Form 10-Q (filed 2-7

Form 10-Q (filed 2-7
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2013.
OR
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)
Delaware
86-0629024
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224-6199
(480) 792-7200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's
Principal Executive Offices)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check One)
Yes
No
Shares Outstanding of Registrant's Common Stock
Class
Common Stock, $0.001 par value
Outstanding at January 31, 2014
199,134,437 shares
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets – December 31, 2013 and March 31,
2013
Condensed Consolidated Statements of Income – Three and Nine Months Ended
December 31, 2013 and 2012
Condensed Consolidated Statements of Comprehensive Income - Three and Nine
Months Ended December 31, 2013 and 2012
3
4
5
Condensed Consolidated Statements of Cash Flows – Nine Months Ended
December 31, 2013 and 2012
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35
Item 4.
Controls and Procedures
36
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 6.
Exhibits
SIGNATURES
CERTIFICATIONS
EXHIBITS
37
37
49
Table of Contents
Item1. Financial Statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
ASSETS
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Prepaid expenses
Deferred tax assets
Other current assets
Total current assets
Property, plant and equipment, net
Long-term investments
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2013
$
375,100
932,302
224,273
274,629
29,441
72,142
61,141
1,969,028
520,565
723,925
275,967
466,278
47,345
$ 4,003,108
Accounts payable
$
Accrued liabilities
Short-term borrowings
Deferred income on shipments to distributors
Total current liabilities
Junior convertible debentures
Long-term line of credit
Long-term borrowings, net
Long-term income tax payable
Deferred tax liability
Other long-term liabilities
Stockholders' equity:
Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued or
outstanding
Common stock, $0.001 par value; authorized 450,000,000 shares; 218,789,994 shares issued
and 199,117,558 shares outstanding at December 31, 2013; 218,789,994 shares issued and
196,472,856 shares outstanding at March 31, 2013
Additional paid-in capital
Common stock held in treasury: 19,672,436 shares at December 31, 2013; 22,317,138 shares
at March 31, 2013
Accumulated other comprehensive (loss) income
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
62,750
96,176
14,159
143,315
316,400
369,618
300,000
335,694
179,246
388,620
38,422
March 31,
2013
$
528,334
1,050,263
229,955
242,334
37,439
80,687
67,358
2,236,370
514,544
257,450
271,348
530,136
41,557
$ 3,851,405
$
75,551
127,108
—
138,952
341,611
363,385
620,000
—
182,723
388,250
21,966
—
—
199
1,254,764
196
1,255,627
(603,672)
(2,579)
1,426,396
2,075,108
4,003,108
See accompanying notes to condensed consolidated financial statements
3
(682,220)
$
6,935
1,352,932
1,933,470
3,851,405
Table of Contents
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Net sales
Cost of sales (1)
Gross profit
Operating expenses:
Research and development (1)
Selling, general and administrative (1)
Amortization of acquired intangible assets
Special charges
Operating income
Gains (losses) on equity method investments
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Income tax provision (benefit)
Net income
Basic net income per common share
Diluted net income per common share
Dividends declared per common share
Basic common shares outstanding
Diluted common shares outstanding
(1) Includes share-based compensation expense as follows:
Cost of sales
Research and development
Selling, general and administrative
$
Three Months Ended
December 31,
2013
2012
482,372 $
416,047
199,652
215,619
282,720
200,428
76,341
66,856
21,804
801
165,802
$
$
$
$
$
$
71,377
69,368
39,711
2,559
183,015
227,680
201,934
73,225
2,491
505,330
184,285
196,727
71,615
24,953
477,580
116,918
150
17,413
(229)
332,827
(211)
121,840
(382)
4,241
(12,545)
3,813
(11,077)
(228)
12,176
(36,755)
11,889
(30,983)
311
102,675
34,976
67,699
0.35
0.33
1.0530
194,157
204,553
3,824
112,588
7,187
105,401
0.53
0.48
0.3545
198,759
219,089
1,841
6,141
5,737
9,692
(481)
$
$
$
$
10,173
0.05
0.05
0.3520
194,958
204,405
$
$
$
$
$
1,834
6,172
6,114
$
See accompanying notes to condensed consolidated financial statements
4
Nine Months Ended
December 31,
2013
2012
1,437,833 $ 1,151,479
599,676
552,059
838,157
599,420
6,093
314,130
30,344
283,786
1.43
1.31
1.0620
197,845
215,943
5,674
18,762
16,939
$
$
$
$
$
5,758
16,562
22,339
Table of Contents
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended
December 31,
2013
2012
Net income
$
105,401
$
Nine Months Ended
December 31,
2013
2012
10,173
$
283,786
$
67,699
Components of other comprehensive (loss) income:
Available-for-sale securities:
Unrealized holding gain (losses), net of tax effect of $0,
$83, $497 and $119, respectively
Reclassification of realized transactions, net of tax
effect of $0, $0, $776 and $51, respectively
Change in net foreign currency translation adjustment
Other comprehensive (loss) income, net of taxes
Total comprehensive income
59
(200)
(8,011)
(113)
(14)
(1,503)
—
299
(54)
$
105,347
$
85
10,258
(184)
—
1,439
(9,514)
$
See accompanying notes to condensed consolidated financial statements
5
2,418
274,272
$
3,673
71,372
Table of Contents
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Share-based compensation expense related to equity incentive plans
Excess tax benefit from share-based compensation
Convertible debt derivatives - revaluation and amortization
Amortization of debt discount on convertible debentures
Amortization of debt issuance costs
Losses on equity method investments
Gain on sale of assets
Loss on write-down of fixed assets
Impairment of intangible assets
Amortization of premium on available-for-sale investments
Unrealized impairment loss on available-for-sale investments
Special income, net
Gain on shares of acquired company
Changes in operating assets and liabilities:
Decrease in accounts receivable
(Increase) decrease in inventories
Increase in deferred income on shipments to distributors
Decrease in accounts payable and accrued liabilities
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of available-for-sale investments
Sales and maturities of available-for-sale investments
Acquisition of SMSC, net of cash acquired
Other business acquisitions, net of cash acquired
Investments in other assets
Proceeds from sale of assets
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Repayments of revolving loan under previous credit facility
Repayments of revolving loan under new credit facility
Proceeds from borrowings on revolving loan under previous credit facility
Proceeds from borrowings on revolving loan under new credit facility
Proceeds from issuance of long-term borrowings
Deferred financing costs
Payment of cash dividends
Proceeds from sale of common stock
Contingent consideration payment
Capital lease payments
Excess tax benefit from share-based compensation
Net cash (used in) provided by financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Nine Months Ended
December 31,
2013
2012
$
$
See accompanying notes to condensed consolidated financial statements
6
283,786
$
67,699
143,704
24,190
41,375
—
(449)
6,682
1,416
211
—
—
350
8,067
—
(999)
(2,438)
140,468
(9,981)
38,713
(154)
253
6,106
164
382
(256)
400
—
10,304
412
—
—
5,624
(30,588)
4,363
(21,870)
9,799
473,223
52,839
47,146
2,526
(58,539)
33,000
331,482
(950,560)
584,186
—
(11,187)
(7,462)
16,200
(79,536)
(448,359)
(656,728)
517,707
(731,746)
(20,556)
(4,018)
306
(36,076)
(931,111)
(650,000)
(153,500)
30,000
453,500
350,000
(7,515)
(210,322)
24,752
(14,700)
(313)
—
(178,098)
—
(153,234)
528,334
375,100 $
(130,000)
—
740,000
—
—
—
(204,592)
22,619
—
—
154
428,181
986
(170,462)
635,755
465,293
Table of Contents
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Microchip
Technology Incorporated and its wholly-owned subsidiaries (the Company). All intercompany balances and transactions have
been eliminated in consolidation. The Company owns 100% of the outstanding stock in all of its subsidiaries.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America, pursuant to the rules and regulations of the Securities
and Exchange Commission (the SEC). The information furnished herein reflects all adjustments which are, in the opinion of
management, of a normal recurring nature and necessary for a fair statement of the results for the interim periods reported.
Certain information and footnote disclosures normally included in audited consolidated financial statements have been
condensed or omitted pursuant to such SEC rules and regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2013. The results of operations for the nine
months ended December 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending
March 31, 2014 or for any other period.
(2)
Reclassification of Prior Periods
In the quarter ended December 31, 2013, the Company identified an error to the presentation on the condensed
consolidated statements of cash flows of the amortization of premium of available-for-sale investments. The Company
previously included the amortization of the premium as an investing activity. This amortization is a non-cash expense that
should be recorded in the adjustments to reconcile net income to net cash provided by operating activities. The Company has
corrected this error in the current period, and has conformed previous periods to the current presentation. Based on the
Company's evaluation of relevant quantitative and qualitative factors, it determined that the classification errors are immaterial
to the prior period financial statements and the Company plans to correct the comparative presentation of the prior periods in
future filings. The effect on net cash provided by operating activities and net cash used in investing activities for the previous
period covered by this report are shown below (amounts in thousands):
Nine Months Ended
December 31, 2012
Cash flows from operating activities
Amortization of premium on available-for-sale investments
Net cash provided by operating activities
Cash flows from investing activities
Purchases of available-for-sale investments
Net cash used in investing activities
As reported
Adjustment
As adjusted
$
$
$
—
321,178
(646,424)
(920,807)
10,304
10,304
(10,304)
(10,304)
10,304
331,482
(656,728)
(931,111)
This correction does not affect the Company's condensed consolidated statements of income, condensed consolidated
balance sheets or condensed consolidated statements of comprehensive income for any periods.
(3)
Business Acquisitions
On November 21, 2013, the Company completed an acquisition which was accounted for under the acquisition
method of accounting. The Company had a prior 18.3% ownership interest in the acquired company accounted for as a cost
method investment and recognized an approximate $2.4 million gain to write that ownership interest up to fair value in the
three and nine-month periods ended December 31, 2013. The total consideration paid for the remaining 81.7% equity of the
business, net of cash acquired, was $9.0 million. The purchase price of the acquisition resulted in purchased intangible assets
7
Table of Contents
of $4.1 million and goodwill of approximately $6.4 million. The purchased intangible assets are being amortized over a
weighted average period of approximately 8 years.
On August 2, 2012, the Company acquired Standard Microsystems Corporation (SMSC), a publicly traded company
based in Hauppauge, New York. The acquisition was accounted for under the acquisition method of accounting. The Company
retained an independent third-party appraiser to assist management in its valuation. The table below represents the allocation
of the purchase price, including adjustments to the purchase price allocation from the previously reported figures at March 31,
2013, to the net assets acquired based on their estimated fair values as of August 2, 2012. The purchase price allocation was
finalized as of August 2, 2013. All adjustments shown in the table below were recorded during the three months ended June 30,
2013 (amounts in thousands):
Assets acquired
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses
Deferred tax assets
Other current assets
Property, plant and equipment, net
Long-term investments
Goodwill
Intangible assets, net
Purchased intangible assets
Other assets
Total assets acquired
Liabilities assumed
Accounts payable
Accrued liabilities
Deferred income on shipments to distributors
Long-term income tax payable
Deferred tax liability
Other liabilities
Total liabilities assumed
Purchase price allocated
(4)
Previously Reported
March 31, 2013
$
180,925
58,441
86,244
5,617
15,843
17,578
35,608
24,275
169,065
10,214
517,800
3,835
1,125,445
Adjustments
$
(28,035)
(62,038)
(11,376)
(72,781)
(21,079)
(10,535)
(205,844)
919,601 $
$
December 31, 2013
— $
180,925
—
58,441
—
86,244
—
5,617
—
15,843
—
17,578
—
35,608
—
24,275
(3,473)
165,592
—
10,214
—
517,800
—
3,835
(3,473)
1,121,972
—
(209)
—
—
4,397
(715)
3,473
— $
(28,035)
(62,247)
(11,376)
(72,781)
(16,682)
(11,250)
(202,371)
919,601
Recently Issued Accounting Pronouncements
In the first quarter of fiscal 2014, the Company adopted the provisions of Accounting Standard Update 2013-02
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,
which required the disclosure of amounts reclassified out of accumulated other comprehensive income (AOCI) to net income.
The adoption of this provision did not have a material impact on the Company's consolidated financial statements and related
disclosures (See Note 19).
(5)
Special Charges
During the three and nine months ended December 31, 2013, the Company incurred severance related, office closing
and other costs associated with its acquisition activity of $0.8 million and $2.5 million, respectively.
During the three and nine months ended December 31, 2012, the Company incurred approximately $2.6 million and
$13.4 million, respectively, of severance related, office closing, and other costs associated with the acquisition of SMSC. Also,
during the nine months ended December 31, 2012, the Company incurred legal settlement costs of approximately $11.5 million
8
Table of Contents
for certain legal matters related to Silicon Storage Technology, Inc. (which the Company acquired in April 2010) in excess of
previously accrued amounts.
(6)
Segment Information
The Company's reportable segments are semiconductor products and technology licensing. The Company does not
allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income
taxes to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is
beneficial in evaluating segment performance. Additionally, the Company does not allocate assets to segments for internal
reporting purposes as it does not manage its segments by such metrics.
The following table represents net sales and gross profit for each segment for the three and nine months ended
December 31, 2013 (amounts in thousands):
Semiconductor products
Three Months Ended
December 31, 2013
Net Sales
Gross Profit
$
458,298 $
258,646
Technology licensing
24,074
482,372
$
$
24,074
282,720
Nine Months Ended
December 31, 2013
Net Sales
Gross Profit
$ 1,366,415 $
766,739
$
71,418
1,437,833
$
71,418
838,157
The following table represents net sales and gross profit for each segment for the three and nine months ended
December 31, 2012 (amounts in thousands):
Semiconductor products
Technology licensing
(7)
Three Months Ended
December 31, 2012
Net Sales
Gross Profit
$
394,709 $
179,090
21,338
21,338
$
416,047 $
200,428
Nine Months Ended
December 31, 2012
Net Sales
Gross Profit
$ 1,089,738 $
537,679
61,741
61,741
$ 1,151,479 $
599,420
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 securities at December 31, 2013 (amounts
in thousands):
Government agency bonds
Municipal bonds
Auction rate securities
Corporate bonds and debt
Adjusted
Cost
$
741,492
51,940
9,827
857,038
$
1,660,297
9
Available-for-sale Securities
Gross
Gross
Unrealized
Unrealized
Estimated
Gains
Losses
Fair Value
(5,645) $
$
164 $
736,011
(209)
20
51,751
—
—
9,827
(1,258)
2,858
858,638
(7,112) $
$
3,042 $
1,656,227
Table of Contents
The following is a summary of available-for-sale and marketable equity securities at March 31, 2013 (amounts in
thousands):
Government agency bonds
Municipal bonds
Auction rate securities
Corporate bonds and debt
Marketable equity securities
Adjusted
Cost
$
558,116
25,000
33,459
680,144
5,270
$
1,301,989
Available-for-sale Securities
Gross
Gross
Estimated
Unrealized
Unrealized
Fair Value
Gains
Losses
(298) $
$
335 $
558,153
(8)
146
25,138
332
—
33,791
(159)
5,137
685,122
239
—
5,509
(465) $
$
6,189 $
1,307,713
At December 31, 2013, the Company's available-for-sale debt securities are presented on the condensed consolidated
balance sheets as short-term investments of $932.3 million and long-term investments of $723.9 million. At March 31, 2013,
the Company’s available-for-sale debt securities and marketable equity securities are presented on the condensed consolidated
balance sheets as short-term investments of $1,050.3 million and long-term investments of $257.5 million.
At December 31, 2013, the Company evaluated its investment portfolio and noted unrealized losses of $7.1 million on
its debt securities which were due primarily to higher interest rates and resulting declines in market prices. Management does
not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available
evidence as of December 31, 2013 and the Company's intent is to hold these investments until these assets are no longer
impaired, except for certain auction rate securities (ARS). For those debt securities not scheduled to mature until after
December 31, 2014, such recovery is not anticipated to occur in the next year and these investments have been classified as
long-term investments.
