UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended March 31,
2009
o Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the transition period from
__________ to __________
Commission
File Number: 0-21184
MICROCHIP
TECHNOLOGY INCORPORATED
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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86-0629024
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|
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(IRS
Employer
Identification
No.)
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2355
W. Chandler Blvd., Chandler, AZ 85224
(Address
of Principal Executive Offices, Including Zip Code)
(480)
792-7200
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, $0.001 Par Value Per Share
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Nasdaq
Global Market
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Preferred
Share Purchase Rights
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None
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.ýYes¨No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.¨YesýNo
Indicate by checkmark whether the
Registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days: ýYes¨No
Indicate
by checkmark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). ¨Yes¨No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of Form 10-K or any
amendment to this Form 10-K¨
Indicate
by check mark whether the registrant is large accelerated filer, an accelerated
filed, or a non-accelerated filer, or smaller reporting
company. See definitions of “large accelerated filer” “accelerated
file” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act):
|
Large
accelerated filer
|
ý
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).¨YesýNo
Aggregate
market value of the voting and non-voting common equity held by non-affiliates
as of September 30, 2008 based upon the closing price of the common stock as
reported by the NASDAQ® Global
Market on such date was approximately $5,215,717,918.
Number of
shares of Common Stock, $.001 par value, outstanding as of May 26, 2009:
182,866,010.
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Documents Incorporated by
Reference
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||
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Document
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Part of Form 10-K
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Proxy
Statement for the 2009 Annual Meeting of Stockholders
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III
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MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
FORM
10-K
TABLE
OF CONTENTS
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Page
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2
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 - 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 – Risk
Factors,” beginning below at page 10, 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.
We
develop and manufacture specialized semiconductor products used by our customers
for a wide variety of embedded control applications. Our product
portfolio comprises 8-bit, 16-bit, and 32-bit PIC®
microcontrollers and 16-bit dsPIC® digital
signal controllers, which feature on-board Flash (reprogrammable) memory
technology. In addition, we offer a broad spectrum of
high-performance linear, mixed-signal, power management, thermal management,
battery management and interface devices. We also make serial
EEPROMs. Our synergistic product portfolio targets thousands of
applications and a growing demand for high-performance designs in the
automotive, communications, computing, consumer and industrial control
markets. Our quality systems are ISO/TS16949 (2002 version)
certified.
Microchip
Technology Incorporated was incorporated in Delaware in 1989. In this
Form 10-K, “we,” “us,” and “our” each refers to Microchip Technology
Incorporated and its subsidiaries. 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:
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our
annual report on Form 10-K
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our
quarterly reports on Form 10-Q
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our
current reports on Form 8-K
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our
proxy statement
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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
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All SEC
filings on our website are available free of charge. The information
on our website is not
incorporated into this Form 10-K.
Industry
Background
Competitive
pressures require manufacturers 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:
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differentiate
their products
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replace
less efficient electromechanical control
devices
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reduce
the number of components in their
system
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add
product functionality
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decrease
time to market for their products
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significantly
reduce product cost
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Embedded
control systems have been incorporated into thousands of products and
subassemblies in a wide variety of applications and markets worldwide,
including:
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automotive
comfort, safety and entertainment
applications
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remote
control devices
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handheld
tools
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home
appliances
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portable
computers
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robotics
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accessories
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cordless
and cellular telephones
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motor
controls
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security
systems
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educational
and entertainment devices
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consumer
electronics
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power
supplies
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3
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, non-volatile program
memory, random access memory for data storage and various input/output
peripheral capabilities. In addition to the microcontroller, a
complete embedded control system incorporates application-specific software and
may include specialized peripheral device controllers, non-volatile memory
components such as EEPROMs, and various analog and interface
products.
The
increasing demand for embedded control has made the market for microcontrollers
one of the larger segments of the semiconductor market at approximately
$14 billion in calendar year 2008. Microcontrollers are
currently available in 4-bit through 32-bit architectures. 4-bit
microcontrollers are the smallest segment of the microcontroller market and have
been in decline for several years. 8-bit microcontrollers remain very
cost-effective for a wide range of high volume embedded control applications
and, as a result, continue to represent the largest 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.
Our
Products
Our
strategic focus is on embedded control solutions, including:
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microcontrollers
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development
tools
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analog
and interface products
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memory
products
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We
provide highly cost-effective embedded control solutions that also offer the
advantages of small size, high performance, low voltage/power operation and ease
of development, enabling timely and cost-effective embedded control product
integration by our customers.
Microcontrollers
We offer
a broad family of microcontroller products featuring our unique, proprietary
architecture marketed under the PIC brand name. We believe that our
PIC product family is a price/performance leader in the worldwide
microcontroller market. We have shipped over 7 billion PIC
microcontrollers to customers worldwide since their introduction in
1990. Our PIC products are designed for applications requiring field
programmability, high performance, low power and cost
effectiveness. They feature a variety of memory technology
configurations, low voltage and power, small footprint and ease of
use. Our performance results from a product architecture which
features dual data and instruction pathways, referred to as a Harvard dual-bus
architecture; a Reduced Instruction Set Computer, referred to as RISC; and
variable length instructions; all of which provide significant speed advantages
over alternative single-bus, Complex Instruction Set Computer architectures,
referred to as CISC. With approximately 600 microcontrollers in our
product portfolio, we target the 8-bit, 16-bit, and 32-bit microcontroller
markets.
Digital
Signal Controllers (DSC) are a subset of our 16-bit microcontroller
offering. Our dsPIC Digital Signal
Controller families integrate the control features of high-performance 16-bit
microcontrollers with the computation capabilities of Digital Signal Processors
(DSPs), along with a wide variety of peripheral functions making them suitable
for a large number of embedded control applications. Our dsPIC
product family offers a broad suite of hardware and software development tools,
software application libraries, development boards and reference designs to ease
and expedite the customer application development cycle. With its
field-re-programmability, large selection of peripheral functions, small
footprint and ease of use, we believe that our dsPIC Digital Signal Controllers
enlarge our addressable market.
We have
used our manufacturing experience and design and process technology to bring
additional enhancements and manufacturing efficiencies to the development and
production of our PIC family of microcontroller products. Our
extensive experience base has enabled us to develop our advanced, low-cost user
programmability feature by incorporating non-volatile memory, such as Flash,
EEPROM and EPROM Memory, into the microcontroller, and to be a leader in
reprogrammable microcontroller product offerings.
4
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 a PIC microcontroller and dsPIC Digital Signal Controllers for specific
applications and, we believe are a key factor for obtaining design
wins.
Our
family of development tools for PIC and dsPIC devices operates in the standard
Windows®
environment on standard PC hardware. These tools range from
entry-level systems, which include an assembler and programmer or in-circuit
debugging hardware, to fully configured systems that provide in-circuit
emulation hardware. 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 PIC devices since all of our PIC
and dsPIC development tools share the same integrated development
environment.
Many
independent companies also develop and market application development tools that
support our standard microcontroller product architecture. Currently,
there are approximately 200 third-party tool suppliers worldwide whose products
support our proprietary microcontroller architecture.
We
believe that familiarity with and adoption of both our and third-party
development tools by an increasing number of product designers will be an
important factor in the future selection of our embedded control
products. These development tools allow design engineers to develop
thousands of application-specific products from our standard
microcontrollers. To date, we have shipped more than 750,000
development tools.
Analog
and Interface Products
Our
analog and interface products consist of several families with over
550 power management, linear, mixed-signal, thermal management and
interface products. At the end of fiscal 2009, our mixed-signal
analog and interface products were being shipped to more than 13,100 end
customers.
We
continue marketing and selling our analog and interface products into our
existing microcontroller customer base, which we refer to as our analog “attach”
strategy, as well as to new customers. In addition to our “attach”
strategy, we market and sell other products that may not fit our traditional PIC
microcontroller and memory products customer base. We market these,
and all of our products, based on an application segment approach targeted to
provide customers with application solutions.
Memory
Products
Our
memory products consist primarily of serial electrically erasable programmable
read-only memory, referred to as Serial EEPROMs. We sell these
devices primarily into the embedded control market, and we are one of the
largest suppliers of such devices worldwide. Serial EEPROM products
are used for non-volatile program and data storage in systems where such data
must be either modified frequently or retained for long
periods. Serial EEPROMs have a very low I/O pin requirement,
permitting production of very small devices.
Manufacturing
Our
manufacturing operations include wafer fabrication and assembly and
test. The ownership of our manufacturing resources is an important
component of our business strategy, enabling us to maintain a high level of
manufacturing control resulting in us being one of the lowest cost producers in
the embedded control industry. By owning our wafer fabrication
facilities and our assembly and test operations, and by employing statistical
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 the wafer manufacturing and a portion of the assembly and testing
profit margin.
Our
manufacturing facilities are located in:
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Tempe,
Arizona (Fab 2)
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Chandler,
Arizona (probe operations)
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Gresham,
Oregon (Fab 4)
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Bangkok,
Thailand (assembly, probe and test)
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Wafer
Fabrication
Fab 2
currently produces 8-inch wafers and supports manufacturing processes from 0.35
to 5.0 microns. During fiscal 2008 and the first half of fiscal 2009,
Fab 2 operated at approximately 99% of its capacity. In response to
lower demand in the second half of fiscal 2009, we reduced the production levels
of Fab 2 to about 60% of capacity. Operating at lower percentages of
capacity has a negative impact on our operating results due to the relatively
high fixed costs inherent in wafer fabrication manufacturing.
5
We
acquired Fab 4 in August 2002 and began production in October
2003. Fab 4 currently produces 8-inch wafers using predominantly 0.22
to 0.5 micron manufacturing processes and is capable of supporting technologies
below 0.18 microns. Similar to Fab 2, Fab 4 was operating at about
100% of its active capacity during the first half of fiscal
2009. We reduced the production levels of Fab 4 in the second
half of fiscal 2009 to about 60% of its active capacity. A
significant amount of clean room capacity and equipment acquired with Fab 4 can
be brought on line in the future to support incremental wafer fabrication
capacity needs. We believe the combined capacity of Fab 2 and
Fab 4 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
outsource a small percentage of our wafer production requirements to third-party
wafer foundries to augment our internal manufacturing capabilities.
Assembly
and Test
We
perform product assembly and testing at our facilities located near Bangkok,
Thailand. As of March 31, 2009, approximately 77% of our assembly
requirements were being performed in our Thailand facility. As of
March 31, 2009, our Thailand facility was testing substantially all of our wafer
production. We use third-party assembly and test contractors in
several Asian countries for the balance of our assembly and test
requirements.
During
fiscal 2009, we completed certain projects to increase capacity at our assembly
and test operation in Thailand. Due to lower demand in the second
half of fiscal 2009, we are currently operating at levels significantly below
the total operating capacity of our Thailand facility.
General
Matters Impacting Our Manufacturing Operations
We employ
proprietary design and manufacturing processes in developing our microcontroller
and memory 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 absorb 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.
Due to
the high fixed costs inherent in semiconductor manufacturing, consistently high
manufacturing yields have significant positive effects on our gross profit and
overall operating results. Our continuous focus on manufacturing
productivity has allowed us to maintain excellent manufacturing yields at our
facilities. Our manufacturing yields are primarily driven by a
comprehensive implementation of statistical process control, extensive employee
training and our effective use of our manufacturing facilities and
equipment. Maintenance of manufacturing productivity and yields are
important factors in the achievement of our operating results. The
manufacture of integrated circuits, particularly non-volatile, erasable 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 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 must maintain a significant work in process and finished goods
inventory.
At the
end of fiscal 2009, we owned identifiable long-lived assets (consisting of
property, plant and equipment) in the United States amounting to $368.1 million
and $163.6 million in other countries, including $152.4 million in
Thailand. At the end of fiscal 2008, we owned identifiable long-lived
assets in the United States amounting to $400.6 million and
$121.7 million in other countries, including $113.1 million in
Thailand.
Research
and Development (R&D)
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 R&D activities
focus on the design of new microcontrollers, digital signal controllers, Serial
EEPROM memory, analog and interface products, new development systems, software
and application-specific software libraries. We are also developing
new design and process technologies to enable new products and innovative
features as well as achieve further cost reductions and performance improvements
in existing products.
6
In fiscal
2009, our R&D expenses were $115.5 million, compared to
$120.9 million in
fiscal 2008 and $113.7 million in fiscal 2007. R&D expenses
included $10.9 million in fiscal 2009, $10.7 million in fiscal 2008 and $9.6
million in fiscal 2007 of share-based compensation as a result of the adoption
of FASB Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004)
Share-Based Payment
(SFAS No. 123R).
Sales
and Distribution
General
We market
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 field sales engineers (FSEs), field application
engineers (FAEs), and sales management have technical degrees or backgrounds and
have been previously employed in high technology environments. We
believe that the technical knowledge of our sales force is a key competitive
advantage in the sale of our products. The primary mission of our FAE
team is to provide technical assistance to customers and to conduct periodic
training sessions for the balance of our sales team. FAEs also
frequently conduct technical seminars and workshops in major cities around the
world.
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 Microchip for its products and brand name and
use distributors as an effective supply channel.
In each
of fiscal 2009 and fiscal 2008, we derived 64% of our net sales through
distributors and 36% of our net sales from customers serviced directly by
Microchip. In fiscal 2007, we derived 65% of our net sales through
distributors and 35% of our net sales from customers serviced directly by
Microchip. Our largest distributor accounted for approximately 14% of
our net sales in fiscal 2009, 12% of our net sales in fiscal 2008 and 11% of our
net sales in fiscal 2007. A second distributor accounted for
approximately 10% of our net sales in fiscal 2007. No other
distributor or end customer accounted for more than 10% of our net sales in
fiscal 2009, 2008 or 2007.
We do not
have long-term agreements with 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.
Sales
by Geography
Sales by
geography for fiscal 2009, 2008 and 2007 were as follows (dollars in
thousands):
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Year
Ended March 31,
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2009
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2008
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2007
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Americas
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$ | 228,922 | 25.3 | % | $ | 273,363 | 26.4 | % | $ | 287,371 | 27.6 | % | ||||||||||||
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Europe
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257,407 | 28.5 | 308,171 | 29.8 | 302,708 | 29.1 | ||||||||||||||||||
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Asia
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416,968 | 46.2 | 454,203 | 43.8 | 449,592 | 43.3 | ||||||||||||||||||
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Total
Sales
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$ | 903,297 | 100.0 | % | $ | 1,035,737 | 100.0 | % | $ | 1,039,671 | 100.0 | % | ||||||||||||
Sales to
foreign customers accounted for approximately 75% of our net sales in each of
fiscal 2009 and fiscal 2008 and 74% of our net sales in fiscal
2007. Our sales to foreign customers have been predominately in Asia
and Europe, which we attribute to the manufacturing strength in those areas for
automotive, communications, computing, consumer and industrial control
products. Americas sales include sales to customers in the United
States, Canada, Central America and South America.
Sales to
customers in China, including Hong Kong, accounted for approximately 23% of our
net sales in fiscal 2009, 20% of our net sales in fiscal 2008 and 18% of our net
sales in fiscal 2007. In each of fiscal 2008 and fiscal 2007, sales
to customers in Taiwan accounted for approximately 10% of our net
sales. We did not have sales into any other foreign countries that
exceeded 10% of our net sales during fiscal 2009, 2008 or 2007.
7
Our
international sales are predominately U.S. dollar
denominated. Although foreign sales are subject to certain government
export restrictions, we have not experienced any material difficulties to date
as a result of export restrictions.
The
semiconductor industry is characterized by seasonality and wide fluctuations of
supply and demand. Since a significant portion of our revenue is from
consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal
year. In recent periods, adverse global economic conditions and
weakness in the housing market have had a more significant impact on our results
than seasonality, and has made it difficult to assess the impact of seasonal
factors on our business.
Backlog
As of
April 30, 2009, our backlog was approximately $135.5 million, compared to $225.7
million as of April 30, 2008. 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
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 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, many 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. Furthermore, recent
adverse economic conditions have resulted in a current over capacity in the
semiconductor industry and excess capacity or improved product availability
could adversely affect market pricing and our competitive position.
We
currently compete principally on the basis of the technical innovation and
performance of our embedded control products, including the following product
characteristics:
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speed
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functionality
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density
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power
consumption
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reliability
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packaging
alternatives
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We
believe that other important competitive factors in the embedded control market
include:
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ease
of use
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functionality
of application development systems
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dependable
delivery, quality and availability
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technical
service and support
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price
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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
between 2009 and 2027. 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 we intend to continue to seek patents on our
inventions 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 product developments, rather
than on our patents. Our existing patents and any new patents that
are issued may not be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. 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.
8
We have
entered into certain intellectual property licenses and cross-licenses with
other companies related to semiconductor products and manufacturing
processes. As is typical in the semiconductor industry, we and our
customers have from time to time received, and may in the future receive,
communications from third parties asserting patent or other intellectual
property rights on certain of our products or technologies. We
investigate all such notices and respond as we believe is
appropriate. Based on industry practice, we believe that in most
cases we can obtain any necessary licenses or other rights on commercially
reasonable terms, but we cannot assure that all licenses would be on acceptable
terms, that litigation would not ensue or that damages for any past infringement
would not be assessed. Litigation, which could result in substantial
cost to us and require significant attention from management, may be necessary
to enforce our patents or other intellectual property rights, or to defend us
against claimed infringement of the rights of others. The failure to
obtain necessary licenses or other rights, or litigation arising out of
infringement claims, 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 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 and disposal of regulated substances
could result in 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 environmental regulations, our
business and results of operations could suffer if for any reason we fail to
control the use of, or to adequately restrict the discharge of, hazardous
substances under present or future environmental regulations.
Employees
As of
March 31, 2009, we had 4,895 employees. None of our employees are
represented by a labor organization. We have never had a work
stoppage and believe that our employee relations are good.
Executive
Officers of the Registrant
The
following sets forth certain information regarding our executive officers as of
April 30, 2009:
|
Name
|
Age
|
Position
|
|
Steve
Sanghi
|
53
|
Chairman
of the Board, President and Chief Executive Officer
|
|
Ganesh
Moorthy
|
49
|
Executive
Vice President
|
|
J.
Eric Bjornholt
|
38
|
Vice
President, Chief Financial Officer
|
|
Stephen
V. Drehobl
|
47
|
Vice
President, Security, Microcontroller and Technology
Division
|
|
David
S. Lambert
|
57
|
Vice
President, Fab Operations
|
|
Mitchell
R. Little
|
57
|
Vice
President, Worldwide Sales and Applications
|
|
Richard
J. Simoncic
|
45
|
Vice
President, Analog and Interface Products
Division
|
Mr. Sanghi has been President
since August 1990, CEO since October 1991, and Chairman of the Board since
October 1993. He 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, India. Since May 2004, he has been a member of the
Board of Directors of Xyratex Ltd., a storage and network technology
company. Since May 2007, he has been a member of the Board of
Directors of FIRST (For Inspiration and Recognition of Science and
Technology).
Mr. Moorthy has served as
Executive Vice President since October 2006 and served 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.
Mr. Bjornholt has served as
Vice President since 2008 and Chief Financial Officer since January 1,
2009. He has served in various financial management capacities since
he joined Microchip in 1995. Mr. Bjornholt holds a Masters degree in
Taxation from Arizona State University and a B.S. degree in accounting
from the University of Arizona.
Mr. Drehobl has served as
Vice President of the Security, Microcontroller, and Technology Division 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. Lambert has served as
Vice President, Fab Operations since November 1993. From 1991 to
November 1993, he served as Director of Manufacturing Engineering, and from 1989
to 1991, he served as Engineering Manager of Fab Operations. Mr.
Lambert holds a B.S. degree in Chemical Engineering from the University of
Cincinnati.
9
Mr. Little has served as Vice
President, Worldwide Sales and Applications 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 has served as
Vice President, Analog and Interface Products Division since September
1999. From October 1995 to September 1999, he served as Vice
President in various roles. 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.
|
RISK
FACTORS
|
When
evaluating Microchip and its business, you should give careful consideration to
the factors listed below, in addition to the information provided elsewhere in
this Form 10-K and in other documents that we file with the Securities and
Exchange Commission.
Our
operating results have been adversely impacted by global economic conditions and
may fluctuate due to a number of other factors that could reduce our net sales
and profitability.
Our
operating results are affected by a wide variety of factors that could reduce
our net sales and profitability, many of which are beyond our
control. Some of the factors that may affect our operating results
include:
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changes
in demand or market acceptance of our products and products of our
customers;
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levels
of inventories at our customers;
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the
mix of inventory we hold and our ability to satisfy orders from our
inventory;
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changes
in utilization of our manufacturing capacity and fluctuations in
manufacturing yields;
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our
ability to secure sufficient assembly and testing
capacity;
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availability
of raw materials and equipment;
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competitive
developments including pricing
pressures;
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the
level of orders that are received and can be shipped in a
quarter;
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the
level of sell-through of our products through
distribution;
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fluctuations
in the mix of products;
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changes
or fluctuations in customer order patterns and
seasonality;
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constrained
availability from other electronic suppliers impacting our customers’
ability to ship their products, which in turn may adversely impact our
sales to those customers;
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costs
and outcomes of any current or future tax audits or any litigation
involving intellectual property, customers or other
issues;
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changes
in tax regulations and policies in the U.S. and other countries in which
we do business;
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disruptions
in our business or our customers’ businesses due to terrorist activity,
armed conflict, war, worldwide oil prices and supply, public health
concerns or disruptions in the transportation
system;
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property
damage or other losses, whether or not covered by insurance;
and
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general
economic, industry or political conditions in the U.S. or
internationally.
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We
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and that you should not rely upon any such comparisons as
indications of future performance. In future periods our operating results may
fall below our public guidance or the expectations of public market analysts and
investors, which would likely have a negative effect on the price of our common
stock. The recent downturn in global economic conditions has
adversely impacted our operating results and makes comparability between periods
less meaningful.
Our
operating results will suffer if we ineffectively utilize our manufacturing
capacity or fail to maintain manufacturing yields.
The
manufacture and assembly of integrated circuits, particularly non-volatile,
erasable CMOS memory and logic devices such as those that we produce, are
complex processes. These processes are sensitive to a wide variety of
factors, including the level of contaminants in the manufacturing environment,
impurities in the materials used, the performance of our wafer fabrication
personnel and equipment, and other quality issues. As is typical in the
semiconductor industry, we have from time to time experienced lower than
anticipated manufacturing yields. Our operating results will suffer if we
are unable to maintain yields at approximately the current levels. This
could include delays in the recognition of revenue, loss of revenue or future
orders, and customer-imposed penalties for failure to meet contractual shipment
deadlines. Our operating results are also adversely affected when we
operate at less than optimal capacity. In the quarter ended March 31,
2009, we reduced wafer starts in both Fab 2 and Fab 4, implemented rotating
unpaid time off and had, and continue to have, multiple planned shutdowns in our
Thailand facility. These actions were implemented to help control
inventory levels in response to current and expected adverse economic
conditions. This lower capacity utilization resulted in certain costs
being charged directly to expense and lower gross margins. We are
unable to predict when we will be able to return to more optimal levels of
capacity utilization.
10
We
are dependent on orders that are received and shipped in the same quarter and
are therefore limited in our visibility of future product
shipments.
Our net
sales in any given quarter depend upon a combination of shipments from backlog
and orders received in that quarter for shipment in that quarter, which we refer
to as turns orders. We measure turns orders at the beginning of a quarter
based on the orders needed to meet the shipment targets that we set entering the
quarter. Historically, we have relied on our ability to respond quickly to
customer orders as part of our competitive strategy, resulting in customers
placing orders with relatively short delivery schedules. Shorter lead
times generally mean that turns orders as a percentage of our business are
relatively high in any particular quarter and reduces our backlog visibility on
future product shipments. Turns orders correlate to overall semiconductor
industry conditions and product lead times. Because turns orders are
difficult to predict, varying levels of turns orders make our net sales more
difficult to forecast. If we do not achieve a sufficient level of turns
orders in a particular quarter relative to our revenue targets, our revenue and
operating results may suffer. For example, in the quarter ended
December 31, 2008, we and the semiconductor industry in general did not achieve
the level of turns orders required to meet our targets which adversely impacted
our revenue and results of operations for the December quarter.
Intense
competition in the markets we serve may lead to pricing pressures, reduced sales
of our products or reduced market share.
The
semiconductor industry is intensely competitive and has been characterized by
price erosion and rapid technological change. We compete with major
domestic and international semiconductor companies, many of which have greater
market recognition and substantially greater financial, technical, marketing,
distribution and other resources than we do. We may be unable to compete
successfully in the future, which could harm our business. Our
ability to compete successfully depends on a number of factors both within and
outside our control, including, but not limited to:
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the
quality, performance, reliability, features, ease of use, pricing and
diversity of our products;
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our
success in designing and manufacturing new products including those
implementing new technologies;
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the
rate at which customers incorporate our products into their own
applications;
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product
introductions by our competitors;
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the
number, nature and success of our competitors in a given
market;
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our
ability to obtain adequate supplies of raw materials and other supplies at
acceptable prices;
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·
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our
ability to protect our products and processes by effective utilization of
intellectual property rights;
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our
ability to address the needs of our customers;
and
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·
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general
market and economic conditions.
|
Historically,
average selling prices in the semiconductor industry decrease over the life of
any particular product. The overall average selling prices of our
microcontroller and proprietary analog and interface products have remained
relatively constant, while average selling prices of our Serial EEPROM and
non-proprietary analog and interface products have declined over
time.
We have
experienced, and expect to continue to experience, modest pricing declines in
certain of our more mature proprietary product lines, due primarily to
competitive conditions. We have been able to moderate average selling
price declines in many of our proprietary product lines by continuing to
introduce new products with more features and higher prices. However,
there can be no assurance that we will be able to do so in the future. We
have experienced in the past, and expect to continue to experience in the
future, varying degrees of competitive pricing pressures in our Serial EEPROM
and non-proprietary analog products. We may be unable to maintain
average selling prices for our products as a result of increased pricing
pressure in the future, which could adversely impact our operating
results.
Our
business is dependent on selling through distributors.
Sales
through distributors accounted for approximately 64% of our net sales in each of
fiscal 2009 and fiscal 2008 and approximately 65% of net sales in fiscal
2007. Our largest distributor accounted for approximately 14% of our
net sales in fiscal 2009, approximately 12% of our net sales in fiscal 2008 and
approximately 11% of our net sales in fiscal 2007. 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.
11
Recent
credit and equity market conditions have adversely impacted our holdings of
auction rate securities, investments and trading securities which has had a
material adverse impact on our results of operations.
At March
31, 2009, $46.8 million of the fair value of our investment portfolio was
invested in auction rate securities (ARS). Historically, the carrying
value of ARS approximated fair value due to the frequent resetting of the
interest rates. With the continuing liquidity issues in the global credit
and capital markets, our ARS have experienced multiple failed auctions. As
a result, we will not be able to access such funds until a future auction on
these investments is successful. In November 2008, we executed an ARS
rights agreement (the Rights) with the broker through which we purchased
$31.9 million of our ARS that provides (1) us with the right to put these
ARS back to the broker at par anytime during the period from June 30, 2010
through July 2, 2012, and (2) the broker with the right to purchase or sell the
ARS at par on our behalf anytime through July 2, 2012. We accounted
for the acceptance of the Rights as the receipt of a put option for no
consideration and recognized a gain with a corresponding recognition as a
long-term investment. We elected to measure the Rights under the fair
value option of SFAS No. 159 and will record changes in the fair value of the
Rights in earnings. We simultaneously recognized an
other-than-temporary impairment loss of $5.5 million as we no longer intend to
hold the ARS to a time where the fair value recovers, which was recorded in
other comprehensive loss in prior quarters. We have reclassified the
ARS from available-for-sale to trading securities and future changes in fair
value will be recorded in earnings. We expect any future changes in
the fair value of the ARS to be largely offset by changes in the fair value of
the related Rights without any significant net impact to our income
statement. We will continue to measure the ARS and the Rights at fair
value (utilizing Level 3 inputs) until the earlier of their maturity or
exercise.
The fair
value of our failed ARS has been estimated based on market information and
estimates determined by management and could change significantly based on
market conditions. Based on the estimated values, we concluded these
investments were other than temporarily impaired and recognized an impairment
charge on these investments of $2.4 million during fiscal 2008 and $3.6 million
during fiscal 2009. If the issuers are unable to successfully close
future auctions or if their credit ratings deteriorate further, we may be
required to further adjust the carrying value of the investments through an
additional impairment charge to earnings.
The
substantial majority of our short and long-term investments are in highly rated
government agency bonds and municipal bonds. Other than with respect
to our holdings of ARS, we have not experienced any liquidity or impairment
issues with such investments. However, the credit markets have
continued to be highly volatile and there can be no assurance that these
conditions will not in the future adversely affect the liquidity or value of our
investments in government agency bonds or municipal bonds.
Our
investment in marketable equity securities at March 31, 2009 consisted of shares
of common stock, the value of which is determined by the closing prices of such
shares on the respective markets on which the shares are traded as of the
balance sheet date. These investments are classified as trading securities and
accounted for under the provisions of SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The market value of these investments was
approximately $79.5 million at March 31, 2009 compared to our cost basis of
approximately $85.5 million. The value of our investments in marketable equity
securities would be materially impacted if there were a significant change in
the market price of the shares. Additionally, we have sold put
options on some of our trading securities, which are recorded as accrued
liabilities, and are marked to market value. A decline in the stock
price of the underlying security prior to the expiration date of the puts would
cause an increase to the liability, which would result in a charge to our
results of operations, and could result in the put being exercised by the
holder. If the put is exercised by the holder, we could be required
to pay up to $11.0 million for additional shares of the common stock, at a
price potentially in excess of the then fair market value of the common stock
which would result in a charge to our results of operations. As a
result, any fluctuations in the value of our marketable securities could result
in unexpected fluctuations in our financial results.
Our
success depends on our ability to introduce new products on a timely
basis.
Our
future operating results will depend on our ability to develop and introduce new
products on a timely basis that can compete effectively on the basis of price
and performance and which address customer requirements. The success
of our new product introductions depends on various factors, including, but not
limited to:
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proper
new product selection;
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timely
completion and introduction of new product
designs;
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·
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availability
of development and support tools and collateral literature that make
complex new products easy for engineers to understand and use;
and
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·
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market
acceptance of our customers’ end
products.
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12
Because
our products are complex, we have experienced delays from time to time in
completing development of new products. In addition, our new products may
not receive or maintain substantial market acceptance. We may be unable to
design, develop and introduce competitive products on a timely basis, which
could adversely impact our future operating results.
Our
success also depends upon our ability to develop and implement new design and
process technologies. Semiconductor design and process technologies
are subject to rapid technological change and require significant R&D
expenditures. We and other companies in the industry have, from time
to time, experienced difficulties in effecting transitions to advanced process
technologies and, consequently, have suffered reduced manufacturing yields or
delays in product deliveries. Our future operating results could be
adversely affected if any transition to future process technologies is
substantially delayed or inefficiently implemented.
We
must attract and retain qualified personnel to be successful and competition for
qualified personnel can be intense.
Our
success depends upon the efforts and abilities of our senior management,
engineering and other personnel. The competition for qualified engineering
and management personnel can be intense.
