form10-k.htm
UNITED
STATES SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x Annual
report pursuant to section 13 or 15(d) of the securities exchange act of
1934
For the fiscal year ended March 31,
2008
o Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the transition period from
__________ to __________
Commission
File Number: 0-21184
MICROCHIP
TECHNOLOGY INCORPORATED
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
|
86-0629024
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(IRS
Employer
Identification
No.)
|
2355
W. Chandler Blvd., Chandler, AZ 85224
(Address
of Principal Executive Offices, Including Zip Code)
(480)
792-7200
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each
Class
|
Name of Each Exchange
on Which Registered
|
Common
Stock, $0.001 Par Value Per Share
|
Nasdaq
Global Market
|
Preferred
Share Purchase Rights
|
None
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.ýYes¨No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.¨YesýNo
Indicate by checkmark whether the
Registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days: ýYes¨No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of Form 10-K or any
amendment to this Form 10-K¨
Indicate
by check mark whether the registrant is large accelerated filer, an accelerated
filed, or a non-accelerated filer, or smaller reporting
company. See definitions of “large accelerated filer” “accelerated
file” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
|
ý
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).¨YesýNo
Aggregate
market value of the voting and non-voting common equity held by non-affiliates
as of September 28, 2007 based upon the closing price of the common stock as
reported by The NASDAQ® Global
Market on such date was approximately $7,668,164,565.
Number of
shares of Common Stock, $.001 par value, outstanding as of May 22, 2008: 184,952,497.
|
Documents Incorporated
by Reference
|
|
Document
|
|
Part of Form
10-K
|
Proxy
Statement for the 2008 Annual Meeting of Stockholders
|
III
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
FORM
10-K
TABLE
OF CONTENTS
This
Form 10-K contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding our strategy and future financial
performance and those statements identified under "Item 7 - Note Regarding
Forward-looking Statements.” Our actual results could differ
materially from the results described in these forward-looking statements as a
result of certain factors including those set forth under “Item 1A – Risk
Factors,” beginning below at page 10, and elsewhere in this Form
10-K. Although we believe that the matters reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place
undue reliance on these forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking
statement.
We
develop and manufacture specialized semiconductor products used by our customers
for a wide variety of embedded control applications. Our product
portfolio comprises 8-bit, 16-bit, and 32-bit PIC®
microcontrollers and 16-bit dsPIC® digital
signal controllers, which feature on-board Flash (reprogrammable) memory
technology. In addition, we offer a broad spectrum of
high-performance linear, mixed-signal, power management, thermal management,
battery management and interface devices. We also make serial
EEPROMs. Our synergistic product portfolio targets thousands of
applications and a growing demand for high-performance designs in the
automotive, communications, computing, consumer and industrial control
markets. Our quality systems are ISO/TS16949 (2002 version)
certified.
Microchip
Technology Incorporated was incorporated in Delaware in 1989. In this
Form 10-K, “we,” “us,” and “our” each refers to Microchip Technology
Incorporated and its subsidiaries. Our executive offices are located
at 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone
number is (480) 792-7200.
Our
Internet address is www.microchip.com. We
post the following filings on our website as soon as reasonably practicable
after they are electronically filed with or furnished to the Securities and
Exchange Commission:
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·
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our
annual report on Form 10-K
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·
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our
quarterly reports on Form 10-Q
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·
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our
current reports on Form 8-K
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·
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any
amendments to the above-listed reports filed or furnished pursuant to
Sections 13(a) or 15(d) of the Securities Exchange Act of
1934
|
All SEC
filings on our website are available free of charge. The information
on our website is not
incorporated into this Form 10-K.
Industry
Background
Competitive
pressures require manufacturers of a wide variety of products to expand product
functionality and provide differentiation while maintaining or reducing
cost. To address these requirements, manufacturers often use
integrated circuit-based embedded control systems that enable them
to:
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·
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differentiate
their products
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·
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replace
less efficient electromechanical control
devices
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·
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reduce
the number of components in their
system
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add
product functionality
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·
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decrease
time to market for their products
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·
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significantly
reduce product cost
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Embedded
control systems have been incorporated into thousands of products and
subassemblies in a wide variety of applications and markets worldwide,
including:
|
·
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automotive
comfort, safety and entertainment
applications
|
|
·
|
cordless
and cellular telephone
|
|
·
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educational
and entertainment devices
|
Embedded
control systems typically incorporate a microcontroller as the principal active,
and sometimes sole, component. A microcontroller is a self-contained
computer-on-a-chip consisting of a central processing unit, non-volatile program
memory, random access memory for data storage and various input/output
peripheral capabilities. In addition to the microcontroller, a
complete embedded control system incorporates application-specific software and
may include specialized peripheral device controllers, non-volatile memory
components such as EEPROMs, and various analog and interface
products.
The
increasing demand for embedded control has made the market for microcontrollers
one of the larger segments of the semiconductor market at approximately
$14 billion in calendar year 2007. Microcontrollers are
currently available in 4-bit through 32-bit architectures. 4-bit
microcontrollers are relatively inexpensive, but they generally lack the minimum
functionality required in most applications and are typically used in relatively
simple applications. 8-bit microcontrollers remain very
cost-effective for a wide range of high volume embedded control applications
and, as a result, continue to represent the largest portion of the overall
microcontroller market. 16-bit and 32-bit microcontrollers provide
higher performance and functionality, and are generally found in more complex
embedded control applications.
Many of
the microcontrollers shipped today are ROM-based and must be programmed by the
semiconductor supplier during manufacturing, resulting in long lead times, based
on market conditions, for delivery of such microcontrollers. In
addition to delayed product introduction, these long lead times can result in
potential inventory obsolescence and temporary factory shutdowns when changes in
the firmware are required. To address these issues, we offer programmable
microcontrollers that can be configured by the customer in the customer’s
manufacturing line, thus significantly reducing lead time and inventory risks
when the inevitable firmware changes occur. While these
microcontrollers were initially expensive relative to ROM-based
microcontrollers, manufacturing technology has evolved over time to the point
where reprogrammable microcontrollers are now available for little to no premium
over ROM-based microcontrollers, thus providing significant value to
microcontroller customers. As a result, reprogrammable
microcontrollers are the fastest growing segment of the microcontroller
market.
Our
Products
Our
strategic focus is on embedded control solutions, including:
|
·
|
analog
and interface products
|
We
provide highly cost-effective embedded control solutions that also offer the
advantages of small size, high performance, low voltage/power operation and ease
of development, enabling timely and cost-effective embedded control product
integration by our customers.
Microcontrollers
We offer
a broad family of microcontroller products featuring our unique, proprietary
architecture marketed under the PIC® brand
name. We believe that our PIC product family is a price/performance
leader in the worldwide microcontroller market. We have shipped over
6 billion PIC microcontrollers to customers worldwide since their introduction
in 1990. Our PIC products are designed for applications requiring
field-programmability, high performance, low power and cost
effectiveness. They feature a variety of memory technology
configurations, low voltage and power, small footprint and ease of
use. Our performance results from a product architecture which
features dual data and instruction pathways, referred to as a Harvard dual-bus
architecture; a Reduced Instruction Set Computer, referred to as RISC; and
variable length instructions; all of which provide significant speed advantages
over alternative single-bus, Complex Instruction Set Computer architectures,
referred to as CISC. With over 550 microcontrollers in our product
portfolio, we target the 8-bit, 16-bit, and 32-bit microcontroller
markets.
Digital
Signal Controllers (DSC) are a subset of our 16-bit microcontroller
offering. Our dsPIC® Digital Signal
Controller families integrate the control features of high-performance 16-bit
microcontrollers with the computation capabilities of Digital Signal Processors
(DSPs), along with a wide variety of peripheral functions making them suitable
for a large number of embedded control applications. Our dsPIC
product family offers a broad suite of hardware and software development tools,
software application libraries, development boards and reference designs to ease
and expedite the customer application development cycle. With its
field-re-programmability, large selection of peripheral functions, small
footprint and ease of use, we believe that our dsPIC Digital Signal Controllers
enlarge our addressable market.
We have
used our manufacturing experience and design and process technology to bring
additional enhancements and manufacturing efficiencies to the development and
production of our PIC family of microcontroller products. Our
extensive experience base has enabled us to develop our advanced, low cost user
programmability feature by incorporating non-volatile memory, such as Flash,
EEPROM and EPROM Memory, into the microcontroller, and to be a leader in
reprogrammable microcontroller product offerings.