The amortized cost and estimated fair value of the available-for-sale securities at December 31, 2013, by contractual
maturity, excluding corporate debt of $6.2 million, which has no contractual maturity, are shown below (amounts in
thousands). Expected maturities can differ from contractual maturities because the issuers of the securities may have the right
to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for
current operations.
Gross
Unrealized
Gains
Adjusted
Cost
Available-for-sale
Due in one year or less
Due after one year and through five years
Due after five years and through ten years
Due after ten years
$
$
190,841
1,332,690
120,749
9,827
1,654,107
$
$
721
2,321
—
—
3,042
Gross
Unrealized
Losses
$
$
— $
(2,223)
(4,889)
—
(7,112) $
Estimated
Fair Value
191,562
1,332,788
115,860
9,827
1,650,037
The Company had no material realized gains or losses from the sale of available-for-sale marketable equity securities
or debt securities during each of the three and nine-month periods ended December 31, 2013 and 2012.
(8)
Fair Value Measurements
Accounting rules for fair value clarify that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows:
10
Table of Contents
Level 1Level 2Level 3-
Observable inputs such as quoted prices in active markets;
Inputs, other than the quoted prices in active markets, that are observable either directly or
indirectly; and
Unobservable inputs in which there is little or no market data, which require the reporting entity to
develop its own assumptions.
Marketable Debt Instruments
Marketable debt instruments include instruments such as corporate bonds and debt, government agency bonds, bank
deposits, municipal bonds, and money market fund deposits. When the Company uses observable market prices for identical
securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When
observable market prices for identical securities are not available, the Company prices its marketable debt instruments using
non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar
instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated
with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing
providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker
quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers
that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroborates non-binding
market consensus prices with observable market data using statistical models when observable market data exists. The
discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward
rates, and credit ratings.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets measured at fair value on a recurring basis at December 31, 2013 are as follows (amounts in thousands):
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
Assets
Money market mutual funds
Corporate bonds and debt
Government agency bonds
Deposit accounts
Municipal bonds
Auction rate securities
Total assets measured at fair value
$
$
114,235
—
—
—
—
—
114,235
11
Significant
Other
Observable
Inputs
(Level 2)
$
$
—
852,448
736,011
260,865
51,751
—
1,901,075
Significant
Unobservable
Inputs
(Level 3)
$
$
—
6,190
—
—
—
9,827
16,017
Total
Balance
$
$
114,235
858,638
736,011
260,865
51,751
9,827
2,031,327
Table of Contents
Assets and liabilities measured at fair value on a recurring basis at March 31, 2013 are as follows (amounts in
thousands):
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
Assets
Money market fund deposits
Marketable equity securities
Corporate bonds and debt
Government agency bonds
Deposit accounts
Municipal bonds
Auction rate securities
Total assets measured at fair value
Liabilities
Contingent consideration
Total liabilities measured at fair value
$
Significant
Other
Observable
Inputs
(Level 2)
$
$
100,878
5,509
—
—
—
—
—
106,387
$
$
—
—
Significant
Unobservable
Inputs
(Level 3)
$
$
—
—
678,932
558,153
427,456
25,138
—
1,689,679
$
$
—
—
Total
Balance
$
$
—
—
6,190
—
—
—
33,791
39,981
$
100,878
5,509
685,122
558,153
427,456
25,138
33,791
1,836,047
$
$
19,100
19,100
$
$
19,100
19,100
There were no transfers between Level 1 and Level 2 during the three and nine-month periods ended December 31,
2013 or the year ended March 31, 2013.
At December 31, 2013, the Company's ARS for which recent auctions were unsuccessful are made up of securities
related to the insurance industry valued at $9.8 million. At March 31, 2013, the Company's ARS for which recent auctions
were unsuccessful were made up of bonds related to the insurance sector valued at $9.8 million, securities related to the energy
and telecommunications sectors valued at $5.3 million, and student loan securities valued at $18.7 million.
The Company estimated the fair value of its ARS, which are classified as Level 3 securities, based on the following:
(i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates
considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase
at par for each period; and (iv) estimates of the recovery rates in the event of default for each security. The significant
unobservable inputs used in the fair value measurement of the insurance sector ARS were estimated risk free discount rates,
liquidity risk premium, and the liquidity horizon. The risk free discount rate applied to these securities was 2% to 2.5%
adjusted for the liquidity risk premium which ranged from 9.1% to 29.5%. The anticipated liquidity horizon ranged from 7 to
10 years. A significant increase in the liquidity premium or discount rate, in isolation, would lead to a significantly lower fair
value measurement. A significant increase in the liquidity horizon, in isolation, would lead to a significantly lower fair value
measurement. Each quarter the Company investigates material changes in the fair value measurements of its ARS.
Level 3 liabilities at March 31, 2013 include contingent consideration from the Company's Roving Networks
acquisition, which was fully paid as of December 31, 2013. The Company evaluates the estimated fair value of its contingent
consideration on a quarterly basis based on certain revenue and gross margin performance criteria and records fair value
adjustments as necessary.
12
Table of Contents
The following tables present 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 nine months ended
December 31, 2013, and the year ended March 31, 2013 (amounts in thousands):
Nine months ended December 31, 2013
Balance at March 31, 2013
Total gains (losses) (realized and unrealized):
Included in earnings
Included in other comprehensive income
Purchases, sales, issuances, and settlements, net
Balance at December 31, 2013
Year ended March 31, 2013
Balance at March 31, 2012
Total gains (losses) (realized and unrealized):
Included in earnings
Included in other comprehensive income
Purchases, sales, issuances, and settlements, net
Acquisition-related
Balance at March 31, 2013
Auction Rate
Securities
$
33,791
Corporate
Debt
$
6,190
1,103
(332)
(24,735)
$
9,827
Auction Rate
Securities
$
10,246
$
Corporate
Debt
$
4,625
(412)
332
(650)
24,275
33,791
$
—
—
—
6,190
$
—
—
1,565
—
6,190
Contingent
Total Gains
Consideration
(Losses)
(19,100) $
$
—
(1,370)
$
—
20,470
—
Contingent
Consideration
$
—
(267)
(332)
—
(599)
$
Total Gains
(Losses)
$
—
(4,400) $
—
—
(14,700)
(19,100) $
$
(4,813)
332
—
—
(4,481)
Assets measured at fair value on a recurring basis are presented/classified on the condensed consolidated balance
sheets at December 31, 2013 as follows (amounts in thousands):
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
Assets
Cash and cash equivalents
Short-term investments
Long-term investments
Total assets measured at fair value
$
114,235
—
—
114,235
$
Significant
Other
Observable
Inputs
(Level 2)
$
$
260,865
932,302
707,908
1,901,075
Significant
Unobservable
Inputs
(Level 3)
$
$
—
—
16,017
16,017
Total
Balance
$
$
375,100
932,302
723,925
2,031,327
Assets measured at fair value on a recurring basis are presented/classified in the consolidated balance sheets at
March 31, 2013 as follows (amounts in thousands):
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
Assets
Cash and cash equivalents
Short-term investments
Long-term investments
Total assets measured at fair value
$
$
100,878
—
5,509
106,387
13
Significant
Other
Observable
Inputs
(Level 2)
$
$
427,456
1,050,263
211,960
1,689,679
Significant
Unobservable
Inputs
(Level 3)
$
$
—
—
39,981
39,981
Total
Balance
$
$
528,334
1,050,263
257,450
1,836,047
Table of Contents
Financial Assets Not Recorded at Fair Value on a Recurring Basis
The Company's non-marketable equity and cost-method investments are not recorded at fair value on a recurring
basis. These investments are monitored on a quarterly basis for impairment charges. The investments will only be recorded at
fair value when an impairment charge is recognized. There were no impairment charges recognized on these investments in the
three and nine months ended December 31, 2013. The Company recognized impairment charges of $0.5 million during the
three and nine months ended December 31, 2012. These investments are included in other assets on the condensed
consolidated balance sheet.
(9)
Fair Value of Financial Instruments
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months.
Management believes the carrying amount of the equity and cost-method investments materially approximated fair value at
December 31, 2013 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair
value measurements. The fair values of the Company's line of credit and short-term and long-term borrowings are estimated
using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements and approximate carrying value. Based on the borrowing rates currently available to the Company for
bank loans with similar terms and average maturities, the fair value of the Company's line of credit and long-term borrowings at
December 31, 2013 approximated book value and are considered Level 2 in the fair value hierarchy described in Note 8. The
carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term
maturity of the amounts. The fair value of the Company's junior subordinated convertible debentures was $1.987 billion at
December 31, 2013 and $1.639 billion at March 31, 2013 based on observable market prices for these debentures, which are
traded in less active markets and are therefore classified as a Level 2 fair value measurement.
(10)
Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
December 31, 2013
$
224,832
2,102
226,934
2,661
$
224,273
Trade accounts receivable
Other
Less allowance for doubtful accounts
(11)
March 31, 2013
$
230,469
2,250
232,719
2,764
$
229,955
Inventories
The components of inventories consist of the following (amounts in thousands):
December 31, 2013
$
9,555
187,822
77,252
$
274,629
Raw materials
Work in process
Finished goods
March 31, 2013
$
9,020
181,750
51,564
$
242,334
Inventories are valued at the lower of cost or market using the first-in, first-out method. Inventory impairment charges
establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later
suggest that increased carrying amounts are recoverable.
14
Table of Contents
(12)
Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in thousands):
December 31, 2013
$
55,601
407,520
1,442,169
62,217
1,967,507
1,446,942
$
520,565
Land
Building and building improvements
Machinery and equipment
Projects in process
Less accumulated depreciation and amortization
March 31, 2013
$
47,102
396,611
1,377,814
76,158
1,897,685
1,383,141
$
514,544
Depreciation expense attributed to property, plant and equipment was $22.2 million and $66.7 million for the three and
nine months ended December 31, 2013, respectively, and $23.0 million and $66.0 million for the three and nine months ended
December 31, 2012, respectively.
(13)
Accrued Liabilities
Accrued liabilities consist of the following (amounts in thousands):
December 31, 2013
$
—
96,176
$
96,176
Acquisition related contingent consideration
Other accrued expenses
(14)
$
$
March 31, 2013
19,100
108,008
127,108
Income Taxes
The provision for income taxes reflects tax on foreign earnings and federal and state tax on U.S. earnings. The
Company had an effective tax rate of 9.7% for the nine-month period ended December 31, 2013 and 34.1% for the nine-month
period ended December 31, 2012. During the three and nine months ended December 31, 2013, the Company recognized a net
$6.2 million one-time tax benefit associated with a favorable settlement of an IRS examination for fiscal years 2009 and 2010
offset by unfavorable items associated with the filing of the Company's fiscal 2013 tax returns as compared to its year-end tax
provisions. The Company's effective tax rate is lower than statutory rates in the U.S. due primarily to its mix of earnings in
foreign jurisdictions with lower tax rates and the aforementioned net tax benefit. The Company's effective tax rate was higher
in the December 31, 2012 period due to certain tax expenses associated with the acquisition of SMSC.
At December 31, 2013, the Company had $179.2 million of unrecognized tax benefits. Unrecognized tax benefits
decreased by $3.5 million compared to March 31, 2013 primarily as a result of the release of accruals related to the settlement
of an IRS audit offset by the ongoing accrual for uncertain tax positions and the accrual of deficiency interest on these
positions.
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 2011 and later tax years remain open for examination by tax authorities. The IRS is currently
auditing SMSC's 2011 and 2012 tax years. For foreign tax returns, the Company is generally no longer subject to income tax
examinations for years prior to fiscal 2005.
The Company recognizes liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on its
estimate of whether, and the extent to which, additional tax payments are more likely than not. The Company believes that it
has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate
for all open years based on an assessment of many factors including past experience and interpretations of tax laws applied to
the facts of each matter.
15
Table of Contents
The Company believes that it maintains appropriate reserves to offset any potential income tax liabilities that may
arise upon final resolution of matters for open tax years. If such reserve amounts ultimately prove to be unnecessary, the
resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed
necessary. If such amounts prove to be less than an ultimate assessment, a future charge to expense would be recorded in the
period in which the assessment is determined. Although the timing of the resolution and/or closure of audits is highly
uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in
the next 12 months.
(15)
2.125% Junior Subordinated Convertible Debentures
The Company's $1.15 billion principal amount of 2.125% junior subordinated convertible debentures due
December 15, 2037, are subordinated in right of payment to any future senior debt of the Company and are effectively
subordinated in right of payment to the liabilities of the Company's subsidiaries. The debentures are convertible, subject to
certain conditions, into shares of the Company's common stock at an initial conversion rate of 29.2783 shares of common stock
per $1,000 principal amount of debentures, representing an initial conversion price of approximately $34.16 per share of
common stock. As of December 31, 2013, the holders of the debentures had the right to convert their debentures between
October 1, 2013 and December 31, 2013 because for at least 20 trading days during the 30 consecutive trading day period
ending on December 31, 2013, the Company's common stock had a last reported sale price greater than 130% of the conversion
price. As of December 31, 2013, a holder could realize more economic value by selling its debentures in the over the counter
market than from converting its debentures. As a result of cash dividends paid since the issuance of the debentures, the
conversion rate has been adjusted to 38.3572 shares of common stock per $1,000 of principal amount of debentures,
representing a conversion price of approximately $26.07 per share of common stock.
As the debentures can be settled in cash upon conversion, for accounting purposes, the debentures were bifurcated into
a liability component and an equity component, which are both initially recorded at fair value. The carrying value of the equity
component at December 31, 2013 and at March 31, 2013 was $822.4 million. The estimated fair value of the liability
component of the debentures at the issuance date was $327.6 million, resulting in a debt discount of $822.4 million. The
unamortized debt discount was $779.5 million at December 31, 2013 and $786.2 million at March 31, 2013. The carrying
value of the debentures was $369.6 million at December 31, 2013 and $363.4 million at March 31, 2013. The remaining period
over which the unamortized debt discount will be recognized as non-cash interest expense is 24 years. In the three and nine
months ended December 31, 2013, the Company recognized $2.3 million and $6.7 million, respectively, in non-cash interest
expense related to the amortization of the debt discount. In the three and nine months ended December 31, 2012, the Company
recognized $2.1 million and $6.1 million, respectively, in non-cash interest expense related to the amortization of the debt
discount. The Company recognized $6.1 million and $18.3 million of interest expense related to the 2.125% coupon on the
debentures in each of the three and nine-month periods ended December 31, 2013 and December 31, 2012, respectively.
(16)
Credit Facility
On June 27, 2013, the Company entered into a $2.0 billion credit agreement among the Company, the lenders from
time to time that are parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (the Credit Agreement). The
Credit Agreement provides for a $350 million term loan and a $1.65 billion revolving credit facility, with a $125 million
foreign currency sublimit, a $35 million letter of credit sublimit and a $25 million swingline loan sublimit, terminating on
June 27, 2018 (the Maturity Date). The Credit Agreement also contains an increase option permitting the Company, subject to
certain requirements, to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $300
million in additional commitments, which may be for revolving loans or term loans. Proceeds of loans made under the Credit
Agreement may be used for working capital and general corporate purposes. The Credit Agreement replaced another credit
agreement the Company had in place since August 2011. At December 31, 2013, $650.0 million of borrowings were
outstanding under the Credit Agreement consisting of $300.0 million of a revolving line of credit and $350.0 million of a term
loan, net of $1.2 million of debt discount resulting from amounts paid to the lenders.
The loans under the Credit Agreement bear interest, at the Company's option, at the base rate plus a spread of 0.25% to
1.25% or an adjusted LIBOR rate (based on one, two, three, or six-month interest periods) plus a spread of 1.25% to 2.25%, in
each case with such spread being determined based on the consolidated leverage ratio for the preceding four fiscal quarter
period. The base rate means the highest of JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a margin equal
to 0.50% and the adjusted LIBOR rate for a 1-month interest period plus a margin equal to 1.00%. Swingline loans accrue
interest at a per annum rate based on the base rate plus the applicable margin for base rate loans. Base rate loans may only be
made in U.S. dollars. The Company is also obligated to pay other customary administration fees and letter of credit fees for a
credit facility of this size and type.