We may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the
services of one or more of our key personnel or the inability to add key
personnel could harm our business. We have no employment agreements
with any member of our senior management team.
We
are dependent on several contractors to perform key manufacturing functions for
us.
We use
several contractors located in Asia for a portion of the assembly and testing of
our products. We also rely on outside wafer foundries for a portion of our wafer
fabrication. Although we own the majority of our manufacturing resources,
the disruption or termination of any of our contractors could harm our business
and operating results.
Our use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. Our future operating results
could suffer if any contractor were to experience financial, operations or
production difficulties or situations when demand exceeds capacity, or if they
were unable to maintain manufacturing yields, assembly and test yields and costs
at approximately their current levels, or if due to their locations in foreign
countries they were to experience political upheaval or infrastructure
disruption. Further, procurement of required products and services from
third parties is done by purchase order and contracts. If these third
parties are unable or unwilling to timely deliver products or services
conforming to our quality standards, we may not be able to qualify additional
manufacturing sources for our products in a timely manner or at all, and such
arrangements, if any, may not be on favorable terms to us. In such event,
we could experience an interruption in production, an increase in manufacturing
and production costs, decline in product reliability, and our business and
operating results could be adversely affected.
We
may lose sales if our suppliers of raw materials and equipment fail to meet our
needs.
Our
semiconductor manufacturing operations require raw materials and equipment that
must meet exacting standards. We generally have more than one source for
these supplies, but there are only a limited number of suppliers capable of
delivering various raw materials and equipment that meet our standards.
The raw materials and equipment necessary for our business could become more
difficult to obtain as worldwide use of semiconductors in product applications
increases. We have experienced supply shortages from time to time in
the past, and on occasion our suppliers have told us they need more time than
expected to fill our orders or that they will no longer support certain
equipment with updates or spare and replacements parts. An interruption of
any raw materials or equipment sources, or the lack of supplier support for a
particular piece of equipment, could harm our business.
Our
operating results may be impacted by both seasonality and the wide fluctuations
of supply and demand in the semiconductor industry.
The
semiconductor industry is characterized by seasonality and wide fluctuations of
supply and demand. Since a significant portion of our revenue is from
consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal
year. However, fluctuations in our overall business in certain recent
periods, semiconductor industry conditions and adverse global economic
conditions have had a more significant impact on our results than seasonality,
and has made it difficult to assess the impact of seasonal factors on our
business. The industry has also experienced significant economic
downturns, characterized by diminished product demand and production
over-capacity. We have sought to reduce our exposure to this industry
cyclically by selling proprietary products that cannot be easily or quickly
replaced to a geographically diverse base of customers across a broad range of
market segments. However, we have experienced substantial period-to-period
fluctuations in operating results and expect, in the future, to experience
period-to-period fluctuations in operating results due to general industry or
economic conditions. In particular, our business and operating
results have been adversely impacted by continuing adverse global economic
conditions.
13
We
are exposed to various risks related to legal proceedings or
claims.
We are
currently, and in the future may be, involved in legal proceedings or claims
regarding patent infringement, intellectual property rights, contracts and other
matters. As is typical in the semiconductor industry, we receive
notifications from customers from time to time who believe that we owe them
indemnification or other obligations related to infringement claims made against
the customers by third parties. These legal proceedings and claims,
whether with or without merit, could result in substantial cost to us and divert
our resources. If we are not able to resolve a claim, negotiate a
settlement of a matter, obtain necessary licenses on commercially reasonable
terms, reengineer our products or processes to avoid infringement, and/or
successfully prosecute or defend our position, we could incur uninsured
liability in any of them, be required to take an appropriate charge to
operations, be enjoined from selling a material portion of our products or using
certain processes, suffer a reduction or elimination in the value of our
inventories, and our business, financial condition or results of operations
could be harmed.
It is
also possible that from time to time we may be subject to claims related to the
performance or use of our products. These claims may be due to
products’ nonconformance to our specifications, or specifications agreed upon
with the customer, changes in our manufacturing processes, and unexpected end
customer system issues due to the interaction with our products or insufficient
design or testing by our customers. We could incur significant
expenses related to such matters, including costs related to writing off the
value of inventory of nonconforming products; recalling nonconforming products;
providing support services, product replacements, or modification to products;
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
and unpaid receivables; customer imposed fines or penalties for failure to meet
contractual requirements; and a requirement to pay damages.
Because
the systems into which our products are integrated have a higher cost of goods
than the products we sell, these expenses and damages may be significantly
higher than the sales and profits we received from the products involved.
While we specifically exclude consequential damages in our standard terms and
conditions, our ability to avoid such liabilities may be limited by applicable
law. We do have liability insurance which covers damages arising out of
product defects, but we do not expect that insurance will cover all claims or be
of a sufficient amount to fully protect against such claims. Costs or
payments we may make in connection with these customer claims may adversely
affect the results of our operations.
Further,
we sell to customers in industries such as automotive, aerospace, and medical,
where failure of the systems in which our products are integrated could cause
damage to property or persons. We may be subject to claims if our
products, or interactions with our products, cause the system failures. We
will face increased exposure to claims if there are substantial increases in
either the volume of our sales into these applications or the frequency of
system failures integrating our products.
Failure
to adequately protect our intellectual property could result in lost revenue or
market opportunities.
Our
ability to obtain patents, licenses and other intellectual property rights
covering our products and manufacturing processes is important for our
success. To that end, we have acquired certain patents and patent
licenses and intend to continue to seek patents on our inventions and
manufacturing processes. The process of seeking patent protection can
be long and expensive, and patents may not be issued from currently pending or
future applications. In addition, our existing patents and any new patents
that are issued may not be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. We may be subject to or may
ourselves initiate interference proceedings in the U.S. Patent and Trademark
Office, which can require significant financial and management resources.
In addition, the laws of certain foreign countries do not protect our
intellectual property rights to the same extent as the laws of the U.S.
Infringement of our intellectual property rights by a third party could result
in uncompensated lost market and revenue opportunities for us.
Our
operating results may be adversely impacted if economic conditions impact the
financial viability of our customers, distributors, or suppliers.
We
regularly review the financial performance of our customers, distributors and
suppliers. However, global economic conditions may adversely impact
the financial viability of our customers, distributors or suppliers. The
financial failure of a large customer or distributor, an important supplier, or
a group thereof, could have an adverse impact on our operating results and could
result in us not being able to collect our accounts receivable
balances.
We
do not typically have long-term contracts with our customers.
We do not
typically enter into long-term contracts with our customers and we cannot be
certain about future order levels from our customers. When we do enter
into customer contracts, the contract is generally cancelable at the convenience
of the customer. Even though we have approximately 63,000 customers and
our ten largest direct customers made up approximately 9% of our total revenue
for the year ended March 31, 2009, cancellation of customer contracts could
have an adverse financial impact on our revenue and profits.
14
Further,
as the practice has become more commonplace in the industry, we have entered
into contracts with certain customers that differ from our standard terms of
sale. Under these contracts we commit to supply quantities of products on
scheduled delivery dates. If we become unable to supply the customer as
required under the contract, the customer may incur additional production costs,
lost revenues due to subsequent delays in their own manufacturing schedule, or
quality related issues. Under these contracts, we may be liable for the
costs the customer has incurred. While we try to limit such liabilities,
if they should arise, there may be a material adverse impact on our results of
operation and financial condition.
Business
interruptions could harm our business.
Operations
at any of our facilities, or at any of our wafer fabrication or assembly and
test subcontractors, may be disrupted for reasons beyond our control, including
work stoppages, power loss, incidents of terrorism or security risk, political
instability, public health issues, telecommunications, transportation or other
infrastructure failure, fire, earthquake, floods, or other natural
disasters. If operations at any of our facilities, or our subcontractors’
facilities are interrupted, we may not be able to shift production to other
facilities on a timely basis. If this occurs, we would likely experience
delays in shipments of products to our customers and alternate sources for
production may be unavailable on acceptable terms. This could result in
reduced revenues and profits and the cancellation of orders or loss of
customers. In addition, business interruption insurance will likely not be
enough to compensate us for any losses that may occur and any losses or damages
incurred by us as a result of business interruptions could significantly harm
our business.
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 each of fiscal 2009 and fiscal 2008, approximately 75%
of our net sales were made to foreign customers. We purchase a substantial
portion of our raw materials and equipment from foreign suppliers. In
addition, we own product assembly and testing facilities located near Bangkok,
Thailand, which has experienced periods of political uncertainty in the
past. We also use various foreign contractors for a portion of our
assembly and testing and for a portion of our wafer fabrication
requirements. Substantially all of our finished goods inventory is
maintained in Thailand.
Our
reliance on foreign operations, foreign suppliers, maintenance of substantially
all of our finished goods inventory at foreign locations and significant foreign
sales exposes us to foreign political and economic risks, including, but not
limited to:
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·
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political,
social and economic instability;
|
|
|
·
|
public
health conditions;
|
|
|
·
|
trade
restrictions and changes in
tariffs;
|
|
|
·
|
import
and export license requirements and
restrictions;
|
|
|
·
|
difficulties
in staffing and managing international
operations;
|
|
|
·
|
employment
regulations;
|
|
|
·
|
disruptions
in international transport or
delivery;
|
|
|
·
|
difficulties
in collecting receivables;
|
|
|
·
|
economic
slowdown in the worldwide markets served by us;
and
|
|
|
·
|
potentially
adverse tax consequences.
|
If any of
these risks materialize, our sales could decrease and/or our operating results
could suffer.
Fluctuations
in foreign currency could impact our operating results. We use
forward currency exchange contracts to reduce the adverse earnings impact from
the effect of exchange rate fluctuations on our non-U.S. dollar net balance
sheet exposures. Nevertheless, in periods when the U.S. dollar
significantly fluctuates in relation to the non-U.S. currencies in which we
transact business, the value of non-U.S. dollar transactions can have an adverse
effect on our results of operations and financial condition.
Interruptions
in our information technology systems could adversely affect our
business.
We rely
on the efficient and uninterrupted operation of complex information technology
systems and networks to operate our business. Any significant system or
network disruption, including but not limited to new system implementations,
computer viruses, security breaches, or energy blackouts could have a material
adverse impact on our operations, sales and operating results. We have
implemented measures to manage our risks related to such disruptions, but such
disruptions could still occur and negatively impact our operations and financial
results. In addition, we may incur additional costs to remedy the damages
caused by these disruptions or security breaches.
15
The
occurrence of events for which we are self-insured, or which exceed our
insurance limits, may adversely affect our profitability and
liquidity.
We have
insurance contracts with independent insurance companies related to many
different types of risk; however, we self-insure for some potentially
significant risks and obligations. In these circumstances, we have determined
that it is more cost effective to self-insure certain risks than to pay the
increased premium costs in place since the disruption in the insurance market
after the events of September 11, 2001. The risks and exposures
that we self-insure include, but are not limited to, certain property, product
defects, political risks, and patent infringement. Should there be a
loss or adverse judgment or other decision in an area for which we are
self-insured, then our financial condition, result of operations and liquidity
may be adversely affected.
We
are subject to stringent environmental regulations, which may force us to incur
significant expenses.
We must
comply with many different federal, state, local and foreign governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our products and manufacturing
processes. Our failure to comply with present or future regulations could
result in the imposition of fines, suspension of production or a cessation of
operations. Such environmental regulations have required us in the past
and could require us in the future to acquire costly equipment or to incur other
significant expenses to comply with such regulations. Any failure by us to
control the use of or adequately restrict the discharge of hazardous substances
could subject us to future liabilities. Environmental problems may occur
that could subject us to future costs or liabilities.
Over the
past few years, there has been an expansion in environmental laws focusing on
reducing or eliminating hazardous substances in electronic products. For
example, the EU RoHS Directive provided that beginning on July 1, 2006,
electronic products sold into Europe were required to meet stringent chemical
restrictions, including the absence of lead. Other countries, such as the
U.S., China and Korea, have enacted or may enact laws or regulations similar to
those of the EU. These and other future environmental regulations
could require us to reengineer certain of our existing products and may make it more expensive for us to manufacture and
sell our products. Over the last several years, the number and
complexity of laws focused on the energy efficiency of electronic products and
accessories; the recycling of electronic products; and the reduction in quantity
and the recycling of packaging materials have expanded
significantly. It may be difficult for us to timely comply with these
laws and we may not have sufficient quantities of compliant products to meet
customers’ needs, thereby adversely impacting our sales and profitability.
We may also have to write off inventory in the event that we hold inventory that
is not saleable as a result of changes to regulations. We expect
these trends to continue. In addition, we anticipate increased
customer requirements to meet voluntary criteria related to the reduction or
elimination of hazardous substances in our products and energy efficiency
measures.
Regulatory
authorities in jurisdictions into which we ship our products could levy fines or
restrict our ability to export products.
A
significant portion of our sales are made outside of the U.S. through the
exporting and re-exporting of products. In addition to local
jurisdictions’ export regulations, our U.S.-manufactured products or products
based on U.S. technology are subject to Export Administration Regulations (EAR)
when exported and re-exported to and from international jurisdictions.
Licenses or proper license exceptions may be required for the shipment of our
products to certain countries. Non-compliance with EAR or other export
regulations can result in penalties including denial of export privileges,
fines, criminal penalties, and seizure of products. Such penalties could
have a material adverse effect on our business including our ability to meet our
net sales and earnings targets.
The
outcome of currently ongoing and future examinations of our income tax returns
by the IRS could have an adverse effect on our results of
operations.
We are
subject to continued examination of our income tax returns by the IRS and other
tax authorities for fiscal 2002 and later, other than fiscal 2005. We
regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes.
There can be no assurance that the outcomes from these continuing examinations
will not have an adverse effect on our future operating results.
The
future trading price of our common stock could be subject to wide fluctuations
in response to a variety of factors.
The
market price of our common stock has fluctuated significantly in the past and is
likely to fluctuate in the future. The future trading price of our
common stock could be subject to wide fluctuations in response to a variety of
factors, many of which are beyond our control, including, but not limited
to:
|
|
·
|
quarterly
variations in our operating results and the operating results of other
technology companies;
|
|
|
·
|
actual
or anticipated announcements of technical innovations or new products by
us or our competitors;
|
|
|
·
|
changes
in analysts’ estimates of our financial performance or buy/sell
recommendations;
|
|
|
·
|
changes
in our financial guidance or our failure to meet such
guidance;
|
|
|
·
|
general
conditions in the semiconductor industry;
and
|
|
|
·
|
global
economic and financial conditions.
|
In
addition, the stock market has recently experienced significant price and volume
fluctuations that have affected the market prices for many companies and that
often have been unrelated to the operating performance of such
companies. These broad market fluctuations and other factors have
harmed and may harm the market price of our common stock.
16
In
the event we make acquisitions, we may not be able to successfully integrate
such acquisitions or attain the anticipated benefits.
We may
consider strategic acquisitions if such opportunities arise. Any
transactions that we consider may involve a number of risks including the
diversion of our management’s attention from our existing business for those
transactions that we complete, or possible adverse effects on our operating
results during the integration process. In addition, we may not be able to
successfully or profitably integrate, operate, maintain and manage any newly
acquired operations or employees. We may not be able to maintain uniform
standards, controls, procedures and policies, which may lead to operational
inefficiencies.
We
have not historically maintained substantial levels of indebtedness, and our
financial condition and results of operations could be adversely affected if we
do not effectively manage our liabilities.
As a
result of our sale of $1.15 billion of 2.125% junior subordinated
convertible debentures in December 2007, we have a substantially greater amount
of long-term debt than we have maintained in the past. Our maintenance of
substantial levels of debt could adversely affect our ability to take advantage
of corporate opportunities and could adversely affect our financial condition
and results of operations. We may need or desire to refinance all or
a portion of our debentures or any other future indebtedness that we incur on or
before the maturity of the debentures. There can be no assurance that
we will be able to refinance any of our indebtedness on commercially reasonable
terms, if at all.
Conversion
of our debentures will dilute the ownership interest of existing stockholders,
including holders who had previously converted their debentures.
The
conversion of some or all of our outstanding debentures will dilute the
ownership interest of existing stockholders to the extent we deliver common
stock upon conversion of the debentures. Upon conversion, we may
satisfy our conversion obligation by delivering cash, shares of common stock or
any combination, at our option. If upon conversion we elect to
deliver cash for the lesser of the conversion value and principal amount of the
debentures, we would pay the holder the cash value of the applicable number of
shares of our common stock. Upon conversion, we intend to satisfy the
lesser of the principal amount or the conversion value of the debentures in
cash. If the conversion value of a debenture exceeds the principal
amount of the debenture, we may also elect to deliver cash in lieu of common
stock for the conversion value in excess of one thousand dollars principal
amount (conversion spread). There would be no adjustment to the
numerator in the net income per common share computation for the cash settled
portion of the debentures as that portion of the debt instrument will always be
settled in cash. The conversion spread will be included in the
denominator for the computation of diluted net income per common
share. Any sales in the public market of any common stock issuable
upon such conversion could adversely affect prevailing market prices of our
common stock. In addition, the existence of the debentures may
encourage short selling by market participants because the conversion of the
debentures could be used to satisfy short positions, or anticipated conversion
of the debentures into shares of our common stock could depress the price of our
common stock.
There
will likely be new accounting pronouncements or regulatory rulings which may
have an adverse impact on our future financial condition and results of
operations.
There
will likely be new accounting pronouncements or regulatory rulings, which may
have an adverse impact on our future financial condition and results of
operations. For example, in May 2008, the FASB issued FASB Staff
Position (FSP) No. APB 14-1, Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1), that alters the accounting
treatment for convertible debt that allows for either mandatory or optional cash
settlements, including our outstanding debentures. FSP APB 14-1
requires the issuer to separately account for the liability and equity
components of the instrument in a manner that reflects the issuer’s economic
interest cost. Further, FSP APB 14-1 requires bifurcation of a
component of the debt, classification of that component as equity, and then
accretion of the resulting discount on the debt to result in the “economic
interest cost” being reflected in the consolidated statements of
income. In issuing FSP APB 14-1, the FASB emphasized that FSP APB
14-1 will be applied to the terms of the instruments as they existed for the
time periods presented, therefore, the application of FSP APB 14-1 would be
applied retrospectively to all periods presented. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008, and will require
retrospective application. We will be required to implement the
proposed standard during the first quarter of fiscal 2010, which begins on April
1, 2009. Although FSP APB 14-1 will have no impact on our actual past
or future cash flows, it will require us to record a significant amount of
non-cash interest expense as the debt discount is amortized. In
addition, if our convertible debt is redeemed or converted prior to maturity,
any unamortized debt discount would result in a loss on
extinguishment. As a result, there could be a material adverse impact
on our results of operations and earnings per share. These impacts
could adversely affect the trading price of our common stock and the trading
price of our debentures.
17
Recently
proposed U.S. tax legislation regarding our foreign earnings could materially
impact our business and financial results.
Currently,
a majority of our revenue is generated from customers located outside the U.S.,
and a substantial portion of our assets, including employees, are located
outside the U.S. Present U.S. income taxes and foreign withholding
taxes have not been provided on undistributed earnings for certain of our
non-U.S. subsidiaries, because such earnings are intended to be indefinitely
reinvested in the operations of those subsidiaries. President Obama’s
administration has recently announced initiatives that would substantially
reduce our ability to defer U.S. taxes including, repealing the deferral of U.S.
taxation of foreign earnings, eliminating utilization of or substantially
reducing our ability to claim foreign tax credits, and eliminating various tax
deductions until foreign earnings are repatriated to the U.S. If any
of these proposals are constituted into legislation, they could have a negative
impact on our financial position and results of operations.
Item
1B. UNRESOLVED
STAFF COMMENTS
None.
Item
2. PROPERTIES
At March
31, 2009, we owned the facilities described below:
|
Location
|
Approximate
Total
Sq. Ft.
|
Uses
|
|
Chandler,
Arizona
|
415,000
|
Executive
and Administrative Offices; Wafer Probe; R&D Center; Sales and
Marketing; and Computer and Service Functions
|
|
Tempe,
Arizona
|
379,000
|
Wafer
Fabrication (Fab
2); R&D Center; Administrative Offices; and
Warehousing
|
|
Gresham,
Oregon
|
826,500
|
Wafer
Fabrication (Fab
4); R&D Center; Administrative Offices; and
Warehousing
|
|
Chacherngsao,
Thailand
|
489,000
|
Test
and Assembly; Wafer Probe; Sample Center; Warehousing; and Administrative
Offices
|
|
Bangalore,
India
|
67,174
|
Research
and Development; Marketing Support; and Administrative
Offices
|
In
addition to the facilities we own, we lease several research and development
facilities and sales offices in North America, Europe and Asia. Our
aggregate monthly rental payment for our leased facilities is approximately
$0.5 million.
We
currently believe that our existing facilities are suitable and will be adequate
to meet our production requirements for at least the next 12
months.
See page
32 for a discussion of the capacity utilization of our manufacturing
facilities.
Item
3. LEGAL PROCEEDINGS
In the
ordinary course of our business, we are involved in a limited number of legal
actions, both as plaintiff and defendant, and could incur uninsured liability in
any one or more of them. We also periodically receive notification
from various third parties alleging infringement of patents, intellectual
property rights or other matters. With respect to these pending legal
actions to which we are a party, although the outcome of these actions is not
presently determinable, we believe that the ultimate resolution of these matters
will not harm our business and will not have a material adverse effect on our
financial position, cash flows or results of operations. Litigation
relating to the semiconductor industry is not uncommon, and we are, and from
time to time have been, subject to such litigation. No assurances
can be given with respect to the extent or outcome of any such litigation in the
future.
On April
18, 2008, LSI Logic and its wholly owned subsidiary Agere, filed both
an action with the International Trade Commission and a complaint
in the U.S. District Court for the Eastern District of Texas alleging patent
infringement by Microchip and 22 other semiconductor and foundry
companies. These actions seek monetary damages and injunctive
relief against the allegedly infringing products. The outcome of
these actions is not presently determinable, and therefore we can make no
assessment of their materiality. The target date for completion of the
International Trade Commission investigation is September 21,
2009. The U.S. District Court action is stayed pending resolution of
the ITC matter. Microchip intends to vigorously defend its rights in
these matters.
18
Item
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
[Remainder of page intentionally left blank.]
19
|
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.” Our
common stock has been quoted on such market since our initial public offering on
March 19, 1993. The following table sets forth the quarterly high and
low closing prices of our common stock as reported by NASDAQ for our last two
fiscal years.
|
Fiscal
2009
|
High
|
Low
|
Fiscal
2008
|
High
|
Low
|
||||||||||||
|
First
Quarter
|
$ | 38.37 | $ | 30.15 |
First
Quarter
|
$ | 42.06 | $ | 35.47 | ||||||||
|
Second
Quarter
|
$ | 34.19 | $ | 27.96 |
Second
Quarter
|
$ | 39.53 | $ | 36.31 | ||||||||
|
Third
Quarter
|
$ | 29.55 | $ | 16.28 |
Third
Quarter
|
$ | 36.92 | $ | 27.57 | ||||||||
|
Fourth
Quarter
|
$ | 21.90 | $ | 16.60 |
Fourth
Quarter
|
$ | 34.56 | $ | 26.86 | ||||||||
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,
The Nasdaq Composite Index, and the Philadelphia Semiconductor
Index.
|
Cumulative
Total Return
|
||||||||||||||||||||||||
|
March
2004
|
March
2005
|
March
2006
|
March
2007
|
March
2008
|
March
2009
|
|||||||||||||||||||
|
Microchip
Technology Incorporated
|
100.00 | 99.18 | 140.93 | 141.89 | 135.30 | 92.42 | ||||||||||||||||||
|
S&P
500 Stock Index (1)
|
100.00 | 106.69 | 119.20 | 133.31 | 126.54 | 78.34 | ||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 101.46 | 120.54 | 127.18 | 119.09 | 78.60 | ||||||||||||||||||
|
Philadelphia
Semiconductor Index
|
100.00 | 85.92 | 94.59 | 90.71 | 82.88 | 59.47 | ||||||||||||||||||
Data
acquired by Research Data Group, Inc. (www.researchdatagroup.com)
(1) Our common stock was added
to the S&P 500 Stock Index and, accordingly, we have selected the S&P
Stock Index to replace the Nasdaq Composite Index as the broad equity market
index for purposes of comparison in the above performance graph and
table. In accordance with Item 201(e) of Regulation S-K, we are
showing the performance of both the S&P Stock Index and the Nasdaq Composite
Index in this year’s performance graph and table.
20
On May
26, 2009, there were approximately 385 holders of record of our common
stock. This figure does not reflect beneficial ownership of shares
held in nominee names.
We have
been declaring and paying quarterly cash dividends on our common stock since the
third quarter of fiscal 2003. Our total cash dividends paid were
$246.7 million, $252.0 million and $207.9 million in fiscal 2009, 2008 and 2007,
respectively. The following table sets forth our quarterly cash
dividends per common share and the total amount of the dividend payment for each
quarter in fiscal 2009 and fiscal 2008 (amounts in thousands, except per share
amounts).
|
Fiscal
2009
|
Dividends
per
Common
Share
|
Amount
of
Dividend
Payment
|
Fiscal
2008
|
Dividends
per
Common
Share
|
Amount
of
Dividend
Payment
|
||||||||||||
|
First
Quarter
|
$ | 0.330 | $ | 60,977 |
First
Quarter
|
$ | 0.280 | $ | 61,119 | ||||||||
|
Second
Quarter
|
0.338 | 62,166 |
Second
Quarter
|
0.295 | 64,095 | ||||||||||||
|
Third
Quarter
|
0.339 | 61,690 |
Third
Quarter
|
0.310 | 66,378 | ||||||||||||
|
Fourth
Quarter
|
0.339 | 61,825 |
Fourth
Quarter
|
0.320 | 60,367 | ||||||||||||
On May 7,
2009, we declared a quarterly cash dividend of $0.339 per share, which will be
paid on June 4, 2009 to stockholders of record on May 21, 2009 and the total
amount of such dividend is expected to be approximately
$62.0 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 and our
results of operations.
Please
refer to “Item 12, Security
Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters,” at page 44 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, 2009.
Issuer
Purchases of Equity Securities
The
following table sets forth our purchases of our common stock in the fourth
quarter of fiscal 2009 and the footnote below the table designates the
repurchase programs that the shares were purchased under:
|
Issuer
Purchases of Equity Securities
|
||||||||||||||||
|
Period
|
(a)
Total Number of Shares Purchased
|
(b)
Average Price Paid per Share
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced
Programs
|
(d)
Maximum Number of Shares that May Yet Be Purchased Under the Programs
(1)
|
||||||||||||
|
January
1 – January 31, 2009
|
--- | $ | --- | --- | 2,460,002 | |||||||||||
|
February
1 – February 28, 2009
|
--- | $ | --- | --- | 2,460,002 | |||||||||||
|
March
1 – March 31, 2009
|
--- | $ | --- | --- | 2,460,002 | |||||||||||
|
Total
|
--- | $ | --- | --- | ||||||||||||
|
(1)
|
On
December 11, 2007, our Board of Directors authorized the repurchase of up
to 10 million shares of our common stock in open market or privately
negotiated transactions. As of March 31, 2009, 2,460,002 shares
of this authorization remained available to be purchased under this
program. There is no expiration date associated with this
program.
|
21
|
SELECTED
FINANCIAL DATA
|
You
should read the following selected consolidated financial data for the five-year
period ended March 31, 2009 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, 2009, and the balance sheet data
as of March 31, 2009 and 2008, are derived from our audited consolidated
financial statements, included in Item 8 of this Form 10-K. The statements of
operations data for the years ended March 31, 2006 and 2005 and balance sheet
data as of March 31, 2007, 2006 and 2005 have been derived from our audited
consolidated financial statements not included herein (for information below all
amounts are in thousands, except per share data).