Development
Tools
We offer
a comprehensive set of low-cost and easy-to-learn application development
tools. These tools enable system designers to quickly and easily
program a PIC microcontroller and dsPIC Digital Signal Controllers for specific
applications and, we believe are a key factor for obtaining design
wins.
Our
family of development tools operates in the standard Windows®
environment on standard PC hardware. These tools range from
entry-level systems, which include an assembler and programmer or in-circuit
debugging hardware, to fully configured systems that provide in-circuit
emulation hardware. Customers moving from entry-level designs to
those requiring real-time emulation are able to preserve their investment in
learning and tools as they migrate to future PIC devices since all of our
systems share the same integrated development environment.
Many
independent companies also develop and market application development tools that
support our standard microcontroller product architecture. Currently,
there are more than 190 third-party tool suppliers worldwide whose products
support our proprietary microcontroller architecture.
We
believe that familiarity with and adoption of both our and third-party
development tools by an increasing number of product designers will be an
important factor in the future selection of our embedded control
products. These development tools allow design engineers to develop
thousands of application-specific products from our standard
microcontrollers. To date, we have shipped more than 600,000
development tools.
Analog
and Interface Products
Our
analog and interface products consist of several families with over 500 power
management, linear, mixed-signal, thermal management and interface
products. At the end of fiscal 2008, our mixed-signal analog and
interface products were being shipped to more than 13,400 end
customers.
We
continue marketing and selling our analog and interface products into our
existing microcontroller customer base, which we refer to as our analog “attach”
strategy, as well as to new customers. In addition to our “attach”
strategy, we market and sell other products that may not fit our traditional PIC
microcontroller and memory products customer base. We market these,
and all of our products, based on an application segment approach targeted to
provide customers with application solutions.
Memory
Products
Our
memory products consist primarily of serial electrically erasable programmable
read only memory, referred to as Serial EEPROMs. We sell these
devices primarily into the embedded control market, and we are one of the
largest suppliers of such devices worldwide. Serial EEPROM products
are used for non-volatile program and data storage in systems where such data
must be either modified frequently or retained for long
periods. Serial EEPROMs have a very low I/O pin requirement,
permitting production of very small devices.
Manufacturing
Our
manufacturing operations include wafer fabrication and assembly and
test. The ownership of our manufacturing resources is an important
component of our business strategy, enabling us to maintain a high level of
manufacturing control resulting in us being one of the lowest cost producers in
the embedded control industry. By owning our wafer fabrication
facilities and much of our assembly and test operations, and by employing
statistical techniques (statistical process control, designed experiments and
wafer level monitoring), we have been able to achieve and maintain high
production yields. Direct control over manufacturing resources allows
us to shorten our design and production cycles. This control also
allows us to capture the wafer manufacturing and a portion of the assembly and
testing profit margin.
Our
manufacturing facilities are located in:
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·
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Chandler,
Arizona (probe operations)
|
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·
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Gresham,
Oregon (Fab 4)
|
|
·
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Bangkok,
Thailand (assembly, probe and test)
|
Wafer
Fabrication
Fab 2
currently produces 8-inch wafers and supports manufacturing processes from 0.35
to 5.0 microns. During fiscal 2008 and fiscal 2007, Fab 2 operated at
approximately 99% of its capacity. Operating at higher percentages of
capacity has a positive impact on our operating results due to the relatively
high fixed costs inherent in wafer fabrication manufacturing.
We
acquired Fab 4 in August 2002 and began production on October 31,
2003. Fab 4 currently produces 8-inch wafers using predominantly 0.35
to 0.5 micron manufacturing processes and is capable of supporting technologies
below 0.18 microns. A significant amount of clean room capacity and
equipment acquired with Fab 4 can be brought on line in the future to support
incremental wafer fabrication capacity needs. We believe the combined
capacity of Fab 2 and Fab 4 will provide sufficient capacity to allow us to
respond to increases in future demand.
In
September 2007, we received an unsolicited offer on our Fab 3 facility located
in Puyallup, Washington. We assessed our available capacity in our
current facilities, along with our capacity available from outside foundries and
determined the capacity of Fab 3 would not be required in the near
term. As a result of this assessment, we accepted the purchase offer
to sell Fab 3 on September 21, 2007 and the transaction closed on October 19,
2007. We received $27.5 million in cash net of expenses
associated with the sale and recognized an impairment charge of $26.8 million on
the sale of Fab 3, representing the difference between the carrying value of the
assets at September 30, 2007 and the amounts realized subsequent to September
30, 2007.
We
continue to transition products to more advanced process technologies to reduce
future manufacturing costs. We believe that our ability to
successfully transition to more advanced process technologies is important for
us to remain competitive.
We
outsource a small percentage of our wafer production requirements to third-party
wafer foundries to augment our internal manufacturing capabilities.
Assembly
and Test
We
perform product assembly and testing at our facilities located near Bangkok,
Thailand. As of March 31, 2008, approximately 67% of our assembly
requirements were being performed in our Thailand facility. As of
March 31, 2008, our Thailand facility was testing substantially all of our wafer
production. We use third-party assembly and test contractors in
several Asian countries for the balance of our assembly and test
requirements.
General
Matters Impacting Our Manufacturing Operations
We employ
proprietary design and manufacturing processes in developing our microcontroller
and memory products. We believe our processes afford us both
cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully absorb our
process research and development costs and to deliver new products to market
more rapidly. Our engineers utilize advanced Computer Aided Design
tools and software to perform circuit design, simulation and layout, and our
in-house photomask and wafer fabrication facilities enable us to rapidly verify
design techniques by processing test wafers quickly and
efficiently.
Due to
the high fixed costs inherent in semiconductor manufacturing, consistently high
manufacturing yields have significant positive effects on our gross profit and
overall operating results. Our continuous focus on manufacturing
productivity has allowed us to maintain excellent manufacturing yields at our
facilities. Our manufacturing yields are primarily driven by a
comprehensive implementation of statistical process control, extensive employee
training and our effective use of our manufacturing facilities and
equipment. Maintenance of manufacturing productivity and yields are
important factors in the achievement of our operating results. The
manufacture of integrated circuits, particularly non-volatile, erasable CMOS
memory and logic devices, such as those that we produce, are complex
processes. These processes are sensitive to a wide variety of
factors, including the level of contaminants in the manufacturing environment,
impurities in the materials used and the performance of our manufacturing
personnel and equipment. As is typical in the semiconductor industry,
we have from time to time experienced lower than anticipated manufacturing
yields. Our operating results will suffer if we are unable to
maintain yields at approximately the current levels.
At the
end of fiscal 2008, we owned long-lived assets (consisting of property, plant
and equipment) in the United States amounting to $400.6 million and
$121.7 million in other countries, including $113.1 million in
Thailand. At the end of fiscal 2007, we owned long-lived assets in
the United States amounting to $488.7 million and $117.0 million in
other countries, including $114.6 million in Thailand.
Research
and Development (R&D)
We are
committed to continuing our investment in new and enhanced products, including
development systems, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. Our current R&D activities
focus on the design of new microcontrollers, digital signal controllers, Serial
EEPROM memory, analog and interface products, new development systems, software
and application-specific software libraries. We are also developing
new design and process technologies to enable new products and innovative
features as well as achieve further cost reductions and performance improvements
in existing products.
In fiscal
2008, our R&D expenses were $120.9 million, compared to
$113.7 million in
fiscal 2007 and $94.9 million in fiscal 2006. R&D expenses
included $10.7 million in fiscal 2008 and $9.6 million in fiscal 2007 of
share-based compensation as a result of the adoption of FASB Statement of
Financial Accounting Standard (SFAS) No. 123 (revised 2004) Share-Based Payment (SFAS No.
123R).
Sales
and Distribution
General
We market
our products worldwide primarily through a network of direct sales personnel and
distributors.
Our
direct sales force focuses on a wide variety of strategic accounts in three
geographical markets: the Americas, Europe and Asia. We currently
maintain sales and technical support centers in major metropolitan areas in all
three geographic markets. We believe that a strong technical service
presence is essential to the continued development of the embedded control
market. Many of our field sales engineers (FSEs), field application
engineers (FAEs), and sales management have technical degrees or backgrounds and
have been previously employed in high technology environments. We
believe that the technical knowledge of our sales force is a key competitive
advantage in the sale of our products. The primary mission of our FAE
team is to provide technical assistance to customers and to conduct periodic
training sessions for the balance of our sales team. FAEs also
frequently conduct technical seminars and workshops in major cities around the
world.