16
Table of Contents
Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest
period (or at each three-month interval in the case of loans with interest periods greater than three months) in the case of loans
bearing interest at the adjusted LIBOR rate. Interest expense related to the Credit Agreement was approximately $4.1 million
in the three months ended December 31, 2013 and $11.5 million in the nine months ended December 31, 2013. Interest
expense related to the Company's prior credit agreement was approximately $3.1 million and $6.1 million in the three and nine
months ended December 31, 2012, respectively. Principal, together with all accrued and unpaid interest, is due and payable on
the Maturity Date. The Company may prepay the loans and terminate the commitments, in whole or in part, at any time
without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions
and reimbursement of certain costs in the case of prepayments of LIBOR loans.
The Company's obligations under the Credit Agreement are guaranteed by certain of its subsidiaries meeting
materiality thresholds set forth in the Credit Agreement. To secure the Company's obligations under the Credit Agreement, the
Company and its domestic subsidiaries will be required to pledge the equity securities of certain of their respective material
subsidiaries, subject to certain exceptions and limitations.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or
restrict the Company and its subsidiaries' ability to, among other things, incur subsidiary indebtedness, grant liens, merge or
consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay
dividends or make distributions, repurchase stock, enter into restrictive agreements and enter into sale and leaseback
transactions, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also
required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. At December 31,
2013, the Company was in compliance with these covenants.
The Credit Agreement includes customary events of default that include, among other things, non-payment defaults,
inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and
insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of
default could result in the acceleration of the obligations under the Credit Agreement. Under certain circumstances, a default
interest rate will apply on all obligations during the existence of an event of default under the Credit Agreement at a per annum
rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base
rate loans for any other overdue amounts.
(17)
Contingencies
In the ordinary course of the Company's business, it 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. The Company also periodically receives
notifications from various third parties alleging infringement of patents, intellectual property rights or other matters. With
respect to pending legal actions to which the Company is a party, although the outcomes of these actions are not generally
determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its
financial position, cash flows or results of operations. Litigation 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.
The Company's technology license agreements generally include an indemnification clause that indemnifies the
licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or
trade secret infringement by the Company's proprietary technology. The terms of these indemnification provisions approximate
the terms of the outgoing technology license agreements, which are typically perpetual unless terminated by either party for
breach. The possible amount of future payments the Company could be required to make based on agreements that specify
indemnification limits, if such indemnifications were required on all of these agreements, is approximately $121 million. There
are some licensing agreements in place that do not specify indemnification limits. The Company had not recorded any
liabilities related to these indemnification obligations as of December 31, 2013.
Contingent liabilities in the amount of $13.0 million were recorded in connection with the Company's April 8, 2010
acquisition of Silicon Storage Technology Inc. (SST) as an adverse outcome was determined to be probable and estimable.
One of the contingent liabilities associated with the SST acquisition was resolved in the second quarter of fiscal 2013 with legal
settlement costs of approximately $11.5 million for certain legal matters related to SST in excess of previously accrued
amounts, which were expensed as special charges in the statement of income. At December 31, 2013, $5.7 million of the
original contingent liabilities recorded were still outstanding.
17
Table of Contents
(18)
Derivative Instruments
The Company has international operations and is thus subject to foreign currency rate fluctuations. To help manage
the risk of changes in foreign currency rates, the Company periodically enters into derivative contracts comprised of foreign
currency forward contracts to hedge its asset and liability foreign currency exposure and a portion of its foreign currency
operating expenses. Approximately 99% of the Company's sales are U.S. dollar denominated. To date, the exposure related to
foreign exchange rate volatility has not been material to the Company's operating results. As of December 31, 2013, the
Company had no foreign currency forward contracts outstanding. As of March 31, 2013, the Company had foreign currency
forward contracts with notional amounts of $6.0 million to economically hedge certain balance sheet exposures related to the
Japanese yen. As these contracts were executed at or near the end of the respective periods, there were no unrecognized gains
or losses on these contracts at March 31, 2013. The Company recognized an immaterial amount of net realized gains and
losses on foreign currency forward contracts in each of the three and nine months ended December 31, 2013 and 2012. Gains
and losses from changes in the fair value of these foreign currency forward contracts are credited or charged to Other Income
(Expense). The Company does not apply hedge accounting to its foreign currency derivative instruments.
(19)
Comprehensive Income
The following table presents the changes in the components of accumulated other comprehensive income (AOCI) for
the nine months ended December 31, 2013 (amounts in thousands):
Unrealized
holding gains (losses)
available-for-sale
securities
Balance at March 31, 2013
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other
comprehensive income (loss)
Net other comprehensive loss
Balance at December 31, 2013
$
$
Minimum
pension
liability
5,444 $
(8,011)
52
—
(1,503)
(9,514)
(4,070) $
—
—
52
Foreign
Currency
$
$
1,439
—
—
—
1,439
Total
$
$
6,935
(8,011)
(1,503)
(9,514)
(2,579)
The table below details where reclassifications of realized transactions out of AOCI are recorded on the Consolidated
Statements of Income.
Three Months Ended
December 31,
Description of AOCI Component
Unrealized gains on available-for-sale
securities
Taxes
Reclassification of realized transactions,
net of taxes
2013
$
2012
113
$
113
2013
14
—
$
Nine Months Ended
December 31,
$
14
18
$
235
$
184
(776)
—
$
2,279
$
1,503
Related Statement
of Income Line
2012
Other income
Provision for income
(51) taxes
Net Income
Table of Contents
(20)
Share-Based Compensation
The following table presents the details of the Company's share-based compensation expense (amounts in thousands):
Cost of sales
Research and development
Selling, general and administrative
Pre-tax effect of share-based compensation
Income tax benefit
Net income effect of share-based
compensation
$
$
Three Months Ended
December 31,
2013
2012
(1)
1,841
$
1,834
6,141
6,172
5,737
6,114
13,719
14,120
1,510
2,755
12,209
$
11,365
(1)
$
$
Nine Months Ended
December 31,
2013
2012
(1)
5,674
$
5,758
18,762
16,562
16,939
22,339
41,375
44,659
4,501
7,496
36,874
$
37,163
(1)
(1) During the three and nine months ended December 31, 2013, $1.9 million and $5.7 million, respectively, of share-based
compensation expense was capitalized to inventory and $1.8 million and $5.7 million, respectively, of previously
capitalized share-based compensation expenses in inventory was sold. During the three and nine months ended
December 31, 2012, $1.8 million and $5.3 million, respectively, of share-based compensation expense was capitalized to
inventory and $1.8 million and $5.8 million, respectively, of previously capitalized share-based compensation expense in
inventory was sold.
(21)
Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share (in thousands,
except per share amounts):
Net income
Weighted average common shares outstanding
Dilutive effect of stock options and RSUs
$
Dilutive effect of convertible debt
Weighted average common and potential common shares
outstanding
Basic net income per common share
$
Diluted net income per common share
$
Three Months Ended
December 31,
2013
2012
105,401 $
10,173
198,759
194,958
3,834
3,725
16,496
5,722
219,089
0.53
0.48
$
$
204,405
0.05
0.05
$
$
$
Nine Months Ended
December 31,
2013
2012
283,786 $
67,699
197,845
194,157
3,882
3,709
14,216
6,687
215,943
1.43
1.31
$
$
204,553
0.35
0.33
Diluted net income per common share for the three and nine months ended December 31, 2013 includes 16,496,384
shares and 14,215,573 shares, respectively, issuable upon the exchange of debentures (see Note 15). Diluted net income per
common share for the three and nine months ended December 31, 2012 includes 5,721,774 and 6,687,078 shares, respectively,
issuable upon the exchange of debentures. The debentures have no impact on diluted net income per common share unless the
average price of the Company's common stock exceeds the conversion price because the principal amount of the debentures
will be settled in cash upon conversion. Prior to conversion, the Company will include, in the diluted net income per common
share calculation, the effect of the additional shares that may be issued when the Company's common stock price exceeds the
conversion price using the treasury stock method. The weighted average conversion price per share used in calculating the
dilutive effect of the convertible debt for the three and nine-month periods ended December 31, 2013 was $26.19 and $26.43,
respectively. The weighted average conversion price per share used in calculating the dilutive effect of the convertible debt for
the three and nine-month period ended December 31, 2012 was $27.21 and $27.51, respectively.
Weighted average common shares exclude the effect of option shares which are not dilutive. There were no
antidilutive option shares for the three and nine months ended December 31, 2013. For the three and nine months ended
December 31, 2012, the number of option shares that were antidilutive was 124,395 and 110,021, respectively.
19
Table of Contents
(22)
Dividends
A quarterly cash dividend of $0.3545 per share was paid on December 5, 2013 in the aggregate amount of $70.6
million. Through the first nine months of fiscal 2014, cash dividends of $1.062 per share have been paid in the aggregate of
$210.3 million. A quarterly cash dividend of $0.355 per share was declared on January 30, 2014 and will be paid on March 7,
2014 to stockholders of record as of February 21, 2014. The Company expects the March 2014 payment of its quarterly cash
dividend to be approximately $70.7 million.
20
Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This report, including "Part I – Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Part II - Item 1A Risk Factors" contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding our strategy, financial performance and revenue sources. We use words such as
"anticipate," "believe," "plan," "expect," "future," "intend" and similar expressions to identify forward-looking statements. Our
actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain
factors including those set forth under "Risk Factors," beginning at page 37 and elsewhere in this Form 10-Q. Although we
believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We
disclaim any obligation to update information contained in any forward-looking statement. These forward-looking statements
include, without limitation, statements regarding the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
The effects that adverse global economic conditions and fluctuations in the global credit and equity markets
may have on our financial condition and results of operations;
The effects and amount of competitive pricing pressure on our product lines;
Our ability to moderate future average selling price declines;
The effect of product mix, capacity utilization, yields, fixed cost absorption, competition and economic
conditions on gross margin;
The amount of, and changes in, demand for our products and those of our customers;
The level of orders that will be received and shipped within a quarter;
Our expectation that our inventory levels will be relatively flat to down modestly in the March 2014 quarter
compared to the December 2013 quarter and that it will allow us to maintain competitive lead times;
The effect that distributor and customer inventory holding patterns will have on us;
Our belief that customers recognize our products and brand name and use distributors as an effective supply
channel;
Anticipating increased customer requirements to meet voluntary criteria related to the reduction or elimination
of substances in our products;
Our belief that deferred cost of sales are recorded at their approximate carrying value and will have low risk of
material impairment;
Our belief that our direct sales personnel combined with our distributors provide an effective means of reaching
our customer base;
Our ability to increase the proprietary portion of our analog and interface product lines and the effect of such an
increase;
Our belief that our processes afford us both cost-effective designs in existing and derivative products and
greater functionality in new product designs;
The impact of any supply disruption we may experience;
Our ability to effectively utilize our facilities at appropriate capacity levels and anticipated costs;
That we adjust capacity utilization to respond to actual and anticipated business and industry-related conditions;
That our existing facilities will provide sufficient capacity to respond to increases in demand with modest
incremental capital expenditures;
That manufacturing costs will be reduced by transition to advanced process technologies;
Our ability to maintain manufacturing yields;
Continuing our investments in new and enhanced products;
The cost effectiveness of using our own assembly and test operations;
Our anticipated level of capital expenditures;
Continuation and amount of quarterly cash dividends;
The sufficiency of our existing sources of liquidity to finance anticipated capital expenditures and otherwise
meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on
them;
The impact of seasonality on our business;
The accuracy of our estimates used in valuing employee equity awards;
That the resolution of legal actions will not have a material effect on our business, and the accuracy of our
assessment of the probability of loss and range of potential loss;
The recoverability of our deferred tax assets;
The adequacy of our tax reserves to offset any potential tax liabilities, having the appropriate support for our
income tax positions and the accuracy of our estimated tax rate;
Our belief that the expiration of any tax holidays will not have a material impact on our overall tax expense or
effective tax rate;
21
Table of Contents
•
•
•
•
•
•
•
•
•
•
•
•
•
Our belief that the estimates used in preparing our consolidated financial statements are reasonable;
Our belief that recently issued accounting pronouncements listed in this document will not have a significant
impact on our consolidated financial statements;
Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis;
Our ability to obtain patents and intellectual property licenses and minimize the effects of litigation;
The level of risk we are exposed to for product liability claims or indemnification claims;
The effect of fluctuations in market interest rates on our income and/or cash flows;
The effect of fluctuations in currency rates;
The accuracy of our estimates of market information that determines the value of our Auction Rate Securities
(ARS), and that the lack of markets for the ARS will not have a material impact on our liquidity, cash flow, or
ability to fund operations;
That our offshore earnings are considered to be permanently reinvested offshore and that we could determine to
repatriate some of our offshore earnings in future periods to fund stockholder dividends, share repurchases,
acquisitions or other corporate activities;
That a significant portion of our future cash generation will be in our foreign subsidiaries;
Our intention to indefinitely reinvest undistributed earnings of certain non-US subsidiaries in those subsidiaries;
Our intent to maintain a high-quality investment portfolio that preserves principal, meets liquidity needs, avoids
inappropriate concentrations and delivers an appropriate yield; and
Our ability to collect accounts receivable.
We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with
a summary of Microchip's overall business strategy to give the reader an overview of the goals of our business and the overall
direction of our business and products. This is followed by a discussion of the Critical Accounting Policies and Estimates that
we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We
then discuss our Results of Operations for the three and nine months ended December 31, 2013 compared to the three and nine
months ended December 31, 2012. 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 the embedded control market, which includes microcontrollers, highperformance linear and mixed signal devices, power management and thermal management devices, connectivity devices,
interface devices, Serial EEPROMs, SuperFlash memory products, our patented KeeLoq® security devices and Flash IP
solutions. We provide highly cost-effective embedded control products that also offer the advantages of small size, high
performance, low voltage/power operation and ease of development, enabling timely and cost-effective embedded control
product integration by our customers. We license SuperFlash technology to foundries, integrated device manufacturers and
design partners throughout the world for use in the manufacture of advanced microcontroller products.
We sell our products to a broad base of domestic and international customers across a variety of industries. The
principal markets that we serve include consumer, automotive, industrial, office automation and telecommunications. Our
business is subject to fluctuations based on economic conditions within these markets.
Our manufacturing operations include wafer fabrication, wafer probe and assembly and test. The ownership of a
substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain
a high level of manufacturing control resulting in us being one of the lowest cost producers in the embedded control
industry. By owning 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 a portion of the wafer
manufacturing and the assembly and test profit margin. We do outsource a significant portion of our wafer fabrication and
assembly and test requirements to third parties.
22
Table of Contents
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, analog and mixed-signal products, Flash-IP systems, new development systems, software and
application-specific software libraries. We are also developing new design and process technologies to achieve further cost
reductions and performance improvements in our products.
We market our products worldwide primarily through a network of direct sales personnel and distributors. Our
distributors focus primarily on servicing the product and technical support requirements of a broad base of diverse
customers. We believe that our direct sales personnel combined with our distributors provide an effective means of reaching
this broad and diverse customer base. Our direct sales force focuses primarily on major strategic accounts in three
geographical markets: the Americas, Europe and Asia. We currently maintain sales and support centers in major metropolitan
areas in North America, Europe and Asia. We believe that a strong technical service presence is essential to the continued
development of the embedded control market. Many of our field sales engineers (FSEs), field application engineers (FAEs),
and sales management have technical degrees and have been previously employed in an engineering environment. We believe
that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The primary mission
of our FAE team is to provide technical assistance to strategic accounts and to conduct periodic training sessions for FSEs and
distributor sales teams. FAEs also frequently conduct technical seminars for our customers in major cities around the world,
and work closely with our distributors to provide technical assistance and end-user support.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of Microchip's financial condition and results of operations is based upon our condensed
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
U.S. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, business combinations, share-based compensation, inventories, income taxes, junior
subordinated convertible debentures and contingencies. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our results may
differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We review
these estimates and judgments on an ongoing basis. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We also have
other policies that we consider key accounting policies, such as our policy regarding revenue recognition to original equipment
manufacturers (OEMs); however, we do not believe these policies require us to make estimates or judgments that are as
difficult or subjective as our policies described below.