Statement
of Income Data:
|
Year
ended March 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Net
sales
|
$ | 903,297 | $ | 1,035,737 | $ | 1,039,671 | $ | 927,893 | $ | 846,936 | ||||||||||
|
Cost
of sales
|
386,793 | 410,799 | 414,915 | 377,016 | 362,961 | |||||||||||||||
|
Research
and development
|
115,524 | 120,864 | 113,698 | 94,926 | 93,040 | |||||||||||||||
|
Selling,
general and administrative
|
161,218 | 175,646 | 163,247 | 129,587 | 111,188 | |||||||||||||||
|
Special
charges (1)
|
6,434 | 26,763 | --- | --- | 21,100 | |||||||||||||||
|
Operating
income
|
233,328 | 301,665 | 347,811 | 326,364 | 258,647 | |||||||||||||||
|
Interest
income
|
32,545 | 54,851 | 58,383 | 32,753 | 17,804 | |||||||||||||||
|
Interest
expense
|
(24,269 | ) | (7,966 | ) | (5,416 | ) | (1,967 | ) | (940 | ) | ||||||||||
|
Other
(expense) income, net
|
(4,354 | ) | 2,435 | 312 | 2,035 | 1,757 | ||||||||||||||
|
Income
before income taxes
|
237,250 | 350,985 | 401,090 | 359,185 | 277,268 | |||||||||||||||
|
Income
tax (benefit) provision
|
(11,570 | ) | 53,237 | 44,061 | 116,816 | 63,483 | ||||||||||||||
|
Net
income
|
$ | 248,820 | $ | 297,748 | $ | 357,029 | $ | 242,369 | $ | 213,785 | ||||||||||
|
Basic
net income per common share
|
$ | 1.36 | $ | 1.44 | $ | 1.66 | $ | 1.15 | $ | 1.03 | ||||||||||
|
Diluted
net income per common share
|
$ | 1.33 | $ | 1.40 | $ | 1.62 | $ | 1.13 | $ | 1.01 | ||||||||||
|
Dividends
declared per common share
|
$ | 1.346 | $ | 1.205 | $ | 0.965 | $ | 0.570 | $ | 0.208 | ||||||||||
|
Basic
common shares outstanding
|
183,158 | 207,220 | 215,498 | 210,104 | 206,740 | |||||||||||||||
|
Diluted
common shares outstanding
|
186,788 | 212,048 | 220,848 | 215,024 | 211,962 | |||||||||||||||
Balance
Sheet Data:
|
March
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Working
capital
|
$ | 1,587,144 | $ | 1,526,649 | $ | 828,817 | $ | 509,860 | $ | 768,683 | ||||||||||
|
Total
assets
|
2,421,439 | 2,512,307 | 2,269,541 | 2,350,596 | 1,817,554 | |||||||||||||||
|
Long-term
obligations, less current portion
|
1,149,184 | 1,150,128 | --- | --- | --- | |||||||||||||||
|
Stockholders’
equity
|
990,766 | 1,036,223 | 2,004,368 | 1,726,189 | 1,485,734 | |||||||||||||||
|
|
(1)
|
There
were no special charges during the fiscal years ended March 31, 2007 and
2006. Discussions of the special charges for the fiscal years
ended March 31, 2009 and 2008 are contained in Note 3 to our consolidated
financial statements. An explanation of the special charge for
the fiscal year ended March 31, 2005 is provided
below. The following table presents a summary of special
charges for the five-year period ended March 31,
2009:
|
|
Year
ended March 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Patent
portfolio license
|
$ | 4,000 | $ | --- | $ | --- | $ | --- | $ | --- | ||||||||||
|
In-process
research and development expenses
|
860 | --- | --- | --- | --- | |||||||||||||||
|
Abandoned
acquisition related expenses
|
1,574 | --- | --- | --- | --- | |||||||||||||||
|
Loss
on sale of Fab 3
|
--- | 26,763 | --- | --- | --- | |||||||||||||||
|
Intellectual
property settlement
|
--- | --- | --- | --- | 21,100 | |||||||||||||||
|
Totals
|
$ | 6,434 | $ | 26,763 | $ | --- | $ | --- | $ | 21,100 | ||||||||||
22
Fiscal
2005 Special Charge
Settlement
with U.S. Philips Corporation
In fiscal
2005, we reached an agreement with U.S. Philips Corporation and Philips
Electronics North America Corp. (together “Philips”) regarding patent license
litigation between Philips and Microchip. The agreement included
dismissal of the then pending litigation and the cross-license of certain
patents between Philips and Microchip. We recorded a special charge
of $21.1 million in the quarter that ended June 30, 2004 associated with this
matter. Pursuant to this cross-license, we licensed certain of our
patents related to 8-pin microcontrollers to Philips, and Philips licensed its
patents related to I2C serial
communications to us, each on fully-paid up, non-royalty bearing worldwide
licenses. We finalized and executed the definitive settlement
agreement related to this matter and made the cash payment to Philips during the
fiscal quarter ending September 30, 2004.
|
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,” “estimate,” “future,” “intend” and similar
expressions to identify forward-looking statements. These
forward-looking statements include, without limitation, statements regarding the
following:
|
|
·
|
The
effects that declining economic conditions and fluctuations in the global
credit and equity markets may have on our financial condition and results
of operation;
|
|
|
·
|
The
effects and amount of competitive pricing pressure on our product
lines;
|
|
|
·
|
Our
ability to moderate future average selling price
declines;
|
|
|
·
|
The
effect of product mix on gross
margin;
|
|
|
·
|
The
amount of changes in demand for our products and those of our
customers;
|
|
|
·
|
The
level of orders that will be received and shipped within a
quarter;
|
|
|
·
|
The
effect that distributor and customer inventory holding patterns will have
on us;
|
|
|
·
|
Our
belief that customers recognize our products and brand name and use
distributors as an effective supply
channel;
|
|
|
·
|
Our
belief that deferred cost of sales will have low risk of material
impairment;
|
|
|
·
|
Our
belief that our direct sales personnel combined with our distributors
provide an effective means of reaching our customer
base;
|
|
|
·
|
Our
ability to increase the proprietary portion of our analog and interface
product lines and the effect of such an
increase;
|
|
|
·
|
The
impact of any supply disruption we may
experience;
|
|
|
·
|
Our
ability to effectively utilize our facilities at appropriate capacity
levels and anticipated costs;
|
|
|
·
|
That
our existing facilities and planned expansion activities provide
sufficient capacity to respond to increases in
demand;
|
|
|
·
|
That
manufacturing costs will be reduced by transition to advanced process
technologies;
|
|
|
·
|
Our
ability to absorb fixed manufacturing
costs;
|
|
|
·
|
Our
ability to maintain manufacturing
yields;
|
|
|
·
|
Continuing
our investments in new and enhanced
products;
|
|
|
·
|
Our
ability to attract and retain qualified
personnel;
|
|
|
·
|
The
cost effectiveness of using our own assembly and test
operations;
|
|
|
·
|
Our
anticipated level of capital
expenditures;
|
|
|
·
|
Continuation
of quarterly cash dividends;
|
|
|
·
|
The
sufficiency of our existing sources of
liquidity;
|
|
|
·
|
The
impact of seasonality on our
business;
|
|
|
·
|
The
accuracy of our estimates used in valuing employee equity
awards;
|
23
|
|
·
|
That
the resolution of legal actions will not harm our business, and the
accuracy of our assessment of the probability of loss and range of
potential loss;
|
|
|
·
|
That
the idling of assets will not impair the value of such
assets;
|
|
|
·
|
Our
belief that we may incur impairment losses, or additional losses on
already impaired assets, in future periods if factors influencing our
estimates change;
|
|
|
·
|
The
recoverability of our deferred tax
assets;
|
|
|
·
|
The
adequacy of our tax reserves to offset any potential tax liabilities,
having the appropriate support for our income tax positions and the
accuracy of our estimated tax rate;
|
|
|
·
|
Our
belief that the expiration of any tax holidays will not have a material
impact;
|
|
|
·
|
The
accuracy of our estimates of the useful life and values of our property,
assets, and other liabilities;
|
|
|
·
|
The
adequacy of our patent strategy;
|
|
|
·
|
Our
ability to obtain patents and intellectual property licenses and minimize
the effects of litigation;
|
|
|
·
|
The
level of risk we are exposed to for product liability
claims;
|
|
|
·
|
The
amount of labor unrest, political instability, governmental interference
and changes in general economic conditions that we
experience;
|
|
|
·
|
The
effect of fluctuations in market interest rates on income and/or cash
flows;
|
|
|
·
|
The
effect of fluctuations in currency
rates;
|
|
|
·
|
Our
ability to collect accounts
receivable;
|
|
|
·
|
Our
belief that our investments in student loan auction rate municipal bond
offerings are of high credit
quality;
|
|
|
·
|
Our
ability to hold our fixed income investments and certain ARS until the
market recovers, and the immaterial impact this will have on our
liquidity;
|
|
|
·
|
Our
belief that any future changes in the fair value of the ARS associated
with the ARS rights agreement will be largely offset by changes in the
fair value of the related rights without any significant net impact to our
income statement;
|
|
|
·
|
The
accuracy of our estimation of the cost effectivity of our insurance
coverage;
|
|
|
·
|
Our
belief that our activities are conducted in compliance with various
regulations not limited to environmental and export
compliance;
|
|
|
·
|
Our
ability and intent to settle the principal amount of the junior
subordinated convertible debentures in cash;
and
|
|
|
·
|
Our
expectation that our wafer fabs will operate at levels significantly below
peak levels.
|
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 – Risk Factors,” 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.
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 – Financial Statements and
Supplementary Data.”
We begin
our Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) with a summary of Microchip’s overall business strategy to
give the reader an overview of the goals of our business and the overall
direction of our business and products. This is followed by a
discussion of the Critical Accounting Policies and Estimates that we believe are
important to understanding the assumptions and judgments incorporated in our
reported financial results. In the next section, beginning at page
30, we discuss our Results of Operations for fiscal 2009 compared to fiscal
2008, and for fiscal 2008 compared to fiscal 2007. We then provide an
analysis of changes in our balance sheet and cash flows, and discuss our
financial commitments in sections titled “Liquidity and Capital Resources,”
“Contractual Obligations” and “Off-Balance Sheet Arrangements.”
Strategy
Our goal
is to be a worldwide leader in providing specialized semiconductor products for
a wide variety of embedded control applications. Our strategic focus
is on embedded control products, which include microcontrollers,
high-performance linear and mixed signal devices, power management and thermal
management devices, interface devices, Serial EEPROMs, and our patented
KeeLoq®
security devices. We provide highly cost-effective embedded
control products that also offer the advantages of small size, high performance,
low voltage/power operation and ease of development, enabling timely and
cost-effective embedded control product integration by our
customers.
24
We sell
our products to a broad base of domestic and international customers
across a variety of industries. The principal markets that
we serve include consumer, automotive, industrial, office automation and
telecommunications. Our business is subject to fluctuations based on
economic conditions within these markets. Over the last two quarters of
fiscal 2009, the downturn in the U.S. and global economies has adversely
impacted our key markets resulting in adverse fluctuations in our
business. In response to these adverse economic conditions, we have
significantly reduced our operating expenses and are operating our manufacturing
facilities at lower production levels. We are unable to predict how
long such adverse business conditions will continue.
Our
manufacturing operations include wafer fabrication and assembly and
test. The ownership of our manufacturing resources is an important
component of our business strategy, enabling us to maintain a high level of
manufacturing control resulting in us being one of the lowest cost producers in
the embedded control industry. By owning our wafer fabrication
facilities and our assembly and test operations, and by employing statistical
process control techniques, we have been able to achieve and maintain high
production yields. Direct control over manufacturing resources allows
us to shorten our design and production cycles. This control also
allows us to capture the wafer manufacturing and a portion of the assembly and
test profit margin.
We employ
proprietary design and manufacturing processes in developing our embedded
control products. We believe our processes afford us both
cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully leverage
our process research and development costs and to deliver new products to market
more rapidly. Our engineers utilize advanced computer-aided design
(CAD) tools and software to perform circuit design, simulation and layout, and
our in-house photomask and wafer fabrication facilities enable us to rapidly
verify design techniques by processing test wafers quickly and
efficiently.
We are
committed to continuing our investment in new and enhanced products, including
development systems, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. Our current research and
development activities focus on the design of new microcontrollers, digital
signal controllers, memory and mixed-signal products, new development systems,
software and application-specific software libraries. We are also
developing new design and process technologies to achieve further cost
reductions and performance improvements in our products.
We market
our products worldwide primarily through a network of direct sales personnel and
distributors. Our distributors focus primarily on servicing the
product and technical support requirements of a broad base of diverse
customers. We believe that our direct sales personnel combined with
our distributors provide an effective means of reaching this broad and diverse
customer base. Our direct sales force focuses primarily on major
strategic accounts in three geographical markets: the Americas, Europe and
Asia. We currently maintain sales and support centers in major
metropolitan areas in North America, Europe and Asia. We believe that
a strong technical service presence is essential to the continued development of
the embedded control market. Many of our field sales engineers
(FSEs), field application engineers (FAEs), and sales management have technical
degrees and have been previously employed in an engineering
environment. We believe that the technical knowledge of our sales
force is a key competitive advantage in the sale of our products. The
primary mission of our FAE team is to provide technical assistance to strategic
accounts and to conduct periodic training sessions for FSEs and distributor
sales teams. FAEs also frequently conduct technical seminars for our
customers in major cities around the world, and work closely with our
distributors to provide technical assistance and end-user support.
Critical
Accounting Policies and Estimates
General
Our
discussion and analysis of 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. We review the accounting policies we use in reporting our financial
results on a regular basis. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
liabilities. On an ongoing basis, we evaluate our estimates, including
those related to revenue recognition, share-based compensation, inventories,
investments, income taxes, property plant and equipment, impairment of property,
plant and equipment, junior subordinated convertible debentures and
litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the 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. We also have other policies that we consider key accounting
policies, such as our policy regarding revenue recognition to OEMs; however, we
do not believe these policies require us to make estimates or judgments that are
as difficult or subjective as our policies described below.
25
Revenue
Recognition – Distributors
Our
distributors worldwide generally have broad price protection and product return
rights, so we defer revenue recognition until the distributor sells the product
to their customer. Revenue is recognized when the distributor sells
the product to an end-user, at which time the sales price becomes fixed or
determinable. Revenue is not recognized upon shipment to our
distributors since, due to discounts from list price as well as price protection
rights, the sales price is not substantially fixed or determinable at that
time. At the time of shipment to these distributors, we record a
trade receivable for the selling price as there is a legally enforceable right
to payment, relieve inventory for the carrying value of goods shipped since
legal title has passed to the distributor, and record the gross margin in
deferred income on shipments to distributors on our consolidated balance
sheets.
Deferred
income on shipments to distributors effectively represents the gross margin on
the sale to the distributor; however, the amount of gross margin that we
recognize in future periods could be less than the deferred margin as a result
of credits granted to distributors on specifically identified products and
customers to allow the distributors to earn a competitive gross margin on the
sale of our products to their end customers and price protection
concessions related to market pricing conditions.
We sell
the majority of the items in our product catalog to our distributors worldwide
at a uniform list price. However, distributors resell our products to
end customers at a very broad range of individually negotiated price
points. The majority of our distributors’ resales require a reduction
from the original list price paid. Often, under these circumstances,
we remit back to the distributor a portion of their original purchase price
after the resale transaction is completed in the form of a credit against the
distributors’ outstanding accounts receivable balance. The credits
are on a per unit basis and are not given to the distributor until they provide
information to us regarding the sale to their end customer. The price
reductions vary significantly based on the customer, product, quantity ordered,
geographic location and other factors and discounts to a price less than our
cost have historically been rare. The effect of granting these
credits establishes the net selling price to our distributors for the product
and results in the net revenue recognized by us when the product is sold by the
distributors to their end customers. Thus, a portion of the “deferred
income on shipments to distributors” balance represents the amount of
distributors’ original purchase price that will be credited back to the
distributor in the future. The wide range and variability of
negotiated price concessions granted to distributors does not allow us to
accurately estimate the portion of the balance in the deferred income on
shipments to distributors account that will be credited back to the
distributors. Therefore, we do not reduce deferred income on
shipments to distributors or accounts receivable by anticipated future
concessions; rather, price concessions are typically recorded against deferred
income on shipments to distributors and accounts receivable when incurred, which
is generally at the time the distributor sells the product. At March
31, 2009, we had approximately $118.2 million of deferred revenue and $34.3
million in deferred cost of sales recognized as $83.9 million of deferred income
on shipments to distributors. At March 31, 2008, we had approximately
$130.4 million of deferred revenue and $35.0 million in deferred cost of sales
recognized as $95.4 million of deferred income on shipments to
distributors. The deferred income on shipments to distributors that
will ultimately be recognized in our income statement will be lower than the
amount reflected on the balance sheet due to additional price credits to be
granted to the distributors when the product is sold to their
customers. These additional price credits historically have resulted
in the deferred income approximating the overall gross margins that we recognize
in the distribution channel of our business.
Distributor
advances, reflected as a reduction of deferred income on shipments to
distributors on our consolidated balance sheets, totaled $37.6 million at
March 31, 2009 and $36.4 million at March 31, 2008. On sales to
distributors, our payment terms generally require the distributor to settle
amounts owed to us for an amount in excess of their ultimate
cost. The sales price to our distributors may be higher than the
amount that the distributors will ultimately owe us because distributors often
negotiate price reductions after purchasing the product from us and such
reductions are often significant. It is our practice to apply these
negotiated price discounts to future purchases, requiring the distributor to
settle receivable balances, on a current basis, generally within 30 days, for
amounts originally invoiced. This practice has an adverse impact on
the working capital of our distributors. As such, we have entered
into agreements with certain distributors whereby we advance cash to the
distributors to reduce the distributor’s working capital
requirements. These advances are reconciled at least on a quarterly
basis and are estimated based on the amount of ending inventory as reported by
the distributor multiplied by a negotiated percentage. Such advances
have no impact on our revenue recognition or our consolidated statements of
income. We process discounts taken by distributors against our
deferred income on shipments to distributors’ balance and true-up the advanced
amounts generally after the end of each completed fiscal quarter. The
terms of these advances are set forth in binding legal agreements and are
unsecured, bear no interest on unsettled balances and are due upon
demand. The agreements governing these advances can be cancelled by
us at any time.
26
We reduce
product pricing through price protection based on market conditions, competitive
considerations and other factors. Price protection is granted to
distributors on the inventory they have on hand at the date the price protection
is offered. When we reduce the price of our products, it allows the
distributor to claim a credit against its outstanding accounts receivable
balances based on the new price of the inventory it has on hand as of the date
of the price reduction. There is no immediate revenue impact from the
price protection, as it is reflected as a reduction of the deferred income on
shipments to distributors’ balance.
Products
returned by distributors and subsequently scrapped have historically been
immaterial to our consolidated results of operations. We routinely
evaluate the risk of impairment of the deferred cost of sales component of the
deferred income on shipments to distributors account. Because of the
historically immaterial amounts of inventory that have been scrapped, and
historically rare instances where discounts given to a distributor result in a
price less than our cost, we believe the deferred costs are recorded at their
approximate carrying value.
Share-based
Compensation
In the
first quarter of fiscal 2007, we adopted SFAS No. 123R, which requires
the measurement at fair value and recognition of compensation expense for all
share-based payment awards, including grants of employee stock options, RSUs and
employee stock purchase rights, to be recognized in our financial statements
based on their respective grant date fair values. Total share-based
compensation in fiscal 2009 was $33.4 million, of which $26.6 million
was reflected in operating expenses. Total share-based compensation
included in cost of sales in fiscal 2009 was $5.8 million. Total
share-based compensation included in our inventory balance was $4.7 million at
March 31, 2009.
Determining
the appropriate fair-value model and calculating the fair value of share-based
awards at the date of grant requires judgment. The fair value of our
RSUs is based on the fair market value of our common stock on the date of grant
discounted for expected future dividends. We use the Black-Scholes
option pricing model to estimate the fair value of employee stock options and
rights to purchase shares under our employee stock purchase plans, consistent
with the provisions of SFAS No. 123R. Option pricing
models, including the Black-Scholes model, also require the use of input
assumptions, including expected volatility, expected life, expected dividend
rate, and expected risk-free rate of return. We use a blend of
historical and implied volatility based on options freely traded in the open
market as we believe this is more reflective of market conditions and a better
indicator of expected volatility than using purely historical
volatility. The expected life of the awards is based on historical
and other economic data trended into the future. The risk-free
interest rate assumption is based on observed interest rates appropriate for the
terms of our awards. The dividend yield assumption is based on our
history and expectation of future dividend payouts.
SFAS No. 123R requires us to develop an estimate of the number
of share-based awards which will be forfeited due to employee
turnover. Quarterly changes in the estimated forfeiture rate can have
a significant effect on reported share-based compensation, as the effect of
adjusting the rate for all expense amortization after April 1, 2006 is
recognized in the period the forfeiture estimate is changed. If the actual
forfeiture rate is higher or lower than the estimated forfeiture rate, then an
adjustment is made to increase or decrease the estimated forfeiture rate, which
will result in a decrease or increase to the expense recognized in our financial
statements. If forfeiture adjustments are made, they would affect our
gross margin, research and development expenses, and selling, general,
administrative expenses. The effect of forfeiture adjustments in
fiscal 2009 was immaterial.
We
evaluate the assumptions used to value our awards on a quarterly
basis. If factors change and we employ different assumptions,
share-based compensation expense may differ significantly from what we have
recorded in the past. If there are any modifications or cancellations
of the underlying unvested securities, we may be required to accelerate,
increase or cancel any remaining unearned share-based compensation
expense. Future share-based compensation expense and unearned
share-based compensation will increase to the extent that we grant additional
equity awards to employees or we assume unvested equity awards in connection
with acquisitions.
Inventories
Inventories
are valued at the lower of cost or market using the first-in, first-out
method. We write down our inventory for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less
favorable than those we projected, additional inventory write-downs may be
required. Inventory impairment charges establish a new cost basis for
inventory and charges are not subsequently reversed to income even if
circumstances later suggest that increased carrying amounts are
recoverable. In estimating our inventory obsolescence, we primarily
evaluate estimates of demand over a 12-month period and record impairment
charges for inventory on hand in excess of the estimated 12-month
demand.
In
periods where our production levels are substantially below our normal operating
capacity, such as in the second half of fiscal 2009, the reduced production
levels of our manufacturing facilities are charged directly to cost of
sales.
27
Investments
We
classify our investments as trading securities or available-for-sale securities
based upon management’s intent with regard to the investments and the nature of
the underlying securities.
Our
trading securities consist of strategic investments in shares of publicly traded
common stock, restricted cash representing cash collateral for put options we
have sold on some of our trading securities and ARS that we intend to dispose of
through the exercise of a put option. (See Note 4 to our consolidated financial
statements for further discussion of the ARS put option.) Our investments
in trading securities are carried at fair value with unrealized gains and losses
reported in other income, (expense).
Our
available-for-sale investments consist of government agency bonds, municipal
bonds, ARS and corporate bonds. Our investments are carried at fair value
with unrealized gains and losses reported in stockholders’ equity to the extent
any unrelated losses are determined to be temporary. Premiums and
discounts are amortized or accreted over the life of the related
available-for-sale security. Dividend and interest income are recognized
when earned. The cost of securities sold is calculated using the specific
identification method.
We
include within our short-term investments our trading securities, as well as our
income yielding available-for-sale securities that can be readily converted to
cash and include within long-term investments those income yielding
available-for-sale securities with maturities of over one year that have
unrealized losses attributable to them or those that cannot be readily
liquidated. We have the ability to hold our long-term investments with
temporary impairments until such time as these assets are no longer
impaired. Such recovery of unrealized losses is not expected to occur
within the next year.
Due to
the lack of availability of observable market quotes on certain of our
investment portfolio of ARS, we utilize valuation models including those that
are based on expected cash flow streams and collateral values, including
assessments of counterparty credit quality, default risk underlying the
security, discount rates and overall capital market liquidity. The valuation of
our ARS investment portfolio is subject to uncertainties that are difficult to
predict. Factors that may impact our ARS valuation include changes to
credit ratings of the securities as well as to the underlying assets supporting
those securities, rates of default of the underlying assets, underlying
collateral value, discount rates, counterparty risk, the ongoing strength and
quality of the credit markets, and market liquidity.
The
credit markets experienced significant deterioration and uncertainty beginning
in the second half of fiscal 2008. If these conditions continue, or we
experience any additional ratings downgrades on any investments in our portfolio
(including our ARS), we may incur additional impairments to our investment
portfolio, which could negatively affect our financial condition, cash flows and
results of operations.
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 in our
consolidated balance sheets. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income within the
relevant jurisdiction and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. We have not provided for a
valuation allowance because we believe that it is more likely than not that our
deferred tax assets will be recovered from future taxable
income. Should we determine that we would not be able to realize all
or part of our net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such determination
was made. At March 31, 2009, our gross deferred tax asset was
$69.6 million.
Various
taxing authorities in the U.S. and other countries in which we do business
scrutinize the tax structures employed by businesses. Companies of
our size and complexity are regularly audited by the taxing authorities in the
jurisdictions in which they conduct significant operations. We are
currently under audit by the U.S. Internal Revenue Service (IRS) for our fiscal
years ended March 31, 2002, 2003, 2004, 2006, 2007 and 2008. We
recognize liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional tax payments are probable. We believe that we maintain
adequate tax reserves to offset any potential tax liabilities that may arise
upon these and other pending audits in the U.S. and other countries in which we
do business. If such amounts ultimately prove to be unnecessary, the
resulting reversal of such reserves would result in tax benefits being recorded
in the period the reserves are no longer deemed necessary. If such
amounts ultimately prove to be less than an ultimate assessment, a future charge
to expense would be recorded in the period in which the assessment is
determined.
28
Property,
Plant & Equipment
Property,
plant and equipment are stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed when
incurred. At March 31, 2009, the carrying value of our property and
equipment totaled $531.7 million, which represents 22% of our total
assets. This carrying value reflects the application of our property
and equipment accounting policies, which incorporate estimates, assumptions and
judgments relative to the useful lives of our property and
equipment. Depreciation is provided on a straight-line basis over the
estimated useful lives of the related assets, which range from 5 to 7 years on
manufacturing equipment, from 10 to 15 years on leasehold improvements and
approximately 30 years on buildings.
We began
production activities at Fab 4 on October 31, 2003. We began to depreciate
the Fab 4 assets as they were placed in service for production purposes.
As of March 31, 2009, all of the buildings and supporting facilities were being
depreciated as well as the manufacturing equipment that had been placed in
service. All manufacturing equipment that was not being used in production
activities was maintained in projects in process and is not being depreciated
until it is placed into service since management believes there will be no
change to its utility from the present time until it is placed into productive
service. The lives to be used for depreciating this equipment at Fab 4
will be evaluated at such time as the assets are placed in service. We do
not believe that the temporary idling of such assets has impaired the estimated
life or carrying values of the underlying assets.
The
estimates, assumptions and judgments we use in the application of our property
and equipment policies reflect both historical experience and expectations
regarding future industry conditions and operations. The use of different
estimates, assumptions and judgments regarding the useful lives of our property
and equipment and expectations regarding future industry conditions and
operations, could result in materially different carrying values of assets and
results of operations.
Impairment
of Property, Plant and Equipment
We assess
whether indicators of impairment of long-lived assets are present. If
such indicators are present, we determine whether the sum of the estimated
undiscounted cash flows attributable to the assets in question is less than
their carrying value. If less, we recognize an impairment loss based
on the excess of the carrying amount of the assets over their respective fair
values. Fair value is determined by discounted future cash flows,
appraisals or other methods. If the assets determined to be impaired
are to be held and used, we recognize an impairment loss through a charge to our
operating results to the extent the present value of anticipated net cash flows
attributable to the asset are less than the asset’s carrying value, which we
depreciate over the remaining estimated useful life of the asset. We may incur
impairment losses, or additional losses on already impaired assets, in future
periods if factors influencing our estimates change.
Junior
Subordinated Convertible Debentures
We
account for our junior subordinated convertible debentures and related
provisions in accordance with the provisions of Emerging Issues Task Force Issue
(EITF) No. 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, EITF No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, EITF No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, EITF No. 01-6, The Meaning of “Indexed to a
Company’s Own Stock,” and EITF No. 04-08, The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share. We also
evaluate the instruments in accordance with SFAS No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, which requires bifurcation of
embedded derivative instruments and measurement of fair value for accounting
purposes. EITF No. 04-08 requires us to include the dilutive effect
of the shares of our common stock issuable upon conversion of the outstanding
junior subordinated convertible debentures in our diluted income per share
calculation regardless of whether the market price trigger or other contingent
conversion feature has been met. We apply the treasury stock method
as we have the intent and current ability to settle the principal amount of the
junior subordinated convertible debentures in cash. This method
results in incremental dilutive shares when the average fair value of our common
stock for a reporting period exceeds the conversion price per share, which was
$32.06 at March 31, 2009, and adjusts as dividends are recorded in the
future.
Litigation
Our
current estimated range of liability related to pending litigation is based on
the probable loss of claims for which we can reasonably estimate the amount and
range of loss. Recorded reserves were immaterial at March 31,
2009.
Because
of the uncertainties related to both the probability of loss and the amount and
range of loss on our pending litigation, we are unable to make a reasonable
estimate of the liability that could result from an unfavorable outcome.
As additional information becomes available, we will assess the potential
liability related to our pending litigation and revise our estimates.
Revisions in our estimates of the potential liability could materially affect
our results of operations and financial position.
29
Results
of Operations
The
following table sets forth certain operational data as a percentage of net sales
for the years indicated:
|
Year
Ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of sales
|
42.8 | % | 39.7 | % | 39.9 | % | ||||||
|
Gross
profit
|
57.2 | % | 60.3 | % | 60.1 | % | ||||||
|
Research
and development
|
12.8 | % | 11.7 | % | 10.9 | % | ||||||
|
Selling,
general and administrative
|
17.9 | % | 16.9 | % | 15.7 | % | ||||||
|
Special
charges
|
0.7 | % | 2.6 | % | --- | % | ||||||
|
Operating
income
|
25.8 | % | 29.1 | % | 33.5 | % | ||||||
Net
Sales
We
operate in one industry segment and engage primarily in the design, development,
manufacture and marketing of semiconductor products. We sell our
products to distributors and original equipment manufacturers, referred to as
OEMs, in a broad range of market segments, perform ongoing credit evaluations of
our customers and generally require no collateral. In certain
circumstances, a customer’s financial condition may require collateral, and, in
such cases, the collateral would be provided primarily by letters of
credit.
Our net
sales of $903.3 million in fiscal 2009
decreased by $132.4 million, or 12.8%, over fiscal 2008, and our net sales of
$1,035.7 million in fiscal 2008 decreased by $3.9 million, or 0.4%, over fiscal
2007. The decreases in net sales in these periods resulted primarily
from adverse changes in global economic and end market conditions across all of
our product lines. Average selling prices for our products were down
approximately 4% in fiscal 2009 over fiscal 2008 and were down approximately 3%
in fiscal 2008 over fiscal 2007. The number of units of our products
sold was down approximately 9% in fiscal 2009 over fiscal 2008 and up
approximately 3% in fiscal 2008 over fiscal 2007. The average selling
prices and the unit volumes of our sales are impacted by the mix of our products
sold and overall semiconductor market conditions. We believe that we
have continued to grow our percentage of market share in the embedded control
market over the last three fiscal years. Key factors impacting the
amount of net sales during the last three fiscal years include:
|
|
·
|
adverse
global economic conditions in the markets we
serve;
|
|
|
·
|
increasing
semiconductor content in our customers’
products;
|
|
|
·
|
customers’
increasing needs for the flexibility offered by our programmable
solutions;
|
|
|
·
|
our
new product offerings that have increased our served available
market;
|
|
|
·
|
continued
market share gains; and
|
|
|
·
|
inventory
holding patterns of our customers.
|
Sales by
product line for the fiscal years ended March 31, 2009, 2008 and 2007 were as
follows (dollars in thousands):
|
Year
Ended March 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Microcontrollers
|
$ | 731,648 | 81.0 | % | $ | 832,921 | 80.4 | % | $ | 834,293 | 80.2 | % | ||||||||||||
|
Memory
products
|
89,336 | 9.9 | 120,280 | 11.6 | 122,748 | 11.8 | ||||||||||||||||||
|
Analog
and interface products
|
82,313 | 9.1 | 82,536 | 8.0 | 82,630 | 8.0 | ||||||||||||||||||
|
Total
Sales
|
$ | 903,297 | 100.0 | % | $ | 1,035,737 | 100.0 | % | $ | 1,039,671 | 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 81% of our total net sales in fiscal 2009,
approximately 80.4% of our total net sales in fiscal 2008 and approximately
80.2% of our total net sales in fiscal 2007.
Net sales
of our microcontroller products decreased approximately 12.2% in fiscal 2009
compared to fiscal 2008, and decreased approximately 0.2% in fiscal 2008
compared to fiscal 2007. The decrease in net sales in fiscal 2009
compared to fiscal 2008 resulted primarily from deteriorating global economic
conditions in the markets we serve, and those factors described
above. The end markets we serve include consumer, automotive,
industrial control, communications and computing markets. The
decrease in net sales in fiscal 2008 compared to fiscal 2007 was primarily due
to adverse economic conditions in the markets we serve, particularly the housing
and consumer markets.
30
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 could adversely affect our
operating results.
Memory
Products
Sales of
our memory products accounted for approximately 9.9% of our total net sales in
fiscal 2009, approximately 11.6% of our total net sales in fiscal 2008 and
approximately 11.8% of our total net sales in fiscal 2007.
Net sales
of our memory products decreased approximately 25.7% in fiscal 2009 compared to
fiscal 2008, and decreased approximately 2.0% in fiscal 2008 compared to fiscal
2007. These sales decreases were driven primarily by global economic
conditions and by customer demand conditions within the Serial EEPROM market,
which products comprise substantially all of our memory product net
sales.
Serial
EEPROM product pricing has historically been cyclical in nature, with steep
price declines followed by periods of relative price stability, driven by
changes in industry capacity at different stages of the business
cycle. We have experienced, and expect to continue to experience,
varying degrees of competitive pricing pressures in our Serial EEPROM
products. We may be unable to maintain the average selling prices of
our Serial EEPROM products as a result of increased pricing pressure in the
future, which could adversely affect our operating results.