Distribution
Our
distributors focus primarily on servicing the product requirements of a broad
base of diverse customers. We believe that distributors provide an
effective means of reaching this broad and diverse customer base. We
believe that customers recognize Microchip for its products and brand name and
use distributors as an effective supply channel.
In fiscal
2008, we derived 64% of our net sales through distributors and 36% of our
net sales from customers serviced directly by Microchip. In fiscal
2007 and 2006, we derived 65% of our net sales through distributors and 35% of
our net sales from customers serviced directly by Microchip. Our
largest distributor accounted for approximately 12% of our net sales in fiscal
2008, 11% of our net sales in fiscal 2007 and 13% of our net sales in fiscal
2006. Our second largest distributor accounted for approximately 7%
of our net sales in fiscal 2008, 10% of our net sales in
fiscal 2007 and 11% of our net sales in fiscal 2006. No other
distributor or end customer accounted for more than 10% of our net sales in
fiscal 2008, 2007 or 2006. In February 2008, we terminated our
relationship with Arrow Electronics in North America and
Europe. Arrow Electronics in Australia and New Zealand remain as our
only Arrow Electronics franchised distributor locations worldwide. In
February 2008, we also entered into a new demand creation relationship with
Avnet/Memec in North America, Avnet/Silica in Europe, and an expanded demand
creation relationship with Future Electronics worldwide.
We do not
have long-term agreements with our distributors and we, or our distributors, may
each terminate our relationship with little or no advanced
notice. The loss of, or the disruption in the operations of, one or
more of our distributors could reduce our future net sales in a given quarter
and could result in an increase in inventory returns.
Sales
by Geography
Sales by
geography for fiscal 2008, 2007 and 2006 were as follows (dollars in
thousands):
|
|
Year
Ended March 31,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
Americas
|
|
$ |
273,363 |
|
|
|
26.4 |
% |
|
$ |
287,371 |
|
|
|
27.6 |
% |
|
$ |
266,353 |
|
|
|
28.7 |
% |
Europe
|
|
|
308,171 |
|
|
|
29.8 |
|
|
|
302,708 |
|
|
|
29.1 |
|
|
|
255,367 |
|
|
|
27.5 |
|
Asia
|
|
|
454,203 |
|
|
|
43.8 |
|
|
|
449,592 |
|
|
|
43.3 |
|
|
|
406,173 |
|
|
|
43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
$ |
1,035,737 |
|
|
|
100.0 |
% |
|
$ |
1,039,671 |
|
|
|
100.0 |
% |
|
$ |
927,893 |
|
|
|
100.0 |
% |
Sales to
foreign customers accounted for approximately 75% of our net sales in fiscal
2008, 74% of our net sales in fiscal 2007 and 74% of our net sales in fiscal
2006. Our sales to foreign customers have been predominately in Asia
and Europe, which we attribute to the manufacturing strength in those areas for
automotive, communications, computing, consumer and industrial control
products. Americas sales include sales to customers in the United
States, Canada, Central America and South America.
Sales to
customers in China, including Hong Kong, accounted for approximately 20% of our
net sales in fiscal 2008, 18% of our net sales in fiscal 2007 and 17% of our net
sales in fiscal 2006. In each of fiscal 2008, 2007 and 2006, sales to
customers in Taiwan accounted for approximately 10% of our net
sales. We did not have sales into any other foreign countries that
exceeded 10% of our net sales during fiscal 2008, 2007 or 2006.
Our
international sales are predominately U.S. dollar
denominated. Although foreign sales are subject to certain government
export restrictions, we have not experienced any material difficulties to date
as a result of export restrictions.
The
semiconductor industry is characterized by seasonality and wide fluctuations of
supply and demand. Since a significant portion of our revenue is from
consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal
year. In recent periods, weakness in the U.S. housing market and
general economic conditions have had a more significant impact on our results
than seasonality, and has made it difficult to assess the impact of seasonal
factors on our business.
Backlog
As of
April 30, 2008, our backlog was approximately $225.7 million, compared to $185.4
million as of April 30, 2007. Our backlog includes all purchase
orders scheduled for delivery within the subsequent 12 months.
We
primarily produce standard products that can be shipped from inventory within a
short time after we receive an order. Our business and, to a large
extent, that of the entire semiconductor industry, is characterized by
short-term orders and shipment schedules. Orders constituting our
current backlog are subject to changes in delivery schedules, or to cancellation
at the customer’s option without significant penalty. Thus, while
backlog is useful for scheduling production, backlog as of any particular date
may not be a reliable measure of sales for any future period.
Competition
The
semiconductor industry is intensely competitive and has been characterized by
price erosion and rapid technological change. We compete with major
domestic and international semiconductor companies, many of which have greater
market recognition and greater financial, technical, marketing, distribution and
other resources than we have with which to pursue engineering, manufacturing,
marketing and distribution of their products. Furthermore, capacity
in the semiconductor industry is generally increasing over time and such
increased capacity or improved product availability could adversely affect our
competitive position.
We
currently compete principally on the basis of the technical innovation and
performance of our embedded control products, including the following product
characteristics:
We
believe that other important competitive factors in the embedded control market
include:
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·
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functionality
of application development systems
|
|
·
|
dependable
delivery, quality and availability
|
|
·
|
technical
service and support
|
We
believe that we compete favorably with other companies on all of these factors,
but we may be unable to compete successfully in the future, which could harm our
business.
Patents,
Licenses and Trademarks
We
maintain a portfolio of United States and foreign patents, expiring on various
dates between 2008 and 2026. We also have numerous additional United
States and foreign patent applications pending. We do not expect that
the expiration of any particular patent will have a material impact on our
business. While we intend to continue to seek patents on our
inventions and manufacturing processes, we believe that our continued success
depends primarily on the technological skills and innovative capabilities of our
personnel and our ability to rapidly commercialize product developments, rather
than on our patents. Our existing patents and any new patents that
are issued may not be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. In addition, the laws
of certain foreign countries do not protect our intellectual property rights to
the same extent as the laws of the United States.
We have
entered into certain intellectual property licenses and cross-licenses with
other companies related to semiconductor products and manufacturing
processes. As is typical in the semiconductor industry, we and our
customers have from time to time received, and may in the future receive,
communications from third parties asserting patent or other intellectual
property rights on certain of our products or technologies. We
investigate all such notices and respond as we believe is
appropriate. Based on industry practice, we believe that in most
cases we can obtain any necessary licenses or other rights on commercially
reasonable terms, but we cannot assure that all licenses would be on acceptable
terms, that litigation would not ensue or that damages for any past infringement
would not be assessed. Litigation, which could result in substantial
cost to us and require significant attention from management, may be necessary
to enforce our patents or other intellectual property rights, or to defend us
against claimed infringement of the rights of others. The failure to
obtain necessary licenses or other rights, or litigation arising out of
infringement claims, could harm our business.
Environmental
Regulation
We must
comply with many different federal, state, local and foreign governmental
regulations related to the use, storage, discharge and disposal of certain
chemicals and gases used in our manufacturing processes. Our
facilities have been designed to comply with these regulations and we believe
that our activities are conducted in compliance with such
regulations. Any changes in such regulations or in their enforcement
could require us to acquire costly equipment or to incur other significant
expenses to comply with environmental regulations. Any failure by us
to adequately control the storage, use and disposal of regulated substances
could result in future liabilities.
Increasing
public attention has been focused on the environmental impact of electronic
manufacturing operations. While we have not experienced any
materially adverse effects on our operations from environmental regulations, our
business and results of operations could suffer if for any reason we fail to
control the use of, or to adequately restrict the discharge of, hazardous
substances under present or future environmental regulations.
Employees
As of
March 31, 2008, we had 4,811 employees. None of our employees are
represented by a labor organization. We have never had a work
stoppage and believe that our employee relations are good.
Executive
Officers
The
following sets forth certain information regarding our executive officers as of
April 30, 2008:
Name
|
Age
|
Position
|
Steve
Sanghi
|
52
|
Chairman
of the Board, President and Chief Executive Officer
|
Ganesh
Moorthy
|
48
|
Executive
Vice President
|
Stephen
V. Drehobl
|
46
|
Vice
President, Security, Microcontroller and Technology
Division
|
David
S. Lambert
|
56
|
Vice
President, Fab Operations
|
Mitchell
R. Little
|
55
|
Vice
President, Worldwide Sales and Applications
|
Gordon
W. Parnell
|
58
|
Vice
President, Chief Financial Officer
|
Richard
J. Simoncic
|
44
|
Vice
President, Analog and Interface Products
Division
|
Mr. Sanghi has been President
since August 1990, CEO since October 1991, and Chairman of the Board since
October 1993. He has served as a director since August 1990. Mr.