Revenue Recognition - Distributors
Our distributors worldwide generally have broad price protection and product return rights, so we defer revenue
recognition until the distributor sells the product to their customer. Revenue is recognized when the distributor sells the
product to an end-customer, at which time the sales price becomes fixed or determinable. Revenue is not recognized upon
shipment to our distributors since, due to discounts from list price as well as price protection rights, the sales price is not
substantially fixed or determinable at that time. At the time of shipment to these distributors, we record a trade receivable for
the selling price as there is a legally enforceable right to payment, relieve inventory for the carrying value of goods shipped
since legal title has passed to the distributor, and record the gross margin in deferred income on shipments to distributors on our
condensed consolidated balance sheets.
23
Table of Contents
Deferred income on shipments to distributors effectively represents the gross margin on the sale to the distributor;
however, the amount of gross margin that we recognize in future periods could be less than the deferred margin as a result of
credits granted to distributors on specifically identified products and customers to allow the distributors to earn a competitive
gross margin on the sale of our products to their end customers and price protection concessions related to market pricing
conditions.
We sell the majority of the items in our product catalog to our distributors worldwide at a uniform list price. However,
distributors resell our products to end customers at a very broad range of individually negotiated price points. The majority of
our distributors' resales require a reduction from the original list price paid. Often, under these circumstances, we remit back to
the distributor a portion of their original purchase price after the resale transaction is completed in the form of a credit against
the distributors' outstanding accounts receivable balance. The credits are on a per unit basis and are not given to the distributor
until they provide information to us regarding the sale to their end customer. The price reductions vary significantly based on
the customer, product, quantity ordered, geographic location and other factors, and discounts to a price less than our cost have
historically been rare. The effect of granting these credits establishes the net selling price to our distributors for the product and
results in the net revenue recognized by us when the product is sold by the distributors to their end customers. Thus, a portion
of the "deferred income on shipments to distributors" balance represents the amount of distributors' original purchase price that
will be credited back to the distributor in the future. The wide range and variability of negotiated price concessions granted to
distributors does not allow us to accurately estimate the portion of the balance in the deferred income on shipments to
distributors' account that will be credited back to the distributors. Therefore, we do not reduce deferred income on shipments to
distributors or accounts receivable by anticipated future concessions; rather, price concessions are typically recorded against
deferred income on shipments to distributors and accounts receivable when incurred, which is generally at the time the
distributor sells the product. At December 31, 2013, we had approximately $215.5 million of deferred revenue and $72.2
million in deferred cost of sales recognized as $143.3 million of deferred income on shipments to distributors. At March 31,
2013, we had approximately $201.8 million of deferred revenue and $62.8 million in deferred cost of sales recognized as
$139.0 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 condensed
consolidated balance sheets, totaled $91.7 million at December 31, 2013 and $70.1 million at March 31, 2013. On sales to
distributors, our payment terms generally require the distributor to settle amounts owed to us for an amount in excess of their
ultimate cost. The sales price to our distributors may be higher than the amount that the distributors will ultimately owe us
because distributors often negotiate price reductions after purchasing the product from us and such reductions are often
significant. It is our practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle
receivable balances, on a current basis, generally within 30 days, for amounts originally invoiced. This practice has an adverse
impact on the working capital of our distributors. As such, we have entered into agreements with certain distributors whereby
we advance cash to the distributors to reduce the distributor's working capital requirements. These advances are reconciled at
least on a quarterly basis and are estimated based on the amount of ending inventory as reported by the distributor multiplied by
a negotiated percentage. Such advances have no impact on our revenue recognition or our condensed consolidated statements
of income. We process discounts taken by distributors against our deferred income on shipments to distributors' balance and
true-up the advanced amounts generally after the end of each completed fiscal quarter. The terms of these advances are set
forth in binding legal agreements and are unsecured, bear no interest on unsettled balances and are due upon demand. The
agreements governing these advances can be canceled by us at any time.
We reduce product pricing through price protection based on market conditions, competitive considerations and other
factors. Price protection is granted to distributors on the inventory they have on hand at the date the price protection is
offered. When we reduce the price of our products, it allows the distributor to claim a credit against its outstanding accounts
receivable balances based on the new 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 distributor's 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.
24
Table of Contents
Business Combinations
All of our business combinations are accounted for at fair value under the acquisition method of accounting. Under
the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity
securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition
date; (iii) in-process research and development will be recorded at fair value as an intangible asset at the acquisition date and
amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination
will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date will be recognized through income tax expense or directly in contributed capital. The
measurement of fair value of assets accrued and liabilities assumed requires significant judgment. The valuation of intangible
assets and acquired investments in privately held companies, in particular, requires that we use valuation techniques such as the
income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash
flow scenarios and requires the following significant estimates: revenue, expenses, capital spending and other costs, and
discount rates based on the respective risks of the cash flows. The valuation of non-marketable equity investments acquired
also takes into account variables such as conditions reflected in the capital markets, recent financing activity by the investees,
the investees' capital structure and the terms of the investees' issued interests.
Share-Based Compensation
We measure fair value and recognize compensation expense for all share-based payment awards, including grants of
employee stock options, RSUs, stock appreciation rights, and employee stock purchase rights, to be recognized in our financial
statements based on their respective grant date fair values. Total share-based compensation during the nine months ended
December 31, 2013 was $41.4 million, of which $35.7 million was reflected in operating expenses. Total share-based
compensation reflected in cost of sales during the nine months ended December 31, 2013 was $5.7 million. Total share-based
compensation included in our inventory balance was $5.5 million at December 31, 2013.
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. Option pricing models,
including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life,
expected dividend rate, and expected risk-free rate of return. We use a blend of historical and implied volatility based on
options freely traded in the open market as we believe this is more reflective of market conditions and a better indicator of
expected volatility than using purely historical volatility. The expected life of the awards is based on historical and other
economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for
the terms of our awards. The dividend yield assumption is based on our history and expectation of future dividend
payouts. We estimate the number of share-based awards 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
and administrative expenses. The effect of forfeiture adjustments in the third quarter of fiscal 2014 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 sharebased compensation will increase to the extent that we grant additional equity awards to employees.
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 on 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
25
Table of Contents
12-month demand. Estimates for projected 12-month demand are based on the average shipments of the prior three-month
period, which are then annualized to adjust for any potential seasonality in our business. The estimated 12-month demand is
compared to our most recently developed sales forecast to further reconcile the 12-month demand estimate. Management
reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new
products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the
extent any existing products are being replaced or discontinued.
In periods where our production levels are substantially below our normal operating capacity, the reduced production
levels of our manufacturing facilities are charged directly to cost of sales. Approximately $1.8 million and $17.2 million was
charged to cost of sales in the three and nine months ended December 31, 2013, respectively, as a result of decreased
production in our wafer fabs compared to approximately $10.5 million and $18.8 million in the three and nine months ended
December 31, 2012, respectively.
Income Taxes
As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which are included within our condensed consolidated
balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income
within the relevant jurisdiction and to the extent we believe that recovery is not likely, we must establish a valuation
allowance. We have provided valuation allowances for certain of our deferred tax assets, including state net operating loss
carryforwards, foreign tax credits and state tax credits, where it is more likely than not that some portion, or all of such assets,
will not be realized. At December 31, 2013, the valuation allowances totaled $93.0 million. Should we determine that we
would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made. At December 31, 2013, our deferred tax asset, net of
valuation allowances, was $72.1 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. SMSC is currently under IRS audit for fiscal years 2011 and 2012.
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.
Junior Subordinated Convertible Debentures
We separately account for the liability and equity components of our junior subordinated convertible debentures in a
manner that reflects our nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. This results in a
bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on
the debt to be recognized as part of interest expense in our condensed consolidated statements of income. Additionally, certain
embedded features of the debentures qualify as derivatives and are bundled as a compound embedded derivative that is
measured at fair value. Lastly, we include the dilutive effect of the shares of our common stock issuable upon conversion of the
outstanding junior subordinated convertible debentures in our diluted income per share calculation regardless of whether the
market price trigger or other contingent conversion feature has been met. We apply the treasury stock method as we have
adopted an accounting policy 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 $26.07 at December 31, 2013 and adjusts as dividends are recorded in the future.
26
Table of Contents
Contingencies
In the ordinary course of our business, we are involved in a limited number of legal actions, both as plaintiff and
defendant, and could incur uninsured liability in any one or more of them. We also periodically receive notifications from
various third parties alleging infringement of patents, intellectual property rights or other matters. With respect to pending
legal actions to which we are a party, although the outcomes of these actions are not generally determinable, we believe that the
ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of
operations. Litigation 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.
Results of Operations
The following table sets forth certain operational data as a percentage of net sales for the periods indicated:
Three Months Ended
December 31,
2013
2012
100.0%
100.0%
Net sales
Cost of sales
Gross profit
Research and development
Selling, general and administrative
Amortization of acquired intangible assets
Special charges
Operating income
41.4
58.6
15.8
13.9
4.5
0.2
24.2%
51.8
48.2
17.2
16.7
9.5
0.6
4.2%
Nine Months Ended
December 31,
2013
2012
100.0%
100.0%
41.7
58.3
15.8
14.1
5.1
0.2
23.1%
47.9
52.1
16.0
17.1
6.2
2.2
10.6%
Net Sales
We operate in two industry segments and engage primarily in the design, development, manufacture and marketing of
semiconductor products as well as the licensing of SuperFlash intellectual property. We sell our products to distributors and
OEMs, in a broad range of markets, perform ongoing credit evaluations of our customers and generally require no collateral. In
certain circumstances, a customer's financial condition may require collateral, and, in such cases, the collateral would be
provided primarily by letters of credit.
Our net sales for the quarter ended December 31, 2013 were $482.4 million, a decrease of 2.1% from the previous
quarter's sales of $492.7 million, and an increase of 15.9% from net sales of $416.0 million in the quarter ended December 31,
2012. Our net sales for the nine months ended December 31, 2013 were $1,437.8 million, an increase of 24.9% from net sales
of $1,151.5 million in the nine months ended December 31, 2012. The decrease in net sales in the quarter ended December 31,
2013 over the previous quarter was due primarily to general economic and semiconductor industry conditions. The increase in
net sales in the three months ended December 31, 2013 compared to the three months ended December 31, 2012 was due
primarily to general economic and semiconductor industry conditions and market share gains. The increase in net sales in the
nine months ended December 31, 2013 compared to the nine months ended December 31, 2012 was due primarily to our
acquisition of SMSC on August 2, 2012, general economic and semiconductor industry conditions and market share gains.
Average selling prices for our semiconductor products were up approximately 1% and 5% for the three and nine-month periods
ended December 31, 2013, over the corresponding periods of the previous fiscal year. The number of units of our
semiconductor products sold were up approximately 16% and 19% for the three and nine-month periods ended December 31,
2013 over the corresponding periods of the previous fiscal year. The average selling prices and the unit volumes of our sales
are impacted by the mix of our products sold and overall semiconductor market conditions. Key factors related to the amount
of net sales during the three and nine-month periods ended December 31, 2013 compared to the three and nine-month periods
ended December 31, 2012 include:
27
Table of Contents
•
•
•
•
•
•
•
•
our acquisition of SMSC during the second quarter of fiscal 2013;
global economic conditions in the markets we serve;
semiconductor industry conditions;
inventory holding patterns of our customers;
increasing semiconductor content in our customers' products;
customers' increasing needs for the flexibility offered by our programmable solutions;
our new product offerings that have increased our served available market; and
continued market share gains in the segments of the markets we address.
Sales by product line for the three and nine months ended December 31, 2013 and 2012 were as follows (dollars in
thousands):
Microcontrollers
Analog, interface and mixed
signal products
Memory products
Technology licensing
Other
Total sales
Three Months Ended
December 31,
(unaudited)
2013
%
2012
$ 313,305
65.0
$ 266,033
108,925
32,503
24,074
3,565
$ 482,372
22.6
6.7
5.0
0.7
93,305
32,476
21,338
2,895
100.0% $ 416,047
%
64.0
22.4
7.8
5.1
0.7
Nine Months Ended
December 31,
(unaudited)
2013
%
2012
$ 934,614
65.0
$ 759,690
320,600
101,482
71,418
9,719
100.0% $ 1,437,833
22.3
7.0
5.0
0.7
210,558
109,764
61,741
9,726
100.0% $ 1,151,479
%
66.0
18.3
9.5
5.4
0.8
100.0%
Microcontrollers
Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and
associated application development systems accounted for approximately 65.0% of our total net sales for each of the three and
nine-month periods ended December 31, 2013 compared to approximately 64.0% of our total net sales for the three-month
period ended December 31, 2012 and approximately 66.0% of our total net sales for the nine-month period ended
December 31, 2012.
Net sales of our microcontroller products increased approximately 17.8% in the three-month period ended
December 31, 2013 and approximately 23.0% in the nine-month period ended December 31, 2013 compared to the three and
nine-month periods ended December 31, 2012. The sales increase in the three-month period ended December 31, 2013
compared to the three-month period ended December 31, 2012 was driven primarily by market share gains and general
economic and semiconductor industry conditions in the end markets we serve including the consumer, automotive, industrial
control, communications and computing markets. The sales increase in the nine-month period ended December 31, 2013
compared to the nine-month period ended December 31, 2012 was driven primarily by our acquisition of SMSC, market share
gains and general economic and semiconductor industry 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 products have remained relatively constant over time due to the proprietary
nature of these products. We have experienced, and expect to continue to experience, moderate pricing pressure in certain
microcontroller product lines, primarily due to competitive conditions. We have in the past been able to, and expect in the
future to be able to, moderate average selling price declines in our microcontroller product lines by introducing new products
with more features and higher prices. We may be unable to maintain average selling prices for our microcontroller products as
a result of increased pricing pressure in the future, which would adversely affect our operating results.
Analog, Interface and Mixed Signal Products
Sales of our analog, interface and mixed signal products accounted for approximately 22.6% of our total net sales for
the three-month period ended December 31, 2013 and approximately 22.3% of our total net sales for the nine-month period
ended December 31, 2013 compared to approximately 22.4% of our total net sales for the three-month period ended
December 31, 2012 and approximately 18.3% of our total net sales for the nine-month period ended December 31, 2012.
28
Table of Contents
Net sales of our analog, interface and mixed signal products increased approximately 16.7% in the three-month period
ended December 31, 2013 and approximately 52.3% in the nine-month period ended December 31, 2013 compared to the three
and nine-month periods ended December 31, 2012. The sales increase in the three-month period ended December 31, 2013
compared to the three-month period ended December 31, 2012 was driven primarily by general economic and semiconductor
industry conditions and market share gains achieved within the analog, interface and mixed signal market. The sales increase
in the nine-month period ended December 31, 2013 compared to the nine-month period ended December 31, 2012 was driven
primarily by our acquisition of SMSC, general economic and semiconductor industry conditions and market share gains
achieved within the analog, interface and mixed signal market.
Analog, interface and mixed signal products can be proprietary or non-proprietary in nature. Currently, we consider
more than 80% of our analog, interface and mixed signal 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,
interface and mixed signal 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, interface and mixed signal products as
a result of increased pricing pressure in the future, which would adversely affect our operating results. We anticipate the
proprietary portion of our analog, interface and mixed signal products will increase over time.
Memory Products
Sales of our memory products accounted for approximately 6.7% of our total net sales for the three-month period
ended December 31, 2013 and approximately 7.0% of our total net sales for the nine-month period ended December 31, 2013
compared to approximately 7.8% of our total net sales for the three-month period ended December 31, 2012 and approximately
9.5% of our total net sales for the nine-month period ended December 31, 2012.