Analog and Interface
Products
Sales of
our analog and interface products accounted for approximately 9.1% of our total
net sales in fiscal 2009, approximately 8.0% of our total net sales in fiscal
2008 and approximately 8.0% of our total net sales in fiscal 2007.
Net sales
of our analog and interface products were essentially flat in fiscal 2009
compared to fiscal 2008 and were essentially flat in fiscal 2008 compared to
fiscal 2007. Net sales of our analog and interface products in these
periods were driven primarily by deteriorating global economic conditions,
market share gains and supply and demand conditions within the analog and
interface market.
Analog
and interface products can be proprietary or non-proprietary in
nature. Currently, we consider more than half of our analog and
interface product mix to be proprietary in nature, where prices are relatively
stable, similar to the pricing stability experienced in our microcontroller
products. The non-proprietary portion of our analog and interface
business will experience price fluctuations, driven primarily by the current
supply and demand for those products. We may be unable to maintain
the average selling prices of our analog and interface products as a result of
increased pricing pressure in the future, which could adversely affect our
operating results. We anticipate the proprietary portion of our
analog and interface products will increase over time.
Distribution
Distributors
accounted for 64% of our net sales in each of fiscal 2009 and fiscal 2008, and
65% of our net sales in fiscal 2007.
Our
largest distributor accounted for approximately 14% of our net sales in fiscal
2009, approximately 12% of our net sales in fiscal 2008 and approximately 11% of
our net sales in fiscal 2007. Our two largest distributors together
accounted for approximately 19% of our net sales in each of fiscal 2009 and
fiscal 2008, and approximately 21% of our net sales in fiscal 2007.
Generally,
we do not have long-term agreements with our distributors and we, or our
distributors, may terminate our relationship with each other with little or no
advanced notice. The loss of, or the disruption in the operations of,
one or more of our distributors could reduce our future net sales in a given
quarter and could result in an increase in inventory returns.
At March
31, 2009, our distributors maintained 38 days of inventory of our products
compared to 33 days at March 31, 2008 and 32 days at March 31,
2007. Over the past three fiscal years, the days of inventory
maintained by our distributors have fluctuated between approximately 31 days and
42 days. Thus, inventory levels at our distributors are at the higher
end of the range we have experienced over the last three years. We do
not believe that inventory holding patterns at our distributors will materially
impact our net sales, due to the fact that we recognize revenue based on
sell-through for all of our distributors.
31
Sales by
Geography
Sales by
geography for the fiscal years ended March 31, 2009, 2008 and 2007 were as
follows (dollars in thousands):
|
Year
Ended March 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Americas
|
$ | 228,922 | 25.3 | % | $ | 273,363 | 26.4 | % | $ | 287,371 | 27.6 | % | ||||||||||||
|
Europe
|
257,407 | 28.5 | 308,171 | 29.8 | 302,708 | 29.1 | ||||||||||||||||||
|
Asia
|
416,968 | 46.2 | 454,203 | 43.8 | 449,592 | 43.3 | ||||||||||||||||||
|
Total
Sales
|
$ | 903,297 | 100.0 | % | $ | 1,035,737 | 100.0 | % | $ | 1,039,671 | 100.0 | % | ||||||||||||
Our sales
to foreign customers have been predominately in Asia and Europe, which we
attribute to the manufacturing strength in those areas for automotive,
communications, computing, consumer and industrial control
products. Americas sales include sales to customers in the U.S.,
Canada, Central America and South America.
Sales to
foreign customers accounted for approximately 75% of our net sales in each of
fiscal 2009 and fiscal 2008 and 74% of our net sales in fiscal
2007. Substantially all of our foreign sales are U.S. dollar
denominated. Sales to customers in Asia have generally increased over
time due to many of our customers transitioning their manufacturing operations
to Asia and growth in demand from the emerging Asian market. Our
sales force in the Americas and Europe supports a significant portion of the
design activity for products which are ultimately shipped to Asia.
Sales to
customers in China, including Hong Kong, accounted for approximately 23% of our
net sales in fiscal 2009, approximately 20% of our net sales in fiscal 2008 and
approximately 18% of our net sales in fiscal 2007. Sales to customers
in Taiwan accounted for approximately 10% of our net sales in each of fiscal
2008 and fiscal 2007. We did not have sales into any other countries
that exceeded 10% of our net sales during the last three fiscal
years.
Gross
Profit
Our gross
profit was $516.5 million in fiscal 2009, $624.9 million in fiscal 2008 and
$624.8 million in fiscal 2007. Gross profit as a percent of sales was
57.2% in fiscal 2009, 60.3% in fiscal 2008 and 60.1% in fiscal
2007.
The most
significant factors affecting our gross profit percentage in the periods covered
by this report were:
|
|
·
|
production
levels below the range of our normal capacity, and resulting under
absorption of fixed costs; and
|
|
|
·
|
inventory
write-downs partially offset by sales of inventory that was previously
written down.
|
Other
factors that impacted gross profit percentage in the periods covered by this
report include:
|
|
·
|
lower
depreciation as a percentage of cost of sales driven by reduced capital
requirements in our business due to our purchase of Fab
4;
|
|
|
·
|
fluctuations
in the product mix of microcontrollers, proprietary and non-proprietary
analog products and Serial EEPROM products resulting in lower overall
average selling prices for our products;
and
|
|
|
·
|
continual
cost reductions in wafer fabrication and assembly and test manufacturing
such as new manufacturing technologies and more efficient manufacturing
techniques.
|
During
fiscal 2009, we operated at approximately 84% of our combined Fab 2 and Fab 4
installed capacity. During each of fiscal 2008 and fiscal 2007, we
operated at approximately 99% of our combined Fab 2 and Fab 4 installed
capacity. During the third and fourth quarters of fiscal 2009, we
reduced wafer starts at both Fab 2 and Fab 4 and implemented rotating unpaid
time off at both fabrication facilities. The reduction in wafer
starts and rotating unpaid time off were implemented to help control inventory
levels due to current and expected adverse economic conditions in the markets we
serve. During the first quarter of fiscal 2010, we expect our wafer
fabs to continue to operate at levels which are significantly lower than peak
levels.
The
process technologies utilized in our wafer fabs impact our gross
margins. Fab 2 currently utilizes various manufacturing process
technologies, but predominantly utilizes our 0.5 to 1.0 micron
processes. Fab 4 predominantly utilizes our 0.22 to 0.5 micron
processes. We continue to transition products to more advanced
process technologies to reduce future manufacturing costs. All of our
production has been on 8-inch wafers during the periods covered by this
report.
Our
overall inventory levels were $131.5 million at March 31, 2009, compared to
$124.5 million at March 31, 2008 and $121.0 million at March 31,
2007. We maintained 134 days of inventory on our balance sheet at
March 31, 2009 compared to 112 days of inventory at March 31, 2008 and 107 days
at March 31, 2007. During the latter part of fiscal 2009, the demand
for our products was adversely impacted by the downturn in global economic
conditions. We were not able to reduce production levels during that
time frame to the extent needed to prevent inventory from rising.
32
We
anticipate that our gross margins will fluctuate over time, driven primarily by
the overall product mix of microcontroller, analog and interface and memory
products and the percentage of net sales of each of these products in
a particular quarter, as well as manufacturing yields, fixed cost
absorption, capacity utilization levels, and competitive and economic conditions
in the markets we serve.
At March
31, 2009, approximately 77% of our assembly requirements were performed in our
Thailand facility, compared to approximately 67% at March 31, 2008 and
approximately 72% at March 31, 2007. Third-party contractors located
in Asia perform the balance of our assembly operations. Substantially
all of our test requirements were performed in our Thailand facility over the
last three fiscal years. We believe that the assembly and test
operations performed at our Thailand facility provide us with significant cost
savings when compared to contractor assembly and test costs, as well as
increased control over these portions of the manufacturing
process. We are planning multiple plant shutdowns of our Thailand
facility in the first quarter of fiscal 2010 to help control inventory levels
due to current and expected adverse economic conditions in the markets we
serve.
As a
result of significant reductions in demand and decreased production in our wafer
fabs and assembly and test operations, approximately $21.4 million was charged
to cost of sales in fiscal 2009, as our production levels for the period were
below the range of normal capacity. There were no such charges in
fiscal 2008 and fiscal 2007. If production levels stay below our
normal capacity, we will continue to charge cost of sales for the unabsorbed
manufacturing costs. Also charged to cost of sales during fiscal 2009
was $7.3 million of obsolescence reserve compared to $1.9 million in fiscal 2008
and $2.3 million fiscal 2007. The increase in the obsolescence
reserve charge was primarily due to decreased demand for our products related to
the adverse economic conditions in the markets we serve.
We rely
on outside wafer foundries for a small portion of our wafer fabrication
requirements.
Our use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. While we review the
quality, delivery and cost performance of our third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain manufacturing yields, assembly and test yields and costs at
approximately their current levels.
Research
and Development (R&D)
R&D
expenses for fiscal 2009 were $115.5 million, or 12.8% of sales, compared to
$120.9 million, or 11.7% of sales, for fiscal 2008 and $113.7 million, or 10.9%
of sales, for fiscal 2007. 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 decreased $5.3 million, or 4.4%, for fiscal 2009 over fiscal
2008. The primary reasons for the dollar decrease in R&D costs in
fiscal 2009 compared to fiscal 2008 were cost-cutting actions taken in the third
and fourth quarters of fiscal 2009, including salary reductions, elimination of
bonuses and reductions in travel costs. R&D expenses increased
$7.2 million, or 6.3%, for fiscal 2008 over fiscal 2007. The primary
reasons for the dollar increase in R&D costs in fiscal 2008 compared to
fiscal 2007 were higher labor costs as a result of expanding our internal
R&D headcount and $1.1 million of additional share-based compensation
expense.
Selling,
General and Administrative
Selling,
general and administrative expenses for fiscal 2009 were $161.2 million, or 17.9% of
sales, compared to $175.6 million, or 16.9% of sales, for fiscal 2008, and
$163.2 million, or 15.7% of sales, for fiscal 2007. 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 include costs related to our direct sales force and field
applications engineers who work in sales offices worldwide to stimulate demand
by assisting customers in the selection and use of our products.
Selling,
general and administrative expenses decreased $14.4 million, or 8.2%, for
fiscal 2009 over fiscal 2008. The primary reasons for the dollar
decrease in selling, general and administrative expenses in fiscal 2009 over
fiscal 2008 were cost-cutting actions taken in the third and fourth quarters of
fiscal 2009, including salary reductions, elimination of bonuses and reduction
in travel costs. Selling, general and administrative expenses
increased $12.4 million, or 7.6%, for fiscal 2008 over fiscal
2007. The primary reasons for the dollar increase in selling, general
and administrative expenses in fiscal 2008 over fiscal 2007 were higher labor
costs as a result of expanding our internal resources in the technical aspects
of selling our products and $1.5 million of additional share-based compensation
expense.
Selling,
general and administrative expenses fluctuate over time, primarily due to
revenue and operating expense investment levels.
33
Special
Charges
Patent Portfolio
License
We
entered into a patent portfolio license effective March 31, 2009 with an
unrelated third-party that covers both issued patents and patent applications
and settled alleged infringement claims. The total payment made to
the third-party was $8.25 million, $4.0 million of which was expensed in the
fourth quarter of fiscal 2009 and the remaining $4.25 million of which was
recorded as a prepaid royalty that will be amortized over the life of the
patents.
Expenses Associated with the
Abandonment of the Atmel Acquisition
On
October 2, 2008, we and ON Semiconductor Corporation announced that we had sent
a proposal to the Board of Directors of Atmel Corporation to acquire Atmel for
$5.00 per share in cash or a total of approximately $2.3 billion. On
October 29, 2008, Atmel announced that its Board of Directors had determined
that the unsolicited proposal was inadequate. On December 15, 2008, we
delivered a written notification to Atmel regarding a proposed alternate slate
of directors to be elected at Atmel’s 2009 annual meeting. On February 10,
2009, we announced our termination of our consideration of a potential
transaction with Atmel in light of the economic uncertainty and the lack of
visibility with respect to Atmel’s business not allowing us to put a value on
Atmel. In the fourth quarter of fiscal 2009, we expensed $1.6 million of
various costs associated with the terminated proposal.
In-Process Research and
Development
During
the third quarter of fiscal 2009, we completed our acquisition of Hampshire
Company, a leader in the large format touch screen controller
market. As a result of the acquisition, we incurred a $0.5 million
in-process research and development charge in the third quarter of fiscal
2009.
During
the fourth quarter of fiscal 2009, we completed the acquisition of HI-TECH
Software, a provider of software development tools and compilers. As a
result of the acquisition, we incurred a $0.2 million in-process research and
development charge in the fourth quarter of fiscal 2009.
During
the fourth quarter of fiscal 2009, we completed our acquisition of R&E
International, a leader in developing innovative integrated circuits for smoke
and carbon monoxide detectors and other life-safety systems. As a
result of the acquisition, we incurred a $0.2 million in-process research and
development charge in the fourth quarter of fiscal 2009.
Loss on Sale of Fab
3
We
received an unsolicited offer on our Fab 3 facility in September
2007. We assessed our available capacity in our current facilities,
along with our capacity available from outside foundries and determined the
capacity of Fab 3 would not be required in the near term. As a result
of this assessment, we accepted the offer on September 21, 2007 and the
transaction closed on October 19, 2007. We received
$27.5 million in cash net of expenses associated with the sale and
recognized an impairment charge in fiscal 2008 of $26.8 million on the sale of
Fab 3, representing the difference between the carrying value of the assets at
September 30, 2007 and the amounts realized subsequent to September 30,
2007.
Other
Income (Expense)
Interest
income in fiscal 2009 decreased to $32.5 million from $54.9 million in
fiscal 2008. Interest income in fiscal 2008 decreased to $54.9
million from $58.4 million in fiscal 2007. The primary reason for the
reductions in interest income in fiscal 2009 over fiscal 2008 and in fiscal 2008
over fiscal 2007 was lower interest rates on our cash and investment
balances. Interest expense in fiscal 2009 increased to $24.3 million
from $8.0 million in fiscal 2008. Interest expense increased to $8.0
million in fiscal 2008 from $5.4 million in fiscal 2007. The primary reason for
the increases in interest expense in fiscal 2009 over fiscal 2008 and in fiscal
2008 over fiscal 2007 was due to the $1.15 billion in 2.125% junior subordinated
convertible debentures we issued in December 2007. Other expenses,
net in fiscal 2009 was $4.4 million compared to other income, net of $2.4
million in fiscal 2008. The increase in other expenses, net was
primarily related to a $7.3 million loss on trading securities in fiscal
2009 as a result of market fluctuations in our trading securities and put
options as described in Note 4 to our consolidated financial
statements. Other income, net was $2.4 million in fiscal 2008
compared to $0.3 million in fiscal 2007. The increase in other
income, net was primarily related to gains on sales of fixed assets and gains
related to currency rate fluctuations.
Provision
for Income Taxes
Provisions
for income taxes reflect tax on our foreign earnings and federal and state tax
on our U.S. earnings. Our effective tax benefit was 4.9% in fiscal
2009 and our effective tax rate was 15.2% in fiscal 2008 and 11.0% in fiscal
2007, and is lower than statutory rates in the U.S. due primarily to lower tax
rates at our foreign locations, R&D tax credits and export sales
incentives. Our effective tax rate in fiscal 2009 reflects a $16.9
million U.S. tax benefit related to our settlement with the IRS for our fiscal
2005 tax audit and a $33.0 million tax reserve release associated with a
favorable clarification of tax regulations. Combined, these tax
benefits reduced our effective tax rate by 21 percentage points to an effective
tax benefit of 4.9%. Our effective tax rate in fiscal 2008 reflects a
$10.3 million U.S. tax benefit associated with the sale of Fab 3 in the second
quarter of fiscal 2008, a $5.7 million tax benefit related to the release of tax
reserves associated with a foreign tax matter in the third quarter of fiscal
2008, a $4.5 million tax benefit related to the release of tax reserves for
certain international tax exposures in the fourth quarter of fiscal 2008 and
approximately $0.8 million related to accrued interest and other reserve
matters. Combined, these tax benefits decreased our effective tax
rate in fiscal 2008 by approximately 4.4%. Our effective tax rate in
fiscal 2007 reflects a $52.2 million benefit related to a tax settlement for our
fiscal 1999 through fiscal 2001 tax years that occurred in the fourth quarter of
fiscal 2007 which decreased our effective tax rate for fiscal 2007 by
13%.
34
Various
taxing authorities in the U.S. and other countries in which we do business are
increasing their scrutiny of the tax structures employed by
businesses. Companies of our size and complexity are regularly
audited by the taxing authorities in the jurisdictions in which they conduct
significant operations. We are currently under audit by the IRS for
our fiscal years ended March 31, 2002, 2003, 2004, 2006, 2007 and
2008. We recognize liabilities for anticipated tax audit issues in
the U.S. and other tax jurisdictions based on our estimate of whether, and the
extent to which, additional tax payments are probable. We believe
that we maintain adequate tax reserves to offset any potential tax liabilities
that may arise upon these and other pending audits in the U.S. and other
countries in which we do business. If such amounts ultimately prove
to be unnecessary, the resulting reversal of such reserves would result in tax
benefits being recorded in the period the reserves are no longer deemed
necessary. If such amounts ultimately prove to be less than any final
assessment, a future charge to expense would be recorded in the period in which
the assessment is determined.
Our
Thailand manufacturing operations currently benefit from numerous tax holidays
that have been granted to us by the Thailand government based on our investments
in property, plant and equipment in Thailand. Our tax holiday periods
in Thailand expire at various times in the future. One of our
Thailand tax holidays expired in September 2006 and the expiration did not have
a material impact on our effective tax rate. Any expiration of our
tax holidays in Thailand are expected to have a minimal impact on our
overall tax expense due to other tax holidays and increases in income in other
taxing jurisdictions with lower statutory rates.
Liquidity
and Capital Resources
We had
$1,440.8 million in cash, cash equivalents and short-term and long-term
investments at March 31, 2009, a decrease of $78.3 million from the March 31,
2008 balance. The decrease in cash, cash equivalents and short-term and
long-term investments over this time period is primarily attributable to cash
generated by operating activities being offset by dividends and stock repurchase
activity during the twelve months ended March 31, 2009.
Net cash
provided from operating activities was $308.7 million for fiscal 2009, $447.3
million for fiscal 2008 and $429.8 million for fiscal 2007. The decrease in
cash flow from operations in fiscal 2009 compared to fiscal 2008 was primarily
due to lower net income in fiscal 2009, an increase in the purchases of trading
securities and changes in accrued liabilities and other assets and
liabilities.
Net cash
used in investing activities was $19.8 million for fiscal 2009, net cash
provided by investing activities was $55.7 million for fiscal 2008 and net
cash used in investing activities was $442.2 million in fiscal
2007. The decrease in cash in fiscal 2009 over fiscal 2008 was
primarily due to an increase in capital expenditures and investments in other
assets. The increase in cash in fiscal 2008 over fiscal 2007 was
primarily due to changes in our net purchases, sales and maturities of
short-term and long-term investments and cash proceeds from the sale of Fab
3.
Net cash
used in financing activities was $330.2 million for fiscal 2009, $182.7 million for fiscal 2008
and $385.3 million for fiscal 2007. Proceeds from the exercise
of stock options and employee purchases under our employee stock purchase plans
were $33.6 million for fiscal 2009, $59.1 million for fiscal 2008 and $68.7
million for fiscal 2007. We paid cash dividends to our shareholders
of $246.7 million in fiscal 2009, $252.0 million in fiscal 2008, and $207.9
million in fiscal 2007. Excess tax benefits from share-based payment
arrangements were $6.8 million in fiscal 2009, $21.2 million in fiscal 2008, and
$22.8 million in fiscal 2007. During the year ended March 31, 2008,
we received net proceeds of $1,127.0 million from the issuance of our
2.125% junior subordinated convertible debentures. Cash expended for
the repurchase of our common stock was $123.9 million in fiscal 2009 and
$1,138.0 million in fiscal 2008. No amounts were expended in
fiscal 2007 for the repurchase of our common stock. During fiscal
2007, we paid down $269.0 million in short-term borrowings. To
complete the repatriation of $500 million in fiscal 2006, we initiated the
$269.0 million in borrowings, which were collateralized against investments
that were held in foreign locations, allowing the investments to reach their
normal maturity date.
Our level
of capital expenditures varies from time to time as a result of actual and
anticipated business conditions. Capital expenditures were
$102.4 million in fiscal 2009, $69.8 million in fiscal 2008 and $60.0
million in fiscal 2007. Capital expenditures are primarily for the
expansion of production capacity and the addition of research and development
equipment. We currently intend to spend approximately
$15.0 million during the next twelve months to invest in equipment and
facilities to maintain, and selectively increase, capacity to meet our currently
anticipated needs.
We expect
to finance our capital expenditures through our existing cash balances and cash
flows from operations. We believe that the capital expenditures
anticipated to be incurred over the next twelve months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
35
We enter
into derivative transactions from time to time in an attempt to reduce our
exposure to currency rate fluctuations. Although none of the
countries in which we conduct significant foreign operations have had a highly
inflationary economy in the last five years, there is no assurance that
inflation rates or fluctuations in foreign currency rates in countries where we
conduct operations will not adversely affect our operating results in the
future. At March 31, 2009, we had no foreign currency forward
contracts outstanding.
On
October 23, 2006, we announced that our Board of Directors had authorized the
repurchase of up to 10,000,000 shares of our common stock in the open market or
privately negotiated transactions. As of March 31, 2009, no shares
related to this authorization remained available for purchase under this
program. On December 11, 2007, we announced that our Board of
Directors had authorized the repurchase of up to an additional 10,000,000 shares
of our common stock in the open market or in privately negotiated
transactions. As of March 31, 2009, 2,460,002 shares related to this
authorization remained available for purchase.
Our Board
of Directors authorized the repurchase of 21,500,000 shares of our common stock
concurrent with our junior subordinated convertible debentures transaction
described in Note 13 to our consolidated financial statements and no further
shares are available to be repurchased under this authorization.
As of
March 31, 2009, approximately 36.0 million shares of our common stock remained
as treasury shares with the balance of the repurchased shares being used to fund
share issuance requirements under our equity incentive plans. The timing and
amount of future repurchases will depend upon market conditions, interest rates,
and corporate considerations.
On
October 28, 2002, we announced that our Board of Directors had approved and
instituted a quarterly cash dividend on our common stock. During
fiscal 2007, we paid dividends in the amount of $0.965 per share for a total
dividend payment of $207.9 million. During fiscal 2008, we paid
dividends in the amount of $1.205 per share for a total dividend payment of
$252.0 million. During fiscal 2009, we paid dividends in the
amount of $1.346 per share for a total dividend payment of $246.7
million. On May 7, 2009, we declared a quarterly cash dividend of
$0.339 per share, which will be paid on June 4, 2009, to stockholders of record
on May 21, 2009 and the total amount of such dividend is expected to be
approximately $62.0 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
and our results of operations.
We
believe that our existing sources of liquidity combined with cash generated from
operations will be sufficient to meet our currently anticipated cash
requirements for at least the next twelve months. However, the
semiconductor industry is capital intensive. In order to remain
competitive, we must constantly evaluate the need to make significant
investments in capital equipment for both production and research and
development. We may seek additional equity or debt financing from
time to time to maintain or expand our wafer fabrication and product assembly
and test facilities, or for acquisitions or other purposes. The
timing and amount of any such financing requirements will depend on a number of
factors, including demand for our products, changes in industry conditions,
product mix, competitive factors and our ability to identify suitable
acquisition candidates. There can be no assurance that such financing
will be available on acceptable terms, and any additional equity financing would
result in incremental ownership dilution to our existing
stockholders.
Contractual
Obligations
The
following table summarizes our significant contractual obligations at March 31,
2009, and the effect such obligations are expected to have on our liquidity and
cash flows in future periods. This table excludes amounts already
recorded on our balance sheet as current liabilities at March 31, 2009 (dollars
in thousands):
36
|
Payments
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
than
1
year
|
1 –
3 years
|
3 –
5 years
|
More
than
5
years
|
||||||||||||||||
|
Operating
lease obligations
|
$ | 10,960 | $ | 5,367 | $ | 4,934 | $ | 659 | $ | --- | ||||||||||
|
Capital
purchase obligations (1)
|
3,883 | 3,793 | 90 | --- | --- | |||||||||||||||
|
Other
purchase obligations and commitments (2)
|
995 | 736 | 259 | --- | --- | |||||||||||||||
|
2.125%
junior convertible debentures –principal and interest (3)
|
1,851,560 | 24,438 | 48,875 | 48,875 | 1,729,372 | |||||||||||||||
|
Total
contractual obligations (4)
|
$ | 1,867,398 | $ | 34,334 | $ | 54,158 | $ | 49,534 | $ | 1,729,372 | ||||||||||
|
(1)
Capital purchase obligations represent commitments for construction
or purchases of property, plant and equipment. They are not
recorded as liabilities on our balance sheet as of March 31, 2009, as we
have not yet received the related goods or taken title to the
property.
|
|
(2)
Other purchase obligations and commitments include payments due under
various types of licenses.
|
|
(3)
For purposes of this table we have assumed that the principal of our
convertible debentures will be paid on December 31,
2037.
|
|
(4)
Total contractual obligations do not include contractual obligations
recorded on the balance sheet as current liabilities, or certain purchase
obligations as discussed below. The contractual obligations
also do not include amounts related to uncertain tax positions because
reasonable estimates cannot be
made.
|
Purchase
orders or contracts for the purchase of raw materials and other goods and
services 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 purchase of goods or services are defined as
agreements that are enforceable and legally binding on Microchip and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Our purchase orders are based on our
current manufacturing needs and are fulfilled by our vendors with short time
horizons. We do not have significant agreements for the purchase of
raw materials or other goods specifying minimum quantities or set prices that
exceed our expected requirements for three months. We also enter into
contracts for outsourced services; however, the obligations under these
contracts were not significant and the contracts generally contain clauses
allowing for cancellation without significant penalty.
The
expected timing of payment of the obligations discussed above is estimated based
on current information. Timing of payments and actual amounts paid
may be different depending on the time of receipt of goods or services or
changes to agreed-upon amounts for some obligations.
Off-Balance
Sheet Arrangements
As of
March 31, 2009, we are not involved in any off-balance sheet arrangements, as
defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141R). SFAS No. 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. In April 2009, the FASB issued FSP FAS 141(R)-1,
Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies (FSP FAS 141R-1). FSP FAS 141R-1 amends and clarifies SFAS
No. 141R to address application issues on initial recognition and
measurement, subsequent measurement and accounting and disclosure of assets and
liabilities arising from contingencies in a business combination. SFAS No.
141R and FSP FAS 141R-1 are effective for fiscal years beginning after December
15, 2008, and will be adopted by us in the first quarter of fiscal
2010. Because the majority of the provisions of SFAS No. 141R and FSP
FAS 141R-1 are applicable to future transactions, we do not believe the adoption
of SFAS No. 141R and FSP FAS 141R-1 will have an impact on our consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008, and will be
adopted by us in the first quarter of fiscal 2010. We do not believe the
adoption of SFAS No. 160 will have an impact on our consolidated financial
statements.
37
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(SFAS No. 161). The standard requires additional quantitative disclosures
(provided in tabular form) and qualitative disclosures for derivative
instruments. The required disclosures include how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance, and cash flows; relative volume of derivative activity; the
objectives and strategies for using derivative instruments; the accounting
treatment for those derivative instruments formally designated as the hedging
instrument in a hedge relationship; and the existence and nature of
credit-related contingent features for derivatives. SFAS No. 161 was
effective for us beginning January 1, 2009. SFAS No. 161 did not
change the accounting treatment for derivative instruments and as such, the
adoption of SFAS No. 161 did not have a material impact on our consolidated
financial statements.
In May
2008, the FASB released FSP APB 14-1, Accounting For Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1) that alters the accounting treatment for
convertible debt instruments that allow for either mandatory or optional cash
settlements. FSP APB 14-1 will impact the accounting associated with
our $1.15 billion junior subordinated convertible debentures. FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods, and will require us to recognize additional (non-cash)
interest expense based on the market rate for similar debt instruments without
the conversion feature. Furthermore, FSP APB 14-1 would require us to
recognize interest expense in prior periods pursuant to retrospective accounting
treatment. FSP APB 14-1 will have no impact on our actual past or
future cash flows. This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and was adopted by us
on April 1, 2009. We are currently evaluating the magnitude of the
impact of adoption of FSP APB 14-1 will have on our consolidated financial
statements.
In June
2008, the EITF issued EITF 07-05, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock (EITF No.
07-05). EITF No. 07-05 clarifies the determination of whether an instrument (or
an embedded feature) is indexed to an entity's own stock, which would qualify as
a scope exception under SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. EITF No. 07-05 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and is
effective for us beginning in fiscal 2010. Early adoption for an
existing instrument is not permitted. We are currently evaluating the
impact the adoption of EITF No. 07-05 will have on our consolidated financial
statements.
In
November 2008, the FASB ratified EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets (EITF No. 08-7). EITF No. 08-7 applies to
defensive intangible assets, which are acquired intangible assets that the
acquirer does not intend to actively use but intends to hold to prevent its
competitors from obtaining access to them. As these assets are separately
identifiable, EITF No. 08-7 requires an acquiring entity to account for
defensive intangible assets as a separate unit of
accounting. Defensive intangible assets must be recognized at fair
value in accordance with SFAS No. 141(R) and
SFAS No. 157. EITF No. 08-7 is effective for us beginning
in fiscal 2010. Because EITF No. 08-7 is applicable to future
transactions, we do not believe the adoption of EITF No. 08-7 will have an
impact on our consolidated financial statements.
In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2
and FAS 124-2). This FSP changes existing guidance for
determining whether an impairment of debt securities is other than
temporary. The FSP requires other-than-temporary impairments to be
separated into the amount representing the decrease in cash flows expected to be
collected from a security (referred to as credit losses) which is recognized in
earnings and the amount related to other factors which is recognized in other
comprehensive income. This noncredit loss component of the impairment
may only be classified in other comprehensive income if the holder of the
security concludes that it does not intend to sell and it will not more likely
than not be required to sell the security before it recovers its
value. If these conditions are not met, the noncredit loss must also
be recognized in earnings. When adopting the FSP, an entity is
required to record a cumulative effect adjustment as of the beginning of the
period of adoption to reclassify the noncredit component of a previously
recognized other-than-temporary impairment from retained earnings to accumulated
other comprehensive income. FSP FAS 115-2 and FAS 124-2 is effective
for interim and annual periods ending after June 15, 2009. Our
management is currently evaluating the requirements of the FSP and has not yet
determined the impact on our consolidated financial statements.
38
In
April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (FSP FAS
157-4). This FSP provides additional guidance on estimating fair
value when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity for the asset or
liability. The FSP also provides additional guidance on circumstances
that may indicate that a transaction is not orderly. FSP FAS 157-4 is
effective for interim and annual periods ending after June 15,
2009. We do not believe the adoption of this FSP will materially
impact our consolidated financial statements.