Sanghi holds an M.S. degree in Electrical and Computer Engineering from the
University of Massachusetts and a B.S. degree in Electronics and Communication
from Punjab University, India. Since May 2004, he has been a member of the
Board of Directors of Xyratex Ltd., a storage and network technology
company. Since May 2007, he has been a member of the Board of
Directors of FIRST (For Inspiration and Recognition of Science and
Technology).
Mr. Moorthy has served as
Executive Vice President since October 2006 and served as a Vice President in
various roles since he joined the Company in 2001. Prior to this
time, he served in various executive capacities with other semiconductor
companies. Mr. Moorthy holds an M.B.A. in Marketing from
National University, a B.S. degree in Electrical Engineering from the
University of Washington and a B.S. degree in Physics from the University of
Bombay.
Mr. Drehobl has served as
Vice President of the Security, Microcontroller, and Technology Division since
July 2001. He has been employed by Microchip since August 1989 and has served as
a Vice President in various roles since February 1997. Mr. Drehobl
holds a Bachelor of Technology degree from the University of
Dayton.
Mr. Lambert has served as
Vice President, Fab Operations since November 1993. From 1991 to
November 1993, he served as Director of Manufacturing Engineering, and from 1989
to 1991, he served as Engineering Manager of Fab Operations. Mr.
Lambert holds a B.S. degree in Chemical Engineering from the University of
Cincinnati.
Mr. Little has served as Vice
President, Worldwide Sales and Applications since July 2000. He has
been employed by Microchip since 1989 and has served as a Vice President in
various roles since September 1993. Mr. Little holds a B.S. degree in
Engineering Technology from United Electronics Institute.
Mr. Parnell has served as
Vice President and Chief Financial Officer since May 2000. He served
as Vice President, Controller and Treasurer from April 1993 to May
2000. Mr. Parnell holds a finance/accounting qualification with the
Association of Certified Accountants from Edinburgh College,
Scotland. Since January 2008, he has been a member of the Board of
Directors of Integrated Device Technology, Inc.
Mr. Simoncic has served as
Vice President, Analog and Interface Products Division since September
1999. From October 1995 to September 1999 he served as Vice President
in various roles. Joining Microchip in 1990, Mr. Simoncic held
various roles in Design, Device/Yield Engineering and Quality
Systems. Mr. Simoncic holds a B.S. degree in Electrical Engineering
Technology from DeVry Institute of Technology.
When
evaluating Microchip and its business, you should give careful consideration to
the factors listed below, in addition to the information provided elsewhere in
this Form 10-K and in other documents that we file with the Securities and
Exchange Commission.
Our
quarterly operating results may fluctuate due to factors that could reduce our
net sales and profitability.
Our
quarterly 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 quarterly operating results
include:
|
·
|
changes
in demand or market acceptance of our products and products of our
customers;
|
|
·
|
levels
of inventories at our customers;
|
|
·
|
the
mix of inventory we hold and our ability to satisfy orders from our
inventory;
|
|
·
|
changes
in utilization of our manufacturing capacity and fluctuations in
manufacturing yields;
|
|
·
|
our
ability to secure sufficient assembly and testing
capacity;
|
|
·
|
availability
of raw materials and equipment;
|
|
·
|
competitive
developments including pricing
pressures;
|
|
·
|
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; |
|
·
|
changes
or fluctuations in customer order patterns and
seasonality;
|
|
·
|
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;
|
|
·
|
disruptions
in our business or our customers’ businesses due to terrorist activity,
armed conflict, war, worldwide oil prices and supply, public health
concerns or disruptions in the transportation
system;
|
|
|
property
damage or other losses, whether or not covered by insurance;
and
|
|
·
|
general
economic, industry or political conditions in the United States or
internationally.
|
We
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and that you should not rely upon any such comparisons as
indications of future performance. In future periods our operating results may
fall below our public guidance or the expectations of public market analysts and
investors, which would likely have a negative effect on the price of our common
stock.
Our
operating results will suffer if we ineffectively utilize our manufacturing
capacity or fail to maintain manufacturing yields.
The
manufacture and assembly of integrated circuits, particularly non-volatile,
erasable CMOS memory and logic devices such as those that we produce, are
complex processes. These processes are sensitive to a wide variety of
factors, including the level of contaminants in the manufacturing environment,
impurities in the materials used, the performance of our wafer fabrication
personnel and equipment, and other quality issues. As is typical in the
semiconductor industry, we have from time to time experienced lower than
anticipated manufacturing yields. Our operating results will suffer if we
are unable to maintain yields at approximately the current levels. This
could include delays in the recognition of revenue, loss of revenue or future
orders, and customer-imposed penalties for failure to meet contractual shipment
deadlines. Our operating results are also adversely affected when we operate at
less than optimal capacity. Lower capacity utilization results in certain
costs being charged directly to expense and lower gross margins.
We
are dependent on orders that are received and shipped in the same quarter and
are therefore limited in our visibility of future product
shipments.
Our net
sales in any given quarter depend upon a combination of shipments from backlog
and orders received in that quarter for shipment in that quarter, which we refer
to as turns orders. We measure turns orders at the beginning of a quarter based
on the orders needed to meet the shipment targets that we set entering the
quarter. Historically, we have relied on our ability to respond quickly to
customer orders as part of our competitive strategy, resulting in customers
placing orders with relatively short delivery schedules. Shorter lead times
generally mean that turns orders as a percentage of our business are relatively
high in any particular quarter and reduces our backlog visibility on future
product shipments. Turns orders correlate to overall semiconductor
industry conditions and product lead times. Because turns orders are
difficult to predict, varying levels of turns orders make our net sales more
difficult to forecast. If we do not achieve a sufficient level of turns
orders in a particular quarter relative to our revenue targets, our revenue and
operating results may suffer.
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 with which to pursue engineering,
manufacturing, marketing and distribution of their products. 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;
|
|
·
|
product
introductions by our competitors;
|
|
·
|
the
number, nature and success of our competitors in a given
market;
|
|
·
|
our
ability to obtain adequate 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;
|
|
·
|
the
quality of our customer service and our ability to address the needs of
our customers; and
|
|
·
|
general
market and economic conditions.
|
Historically,
average selling prices in the semiconductor industry decrease over the life of
any particular product. The overall average selling prices of our
microcontroller and proprietary analog and interface products have remained
relatively constant, while average selling prices of our Serial EEPROM and
non-proprietary analog and interface products have declined over
time.
We have
experienced, and expect to continue to experience, modest pricing declines in
certain of our more mature proprietary product lines, due primarily to
competitive conditions. We have been able to moderate average selling
price declines in many of our proprietary product lines by continuing to
introduce new products with more features and higher prices. However,
there can be no assurance that we will be able to do so in the future. We
have experienced in the past and expect to continue to experience in the future
varying degrees of competitive pricing pressures in our Serial EEPROM and
non-proprietary analog products.
We may be
unable to maintain average selling prices for our products as a result of
increased pricing pressure in the future, which could adversely impact our
operating results.
Our
business is dependent on selling through distributors.
Sales
through distributors accounted for approximately 64% of our net sales in fiscal
2008 and 65% of our net sales in each of fiscal 2007 and 2006. Our
largest distributor accounted for approximately 12% of our net sales in fiscal
2008, 11% of our net sales in fiscal 2007 and 13% of our net sales in fiscal
2006. Our two largest distributors accounted for approximately 19% of our
net sales in fiscal 2008, 21% of our net sales in fiscal 2007 and 24% of our net
sales in fiscal 2006. 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.
On
February 4, 2008, we terminated our distributor Arrow Electronics and
announced that we had partnered with Avnet Electronics Marketing and Future
Electronics to provide our global distribution services. We believe that
these two global distributors combined with our regional and specialty
distributor partners will have a positive long-term impact in supporting the
technical and commercial support needs of our customers. Our net sales of
product sold by Arrow Electronics in the year ended March 31, 2008 represented
approximately 7% of our net sales. Although we do not believe the
termination of Arrow Electronics will have a material adverse impact on our net
sales, there can be no assurance as to what the long-term or short-term impact
on us will be as a result of these recent actions.