Net sales of our memory products were essentially flat in the three-month period ended December 31, 2013 and
decreased approximately 7.5% in the nine-month period ended December 31, 2013 compared to the three and nine-month
periods ended December 31, 2012. The sales decrease in the nine-month period ended December 31, 2013 compared to the
nine-month period ended December 31, 2012 was driven primarily by adverse customer demand conditions within the Serial
EEPROM and Flash memory markets.
Memory product pricing has historically been cyclical in nature, with steep price declines followed by periods of
relative price stability, driven by changes in industry capacity at different stages of the business cycle. We have experienced,
and expect to continue to experience, varying degrees of competitive pricing pressures in our memory products. We may be
unable to maintain the average selling prices of our memory products as a result of increased pricing pressure in the future,
which could adversely affect our operating results.
Technology Licensing
Technology licensing revenue includes a combination of royalties associated with technology licensed for the use of
our SuperFlash technology and fees for engineering services. Technology licensing accounted for approximately 5.0% of our
total net sales for each of the three and nine-month periods ended December 31, 2013 compared to approximately 5.1% of our
total net sales for the three-month period ended December 31, 2012 and approximately 5.4% of our total net sales for the ninemonth period ended December 31, 2012.
Net sales related to our technology licensing increased approximately 12.8% in the three-month period ended
December 31, 2013 and approximately 15.7% in the nine-month period ended December 31, 2013 compared to the three and
nine-month periods ended December 31, 2012. These sales increases were driven primarily by the adoption of our technology
by more manufacturers of semiconductors as well as semiconductor industry and global economic conditions.
Other
Revenue from assembly and test subcontracting services performed during each of the three and nine-month periods
ended December 31, 2013 and 2012 was less than one percent of our total net sales.
29
Table of Contents
Distribution
Distributors accounted for approximately 53.6% of our net sales in the three-month period ended December 31, 2013
and approximately 52.5% of our net sales in the three-month period ended December 31, 2012. Distributors accounted for
approximately 53.6% of our net sales in the nine-month period ended December 31, 2013 and approximately 53.7% of our net
sales in the nine-month period ended December 31, 2012. Our distributors focus primarily on servicing the product
requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this
broad and diverse customer base. We believe that customers recognize Microchip for its products and brand name and use
distributors as an effective supply channel.
Generally, we do not have long-term agreements with our distributors and we, or our distributors, may terminate our
relationships with each other with little or no advance notice. The loss of, or the disruption in the operations of, one or more of
our distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.
At December 31, 2013, our distributors maintained 33 days of inventory of our products compared to 30 days at
March 31, 2013. Over the past three fiscal years, the days of inventory maintained by our distributors have fluctuated between
27 days and 47 days. We do not believe that inventory holding patterns at our distributors will materially impact our net sales,
due to the fact that we recognize revenue based on sell-through for all our distributors.
Sales by Geography
Sales by geography for the three and nine months ended December 31, 2013 and 2012 were as follows (dollars in
thousands):
Americas
Europe
Asia
Total sales
2013
$ 90,698
95,423
296,251
$ 482,372
Three Months Ended
December 31,
(unaudited)
%
2012
18.8
$ 77,299
19.8
84,066
61.4
254,682
100.0% $ 416,047
%
2013
18.6
$ 272,811
20.2
295,584
61.2
869,438
100.0% $1,437,833
Nine Months Ended
December 31,
(unaudited)
%
2012
19.0
$ 228,835
20.5
245,051
60.5
677,593
100.0% $1,151,479
%
19.9
21.3
58.8
100.0%
Americas sales include sales to customers in the U.S., Canada, Central America and South America. Sales to foreign
customers accounted for approximately 85% of our total net sales in the three-month period ended December 31, 2013 and
approximately 84% of our total net sales in the nine-month period ended December 31, 2013. Sales to foreign customers
accounted for approximately 82% of our total net sales in each of the three and nine-month periods ended December 31, 2012.
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.
Gross Profit
Our gross profit was $282.7 million in the three months ended December 31, 2013 and $200.4 million in the three
months ended December 31, 2012. Our gross profit was $838.2 million in the nine months ended December 31, 2013 and
$599.4 million in the nine months ended December 31, 2012. Gross profit as a percent of sales was 58.6% in the three months
ended December 31, 2013 and 48.2% in the three months ended December 31, 2012. Gross profit as a percent of sales was
58.3% in the nine months ended December 31, 2013 and 52.1% in the nine months ended December 31, 2012.
30
Table of Contents
The most significant factors affecting our gross profit percentage in the periods covered by this Form 10-Q were:
•
•
•
•
•
charges of approximately $30.8 million and $55.0 million in the three and nine months ended December 31,
2012, respectively, related to acquired inventory valuation adjustments as a result of our acquisition activity
reducing margins below their historical levels;
production levels being below the range of normal capacity levels, resulting in under absorption of fixed
costs, in all periods covered by this report, but particularly during the nine months ended December 31, 2013
and the three and nine months ended December 31, 2012;
for the nine months ended December 31, 2013, inventory write-downs being lower than the gross margin
impact of sales of inventory that was previously written down:
for the three months ended December 31, 2013 and the three and nine months ended December 31, 2012,
inventory write-downs being higher than the gross margin impact of sales of inventory that was previously
written down; and
fluctuations in our product mix of microcontrollers, analog products, memory products and technology
licensing.
Other factors that impacted our gross profit percentage in the periods covered by this Form 10-Q include:
•
•
continual cost reductions in wafer fabrication and assembly and test manufacturing, such as new
manufacturing technologies and more efficient manufacturing techniques; and
lower depreciation as a percentage of cost of sales.
We adjust our wafer fabrication and assembly and test capacity utilization as required to respond to actual and
anticipated business and industry-related conditions. When production levels are below normal capacity, we charge cost of
sales for the unabsorbed capacity. During each of the three and nine-month periods ended December 31, 2013 and 2012, we
operated below normal capacity levels, which we typically consider to be 90% to 95% of the actual capacity of our installed
equipment, in our wafer fabrication facilities in response to uncertain global economic conditions and our inventory position.
As a result of decreased production in our wafer fabs, approximately $1.8 million and $17.2 million was charged to cost of
sales during the three and nine months ended December 31, 2013, respectively, compared to $10.5 million and $18.8 million
during the three and nine months ended December 31, 2012, respectively. We operated at normal capacity levels in our
Thailand assembly and test facility during the three and nine months ended December 31, 2013. During the three and nine
months ended December 31, 2012, we operated below normal capacity levels in our Thailand assembly and test facility which
had a negative impact on our gross margin during such periods.
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 Form 10-Q.
Our overall inventory levels were $274.6 million at December 31, 2013, compared to $242.3 million at March 31,
2013. We maintained 126 days of inventory on our balance sheet at December 31, 2013 compared to 116 days of inventory at
March 31, 2013. We expect our inventory levels in the March 2014 quarter to be flat to down modestly over those levels at
December 31, 2013. We believe our existing level of inventory will allow us to maintain competitive lead times and provide
strong delivery performance to our customers and allow us to keep our fiscal 2014 capital expenditures at relatively low levels.
We anticipate that our gross margins will fluctuate over time, driven primarily by capacity utilization levels, the
overall mix of microcontroller products, analog, interface and mixed signal products, memory products and technology
licensing revenue and the percentage of net sales of each of these products in a particular quarter, as well as manufacturing
yields, fixed cost absorption, and competitive and economic conditions in the markets we serve.
During the three months ended December 31, 2013, approximately 49% of our assembly requirements were performed
in our Thailand facility compared to approximately 60% of our assembly requirements during the three months ended
December 31, 2012. The percentage of our assembly work that is performed internally fluctuates over time based on supply
and demand conditions in the semiconductor industry and our internal capacity capabilities. Third-party contractors located in
Asia perform the balance of our assembly operations. During each of the three-month periods ended December 31, 2013 and
2012, approximately 86% of our test requirements were performed in our Thailand facility. 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.
31
Table of Contents
We rely on outside wafer foundries for a significant portion of our wafer fabrication requirements. In each of the three
and nine-month periods ended December 31, 2013, approximately 38% of our total net sales related to wafers purchased from
outside foundries. In the three and nine-month periods ended December 31, 2012, approximately 39% and 31%, respectively,
of our total net sales related to wafers purchased from outside foundries. The primary reason for the increased percentage in
the nine months ended December 31, 2013 compared to the nine months ended December 31, 2012 is our acquisition of SMSC
in the September 2012 quarter, as SMSC relied solely on outside wafer foundries for their wafer fabrication requirements.
Our use of third parties involves some reduction in our level of control over the portions of our business that we
subcontract. While we review the quality, delivery and cost performance of our third-party contractors, our future operating
results could suffer if any third-party contractor is unable to maintain manufacturing yields, assembly and test yields and costs
at approximately their current levels.
Research and Development (R&D)
R&D expenses for the three months ended December 31, 2013 were $76.3 million, or 15.8% of net sales, compared to
$71.4 million, or 17.2% of net sales, for the three months ended December 31, 2012. R&D expenses for the nine months ended
December 31, 2013 were $227.7 million, or 15.8% of net sales, compared to $184.3 million, or 16.0% of net sales, for the nine
months ended December 31, 2012. We are committed to investing in new and enhanced products, including development
systems software, and in our design and manufacturing process technologies. We believe these investments are significant
factors in maintaining our competitive position. R&D costs are expensed as incurred. Assets purchased to support our ongoing
research and development activities are capitalized when related to products which have achieved technological feasibility or
that have alternative future uses and are amortized over their expected useful lives. R&D expenses include labor, depreciation,
masks, prototype wafers, and expenses for the development of process technologies, new packages, and software to support
new products and design environments.
R&D expenses increased $5.0 million, or 7.0%, for the three months ended December 31, 2013 over the same period
last year. The primary reasons for the increase in R&D costs in the 2013 period were higher headcount and bonus costs. R&D
expenses increased $43.4 million, or 23.5%, for the nine months ended December 31, 2013 over the same period last year. The
primary reasons for the increase in R&D costs in the 2013 period were additional costs from our acquisition of SMSC as well
as higher headcount and bonus costs.
R&D expenses fluctuate over time, primarily due to revenue and operating expense investment levels.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended December 31, 2013 were $66.9 million, or
13.9% of net sales, compared to $69.4 million, or 16.7% of net sales, for the three months ended December 31, 2012. Selling,
general and administrative expenses for the nine months ended December 31, 2013 were $201.9 million, or 14.1% of net sales,
compared to $196.7 million, or 17.1% of net sales, for the nine months ended December 31, 2012. 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 $2.5 million, or 3.6%, for the three months ended
December 31, 2013 over the same period last year. The primary reasons for the dollar decrease in selling, general and
administrative costs in the 2013 period were lower SMSC headcount costs partially offset by higher bonus costs. Selling,
general and administrative expenses increased $5.2 million, or 2.6%, for the nine months ended December 31, 2013 over the
same period last year. The primary reasons for the dollar increase in selling, general and administrative costs for the 2013
period were higher headcount costs related to our acquisition of SMSC and higher bonus costs partially offset by lower
acquisition related legal, professional service and share-based compensation expenses.
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense
investment levels.
32
Table of Contents
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets for the three and nine months ended December 31, 2013 were $21.8 million
and $73.2 million, respectively. Amortization of acquired intangible assets for the three and nine months ended December 31,
2012 were $39.7 million and $71.6 million, respectively.
Special Charges
During the three and nine months ended December 31, 2013, we incurred severance-related, office closing and other
costs associated with our acquisition activity of $0.8 million and $2.5 million, respectively.
During the three and nine months ended December 31, 2012, we incurred approximately $2.6 million and $13.4
million, respectively, of severance-related, office closing costs, and other costs associated with the acquisition of SMSC. Also,
during the nine months ended December 31, 2012, we incurred legal settlement costs of approximately $11.5 million for certain
legal matters related to Silicon Storage Technology, Inc. (which we acquired in April 2010) in excess of previously accrued
amounts.
Other Income (Expense)
Interest income in the three and nine months ended December 31, 2013 was $4.2 million and $12.2 million,
respectively, compared to interest income of $3.8 million and $11.9 million in the three and nine months ended December 31,
2012, respectively. Interest expense in the three and nine months ended December 31, 2013 was $12.5 million and $36.8
million, respectively, compared to $11.1 million and $31.0 million in the three and nine months ended December 31, 2012,
respectively. The primary reason for the increases in interest expense in the three and nine months ended December 31, 2013
relates to increased borrowings under our credit facility to partially finance our acquisition of SMSC. Other income, net in the
three and nine months ended December 31, 2013 was $3.8 million and $6.1 million, respectively, compared to other expense,
net of $0.2 million and other income, net of $0.3 million in the three and nine months ended December 31, 2012, respectively.
The change in other income (expense), net in the three months ended December 31, 2013 compared to the same period last year
primarily relates to a gain of $2.4 million recognized on a strategic investment in a company in which we previously owned an
18.3% interest and which we acquired in the three months ended December 31, 2013. The change in other income (expense),
net in the nine months ended December 31, 2013 compared to the same period last year primarily relates to realized gains of
$2.3 million from the sale of marketable equity and debt securities and the aforementioned gain of $2.4 million recognized on a
strategic investment in a company we acquired compared to a prior year gain of $1.3 million related to the sale of inventory
previously considered discontinued and fluctuations on our foreign currency derivatives.
Provision for Income Taxes
Our provision for income taxes reflects tax on foreign earnings and federal and state tax on U.S. earnings. We had an
effective tax rate from continuing operations of 9.7% for the nine-month period ended December 31, 2013 and 34.1% for the
nine-month period ended December 31, 2012. Our effective tax rate is lower than statutory rates in the U.S. due primarily to
our mix of earnings in foreign jurisdictions with lower tax rates and a net one-time tax benefit associated with a favorable IRS
examination partially offset by unfavorable items associated with the filing of our fiscal 2013 tax returns. Our effective tax rate
was higher in the December 31, 2012 period due to certain tax expenses associated with our acquisition of SMSC.
Various taxing authorities in the U.S. and other countries in which we do business are increasing their scrutiny of the
tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing authorities in
the jurisdictions in which they conduct significant operations. For U.S. federal, and in general for U.S. state tax returns, our
fiscal 2011 and later tax returns remain open for examination by the taxing authorities. SMSC is currently under IRS audit for
fiscal years 2011 and 2012. 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.
33
Table of Contents
Our Thailand manufacturing operations currently benefit from numerous tax holidays that have been granted to us by
the Thailand government based on our investments in property, plant and equipment in Thailand. Our tax holiday periods in
Thailand expire at various times in the future. Any expiration of our tax holidays are expected to have a minimal impact on our
overall tax expense due to other tax holidays and an increase in income in other taxing jurisdictions with lower statutory rates.
Liquidity and Capital Resources
We had $2,031.3 million in cash, cash equivalents and short-term and long-term investments at December 31, 2013, an
increase of $195.3 million from the March 31, 2013 balance. The increase in cash, cash equivalents and short-term and longterm investments over this time period is primarily attributable to cash generated from operating activities offset in part by
dividend payments of $210.3 million.
Net cash provided from operating activities was $473.2 million for the nine-month period ended December 31, 2013
compared to $331.5 million for the nine-month period ended December 31, 2012. The increase in cash flow from operations in
the nine-month period ended December 31, 2013 compared to the nine-month period ended December 31, 2012 was primarily
due to higher sales and net income during the nine-month period ended December 31, 2013.
During the nine months ended December 31, 2013, net cash used in investing activities was $448.4 million compared
to net cash used in investing activities of $931.1 million for the nine months ended December 31, 2012. The decrease in net
cash used in investing activities was due primarily to $731.7 million of cash consideration, net of $180.9 million of cash and
cash equivalents acquired, used in our acquisition of SMSC.
Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.
Capital expenditures in the nine months ended December 31, 2013 were $79.5 million compared to $36.1 million in the nine
months ended December 31, 2012. Capital expenditures were primarily for the expansion of production capacity and the
addition of research and development equipment. We currently intend to spend approximately $100 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.