In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosure about Fair Value
of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and
APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. The FSP also amends APB
Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is
effective for interim reporting periods ending after June 15,
2009. We are currently evaluating the potential impact, if any, of
the adoption of FSP FAS 107-1 and APB 28-1 on our consolidated financial
statements.
Item
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
investment portfolio, consisting of fixed income securities and money market
funds that we hold on an available-for-sale basis totaled $1,318.3 million and
our trading securities totaled $122.5 million as of March 31, 2009, and $1,489.4
million and $29.6 million, respectively, as of March 31, 2008. The
available-for-sale securities, like all fixed income instruments, are subject to
interest rate risk and will decline in value if market interest rates
increase. We have the ability to hold our fixed income investments
until maturity and, therefore, we would not expect to recognize any material
adverse impact in income or cash flows if market interest rates
increase. The following table provides information about our
available-for-sale securities that are sensitive to changes in interest
rates. We have aggregated our available-for-sale securities for
presentation purposes since they are all very similar in nature (dollars in
thousands):
|
Financial
instruments maturing during the fiscal year ended March
31,
|
||||||||||||||||||||||||
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
|||||||||||||||||||
|
Available-for-sale
securities
|
$ | 352,734 | $ | 500,290 | $ | --- | $ | --- | $ | --- | $ | 18,901 | ||||||||||||
|
Weighted-average
yield rate
|
1.95 | % | 1.84 | % | --- | --- | --- | 2.55 | % | |||||||||||||||
At March
31, 2009, $56.8 million of original purchase value of our investment portfolio
was invested in ARS. Historically, the carrying value of ARS approximated
fair value due to the frequent resetting of the interest rates. If an
auction fails for amounts we have invested, our investment will not be
liquid. With the continuing liquidity issues experienced in the global
credit and capital markets, our ARS have experienced multiple failed
auctions. In September 2007 and February 2008, auctions for
$24.9 million and $34.8 million, respectively, of the original purchase value of
our investments in ARS had failed. While we continue to earn interest on
these investments based on a pre-determined formula with spreads tied to
particular interest rate indices, the estimated market value for a portion of
these ARS no longer approximates the original purchase value.
At March
31, 2009, the $24.9 million of ARS that failed during September 2007
carried ratings between A and B by Standard & Poors compared to ratings
between AAA and AA- at March 31, 2008. All but $2.5 million of the
securities possess credit enhancement in the form of insurance for principal and
interest. The underlying characteristics of $22.4 million of these ARS
relate to servicing statutory requirements in the life insurance industry and
$2.5 million relate to a specialty finance company whose counterparty rating was
downgraded to Baa1 by Moody’s during December 2008. Moody’s also
downgraded the $2.5 million specialty finance company issue we own to Caa3
during December 2008. Additionally, Moody’s downgraded $7.5 million
of the $22.4 million of ARS related to servicing statutory requirements in the
life insurance industry from Aa3 to Baa1 during the quarter ending December 31,
2008. During the first week of January 2009, Moody’s downgraded other
securities from the same issuer of the $7.5 million ARS, which we do not
own, to D and simultaneously cited their expectation that the series owned
by us would have interest payment shortfalls, but that any shortfalls would be
paid by the insurer and the ratings on the notes would then become based on the
rating of the insurer. The issuer announced a default as expected in
early January 2009 and interest has continuously been paid by the insurer and
posted to our account since that time. All rating change actions have
been factored into our fair value estimates for the period ending March 31,
2009.
The $24.9
million in failed auctions have continued to fail through the filing date of
this report. As a result, we will not be able to access such funds
until a future auction on these investments is successful. The fair
value of the failed ARS has been estimated based on market information and
estimates determined by management and could change significantly based on
market conditions. Based on the estimated values, we concluded these
investments were other than temporarily impaired and recognized impairment
charges on these investments of $2.4 million during fiscal 2008 and $3.6 million
during fiscal 2009. If the issuers are unable to successfully close
future auctions or if their credit ratings deteriorate further, we may be
required to further adjust the carrying value of the investments through an
additional impairment charge to earnings.
39
The $34.8
million of ARS that failed during February 2008 are investments in student
loan-backed ARS. Approximately, $0.2 million, $1.7 million, and $1.0
million of these ARS were redeemed at par by the issuers during the first,
second, and third quarters of fiscal 2009, respectively, reducing our overall
position to $31.9 million. Based upon our evaluation of available
information, we believe these investments are of high credit quality, as all of
the investments carry AAA credit ratings by one or more of the major credit
rating agencies and are largely backed by the federal government (Federal Family
Education Loan Program). The fair value of the failed ARS has been
estimated based on market information and estimates determined by management and
could change significantly based on market conditions. However, if
the issuers are not able to successfully close future auctions or over time are
not able to obtain more favorable financing options for their debt issuance
needs, including refinancing these obligations into lower rate securities, the
market value of these investments could be negatively impacted.
In
November 2008, we executed an ARS rights agreement (the Rights) with the broker
through which we purchased the $31.9 million in ARS that provides (1) us
with the right to put these ARS back to the broker at par anytime during the
period from June 30, 2010 through July 2, 2012, and (2) the broker with the
right to purchase or sell the ARS at par on our behalf anytime through July 2,
2012. We accounted for the acceptance of the Rights as the receipt of
a put option for no consideration and recognized a gain with a corresponding
recognition as a long-term investment. We elected to measure the
Rights under the fair value option of SFAS No. 159 and will record changes in
the fair value of the Rights in earnings. We simultaneously
recognized an other-than-temporary impairment loss of $5.5 million as we no
longer intend to hold these ARS until the fair value recovers, which was
recorded in other comprehensive loss in prior quarters. We
reclassified the ARS from available-for-sale to trading securities and future
changes in fair value are being recorded in earnings. During the
fourth quarter of fiscal 2009, we estimated the fair value of the ARS increased
by $1.5 million offset by a change in the fair value of the related Rights of
$1.5 million, with no net impact to our income statement. We expect
any future changes in the fair value of the ARS to continue to be largely offset
by changes in the fair value of the related Rights without any significant net
impact to our income statement. We will continue to measure the ARS
and the Rights at fair value (utilizing Level 3 fair value inputs) until the
earlier of its maturity or exercise.
We
continue to monitor the market for ARS and consider its impact, if any, on the
fair market value of our investments. If the market conditions
deteriorate further, we may be required to record additional impairment
charges. We intend and have the ability to hold these ARS until the
market recovers, or as it relates to the $31.9 million of par value of these
ARS, until June 30, 2010 when we have the right to sell the securities at par to
the broker. We do not anticipate having to sell these securities to
fund the operation of our business. We believe that, based on our
current unrestricted cash, cash equivalents and short-term investment balances,
the current lack of liquidity in the credit and capital markets will not have a
material impact on our liquidity, cash flow or ability to fund our
operations.
Our
investment in marketable equity securities at March 31, 2009 consists of shares
of common stock, the value of which is determined by the closing price of such
shares on the respective markets on which the shares are traded as of the
balance sheet date. These investments are classified as trading securities and
accounted for under the provisions of SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The market value of these investments was
approximately $79.5 million at March 31, 2009 compared to our cost basis of
approximately $85.5 million. The value of our investment in marketable equity
securities would be materially impacted if there were a significant change in
the market price of the shares. A hypothetical 30% favorable or
unfavorable change in the stock prices compared to the stock prices at
March 31, 2009 would have affected the value of our investments in
marketable equity securities by approximately $23.9 million. Additionally, we
have sold put options on some of our trading securities, which are recorded as
accrued liabilities, and are marked to market value. A decline in the
stock price of the underlying security prior to the expiration date of the puts
would cause an increase to the liability, which would result in a charge to our
results of operations, and could result in the put being exercised by the
holder. If the put is exercised by the holder, we could be required
to pay up to $11.0 million for additional shares of common stock, at a
price potentially in excess of the then fair market value of the common
stock. A hypothetical 30% unfavorable change in the stock price of
the trading security on which we have sold the puts, compared to the stock price
at March 31, 2009 could potentially result in the puts being exercised and would
result in our paying $11.0 million to acquire the shares of common
stock. The stock would then be marked to market value, affecting the
value of our investment by approximately $2.1 million. (See Note
4 to our consolidated financial statements for additional information about our
investments in marketable equity securities.)
We have
international operations and are thus subject to foreign currency rate
fluctuations. To date, our exposure related to exchange rate
volatility has not been material to our operating
results. Approximately 99% of our sales are denominated in U.S.
dollars. We maintain hedges related to the net of our asset and
liability foreign currency exposure as needed. As of March 31, 2009,
there were no foreign currency derivatives outstanding, compared to
$2.4 million of foreign currency derivatives outstanding as of March 31,
2008. If foreign currency rates fluctuate by 15% from the rates at
March 31, 2009, the effect on our financial position and results of operation
would be immaterial.
40
During
the normal course of business we are routinely subjected to a variety of market
risks, examples of which include, but are not limited to, interest rate
movements, foreign currency fluctuations, and collectability of accounts
receivable. We continuously assess these risks and have established
policies and procedures to protect against the adverse effects of these and
other potential exposures. Although we do not anticipate any material
losses in these risk areas, no assurance can be made that material losses will
not be incurred in these areas in the future. The recent decline in general
economic conditions and fluctuations in the global credit and equity markets may
adversely affect our financial position and results of operations.
|
FINANCIAL
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.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
CONTROLS
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, we evaluated under the supervision of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended). Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and (ii) is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Our disclosure controls and
procedures are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and
procedures include components of our internal control over financial reporting.
Management’s assessment of the effectiveness of our internal control over
financial reporting is expressed at the level of reasonable assurance because a
control system, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that the control system’s objectives
will be met.
Management
Report on Internal Control Over Financial Reporting
Our
management 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. 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, 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 the company’s assets that could have a
material effect on our financial statements.
Management
assessed our internal control over financial reporting as of March 31, 2009, the
end of our fiscal year. Management based its assessment on criteria
established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Management’s assessment included evaluation of such
elements as the design and operating effectiveness of key financial reporting
controls, process documentation, accounting policies, and our overall control
environment. This assessment is supported by testing and monitoring
performed by our finance organization.
Based on
our assessment, management has concluded that our internal control over
financial reporting was effective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with generally accepted accounting principles. 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, which is
included in Part II, Item 9A.
41
Changes in Internal Control over
Financial Reporting
During
the three months ended March 31, 2009, there was no change in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
42
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders of
Microchip
Technology Incorporated and subsidiaries
We have
audited Microchip Technology Incorporated’s internal control over financial
reporting as of March 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Microchip Technology
Incorporated’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’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (U.S.). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Microchip Technology Incorporated maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2009, based
on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (U.S.), the March 31, 2009 consolidated financial statements of
Microchip Technology Incorporated and our report dated May 28, 2009 expressed an
unqualified opinion thereon.
/s/ Ernst
& Young LLP
Phoenix,
Arizona
May 28, 2009
43
|
OTHER
INFORMATION
|
In fiscal
2009, each of Steve Sanghi, our Chairman, Chief Executive Officer and President,
Mitch Little, our Vice President, Worldwide Sales and Applications, Steve
Drehobl, our Vice President, Security, Microcontroller and Technology Division,
and Rich Simoncic, our Vice President, Analog and Interface Products Division,
entered into trading plans as contemplated by Rule 10b-5-1 under the Securities
Exchange Act of 1934 and periodic sales of our common stock 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.
|
DIRECTORS,
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 2009 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 2009 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 9,
above.
Information
with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, is incorporated herein by reference to our proxy statement for
our 2009 annual meeting of stockholders under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance.”
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 2009 annual meeting of stockholders under the caption “Code of
Ethics.” A copy of the Code of Ethics is available on our website at
the Investor Relations section under Mission Statement/Corporate Governance on
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 2009 annual meeting of stockholders under the caption
“Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the
2009 Annual Meeting of Stockholders; Discretionary Authority to Vote on
Stockholder Proposals.”
|
EXECUTIVE
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 2009 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 2009 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 2009 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 2009 annual meeting of stockholders.
|
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 2009 annual meeting of stockholders.
44
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 2009 annual
meeting of stockholders.
|
CERTAIN
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 2009 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 2009 annual meeting of stockholders.
|
PRINCIPAL
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 2009 annual meeting of
stockholders.
[Remainder
of page intentionally left blank.]
45
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a) The
following documents are filed as part of this Form 10-K:
|
Page
No.
|
||
|
(1)
|
Financial
Statements:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets as of March 31, 2009 and 2008
|
F-2
|
|
|
Consolidated
Statements of Income for each of the three years in the period
ended March 31, 2009
|
F-3
|
|
|
Consolidated
Statements of Cash Flows for each of the three years in the period
ended March 31, 2009
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Equity for each of the three years in the
period ended March 31, 2009
|
F-5
|
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
|
|
(2)
|
Financial
Statement Schedules
|
|
|
(3)
|
The
Exhibits filed with this Form 10-K or incorporated herein by reference are
set
forth
in the Exhibit Index beginning on page 48
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.
46
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)
|
|
|
Date: May
29,
2009
|
By: /s/ Steve
Sanghi
|
|
Steve Sanghi
|
|
|
President and Chief Executive
Officer
|
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
|
Director,
President and
Chief
Executive Officer
|
May
29,
2009
|
||
|
Steve
Sanghi
|
||||
|
/s/
Albert J. Hugo-Martinez
|
Director
|
May
29,
2009
|
||
|
Albert
J. Hugo-Martinez
|
||||
|
/s/
L.B. Day
|
Director
|
May
29,
2009
|
||
|
L.B.
Day
|
||||
|
/s/
Matthew W. Chapman
|
Director
|
May
29,
2009
|
||
|
Matthew
W. Chapman
|
||||
|
/s/
Wade F. Meyercord
|
Director
|
May
29,
2009
|
||
|
Wade
F. Meyercord
|
||||
|
/s/
J. Eric Bjornholt
|
Vice
President and Chief Financial
|
May
29,
2009
|
||
|
J.
Eric Bjornholt
|
Officer
(Principal Financial
|
|||
|
and
Accounting Officer)
|
||||
47
|
Incorporated
by Reference
|
||||||
|
Exhibit
Number
|
Exhibit Description
|
Form
|
File Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
2.1
|
Purchase
and Sale Agreement, dated as of July 18, 2002 between Registrant and
Fujitsu Microelectronics, Inc.
|
8-K
|
000-21184
|
2.1
|
7/18/02
|
|
|
3.1
|
Restated
Certificate of Incorporation of Registrant
|
10-Q
|
000-21184
|
3.1
|
11/12/02
|
|
|
3.2
|
Amended
and Restated By-Laws of Registrant, as amended through January 29,
2007
|
10-Q
|
000-21184
|
3.1
|
2/6/07
|
|
|
4.1
|
First
Amendment to Preferred Shares Rights Agreement dated January 9,
2007
|
10-Q
|
000-21184
|
4.1
|
2/6/07
|
|
|
4.2
|
Amended
and Restated Preferred Shares Rights Agreement, dated as of October 11,
1999, between Registrant and Norwest Bank Minnesota,
N.A., including the Amended Certificate of Designations, the
form of Rights Certificate and the Summary of Rights, attached as exhibits
thereto
|
8-K
|
000-21184
|
4.1
|
10/12/99
|
|
|
4.3
|
Indenture,
dated as of December 7, 2007, by and between Wells Fargo Bank, National
Association, as Trustee, and Microchip Technology
Incorporated
|
8-K
|
000-21184
|
4.1
|
12/7/07
|
|
|
4.4
|
Registration
Rights Agreement, dated as of December 7, 2007, by and between J.P. Morgan
Securities Inc. and Microchip Technology Incorporated
|
8-K
|
000-21184
|
4.2
|
12/7/07
|
|
|
10.1
|
Form
of Indemnification Agreement between Registrant and its directors and
certain of its officers
|
S-1
|
33-57960
|
10.1
|
2/5/93
|
|
|
10.2
|
*2004
Equity Incentive Plan as amended and restated by the Board on May 1,
2006
|
10-Q
|
000-21184
|
10.3
|
2/6/07
|
|
|
10.3
|
*Form
of Notice of Grant for 2004 Equity Incentive Plan (including Exhibit A
Stock Option Agreement)
|
S-8
|
333-119939
|
4.5
|
10/25/04
|
|
|
10.4
|
*Form
of Notice of Grant (Foreign) for 2004 Equity Incentive Plan (including
Exhibit A Stock Option Agreement (Foreign)
|
10-K
|
000-21184
|
10.4
|
5/23/05
|
|
|
10.5
|
*Restricted
Stock Units Agreement (Domestic) for 2004 Equity Incentive
Plan
|
10-Q
|
000-21184
|
10.3
|
11/7/07
|
|
|
10.6
|
Restricted
Stock Units Agreement (Foreign) for 2004 Equity Incentive
Plan
|
10-Q
|
000-21184
|
10.4
|
11/7/08
|
|
|
10.7
|
*Form
of Notice of Grant of Restricted Stock Units for 2004 Equity Incentive
Plan (including Exhibit A Restricted Stock Units
Agreement)
|
10-K
|
000-21184
|
10.6
|
5/31/06
|
|
|
10.8
|
*1993
Stock Option Plan, as Amended through August 16, 2002
|
10-Q
|
000-21184
|
10.1
|
11/12/02
|
|
|
10.9
|
*Form
of Notice of Grant For 1993 Stock Option Plan, with Exhibit A thereto,
Form of Stock Option Agreement; and Exhibit B thereto, Form of Stock
Purchase Agreement
|
S-8
|
333-872
|
10.6
|
1/23/96
|
|
48
EXHIBITS
(cont’d.)
|
Incorporated
by Reference
|
||||||
|
Exhibit
Number
|
Exhibit Description
|
Form
|
File Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
10.10
|
*Microchip
Technology Incorporated 2001 Employee Stock Purchase Plan as amended
through August 15, 2003 (including Enrollment Form, Stock Purchase
Agreement, and Change Form)
|
S-8
|
333-140773
|
4.4
|
2/16/07
|
|
|
10.11
|
*1997
Nonstatutory Stock Option Plan, as Amended Through March 3,
2003
|
10-K
|
000-21184
|
10.13
|
6/5/03
|
|
|
10.12
|
*Form
of Notice of Grant For 1997 Nonstatutory Stock Option Plan, with Exhibit A
thereto, Form of Stock Option Agreement
|
10-K
|
000-21184
|
10.17
|
5/27/98
|
|
|
10.13
|
Microchip
Technology Incorporated International Employee Stock Purchase Plan, as
amended through May 1, 2006
|
S-8
|
333-140773
|
4.1
|
2/16/07
|
|
|
10.14
|
Microchip
Technology Incorporated International Stock Purchase Agreement (including
attached Form of Enrollment Form)
|
S-8
|
333-140773
|
4.2
|
2/16/07
|
|
|
10.15
|
Form
of Change Form for Microchip Technology Incorporated International
Employee Stock Purchase Plan
|
S-8
|
333-140773
|
4.3
|
2/16/07
|
|
|
10.16
|
*Executive
Management Incentive Compensation Plan
|
10-Q
|
000-21184
|
10.4
|
2/6/07
|
|
|
10.17
|
*Discretionary
Executive Management Incentive Compensation Plan
|
10-Q
|
000-21184
|
10.5
|
2/6/07
|
|
|
10.18
|
*Management
Incentive Compensation Plan amended by Board of Directors August 14,
2008
|
10-Q
|
000-21184
|
10.1
|
11/7/08
|
|
|
10.19
|
TelCom
Semiconductor, Inc. 1994 Stock Option Plan and forms of agreements
thereunder
|
S-8
|
333-53876
|
4.1
|
1/18/01
|
|
|
10.20
|
TelCom
Semiconductor, Inc. 2000 Nonstatutory Stock Option Plan and forms of
agreements used thereunder
|
S-8
|
333-53876
|
4.4
|
1/18/01
|
|
|
10.21
|
PowerSmart,
Inc. 1998 Stock Incentive Plan, Including Forms of Incentive Stock Option
Agreement and Nonqualified Stock Option Agreement
|
S-8
|
333-96791
|
4.1
|
7/19/02
|
|
|
10.22
|
*February
3, 2003 Amendment to the Adoption Agreement to the Microchip Technology
Incorporated Supplemental Retirement Plan
|
10-K
|
000-21184
|
10.28
|
6/5/03
|
|
|
10.23
|
*Amendment
dated August 29, 2001 to the Microchip Technology Incorporated
Supplemental Retirement Plan
|
S-8
|
333-101696
|
4.1.2
|
12/6/02
|
|
|
10.24
|
*Amendment
Dated December 9, 1999 to the Adoption Agreement to the Microchip
Technology Incorporated Supplemental Retirement Plan
|
S-8
|
333-101696
|
4.1.4
|
12/6/02
|
|
49
EXHIBITS
(cont’d.)
|
Incorporated
by Reference
|
||||||
|
Exhibit
Number
|
Exhibit Description
|
Form
|
File Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
10.25
|
*Adoption
Agreement to the Microchip Technology Incorporated Supplemental Retirement
Plan dated January 1, 1997
|
S-8
|
333-101696
|
4.1.3
|
12/6/02
|
|
|
10.26
|
*Microchip
Technology Incorporated Supplemental Retirement Plan
|
S-8
|
333-101696
|
4.1.1
|
12/6/02
|
|
|
10.27
|
*Amendments
to Supplemental Retirement Plan
|
10-Q
|
000-21184
|
10.1
|
2/9/06
|
|
|
10.28
|
*Change
of Control Severance Agreement
|
8-K
|
000-21184
|
10.1
|
12/18/08
|
|
|
10.29
|
*Change
of Control Severance Agreement
|
8-K
|
000-21184
|
10.2
|
12/18/08
|
|
|
10.30
|
Development
Agreement dated as of August 29, 1997 by and between Registrant and the
City of Chandler, Arizona
|
10-Q
|
000-21184
|
10.1
|
2/13/98
|
|
|
10.31
|
Addendum
to Development Agreement by and between Registrant and the City of Tempe,
Arizona, dated May 11, 2000
|
10-K
|
000-21184
|
10.14
|
5/15/01
|
|
|
10.32
|
Development
Agreement dated as of July 17, 1997 by and between Registrant and the City
of Tempe, Arizona
|
10-Q
|
000-21184
|
10.2
|
2/13/98
|
|
|
10.33
|
Strategic
Investment Program Contract dated as of August 15, 2002 by and between
Registrant, Multnomah County, Oregon and City of Gresham,
Oregon
|
8-K
|
000-21184
|
2.2
|
8/23/02
|
|
|
21.1
|
Subsidiaries
of Registrant
|
X
|
||||
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
X
|
||||
|
24.1
|
Power
of Attorney re: Microchip Technology Incorporated, the
Registrant
|
|
|
X
|
||
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act)
|
X
|
||||
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act)
|
X
|
||||
|
32
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
X
|
||||
|
*Compensation
plans or arrangements in which directors or executive officers are
eligible to participate
|
||||||
50
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, 2009
MICROCHIP
TECHNOLOGY INCORPORATED
AND
SUBSIDIARIES
CHANDLER,
ARIZONA
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to
Consolidated Financial Statements
|
Page Number
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets as of March 31, 2009 and 2008
|
F-2
|
|
Consolidated
Statements of Income for each of the three years in the period ended March
31, 2009
|
F-3
|
|
Consolidated
Statements of Cash Flows for each of the three years in the period ended
March 31, 2009
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity for each of the three years in the
period ended March 31, 2009
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
i
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders of
Microchip
Technology Incorporated and subsidiaries
We have
audited the accompanying consolidated balance sheets of Microchip Technology
Incorporated and subsidiaries as of March 31, 2009 and 2008, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each
of the three years in the period ended March 31, 2009. These financial
statements are the responsibility of the company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (U.S.). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Microchip
Technology Incorporated and subsidiaries at March 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 2009, in conformity with U.S.
generally accepted accounting principles.
As
discussed in Note 1 and Note 10 to the consolidated financial
statements, effective April 1, 2007, the Company adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, and changed its method of accounting for uncertain tax positions.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (U.S.), the effectiveness of Microchip Technology Incorporated’s
internal control over financial reporting as of March 31, 2009, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated May 28, 2009
expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Phoenix,
Arizona
May 28, 2009
F-1
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
|
||||||||
|
(in
thousands, except share and per share amounts)
|
||||||||
|
ASSETS
|
||||||||
|
March
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
and cash equivalents
|
$ | 446,329 | $ | 487,736 | ||||
|
Short-term
investments
|
943,616 | 837,054 | ||||||
|
Accounts
receivable, net
|
88,525 | 138,319 | ||||||
|
Inventories
|
131,510 | 124,483 | ||||||
|
Prepaid
expenses
|
11,447 | 17,135 | ||||||
|
Deferred
tax assets
|
69,626 | 63,261 | ||||||
|
Other
current assets
|
51,736 | 49,742 | ||||||
|
Total
current assets
|
1,742,789 | 1,717,730 | ||||||
|
Property,
plant and equipment, net
|
531,687 | 522,305 | ||||||
|
Long-term
investments
|
50,826 | 194,274 | ||||||
|
Goodwill
|
36,165 | 31,886 | ||||||
|
Intangible
assets, net
|
25,718 | 11,613 | ||||||
|
Other
assets
|
34,254 | 34,499 | ||||||
|
Total
assets
|
$ | 2,421,439 | $ | 2,512,307 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Accounts
payable
|
$ | 29,228 | $ | 39,317 | ||||
|
Accrued
liabilities
|
42,486 | 56,323 | ||||||
|
Deferred
income on shipments to distributors
|
83,931 | 95,441 | ||||||
|
Total
current liabilities
|
155,645 | 191,081 | ||||||
|
Junior
convertible debentures
|
1,149,184 | 1,150,128 | ||||||
|
Long-term
income tax payable
|
70,051 | 112,311 | ||||||
|
Deferred
tax liability
|
51,959 | 21,460 | ||||||
|
Other
long-term liabilities
|
3,834 | 1,104 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or
outstanding.
|
--- | --- | ||||||
|
Common
stock, $0.001 par value; 450,000,000 shares authorized; 218,789,994 shares
issued and 182,769,124 shares outstanding at March 31, 2009; 218,789,994
shares issued and 184,338,768 outstanding at March 31,
2008.
|
183 | 184 | ||||||
|
Additional
paid-in capital
|
778,204 | 793,919 | ||||||
|
Retained
earnings
|
1,303,437 | 1,301,275 | ||||||
|
Accumulated
other comprehensive income
|
4,312 | 2,508 | ||||||
|
Common
stock held in treasury: 36,020,870 shares at March 31, 2009; and
34,451,226 shares at March 31, 2008.