During an
industry and/or economic downturn, it is possible there will be an oversupply of
products, and a decrease in sell-through by our distributors. The
decline in sell-through of our products by, loss of, or a disruption in the
operations of, one or more of our distributors could reduce our net sales in a
given period and could result in an increase in inventory returns.
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;
|
|
·
|
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.
We
must attract and retain qualified personnel to be successful, and competition
for qualified personnel is intense in our market.
Our
success depends upon the efforts and abilities of our senior management,
engineering and other personnel. The competition for qualified engineering
and management personnel is intense.
We may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the
services of one or more of our key personnel or the inability to add key
personnel could harm our business. We have no employment agreements
with any member of our senior management team. As a result of the
anticipated impact that the adoption of SFAS No. 123R in our first fiscal
quarter of 2007 would have on our results of operations, we changed our equity
compensation program during fiscal 2006. We now grant fewer equity-based
shares per employee and the type of equity instrument is generally restricted
stock units rather than stock options. This change in our equity
compensation program may make it more difficult for us to attract or retain
qualified management and engineering personnel, which could have an adverse
effect on our business.
We
are dependent on several contractors to perform key manufacturing functions for
us.
We use
several contractors located in Asia for a portion of the assembly and testing of
our products. We also rely on outside wafer foundries for a portion of our wafer
fabrication. Although we own the majority of our manufacturing resources,
the disruption or termination of any of our contractors could harm our business
and operating results.
Our use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. Our future operating results
could suffer if any contractor were to experience financial, operations or
production difficulties or situations when demand exceeds capacity, or if they
were unable to maintain manufacturing yields, assembly and test yields and costs
at approximately their current levels, or if due to their locations in foreign
countries they were to experience political upheaval or infrastructure
disruption. Further, procurement of required products and services from
third parties is done by purchase order and contracts. If these third
parties are unable or unwilling to timely deliver products or services
conforming to our quality standards, we may not be able to qualify additional
manufacturing sources for our products in a timely manner or at all, and such
arrangements, if any, may not be on favorable terms to us. In such event,
we could experience an interruption in production, an increase in manufacturing
and production costs, decline in product reliability, and our business and
operating results could be adversely affected.
We
may lose sales if our suppliers of raw materials and equipment fail to meet our
needs.
Our
semiconductor manufacturing operations require raw materials and equipment that
must meet exacting standards. We generally have more than one source for
these supplies, but there are only a limited number of suppliers capable of
delivering various raw materials and equipment that meet our standards.
The raw materials and equipment necessary for our business could become more
difficult to obtain as worldwide use of semiconductors in product applications
increases. We have experienced supply shortages from time to time in the past,
and on occasion our suppliers have told us they need more time than expected to
fill our orders or that they will no longer support certain equipment with
updates or spare and replacements parts. An interruption of any raw
materials or equipment sources, or the lack of supplier support for a particular
piece of equipment, could harm our business.
Our
operating results may be impacted by both seasonality and the wide fluctuations
of supply and demand in the semiconductor industry.
The
semiconductor industry is characterized by seasonality and wide fluctuations of
supply and demand. Since a significant portion of our revenue is from
consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal
year. However, fluctuations in our overall business in certain recent
periods and semiconductor industry conditions have had a more significant impact
on our results than seasonality, and has made it difficult to assess the impact
of seasonal factors on our business. The industry has also experienced
significant economic downturns, characterized by diminished product demand and
production over-capacity. We have sought to reduce our exposure to this
industry cyclically by selling proprietary products that cannot be easily or
quickly replaced, to a geographically diverse base of customers across a broad
range of market segments. However, we have experienced substantial
period-to-period fluctuations in operating results and expect, in the future, to
experience period-to-period fluctuations in operating results due to general
industry or economic conditions.
We are exposed to
various risks related to legal proceedings or claims.
We are
currently, and in the future may be, involved in legal proceedings or claims
regarding patent infringement, intellectual property rights, contracts and other
matters. As is typical in the semiconductor industry, we receive
notifications from customers from time to time who believe that we owe them
indemnification or other obligations related to infringement claims made against
the customers by third parties. These legal proceedings and claims,
whether with or without merit, could result in substantial cost to us and divert
our resources. If we are not able to resolve a claim, negotiate a
settlement of a matter, obtain necessary licenses on commercially reasonable
terms, reengineer our products or processes to avoid infringement, and/or
successfully prosecute or defend our position, we could incur uninsured
liability in any of them, be required to take an appropriate charge to
operations, be enjoined from selling a material portion of our product line or
using certain processes, suffer a reduction or elimination in value of
inventories, and our business, financial condition or results of operations
could be harmed.
It is
also possible that from time to time we may be subject to claims related to the
performance or use of our products. These claims may be due to
products nonconformance to our specifications, or specifications agreed upon
with the customer, changes in our manufacturing processes, and unexpected end
customer system issues due to the interaction with our products or insufficient
design or testing by our customers. We could incur significant
expenses related to such matters, including costs related to writing off the
value of inventory of defective products; recalling defective products;
providing support services, product replacements, or modification to products;
the defense of such claims; diversion of resources from other projects; lost
revenue or delay in recognition of revenue due to cancellation of orders and
unpaid receivables; customer imposed fines or penalties for failure to meet
contractual requirements; and a requirement to pay damages.
Because
the systems into which our products are integrated have a higher cost of goods
than the products we sell, these expenses and damages may be significantly
higher than the sales and profits we received from the products involved.
While we specifically exclude consequential damages in our standard terms and
conditions, our ability to avoid such liabilities may be limited by applicable
law. We do have product liability insurance, 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 their systems could cause damage to property or persons.
We may be subject to customer claims if our products, or interactions with our
products, cause the system failures. We will face increased exposure to
customer claims if there are substantial increases in either the volume of our
sales into these applications or the frequency of system failures caused by our
products.
Failure
to adequately protect our intellectual property could result in lost revenue or
market opportunities.
Our
ability to obtain patents, licenses and other intellectual property rights
covering our products and manufacturing processes is important for our success.
To that end, we have acquired certain patents and patent licenses and intend to
continue to seek patents on our inventions and manufacturing processes. The
process of seeking patent protection can be long and expensive, and patents may
not be issued from currently pending or future applications. In addition,
our existing patents and any new patents that are issued may not be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to us. We may be subject to or may ourselves initiate
interference proceedings in the U.S. Patent and Trademark Office, which can
require significant financial and management resources. In addition, the
laws of certain foreign countries do not protect our intellectual property
rights to the same extent as the laws of the United States. Infringement
of our intellectual property rights by a third party could result in
uncompensated lost market and revenue opportunities for us.
We
do not typically have long-term contracts with our customers.
We do not
typically enter into long-term contracts with our customers and we cannot be
certain about future order levels from our customers. When we do enter
into customer contracts, the contract is generally cancelable at the convenience
of the customer. Even though we have approximately 60,000 end customers
and our ten largest customers made up approximately 9% of our total revenue for
the year ended March 31, 2008, cancellation of customer contracts could have an
adverse financial impact on our revenue and profits.
Further,
as the practice has become more commonplace in the industry, we have entered
into contracts with certain customers that differ from our standard terms of
sale. Under these contracts we commit to supply quantities of products on
scheduled delivery dates. If we become unable to supply the customer as
required under the contract, the customer may incur additional production costs,
lost revenues due to subsequent delays in their own manufacturing schedule, or
quality related issues. Under these contracts, we may be liable for the
costs the customer has incurred. While we try to limit such liabilities,
if they should arise, there may be a material adverse impact on our results of
operation and financial condition.
Business
interruptions could harm our business.
Operations
at any of our manufacturing facilities, or at any of our wafer fabrication or
test and assembly subcontractors, may be disrupted for reasons beyond our
control, including work stoppages, power loss, incidents of terrorism or
security risk, political instability, public health issues, telecommunications,
transportation or other infrastructure failure, fire, earthquake, floods, or
other natural disasters. If operations at any of our facilities, or our
subcontractors’ facilities are interrupted, we may not be able to shift
production to other facilities on a timely basis. If this occurs, we would
likely experience delays in shipments of products to our customers and alternate
sources for production may be unavailable on acceptable terms. This could
result in reduced revenues and profits and the cancellation of orders or loss of
customers. In addition, business interruption insurance will likely not be
enough to compensate us for any losses that may occur and any losses or damages
incurred by us as a result of business interruptions could significantly harm
our business.
We
are highly dependent on foreign sales and operations, which exposes us to
foreign political and economic risks.
