangible assets based on their estimated fair values as of April 4, 2016. The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's
semiconductor products reporting segment. None of the goodwill related to the Atmel acquisition is deductible for tax purposes. The Company retained independent third-party appraisers to assist management in its valuation.
The table below represents the allocation of the final purchase price to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (amounts in millions).
|
| | | | |
| Assets acquired | | |
| Cash and cash equivalents | | $ | 230.2 |
|
| Accounts receivable | | 141.4 |
|
| Inventories | | 335.1 |
|
| Prepaid expenses and other current assets | | 28.4 |
|
| Assets held for sale | | 32.0 |
|
| Property, plant and equipment | | 129.9 |
|
| Goodwill | | 1,286.4 |
|
| Purchased intangible assets | | 1,888.4 |
|
| Long-term deferred tax assets | | 46.7 |
|
| Other assets | | 7.5 |
|
| Total assets acquired | | 4,126.0 |
|
| | | |
| Liabilities assumed | | |
| Accounts payable | | (55.7 | ) |
| Other current liabilities | | (121.0 | ) |
| Long-term line of credit | | (192.0 | ) |
| Deferred tax liabilities | | (27.5 | ) |
| Long-term income tax payable | | (115.1 | ) |
| Other long-term liabilities | | (141.7 | ) |
| Total liabilities assumed | | (653.0 | ) |
| Purchase price allocated | | $ | 3,473.0 |
|
|
| | | | | |
| Purchased Intangible Assets | Weighted Average | | |
| | Useful Life | | April 4, 2016 |
| | (in years) | | (in millions) |
| Core and developed technology | 11 | | $ | 1,075.0 |
|
| In-process research and development | — | | 140.7 |
|
| Customer-related | 6 | | 630.6 |
|
| Backlog | 1 | | 40.3 |
|
| Other | 5 | | 1.8 |
|
| Total purchased intangible assets | | | $ | 1,888.4 |
|
Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles, acquisition-date backlog and other intangible assets. The estimated fair values of the core and developed technology and in-process research and development were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized in a manner based on the expected cash flows used in the initial determination of fair value. In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Customer-related intangible assets consist of Atmel's contractual relationships and customer loyalty related to its distributor and end-customer relationships, and the fair values of the customer-related intangibles were determined based on Atmel's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from Atmel's historical customer information. Customer relationships are being amortized in a manner based on the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by Atmel at the acquisition date, and the fair values were based on the estimated profit associated with those orders. Backlog related assets had a one year useful life and were being amortized on a straight-
line basis over that period. The total weighted average amortization period of intangible assets acquired as a result of the Atmel transaction is 9 years. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $178.1 million was established as a net deferred tax liability for the future amortization of the intangible assets.
Note 3. Net Sales
The following table represents the Company's net sales by product line (in millions):
|
| | | |
| | Year Ended |
| | March 31, 2019 |
| Microcontrollers | $ | 2,921.9 |
|
| Analog, interface, mixed signal and timing products | 1,530.7 |
|
| Field-programmable gate array products | 303.8 |
|
| Memory products | 184.0 |
|
| Technology licensing | 132.4 |
|
| Multi-market and other | 276.7 |
|
| Total net sales | $ | 5,349.5 |
|
All of the product lines listed above are included in the Company's Semiconductor Product segment with the exception of Technology Licensing, which belongs to the Technology Licensing segment.
The following table represents the Company's net sales by contract type (in millions).
|
| | | |
| | Year Ended |
| | March 31, 2019 |
| Distributors | $ | 2,719.1 |
|
| Direct customers | 2,498.0 |
|
| Licensees | 132.4 |
|
| Total net sales | $ | 5,349.5 |
|
Distributors are customers that buy products with the intention of reselling them. Distributors generally have a distributor agreement with the Company to govern the terms of the relationship. Direct customers are non-distributor customers, which generally do not have a master sales agreement with the Company. The Company's direct customers primarily consist of original equipment manufacturers (OEMs) and, to a lesser extent, contract manufacturers. Licensees are customers of the Company's Technology Licensing segment, which include purchasers of intellectual property and customers that have licensing agreements to use the Company's SuperFlash® embedded flash and Smartbits® one time programmable NVM technologies. All of the contract types listed in the table above are included in the Company's Semiconductor Product segment with the exception of Licensees, which belong to the Technology Licensing segment.
Substantially all of the Company's net sales are recognized from contracts with customers, and therefore, subject to the new revenue recognition standard.
Semiconductor Product Segment
For contracts related to the purchase of semiconductor products, the Company satisfies its performance obligation when control of the ordered product transfers to the customer. The timing of the transfer of control depends on the agreed upon shipping terms with the customer, but generally occurs upon shipment, which is when physical possession of the product has been transferred and legal title of the product transfers to the customer. Payment is generally due within 30 days of the ship date. Payment is generally collected after the Company satisfies its performance obligation, therefore contract liabilities are uncommon. Also, the Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a
contract asset. Refer to Note 8 for the opening and closing balances of the Company's receivables. As contracts with customers generally have an expected duration of one year or less, the balance of open performance obligations as of period end that will be recognized as revenue subsequent to March 31, 2020 is immaterial.
Generally, there is only a single performance obligation in the Company's contracts with customers for semiconductor products; as such, the entire transaction price is allocated to the single performance obligation and allocation of the transaction price to individual performance obligations is not necessary. The consideration received from customers is fixed, with the exception of consideration from certain distributors. Certain of the Company's distributors are granted price concessions and return rights, which result in variable consideration. The amount of revenue recognized for sales to these certain distributors is adjusted for estimates of the price concessions and return rights that are expected to be claimed. These estimates are based on the recent history of price concessions and stock rotations.
Technology Licensing Segment
The technology licensing segment includes sales and licensing of the Company's intellectual property. For contracts related to the sale of the Company's intellectual property, the Company satisfies its performance obligation and recognizes revenue when control of the intellectual property transfers to the customer. For contracts related to the licensing of the Company's technology, the Company satisfies its performance obligation and recognizes revenue as usage of the license occurs. The transaction price is fixed by the license agreement. Payment is collected after the Company satisfies its performance obligation, and therefore no contract liabilities are recorded. The Company does not record contract assets due to the fact that the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, the Company recognizes a receivable instead of a contract asset. Refer to Note 8 for the opening and closing balances of the Company's receivables.