|
(1,095,370 | ) | (1,061,663 | ) | ||||
|
Total
stockholders’ equity
|
990,766 | 1,036,223 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 2,421,439 | $ | 2,512,307 | ||||
|
See
accompanying notes to consolidated financial statements
|
||||||||
F-2
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
|
||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||
|
Year
ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
sales
|
$ | 903,297 | $ | 1,035,737 | $ | 1,039,671 | ||||||
|
Cost
of sales (1)
|
386,793 | 410,799 | 414,915 | |||||||||
|
Gross
profit
|
516,504 | 624,938 | 624,756 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development (1)
|
115,524 | 120,864 | 113,698 | |||||||||
|
Selling,
general and administrative (1)
|
161,218 | 175,646 | 163,247 | |||||||||
|
Special
charges
|
6,434 | 26,763 | --- | |||||||||
| 283,176 | 323,273 | 276,945 | ||||||||||
|
Operating
income
|
233,328 | 301,665 | 347,811 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
32,545 | 54,851 | 58,383 | |||||||||
|
Interest
expense
|
(24,269 | ) | (7,966 | ) | (5,416 | ) | ||||||
|
Other,
net
|
(4,354 | ) | 2,435 | 312 | ||||||||
|
Income
before income taxes
|
237,250 | 350,985 | 401,090 | |||||||||
|
Income
tax (benefit) provision
|
(11,570 | ) | 53,237 | 44,061 | ||||||||
|
Net
income
|
$ | 248,820 | $ | 297,748 | $ | 357,029 | ||||||
|
Basic
net income per common share
|
$ | 1.36 | $ | 1.44 | $ | 1.66 | ||||||
|
Diluted
net income per common share
|
$ | 1.33 | $ | 1.40 | $ | 1.62 | ||||||
|
Dividends
declared per common share
|
$ | 1.346 | $ | 1.205 | $ | 0.965 | ||||||
|
Basic
common shares outstanding
|
183,158 | 207,220 | 215,498 | |||||||||
|
Diluted
common shares outstanding
|
186,788 | 212,048 | 220,848 | |||||||||
|
(1)
Includes share-based compensation expense as follows:
|
||||||||||||
|
Cost
of sales
|
$ | 5,845 | $ | 6,191 | $ | 3,255 | ||||||
|
Research
and development
|
10,866 | 10,695 | 9,623 | |||||||||
|
Selling,
general and administrative
|
15,770 | 15,960 | 14,501 | |||||||||
|
See
accompanying notes to consolidated financial statements
|
||||||||||||
F-3
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Year
ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income
|
$ | 248,820 | $ | 297,748 | $ | 357,029 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
|
||||||||||||
|
activities:
|
||||||||||||
|
Depreciation
and amortization
|
96,046 | 100,076 | 116,171 | |||||||||
|
Deferred
income taxes
|
22,465 | 9,562 | 9,023 | |||||||||
|
Share-based
compensation expense related to equity incentive plans
|
32,481 | 32,846 | 27,379 | |||||||||
|
Tax
benefit from equity incentive plans
|
7,584 | 21,914 | 22,862 | |||||||||
|
Excess
tax benefit from share-based compensation
|
(6,798 | ) | (21,184 | ) | (22,788 | ) | ||||||
|
Convertible
debt derivatives – re-valuation and amortization
|
(944 | ) | 128 | --- | ||||||||
|
Amortization
of junior convertible debenture issuance costs
|
767 | 241 | --- | |||||||||
|
Gain
on sale of assets
|
(100 | ) | (937 | ) | (364 | ) | ||||||
|
Special
charges
|
860 | 26,763 | --- | |||||||||
|
Purchases/sales
of trading securities
|
(73,510 | ) | (12,133 | ) | --- | |||||||
|
Loss
on trading securities
|
6,332 | --- | --- | |||||||||
|
Unrealized
impairment loss on available-for-sale investments
|
3,560 | 2,439 | --- | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Decrease
(increase) in accounts receivable
|
50,832 | (13,760 | ) | 14,802 | ||||||||
|
Increase
in inventories
|
(4,110 | ) | (2,902 | ) | (2,663 | ) | ||||||
|
(Decrease)
increase in deferred income on shipments to distributors
|
(11,510 | ) | 4,078 | (8,118 | ) | |||||||
|
(Decrease)
increase in accounts payable and accrued liabilities
|
(25,097 | ) | 12,080 | (75,978 | ) | |||||||
|
Change
in other assets and liabilities
|
(39,024 | ) | (9,652 | ) | (7,586 | ) | ||||||
|
Net
cash provided by operating activities
|
308,654 | 447,307 | 429,769 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of available-for-sale investments
|
(2,479,175 | ) | (1,857,964 | ) | (1,327,042 | ) | ||||||
|
Sales
and maturities of available-for-sale investments
|
2,583,152 | 1,959,210 | 943,955 | |||||||||
|
Investment
in other assets
|
(21,600 | ) | (5,012 | ) | (844 | ) | ||||||
|
Proceeds
from sale of Fab 3
|
--- | 27,523 | --- | |||||||||
|
Proceeds
from sale of assets
|
166 | 1,725 | 1,746 | |||||||||
|
Capital
expenditures
|
(102,370 | ) | (69,827 | ) | (60,039 | ) | ||||||
|
Net
cash (used in) provided by investing activities
|
(19,827 | ) | 55,655 | (442,224 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Payment
of cash dividend
|
(246,658 | ) | (251,959 | ) | (207,898 | ) | ||||||
|
Repurchase
of common stock
|
(123,929 | ) | (1,138,040 | ) | --- | |||||||
|
Proceeds
from issuance of junior convertible debentures, net of issuance
costs
|
--- | 1,127,000 | --- | |||||||||
|
Proceeds
from sale of common stock
|
33,555 | 59,112 | 68,723 | |||||||||
|
Excess
tax benefit from share-based compensation
|
6,798 | 21,184 | 22,788 | |||||||||
|
Payments
on short-term borrowings
|
--- | --- | (268,954 | ) | ||||||||
|
Net
cash used in financing activities
|
(330,234 | ) | (182,703 | ) | (385,341 | ) | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(41,407 | ) | 320,259 | (397,796 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
487,736 | 167,477 | 565,273 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 446,329 | $ | 487,736 | $ | 167,477 | ||||||
|
See
accompanying notes to consolidated financial statements
|
||||||||||||
F-4
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
|
|||||||||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||||
|
Common
Stock and
Additional
Paid-in Capital
|
Common
Stock
Held
in Treasury
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|||||||||||||||||||||||
|
Deferred
Share-based
Compensation
|
Retained
Earnings
|
Net
Stockholders’
Equity
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||
|
Balance
at March 31, 2006
|
213,614 | $ | 639,452 | --- | $ | --- | $ | (13,913 | ) | $ | (5,705 | ) | $ | 1,106,355 | $ | 1,726,189 | |||||||||
|
Components
of other comprehensive income:
|
|||||||||||||||||||||||||
|
Net
income
|
--- | --- | --- | --- | --- | --- | 357,029 | 357,029 | |||||||||||||||||
|
Net
unrealized gains on available-for-sale investments, net of $1,228 of
tax
|
--- | --- | --- | --- | 6,744 | --- | --- | 6,744 | |||||||||||||||||
|
Total
comprehensive income
|
363,773 | ||||||||||||||||||||||||
|
Issuances
from equity incentive plans
|
3,435 | 57,322 | --- | --- | --- | --- | --- | 57,322 | |||||||||||||||||
|
Employee
stock purchase plan
|
391 | 11,401 | --- | --- | --- | --- | --- | 11,401 | |||||||||||||||||
|
Tax
benefit from equity incentive plans
|
--- | 22,862 | --- | --- | --- | --- | --- | 22,862 | |||||||||||||||||
|
Reclassification
due to the adoption of SFAS 123R
|
--- | (5,705 | ) | --- | --- | --- | 5,705 | --- | --- | ||||||||||||||||
|
Unearned
share-based compensation amortization
|
--- | 2 | --- | --- | --- | --- | --- | 2 | |||||||||||||||||
|
Share-based
compensation
|
--- | 30,717 | --- | --- | --- | --- | --- | 30,717 | |||||||||||||||||
|
Cash
dividend
|
--- | --- | --- | --- | --- | --- | (207,898 | ) | (207,898 | ) | |||||||||||||||
|
Balance
at March 31, 2007
|
217,440 | 756,051 | --- | --- | (7,169 | ) | --- | 1,255,486 | 2,004,368 | ||||||||||||||||
|
Components
of other comprehensive income:
|
|||||||||||||||||||||||||
|
Net
income
|
--- | --- | --- | --- | --- | --- | 297,748 | 297,748 | |||||||||||||||||
|
Net
unrealized gains on available-for-sale investments, net of $2,293 of
tax
|
--- | --- | --- | --- | 9,677 | --- | --- | 9,677 | |||||||||||||||||
|
Total
comprehensive income
|
307,425 | ||||||||||||||||||||||||
|
Issuances
from equity incentive plans
|
2,983 | 47,406 | --- | --- | --- | --- | --- | 47,406 | |||||||||||||||||
|
Employee
stock purchase plan
|
419 | 11,706 | --- | --- | --- | --- | --- | 11,706 | |||||||||||||||||
|
Purchase
of treasury stock
|
--- | --- | 36,503 | (1,138,040 | ) | --- | --- | --- | (1,138,040 | ) | |||||||||||||||
|
Treasury
stock used for new issuances
|
(2,052 | ) | (76,377 | ) | (2,052 | 76,377 | --- | --- | --- | --- | |||||||||||||||
|
Tax
benefit from equity incentive plans
|
--- | 21,914 | --- | --- | --- | --- | --- | 21,914 | |||||||||||||||||
|
Share-based
compensation
|
--- | 33,403 | --- | --- | --- | --- | --- | 33,403 | |||||||||||||||||
|
Cash
dividend
|
--- | --- | --- | --- | --- | --- | (251,959 | ) | (251,959 | ) | |||||||||||||||
|
Balance
at March 31, 2008
|
218,790 | 794,103 | 34,451 | (1,061,663 | ) | 2,508 | --- | 1,301,275 | 1,036,223 | ||||||||||||||||
|
Components
of other comprehensive income:
|
|||||||||||||||||||||||||
|
Net
income
|
--- | --- | --- | --- | --- | --- | 248,820 | 248,820 | |||||||||||||||||
|
Net
unrealized gains on available-for-sale investments, net of $1,669 of
tax
|
--- | --- | --- | --- | 1,804 | --- | --- | 1,804 | |||||||||||||||||
|
Total
comprehensive income
|
250,624 | ||||||||||||||||||||||||
|
Issuances
from equity incentive plans
|
1,917 | 22,767 | --- | --- | --- | --- | --- | 22,767 | |||||||||||||||||
|
Employee
stock purchase plan
|
545 | 10,788 | --- | --- | --- | --- | --- | 10,788 | |||||||||||||||||
|
Purchase
of treasury stock
|
--- | --- | 4,032 | (123,929 | ) | --- | --- | --- | (123,929 | ) | |||||||||||||||
|
Treasury
stock used for new issuances
|
(2,462 | ) | (90,222 | ) | (2,462 | 90,222 | --- | --- | --- | --- | |||||||||||||||
|
Tax
benefit from equity incentive plans
|
--- | 7,584 | --- | --- | --- | --- | --- | 7,584 | |||||||||||||||||
|
Share-based
compensation
|
--- | 33,367 | --- | --- | --- | --- | --- | 33,367 | |||||||||||||||||
|
Cash
dividend
|
--- | --- | --- | --- | --- | --- | (246,658 | ) | (246,658 | ) | |||||||||||||||
|
Balance
at March 31, 2009
|
218,790 | $ | 778,387 | 36,021 | $ | (1,095,370 | ) | $ | 4,312 | $ | --- | $ | 1,303,437 | $ | 990,766 | ||||||||||
|
See
accompanying notes to consolidated financial statements
|
|||||||||||||||||||||||||
F-5
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
|
1.
|
SIGNIFICANT ACCOUNTING
POLICIES
|
Nature
of Business
Microchip
develops, manufactures and sells specialized semiconductor products used by its
customers for a wide variety of embedded control
applications. Microchip’s product portfolio comprises 8-bit, 16-bit
and 32-bit PIC®
microcontrollers and 16-bit dsPIC® digital
signal controllers, which feature on-board Flash (reprogrammable) memory
technology. In addition, Microchip offers a broad spectrum of
high-performance linear, mixed-signal, power management, thermal management,
battery management and interface devices. Microchip also makes serial
EEPROMs.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Microchip Technology
Incorporated and its wholly-owned subsidiaries (Microchip or the
Company). The Company does not have any subsidiaries in which it does
not own 100% of the outstanding stock. All of the Company’s
subsidiaries are included in the consolidated financial
statements. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Revenue
Recognition
The
Company recognizes revenue when the earnings process is complete, as evidenced
by an agreement with the customer, transfer of title as well as fixed pricing
and probable collectability. The Company recognizes revenue from
product sales to OEMs upon shipment and records reserves for estimated customer
returns. Distributors worldwide generally have broad price protection and
product return rights, so the Company defers revenue recognition until the
distributor sells the product to their customer. Revenue is
recognized when the distributor sells the product to their end customer, at
which time the sales price becomes fixed or determinable. Revenue is
not recognized upon the Company’s shipment to the distributors since, due to
discounts from list price as well as price protection rights, the sales price is
not substantially fixed or determinable at that time. At the time of shipment to
these distributors, the Company records a trade receivable for the selling price
as there is a legally enforceable right to payment, relieves inventory for the
carrying value of goods shipped since legal title has passed to the distributor,
and records the gross margin in deferred income on shipments to distributors on
the consolidated balance sheets.
Deferred
income on shipments to distributors effectively represents the gross margin on
the sale to the distributor; however, the amount of gross margin recognized by
the Company in future periods could be less than the deferred margin as a result
of credits granted to distributors on specifically identified
products and customers to allow the distributors to earn a competitive gross
margin on the sale of the Company’s products to their end customers and price
protection concessions related to market pricing conditions.
The
Company sells the majority of the items in its product catalog to its
distributors worldwide at a uniform list price. However, distributors
resell the Company's products to end customers at a very broad range of
individually negotiated price points. The majority of the Company's
distributors’ resales require a reduction from the original list price
paid. Often, under these circumstances, the Company remits back to
the distributor a portion of their original purchase price after the resale
transaction is completed in the form of a credit against the distributors’
outstanding accounts receivable balance. The credits are on a per
unit basis and are not given to the distributor until they provide information
regarding the sale to their end customer. The price reductions vary
significantly based on the customer, product, quantity ordered, geographic
location and other factors and discounts to a price less than the Company’s cost
have historically been rare. The effect of granting these credits
establishes the net selling price from the Company to its distributors for the
product and results in the net revenue recognized by the Company when the
product is sold by the distributors to their end customers. Thus, a portion
of the “deferred income on shipments to distributors” balance represents the
amount of distributors’ original purchase price that will be credited back to
the distributor in the future. The wide range and variability of
negotiated price concessions granted to distributors does not allow the Company
to accurately estimate the portion of the balance in the deferred income on
shipments to distributors account that will be credited back to the
distributors. Therefore, the Company does not reduce deferred income
on shipments to distributors or accounts receivable by anticipated future price
concessions; rather, price concessions are typically recorded against deferred
income on shipments to distributors when incurred, which is generally at the
time the distributor sells the product.
F-6
At March
31, 2009, the Company had approximately $118.2 million of deferred revenue and
$34.3 million in deferred cost of sales recognized as $83.9 million of deferred
income on shipments to distributors. At March 31, 2008, the Company
had approximately $130.4 million of deferred revenue and $35.0 million of
deferred cost of sales recognized as $95.4 million of deferred income on
shipments to distributors. The deferred income on shipments to
distributors that will ultimately be recognized in the Company’s income
statement will be lower than the amount reflected on the balance sheet due to
price credits to be granted to the distributors when the product is sold to
their customers. These price credits historically have resulted in
the deferred income approximating the overall gross margins that the Company
recognizes in the distribution channel of its business.
The
Company reduces product pricing through price protection based on market
conditions, competitive considerations and other factors. Price
protection is granted to distributors on the inventory they have on hand at the
date the price protection is offered. When the Company reduces the
price of its products, it allows the distributor to claim a credit against its
outstanding accounts receivable balances based on the new price of the inventory
it has on hand as of the date of the price reduction. There is no
immediate revenue impact from the price protection, as it is reflected as a
reduction of the deferred income on shipments to distributors’
balance.
Products
returned by distributors and subsequently scrapped have historically been
immaterial to the Company’s consolidated results of operations. The
Company routinely evaluates the risk of impairment of the deferred cost of sales
component of the deferred income on shipments to distributors
account. Because of the historically immaterial amounts of inventory
that have been scrapped, and historically rare instances where discounts given
to a distributor result in a price less than the Company’s cost, the Company
believes the deferred costs have a low risk of material impairment.
Shipping
charges billed to customers are included in net sales, and the related shipping
costs are included in cost of sales.
Product
Warranty
The
Company generally sells products with a limited warranty related to product
quality and a limited indemnification of customers against intellectual property
infringement claims related to the Company’s products. Due to
comprehensive product testing, the short time between product shipment and the
detection and correction of product failures, and a low historical rate of
payments on indemnification claims, the accrual based on historical activity and
the related expense were immaterial as of and for fiscal years ended March 31,
2009, 2008 and 2007.
Advertising
Costs
The
Company expenses all advertising costs as incurred. Advertising costs
were immaterial for the fiscal years ended March 31, 2009, 2008 and
2007.
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. 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.
Foreign
Currency Translation and Forward Contracts
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 income (expense) 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. 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.
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 the Company’s 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
sheet. The Company must then assess the likelihood that its deferred
tax assets will be recovered from future taxable income and to the extent it
believes that recovery is not likely, it must establish a valuation
allowance. The Company has not provided for a valuation allowance
because management currently believes that it is “more likely than not” that its
deferred tax assets will be recovered from future taxable income.
F-7
In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 48, Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement
109. FIN 48 establishes a single model to address accounting
for uncertain tax positions. FIN 48 clarifies the accounting for
income taxes by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on de-recognition,
measurement classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company adopted FIN 48 on
April 1, 2007, and did not recognize any cumulative-effect adjustment associated
with its unrecognized tax benefits, interest, and penalties.
Cash
and Cash Equivalents
All
highly liquid investments, including marketable securities purchased with a
remaining maturity of three months or less when acquired are considered to be
cash equivalents.
Investments
The
Company classifies its investments as trading securities or available-for-sale
securities based upon management’s intent with regard to the investments and the
nature of the underlying securities.
The
Company’s trading securities consist of strategic investments in shares of
publicly traded common stock and restricted cash representing cash collateral
for put options the Company has written on some of its trading
securities. See further discussion in Note 4. The
Company’s investments in trading securities are carried at fair value with
unrealized gains and losses reported in other, net in the consolidated
statements of income.
The
Company’s available-for-sale investments consist of government agency bonds,
municipal bonds, auction rate securities (ARS) and corporate
bonds. The Company’s investments are carried at fair value with
unrealized gains and losses reported in stockholders’ equity. Premiums and
discounts are amortized or accreted over the life of the related
available-for-sale security. Dividend and interest income are
recognized when earned. The cost of securities sold is calculated
using the specific identification method.
The
Company includes within short-term investments its trading securities, as well
as 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. The Company has both the intent and
the ability to hold its long-term investments until such time as these assets
are no longer impaired. Such recovery is not expected to occur within
the next year.
Due to
the lack of availability of observable market quotes on certain of the Company’s
investment portfolio of ARS, it utilizes valuation models including those that
are based on expected cash flow streams and collateral values, including
assessments of counterparty credit quality, default risk underlying the
security, discount rates and overall capital market liquidity. The
valuation of the Company’s ARS investment portfolio is subject to uncertainties
that are difficult to predict. Factors that may impact the Company’s ARS
valuation include changes to credit ratings of the securities as well as to the
underlying assets supporting those securities, rates of default of the
underlying assets, underlying collateral value, discount rates, counterparty
risk, the ongoing strength and quality of the credit market, and market
liquidity.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments, which
is included in bad debt expense. The Company determines the adequacy
of this allowance by regularly reviewing the composition of its accounts
receivable aging and evaluating individual customer receivables, considering
such customer’s financial condition, credit history and current economic
conditions.
Inventories
Inventories
are valued at the lower of cost or market 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 market 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
twelve-month period and provides reserves for inventory on hand in excess of the
estimated twelve-month demand.
F-8
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 3 to 30 years. 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.
Convertible
Debentures
The
Company accounts for its junior subordinated convertible debentures and related
provisions in accordance with the provisions of Emerging Issues Task Force Issue
(EITF) No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, EITF No. 00-27, Application of Issue No. 98-5
to Certain Convertible Instruments, EITF No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, and EITF No. 01-6, The Meaning of ‘Indexed to a
Company’s Own Stock’, EITF No. 04-08, The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share (EITF 04-08)
and EITF No. 90-19, Convertible Bonds with Issuer Option
to Settle for Cash upon Conversion. The Company also evaluates the
instruments in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging
Activities (SFAS No. 133), which requires bifurcation of embedded
derivative instruments and measurement of fair value for accounting purposes.
EITF 04-08 requires the Company to include the dilutive effect of the shares of
its common stock issuable upon conversion of the outstanding convertible
debentures in its diluted income per share calculation regardless of whether the
market price trigger or other contingent conversion feature has been
met. The Company applies the treasury stock method as it has the
intent and current ability to settle the principal amount of the convertible
debentures in cash. This method results in incremental dilutive
shares when the average fair value of the Company’s common stock for a reporting
period exceeds the conversion price.
The
Company considers the embedded features related to the contingent interest
payments, over-allotment option, and the Company’s ability to make specific
types of distributions (e.g., extraordinary dividends) to qualify as derivatives
and bundles them as a compound embedded derivative under SFAS No.
133. The fair value of the derivative at the date of issuance of the
debentures is accounted for as a discount on the debentures. The
over-allotment feature which was revalued on the date of exercise is accounted
for as a premium on the debentures. The debt discount and the debt
premium are being accreted to the face value of the debentures as interest
expense, net, over the maturity period of the debentures. Any change
in the fair value of this embedded derivative is recognized as an unrealized
gain or loss in other income (expense) in the consolidated statements of
income.
Litigation
The
Company’s estimated range of liability related to pending litigation is based on
claims for which management believes a loss is probable and it can estimate the
amount or range of loss. Because of the uncertainties related to both
the outcome and range of any potential losses on the pending litigation, the
Company is unable to make a reasonable estimate of the liability that could
result from an unfavorable outcome. As additional information becomes
available, the Company will assess the potential liability related to its
pending litigation and revise its estimates, if necessary.
Goodwill
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. The Company is required to perform an annual impairment
review, and more frequently under certain circumstances. The goodwill is
subjected to this test during the fourth quarter of the Company’s fiscal
year. The Company engages primarily in the design, development,
manufacture and marketing of semiconductor products and, as a result, the
Company concluded there is one reporting unit. The impairment review
process compares the fair value of the reporting unit to its carrying
value. If the Company determines through the impairment process that
goodwill has been impaired, the Company will record the impairment charge in its
results of operation. As of March 31, 2009, there was no impairment
charge related to goodwill.
F-9
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) have been granted to employees and under which
non-qualified stock options have been granted to non-employee members of the
Board of Directors. In the second half of fiscal 2006, the Company
adopted RSUs as its primary equity incentive compensation instrument for
employees. The Company also has an employee stock purchase plan for
all eligible employees.
Effective
April 1, 2006, the Company adopted FASB Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R). SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
RSUs, and employee stock purchase rights, to be recognized in the financial
statements based on their respective grant date fair values and does not allow
the previously permitted pro forma disclosure-only method as an alternative to
financial statement recognition. SFAS No. 123R supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related interpretations,
and amends SFAS No. 95, Statement of Cash
Flows. SFAS No. 123R also requires the benefits of
tax deductions in excess of recognized compensation cost be reported as a
financing cash flow, rather than as an operating cash flow as required under
previous literature. This requirement has reduced the Company’s net
operating cash flows and increased net financing cash flows. In March
2005, the SEC issued SAB No. 107, Share-Based
Payment (SAB 107), which provides guidance regarding the
interaction of SFAS No. 123R and certain SEC rules and
regulations. The Company has applied the provisions of SAB 107
in its adoption of SFAS No. 123R.
SFAS No. 123R
requires companies to estimate the fair value of share-based payment awards on
the date of grant using an option pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense ratably over
the requisite service periods. The Company has estimated the fair
value of each award as of the date of grant using the Black-Scholes option
pricing model, which was developed for use in estimating the value of traded
options that have no vesting restrictions and that are freely
transferable. The Black-Scholes model considers, among other factors,
the expected life of the award and the expected volatility of the Company’s
stock price.
Determining
the appropriate fair-value model and calculating the fair value of share-based
awards at the date of grant requires judgment. The fair value of RSUs
is based on the fair market value of the Company’s common stock on the date of
grant discounted for expected future dividends. The Company uses the
Black-Scholes option pricing model to estimate the fair value of employee stock
options and rights to purchase shares under stock participation plans,
consistent with the provisions of SFAS No. 123R. Option pricing
models, including the Black-Scholes model, also require the use of input
assumptions, including expected volatility, expected life, expected dividend
rate, and expected risk-free rate of return. The Company uses a blend
of historical and implied volatility based on options freely traded in the open
market as it believes this is more reflective of market conditions and a better
indicator of expected volatility than using purely historical
volatility. The expected life of the awards is based on historical
and other economic data trended into the future. The risk-free
interest rate assumption is based on observed interest rates appropriate for the
expected terms of the Company’s awards. The dividend yield assumption
is based on the Company’s history and expectation of future dividend
payouts. SFAS No. 123R requires the Company to develop an estimate of
the number of share-based awards which will be forfeited due to employee
turnover. Quarterly changes in the estimated forfeiture rate
would affect share-based compensation, as the effect of adjusting the rate
for all expense amortization after April 1, 2006 is recognized in the period the
forfeiture estimate is changed. If the actual forfeiture rate is
higher than the estimated forfeiture rate, then an adjustment is made to
increase the estimated forfeiture rate, which will result in a decrease to the
expense recognized in the financial statements. If the actual
forfeiture rate is lower than the estimated forfeiture rate, then an adjustment
is made to decrease the estimated forfeiture rate, which will result in an
increase to the expense recognized in the financial statements. If
forfeiture adjustments are made, they would affect the Company’s results of
operations. The effect of forfeiture adjustments in the year ended
March 31, 2009, 2008 and 2007 was immaterial.
F-10
The
Company evaluates the assumptions used to value its awards on a quarterly
basis. If factors change and the Company employs different
assumptions, share-based compensation expense may differ significantly from what
was recorded in the past. If there are any modifications or
cancellations of the underlying unvested securities, the Company may be required
to accelerate or increase any remaining unearned share-based compensation
expense. Future share-based compensation expense and unearned
share-based compensation will increase to the extent that the Company grants
additional equity awards to employees or it assumes unvested equity awards in
connection with acquisitions.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of investments in debt securities and trade
receivables. Investments in debt securities with original maturities
of greater than six months consist primarily of AAA rated financial instruments
and counterparties. The Company’s investments are primarily in direct
obligations of the U.S. government or its agencies and in 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 had one distributor that accounted for 10% or more
of its net sales in the year ended March 31, 2009. 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. No single end customer accounted for 10%
or more of the Company’s net sales or accounts receivable balances during the
years ended March 31, 2009, 2008 and 2007. See Note 17, Geographic
Information, for additional information on the Company’s largest
distributors.
Distributor
advances, included in deferred income on shipments to distributors in the
consolidated balance sheets, totaled $37.6 million at March 31, 2009 and $36.4
million at March 31, 2008. 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 product from the Company and
such reductions are often significant. It is the Company’s practice
to apply these negotiated price discounts to future purchases, requiring the
distributor to settle receivable balances, on a current basis, generally within
30 days, for amounts originally invoiced. This practice has an
adverse impact on the working capital of the Company’s
distributors. As such, the Company has entered into agreements with
certain distributors whereby it advances cash to the distributors to reduce the
distributor’s working capital requirements. These advances are
reconciled at least on a quarterly basis and are estimated based on the amount
of ending inventory as reported by the distributor multiplied by a negotiated
percentage. Such advances have no impact on 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 cancelled 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. Actual
results could differ from those estimates.
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141R). SFAS No. 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. In April 2009, the FASB issued FSP FAS 141(R)-1,
Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from Contingencies
(FSP FAS 141R-1). FSP FAS 141R-1 amends and clarifies SFAS No. 141R
to address application issues on initial recognition and measurement, subsequent
measurement and accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. SFAS No. 141R and FSP FAS 141R-1
are effective for fiscal years beginning after December 15, 2008, and will be
adopted by the Company in the first quarter of fiscal 2010. Because
the majority of the provisions of SFAS No. 141R and FSP FAS 141R-1 are
applicable to future transactions, the Company does not believe the adoption of
SFAS No. 141R and FSP FAS 141R-1 will have an impact on its consolidated
financial statements.
F-11
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008, and will be
adopted by the Company in the first quarter of fiscal 2010. The Company is
currently evaluating the potential impact, if any, the adoption of SFAS No. 160
will have an impact on the Company's consolidated financial
statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(SFAS No. 161). The standard requires additional quantitative disclosures
(provided in tabular form) and qualitative disclosures for derivative
instruments. The required disclosures include how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance, and cash flows; relative volume of derivative activity; the
objectives and strategies for using derivative instruments; the accounting
treatment for those derivative instruments formally designated as the hedging
instrument in a hedge relationship; and the existence and nature of
credit-related contingent features for derivatives. SFAS No. 161 was
effective for the Company beginning January 1, 2009. SFAS No. 161 did
not change the accounting treatment for derivative instruments and as
such, the adoption of SFAS No. 161 did not have a material impact on its
consolidated financial statements.
In May
2008, the FASB released FSP APB 14-1, Accounting For Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1) that alters the accounting treatment for
convertible debt instruments that allow for either mandatory or optional cash
settlements. FSP APB 14-1 will impact the accounting associated with
the Company’s $1.15 billion junior subordinated convertible debentures.
FSP APB 14-1 specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect
the entity’s nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods, and will require the Company to recognize additional
(non-cash) interest expense based on the market rate for similar debt
instruments without the conversion feature. Furthermore, FSP APB 14-1
would require the Company to recognize additional interest expense in prior
periods pursuant to retrospective accounting treatment. FSP APB 14-1
will have no impact on the Company’s actual past or future cash
flows. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and will be adopted by the
Company on April 1, 2009. The Company is currently evaluating the
mafnitude of the impact of adoption of FSP APB 14-1 on its consolidated
financial statements.
In June 2008, the EITF issued EITF 07-05, Determining Whether an Instrument
(or
Embedded Feature) Is Indexed to an Entity's Own Stock (EITF No. 07-05).
EITF No. 07-05 clarifies the determination of whether an
instrument (or an embedded feature) is indexed to an entity's own stock, which
would qualify as a scope exception under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. EITF No. 07-05 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and is effective for the Company beginning in fiscal 2010.
Early adoption for an existing instrument is not permitted. The Company is currently evaluating the impact the adoption of EITF No.
07-05 will have on its consolidated financial statements.
In
November 2008, the FASB ratified EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets (EITF No. 08-7). EITF No. 08-7 applies to defensive
intangible assets, which are acquired intangible assets that the acquirer does
not intend to actively use but intends to hold to prevent its competitors from
obtaining access to them. As these assets are separately identifiable, EITF
No. 08-7 requires an acquiring entity to account for defensive intangible
assets as a separate unit of accounting. Defensive intangible assets must be
recognized at fair value in accordance with SFAS No. 141(R) and
SFAS No. 157. EITF No. 08-7 is effective for the Company beginning in
fiscal 2010. Because EITF No. 08-7 is applicable to future transactions, the
Company does not believe the adoption of EITF No. 08-7 will have an impact
on its consolidated financial statements.
In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP changes existing guidance for
determining whether an impairment of debt securities is other than temporary.
The FSP requires other than temporary impairments to be separated into the
amount representing the decrease in cash flows expected to be collected from a
security (referred to as credit losses) which is recognized in earnings and the
amount related to other factors which is recognized in other comprehensive
income. This noncredit loss component of the impairment may only be classified
in other comprehensive income if the holder of the security concludes that it
does not intend to sell and it will not more likely than not be required to sell
the security before it recovers its value. If these conditions are not met, the
noncredit loss must also be recognized in earnings. When adopting the FSP, an
entity is required to record a cumulative effect adjustment as of the beginning
of the period of adoption to reclassify the noncredit component of a previously
recognized other than temporary impairment from retained earnings to accumulated
other comprehensive income. FSP FAS 115-2 and FAS 124-2 is effective for interim
and annual periods ending after June 15, 2009. The Company is
currently evaluating the requirements of the FSP and has not yet determined the
impact on its consolidated financial statements.
F-12
In
April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. This FSP
provides additional guidance on estimating fair value when the volume and level
of activity for an asset or liability have significantly decreased in relation
to normal market activity for the asset or liability. The FSP also provides
additional guidance on circumstances that may indicate that a transaction is not
orderly. FSP FAS 157-4 is effective for interim and annual periods ending after
June 15, 2009. The Company does not believe the adoption of this
FSP will materially impact its consolidated financial statements.
In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosure about Fair Value
of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and
APB 28-1 amend SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. The FSP also amends APB Opinion
No. 28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is
effective for interim reporting periods ending after June 15,
2009. The Company is currently evaluating the potential impact, if
any, of the adoption of FSP FAS 107-1 and APB 28-1 on its consolidated financial
statements.
2. BUSINESS
ACQUISITIONS
During the year ended March 31, 2009,
the Company made several immaterial business acquisitions which were accounted
for under the purchase method of accounting. Total consideration paid for these
business acquisitions was approximately $19.9 million. The combined purchase
price of the acquisitions resulted in purchased intangible assets of
approximately $15.1 million and goodwill of approximately $4.3 million. The
purchased intangible assets (other than goodwill) are being amortized over an
average period of seven years. One of the acquisitions has an earn-out payment
associated with it based on the operating performance of the acquired business
for the twelve-month period ending September 30, 2010. The initial purchase price of this
acquisition was less than the fair value of the acquired net assets, and as a
result, the Company recorded negative goodwill totaling $2.2 million, which is
recorded in other long-term liabilities in the consolidated balance
sheet.
|
3.
|
SPECIAL
CHARGES
|
Patent Portfolio
License
The
Company entered into a patent portfolio license effective March 31, 2009 with an
unrelated third-party that covers both issued patents and patent applications
and settled alleged infringement claims. The total payment made to
the third-party was $8.25 million, $4.0 million of which was expensed in the
fourth quarter of fiscal 2009 and the remaining $4.25 million was recorded as a
prepaid royalty that will be amortized over the estimated 20-year remaining life
of the patents.
Expenses Associated with the
Abandonment of the Atmel Acquisition
On
October 2, 2008, the Company and ON Semiconductor Corporation announced that
they had sent a proposal to the Board of Directors of Atmel Corporation to
acquire Atmel for $5.00 per share in cash or a total of approximately
$2.3 billion. On October 29, 2008, Atmel announced that its Board of
Directors had determined that the unsolicited proposal was inadequate. On
December 15, 2008, the Company delivered a written notification to Atmel
regarding a proposed alternate slate of directors to be elected at Atmel’s 2009
annual meeting. On February 10, 2009, the Company announced its
termination of its consideration of a potential transaction with Atmel in light
of the economic uncertainty and the lack of visibility with respect to Atmel’s
business not allowing the Company to put a value on Atmel. In the fourth
quarter of fiscal 2009, the Company expensed $1.6 million of various costs
associated with the terminated proposal.