Net cash used in financing activities was $178.1 million for the nine months ended December 31, 2013 compared to
net cash provided by financing activities of $428.2 million for the nine months ended December 31, 2012. We made payments
on our borrowings under our credit agreements of $803.5 and $130.0 million during the nine months ended December 31, 2013
and 2012, respectively. Cash received on borrowings under our credit agreements totaled $833.5 million and $740.0 million
during the nine months ended December 31, 2013 and 2012, respectively. We paid cash dividends to our stockholders of
$210.3 million in the nine months ended December 31, 2013 and $204.6 million in the nine months ended December 31, 2012.
Proceeds from the exercise of stock options and employee purchases under our employee stock purchase plans were $24.8
million for the nine months ended December 31, 2013 and $22.6 million for the nine months ended December 31, 2012.
On June 27, 2013, we entered into a $2.0 billion credit agreement with certain lenders. The credit agreement provides
for a $350.0 million term loan and a $1.65 billion revolving credit facility, with a $125 million foreign currency sublimit, a
$35 million letter of credit sublimit and a $25 million swingline loan sublimit, terminating on June 27, 2018. The credit
agreement also contains an increase option permitting us, subject to certain requirements, to arrange with existing lenders and/
or new lenders for them to provide up to an aggregate of $300 million in additional commitments, which may be for revolving
loans or term loans. Proceeds of loans made under the credit agreement may be used for working capital and general corporate
purposes. The new credit agreement replaced another credit agreement we had in place since August 2011. At December 31,
2013, $650.0 million of borrowings were outstanding under the credit agreement consisting of $300.0 million of a revolving
line of credit and $350.0 million of a term loan, net of $1.2 million of debt discount resulting from amounts paid to the lenders.
See Note 16 of the notes to condensed consolidated financial statements for more information regarding the credit agreement.
Our total cash, cash equivalents, short-term investments and long-term investments held by our foreign subsidiaries
was $2,022.2 million at December 31, 2013 and $1,782.0 million at March 31, 2013. Under current tax laws and regulations, if
accumulated earnings and profits held by our foreign subsidiaries that U.S. taxes had not previously been provided for were to
be distributed to the U.S., in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and
foreign withholding taxes. Our balance of cash, cash equivalents, short-term investments and long-term investments available
for our U.S. operations as of December 31, 2013 and March 31, 2013 was approximately $9.2 million and $100.0 million,
34
Table of Contents
respectively. We utilize a variety of tax planning and financing strategies (including borrowings under our credit agreement)
with the objective of having our worldwide cash available in the locations in which it is needed. We consider our offshore
earnings to be permanently reinvested offshore. However, we could determine to repatriate some of our offshore earnings in
future periods to fund stockholder dividends, share repurchases, acquisitions or other corporate activities in the future. We
expect that a significant portion of our future cash generation will be in our foreign subsidiaries.
We enter into derivative transactions from time to time in an attempt to reduce our exposure to currency rate
fluctuations. Although none of the countries in which we conduct significant foreign operations has had a highly inflationary
economy in the last five years, there is no assurance that inflation rates or fluctuations in foreign currency rates in countries
where we conduct operations will not adversely affect our operating results in the future. At December 31, 2013, we had no
foreign currency forward contracts outstanding.
On December 11, 2007, we announced that our Board of Directors had authorized the repurchase of up to 10.0 million
shares of our common stock in the open market or in privately negotiated transactions. As of December 31, 2013, we had
repurchased 7.5 million shares under this 10.0 million share authorization for a total of $234.7 million. There is no expiration
date associated with this program. The timing and amount of future repurchases will depend upon market conditions, interest
rates, and corporate considerations.
As of December 31, 2013, we held approximately 19.7 million shares as treasury shares.
On October 28, 2002, we announced that our Board of Directors had approved and instituted a quarterly cash dividend
on our common stock. A quarterly dividend of $0.3545 per share was paid on December 5, 2013 in the aggregate amount of
$70.6 million. A quarterly dividend of $0.355 per share was declared on January 30, 2014 and will be paid on March 7, 2014 to
stockholders of record as of February 21, 2014. We expect the aggregate March 2014 cash dividend to be approximately
$70.7 million. Our Board is free to change our dividend practices at any time and to increase or decrease the dividend paid, or
not to pay a dividend on our common stock on the basis of our results of operations, financial condition, cash requirements and
future prospects, and other factors deemed relevant by our Board. Our current intent is to provide for ongoing quarterly cash
dividends depending upon market conditions, our results of operations, and potential changes in tax laws.
We believe that our existing sources of liquidity combined with cash generated from operations and borrowings under
our credit agreement will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months.
However, the semiconductor industry is capital intensive. In order to remain competitive, we must constantly evaluate the need
to make significant investments in capital equipment for both production and research and development. We may further
borrow under our credit agreement or seek additional equity or debt financing from time to time to maintain or expand our
wafer fabrication and product assembly and test facilities, for cash dividends or for acquisitions or other purposes. The timing
and amount of any such financing requirements will depend on a number of factors, including our level of dividend payments,
changes in tax laws and regulations regarding the repatriation of offshore cash, demand for our products, changes in industry
conditions, product mix, competitive factors and our ability to identify suitable acquisition candidates. There can be no
assurance that such financing will be available on acceptable terms, and any additional equity financing would result in
incremental ownership dilution to our existing stockholders.
Contractual Obligations
There have not been any material changes in our contractual obligations from what we disclosed in our Annual Report
on Form 10-K for the fiscal year ended March 31, 2013.
Off-Balance Sheet Arrangements
As of December 31, 2013, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii)
of SEC Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our 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 our investment guidelines and market
conditions. Our investment portfolio, consisting of fixed income securities, money market funds, cash deposits, and marketable
securities that we hold on an available-for-sale basis, was $2,031.3 million as of December 31, 2013 compared to $1,836.0
million as of March 31, 2013. The available-for-sale debt securities, like all fixed income instruments, are subject to interest
rate risk and will decline in value if market interest rates increase. We have the ability to hold our fixed income investments
35
Table of Contents
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. The amounts for fiscal 2014 refer to the remaining three months of the current fiscal year (dollars in
thousands):
Available-for-sale securities
Weighted-average yield rate
$
Financial instruments maturing during the fiscal year ended March 31,
2014
2015
2016
2017
2018
Thereafter
72,994
$ 237,777
$ 503,031
$ 700,677
$
9,871
$ 125,687
1.65%
1.47%
0.69%
0.94%
0.74%
1.07%
At December 31, 2013, $9.8 million of the fair value of our investment portfolio was invested in ARS. With the
continuing liquidity issues in the global credit and capital markets, our ARS have experienced multiple failed auctions and are
not liquid. 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. The fair value of the failed ARS of $9.8 million has been estimated based on market information and estimates
determined by management and could change significantly based on market conditions. We evaluated the impairments in the
value of these ARS, determining our intent to sell these securities prior to the recovery of our amortized cost basis, which did
not result in some of the securities being other-than-temporarily impaired nor the need to recognize impairment charges on
these investments for the three and nine months ended December 31, 2013 compared to impairment charges of $0.3 million for
the three and nine months ended December 31, 2012. 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, as required by paragraph (b) of Rule
13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934, as amended, we evaluated under the supervision of our
Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to
ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934
(i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure control and
procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our
management. Our disclosure controls and procedures include components of our internal control over financial reporting.
Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of
reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not
absolute, assurance that the control system's objectives will be met.
Changes in Internal Control over Financial Reporting
During the three months ended December 31, 2013, 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.
36
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of our business, we are involved in a limited number of legal actions, both as plaintiff and
defendant, and could incur uninsured liability in any one or more of them. We also periodically receive notifications from
various third parties alleging infringement of patents, intellectual property rights or other matters. With respect to pending
legal actions to which we are a party or of which any of our property is the subject, although the outcomes of these actions are
not generally determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on
our financial position, cash flows or results of operations. Litigation 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.
Item 1A. Risk Factors
When evaluating Microchip and its business, you should give careful consideration to the factors listed below, in
addition to the information provided elsewhere in this Form 10-Q and in other documents that we file with the Securities and
Exchange Commission.
Our operating results are impacted by global economic conditions and may fluctuate in the future due to a number of
factors that could reduce our net sales and profitability.
Our operating results are affected by a wide variety of factors that could reduce our net sales and profitability, many of
which are beyond our control. Some of the factors that may affect our operating results include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
general economic, industry or political conditions in the U.S. or internationally;
changes in demand or market acceptance of our products and products of our customers, and market
fluctuations in the industries into which such products are sold;
changes in utilization of our manufacturing capacity and fluctuations in manufacturing yields;
the mix of inventory we hold and our ability to satisfy orders from our inventory;
levels of inventories held by our customers;
risk of excess and obsolete inventories;
our ability to secure sufficient wafer foundry, assembly and testing capacity;
changes or fluctuations in customer order patterns and seasonality;
our ability to realize the expected benefits of our acquisitions;
competitive developments including pricing pressures;
unauthorized copying of our products resulting in pricing pressure and loss of sales;
availability of raw materials and equipment;
the level of orders that are received and can be shipped in a quarter;
the level of sell-through of our products through distribution;
fluctuations in the mix of products;
announcements of significant acquisitions;
changes in tax regulations and policies in the U.S. and other countries in which we do business;
disruptions in our business or our customers' businesses due to terrorist activity, armed conflict, war,
worldwide oil prices and supply, public health concerns, natural disasters or disruptions in the transportation
system;
constrained availability from other electronic suppliers impacting our customers' ability to ship their
products, which in turn may adversely impact our sales to those customers;
costs and outcomes of any current or future tax audits or any litigation involving intellectual property,
customers or other issues;
fluctuations in commodity prices; and
property damage or other losses, whether or not covered by insurance.
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 our future performance. In future periods, our operating results
may fall below our public guidance or the expectations of public market analysts and investors, which would likely have a
negative effect on the price of our common stock. Adverse global economic conditions, the subsequent economic recovery and
uncertainty surrounding the strength of such recovery have caused our operating results to fluctuate significantly and make
comparability between periods less meaningful.
37
Table of Contents
Our operating results will suffer if we ineffectively utilize our manufacturing capacity or fail to maintain manufacturing
yields.
The manufacture and assembly of integrated circuits, particularly non-volatile, erasable CMOS memory and logic
devices such as those that we produce, are complex processes. These processes are sensitive to a wide variety of factors,
including the level of contaminants in the manufacturing environment, impurities in the materials used, the performance of our
wafer fabrication and assembly and test personnel and equipment, and other quality issues. As is typical in the semiconductor
industry, we have from time to time experienced lower than anticipated manufacturing yields. Our operating results will suffer
if we are unable to maintain yields at 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. For example, in the third quarter of
fiscal 2012, we reduced wafer starts in both Fab 2 and Fab 4 to help control inventory balances in response to a slowdown in
global economic conditions. We continued with the reduced level of wafer starts through the first quarter of fiscal 2013. These
actions had a negative impact on our gross profit. We further reduced the wafer starts in our fabs in late September 2012 and
again during the quarter ended December 31, 2012 which continued to negatively impact our gross profit through the March
2013 quarter. We increased wafer starts modestly through the third quarter of fiscal 2014 but were still below normal capacity
levels.
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 customer orders that
are both received and shipped in that same quarter, which we refer to as turns orders. We measure turns orders at the beginning
of a quarter based on the orders needed to meet the shipment targets that we set entering the quarter. Historically, we have
relied on our ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing
orders with relatively short delivery schedules. Shorter lead times generally mean that turns orders as a percentage of our
business are relatively high in any particular quarter and reduce our backlog visibility on future product shipments. Turns
orders correlate to overall semiconductor industry conditions and product lead times. Because turns orders are difficult to
predict, varying levels of turns orders make our net sales more difficult to forecast. As a significant portion of our products are
manufactured at foundries, foundry lead times may affect our ability to achieve certain turns orders. If we do not achieve a
sufficient level of turns orders in a particular quarter relative to our revenue targets, our revenue and operating results will
likely suffer.
Intense competition in the markets we serve may lead to pricing pressures, reduced sales of our products or reduced market
share.
The semiconductor industry is intensely competitive and has been characterized by price erosion and rapid
technological change. We compete with major domestic and international semiconductor companies, many of which have
greater market recognition and substantially greater financial, technical, marketing, distribution and other resources than we do.
We may be unable to compete successfully in the future, which could harm our business. Our ability to compete successfully
depends on a number of factors both within and outside our control, including, but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
the quality, performance, reliability, features, ease of use, pricing and diversity of our products;
our success in designing and manufacturing new products including those implementing new technologies;
the rate at which customers incorporate our products into their own applications;
the rate at which the markets that we serve redesign and change their own products;
changes in demand in the markets that we serve and the overall rate of growth or contraction of such markets,
including but not limited to the automotive, personal computing and consumer electronics markets;
product introductions by our competitors;
the number, nature and success of our competitors in a given market;
our ability to obtain adequate foundry and assembly and test capacity and supplies of raw materials and other
supplies at acceptable prices;
our ability to protect our products and processes by effective utilization of intellectual property rights;
our ability to remain price competitive against companies that have copied our proprietary product lines,
especially in countries where intellectual property rights protection is difficult to achieve and maintain;
our ability to address the needs of our customers; and
general market and economic conditions.
38
Table of Contents
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, interface and mixed signal products have remained
relatively constant, while average selling prices of our memory and non-proprietary analog, interface and mixed signal products
have declined over time.
We have experienced, and expect to continue to experience, modest pricing declines in certain of our more mature
proprietary product lines, primarily due to competitive conditions. We have been able to moderate average selling price
declines in many of our proprietary product lines by continuing to introduce new products with more features and higher prices.
However, there can be no assurance that we will be able to do so in the future. We have experienced in the past, and expect to
continue to experience in the future, varying degrees of competitive pricing pressures in our memory 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.
We are dependent on wafer foundries and other contractors to perform key manufacturing functions for us, and our
licensees of our SuperFlash technology also rely on foundries and other contractors.
We rely on outside wafer foundries for a significant portion of our wafer fabrication needs. We also use several
contractors located in Asia for a portion of the assembly and testing of our products. Our reliance on third party contractors and
foundries increased as a result of our acquisition of SMSC. 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, operational or production
difficulties or situations when demand exceeds capacity, or if they were unable to maintain manufacturing yields, assembly and
test yields and costs at approximately their current levels, or if due to their locations in foreign countries they were to
experience political upheaval or infrastructure disruption. If these third parties are unable or unwilling to timely deliver
products or services conforming to our quality standards, we may not be able to qualify additional manufacturing sources for
our products in a timely manner or at all, or on terms favorable to us. Additionally, these subcontractors could abandon
fabrication processes that are important to us, or fail to adopt advanced manufacturing technologies that we desire to control
costs. In any such event, we could experience an interruption in production, an increase in manufacturing and production costs
or a decline in product reliability, and our business and operating results could be adversely affected. Further, use of these
subcontractors creates increased opportunities for potential misappropriation of our intellectual property.
Certain of our SuperFlash technology licensees also rely on outside wafer foundries for wafer fabrication services. If
the licensees were to experience any disruption in supply from the wafer foundries, this would reduce the revenue we receive in
our technology licensing business and would harm our operating results.
Our business is dependent on selling through distributors.
Sales through distributors accounted for approximately 54% of our net sales for the first nine months of fiscal 2014
and approximately 53% of our net sales in fiscal 2013. We do not have long-term agreements with our distributors and we and
our distributors may each terminate our relationship with little or no advance notice.
Any future adverse conditions in the U.S. or global economies or in the U.S. or global credit markets could materially
impact the operations of our distributors. Any deterioration in the financial condition of our distributors or any disruption in the
operations of our distributors could adversely impact the flow of our products to our end customers and adversely impact our
results of operation. In addition, during an industry or economic downturn, it is possible there will be an oversupply of
products and a decrease in sell-through of our products by our distributors which could reduce our net sales in a given period
and result in an increase in inventory returns. Violations of the Foreign Corrupt Practices Act, or similar laws, by our
distributors or other channel partners could have a material adverse impact on our business.