Note 4.3. Special Charges and Other, Net
The following table summarizes activity included in the "special charges and other, net" caption on the Company's consolidated statements of income (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2021 | | 2020 | | 2019 | | | | | | | | |
| Restructuring | | | | | | | | | | | | | |
| Employee separation costs | $ | (1.3) | | | $ | 6.0 | | | $ | 65.3 | | | | | | | | | |
| Gain on sale of assets | (5.8) | | | (1.5) | | | 0 | | | | | | | | | |
| Impairment charges | 0 | | | 0.7 | | | 3.6 | | | | | | | | | |
| Contract exit costs | (1.6) | | | 5.2 | | | (4.7) | | | | | | | | | |
| Wafer fabrication restructuring | 15.0 | | | 18.0 | | | 0 | | | | | | | | | |
| Other | 0.1 | | | 2.6 | | | (0.3) | | | | | | | | | |
| Legal contingencies | 0.2 | | | 15.7 | | | (30.2) | | | | | | | | | |
| | | | | | | | | | | | | |
| Contingent consideration revaluation | (4.9) | | | 0 | | | 0 | | | | | | | | | |
| | | | | | | | | | | | | |
| Total | $ | 1.7 | | | $ | 46.7 | | | $ | 33.7 | | | | | | | | | |
|
| | | | | | | | | | | |
| | For The Years Ended March 31, |
| | 2019 | | 2018 | | 2017 |
| Restructuring | | | | | |
| Employee separation costs | $ | 65.3 |
| | $ | 1.2 |
| | $ | 39.1 |
|
| Gain on sale of assets | — |
| | (4.4 | ) | | — |
|
| Impairment charges | 3.6 |
| | — |
| | 12.6 |
|
| Contract exit costs | (4.7 | ) | | 0.7 |
| | 44.1 |
|
| Other | (0.3 | ) | | — |
| | 2.8 |
|
| Legal contingencies | (30.2 | ) | | — |
| | — |
|
| Non-restructuring contract exit costs and other | — |
|
| 20.0 |
|
| — |
|
| Total | $ | 33.7 |
| | $ | 17.5 |
| | $ | 98.6 |
|
The Company continuously evaluates its existing operations in an attempt to identify and realize cost savings opportunities and operational efficiencies. This same approach is applied to businesses that are acquired by the Company and often the operating models of acquired companies are not as efficient as the Company's operating model which enables the Company to realize significant savings and efficiencies. As a result, following an acquisition, the Company will from time to time incur restructuring expenses; however, the Company is often not able to estimate the timing or amount of such costs in advance of the period in which they occur. The primary reason for this is that the Company regularly reviews and evaluates each position, contract and expense against the Company's strategic objectives, long-term operating targets and other operational priorities. Decisions related to restructuring activities are made on a "rolling basis" during the course of the integration of an acquisition whereby department managers, executives and other leaders work together to evaluate each of these expenses and make recommendations. As a result of this approach, at the time of an acquisition, the Company is not able to estimate the future amount of expected employee separation or exit costs that it will incur in connection with its restructuring activities.
The Company'sDuring the fiscal year ended March 31, 2021, the Company incurred net costs of $15.0 million associated with restructuring expensescertain of its wafer fabrication operations consisting of $8.0 million to re-purpose its Colorado Springs (Fab 5) facility and $7.0 million associated with restructuring other acquired operations compared to net costs of $18.0 million during the fiscal year ended March 31, 2020 to re-purpose its Fab 5 facility, primarily consisting of $8.2 million in contract exit costs, $6.6 million in other relocation costs and $2.5 million in asset impairment charges. These wafer fabrication restructuring efforts were substantially completed as of March 31, 2021. The Company's other restructuring activities during the fiscal years ended March 31, 2021, March 31, 2020 and March 31, 2019 were primarily related to the Company's most recent business acquisitions, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. These expenses were for employee separation costs and intangible asset impairment charges. The impairment charges in the fiscal year ended March 31, 2019 were primarily recognized as a result of writing off intangible assets purchased from Microsemi prior to the close of the acquisition and other intangible assets that were impaired as a result of changes in the combined product roadmaps after the acquisition that affected the use and life of the assets. Additional costs will be incurred in the future as additional synergies or operational efficiencies are identified in connection with the Microsemi transaction, and other previous acquisitions.acquisitions, or the restructuring of wafer fabrication operations. The Company is not able to estimate the amount of other such future expenses at this time.
During the fiscal 2018,year ended March 31, 2020, the Company incurred expenses including non-restructuring contract exit costs of $19.5 million for fees associated with transitioning from the public utility provider in Oregon to a lower cost direct access provider. The fee is paid monthly and will depend on the amount of actual energy consumed by the Company's wafer fabrication facility in Oregon over the next five years. In connection with the transition to a direct access provider, the Company signed a ten-year supply agreement to purchase monthly amounts of energy that are less than the current average usage and priced on a per mega watt hour published index rate in effect at those future dates. Also during fiscal 2018, the Company incurred $1.2$15.7 million of employee separation costs in connection with the acquisition of Atmel.
The Company's restructuring expenses during fiscal 2017 werenet charges related to legal settlements, for which the Company's acquisitionsmajority of Atmel and Micrel, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. These expenses were for employee separation costs, contract exit costs, other operating expenses and intangible asset impairment losses. The impairment charges in fiscal 2017 were recognized as a result of changesthe cash settlement occurred early in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets. Atfiscal year ended March 31, 2017, these activities were substantially complete.2021.
All of the Company's restructuring activities occurred in its semiconductor products segment. The Company incurred $115.2$71.2 million in costs since the start of the fiscal 2016year ended March 31, 2018 in connection with employee separation activities net of which$1.3 million in credits during the fiscal year ended March 31, 2021 and $6.0 million and $65.3 million $1.2 million and $39.1 million waswere incurred during the fiscal years ended March 31, 2019, 20182020 and 2017,2019, respectively. The Company could incur future expenses as additional synergies or operational efficiencies are identified. TheBeyond what is already accrued, the Company is not able to estimate future expenses, if any, to be incurred in employee separation costs. The Company has incurred $40.8$0.4 million in costsnet credits in connection with contract exit activities since the start of fiscal 2016 which includes $4.7 million of income incurred for the year ended March 31, 2019 and $0.7 million and $44.1 million of costs incurred for the years ended March 31, 2018 and 2017, respectively. The amounts recognized during the fiscal year ended March 31, 2019 were primarily related to vacated lease liabilities. While the Company expects to incur further acquisition-related contract exit expenses, it is not able to estimate the amount at this time.
In the three months ended June 30, 2017, the Company completed the sale2018 which includes net credits of an asset it acquired as part of its acquisition of Micrel for proceeds of $10.0$1.6 million and $4.7 million for the gainfiscal years ended March 31, 2021 and March 31, 2019, respectively, compared to expense of $4.4$5.2 million is included infor the gain on sale of assets in the above table.fiscal year ended March 31, 2020.
The following is a roll forward of accrued restructuring charges for fiscal 2019 and fiscal 2018 (in millions):
|
| | | | | | | | | | | | | | | |
| | Restructuring | | Non-Restructuring | | |
| | Employee Separation Costs | | Exit Costs | | Exit Costs | | Total |
| Balance at March 31, 2017 | $ | 5.4 |
| | $ | 34.8 |
| | $ | — |
| | $ | 40.2 |
|
| Charges | 1.2 |
| | 0.7 |
| | 20.0 |
| | 21.9 |
|
| Payments | (5.9 | ) | | (9.2 | ) | | (0.9 | ) | | (16.0 | ) |
| Non-cash - Other | (0.2 | ) | | 1.0 |
| | — |
| | 0.8 |
|
| Changes in foreign exchange rates | 0.3 |
| | — |
| | — |
| | 0.3 |
|
| Balance at March 31, 2018 | 0.8 |
| | 27.3 |
| | 19.1 |
| | 47.2 |
|
| Additions due to Microsemi acquisition | 10.4 |
| | 9.0 |
| | — |
| | 19.4 |
|
| Charges | 48.9 |
| | (4.7 | ) | | — |
| | 44.2 |
|
| Payments | (47.1 | ) | | (13.1 | ) | | (4.1 | ) | | (64.3 | ) |
| Non-cash - Other | — |
| | 0.7 |
| | 0.7 |
| | 1.4 |
|
| Changes in foreign exchange rates | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| Balance at March 31, 2019 | $ | 12.9 |
| | $ | 19.2 |
| | $ | 15.7 |
| | $ | 47.8 |
|
| Current | | | | | | | $ | 26.9 |
|
| Non-current | | | | | | | 20.9 |
|
| Total | | | | | | | $ | 47.8 |
|
The liability for restructuring and other exit costs of $47.8$15.9 million is included in accrued liabilities and other long-term liabilities, on the Company's consolidated balance sheets as of March 31, 2019.2021.