Sales to
foreign customers account for a substantial portion of our net sales. During
fiscal 2008, approximately 75% of our net sales were made to foreign
customers. During fiscal 2007, approximately 74% of our net sales
were made to foreign customers. We purchase a substantial portion of
our raw materials and equipment from foreign suppliers. In addition, we
own product assembly and testing facilities located near Bangkok, Thailand,
which has experienced periods of political uncertainty in the past. We
also use various foreign contractors for a portion of our assembly and testing
and for a portion of our wafer fabrication requirements. Substantially all
of our finished goods inventory is maintained in Thailand.
Fluctuations
in foreign currency could impact our operating results. We use
forward currency exchange contracts to reduce the adverse earnings impact from
the effect of exchange rate fluctuations on our non-U.S. dollar net balance
sheet exposures. Nevertheless, in periods when the U.S. dollar
significantly fluctuates in relation to the non-U.S. currencies in which we
transact business, the remeasurement of non-U.S. dollar transactions can have an
adverse effect on our results of operations and financial
condition.
Our
reliance on foreign operations, foreign suppliers, maintenance of substantially
all of our finished goods in 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;
|
|
·
|
public
health conditions;
|
|
·
|
trade
restrictions and changes in
tariffs;
|
|
·
|
import
and export license requirements and
restrictions;
|
|
·
|
difficulties
in staffing and managing international
operations;
|
|
·
|
employment
regulations;
|
|
·
|
disruptions
in international transport or
delivery;
|
|
·
|
difficulties
in collecting receivables;
|
|
·
|
economic
slowdown in the worldwide markets served by us;
and
|
|
·
|
potentially
adverse tax consequences.
|
If any of
these risks materialize, our sales could decrease and/or our operating results
could suffer.
A
portion of our short-term investment portfolio is invested in auction rate
securities. Recent auctions for these securities have failed and our
investment in these securities is not liquid. If the issuer is unable to
successfully close future auctions or their credit rating deteriorates, we may
be required to further adjust the carrying value of our investment through an
impairment charge to earnings.
At March
31, 2008, $59.7 million of our investment portfolio was invested in auction rate
securities. Historically, the carrying value of auction rate securities
approximated fair value due to the frequent resetting of the interest
rates. If an auction fails for amounts we have invested, our investment
will not be liquid. With the recent liquidity issues experienced in the
global credit and capital markets, our auction rate securities have experienced
multiple failed auctions. In September 2007 and February 2008,
auctions for $24.9 million and $34.8 million, respectively, of the original
purchase value of our investments in auction rate securities had failed.
While we earn interest on these investments based on a pre-determined formula
with spreads tied to particular interest rate indexes, the estimated market
value for a portion of these auction rate securities no longer approximates the
original purchase value.
The $24.9
million in failed auctions during September 2007 are all either AA or AAA
rated by Standard & Poors and all but $2.5 million of the securities
possesses credit enhancement in the form of insurance for principal and
interest. The underlying characteristics of $22.4 million of these auction rate
securities relate to servicing statutory requirements in the life insurance
industry and $2.5 million relate to a specialty finance company that has a AAA
rating from Standard & Poors and the issue we own has a AA rating from
Standard & Poors. The $24.9 million in failed auctions have continued
to fail through May 23, 2008. As a result, we will not be able to access
such funds until a future auction on these investments is successful. The
fair value of the failed auction rate securities has been estimated based on
market information and estimates determined by management and could change
significantly based on market conditions. Based on the estimated values,
we concluded these investments were other than temporarily impaired and
recognized an impairment charge on these investments of $2.4 million during
fiscal 2008. If the issuers are unable to successfully close future
auctions or if their credit ratings deteriorate, we may be required to further
adjust the carrying value of the investments through an impairment charge to
earnings.
The $34.8
million in failed auctions during February 2008 are investments in student
loan-backed municipal bond auction rate securities. Based upon our
evaluation of available information, we believe these investments are of high
credit quality, as all of the investments carry at least two AAA credit ratings
and are largely backed by the federal government (Federal Family Education Loan
Program). The fair value of the failed auction rate securities has
been estimated based on market information and estimates determined by
management and could change significantly based on market
conditions.
We
continue to monitor the market for auction rate securities and consider its
impact (if any) on the fair market value of our investments. If the market
conditions deteriorate further, we may be required to record additional
unrealized losses in other comprehensive income or impairment charges. We
intend and have the ability to hold these auction rate securities until the
market recovers as we do not anticipate having to sell these securities to fund
the operations of our business. We believe that, based on our current
unrestricted cash, cash equivalents and short-term marketable securities
balances, the current lack of liquidity in the markets for auction rate
securities will not have a material impact on our liquidity, cash flow or our
ability to fund our operations.
Interruptions
in information technology systems could adversely affect our
business.
We rely
on the efficient and uninterrupted operation of complex information technology
systems and networks to operate our business. Any significant system or
network disruption, including but not limited to computer viruses, security
breaches, or energy blackouts could have a material adverse impact on our
operations, sales and operating results. We have implemented measures to
manage our risks related to such disruptions, but such disruptions could
negatively impact our operations and financial results. In addition, we
may incur additional costs to remedy the damages caused by these disruptions or
security breaches.
The
occurrence of events for which we are self-insured, or which exceed our
insurance limits may adversely affect our profitability and
liquidity.
We have
insurance contracts with independent insurance companies related to many
different types of risk; however, we self-insure for some risks and obligations.
In these circumstances, we have determined that it is more cost effective to
self-insure certain risks than to pay the increased premium costs in place since
the disruption in the insurance market after the events of September 11,
2001. The risks and exposures that we self-insure include, but are not limited
to, certain property, product defects, political risks, and patent infringement.
Should there be a loss or adverse judgment or other decision in an area for
which we are self-insured, then our financial condition, result of operations
and liquidity may be adversely affected.
We
are subject to stringent environmental regulations, which may force us to incur
significant expenses.
We must
comply with many different federal, state, local and foreign governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our products and manufacturing
process. Our failure to comply with present or future regulations could
result in the imposition of fines, suspension of production or a cessation of
operations. Such environmental regulations have required us in the past
and could require us in the future to acquire costly equipment or to incur other
significant expenses to comply with such regulations. Any failure by us to
control the use of or adequately restrict the discharge of hazardous substances
could subject us to future liabilities. Environmental problems may occur
that could subject us to future costs or liabilities.
Over the
past few years, there has been an expansion in environmental laws focusing on
reducing or eliminating hazardous substances in electronic products. For
example, the EU RoHS Directive provided that beginning July 1, 2006,
electronic products sold into Europe were required to meet stringent chemical
restrictions, including the absence of lead. Other countries, such as the
United States, China and Korea, have enacted or may enact laws or
regulations similar to those of the EU. These and other future
environmental regulations could require us to reengineer certain of our existing
products and may make it more expensive for us to manufacture
and sell our products. Over the last several years, the number and
complexity of laws focused on the energy efficiency of electronic products and
accessories; the recycling of electronic products; and the reduction in quantity
and the recycling of packaging materials have expanded
significantly. It may be difficult for us to timely comply with these
laws and we may not have sufficient quantities of compliant materials to meet
customers’ needs, thereby adversely impacting our sales and profitability.
We may also have to write off inventory in the event that we hold inventory that
is not saleable as a result of changes to regulations. We expect
these trends to continue. In addition, we anticipate increased
customer requirements to meet voluntary criteria related to reduction or
elimination of hazardous substances in our products and energy efficiency
measures.
Regulatory
authorities in jurisdictions into which we ship our products could levy fines or
restrict our ability to export products.
A
significant portion of our sales are made outside of the United States through
exporting and re-exporting of products. In addition to local
jurisdictions’ export regulations, our U.S. manufactured products or products
based on U.S. technology are subject to Export Administration Regulations
(“EAR”) when exported and re-exported to and from all international
jurisdictions. Licenses or proper license exceptions may be required for
the shipment of our products to certain countries. Non-compliance with the
EAR or other export regulations can result in penalties including denial of
export privileges, fines, criminal penalties, and seizure of products.
Such penalties could have a material adverse effect on our business including
our ability to meet our net sales and earnings targets.
The
outcome of currently ongoing and future examinations of our income tax returns
by the IRS could have an adverse effect on our results of
operations.
We are
subject to continued examination of our income tax returns by the Internal
Revenue Service and other tax authorities for fiscal year 2002 and later.
We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes.
There can be no assurance that the outcomes from these continuing examinations
will not have an adverse effect on our future operating results.