Our success depends on our ability to introduce new products on a timely basis.
Our future operating results 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:
•
•
proper new product selection;
timely completion and introduction of new product designs;
39
Table of Contents
•
procurement of licenses for intellectual property rights from third parties under commercially reasonable
terms;
timely filing and protection of intellectual property rights for new product designs;
availability of development and support tools and collateral literature that make complex new products easy
for engineers to understand and use; and
market acceptance of our customers' end products.
•
•
•
Because our products are complex, we have experienced delays from time to time in completing 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.
Our technology licensing business exposes us to various risks.
Our technology licensing business is based on our SuperFlash technology. The success of our licensing business will
depend on the continued market acceptance of this technology and on our ability to further develop and enhance such
technology and to introduce new technologies in the future. To be successful, any such technology must be able to be
repeatably implemented by licensees, provide satisfactory yield rates, address licensee and customer requirements, and perform
competitively. The success of our technology licensing business depends on various other factors, including, but not limited to:
•
•
•
•
•
•
•
proper identification of licensee requirements;
timely development and introduction of new or enhanced technology;
our ability to protect our intellectual property rights for our licensed technology;
our ability to limit our liability and indemnification obligations to licensees;
availability of sufficient development and support services to assist licensees in their design and manufacture
of products integrating our technology;
availability of foundry licensees with sufficient capacity to support OEM production; and
market acceptance of our customers' end products.
Because our SuperFlash technology is complex, there may be delays from time to time in developing and enhancing
such technology. There can be no assurance that our existing or any enhanced or new technology will achieve or maintain
substantial market acceptance. Our licensees may experience disruptions in production or lower than expected production
levels which would adversely affect the revenue that we receive from them. Our technology license agreements generally
include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs)
arising from intellectual property matters. We could be exposed to substantial liability for claims or damages related to
intellectual property matters or indemnification claims. Any claim, with or without merit, could result in significant legal fees
and require significant attention from our management. Any of the foregoing issues may adversely impact the success of our
licensing business and adversely affect our future operating results.
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 is subject to seasonally lower
revenues in the third and fourth quarters of our fiscal year. However, broad fluctuations in our overall business in recent
periods and changes in semiconductor industry and global economic conditions have had a more significant impact on our
results than seasonality, and have made it difficult to assess the impact of seasonal factors on our business. The industry has
also experienced significant economic downturns, characterized by diminished product demand and production over-capacity.
We have sought to reduce our exposure to this industry cyclically by selling proprietary products that cannot be easily or
quickly replaced to a geographically diverse base of customers across a broad range of market segments. However, we have
experienced substantial period-to-period fluctuations in operating results and expect, in the future, to experience period-toperiod fluctuations in operating results due to general industry or economic conditions.
40
Table of Contents
We may not fully realize the anticipated benefits of our completed or future acquisitions or divestitures, including our
acquisition of SMSC.
We have acquired, and expect in the future to acquire, additional businesses that we believe will complement or
augment our existing businesses. In this regard, on August 2, 2012, we completed our acquisition of SMSC, a publicly traded
semiconductor company. The integration process for our acquisitions may be complex, costly and time consuming and include
unanticipated issues, expenses and liabilities. We may not be able to successfully or profitably integrate, operate, maintain and
manage any newly acquired operations or employees. We may not be able to maintain uniform standards, procedures and
policies and we may be unable to realize the expected synergies and cost savings from the integration. There may be increased
risk due to integrating financial reporting and internal control systems. We may have difficulty in developing, manufacturing
and marketing the products of a newly acquired company, or in growing the business at the rate we anticipate. Following an
acquisition, we may not achieve the revenue or net income levels that justify the acquisition. We may suffer loss of key
employees, customers and strategic partners of acquired companies and it may be difficult to implement our corporate culture
at acquired companies. We may be subject to claims by terminated employees, shareholders of acquired companies and other
third parties related to the transaction. Acquisitions may also result in one-time charges (such as acquisition-related expenses,
write-offs, restructuring charges, or future impairment of goodwill), contingent liabilities, adverse tax consequences, additional
stock-based compensation expense and other charges that adversely affect our operating results. Additionally, we may fund
acquisitions of new businesses or strategic alliances by utilizing cash, borrowings under our credit agreement, raising debt,
issuing shares of common stock, or other mechanisms.
Further, when we decide to sell assets or a business, we may encounter difficulty in finding or completing divestiture
opportunities or alternative exit strategies on acceptable terms or in a timely manner. These circumstances could delay the
accomplishment of our strategic objectives or cause us to incur additional expenses with respect to a business that we want to
dispose of, or we may dispose of a business at a price or on terms that are less favorable than we had anticipated. Even
following a divestiture, we may be contractually obligated with respect to certain continuing obligations to customers, vendors
or other third parties and such obligations may have a material adverse impact on our results of operation and financial
condition.
In addition to acquisitions, we have in the past and expect in the future to enter into joint development agreements or
other business or strategic relationships with other companies. These transactions are subject to a number of risks similar to
those we face with our acquisitions including our ability to realize the expected benefits of any such transaction, to successfully
market and sell any products resulting from such transactions or to successfully integrate any technology developed through
such transactions.
We may lose sales if our suppliers of raw materials and equipment fail to meet our needs.
Our semiconductor manufacturing operations require raw and processed materials and equipment that must meet
exacting standards. We generally have more than one source for these supplies, but there are only a limited number of suppliers
capable of delivering various materials and equipment that meet our standards. The materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of semiconductors in product applications increases.
Additionally, consolidation in our supply chain due to mergers and acquisitions may reduce the number of suppliers or change
the relationships that we have with our suppliers. This could impair sourcing flexibility or increase costs. We have
experienced supply shortages from time to time in the past, and on occasion our suppliers have told us they need more time
than expected to fill our orders or that they will no longer support certain equipment with updates or spare and replacement
parts. An interruption of any materials or equipment sources, or the lack of supplier support for a particular piece of
equipment, could harm our business.
We are exposed to various risks related to legal proceedings or claims.
We are currently, and in the future may be, involved in legal proceedings or claims regarding patent infringement,
other intellectual property rights, contracts and other matters. As is typical in the semiconductor industry, we receive
notifications from customers or licensees from time to time who believe that we owe them indemnification or other obligations
related to infringement claims made against us, the customers or licensees by third parties. These legal proceedings and claims,
even if meritless, could result in substantial cost to us and divert our resources. If we are not able to resolve a claim, settle a
matter, obtain necessary licenses on commercially reasonable terms, reengineer our products or processes to avoid
infringement, and/or successfully prosecute or defend our position, we could incur uninsured liability in any of them, be
required to take an appropriate charge to operations, be enjoined from selling a material portion of our products or using certain
processes, suffer a reduction or elimination in the value of our inventories, and our business, financial condition or results of
operations could be harmed.
41
Table of Contents
It is also possible that from time to time we may be subject to claims related to the manufacture, performance or use of
our products. These claims may be due to injuries or environmental exposures related to manufacturing, a product's
nonconformance to our specifications, or specifications agreed upon with the customer, changes in our manufacturing
processes, or unexpected end customer system issues due to the interaction with our products or insufficient design or testing
by our customers. We could incur significant expenses related to such matters, including, but not limited to:
•
•
•
•
•
•
•
costs related to writing off the value of our inventory of nonconforming products;
recalling nonconforming products;
providing support services, product replacements, or modifications to products and the defense of such
claims;
diversion of resources from other projects;
lost revenue or a delay in the recognition of revenue due to cancellation of orders 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, our
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, certain of our contracts may not exclude
such liabilities. Further, our ability to avoid such liabilities may be limited by applicable law. We do have liability insurance
which covers certain damages arising out of product defects, but we do not expect that insurance will cover all claims or be of a
sufficient amount to fully protect against such claims. Costs or payments we may make in connection with these customer
claims may adversely affect the results of our operations.
Further, we sell to customers in industries such as automotive, aerospace, 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 system failures. We will face increased exposure to claims if there are substantial
increases in either the volume of our sales into these applications or the frequency of system failures integrating our products.
Failure to adequately protect our intellectual property could result in lost revenue or market opportunities.
Our ability to obtain patents, licenses and other intellectual property rights covering our products and manufacturing
processes is important for our success. To that end, we have acquired certain patents and patent licenses and intend to continue
to seek patents on our technology and manufacturing processes. The process of seeking patent protection can be long and
expensive, and patents may not be issued from currently pending or future applications. In addition, our existing and new
patents, trademarks and copyrights that issue may not 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, patent offices of a foreign country or U.S. or foreign courts, which can require significant financial and
management resources. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the
same extent as the laws of the U.S. Infringement of our intellectual property rights by a third party could result in
uncompensated lost market and revenue opportunities for us. Although we continue to vigorously and aggressively defend and
protect our intellectual property on a worldwide basis, there can be no assurance that we will be successful in our endeavors.
Our operating results may be adversely impacted if economic conditions impact the financial viability of our licensees,
customers, distributors, or suppliers.
We regularly review the financial performance of our licensees, customers, distributors and suppliers. However, any
downturn in global economic conditions may adversely impact the financial viability of our licensees, customers, distributors
or suppliers. The financial failure of a large licensee, customer or distributor, an important supplier, or a group thereof, could
have an adverse impact on our operating results and could result in our not being able to collect our accounts receivable
balances, higher reserves for doubtful accounts, write-offs for accounts receivable, and higher operating costs as a percentage
of revenues.
42
Table of Contents
We do not typically have long-term contracts with our customers, but where we do, certain terms of such contracts may
expose us to risks and liabilities.
We do not typically enter into long-term contracts with our customers and we cannot be certain about future order
levels from our customers. When we do enter into customer contracts, the contract is generally cancelable at the convenience
of the customer. Even though we had approximately 84,000 customers and our ten largest direct customers made up
approximately 10% of our total revenue for the nine months ended December 31, 2013, cancellation of customer contracts
could have an adverse impact on our revenue and profits.
We have entered into contracts with certain customers that differ from our standard terms of sale. Further, as a result
of our acquisition of SMSC, we inherited certain customer contracts that differ from our standard terms of sale. For several of
the significant markets that we sell into, such as the automotive and personal computer markets, our current or potential
customers may possess significant leverage over us in negotiating the terms and conditions of supply as a result of their market
size and position. For example, under certain contracts we may commit to supply specific quantities of products on scheduled
delivery dates, or agree to extend our obligations for certain liabilities such as warranties or indemnification for quality issues
or claims of intellectual property infringement. If we are unable to supply the customer as required under the contract, the
customer may incur additional production costs, lost revenues due to subsequent delays in their own manufacturing schedule,
or quality-related issues. We may be liable for the customer's costs, expenses and damages associated with their claims and we
may be obligated to defend the customer against claims of intellectual property infringement and pay the associated legal fees.
While we try to limit the number of contracts that we sign which contain such special provisions, manage the risks underlying
such liabilities, and set caps on our liability exposure, sometimes we may not be able to do so. In order to win important
designs, avoid losing business to competitors, maintain existing business, or be permitted to bid on new business, we have
been, and may in the future be, forced to agree to uncapped liability for such items as intellectual property infringement or
confidentiality. Such provisions expose us to risk of liability far exceeding the purchase price of the products we sell under
such contracts, the lifetime revenues we receive from such products, or various forms of potential consequential damages.
These significant additional risks could result in a material adverse impact on our results of operation and financial condition.
We must attract and retain qualified personnel to be successful, and competition for qualified personnel can be intense.
Our success depends upon the efforts and abilities of our senior management, engineering, manufacturing and other
personnel. The competition for qualified engineering and management personnel can be intense. We may be unsuccessful in
retaining our existing key personnel or in attracting and retaining additional key personnel that we require. The loss of the
services of one or more of our key personnel or the inability to add key personnel could harm our business. The loss of, or any
inability to attract personnel, even if not key personnel, if experienced in sufficient numbers could harm our business. We have
no employment agreements with any member of our senior management team.
Business interruptions to our operations or the operations of our key vendors, subcontractors, licensees or customers,
whether due to natural disasters or other events, could harm our business.
Operations at any of our facilities, at the facilities of any of our wafer fabrication or assembly and test subcontractors,
or at any of our significant vendors or customers may be disrupted for reasons beyond our control. These reasons may include
work stoppages, power loss, incidents of terrorism or security risk, political instability, public health issues,
telecommunications, transportation or other infrastructure failure, radioactive contamination, fire, earthquake, floods, volcanic
eruptions or other natural disasters. We have taken steps to mitigate the impact of some of these events should they occur;
however, we cannot be certain that our actions will be effective to avoid a significant impact on our business in the event of a
disaster or other business interruption.
In particular, Thailand has experienced periods of severe flooding in recent years; however, our facilities in Thailand
have continued to operate normally. There can be no assurance that any future flooding in Thailand would not have a material
adverse impact on our operations. If operations at any of our facilities, or our subcontractors' facilities are interrupted, we may
not be able to shift production to other facilities on a timely basis, and we may need to spend significant amounts to repair or
replace our facilities and equipment. If we experienced business interruptions, we would likely experience delays in shipments
of products to our customers and alternate sources for production may be unavailable on acceptable terms. This could result in
reduced revenues and profits and the cancellation of orders or loss of customers. Although we maintain business interruption
insurance, such insurance will likely not be enough to compensate us for any losses that may occur and any losses or damages
incurred by us as a result of business interruptions could significantly harm our business.
43
Table of Contents
Additionally, as described above, operations at our customers and licensees may be disrupted for a number of reasons.
In the event of customer disruptions, sales of our products may decline and our revenue, profitability and financial condition
could suffer. Likewise, if our licensees are unable to manufacture and ship products incorporating our technology, or if there is
a decrease in product demand due to a business disruption, our royalty revenue may decline as our licenses are based on per
unit royalties.
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 the first nine months of fiscal
2014, approximately 84% of our net sales were made to foreign customers, including 29% in China. During fiscal 2013,
approximately 83% of our net sales were made to foreign customers, including 27% in China. A strong position in the Chinese
market is a key component of our global growth strategy. The market for integrated circuit products in China is highly
competitive, and both international and domestic competitors are aggressively seeking to increase their market share. Increased
competition in the China market may make it difficult for us to achieve our desired sales volumes in China. 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 is currently experiencing political instability, and has experienced
periods of political instability in the past. From time to time, Thailand has also experienced periods of severe flooding. There
can be no assurance that any future flooding in Thailand would not have a material adverse impact on our operations. We use
various foreign contractors for a significant portion of our assembly and testing and 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:
•
•
•
•
•
•
•
•
•
•
•
•
political, social and economic instability;
economic uncertainty in the worldwide markets served by us;
public health conditions;
trade restrictions and changes in tariffs;
import and export license requirements and restrictions;
changes in rules and laws related to taxes, environmental, health and safety, technical standards and consumer
protection in various jurisdictions;
difficulties in staffing and managing international operations;
employment regulations;
disruptions in international transport or delivery;
difficulties in collecting receivables and longer payment cycles;
currency fluctuations and foreign exchange regulations; and
potentially adverse tax consequences.
If any of these risks materialize, or are worse than we anticipate, our sales could decrease and our operating results
could suffer.
Fluctuations in foreign currency exchange rates could adversely impact our operating results.
We use forward currency exchange contracts in an attempt to reduce the adverse earnings impact from the effect of
exchange rate fluctuations on our non-U.S. dollar net balance sheet exposures. Nevertheless, in periods when the U.S. dollar
significantly fluctuates in relation to the non-U.S. currencies in which we transact business, the value of our non-U.S. dollar
transactions can have an adverse effect on our results of operations and financial condition. In particular, in periods when a
foreign currency significantly declines in value in relation to the U.S. dollar, such as past declines in the Euro relative to the
U.S. dollar, customers transacting in that foreign currency may find it more difficult to fulfill their previously committed
contractual obligations or to undertake new obligations to make payments or purchase products. In periods when the U.S.
dollar is significantly declining in relation to the British pound, Euro and Thai baht, the operational costs in our European and
Thailand subsidiaries are adversely affected.