Note 4. Net Sales
The following table represents the Company's net sales by product line (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2021 | | 2020 | | 2019 | | | | | | | | |
| Microcontrollers | $ | 2,961.0 | | | $ | 2,817.9 | | | $ | 2,921.9 | | | | | | | | | |
| Analog | 1,519.8 | | | 1,511.1 | | | 1,530.7 | | | | | | | | | |
| | | | | | | | | | | | | |
| Other | 957.6 | | | 945.2 | | | 896.9 | | | | | | | | | |
| Total net sales | $ | 5,438.4 | | | $ | 5,274.2 | | | $ | 5,349.5 | | | | | | | | | |
The product lines listed above are included entirely in the Company's semiconductor product segment with the exception of the other product line, which includes products from both the semiconductor product and technology licensing segments.
The following table represents the Company's net sales by contract type (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2021 | | 2020 | | 2019 | | | | | | | | |
| Distributors | $ | 2,737.4 | | | $ | 2,626.9 | | | $ | 2,719.1 | | | | | | | | | |
| Direct customers | 2,598.1 | | | 2,550.4 | | | 2,498.0 | | | | | | | | | |
| Licensees | 102.9 | | | 96.9 | | | 132.4 | | | | | | | | | |
| Total net sales | $ | 5,438.4 | | | $ | 5,274.2 | | | $ | 5,349.5 | | | | | | | | | |
Distributors are customers that buy products with the intention of reselling them. Distributors generally have a distributor agreement with the Company to govern the terms of the relationship. Direct customers are non-distributor customers, which generally do not have a master sales agreement with the Company. The Company's direct customers primarily consist of OEMs and, to a lesser extent, contract manufacturers. Licensees are customers of the Company's technology licensing segment, which
include purchasers of intellectual property and customers that have licensing agreements to use the Company's SuperFlash® embedded flash and Smartbits® one time programmable NVM technologies. All of the contract types listed in the table above are included in the Company's semiconductor product segment with the exception of licenses, which is included in the technology licensing segment.
Substantially all of the Company's net sales are recognized from contracts with customers.
Semiconductor Product Segment
For contracts related to the purchase of semiconductor products, the Company satisfies its performance obligation when control of the ordered product transfers to the customer. The timing of the transfer of control depends on the agreed upon shipping terms with the customer, but generally occurs upon shipment, which is when physical possession of the product has been transferred and legal title of the product transfers to the customer. Payment is generally due within 30 days of the ship date. Payment is generally collected after the Company satisfies its performance obligation, therefore contract liabilities are uncommon. Also, the Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a contract asset. Refer to Note 10 for the opening and closing balances of the Company's receivables.
Generally, there is only a single performance obligation in the Company's contracts with customers for semiconductor products; as such, the entire transaction price is allocated to the single performance obligation and allocation of the transaction price to individual performance obligations is not necessary. The consideration received from customers is fixed, with the exception of consideration from certain distributors. Certain of the Company's distributors are granted price concessions and return rights, which result in variable consideration. The amount of revenue recognized for sales to these certain distributors is adjusted for estimates of the price concessions and return rights that are expected to be claimed. These estimates are based on the recent history of price concessions and stock rotations.
Technology Licensing Segment
The technology licensing segment includes sales and licensing of the Company's intellectual property. For contracts related to the sale of the Company's intellectual property, the Company satisfies its performance obligation and recognizes revenue when control of the intellectual property transfers to the customer. For contracts related to the licensing of the Company's technology, the Company satisfies its performance obligation and recognizes revenue as usage of the license occurs. The transaction price is fixed by the license agreement. Payment is collected after the Company satisfies its performance obligation, and therefore no contract liabilities are recorded. The Company does not record contract assets due to the fact that the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, the Company recognizes a receivable instead of a contract asset. Refer to Note 10 for the opening and closing balances of the Company's receivables.
Note 5. InvestmentsGeographic and Segment Information
The Company's investmentsreportable segments are intendedsemiconductor products and technology licensing. The Company does not allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income taxes to establish a high-quality portfoliothese segments for internal reporting purposes, as the Company does not believe that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yieldallocating these expenses is beneficial in relationshipevaluating segment performance. Additionally, the Company does not allocate assets to the Company's investment guidelines and market conditions. segments for internal reporting purposes as it does not manage its segments by such metrics.
At March 31, 2019, the company had short-term investments of $2.3 million consisting of marketable equity securities.
At March 31, 2018, short-term investments of $1.30 billion included available-for-sale debt securities of $1.29 billion and marketable equity securities of $2.8 million. The following is a summary of available-for-sale debt securities at March 31, 2018table represents net sales and gross profit for each segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2021 | | 2020 | | 2019 |
| Net Sales | | Gross Profit | | Net Sales | | Gross Profit | | Net Sales | | Gross Profit |
| Semiconductor products | $ | 5,335.5 | | | $ | 3,275.9 | | | $ | 5,177.3 | | | $ | 3,145.2 | | | $ | 5,217.1 | | | $ | 2,798.9 | |
| Technology licensing | 102.9 | | | 102.9 | | | 96.9 | | | 96.9 | | | 132.4 | | | 132.4 | |
| Total | $ | 5,438.4 | | | $ | 3,378.8 | | | $ | 5,274.2 | | | $ | 3,242.1 | | | $ | 5,349.5 | | | $ | 2,931.3 | |
|
| | | | | | | | | | | | | | | |
| | Available-for-sale Debt Securities |
| | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Available-for-sale debt securities: | | | | | | | |
| Government agency bonds | $ | 723.2 |
| | $ | — |
| | $ | — |
| | $ | 723.2 |
|
| Municipal bonds - taxable | 14.9 |
| | — |
| | — |
| | 14.9 |
|
| Time deposits | 11.5 |
| | — |
| | — |
| | 11.5 |
|
| Corporate bonds and debt | 542.9 |
| | — |
| | — |
| | 542.9 |
|
| Total | $ | 1,292.5 |
| | $ | — |
| | $ | — |
| | $ | 1,292.5 |
|
The Company sold available-for-sale debt securitiessells its products to distributors and OEMs in a broad range of market segments, performs on-going credit evaluations of its customers and, as deemed necessary, may require collateral, primarily letters of credit. The Company's operations outside the U.S. consist of product assembly and final test facilities in Thailand, and sales and support centers and
design centers in certain foreign countries. Domestic operations are responsible for proceedsthe design, development and wafer fabrication of $1.38 billionproducts, as well as the coordination of production planning and shipping to meet worldwide customer commitments. The Company's Thailand assembly and test facility is reimbursed in relation to value added with respect to assembly and test operations and other functions performed, and certain foreign sales offices receive compensation for sales within their territory. Accordingly, for financial statement purposes, it is not meaningful to segregate sales or operating profits for the assembly and test and foreign sales office operations. Identifiable long-lived assets (consisting of property, plant and equipment net of accumulated amortization and ROU assets) by geographic area are as follows (in millions):
| | | | | | | | | | | |
| March 31, |
| 2021 | | 2020 |
| United States | $ | 516.6 | | | $ | 515.0 | |
| Thailand | 178.1 | | | 174.4 | |
| Various other countries | 314.3 | | | 306.2 | |
| Total long-lived assets | $ | 1,009.0 | | | $ | 995.6 | |
Sales to unaffiliated customers located outside the U.S., primarily in Asia and Europe, aggregated approximately 77%, 78% and 80% of consolidated net sales for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Sales to customers in Europe represented approximately 19%, 22% and 23% of consolidated net sales for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Sales to customers in Asia represented approximately 55% of consolidated net sales for fiscal 2021 and approximately 52% of consolidated net sales for each of fiscal 2020 and 2019. Within Asia, sales into China represented approximately 22%, 21% and 22% of consolidated net sales for fiscal 2021, 2020 and 2019, respectively. Sales into Taiwan represented approximately 16%, 15% and 13% of consolidated net sales for fiscal 2021, 2020 and 2019, respectively. Sales into any other individual foreign country did not exceed 10% of the Company's net sales for any of the three years presented.