F-13
In-Process Research and
Development
During
the third quarter of fiscal 2009, the Company completed its acquisition of
Hampshire Company, a leader in the large format touch screen controller
market. As a result of the acquisition, the Company incurred a $0.5
million in-process research and development charge in the third quarter of
fiscal 2009.
During
the fourth quarter of fiscal 2009, the Company completed the acquisition of
HI-TECH Software, a provider of software development tools and compilers. As a
result of the acquisition, the Company incurred a $0.2 million in-process
research and development charge in the fourth quarter of fiscal
2009.
During
the fourth quarter of fiscal 2009, the Company completed its acquisition of
R&E International, a leader in developing innovative integrated circuits for
smoke and carbon monoxide detectors and other life-safety systems. As
a result of the acquisition, the Company incurred a $0.2 million in-process
research and development charge in the fourth quarter of fiscal
2009.
Loss on Sale of Fab
3
The
Company received an unsolicited offer on its Puyallup, Washington facility (Fab
3) in September 2007. The Company assessed its available capacity in
its current facilities, along with potential available capacity from outside
foundries and determined the capacity of Fab 3 would not be required in the near
term. As a result of this assessment, the Company accepted the offer
on September 21, 2007, and the transaction closed on October 19,
2007. The Company received $27.5 million in cash, net of expenses
associated with the sale, and recognized a loss on sale of $26.8 million,
representing the difference between the carrying value of the assets and the
amounts received.
|
4.
|
INVESTMENTS
|
The
Company’s investments are intended to establish a high-quality portfolio that
preserves principal, meets liquidity needs, avoids inappropriate concentrations,
and delivers an appropriate yield in relationship to the Company’s investment
guidelines and market conditions. The following is a summary of
available-for-sale and trading securities at March 31, 2009 (amounts in
thousands):
|
Available-for-sale
Securities
|
||||||||||||||||
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Government
agency bonds
|
$ | 469,815 | $ | 960 | $ | --- | $ | 470,775 | ||||||||
|
Municipal
bonds
|
356,520 | 6,159 | --- | 362,679 | ||||||||||||
|
ARS
|
18,901 | --- | --- | 18,901 | ||||||||||||
|
Corporate
bonds
|
20,000 | --- | 430 | 19,570 | ||||||||||||
| $ | 865,236 | $ | 7,119 | $ | 430 | $ | 871,925 | |||||||||
|
Trading
Securities
|
||||||||||||||||
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Marketable
equity securities
|
$ | 85,482 | $ | 550 | $ | 6,482 | $ | 79,550 | ||||||||
|
Restricted
cash
|
11,042 | --- | --- | 11,042 | ||||||||||||
|
ARS
|
27,899 | -- | --- | 27,899 | ||||||||||||
|
Put
option on ARS
|
4,026 | --- | --- | 4,026 | ||||||||||||
| $ | 128,449 | $ | 550 | $ | 6,482 | $ | 122,517 | |||||||||
At March
31, 2009, the Company’s available-for-sale and trading securities are presented
in the consolidated balance sheets as short-term investments of $943.6 million
and long-term investments of $50.8 million.
The
$79.5 million in marketable securities listed above relates to strategic
investments in publicly traded companies. The Company has classified
the shares owned in these companies as trading securities. During the
year ended March 31, 2009, the Company recognized a net unrealized loss in
earnings of $5.4 million on these trading securities. During the year
ended March 31, 2009, the Company had a realized loss of $0.4 million on trading
securities that it sold. The Company also has cash on deposit of
$11.0 million, held by a broker as cash collateral for put options the
Company has written on some of its trading securities. This amount is
shown as restricted cash in the table above. The Company recorded the
value received at the date the puts were written within other current
liabilities. The Company records the change in the fair value of the
puts in other income (expense) in the consolidated statements of income at
each reporting date. At March 31, 2009, the fair value of the puts of
$1.9 million was recorded in other current liabilities. These put
options have final maturities ranging from April 2009 through January
2010. If the price of the common stock underlying the puts falls
below the strike price of the puts at any time prior to the maturity date, the
Company can be required to make an additional investment at the designated
strike price of the puts.
F-14
At March
31, 2009, $46.8 million of the Company’s investment portfolio was invested in
ARS. With the continuing liquidity issues in the global credit and
capital markets, the Company’s ARS have experienced multiple failed
auctions. In September 2007 and February 2008, auctions for
$24.9 million and $34.8 million, respectively, of the original purchase value of
the Company’s investments in ARS first failed. While the Company continues
to earn interest on these investments based on a pre-determined formula with
spreads tied to particular interest rate indices, the estimated market value for
these ARS no longer approximates the original purchase value.
At March
31, 2009, the $24.9 million of ARS that failed during September 2007
carried ratings between A and B by Standard & Poors compared to ratings
between AAA and AA at March 31, 2008. All but $2.5 million of the
securities possesses credit enhancement in the form of insurance for principal
and interest. The underlying characteristics of $22.4 million of
these ARS relate to servicing statutory requirements in the life insurance
industry and $2.5 million relate to a specialty finance company whose
counterparty rating was downgraded to Baa1 by Moody’s during December
2008. Moody’s also downgraded the $2.5 million specialty finance
company issue to Caa3 during December 2008. Additionally, Moody’s
downgraded $7.5 million of the $22.4 million of ARS related to servicing
statutory requirements in the life insurance industry from Aa3 to Baa1 during
the quarter ending December 31, 2008. During the first week of
January 2009, Moody’s downgraded other issues from the same issuer of the $7.5
million ARS, which the Company does not own, to D, and simultaneously cited
their expectation that the series owned by the Company would have interest
payment shortfalls, but that any shortfalls would be paid by the insurer and the
ratings on the notes would then become based on the rating of the
insurer. The issuer announced a default as expected in early January
2009 and interest has continuously been paid by the insurer and posted to the
Company's account since that time. All rating change actions have
been factored into the fair value estimates for the period ending March 31,
2009.
The $24.9
million in failed auctions have continued to fail through the filing date of
this report. As a result, the Company will not be able to access such
funds until a future auction on these investments is successful. The fair
value of the failed ARS has been estimated based on market information and
estimates determined by management and could change significantly based on
market conditions. Based on the estimated values, the Company concluded
these investments were other than temporarily impaired and recognized an
impairment charge on these investments of $2.4 million during fiscal 2008 and
$3.6 million during fiscal 2009. If the issuers are unable to successfully
close future auctions or if their credit ratings deteriorate further, the
Company may be required to further adjust the carrying value of the investments
through an additional impairment charge to earnings.
The $34.8
million of ARS that failed during February 2008 are investments in student
loan-backed ARS. Approximately $0.2 million, $1.7 million, and $1.0
million of these ARS were redeemed at par by the issuers during the first,
second, and third quarters of fiscal 2009, respectively, reducing the Company's
overall position to $31.9 million. Based upon the Company’s
evaluation of available information, it believes these investments are of high
credit quality, as all of the investments carry AAA credit ratings by one or
more of the major credit rating agencies and are largely backed by the federal
government (Federal Family Education Loan Program). The fair value of
the failed ARS has been estimated based on market information and estimates
determined by management and could change significantly based on market
conditions. The Company continues to monitor the market for ARS and
consider its impact, if any, on the fair market value of its investments.
If the market conditions deteriorate further, the Company may be required to
record additional impairment charges. In November 2008, the Company
executed an ARS rights agreement (the Rights) with the broker through which the
Company purchased the $31.9 million in ARS that provides (1) the Company
with the right to put these ARS back to the broker at par anytime during the
period from June 30, 2010 through July 2, 2012, and (2) the broker with the
right to purchase or sell the ARS at par on the Company’s behalf anytime through
July 2, 2012. The Company accounted for the acceptance of the Rights as
the receipt of a put option for no consideration and recognized a gain with a
corresponding recognition as a long-term investment. The Company elected
to measure the Rights under the fair value option of SFAS No. 159 and will
record changes in the fair value of the Rights in earnings. The Company
simultaneously recognized an other-than-temporary impairment loss of $5.5
million as the Company no longer intends to hold these ARS until the fair value
recovers, which was recorded in other comprehensive loss in prior
quarters. The Company reclassified the ARS from available-for-sale to
trading securities and future changes in fair value are being recorded in
earnings. During the fourth quarter of fiscal 2009, the Company estimated
the fair value of the ARS increased by $1.5 million offset by a change in the
fair value of the related Rights of $1.5 million, with no net impact to its
income statement. The Company expects any future changes in the fair value
of the ARS to continue to be largely offset by changes in the fair value of the
related Rights without any significant net impact to its income statement.
The Company will continue to measure the ARS and the Rights at fair value
(utilizing Level 3 inputs) until the earlier of its maturity or
exercise. The Company intends and has the ability to hold these ARS until
the market recovers, or as it relates to $27.9 million of these auction rates,
until June 30, 2010 when the Company has the right to sell the auction rates at
par to the broker. The Company does not anticipate having to sell
these securities to fund the operations of its business. The Company
believes that, based on its current unrestricted cash, cash equivalents and
short-term investment balances, the current lack of liquidity in the credit and
capital markets will not have a material impact on its liquidity, cash flow or
ability to fund its operations.
F-15
At March
31, 2009, the Company evaluated its investment portfolio, and noted unrealized
losses of $0.4 million were due to fluctuations in interest rates and
credit market conditions. Management does not believe any of the
unrealized losses represent other-than-temporary impairment based on its
evaluation of available evidence as of March 31, 2009. The Company’s
intent is to hold these investments to such time as these assets are no longer
impaired. For those investments not scheduled to mature until after
March 31, 2010, such recovery is not anticipated to occur in the next year and
these investments have been classified as long-term investments in the Company's
consolidated balance sheets.
The
amortized cost and estimated fair value of the available-for-sale securities at
March 31, 2009, by maturity, are shown below (amounts in
thousands). Expected maturities can differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties, and the Company views its
available-for-sale securities as available for current operations.
|
Available-for-sale
Securities
|
||||||||||||||||
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
Due in one year or less
|
$ | 350,469 | $ | 2,694 | $ | 430 | $ | 352,733 | ||||||||
|
Due after one year and through five years
|
495,866 | 4,425 | --- | 500,291 | ||||||||||||
|
Due after five years and through ten years
|
--- | --- | --- | --- | ||||||||||||
|
Due after ten years
|
18,901 | --- | --- | 18,901 | ||||||||||||
| $ | 865,236 | $ | 7,119 | $ | 430 | $ | 871,925 | |||||||||
The
following is a summary of available-for-sale securities at March 31, 2008
(amounts in thousands):
|
Available-for-sale
Securities
|
||||||||||||||||
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Government
agency bonds
|
$ | 397,708 | $ | 1,933 | $ | --- | $ | 399,641 | ||||||||
|
ARS
|
57,236 | --- | 1,095 | 56,141 | ||||||||||||
|
Municipal
bonds
|
463,531 | 2,877 | 395 | 466,013 | ||||||||||||
|
Corporate
bonds
|
80,000 | --- | 102 | 79,898 | ||||||||||||
| $ | 998,475 | $ | 4,810 | $ | 1,592 | $ | 1,001,693 | |||||||||
At March
31, 2008, short-term investments consisted of $837.0 million and long-term
investments consisted of $194.3 million.
During
the years ended March 31, 2009 and March 31, 2008, the Company had gross
realized gains or sales on sales of available-for-sale securities of $0.5
million and $0, respectively.
F-16
5. ACCOUNTS
RECEIVABLE
Accounts
receivable consists of the following (amounts in thousands):
|
March
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Trade
accounts receivable
|
$ | 91,325 | $ | 140,966 | ||||
|
Other
|
376 | 505 | ||||||
| 91,701 | 141,741 | |||||||
|
Less
allowance for doubtful accounts
|
3,176 | 3,152 | ||||||
| $ | 88,525 | $ | 138,319 | |||||
6. INVENTORIES
Inventories
consist of the following (amounts in thousands):
|
March
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 3,693 | $ | 4,205 | ||||
|
Work
in process
|
114,676 | 95,973 | ||||||
|
Finished
goods
|
13,141 | 24,305 | ||||||
| $ | 131,510 | $ | 124,483 | |||||
7. FAIR VALUE
MEASUREMENTS
The
Company adopted SFAS No. 157 on April 1, 2008. SFAS No. 157,
among other things, defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure for each major asset and liability
category measured at fair value on either a recurring or nonrecurring basis.
SFAS No. 157 clarifies 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, SFAS No. 157 establishes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
|
|
Level
1 – Observable inputs such as quoted prices in active
markets;
|
|
|
Level
2 – Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly;
and
|
|
|
Level
3 – Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own
assumptions.
|
Assets
and liabilities measured at fair value on a recurring basis at March 31, 2009
are as follows (amounts in thousands):
|
Quoted
Prices in Active Markets for Identical Instruments
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Total
Balance
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Money
market fund deposits
|
$ | 282,347 | $ | --- | $ | --- | $ | 282,347 | ||||||||
|
Deposit
accounts
|
--- | 175,024 | --- | 175,024 | ||||||||||||
|
Government
agency bonds
|
--- | 470,775 | --- | 470,775 | ||||||||||||
|
Municipal
bonds
|
--- | 362,679 | --- | 362,679 | ||||||||||||
|
ARS
|
--- | --- | 46,800 | 46,800 | ||||||||||||
|
Put
option on ARS
|
--- | --- | 4,026 | 4,026 | ||||||||||||
|
Corporate
bonds
|
--- | 19,570 | --- | 19,570 | ||||||||||||
|
Marketable
securities
|
79,550 | --- | --- | 79,550 | ||||||||||||
|
Total
assets measured at fair value
|
$ | 361,897 | $ | 1,028,048 | $ | 50,826 | $ | 1,440,771 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Put
options on publicly traded common stock
|
$ | 1,889 | $ | --- | $ | --- | $ | 1,889 | ||||||||
|
Total
liabilities measured at fair value
|
$ | 1,889 | $ | --- | $ | --- | $ | 1,889 | ||||||||
For Level
3 valuations, the Company estimated the fair value of these ARS based on the
following: (i) the underlying structure of each security; (ii) the
present value of future principal and interest payments discounted at rates
considered to reflect current market conditions; (iii) consideration of the
probabilities of default, auction failure, or repurchase at par for each period;
and (iv) estimates of the recovery rates in the event of default for each
security. The Company estimated the value of the put option on the
ARS by evaluating the estimated cash flows before and after the receipt of the
put option, discounted at rates reflecting the likelihood of default and lack of
liquidity, or in the case of the payment of the par value to be paid by the
broker at exercise of the put option, the counterparty credit
risk. The estimated fair values that are categorized as Level 3 as
well as the put options on publicly traded public stock could change
significantly based on future market conditions. Refer to Note 4 for further
discussion of the Company’s investments in ARS.
F-17
The
following table presents a reconciliation for all assets and liabilities
measured at fair value on a recurring basis, excluding accrued interest
components, using significant unobservable inputs (Level 3) for the year ended
March 31, 2009 as follows (amounts in thousands):
|
Year Ended
March
31, 2009
|
||||
|
Balance
at March 31, 2008
|
$ | 56,141 | ||
|
Securities
redeemed at par
|
(2,850 | ) | ||
|
Unrealized
gains recorded to other comprehensive income
|
1,095 | |||
|
Recognition
of put option on ARS
|
5,492 | |||
|
Impairment
losses included in other, net due to change in ability and intent to
hold student loan ARS
|
(5,492 | ) | ||
|
Impairment
losses included in other, net
|
(3,560 | ) | ||
|
Balance
at March 31, 2009
|
$ | 50,826 | ||
Assets
and liabilities measured at fair value on a recurring basis are
presented/classified in the consolidated balance sheets at March 31, 2009 as
follows (amounts in thousands):
|
Quoted
Prices
in
Active
Markets
for
Identical
Instruments
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Total
Balance
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 282,347 | $ | 163,982 | $ | --- | $ | 446,329 | ||||||||
|
Short-term
investments
|
79,550 | 864,066 | --- | 943,616 | ||||||||||||
|
Long-term
investments
|
--- | --- | 50,826 | 50,826 | ||||||||||||
|
Total
assets measured at fair value
|
$ | 361,897 | $ | 1,028,048 | $ | 50,826 | $ | 1,440,771 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Accrued
liabilities
|
$ | 1,889 | $ | --- | $ | --- | $ | 1,889 | ||||||||
|
Total
liabilities measured at fair value
|
$ | 1,889 | $ | --- | $ | --- | $ | 1,889 | ||||||||
8. PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment consists of the following (amounts in
thousands):
|
March
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Land
|
$ | 39,671 | $ | 39,764 | ||||
|
Building
and building improvements
|
334,717 | 330,519 | ||||||
|
Machinery
and equipment
|
1,148,588 | 1,100,759 | ||||||
|
Projects
in process
|
114,478 | 78,073 | ||||||
| 1,637,454 | 1,549,115 | |||||||
|
Less
accumulated depreciation and amortization
|
1,105,767 | 1,026,810 | ||||||
| $ | 531,687 | $ | 522,305 | |||||
Depreciation
expense attributed to property, plant and equipment was $93.3 million, $98.2
million and $114.3 million for the years ending March 31, 2009, 2008 and
2007, respectively.
F-18
9. INTANGIBLE
ASSETS
Intangible
assets consist of the following (amounts in thousands):
|
March
31, 2009
|
||||||||||||
|
Gross
Amount
|
Accumulated
Amortization
|
Net
Amount
|
||||||||||
|
Developed
technology
|
$ | 38,419 | $ | (14,805 | ) | $ | 23,614 | |||||
|
Distribution
rights
|
5,236 | (3,132 | ) | 2,104 | ||||||||
| $ | 43,655 | $ | (17,937 | ) | $ | 25,718 | ||||||
|
March
31, 2008
|
||||||||||||
|
Gross
Amount
|
Accumulated
Amortization
|
Net
Amount
|
||||||||||
|
Developed
technology
|
$ | 21,582 | $ | (12,605 | ) | $ | 8,977 | |||||
|
Distribution
rights
|
5,236 | (2,600 | ) | 2,636 | ||||||||
| $ | 26,818 | $ | (15,205 | ) | $ | 11,613 | ||||||
The
Company amortizes intangible assets over their expected useful lives, which
range between 1 and 10 years. In fiscal 2009, the Company acquired $16.8 million
of developed technology, which has a weighted average amortization period of 7.0
years. The following is an expected amortization schedule for the
intangible assets for the fiscal years March 31, 2010 through March 31, 2014,
absent any future acquisitions or impairment charges (amounts in
thousands):
|
Year
Ending
March
31,
|
Projected
Amortization
Expense
|
|
2010
|
$ 4,248
|
|
2011
|
4,259
|
|
2012
|
4,281
|
|
2013
|
4,253
|
|
2014
|
3,601
|
Amortization
expense attributed to intangible assets was $2.7 million, $1.9 million, and $1.9
million for the years ending March 31, 2009, 2008 and 2007, respectively.
The Company did not record any impairment losses in the years ended March 31,
2009, 2008 and 2007 associated with the intangible assets acquired.
10. INCOME
TAXES
The
Company is subject to income taxes in the U.S. and numerous foreign
jurisdictions. The Company files U.S. federal, U.S. state, and
foreign income tax returns. For U.S. federal, and in general for U.S.
state tax returns, the fiscal 2002 through fiscal 2004 and fiscal 2006 through
fiscal 2008 tax years remain open for examination by tax authorities. For
foreign tax returns, the Company is generally no longer subject to income tax
examinations for years prior to fiscal 2002.
Significant
judgment is required in evaluating its uncertain tax positions and
determining its provision for income taxes. Although the
Company believes that it has adequately reserved for its uncertain tax
positions, no assurance can be given that the final tax outcome of these matters
will not be different. The Company will adjust these reserves in
light of changing facts and circumstances, such as the closing of a tax
audit, the refinement of an estimate, the closing of a statutory audit
period or changes in applicable tax law. To the extent that the final
tax outcome of these matters is different than the amounts recorded, such
differences will impact the provision for income taxes in the period in which
such determination is made. The provision for income taxes
includes the impact of reserve provisions and changes to the reserves that are
considered appropriate, as well as related net interest.
The
Company recognizes liabilities for anticipated tax audit issues in the U.S. and
other domestic and international tax jurisdictions based on its estimate of
whether, and the extent to which, additional tax payments are more likely than
not. The Company believes it maintains appropriate reserves to offset
potential income tax liabilities that may arise upon final resolution of matters
for open tax years. The U.S. Internal Revenue Service (IRS) is currently
auditing the Company’s fiscal years ended March 31, 2002, 2003, 2004, 2006, 2007
and 2008. The Company believes that it has appropriate support for
the income tax positions taken and to be taken on its tax returns and that its
accruals for tax liabilities are appropriate for all open years based on an
assessment of many factors including past experience and interpretations of tax
law applied to the facts of each matter. If such amounts ultimately
prove to be unnecessary, the resulting reversal of such reserves would result in
tax benefits being recorded in the period the reserves are no longer deemed
necessary. If such assessments ultimately prove to be greater than
anticipated, a future charge to expense would be recorded in the period in which
the assessment is determined. Timing of the resolution and/or closure on
audits is highly uncertain; however, the Company believes that it is reasonably
possible that the unrecognized tax benefits could significantly change within
the next 12 months as the result of a tax examination closure. This
settlement could have a significant impact on the unrecognized tax benefit;
however the Company is not currently able to quantify the amount of such
change.
F-19
The
following table summarizes the activity related to the Company’s gross
unrecognized tax benefits from April 1, 2008 to March 31, 2009 (amounts in
thousands):
|
Balance
as of April 1, 2008
|
$ | 112,311 | ||
|
Decreases
related to prior year tax positions
|
(49,967 | ) | ||
|
Increases
related to current year tax positions
|
7,584 | |||
|
Increases
related to prior year tax positions
|
123 | |||
|
Balance
as of March 31, 2009
|
$ | 70,051 |
As of
March 31, 2009, the Company had accrued approximately $1.7 million related to
the potential payment of interest on the Company's uncertain tax positions, net
of interest receivable on tax overpayments. Interest was included in
the provision for income taxes. The Company has not accrued any
penalties related to its uncertain tax positions as the Company believes that it
is more likely than not that there will not be any assessments of
penalties.
The
income tax (benefit) provision consists of the following (amounts in
thousands):
|
Year
Ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current
(benefit) expense:
|
||||||||||||
|
Federal
|
$ | (38,836 | ) | $ | 31,202 | $ | 24,334 | |||||
|
State
|
(3,888 | ) | 3,124 | 2,437 | ||||||||
|
Foreign
|
8,689 | 9,350 | 8,267 | |||||||||
|
Total
current
|
(34,035 | ) | 43,676 | 35,038 | ||||||||
|
Deferred
expense (benefit):
|
||||||||||||
|
Federal
|
21,238 | 7,336 | 10,005 | |||||||||
|
State
|
2,126 | 734 | 1,001 | |||||||||
|
Foreign
|
(899 | ) | 1,491 | (1,983 | ) | |||||||
|
Total
deferred
|
22,465 | 9,561 | 9,023 | |||||||||
| $ | (11,570 | ) | $ | 53,237 | $ | 44,061 | ||||||
The tax
benefit associated with the Company’s equity incentive plans reduced taxes
currently payable by $7.6 million, $21.9 million and
$22.9 million for the years ended March 31, 2009, 2008 and 2007,
respectively. These amounts were credited to additional paid-in
capital in each of the three fiscal years.
The
provision for income taxes differs from the amount computed by applying the
statutory federal tax rate to income before income taxes. The sources
and tax effects of the differences in the total income tax (benefit) provision
are as follows (amounts in thousands):
|
Year
Ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Computed
expected income tax provision
|
$ | 83,038 | $ | 122,845 | $ | 140,382 | ||||||
|
State
income taxes, net of federal benefits
|
1,476 | 2,727 | 5,103 | |||||||||
|
Domestic
production activities/foreign export sales benefit
|
--- | (257 | ) | (658 | ) | |||||||
|
Research
and development tax credits
|
(2,732 | ) | (2,625 | ) | (3,573 | ) | ||||||
|
Foreign
income taxed at lower than the federal rate
|
(43,505 | ) | (58,489 | ) | (44,993 | ) | ||||||
|
Tax
benefit from IRS settlement
|
(16,880 | ) | --- | (52,200 | ) | |||||||
|
Release
of tax reserves
|
(32,967 | ) | (10,964 | ) | --- | |||||||
| $ | (11,570 | ) | $ | 53,237 | $ | 44,061 | ||||||
F-20
Pretax
income from foreign operations was $195.1 million, $273.1 million and
$255.3 million for the years ended March 31, 2009, 2008 and 2007,
respectively. Unremitted foreign earnings that are considered to be
permanently invested outside the U.S., and on which no deferred taxes have been
provided, amounted to approximately $1,054.9 million at March 31,
2009. Should the Company elect in the future to repatriate a portion
of the foreign earnings so invested, the Company would incur income tax expense
on such repatriation, net of any available deductions and foreign tax
credits. This would result in additional income tax expense beyond
the computed effective tax rate in such periods.
In
October 2008, the U.S. Congress passed the Emergency Economic Stabilization Act
of 2008 which included a provision to extend the research and development tax
credit retroactively from January 1, 2008. As a result, the Company
is recognizing a one-time tax benefit of $1.5 million in the quarter ending
December 31, 2008. Likewise, the ongoing benefit from this credit is
reflected in the Company’s fiscal 2009 effective tax rate.
During
the year ended March 31, 2009, the Company settled an IRS examination of fiscal
2005 which resulted in a one-time tax benefit of $16.9 million. Also
during fiscal 2009, the IRS issued revised Treasury Regulations that provided a
clarification of the tax treatment of certain items that the Company had
previously established a tax accrual for, and as a result, the Company
recognized a $33.0 million tax benefit. The tax reserve releases are reflected
as separate line items in the rate reconciliation table above. These
tax benefits decreased the Company’s effective tax rate by 21.0 percentage
points to an effective tax benefit of 4.9%
During
the year ended March 31, 2008, the Company realized a U.S. tax benefit of $10.3
million as a result of the sale of Fab 3 and realized a tax benefit of
$11.0 million as the result of the release of previously established
tax reserves consisting of approximately $5.7 million related to the resolution
of a foreign tax matter in the third quarter of fiscal 2008, $4.5 million
related to the release of tax reserves for certain international tax exposures
in the fourth quarter of fiscal 2008 and approximately $0.8 million related
to accrued interest and other reserve matters. The tax reserve
releases are reflected as a separate line in the rate reconciliation table
above. These tax benefits decreased the Company’s effective tax rate
for fiscal 2008 by approximately 4.4 percentage points to 15.2%.
During
the year ended March 31, 2007, the Company completed a settlement agreement with
the IRS for its fiscal years ended March 31, 1998, 1999, 2000 and
2001. As part of this settlement the Company recognized $52.2 million
as a tax benefit in March 2007 related to amounts previously accrued for the
issues that were in dispute with the IRS. This tax benefit decreased
the Company’s effective tax rate for fiscal 2007 by approximately 13.0
percentage points, to 11.0%. This decrease is reflected as a separate
line in the rate reconciliation table above.
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are as follows (amounts in
thousands):
|
March
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Deferred intercompany
profit
|
$ | 10,048 | $ | 8,733 | ||||
|
Deferred income on shipments to
distributors
|
20,596 | 23,040 | ||||||
|
Inventory
valuation
|
2,548 | 1,110 | ||||||
|
Net operating loss
carryforward
|
3,079 | 2,864 | ||||||
|
Share-based
compensation
|
23,938 | 18,627 | ||||||
|
Accrued expenses and
other
|
9,417 | 8,888 | ||||||
|
Gross deferred tax
assets
|
69,626 | 63,262 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property, plant and equipment,
principally due
to differences in depreciation
|
(7,997 | ) | (11,277 | ) | ||||
|
Junior convertible
debentures
|
(41,532 | ) | (9,089 | ) | ||||
|
Other
|
(2,430 | ) | (1,095 | ) | ||||
|
Gross deferred tax
liability
|
(51,959 | ) | (21,461 | ) | ||||
|
Net deferred tax
asset
|
$ | 17,667 | $ | 41,801 | ||||
Management
believes that the Company’s results of future operations will generate
sufficient taxable income such that it is “more likely than not” that the
deferred tax assets will be realized.
At March
31, 2009, the Company had a net operating loss carryforward for federal income
tax purposes of approximately $7.4 million, which begins to expire in
varying amounts in the years 2020 through
2022. The net operating loss carryforward is attributable to the
acquisition of PowerSmart in fiscal 2003. An analysis of the annual
limitation on the utilization of the PowerSmart net operating losses was
performed in accordance with Internal Revenue Code Section 382. It
was determined that Section 382 will not limit the use of the PowerSmart net
operating losses in full over the carryover period.
F-21
The
Company’s Thailand manufacturing operations currently benefit from numerous tax
holidays granted to the Company based on its investment in property, plant and
equipment in Thailand. The Company’s tax holiday periods in Thailand
expire at various times in the future beginning in May 2010. The
Company does not expect the future expiration of any of its tax holiday periods
in Thailand to have a material impact on its effective tax rate. The
aggregate dollar benefits derived from these tax holidays approximated $6.4
million, $7.1 million and $6.1 million for the years ended March 31,
2009, 2008 and 2007, respectively. The benefit the tax holiday had on
diluted net income per share approximated $0.03 for each of the years ended
March 31, 2009, 2008 and 2007.
11. 2.125% JUNIOR
SUBORDINATED CONVERTIBLE DEBENTURES
In
December 2007, the Company issued $1.15 billion principal amount of 2.125%
junior subordinated convertible debentures due December 15, 2037, to two initial
purchasers in a private offering. The debentures are subordinated in
right of payment to any future senior debt of the Company and are effectively
subordinated in right of payment to the liabilities of the Company’s
subsidiaries. The debentures are convertible, subject to certain
conditions, into shares of the Company’s common stock at an initial conversion
rate of 29.2783 shares of common stock per one thousand dollar principal amount
of debentures, representing an initial conversion price of approximately $34.16
per share of common stock. As of March 31, 2009, none of the
conditions allowing holders of the debentures to convert had been
met. The conversion rate will be subject to adjustment for certain
events as outlined in the indenture governing the debentures, including in the
event the Company pays a cash dividend on its common stock, but will not be
adjusted for accrued interest. As a result of a cash dividend of
$0.339 per share paid in February 2009, the conversion rate was adjusted to
31.1918 shares of common stock per $1,000 of principal amount of debentures,
representing a conversion price of approximately $32.06 per share of common
stock. The Company received net proceeds of $1,127.0 million after
deduction of issuance costs of $23.0 million. The debt issuance costs
are recorded in long-term other assets and are being amortized to interest
expense over 30 years. Interest is payable in cash semiannually in
arrears on June 15 and December 15, beginning on June 15,
2008. Interest expense related to cash payments of interest for
fiscal 2009 totaled $24.3 million, and was included in interest expense on the
consolidated statement of income. The debentures also have a
contingent interest component that will require the Company to pay interest
during any semiannual interest period if the average trading price of the
debenture is greater or less than certain thresholds beginning with the
semi-annual interest period commencing on December 15, 2017 (the maximum amount
of contingent interest that will accrue is 0.50% of such average trading price
per year) and upon the occurrence of certain events, as outlined in the
indenture governing the debentures.