The
future trading price of our common stock could be subject to wide fluctuations
in response to a variety of factors.
The
market price of our common stock has fluctuated significantly in the past and is
likely to fluctuate in the future. The future trading price of our
common stock could be subject to wide fluctuations in response to a variety of
factors, many of which are beyond our control, including, but not limited
to:
|
·
|
quarterly
variations in our operating results and the operating results of other
technology companies;
|
|
·
|
actual
or anticipated announcements of technical innovations or new products by
us or our competitors;
|
|
·
|
changes
in analysts’ estimates of our financial performance or buy/sell
recommendations;
|
|
·
|
changes
in our financial guidance or our failure to meet such
guidance;
|
|
·
|
general
conditions in the semiconductor industry;
and
|
|
·
|
worldwide
economic and financial conditions.
|
In
addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many high
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations and
other factors may harm the market price of our common stock.
In
the event we make acquisitions, we may not be able to successfully integrate
such acquisitions or attain the anticipated benefits.
While
acquisitions do not represent a major part of our growth strategy, from time to
time we may consider strategic acquisitions if such opportunities arise.
Any transactions that we complete may involve a number of risks, including: the
diversion of our management’s attention from our existing business to integrate
the operations and personnel of the acquired business, or possible adverse
effects on our operating results during the integration process. In
addition, we may not be able to successfully or profitably integrate, operate,
maintain and manage any newly acquired operations or employees. We may not
be able to maintain uniform standards, controls, procedures and policies, and
this may lead to operational inefficiencies.
We
have not historically maintained substantial levels of indebtedness, and our
financial condition and results of operations could be adversely affected if we
do not effectively manage our liabilities.
As a
result of our sale of $1.15 billion of 2.125% junior subordinated
convertible debentures in December 2007, we have a substantially greater amount
of long-term debt than we have maintained in the past. Our maintenance of
substantial levels of debt could adversely affect our flexibility to take
advantage of corporate opportunities and could adversely affect our financial
condition and results of operations. We may need or desire to
refinance all or a portion of our debentures or any other future indebtedness
that we incur on or before the maturity of the debentures. There can
be no assurance that we will be able to refinance any of our indebtedness on
commercially reasonable terms, if at all.
Conversion
of our debentures will dilute the ownership interest of existing stockholders,
including holders who had previously converted their debentures.
The
conversion of some or all of our outstanding debentures will dilute the
ownership interest of existing stockholders to the extent we deliver common
stock upon conversion of the debentures. Upon conversion, we may satisfy
our conversion obligation by delivering cash, shares of common stock or any
combination, at our option. If upon conversion we elect to deliver
cash for the lesser of the conversion value and principal amount of the
debentures, we would pay the holder the cash value of the applicable number of
shares of our common stock. If the conversion value of a debenture
exceeds the principal amount of the debenture, we may also elect to deliver in
cash in lieu of common stock for the conversion value in excess of one thousand
dollars principal amount (conversion spread). There would be no
adjustment to the numerator in the net income per common share computation for
the cash settled portion of the debentures as that portion of the debt
instrument will always be settled in cash. The conversion spread will
be included in the denominator for the computation of diluted net income per
common share. Any sales in the public market of any common stock
issuable upon such conversion could adversely affect prevailing market prices of
our common stock. In addition, the existence of the debentures may
encourage short selling by market participants because the conversion of the
debentures could be used to satisfy short positions, or anticipated conversion
of the debentures into shares of our common stock could depress the price of our
common stock.
There
will likely be potential new accounting pronouncements or regulatory rulings
which may have an adverse impact on our future financial condition and results
of operations.
There
will likely be potential new accounting pronouncements of regulatory rulings,
which may have an adverse impact on our future financial condition and results
of operations. For example, in May 2008, the FASB issued FASB Staff
Position (FSP) No. APB 14-1, Accounting for Convertible Debt
Instruments that May be Settled in Cash upon Conversion (Including
Partial Cash Settlement) (FSP APB 14-1), that alters the accounting
treatment for convertible debt that allows for either mandatory or optional cash
settlements, including our outstanding debentures. The FSP requires
the issuer to separately account for the liability and equity components of the
instrument in a manner that reflects the issuer’s economic interest
cost.
Further, the FSP will require bifurcation of a component of the
debt, classification of that component as equity, and then accretion of the
resulting discount on the debt to result in the “economic interest cost” being
reflected in the condensed consolidated statements of operations. In
issuing this FSP, the FASB emphasized that the FSP will be applied to the terms
of the instruments as they exited for the time periods existed, therefore, the
application of the FSP would be applied retrospectively to all periods
presented. The FSP is effective for fiscal years beginning after
December 15, 2008, and will require retrospective
application. We will be required to implement the proposed
standard during the first quarter of fiscal 2010, which begins on April 1,
2009. Although FSP APB 14-1 will have no impact on our actual
past or future cash flows, it would require us to record a significant amount of
non-cash interest expense as the debt discount is amortized. In
addition, if our convertible debt is redeemed or converted prior to maturity,
any unamortized debt discount would result in a loss on
extinguishment. As a result, there could be a material adverse impact
on our results of operations and earnings per share. These impacts
could adversely affect the trading price of our common stock and the trading
price of our debentures.
None.
At March
31, 2008, we owned the facilities described below:
Location
|
Approximate
Total
Sq. Ft.
|
Uses
|
Chandler,
Arizona
|
415,000
|
Executive
and Administrative Offices; Wafer Probe; R&D Center; Sales and
Marketing; and Computer and Service Functions
|
Tempe,
Arizona
|
379,000
|
Wafer
Fabrication (Fab
2); R&D Center; Administrative Offices; and
Warehousing
|
Gresham,
Oregon
|
826,500
|
Wafer
Fabrication (Fab
4), R&D Center, Administrative Offices, and
Warehousing
|
Chacherngsao,
Thailand (1)
|
290,000
|
Test
and Assembly; Wafer Probe; Sample Center; Warehousing; and Administrative
Offices
|
(1) Located
in the Alphatechnopolis Industrial Park near Bangkok on land to which title was
acquired by us in the fourth quarter of fiscal 2008. Obtaining full
title of the land had been delayed due to a bankruptcy relating to the seller of
the land.
We own a
67,174 square foot building in Bangalore, India which is used for research and
development, marketing support and other administrative functions.
In
addition to the facilities we own, we lease several research and development
facilities and sales offices in North America, Europe and Asia. Our
aggregate monthly rental payment for our leased facilities is approximately
$0.5 million.
We
currently believe that our existing facilities will be adequate to meet our
production requirements for the next 12 months.
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. On April 18, 2008, LSI Logic and its wholly
owned subsidiary Agere, filed both an action with the
International Trade Commission and a complaint in the Eastern District of
Texas alleging patent infringement by Microchip and 17 other semiconductor and
foundry companies. These actions seek monetary damages and
injunctive relief against the allegedly infringing products. Due to
the very early stage of these proceedings, the outcome of these actions is
not presently determinable, and therefore we can make no assessment of
their
materiality.
Microchip intends to vigorously defend its rights in these
matters. We periodically receive notification from various third
parties alleging patent infringment of patents, intellectual property rights or
other matters. With respect to these and other pending legal actions to
which we are a party, although the outcome of these actions is not presently
determinable, we believe that the ultimate resolution of these matters will not
harm our business and will not have a material adverse effect on our financial
position, cash flows or results of operations. Litigation relating to
the semiconductor industry is not uncommon, and we are, and from time to time
have been, subject to such litigation. No assurances can be given
with respect to the extent or outcome of any such litigation in the
future.
Item
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our common stock is
traded on the NASDAQ Global Market under the symbol “MCHP.” Our
common stock has been quoted on such market since our initial public offering on
March 19, 1993. The following table sets forth the quarterly high and
low closing prices of our common stock as reported by NASDAQ for our last two
fiscal years.