With the exception of Arrow Electronics, the Company's largest distributor, which accounted for 10% of net sales in fiscal 2020 and fiscal 2019, no other distributor or end customer accounted for more than 10% of net sales in fiscal 2021, fiscal 2020 or fiscal 2019.
Note 6. Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2021 | | 2020 | | 2019 | | | | | | | | |
| Net income | $ | 349.4 | | | $ | 570.6 | | | $ | 355.9 | | | | | | | | | |
| Basic weighted average common shares outstanding | 259.6 | | | 238.9 | | | 236.2 | | | | | | | | | |
| Dilutive effect of stock options and RSUs | 3.5 | | | 3.4 | | | 3.8 | | | | | | | | | |
| | | | | | | | | | | | | |
| Dilutive effect of 2015 Senior Convertible Debt | 4.7 | | | 13.7 | | | 9.9 | | | | | | | | | |
| Dilutive effect of 2017 Senior Convertible Debt | 1.7 | | | 0.1 | | | 0 | | | | | | | | | |
| Dilutive effect of 2020 Senior Convertible Debt | 0 | | | 0 | | | 0 | | | | | | | | | |
| Dilutive effect of 2017 Junior Convertible Debt | 1.1 | | | 0.1 | | | 0 | | | | | | | | | |
| Diluted weighted average common shares outstanding | 270.6 | | | 256.2 | | | 249.9 | | | | | | | | | |
| Basic net income per common share | $ | 1.35 | | | $ | 2.39 | | | $ | 1.51 | | | | | | | | | |
| Diluted net income per common share | $ | 1.29 | | | $ | 2.23 | | | $ | 1.42 | | | | | | | | | |
The Company computed basic net income per common share based on the weighted average number of common shares outstanding during the year ended March 31, 2019period. The Company computed diluted net income per common share based on the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to help finance its acquisitionthe assumed exercise of Microsemi.outstanding stock options and the assumed vesting of outstanding RSUs. Weighted average common shares exclude the effect of option shares which are not dilutive. There were no sales0 anti-dilutive option shares for each of available-for-sale debt securities during the year ended March 31, 2018. The Company sold available-for-sale debt securities for proceeds of $470.2 million during the year ended March 31, 2017. The Company recognized losses of $5.6 million on available-for-sale debt securities during the year ended
March 31, 2019. The Company had no material net realized gains from sales of available-for-sale debt securities during fiscal years ended March 31, 20182021, 2020 and March 31, 2017. During2019.
The Company's Convertible Debt has no impact on diluted net income per common share unless the year ended March 31, 2018,average price of the Company's common stock exceeds the conversion price because the Company recognized an impairmentintends to settle the principal amount of $15.5 million on available-for-sale debt securities based on its evaluationthe Convertible Debt in cash upon conversion. Prior to conversion, the Company will include, in the diluted net income per common share calculation, the effect of available evidence andthe additional shares that may be issued when the Company's intent to sell these investments which were subsequently soldcommon stock price exceeds the conversion price using the treasury stock method. The following is the weighted average conversion price per share used in calculating the dilutive effect (see Note 7 for details on the Convertible Debt):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2021 | | 2020 | | 2019 | | | | | | | | |
| | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 60.90 | | | $ | 61.80 | | | $ | 62.86 | | | | | | | | | |
| 2017 Senior Convertible Debt | $ | 94.96 | | | $ | 96.37 | | | $ | 98.03 | | | | | | | | | |
| 2020 Senior Convertible Debt | $ | 186.86 | | | $ | 0 | | | $ | 0 | | | | | | | | | |
| 2017 Junior Convertible Debt | $ | 93.30 | | | $ | 94.68 | | | $ | 96.31 | | | | | | | | | |
Note 7. Debt
Debt obligations included in the first quarterconsolidated balance sheets consisted of fiscal 2019.the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Coupon Interest Rate | | Effective Interest Rate | | Fair Value of Liability Component at Issuance (1) | | | | | | | | |
| | | | March 31, | | | | |
| | | | 2021 | | 2020 | | |
| Senior Secured Indebtedness | | | | | | | | | | | | | |
| Revolving Credit Facility | | | | | | | $ | 2,346.6 | | | $ | 2,388.5 | | | | | |
| Term Loan Facility | | | | | | | 0 | | | 1,723.5 | | | | | |
| Bridge Loan Facility | | | | | | | 0 | | | 615.0 | | | | | |
| 3.922% 2021 Notes | 3.922% | | 4.5% | | | | 1,000.0 | | | 1,000.0 | | | | | |
| 4.333% 2023 Notes | 4.333% | | 4.7% | | | | 1,000.0 | | | 1,000.0 | | | | | |
| 2.670% 2023 Notes | 2.670% | | 2.8% | | | | 1,000.0 | | | 0 | | | | | |
| 0.972% 2024 Notes | 0.972% | | 1.1% | | | | 1,400.0 | | | 0 | | | | | |
| | | | | | | | | | | | | |
| Senior Unsecured Indebtedness | | | | | | | | | | | | | |
| 4.250% 2025 Notes | 4.250% | | 4.6% | | | | 1,200.0 | | | 0 | | | | | |
| Total Senior Indebtedness | | | | | | | 7,946.6 | | | 6,727.0 | | | | | |
| Senior Subordinated Convertible Debt - Principal Outstanding | | | | | | | | |
| 2015 Senior Convertible Debt | 1.625% | | 5.9% | | $ | 120.9 | | | 141.4 | | | 1,110.0 | | | | | |
| 2017 Senior Convertible Debt | 1.625% | | 6.0% | | $ | 260.9 | | | 333.3 | | | 2,070.0 | | | | | |
| 2020 Senior Convertible Debt | 0.125% | | 5.1% | | $ | 555.5 | | | 665.5 | | | 0 | | | | | |
| Junior Subordinated Convertible Debt - Principal Outstanding | | | | | | | | |
| 2017 Junior Convertible Debt | 2.250% | | 7.4% | | $ | 64.0 | | | 122.6 | | | 686.3 | | | | | |
| | | | | | | | | | | | | |
| Total Convertible Debt | | | | | | | 1,262.8 | | | 3,866.3 | | | | | |
| | | | | | | | | | | | | |
| Gross long-term debt including current maturities | | | | | | | 9,209.4 | | | 10,593.3 | | | | | |
Less: Debt discount (2) | | | | | | | (273.0) | | | (1,043.2) | | | | | |
Less: Debt issuance costs (3) | | | | | | | (32.3) | | | (67.9) | | | | | |
| Net long-term debt including current maturities | | | | | | | 8,904.1 | | | 9,482.2 | | | | | |
Less: Current maturities (4) | | | | | | | (1,322.9) | | | (608.8) | | | | | |
| Net long-term debt | | | | | | | $ | 7,581.2 | | | $ | 8,873.4 | | | | | |
(1) As each of the convertible debt instruments may be settled in cash upon conversion, for accounting purposes, they were bifurcated into a liability component and an equity component. The Company determinesamount allocated to the cost of available-for-sale debt securities sold on a first-in first-out (FIFO) basis atequity component is the individual security level for sales from multiple lots. For sales of marketable equity securities,difference between the Company uses an average cost basis at the individual security level. Gains and losses recognized in earnings are credited or charged to other (loss) income, net on the consolidated statements of income.