On or
after December 15, 2017, the Company may redeem all or part of the debentures
for the principal amount plus any accrued and unpaid interest if the closing
price of the Company’s common stock has been at least 150% of the conversion
price then in effect for at least 20 trading days during any 30 consecutive
trading-day period prior to the date on which the Company provides notice of
redemption.
Prior to
September 1, 2037, holders of the debentures may convert their debentures only
upon the occurrence of certain events, as outlined in the indenture including,
without limitation, during the five business day period after any ten
consecutive trading day period in which the trading price for a debenture for
each day of that ten consecutive trading day period was less than 98% of the
product of the last reported sale of the Company's common stock and the
conversion rate on such day (the conversion value). If holders of the
debentures convert their debentures in connection with a fundamental change, as
defined in the indenture, the Company will, in certain circumstances, be
required to pay a make-whole premium in the form of an increase in the
conversion rate. Additionally, in the event of a fundamental change,
the holders of the debentures may require the Company to purchase all or a
portion of their debentures at a purchase price equal to 100% of the principal
amount of debentures, plus accrued and unpaid interest, if any.
Upon
conversion, the Company can satisfy its conversion obligation by delivering
cash, shares of common stock or any combination, at the Company’s
option. The Company intends to satisfy the lesser of the principal
amount of the debentures or the conversion value in cash. If the
conversion value of a debenture exceeds the principal amount, the Company may
also elect to deliver cash in lieu of common stock for the conversion value in
excess of one thousand dollars principal amount (conversion
spread). There would be no adjustment to the numerator in the net
income per common share computation for the cash settled portion of the
debentures as that portion of the debt instrument will always be settled in
cash. The conversion spread will be included in the denominator for
the computation of diluted net income per common share.
F-22
Under the
terms of a registration rights agreement entered into in connection with
the offering of the debentures, the Company filed a shelf registration statement
covering resales of the debentures and any common stock issuable upon conversion
of the debentures with the SEC. The Company must maintain the
effectiveness of the shelf registration statement until all of the debentures
and all shares of common stock issuable upon conversion of the debentures cease
to be outstanding, have been sold or transferred pursuant to an effective
registration statement, have been sold pursuant to Rule 144 under the Securities
Act of 1933, as amended, or the period of time specified in Rule 144 for the
holding period has passed. If the Company fails to comply with the terms
of the registration rights agreement, it will be required to pay additional
interest on the debentures at a rate per annum equal to 0.25% for the first 90
days after the date of such failure and 0.50% thereafter.
The
Company concluded the embedded features related to the contingent interest
payments, the Company making specific types of distributions (e.g.,
extraordinary dividends), the redemption feature in the event of changes in tax
law, and penalty interest in the event of a failure to maintain an effective
registration qualify as derivatives and should be bundled as a compound embedded
derivative under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133) and bifurcated from the
convertible debt. Additionally, the Company concluded the
registration rights agreement entered into at the time the Company issued the
debt is a separate bifurcated derivative, however, the value of this derivative
was deemed to be immaterial, due to the low likelihood the registration would
not occur. The fair value of the compound embedded derivative at the
date of issuance of the debentures was $1.3 million and is accounted for as
a discount on the debentures. The resulting value of the debentures
of $1,148.7 million will be accreted to par value over the term of the debt
resulting in $1.3 million being amortized to interest expense over 30
years. Any change in fair value of this embedded derivative will be
included in interest expense on the Company’s consolidated statements of income.
The fair value of the derivative as of March 31, 2009 was $0.5 million
compared to the value at March 31, 2008 of $1.5 million, resulting in a
reduction of interest expense of $1.0 million in fiscal
2009. The balance of the debentures on the Company’s consolidated
balance sheet at March 31, 2009 was $1,149.2 million, including the fair value
of the embedded derivative. The Company also concluded that the debentures are
not conventional convertible debt instruments and that the embedded stock
conversion option qualifies as a derivative under SFAS No. 133. In
addition, in accordance with Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock,
the Company has concluded that the embedded conversion option would be
classified in stockholders’ equity if it were a freestanding
instrument. Accordingly, the embedded conversion option is not
required to be accounted for separately as a derivative.
|
12.
|
CONTINGENCIES
|
In the
ordinary course of its business, the Company is involved in a limited number of
legal actions, both as plaintiff and defendant, and could incur uninsured
liability in any one or more of them. On April 18, 2008, LSI Logic
and its wholly owned subsidiary Agere, filed both an action with
the International Trade Commission and a complaint in the Eastern District
of Texas alleging patent infringement by the Company and 22 other semiconductor
and foundry companies. These actions seek monetary damages and
injunctive relief against the allegedly infringing products. The
outcome of these actions is not presently determinable, and therefore the
Company can make no assessment of its materiality. The Company intends to
vigorously defend its rights in these matters.
The
Company periodically receives notification from various third parties alleging
patent infringement of patents, intellectual property rights or other
matters. With respect to these and other pending legal actions to
which Microchip is a party, although the outcome of these actions is not
presently determinable, in the Company’s opinion, based on consultation with
legal counsel, as of March 31, 2009, the ultimate resolution of these matters
will not harm its business and will not have a material adverse effect on its
financial position, cash flows or results of operations. Litigation
relating to the semiconductor industry is not uncommon, and the Company is, and
from time to time has been, subject to such litigation. No
assurances can be given with respect to the extent or outcome of any such
litigation in the future.
|
13.
|
STOCKHOLDERS’
EQUITY
|
Stockholder Rights
Plan. Effective October 11, 1999, the Company adopted an
Amended and Restated Preferred Shares Rights Agreement as amended on January 29,
2008 (the Amended Rights Agreement). The Amended Rights Agreement
amends and restates the Preferred Share Rights Agreement adopted by the Company
as of February 13, 1995 (the Prior Rights Agreement). Under the Prior
Rights Agreement, on February 13, 1995, the Company’s Board of Directors
declared a dividend of one right (a Right) to purchase one one-hundredth of a
share of the Company’s Series A Participating Preferred Stock (Series A
Preferred) for each outstanding share of common stock, $.001 par value, of the
Company. The dividend was payable on February 24, 1995 to
stockholders of record as of the close of business on that date. The
Amended Rights Agreement supersedes the Prior Rights Agreement as originally
executed. Under the Amended Rights Agreement, each Right enables the
holder to purchase from the Company one one-hundredth of a share of Series A
Preferred at a purchase price of seventy four dollars and seven cents ($74.07)
(the Purchase Price), subject to adjustment. Under the Amended Rights
Agreement, the rights will become exercisable upon the earlier of (i) 10 days
following a public announcement that a person or a group of affiliated or
associated persons has acquired, or obtained the right to acquire, beneficial
ownership of 18% or more of the Company’s outstanding common shares, or (ii) 10
days (or such later date as may be determined by action of the Company’s Board
of Directors) following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer the consummation of which would result in
a beneficial ownership by a person or group of 18% or more of the Company’s
outstanding common shares.
F-23
Stock Repurchase Activity. On
October 25, 2006, the Company announced that its Board of Directors had
authorized the repurchase of up to 10.0 million shares of its common stock in
the open market or in privately negotiated transactions. As of March
31, 2009, the Company had repurchased all of the shares under this authorization
for $333.3 million. On December 11, 2007, the Company announced that its Board
of Directors had authorized the repurchase of up to an additional 10.0 million
shares of its common stock in the open market or in privately negotiated
transactions. As of March 31, 2009, the Company had repurchased
7.5 million shares under this authorization for $234.7
million. There is no expiration date associated with this
program.
The
Company’s Board of Directors authorized the repurchase of 21.5 million shares of
its common stock concurrent with the junior subordinated convertible debenture
transaction for $638.6 million and no further shares are available to be
repurchased under this authorization.
During
the year ended March 31, 2009, the Company purchased 4.0 million shares of
its common stock for $123.9 million. During the year ended March
31, 2008, the Company purchased 36.5 million shares of its common stock for
$1,138.0 million. During the year ended March 31, 2007, the Company
did not purchase any of its shares of common stock.
As of
March 31, 2009, approximately 36.0 million shares remained as treasury shares
with the balance of the shares being used to fund share issuance requirements
under the Company’s equity incentive plans. The timing and amount of future
repurchases will depend upon market conditions, interest rates, and corporate
considerations.
|
14.
|
EMPLOYEE BENEFIT
PLANS
|
The
Company maintains a contributory profit-sharing plan for its domestic employees
meeting certain eligibility and service requirements. The plan
qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended,
and allows employees to contribute up to 60% of their base salary, subject to
maximum annual limitations prescribed by the IRS. Through December
31, 2008, the Company made matching contributions of up to 25% of the first 4%
of the participant’s eligible compensation and could award up to an additional
25% under the discretionary match. The Company eliminated the
mandatory matching contribution as of January 1, 2009. All matches
are provided on a quarterly basis and require the participant to be an active
employee at the end of each quarter. For the fiscal years ended March
31, 2009, 2008 and 2007, the Company contributions to the plan totaled $1.4 million, $1.4 million
and $1.7 million, respectively.
The
Company’s 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) became
effective on March 1, 2002. The Board of Directors approved the 2001
Purchase Plan in May 2001 and the stockholders approved it in August
2001. Under the 2001 Purchase Plan, eligible employees of the Company
may purchase shares of common stock at semi-annual intervals through periodic
payroll deductions. The purchase price in general will be 85% of the
lower of the fair market value of the common stock on the first day of the
participant’s entry date into the offering period or 85% of the fair market
value on the semi-annual purchase date. Depending upon a
participant’s entry date into the 2001 Purchase Plan, purchase periods under the
2001 Purchase Plan consist of overlapping periods of either 24, 18, 12 or 6
months in duration. In May 2003 and August 2003, the Company’s Board
and stockholders, respectively, each approved an annual automatic increase in
the number of shares reserved under the 2001 Purchase Plan. The
automatic increase took effect on January 1, 2005, and on each January 1
thereafter during the term of the plan, and is equal to the lesser of (i)
1,500,000 shares, (ii) one half of one percent (0.5%) of the then outstanding
shares of the Company’s common stock, or (iii) such lesser amount as is approved
by the Company’s Board of Directors. On January 1, 2009, 910,229
additional shares were reserved under the 2001 Purchase Plan based on the
automatic increase. On January 1, 2008, 945,068 additional shares
were reserved under the 2001 Purchase Plan based on the automatic
increase. On January 1, 2007, 1,080,191 additional shares were
reserved under the 2001 Purchase Plan based on the automatic
increase. Since the inception of the 2001 Purchase Plan, 7,544,663
shares of common stock have been reserved for issuance and 3,023,050 shares have
been issued under this purchase plan.
During
fiscal 1995, a purchase plan was adopted for employees in non-U.S.
locations. Such plan allows for the purchase price per share to be
100% of the lower of the fair market value of the common stock at the beginning
or end of the semi-annual purchase plan period. Effective May 1,
2006, the Company’s Board approved a purchase price per share equal to
eighty-five percent (85%) of the lower of the fair market value of the common
stock at the beginning or end of the semi-annual purchase plan
period. Since the inception of this purchase plan, 753,645 shares of
common stock have been reserved for issuance and 390,894 shares have been issued
under this purchase plan.
F-24
Effective
January 1, 1997, the Company adopted a non-qualified deferred compensation
arrangement. This plan is unfunded and is maintained primarily for
the purpose of providing deferred compensation for a select group of highly
compensated employees as defined in ERISA Sections 201, 301 and
401. There are no Company matching contributions made under this
plan.
The
Company has management incentive compensation plans which provides for bonus
payments, based on a percentage of base salary, from an incentive pool created
from operating profits of the Company, at the discretion of the Board of
Directors. During the years ended March 31, 2009, 2008 and 2007,
$3.0 million, $9.2 million and $12.4 million were charged against
operations for this plan, respectively.
The
Company also has a plan that, at the discretion of the Board of Directors,
provides a cash bonus to all employees of the Company based on the operating
profits of the Company. During the years ended March 31, 2009, 2008
and 2007, $2.9 million, $2.3 million and $6.2 million, respectively, were
charged against operations for this plan.
|
15.
|
EQUITY INCENTIVE
PLANS
|
The
Company has equity incentive plans under which incentive stock options,
restricted stock units (RSUs) and non-qualified stock options have been granted
to employees and under which non-qualified stock options have been granted to
non-employee members of the Board of Directors. The Company’s 2004
Equity Incentive Plan, as amended and restated (the 2004 Plan), is shareholder
approved and permits the grant of stock options and RSUs to employees,
non-employee members of the Board of Directors and consultants. At
March 31, 2009, 9.8 million shares remained available for future grant
under the 2004 Plan. Stock options and RSUs are designed to reward
employees for their long-term contributions to the Company and to provide
incentive for them to remain employed with the Company. The Company
believes that such awards better align the interests of its employees with those
of its shareholders.
The Board
of Directors or the plan administrator determines eligibility, vesting schedules
and exercise prices for equity incentives granted under the
plans. Equity incentives granted generally have a term of 10
years. Equity incentives granted in the case of newly hired employees
generally vest and become exercisable at the rate of 25% after one year of
service and ratably on a monthly or quarterly basis over a period of 36 months
thereafter. Subsequent equity incentive grants to existing employees
generally vest and become exercisable ratably on a monthly or quarterly basis
over a period starting in 48 months and ending in 60 months after the date of
grant. Beginning in fiscal 2008, the Company converted its equity
granting practices to a quarterly process instead of an annual
process. The quarterly grants generally vest 48 months from the date
of grant.
Under the
plans, 106,073,290 shares of common stock had been reserved for issuance since
the inception of the plans.
Share-Based
Compensation Expense
The
following table presents details of share-based compensation expense resulting
from the application of SFAS No. 123R (amounts in thousands):
|
Year
Ended March
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cost
of sales
|
$ | 5,845 | (1) | $ | 6,191 | (1) | $ | 3,255 | (1) | |||
|
Research
and development
|
10,866 | 10,695 | 9,623 | |||||||||
|
Selling,
general and administrative
|
15,770 | 15,960 | 14,501 | |||||||||
|
Pre-tax
effect of share-based compensation
|
32,481 | 32,846 | 27,379 | |||||||||
|
Income
tax benefit
|
(5,277) | (6,395) | (6,570) | |||||||||
|
Net
income effect of share-based compensation
|
$ | 27,204 | $ | 26,451 | $ | 20,809 | ||||||
(1)
During the year ended March 31, 2009, $6.7 million was capitalized
to inventory, and $5.8 million of capitalized inventory was
sold. During the year ended March 31, 2008, $6.7 million was
capitalized to inventory and $6.2 million of capitalized inventory was
sold. During the year ended March 31, 2007, $6.6 million was
capitalized to inventory and $3.3 million of capitalized inventory was
sold.
F-25
The
amount of unearned share-based compensation currently estimated to be expensed
in fiscal 2010 through fiscal 2013 related to unvested share-based payment
awards at March 31, 2009 is $58.5 million. The weighted average
period over which the unearned share-based compensation is expected to be
recognized is approximately 2.30 years.
Combined
Incentive Plan Information
RSU share
activity under the 2004 Plan is set forth below:
|
Number
of Shares
|
||||
|
Nonvested
shares at March 31, 2006
|
195,524 | |||
|
Granted
|
1,634,393 | |||
|
Canceled
|
(99,380 | ) | ||
|
Vested
|
(43,094 | ) | ||
|
Nonvested
shares at March 31, 2007
|
1,687,443 | |||
|
Granted
|
1,084,690 | |||
|
Canceled
|
(174,755 | ) | ||
|
Vested
|
(132,813 | ) | ||
|
Nonvested
shares at March 31, 2008
|
2,464,565 | |||
|
Granted
|
1,876,738 | |||
|
Canceled
|
(293,573 | ) | ||
|
Vested
|
(445,958 | ) | ||
|
Nonvested
shares at March 31, 2009
|
3,601,772 | |||
The total
intrinsic value of RSUs which vested during the years ended March 31, 2009
was $12.3 million. The aggregate intrinsic value of RSUs outstanding
at March 31, 2009 was $76.3 million calculated based on the closing price of the
Company’s common stock of $21.19 on March 31, 2009.
The
weighted average fair values per share of the RSUs awarded are calculated based
on the fair market value of the Company’s common stock on the respective grant
dates discounted for the Company’s expected dividend yield. The
weighted average fair values per share of RSUs awarded in the years ended March
31, 2009, 2008 and 2007 was $22.11, $29.73 and $31.37, respectively. At
March 31, 2009, the weighted average remaining expense recognition period was
2.42 years.
Option
activity under the Company’s stock incentive plans in the three years ended
March 31, 2009 is set forth below:
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
per Share
|
|||||||
|
Outstanding
at March 31, 2006
|
18,450,360 | $ | 20.97 | |||||
|
Granted
|
59,452 | 34.58 | ||||||
|
Exercised
|
(3,393,779 | ) | 16.87 | |||||
|
Canceled
|
(375,487 | ) | 24.25 | |||||
|
Outstanding
at March 31, 2007
|
14,740,546 | 21.88 | ||||||
|
Granted
|
31,597 | 37.23 | ||||||
|
Exercised
|
(2,850,155 | ) | 16.66 | |||||
|
Canceled
|
(189,603 | ) | 25.17 | |||||
|
Outstanding
at March 31, 2008
|
11,732,385 | 23.14 | ||||||
|
Granted
|
24,000 | 33.90 | ||||||
|
Exercised
|
(1,573,183 | ) | 16.33 | |||||
|
Canceled
|
(101,669 | ) | 26.27 | |||||
|
Outstanding
at March 31, 2009
|
10,081,533 | $ | 24.20 | |||||
The total
intrinsic value of options exercised during the years ended March 31, 2009,
2008 and 2007 was $22.3 million, $56.5 million and $61.8 million,
respectively. This intrinsic value represents the difference between
the fair market value of the Company’s common stock on the date of exercise and
the exercise price of each equity award.
F-26
The
following table summarizes information about the stock options outstanding at
March 31, 2009:
|
Range
of
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Life
(in
years)
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||
| $6.37 - $17.85 | 904,025 | $ | 16.00 | 1.89 | 904,025 | $ | 16.00 | |||||||||||||||
| 17.86 - 18.48 | 1,162,731 | 18.48 | 3.99 | 1,162,731 | 18.48 | |||||||||||||||||
| 18.49 - 23.39 | 1,359,091 | 22.42 | 1.58 | 1,359,091 | 22.42 | |||||||||||||||||
| 23.40 - 25.26 | 819,420 | 24.17 | 3.15 | 819,420 | 24.17 | |||||||||||||||||
| 25.27 - 25.29 | 1,523,478 | 25.29 | 5.98 | 99,812 | 25.29 | |||||||||||||||||
| 25.30 - 27.00 | 660,957 | 26.21 | 4.74 | 660,957 | 26.21 | |||||||||||||||||
| 27.01 - 27.05 | 1,322,937 | 27.05 | 4.96 | 1,321,187 | 27.05 | |||||||||||||||||
| 27.06 - 27.15 | 1,391,949 | 27.15 | 2.99 | 1,391,949 | 27.15 | |||||||||||||||||
| 27.16 - 37.46 | 912,945 | 29.99 | 4.70 | 835,423 | 29.63 | |||||||||||||||||
| 37.47 - 37.84 | 24,000 | 37.84 | 8.38 | 24,000 | 37.84 | |||||||||||||||||
| 10,081,533 | $ | 24.20 | 3.82 | 8,578,595 | $ | 23.93 | ||||||||||||||||
The
aggregate intrinsic value of options outstanding and options exercisable at
March 31, 2009 was $8.2 million and $8.2 million, respectively. The
aggregate intrinsic values were calculated based on the closing price of the
Company’s common stock of $21.19 per share on March 31, 2009.
At March
31, 2009 and 2008, the number of option shares exercisable was 8,578,595 and
8,719,719, respectively, and the weighted average exercise price per share of
these options was $23.93 and $22.01, respectively.
The
weighted average fair values per share of stock options granted in the years
ended March 31, 2009, 2008, and 2007 was $10.39, $11.93 and $11.90,
respectively.
The
weighted average fair values per share of stock options granted in connection
with the Company’s stock incentive plans in the years ended March 31, 2009, 2008
and 2007 were estimated utilizing the following assumptions:
|
Year
Ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
term (in years)
|
6.50 | 6.50 | 5.42 | |||||||||
|
Volatility
|
43 | % | 39 | % | 42 | % | ||||||
|
Risk-free
interest rate
|
3.14 | % | 3.92 | % | 5.00 | % | ||||||
|
Dividend
yield
|
4.00 | % | 3.31 | % | 3.01 | % | ||||||
|
16.
|
LEASE
COMMITMENTS
|
The
Company leases office space, transportation and other equipment under operating
leases which expire at various dates through March 31, 2014. The
future minimum lease commitments under these operating leases at March 31, 2009
were as follows (amounts in thousands):
|
Year
Ending
March
31,
|
Amount
|
|||
|
2010
|
$ | 5,367 | ||
|
2011
|
3,419 | |||
|
2012
|
1,515 | |||
|
2013
|
585 | |||
|
2014
|
74 | |||
|
Total
minimum payments
|
$ | 10,960 | ||
Rental
expense under operating leases totaled $7.9 million, $7.6 million and $6.2
million for the years ended March 31, 2009, 2008 and 2007,
respectively.
F-27
|
17.
|
GEOGRAPHIC
INFORMATION
|
The
Company operates in one operating segment and engages primarily in the design,
development, manufacture and marketing of semiconductor products. The
Company sells its products to distributors and original equipment manufacturers
(OEMs) in a broad range of market segments, performs on-going credit evaluations
of its customers and, as deemed necessary, may require collateral, primarily
letters of credit. The Company’s operations outside the U.S. consist
of product assembly and final test facilities in Thailand, and sales and support
centers and design centers in certain foreign countries. Domestic
operations are responsible for the design, development and wafer fabrication of
products, as well as the coordination of production planning and shipping to
meet worldwide customer commitments. The 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) by geographic area are as follows (amounts in
thousands):
|
March
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
United
States
|
$ | 368,149 | $ | 400,564 | ||||
|
Thailand
|
152,359 | 113,117 | ||||||
|
Various
other countries
|
11,179 | 8,624 | ||||||
|
Total
long-lived assets
|
$ | 531,687 | $ | 522,305 | ||||
Sales to
unaffiliated customers located outside the U.S., primarily in Asia and Europe,
aggregated approximately 75%, 75% and 74% of consolidated net sales for the
years ended March 31, 2009, 2008 and 2007, respectively. Sales to
customers in Europe represented 29%, 30% and 29% of consolidated net sales for
the years ended March 31, 2009, 2008 and 2007, respectively. Sales to
customers in Asia represented 46%, 44% and 43% of consolidated net sales for
each of the years ended March 31, 2009, 2008 and 2007,
respectively. Sales into China, including Hong Kong, represented 23%,
20% and 18% of consolidated net sales for the years ended March 31, 2009, 2008
and 2007, respectively. Sales into Taiwan represented 10% of
consolidated net sales for the years ended March 31, 2008 and
2007. Sales into any other individual foreign country did not exceed
10% of the Company’s net sales for any of the years presented.
The
Company had one distributor who represented more than 10% of its net sales
during fiscal 2009 and fiscal 2008 and two distributors who represented more
than 10% of its net sales during fiscal 2007. The Company’s largest
distributor accounted for approximately 14% of its net sales in fiscal
2009. The Company’s largest distributor accounted for approximately
12% of its net sales in fiscal 2008. The Company’s largest
distributor accounted for approximately 11% of its net sales and its second
largest distributor accounted for approximately 10% of its net sales in fiscal
2007.
|
18.
|
FAIR VALUE OF
FINANCIAL INSTRUMENTS
|
The
carrying amount of cash equivalents approximates fair value because their
maturity is less than three months. The carrying amount of short-term
and long-term investments approximates fair value as the securities are marked
to market as of each balance sheet date with any unrealized gains and losses
reported in stockholders’ equity. The carrying amount of accounts
receivable, accounts payable and accrued liabilities approximates fair value due
to the short-term maturity of the amounts. The fair value of the
Company’s junior subordinated convertible debentures was $832.3 million at March
31, 2009, and $1.246 billion at March 31, 2008 based on the trading price of the
bonds.
|
19.
|
DERIVATIVE
INSTRUMENTS
|
The
Company has international operations and is thus subject to foreign currency
rate fluctuations. To manage the risk of changes in foreign currency
rates, the Company periodically enters into derivative contracts comprised
of foreign currency forward contracts to hedge its asset and
liability foreign currency exposure and a portion of its foreign currency
operating expenses. Approximately 99% of the Company’s sales are U.S.
Dollar denominated. To date, the exposure related to foreign exchange
rate volatility has not been material to the Company’s operating
results. As of March 31, 2009, the Company had no foreign currency
derivatives outstanding compared to $2.4 million of foreign currency derivatives
outstanding at March 31, 2008. The Company recognized an immaterial
amount of net realized losses on foreign currency derivatives in the three
months ended March 31, 2009.
F-28
|
20.
|
NET INCOME PER COMMON
SHARE
|
The
following table sets forth the computation of basic and diluted net income per
share (in thousands, except per share amounts):
|
Year
Ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income
|
$ | 248,820 | $ | 297,748 | $ | 357,029 | ||||||
|
Weighted
average common shares outstanding
|
183,158 | 207,220 | 215,498 | |||||||||
|
Dilutive
effect of stock options and RSUs
|
3,336 | 4,828 | 5,350 | |||||||||
|
Dilutive
effect of convertible debt
|
294 | --- | --- | |||||||||
|
Weighted
average common and common equivalent shares outstanding
|
186,788 | 212,048 | 220,848 | |||||||||
|
Basic
net income per common share
|
$ | 1.36 | $ | 1.44 | $ | 1.66 | ||||||
|
Diluted
net income per common share
|
$ | 1.33 | $ | 1.40 | $ | 1.62 | ||||||
Weighted
average common shares exclude the effect of antidilutive options. For
the year ended March 31, 2009, the number of options that were antidilutive were
3,685,806. For the year ended March 31, 2008, the number of options
that were antidilutive were 127,219. For the year ended March 31,
2007, the number of options that were antidilutive were 36,103.
Diluted
net income per common share for the year ended March 31, 2009 includes 294,445
incremental shares issuable upon the exchange of the debentures (see Note 11).
The debentures will have no impact on diluted net income per common share until
the average price of the Company’s common stock exceeds the conversion price
because the principal amount of the debentures will be settled in cash upon
conversion. Prior to conversion, the Company will include, in the diluted net
income per common share calculation, the effect of the additional shares that
may be issued when the Company’s common stock price exceeds the conversion
price, using the treasury stock method. The weighted average
conversion price per share used in calculating the dilutive effect of the
convertible debt for the year ended March 31, 2009 was $33.05.
|
21.
|
QUARTERLY RESULTS
(UNAUDITED)
|
The
following table presents the Company’s selected unaudited quarterly operating
results for the eight quarters ended March 31, 2009. The Company
believes that all adjustments of a normal recurring nature have been made to
present fairly the related quarterly results (in thousands, except per share
amounts):
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
||||||||||||||||
|
Fiscal 2009
|
||||||||||||||||||||
|
Net
sales
|
$ | 268,172 | $ | 269,706 | $ | 192,166 | $ | 173,253 | $ | 903,297 | ||||||||||
|
Gross
profit
|
163,597 | 164,153 | 104,787 | 83,967 | 516,504 | |||||||||||||||
|
Operating
income
|
86,632 | 87,181 | 40,474 | 19,041 | 233,328 | |||||||||||||||
|
Net
income
|
76,310 | 76,512 | 73,169 | 22,829 | 248,820 | |||||||||||||||
|
Diluted
net income per common share
|
0.40 | 0.41 | 0.40 | 0.12 | 1.33 | |||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
||||||||||||||||
|
Fiscal 2008
|
||||||||||||||||||||
|
Net
sales
|
$ | 264,072 | $ | 258,647 | $ | 252,600 | $ | 260,418 | $ | 1,035,737 | ||||||||||
|
Gross
profit
|
158,545 | 154,712 | 153,047 | 158,634 | 624,938 | |||||||||||||||
|
Operating
income
|
85,019 | 55,674 | 79,240 | 81,732 | 301,665 | |||||||||||||||
|
Net
income
|
80,293 | 60,679 | 80,124 | 76,652 | 297,748 | |||||||||||||||
|
Diluted
net income per common share
|
0.36 | 0.27 | 0.38 | 0.40 | 1.40 | |||||||||||||||
F-29
Refer to
Note 3, Special Charges, for an explanation of the special charges in the
quarter ended March 31, 2009 related to the Company’s patent portfolio license
and in-process research and development expenses, as well as expenses associated
with the abandonment of the Atmel acquisition. Refer to Note 3,
Special Charges, for an explanation of the special charge in the quarter ended
September 30, 2007 related to the Company’s loss on sale of Fab
3. Refer to Note 10, Income Taxes, for an explanation of the benefit
related to an IRS settlement and change in tax regulations in the quarter ended
December 31, 2008, a tax benefit from the reinstatement of the R&D tax
credit in the quarter ended December 31, 2008, a tax benefit from a tax
settlement in the quarter ended March 31, 2007, a benefit from a resolution of a
foreign tax matter in the quarter ended December 31, 2007 and a release of tax
reserves in the quarter ended March 31, 2008.
|
22.
|
SUPPLEMENTAL FINANCIAL
INFORMATION
|
Cash paid
for income taxes amounted to $8.8 million, $25.2 million and $72.6 million
during the years ended March 31, 2009, 2008 and 2007,
respectively. Cash paid for interest on borrowings amounted to $25.0
million and $5.4 million during the years ended March 31, 2009 and 2007,
respectively. There was no cash paid for interest on borrowings in
the year ended March 31, 2008.
A summary
of additions and deductions related to the allowance for doubtful accounts for
the years ended March 31, 2009, 2008 and 2007 follows (amounts in
thousands):
|
Balance
at Beginning
of
Year
|
Charged
to
Costs
and Expenses
|
Deductions
(1)
|
Balance
at
End
of Year
|
|||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||||||
|
2009
|
$ | 3,152 | $ | 132 | $ | (108 | ) | $ | 3,176 | |||||||
|
2008
|
3,544 | --- | (392 | ) | 3,152 | |||||||||||
|
2007
|
3,662 | --- | (118 | ) | 3,544 | |||||||||||
(1)
Deductions represent uncollectible accounts written off, net of
recoveries.
23. DIVIDENDS
On
October 28, 2002, the Company announced that its Board of Directors had approved
and instituted a quarterly cash dividend on its common stock. The
initial quarterly dividend of $0.02 per share was paid on December 6, 2003 in
the amount of $4.1 million. The Company has continued to pay
quarterly dividends and has increased the amount of such dividends on a regular
basis. Cash dividends paid per share amounted to $1.346, $1.205 and
$0.965 during the years ended March 31, 2009, 2008 and 2007,
respectively. Total dividend payments amounted to $246.7 million,
$252.0 million and $207.9 million during the years ended March 31, 2009, 2008
and 2007, respectively.
F-30