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 disruption to our systems or networks, including, but not limited to, new system
implementations, computer viruses, security breaches, facility issues, natural disasters, terrorism, war, telecommunication
44
Table of Contents
failures or energy blackouts could have a material adverse impact on our operations, sales and operating results. Such
disruption could result in a loss of our intellectual property or the release of sensitive competitive information or supplier,
customer or employee personal data. Any loss of such information could harm our competitive position, result in a loss of
customer confidence, and cause us to incur significant costs to remedy the damages caused by the disruptions or security
breaches. Additionally, as there has been increased legislation in the U.S., Europe and elsewhere regarding the handling of
personal data, including the data of employees and customers, such a failure may result in regulatory penalties, enforcement
actions, remediation obligations and litigation. There is also risk that we may be found not to comply with laws or regulations
regarding the collection, consent, handling, transfer, or disposal of personal data. Fines and other sanctions may result.
From time to time, we have experienced verifiable attacks on our data, attempts to breach our security and attempts to
introduce malicious software into our IT systems; however, such attacks have not previously resulted in any material damage to
us. Were future attacks successful, we may be unaware of the incident, its magnitude, or its effects until significant harm is
done. In recent years, we have implemented improvements to our protective measures which are not limited to the following:
firewalls, antivirus measures, patches, log monitors, routine backups with offsite retention of storage media, system audits, data
partitioning and routine password modifications. There can be no assurance that such system improvements will be sufficient
to prevent or limit the damage from any future cyber attack or disruptions. Any such attack or disruption could result in
additional costs related to rebuilding of internal systems, defending litigation, responding to regulatory actions, or paying
damages. Such attacks or disruption could have a material adverse impact on our business, operations and financial results.
Third-party service providers, such as foundries, assembly and test contractors, distributors, credit card processors and
other vendors have access to certain portions of our sensitive data. In the event that these service providers do not properly
safeguard our data that they hold, security breaches and loss of our data could result. Any such loss of data by our third-party
service providers could negatively impact our business, operations and financial results.
The occurrence of events for which we are self-insured, or which exceed our insurance limits, may adversely affect our
profitability and liquidity.
We have insurance contracts with independent insurance companies related to many different types of risk; however,
we self-insure for some potentially significant risks and obligations. In these circumstances, we believe that it is more cost
effective for us to self-insure certain risks than to pay the high premium costs. The risks and exposures that we self-insure
include, but are not limited to certain property, product defects, employment risks, political risks, and intellectual property
matters. Should there be a loss or adverse judgment or other decision in an area for which we are self-insured, then our
financial condition, results of operations and liquidity may be adversely affected.
We are subject to stringent environmental and other regulations, which may force us to incur significant expenses.
We must comply with many federal, state, local and foreign governmental regulations related to the use, storage,
discharge and disposal of toxic, volatile or otherwise hazardous substances used in our products and manufacturing processes.
Our failure to comply with applicable regulations could result in fines, suspension of production, cessation of operations or
future liabilities. Such environmental regulations have required us in the past, and could require us in the future to buy costly
equipment or to incur significant expenses to comply with such regulations. Our failure to control the use of, or adequately
restrict the discharge of, hazardous substances could impact the health of our employees and others and could impact our ability
to operate. Such failure could also restrict our ability to ship certain products to certain countries, require us to modify our
operations logistics, or require us to incur other significant costs and expenses. There is a continuing expansion in
environmental laws with a focus on reducing or eliminating hazardous substances and substances of high concern in electronic
products and shipping materials. These and other future environmental regulations could require us to reengineer certain of our
existing products and may make it more expensive for us to manufacture, sell and ship our products. In addition, the number
and complexity of laws focused on the energy efficiency of electronic products and accessories, the recycling of electronic
products, and the reduction in quantity and the recycling of packing materials have expanded significantly. It may be difficult
for us to timely comply with these laws and we may not have sufficient quantities of compliant products to meet customers'
needs, thereby adversely impacting our sales and profitability. We may also have to write off inventory in the event that we
hold inventory that is not saleable as a result of changes to regulations or customer requirements. We expect these risks and
trends to continue. In addition, we anticipate increased customer requirements to meet voluntary criteria related to the
reduction or elimination of substances of high concern in our products and energy efficiency measures. These requirements
may increase our own costs, as well as those passed on to us by our supply chain.
45
Table of Contents
Customer demands for us to implement business practices that are more stringent than applicable legal requirements may
reduce our revenue opportunities or cause us to incur higher costs.
Some of our customers and potential customers are more frequently requiring that we implement operating practices
that are more stringent than what is required by applicable laws with respect to workplace and labor requirements, the type of
materials we use in our products, environmental matters or other items. To comply with such requirements, we may have to
pass these same operating practices on to our suppliers. Our suppliers may refuse to implement these operating practices, or
may charge us more for complying with them. The cost to implement such practices may cause us to incur higher costs and
reduce our profitability, and if we choose not to implement such practices, such customers may disqualify us as a supplier,
resulting in decreased revenue opportunities. Developing, administering, monitoring and auditing these customer-requested
practices at our own sites and those in our supply chain will increase our costs and may require that we hire more personnel.
Customer demands and new regulations related to conflict-free minerals may force us to incur additional expenses.
As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012, the SEC released
new disclosure and reporting requirements regarding the use of “conflict” minerals necessary to the functionality or production
of products mined from the Democratic Republic of Congo and adjoining countries in products, whether or not these products
are manufactured by third parties. Other countries are considering similar regulations. As we implement these new
requirements, if it is determined that we are using other than conflict-free minerals, customers may demand us to change the
sourcing of minerals used in the manufacture of semiconductor devices (including our products), even if the costs for
acceptable minerals significantly increases and availability is limited. There will likely be additional costs associated with
complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our
products. Also, since our supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify
the origins for all metals used in our products through the procedures we may implement. We may also encounter challenges to
satisfy those customers who require that all of the components of our products are certified as conflict free. If we are not able
to meet customer requirements, customers may choose to disqualify us as a supplier and we may have to write off inventory in
the event that it cannot be sold.
Regulatory authorities in jurisdictions into which we ship our products could levy fines or restrict our ability to export
products.
A significant portion of our sales are made outside of the U.S. through the exporting and re-exporting of products. In
addition to local jurisdictions' export regulations, our U.S.-manufactured products or products based on U.S. technology are
subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the Foreign Corrupt
Practices Act, Export Administration Regulations (EAR), and trade sanctions against embargoed countries and destinations
administered by the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC). Licenses or proper license
exceptions are required for the shipment of our products to certain countries. A determination by the U.S. or foreign
government that we have failed to comply with these or other export regulations or anti-bribery regulations can result in
penalties which may include denial of export privileges, fines, civil or criminal penalties, and seizure of products. Such
penalties could have a material adverse effect on our business, sales and earnings. Further, a change in these laws and
regulations could restrict our ability to export to previously permitted countries, customers, distributors or other third parties.
Any one or more of these sanctions or a change in laws or regulations could have a material adverse effect on our business,
financial condition and results of operations.
The outcome of currently ongoing and future examinations of our income tax returns by the IRS could have an adverse
effect on our results of operations.
We are subject to examination of our income tax returns by the IRS and other tax authorities for fiscal 2011 and later.
SMSC is currently under IRS audit for fiscal 2011 and 2012. We are subject to certain income tax examinations in foreign
jurisdictions for fiscal 2005 and later. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from
these continuing examinations will not have an adverse effect on our future operating results.
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate in the future.
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of
which are beyond our control, including, but not limited to:
46
Table of Contents
•
•
•
•
•
•
•
quarterly variations in our operating results or the operating results of other technology companies;
general conditions in the semiconductor industry;
global economic and financial conditions;
changes in analysts' estimates of our financial performance or buy/sell recommendations;
changes in our financial guidance or our failure to meet such guidance;
any acquisitions we pursue or complete; and
actual or anticipated announcements of technical innovations or new products by us or our competitors.
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have
affected the market prices for many companies and that often have been unrelated to the operating performance of such
companies. These broad market fluctuations and other factors have harmed and may harm the market price of our common
stock. Some or all of the foregoing factors could also cause the market price of our convertible debentures to decline or
fluctuate substantially.
We may in the future incur impairments to goodwill or long-lived assets.
We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth
fiscal quarter or whenever events or changes in circumstances indicate that the carrying amount of those assets may not be
recoverable. Factors that may be considered in assessing whether goodwill or intangible assets may not be recoverable include
a decline in our stock price or market capitalization, reduced estimates of future cash flows and slower growth rates in our
industry. Our valuation methodology for assessing impairment requires management to make judgments and assumptions
based on historical experience and to rely heavily on projections of future operating performance. Because we operate in
highly competitive environments, projections of our future operating results and cash flows may vary significantly from our
actual results. No goodwill or long-lived asset impairment charges were recorded in fiscal 2012 or fiscal 2013.
Our financial condition and results of operations could be adversely affected if we do not effectively manage our current or
future debt.
In June 2013, we entered into a $2.0 billion credit agreement. At December 31, 2013, we had $650.0 million in
outstanding borrowings under such credit agreement. In December 2007, we sold $1.15 billion of principal value 2.125%
junior subordinated convertible debentures. As a result of such transactions, we have a substantially greater amount of debt
than we had maintained in the past. Our maintenance of substantial levels of debt could adversely affect our ability to take
advantage of corporate opportunities and could adversely affect our financial condition and results of operations. We may need
or desire to refinance all or a portion of our loans under our credit agreement, our debentures or any other future indebtedness
and there can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms, if at
all.
Conversion of our debentures will dilute the ownership interest of existing stockholders, including holders who had
previously converted their debentures.
The conversion of some or all of our outstanding debentures will dilute the ownership interest of existing stockholders
to the extent we deliver common stock upon conversion of the debentures. Upon conversion, we may satisfy our conversion
obligation by delivering cash, shares of common stock or any combination, at our option. If upon conversion we elect to
deliver cash for the lesser of the conversion value and principal amount of the debentures, we would pay the holder the cash
value of the applicable number of shares of our common stock. Upon conversion, we intend to satisfy the lesser of the
principal amount or the conversion value of the debentures in cash. If the conversion value of a debenture exceeds the
principal amount of the debenture, we may also elect to deliver cash in lieu of common stock for the conversion value in excess
of the one thousand dollars principal amount (i.e., the conversion spread). There would be no adjustment to the numerator in
the net income per common share computation for the cash settled portion of the debentures as that portion of the debt
instrument will always be settled in cash. The conversion spread will be included in the denominator for the computation of
diluted net income per common share. Any sales in the public market of any common stock issuable upon conversion of our
debentures could adversely affect prevailing market prices of our common stock. In addition, the existence of the debentures
may encourage short selling by market participants because the conversion of the debentures could be used to satisfy short
positions, or anticipated conversion of the debentures into shares of our common stock could depress the price of our common
stock.
47
Table of Contents
Our reported financial results may be adversely affected by new accounting pronouncements or changes in existing
accounting standards and practices.
We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These
accounting principles are subject to interpretation or changes by the FASB and the SEC. New accounting pronouncements and
varying interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future.
New accounting pronouncements or a change in the interpretation of existing accounting standards or practices may have a
significant effect on our reported financial results and may even affect our reporting of transactions completed before the
change is announced or effective.
Potential U.S. tax legislation regarding our foreign earnings could materially and adversely impact our business and financial
results.
Currently, a majority of our revenue is generated from customers located outside the U.S., and a substantial portion of
our assets, including employees, are located outside the U.S. Present U.S. income taxes and foreign withholding taxes have not
been provided on undistributed earnings for certain of our non-U.S. subsidiaries, because such earnings are intended to be
indefinitely reinvested in the operations of those subsidiaries. In recent years, there have been a number of initiatives proposed
by the Obama administration and members of Congress regarding the tax treatment of such undistributed earnings. If adopted,
certain of these initiatives would substantially reduce our ability to defer U.S. taxes including repealing the deferral of U.S.
taxation of foreign earnings, eliminating utilization of or substantially reducing our ability to claim foreign tax credits, and
eliminating various tax deductions until foreign earnings are repatriated to the U.S. Changes in tax law such as these proposals
could have a material negative impact on our financial position and results of operations.
Credit conditions have adversely impacted our holdings of auction rate securities (ARS).
At December 31, 2013, $9.8 million of the fair value of our investment portfolio was invested in ARS. With the
continuing liquidity issues in the global credit and capital markets, our ARS have experienced multiple failed auctions and are
not liquid. 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. The fair value of the failed ARS of $9.8 million has been estimated based on market information and estimates
determined by management and could change significantly based on market conditions. 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 impairment charge to earnings.
The majority of our short and long-term investments are in highly rated government agency bonds and corporate
bonds. Other than with respect to our holdings of ARS, we have not experienced any liquidity or impairment issues with such
investments. However, there can be no assurance that credit market conditions will not in the future adversely affect the
liquidity or value of our non-ARS investments.
Climate change regulations and sustained adverse climate change poses both regulatory and physical risks that could harm
our results of operations or affect the way we conduct our business.
Climate change regulations could require us to limit emissions, change our manufacturing processes, obtain substitute
materials which may cost more or be less available, increase our investment in control technology for greenhouse gas
emissions, fund offset projects or undertake other costly activities. These regulations could significantly increase our costs and
restrict our manufacturing operations by virtue of requirements for new equipment. New permits may be required for our
current operations, or expansions thereof. Failure to timely receive permits could result in fines, suspension of production, or
cessation of operations at one or more facilities. In addition, restrictions on carbon dioxide or other greenhouse gas emissions
could result in significant costs such as higher energy costs, and utility companies passing down carbon taxes, emission cap and
trade programs and renewable portfolio standards. The cost of complying, or of failing to comply, with these and other climate
change and emissions regulations could have an adverse effect on our operating results.
Further, any sustained adverse change in climate could have a direct adverse economic impact on us, such as water
and power shortages, higher costs for water or energy to control the temperature inside of our facilities. Certain of our
operations are located in arid or tropical regions, such as Thailand and Arizona. Some environmental experts predict that these
regions may become vulnerable to storms, severe floods and droughts due to climate change. While we maintain business
recovery plans that are intended to allow us to recover from natural disasters or other events that can interrupt business, we
cannot be certain that our plans will protect us from all such disasters or events.
48
Table of Contents
Item 6. Exhibits
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of
Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
49
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date:
February 7, 2014
By: /s/ J. Eric Bjornholt
J. Eric Bjornholt
Vice President and Chief Financial Officer
(Duly Authorized Officer, and
Principal Financial and Accounting Officer)
50
Exhibit 31.1
CERTIFICATION
I, Steve Sanghi, certify that:
1.
I have reviewed this Form 10-Q of Microchip Technology Incorporated;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and l5d-l5(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
5.
Date:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
February 7, 2014
/s/ Steve Sanghi
Steve Sanghi
President and CEO
Exhibit 31.2
CERTIFICATION
I, J. Eric Bjornholt, certify that:
1.
I have reviewed this Form 10-Q of Microchip Technology Incorporated;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and l5d-l5(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
5.
Date:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
February 7, 2014
/s/ J. Eric Bjornholt
J. Eric Bjornholt
Vice President and CFO
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Steve Sanghi, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that the Quarterly Report of Microchip Technology Incorporated on Form 10-Q for the quarterly period ended
December 31, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of
operations of Microchip Technology Incorporated.
By:
Name:
Title:
Date:
/s/ Steve Sanghi
Steve Sanghi
President and Chief Executive Officer
February 7, 2014
I, J. Eric Bjornholt, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that the Quarterly Report of Microchip Technology Incorporated on Form 10-Q for the quarterly period ended
December 31, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of
operations of Microchip Technology Incorporated.
By:
Name:
Title:
Date:
/s/ J. Eric Bjornholt
J. Eric Bjornholt
Vice President and Chief Financial Officer
February 7, 2014
Was this manual useful for you? yes no
Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Download PDF

advertising