As of March 31, 2019 and 2018 , the Company had no available-for-sale debt securities in an unrealized loss position.
The Company did not have any available-for-sale debt securities at March 31, 2019. The amortized cost and estimated fairprincipal value of the available-for-sale debt securities at March 31, 2018, by maturity are shown below (in millions). Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties,instrument and the Company views its available-for-sale debt 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 | $ | 246.5 |
| | $ | — |
| | $ | — |
| | $ | 246.5 |
|
| Due after one year and through five years | 1,046.0 |
| | — |
| | — |
| | 1,046.0 |
|
| Due after five years and through ten years | — |
| | — |
| | — |
| | — |
|
| Due after ten years | — |
| | — |
| | — |
| | — |
|
| Total | $ | 1,292.5 |
| | $ | — |
| | $ | — |
| | $ | 1,292.5 |
|
Note 6. 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. |
Marketable Debt Instruments
Marketable debt instruments include instruments such as corporate bonds and debt, government agency bonds, bank deposits, municipal bonds, and money market mutual funds. When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroborates non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.
Assets Measured at Fair Value on a Recurring Basis
Assets measured at fair value on a recurring basis at March 31, 2019 are as follows (amounts in millions):
|
| | | | | | | | | | | |
| | Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Total Balance |
| Assets | | | | | |
| Cash and cash equivalents: | | | | | |
| Money market mutual funds | $ | 8.3 |
| | $ | — |
| | $ | 8.3 |
|
| Deposit accounts | — |
| | 420.3 |
| | 420.3 |
|
| Short-term investments: | | | | | |
| Marketable equity securities | 2.3 |
| | — |
| | 2.3 |
|
| Total assets measured at fair value | $ | 10.6 |
| | $ | 420.3 |
| | $ | 430.9 |
|
Assets measured at fair value on a recurring basis at March 31, 2018 are as follows (amounts in millions):
|
| | | | | | | | | | | |
| | Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Total Balance |
| Assets | | | | | |
| Cash and cash equivalents: | | | | | |
| Money market mutual funds | $ | 121.0 |
| | $ | — |
| | $ | 121.0 |
|
| Deposit accounts | — |
| | 641.6 |
| | 641.6 |
|
| Commercial Paper | — |
| | 118.7 |
| | 118.7 |
|
| Government agency bonds | — |
| | 20.0 |
| | 20.0 |
|
| Short-term investments: | | | | | |
| Marketable equity securities | 2.8 |
| | — |
| | 2.8 |
|
| Corporate bonds and debt | — |
| | 542.9 |
| | 542.9 |
|
| Time deposits | — |
| | 11.5 |
| | 11.5 |
|
| Government agency bonds | — |
| | 723.2 |
| | 723.2 |
|
| Municipal bonds - taxable | — |
| | 14.9 |
| | 14.9 |
|
| Total assets measured at fair value | $ | 123.8 |
| | $ | 2,072.8 |
| | $ | 2,196.6 |
|
There were no transfers between Level 1 or Level 2 during fiscal 2019 or fiscal 2018. There were no assets measured on a recurring basis during fiscal 2019 or fiscal 2018 using significant unobservable inputs (Level 3).
Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis
The Company's non-marketable equity, cost method investments, certain acquired liabilities and non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment, are recorded at fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.
The Company's non-marketable and cost method investments are monitored on a quarterly basis for impairment charges. The fair values of these investments have been determined as Level 3 fair value measurements because the valuations use unobservable inputs that require management's judgment due to the absence of quoted market prices. There were no impairment charges recognized on these investments during the years ended March 31, 2019, 2018 and 2017. These investments are included in other assets on the consolidated balance sheets.
The fair value measurements related to the Company's non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment are based on available market prices at the measurement date based on transactions of similar assets and third-party independent appraisals, less costs to sell where appropriate. The Company classifies these measurements as Level 2.
Note 7. Fair Value of Financial Instruments
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months. Management believes the carrying amount of the equity and cost-method investments materially approximated fair value at March 31, 2019 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair value measurements. The fair values of the Company's line of credit borrowings are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements and approximate carrying value excluding debt issuance costs. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the Company's lineliability component at issuance. The resulting debt discount is being amortized to interest expense at the respective effective interest rate over the contractual term of credit borrowings atthe debt.
(2) The unamortized discount consists of the following (in millions):
| | | | | | | | | | | | | | | |
| March 31, | | | | |
| 2021 | | 2020 | | | |
| Bridge Loan Facility | $ | 0 | | | $ | (3.1) | | | | | |
| 3.922% 2021 Notes | (0.3) | | | (2.1) | | | | | |
| 4.333% 2023 Notes | (2.4) | | | (3.5) | | | | | |
| 2.670% 2023 Notes | (2.3) | | | 0 | | | | | |
| 0.972% 2024 Notes | (3.8) | | | 0 | | | | | |
| 4.250% 2025 Notes | (12.8) | | | 0 | | | | | |
| 2015 Senior Convertible Debt | (20.1) | | | (192.9) | | | | | |
| 2017 Senior Convertible Debt | (71.3) | | | (504.2) | | | | | |
| 2020 Senior Convertible Debt | (101.6) | | | 0 | | | | | |
| 2017 Junior Convertible Debt | (58.4) | | | (337.4) | | | | | |
| Total unamortized discount | $ | (273.0) | | | $ | (1,043.2) | | | | | |
(3) Debt issuance costs consist of the following (in millions):
| | | | | | | | | | | | | | | |
| March 31, | | | | |
| 2021 | | 2020 | | | |
| Revolving Credit Facility | $ | (10.0) | | | $ | (14.6) | | | | | |
| Term Loan Facility | 0 | | | (14.6) | | | | | |
| Bridge Loan Facility | 0 | | | (3.1) | | | | | |
| 3.922% 2021 Notes | (0.7) | | | (4.8) | | | | | |
| 4.333% 2023 Notes | (5.3) | | | (7.7) | | | | | |
| 2.670% 2023 Notes | (1.3) | | | 0 | | | | | |
| 0.972% 2024 Notes | (2.0) | | | 0 | | | | | |
| 4.250% 2025 Notes | (1.7) | | | 0 | | | | | |
| 2015 Senior Convertible Debt | (0.7) | | | (7.0) | | | | | |
| 2017 Senior Convertible Debt | (1.8) | | | (13.0) | | | | | |
| 2020 Senior Convertible Debt | (8.3) | | | 0 | | | | | |
| 2017 Junior Convertible Debt | (0.5) | | | (3.1) | | | | | |
| Total debt issuance costs | $ | (32.3) | | | $ | (67.9) | | | | | |
(4) As of March 31, 2019 approximated2021, current maturities consist of the carrying valueliability component of the 2017 Senior Convertible Debt and the 2017 Junior Convertible Debt, and the 3.922% 2021 Notes which are considered Level 2 indue June 1, 2021. As of March 31, 2020, current maturities included the fair value hierarchy described in Note 6. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value dueBridge Loan Facility.
Expected maturities relating to the short-term maturityCompany’s debt obligations as of March 31, 2021 are as follows (in millions):
| | | | | | | | |
| Fiscal year ending March 31, | | Expected Maturities |
| 2022 | | $ | 1,000.0 | |
| 2023 | | 0 | |
| 2024 | | 5,746.6 | |
| 2025 | | 806.9 | |
| 2026 | | 1,200.0 | |
| Thereafter | | 455.9 | |
| Total | | $ | 9,209.4 | |
Ranking of Convertible Debt - The Convertible Debt are unsecured obligations which are subordinated in right of payment to the amounts outstanding under the Company's Senior Indebtedness. The 2017 Junior Convertible Debt is expressly subordinated in right of payment to any existing and future senior debt of the amountsCompany (including the Senior Indebtedness and are considered Level 2the Senior Subordinated Convertible Debt) and is structurally subordinated in right of payment to the fair value hierarchy.
Fair Valueliabilities of the Company's subsidiaries. The Senior Subordinated Convertible Debt is subordinated to the Senior SecuredIndebtedness; ranks senior to the Company's indebtedness that is expressly subordinated in right of payment to it, including the 2017 Junior Convertible Debt; ranks equal in right of payment to any of the Company's unsubordinated indebtedness that does not provide that it is
senior to the Senior Subordinated Convertible Debt; ranks junior in right of payment to any of the Company's secured and unsecured unsubordinated indebtedness to the extent of the value of the assets securing such indebtedness; and is structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries.
Summary of Conversion Features - Each series of Convertible Debt is convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at specified conversion rates (see table below), adjusted for certain events including the declaration of cash dividends. Except during the three-month period immediately preceding the maturity date of the applicable series of Convertible Debt, each series of Convertible Debt is convertible only upon the occurrence of (i) such time as the closing price of the Company's common stock exceeds the applicable conversion price (see table below) by 130% for 20 days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter or (ii) during the 5 business day period after any 10 consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of notes of a given series for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such trading day or (iii) upon the occurrence of certain corporate events specified in the indenture of such series of Convertible Debt. In addition, for each series, with the exception of the 2020 Senior Convertible Debt, if at the time of conversion the applicable price of the Company's common stock exceeds the applicable conversion price at such time, the applicable conversion rate will be increased by up to an additional maximum incremental shares rate, as determined pursuant to a formula specified in the indenture for the applicable series of Convertible Debt, and as adjusted for cash dividends paid since the issuance of such series of Convertible Debt. However, in no event will the applicable conversion rate exceed the applicable maximum conversion rate specified in the indenture for the applicable series of Convertible Debt (see table below).
The following table sets forth the applicable conversion rates adjusted for dividends declared since issuance of such series of Convertible Debt and the applicable incremental share factors and maximum conversion rates as adjusted for dividends paid since the applicable issuance date:
| | | | | | | | | | | | | | | | | | | | | | | |
| Dividend adjusted rates as of March 31, 2021 |
| Conversion Rate | | Approximate Conversion Price | | Incremental Share Factor | | Maximum Conversion Rate |
2015 Senior Convertible Debt (1) | 16.5197 | | | $ | 60.53 | | | 8.2599 | | | 23.1276 | |
2017 Senior Convertible Debt (1) | 10.5934 | | | $ | 94.40 | | | 5.2967 | | | 15.0957 | |
2020 Senior Convertible Debt (1) | 5.3521 | | | $ | 186.84 | | | 0 | | | 7.4929 | |
2017 Junior Convertible Debt (1) | 10.7826 | | | $ | 92.74 | | | 5.3914 | | | 15.0957 | |
| | | | | | | |
(1) As of March 31, 2021, the 2020 Senior Convertible Debt was not convertible. As of March 31, 2021, the holders of each of the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2017 Junior Convertible Debt have the right to convert their notes between April 1, 2021 and June 30, 2021 because the Company's common stock price has exceeded the applicable conversion price for such series by 130% for the specified period of time during the quarter ended March 31, 2021. As of March 31, 2021, the adjusted conversion rate for the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2017 Junior Convertible Debt would be increased to 21.5583 shares of common stock, 12.6689 shares of common stock, and 12.9527 shares of common stock, respectively, per $1,000 principal amount of notes based on the closing price of $155.22 per share of common stock to include an additional maximum incremental share rate per the terms of the applicable indenture. As of March 31, 2021, each of the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2017 Junior Convertible Debt had a conversion value in excess of par of $331.9 million, $322.2 million, and $123.9 million, respectively.
With the exception of the 2020 Senior Convertible Debt, which may be redeemed by the Company on or after November 20, 2022, the Company may not redeem any series of Convertible Debt prior to the relevant maturity date and no sinking fund is provided for any series of Convertible Debt. Under the terms of the applicable indenture, the Company may repurchase any series of Convertible Debt in the open market through privately negotiated exchange offers. Upon the occurrence of a fundamental change, as defined in the applicable indenture of such series of Convertible Debt, holders of such series may require the Company to purchase all or a portion of their Convertible Debt for cash at a price equal to 100% of the principal amount plus any accrued and unpaid interest.
Interest expense consists of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, | | | | |
| 2021 | | 2020 | | 2019 | | | | | | | | |
| Debt issuance cost amortization | $ | 14.7 | | | $ | 13.2 | | | $ | 12.9 | | | | | | | | | |
| Debt discount amortization | 6.6 | | | 2.9 | | | 2.2 | | | | | | | | | |
| Interest expense | 227.4 | | | 277.6 | | | 291.8 | | | | | | | | | |
| Total interest expense on Senior Indebtedness | 248.7 | | | 293.7 | | | 306.9 | | | | | | | | | |
| Debt issuance cost amortization | 2.4 | | | 3.9 | | | 3.6 | | | | | | | | | |
| Debt discount amortization | 64.5 | | | 118.8 | | | 112.4 | | | | | | | | | |
| Coupon interest expense | 37.6 | | | 77.2 | | | 77.1 | | | | | | | | | |
| Total interest expense on Convertible Debt | 104.5 | | | 199.9 | | | 193.1 | | | | | | | | | |
| Other interest expense | 3.7 | | | 3.7 | | | 2.9 | | | | | | | | | |
| Total interest expense | $ | 356.9 | | | $ | 497.3 | | | $ | 502.9 | | | | | | | | | |
The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 3.9 years, 5.9 years, 3.6 years, and 15.9 years for the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, 2020 Senior Convertible Debt, and 2017 Junior Convertible Debt, respectively.
The Company's settlement transactions consists of the following (in millions)(1):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal Amount Settled | | Consideration | | Fair Value Settled(2) | | Equity Component(2) | | Net Loss on Inducements and Settlements |
| | Cash Paid | | | | Value of Shares Issued | | Debt Issued | | Total | | | |
February 2021(3) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 81.0 | | | $ | 81.0 | | | | | $ | 206.5 | | | $ | — | | | $ | 287.5 | | | $ | 79.2 | | | $ | 208.1 | | | $ | 10.7 | |
| 2017 Senior Convertible Debt | $ | 122.2 | | | $ | 122.2 | | | | | $ | 166.4 | | | $ | — | | | $ | 288.6 | | | $ | 115.9 | | | $ | 168.2 | | | $ | 25.5 | |
| 2017 Junior Convertible Debt | $ | 156.0 | | | $ | 156.0 | | | | | $ | 217.9 | | | $ | — | | | $ | 373.9 | | | $ | 129.8 | | | $ | 243.9 | | | $ | 49.4 | |
December 2020(4) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 90.0 | | | $ | 48.5 | | | | | $ | 221.0 | | | $ | — | | | $ | 269.5 | | | $ | 79.4 | | | $ | 184.5 | | | $ | 9.4 | |
| 2017 Senior Convertible Debt | $ | 588.8 | | | $ | 155.4 | | | | | $ | 408.7 | | | $ | 601.5 | | | $ | 1,165.6 | | | $ | 486.7 | | | $ | 655.3 | | | $ | 57.0 | |
| 2017 Junior Convertible Debt | $ | 407.7 | | | $ | 225.0 | | | | | $ | 530.4 | | | $ | 64.0 | | | $ | 819.4 | | | $ | 246.3 | | | $ | 547.1 | | | $ | 62.8 | |
| Term Loan Facility | $ | 1,705.7 | | | $ | 1,705.7 | | | | | $ | — | | | $ | — | | | $ | 1,705.7 | | | $ | — | | | $ | — | | | $ | 12.9 | |
August 2020(5) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 414.3 | | | $ | 414.3 | | | | | $ | 547.6 | | | $ | — | | | $ | 961.9 | | | $ | 351.7 | | | $ | 592.3 | | | $ | 25.0 | |
| 2017 Senior Convertible Debt | $ | 381.8 | | | $ | 381.8 | | | | | $ | 221.1 | | | $ | — | | | $ | 602.9 | | | $ | 299.0 | | | $ | 292.2 | | | $ | 20.1 | |
June 2020(6) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 383.3 | | | $ | 383.3 | | | | | $ | 405.1 | | | $ | — | | | $ | 788.4 | | | $ | 314.4 | | | $ | 464.4 | | | $ | 7.8 | |
| 2017 Senior Convertible Debt | $ | 643.9 | | | $ | 643.9 | | | | | $ | 246.4 | | | $ | — | | | $ | 890.3 | | | $ | 481.0 | | | $ | 390.9 | | | $ | 13.7 | |
| Term Loan Facility | $ | 17.8 | | | $ | 17.8 | | | | | $ | — | | | $ | — | | | $ | 17.8 | | | $ | — | | | $ | — | | | $ | — | |
| Bridge Loan Facility | $ | 615.0 | | | $ | 615.0 | | | | | $ | — | | | $ | — | | | $ | 615.0 | | | $ | — | | | $ | — | | | $ | 5.3 | |
March 2020(7) | | | | | | | | | | | | | | | | | |
| 2015 Senior Convertible Debt | $ | 615.0 | | | $ | 615.0 | | | | | $ | 351.8 | | | $ | — | | | $ | 966.8 | | | $ | 460.4 | | | $ | 461.1 | | | $ | 3.4 | |
(1) The Company settled portions of its convertible debt in privately negotiated transactions that are accounted for as induced conversions.
(2) The total consideration for the convertible debt settlements was allocated to the liability and equity components using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt instrument prior to the settlement.
(3) The Company used borrowings under its Revolving Credit Facility to finance a portion of such settlement.
(4) The Company used proceeds from the issuance of $665.5 million principal amount of 2020 Senior Convertible Debt and used borrowings under its Revolving Credit Facility to finance a portion of such settlement. The Company also issued $1.40 billion aggregate principal amount of 0.972% 2024 Notes and used the proceeds in addition to $213.0 million in borrowings under its Revolving Credit Facility, and cash on hand to repay all amounts outstanding under its Term Loan FacilityFacility.
(5)The Company measuresused borrowings under its Revolving Credit Facility to finance a portion of such settlement.
(6) The Company used a portion of the proceeds from the issuance of the 2.670% 2023 Notes and the 4.250% 2025 Notes to (i) finance a portion of such settlement, and (ii) repay a portion of the amount outstanding under the Company's existing Revolving Credit Facility as well as for general corporate purposes.
(7) The Company entered into a Bridge Loan Facility (which has since been repaid in full), for an aggregate principal amount of $615.0 million to finance a portion of such settlement.
In December 2020, in connection with the issuance of the 2020 Senior Convertible Debt, the Company incurred issuance costs of $10.8 million, of which $9.0 million was recorded as debt issuance costs and will be amortized using the effective interest method over the term of the debt. The remainder of $1.8 million in fees was recorded to equity. The debt discount on the 2020 Senior Convertible Debt was the difference between the par value and the fair value of its seniorthe debt resulting in a debt discount of $110.0 million which will be amortized to interest expense using the effective interest method over the term of the debt. Interest on the 2020 Senior Convertible Debt is payable semi-annually in arrears on May 15 and junior subordinated convertible debt and senior securedNovember 15 of each year. In connection with the issuance of the 2020 Senior Convertible Debt, the Company entered into capped call option transactions with several financial institutions at a cost of $35.8 million. The capped call options cover, subject to anti-dilution adjustments, the number of shares of the Company’s common stock initially underlying the 2020 Senior Convertible Debt. Upon conversion of the 2020 Senior Convertible Debt, the Company may exercise the capped call options subject to a cap strike price of $233.58 per share which would reduce the potential dilution to the Company’s common stock or offset any cash payments the Company is required to make in excess of the principal amount of converted notes. Upon conversion of the 2020 Senior Convertible Debt, there will be no economic dilution from the notes for disclosure purposes. These fair valuesuntil the average market price of the Company’s common stock exceeds the cap price of $233.58 per share as the exercise of the capped call options will offset any dilution from the 2020 Senior Convertible Debt from the conversion price up to the cap price. As these transactions meet certain accounting criteria, the capped call options are based on observable market prices for this debt, which is traded in less active marketsrecorded as a reduction of stockholders' equity and are therefore classifiednot accounted for as a Level 2 fair value measurement.derivatives.
Senior Notes
The following table shows0.972% 2024 Notes mature on February 15, 2024 and interest accrues at a rate of 0.972% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The 2.670% 2023 Notes mature on September 1, 2023 and interest accrues at a rate of 2.670% per annum, payable semi-annually in arrears on March 1 and September 1 of each year. The 4.250% 2025 Notes mature on September 1, 2025 and interest accrues at a rate of 4.250% per annum, payable semi-annually in arrears on March 1 and September 1 of each year. The 3.922% 2021 Notes mature on June 1, 2021 and interest accrues at a rate of 3.922% per annum, payable semi-annually in arrears on June 1 and December 1 of each year. The 4.333% 2023 Notes mature on June 1, 2023 and interest accrues at a rate of 4.333% per annum, payable semi-annually in arrears on June 1 and December 1 of each year.
The Company may, at its option, redeem some or all of the carrying amountsapplicable series of Senior Notes in the manner set forth in the indenture governing the applicable series of Senior Notes. If the Company experiences a specified change of control triggering event set forth in the indenture governing the applicable series of Senior Notes, the Company must offer to repurchase each of the notes of such series at a price equal to 101% of the principal amount of each note of such series repurchased, plus accrued and fair valuesunpaid interest, if any, to, but excluding, the applicable redemption date.
The indenture governing each series of Senior Notes contains certain customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, create or incur certain liens, and enter into sale and leaseback transactions, sell or otherwise dispose of any assets constituting collateral securing the Senior Notes, and consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets, to another person. These covenants are subject to a number of limitations and exceptions set forth in the indenture governing the applicable series of Senior Notes.
Each series of Senior Notes is guaranteed by certain of the Company's subsidiaries that have also guaranteed the obligations under the Credit Agreement and under the Company’s existing Senior Indebtedness. In the future, each subsidiary of the Company that is a guarantor or other obligor of the Credit Agreement is required to guarantee each series of Senior Notes.
The 0.972% 2024 Notes, the 2.670% 2023 Notes, the 3.922% 2021 Notes, and the 4.333% 2023 Notes and each of the associated guarantees are secured, on a pari passu first lien basis with the Credit Agreement, by substantially all of the tangible and intangible assets (other than certain excluded assets) of the Company and the guarantors that secure obligations under the
Credit Agreement, in each case subject to certain thresholds, exceptions and permitted liens, as set forth in the respective security agreement, by and among the Company, the subsidiary guarantors party thereto and the collateral agent.
Senior Credit Facilities
In March 2020 and September 2019, the Company amended the Company's Credit Agreement to, among other things, provide the ability to factor receivables and, subject to the satisfaction of specified conditions, to permit the incurrence of secured debt. In addition, the amendments reduce the margin added to the interest rate on revolving loans under the Credit Agreement to 0.0% to 0.75% for base rate loans and 1.0% to 1.75% for the LIBOR rate loans, in each case determined based on the Company's senior leverage ratio. The amendments reduced the commitments for the Revolving Credit Facility thereunder to $3.57 billion from $3.60 billion.
The Company's obligations under the Credit Agreement are guaranteed by certain of its subsidiaries meeting materiality thresholds set forth in the Credit Agreement. To secure the Company's obligations under the Credit Agreement and junior subordinated convertible debt, senior secured notes,the subsidiary guarantors’ obligations under the guarantees, the Company and term loan facility aseach of the subsidiary guarantors have granted a security interest in substantially all of their assets subject to certain exceptions and limitations.
In May 2018, the Company borrowed $3.00 billion aggregate principal amount of loans under the Term Loan Facility. As of March 31, 20192021, the Company has repaid all amounts outstanding under its Term Loan Facility.
The Credit Agreement contains customary affirmative and 2018 (in millions).
|
| | | | | | | | | | | | | | | |
| | March 31, |
| | 2019 | | 2018 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| 2023 Senior Secured Notes | $ | 985.4 |
| | $ | 1,020.1 |
| | N/A |
| | N/A |
|
| 2021 Senior Secured Notes | $ | 987.4 |
| | $ | 1,008.1 |
| | N/A |
| | N/A |
|
| Term Loan Facility | $ | 1,892.1 |
| | $ | 1,911.5 |
| | N/A |
| | N/A |
|
| 2017 Senior Convertible Debt | $ | 1,493.6 |
| | $ | 2,285.4 |
| | $ | 1,437.6 |
| | $ | 2,459.2 |
|
| 2015 Senior Convertible Debt | $ | 1,360.8 |
| | $ | 2,810.6 |
| | $ | 1,309.9 |
| | $ | 3,079.1 |
|
| 2017 Junior Convertible Debt | $ | 335.9 |
| | $ | 740.8 |
| | $ | 326.7 |
| | $ | 876.9 |
|
(1) The carrying amounts presented are net of debt discounts and debt issuance costs (see Note 12 Debt and Credit Facility for further information).
Note 8. OtherFair Value of Financial Statement DetailsInstruments
Accounts ReceivableFair 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.
Accounts receivable consistsThe carrying amount of cash equivalents approximates fair value because their maturity is less than three months. Management believes the carrying amount of the equity and cost-method investments materially approximated fair value at March 31, 2021 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair value measurements. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy.
The fair values of the Company's Revolving Credit Facility, Term Loan Facility and Bridge Loan Facility are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the Company's Revolving Credit Facility at March 31, 2021 approximated the carrying value excluding debt discounts and debt issuance costs and are considered Level 2 in the fair value hierarchy. The Company measures the fair value of its Convertible Debt and Senior Notes for disclosure purposes. These fair values are based on observable market prices for this debt, which is traded in less active markets and are therefore classified as a Level 2 fair value measurement.
The following table shows the carrying amounts and fair values of the Company's debt obligations (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, |
| 2021 | | 2020 |
| Carrying Amount (1) | | Fair Value | | Carrying Amount (1) | | Fair Value |
| Revolving Credit Facility | $ | 2,336.6 | | | $ | 2,346.6 | | | $ | 2,373.9 | | | $ | 2,388.5 | |
| Term Loan Facility | 0 | | | 0 | | | 1,708.9 | | | 1,723.5 | |
| Bridge Loan Facility | 0 | | | 0 | | | 608.8 | | | 615.0 | |
| 3.922% 2021 Notes | 999.0 | | | 1,004.3 | | | 993.1 | | | 985.0 | |
| 4.333% 2023 Notes | 992.3 | | | 1,022.4 | | | 988.8 | | | 990.0 | |
| 2.670% 2023 Notes | 996.4 | | | 1,040.8 | | | 0 | | | 0 | |
| 0.972% 2024 Notes | 1,394.2 | | | 1,394.0 | | | 0 | | | 0 | |
| 4.250% 2025 Notes | 1,185.5 | | | 1,252.6 | | | 0 | | | 0 | |
| 2015 Senior Convertible Debt | 120.6 | | | 485.4 | | | 910.1 | | | 1,601.8 | |
| 2017 Senior Convertible Debt | 260.2 | | | 731.4 | | | 1,552.8 | | | 2,130.3 | |
| 2020 Senior Convertible Debt | 555.6 | | | 778.3 | | | 0 | | | 0 | |
| 2017 Junior Convertible Debt | 63.7 | | | 272.9 | | | 345.8 | | | 656.2 | |
| Total | $ | 8,904.1 | | | $ | 10,328.7 | | | $ | 9,482.2 | | | $ | 11,090.3 | |
| | | | | | | |
|
| | | | | | | |
| | March 31, |
| | 2019 | | 2018 |
| Trade accounts receivable | $ | 875.8 |
| | $ | 557.8 |
|
| Other | 6.8 |
| | 8.1 |
|
| Total accounts receivable, gross | 882.6 |
| | 565.9 |
|
| Less allowance for doubtful accounts | 2.0 |
| | 2.2 |
|
| Total accounts receivable, net | $ | 880.6 |
| | $ | 563.7 |
|
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years. During the year ended March 31, 2019, due to the acquisition of Microsemi, the Company acquired $4.57 billion of core and developed technology which has a weighted average amortization period of 15 years, $200.2 million of customer-related intangible assets which have a weighted average amortization period of 12 years, $12.3 million of intangible assets related to
In the ordinary course of the Company's business, it is exposed to various liabilities as a result of contracts, product liability, customer claims, governmental investigations and other matters. Additionally, the Company is involved in a limited number of legal actions, both as plaintiff and defendant. Consequently, the Company could incur uninsured liability in any of those actions. The Company also periodically receives notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting reimbursement for various costs. With respect to pending legal actions to which the Company is a party and other claims, although the outcomes are generally not determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations. Litigation, governmental investigations and disputes relating to the semiconductor industry are not uncommon, and the Company is, from time
In connection with its acquisition of Microsemi, which closed on May 29, 2018, the Company became involved with the following legal matters:
As a result of its acquisition of Atmel, which closed April 4, 2016, the Company became involved with the following legal matters:
The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, the Company accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, the Company records an accrual for the amount within the range
that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, the Company uses the amount that is the low end of such range. As of March 31, 2019,2021, the Company's estimate of the aggregate potential liability that is possible but not probable is approximately $100 million in excess of amounts accrued.
The change in projected benefit obligation and the accumulated benefit obligation, were as follows (in millions):
The Company's pension liability represents the present value of estimated future benefits to be paid. The discount rate is based on the quarterly average yield for Euros treasuries with a duration of 30 years, plus a supplement for corporate bonds