Fiscal
2008
|
|
High
|
|
|
Low
|
|
Fiscal
2007
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$ |
42.06 |
|
|
$ |
35.47 |
|
First
Quarter
|
|
$ |
38.15 |
|
|
$ |
31.79 |
|
Second
Quarter
|
|
$ |
39.53 |
|
|
$ |
36.31 |
|
Second
Quarter
|
|
|
34.88 |
|
|
|
31.11 |
|
Third
Quarter
|
|
$ |
36.92 |
|
|
$ |
27.57 |
|
Third
Quarter
|
|
|
34.83 |
|
|
|
31.40 |
|
Fourth
Quarter
|
|
$ |
34.56 |
|
|
$ |
26.86 |
|
Fourth
Quarter
|
|
|
37.49 |
|
|
|
33.21 |
|
Stock
Price Performance Graph
The
following graph and table show a comparison of the five-year cumulative total
stockholder return, calculated on a dividend reinvestment basis, for Microchip
Technology, The Nasdaq Composite Index, and the Philadelphia Semiconductor
Index.
|
|
Cumulative
Total Return
|
|
|
|
March 2003
|
|
|
March 2004
|
|
|
March 2005
|
|
|
March 2006
|
|
|
March 2007
|
|
|
March 2008
|
|
Microchip
Technology Incorporated
|
|
|
100.00 |
|
|
|
133.30 |
|
|
|
132.21 |
|
|
|
187.86 |
|
|
|
189.14 |
|
|
|
180.35 |
|
NASDAQ
Composite
|
|
|
100.00 |
|
|
|
151.41 |
|
|
|
152.88 |
|
|
|
181.51 |
|
|
|
190.24 |
|
|
|
177.63 |
|
Philadelphia
Semiconductor Index
|
|
|
100.00 |
|
|
|
170.76 |
|
|
|
146.74 |
|
|
|
161.55 |
|
|
|
154.91 |
|
|
|
141.59 |
|
Data
acquired by Research Data Group, Inc. (www.researchdatagroup.com)
On May
16, 2008, there were approximately 399 holders of record of our common
stock. This figure does not reflect beneficial ownership of shares
held in nominee names.
We have
been declaring and paying quarterly cash dividends on our common stock since the
third quarter of fiscal 2003. Our total cash dividends paid were
$252.0 million, $207.9 million and $120.1 million in fiscal 2008, 2007 and 2006,
respectively. The following table sets forth our quarterly cash
dividends per common share and the total amount of the dividend payment for each
quarter in fiscal 2008 and 2007 (amounts in thousands, except per share
amounts).
Fiscal
2008
|
|
Dividends
per Common Share
|
|
|
Amount
of
Dividend
Payment
|
|
Fiscal
2007
|
|
Dividends
per Common Share
|
|
|
Amount
of Dividend Payment
|
|
First
Quarter
|
|
$ |
0.280 |
|
|
$ |
61,119 |
|
First
Quarter
|
|
$ |
0.215 |
|
|
$ |
46,064 |
|
Second
Quarter
|
|
|
0.295 |
|
|
|
64,095 |
|
Second
Quarter
|
|
|
0.235 |
|
|
|
50,509 |
|
Third
Quarter
|
|
|
0.310 |
|
|
|
66,378 |
|
Third
Quarter
|
|
|
0.250 |
|
|
|
53,953 |
|
Fourth
Quarter
|
|
|
0.320 |
|
|
|
60,367 |
|
Fourth
Quarter
|
|
|
0.265 |
|
|
|
57,374 |
|
On April
28, 2008, we declared a quarterly cash dividend of $0.330 per share, which will
be paid on May 27, 2008 to stockholders of record on May 12, 2008 and the total
amount of such dividend is expected to be $60.9 million. Our
Board is free to change our dividend practices at any time and to increase or
decrease the dividend paid, or not to pay a dividend, on our common stock on the
basis of our results of operations, financial condition, cash requirements and
future prospects, and other factors deemed relevant by our Board. Our
current intent is to provide for ongoing quarterly cash dividends depending upon
market conditions and our results of operations.
Please
refer to “Item 12, Security
Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters,” at page 42 below, for the information required by Item 201(d)
of Regulation S-K with respect to securities authorized for issuance under our
equity compensation plans at March 31, 2008.
Issuer
Purchases of Equity Securities
The
following table sets forth our purchases of our common stock in the fourth
quarter of fiscal 2008 and the footnote below the table designates the
repurchase programs that the shares were purchased under:
Issuer
Purchases of Equity Securities
|
|
Period
|
|
(a)
Total Number of Shares Purchased
|
|
|
(b)
Average Price Paid per Share
|
|
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced
Programs
|
|
|
(d)
Maximum Number of Shares that May Yet Be Purchased Under the Programs
(1)(2)
|
|
January
1 – January 31, 2008
|
|
|
200,000 |
|
|
$ |
31.81 |
|
|
|
200,000 |
|
|
|
11,790,031 |
|
February
1 – February 29, 2008
|
|
|
3,997,797 |
|
|
$ |
31.45 |
|
|
|
3,997,797 |
|
|
|
7,792,234 |
|
March
1 – March 31, 2008
|
|
|
1,300,000 |
|
|
$ |
31.69 |
|
|
|
1,300,000 |
|
|
|
6,492,234 |
|
Total
|
|
|
5,497,797 |
|
|
$ |
31.52 |
|
|
|
5,497,797 |
|
|
|
|
|
(1)
|
On
October 23, 2006, our Board of Directors authorized the repurchase of up
to 10 million shares of our common stock in the open market or privately
negotiated transactions. As of March 31, 2008, no shares of
this authorization remained available to be purchased under this
program.
|
(2)
|
On
December 11, 2007, our Board of Directors authorized the repurchase of up
to 10 million shares of our common stock in open market or privately
negotiated transactions. As of March 31, 2008, 6,492,234 shares
of this authorization remained available to be purchased under this
program. There is no expiration date associated with this
program.
|
Our Board
of Directors authorized the repurchase of 21,500,000 shares of our common stock
concurrent with the junior subordinated convertible debenture transaction
described in Note 10 to our consolidated financial statements and no further
shares are available to be repurchased under this authorization.
You
should read the following selected consolidated financial data for the five-year
period ended March 31, 2008 in conjunction with our Consolidated Financial
Statements and Notes thereto and, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in Items 7 and 8 of this
Form 10-K. Our consolidated statements of income data for each of the
years in the three-year period ended March 31, 2008, and the balance sheet data
as of March 31, 2008 and 2007, are derived from our audited consolidated
financial statements, included in Item 8 of this Form 10-K. The statements of
operations data for the years ended March 31, 2005 and 2004 and balance sheet
data as of March 31, 2006, 2005 and 2004 have been derived from our audited
consolidated financial statements not included herein (for information below all
amounts are in thousands, except per share data).
Statement
of Income Data:
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net
sales
|
|
$ |
1,035,737 |
|
|
$ |
1,039,671 |
|
|
$ |
927,893 |
|
|
$ |
846,936 |
|
|
$ |
699,260 |
|
Cost
of sales
|
|
|
410,799 |
|
|
|
414,915 |
|
|
|
377,016 |
|
|
|
362,961 |
|
|
|
349,301 |
|
Research
and development
|
|
|
120,864 |
|
|
|
113,698 |
|
|
|
94,926 |
|
|
|
93,040 |
|
|
|
85,389 |
|
Selling,
general and administrative
|
|
|
175,646 |
|
|
|
163,247 |
|
|
|
129,587 |
|
|
|
111,188 |
|
|
|
92,411 |
|
Special
charges (1)
|
|
|
26,763 |
|
|
|
--- |
|
|
|
--- |
|
|
|
21,100 |
|
|
|
865 |
|
Operating
income
|
|
|
301,665 |
|
|
|
347,811 |
|
|
|
326,364 |
|
|
|
258,647 |
|
|
|
171,294 |
|
Interest
income (expense), net
|
|
|
46,885 |
|
|
|
52,967 |
|
|
|
30,786 |
|
|
|
16,864 |
|
|
|
4,639 |
|
Other
income (expense), net
|
|
|
2,435 |
|
|
|
312 |
|
|
|
2,035 |
|
|
|
1,757 |
|
|
|
1,963 |
|
Income
before income taxes
|
|
|
350,985 |
|
|
|
401,090 |
|
|
|
359,185 |
|
|
|
277,268 |
|
|
|
177,896 |
|
Income
tax provision
|
|
|
53,237 |
|
|
|
44,061 |
|
|
|
116,816 |
|
|
|
63,483 |
|
|
|
40,634 |
|
Net
income
|
|
$ |
297,748 |
|
|
$ |
357,029 |
|
|
$ |
242,369 |
|
|
$ |
213,785 |
|
|
$ |
137,262 |
|
Basic
net income per common share
|
|
$ |
1.44 |
|
|
$ |
1.66 |
|
|
$ |
1.15 |
|
|
$ |
1.03 |
|
|
$ |
0.67 |
|
Diluted
net income per common share
|
|
$ |
1.40 |
|
|
$ |
1.62 |
|
|
$ |
1.13 |
|
|
$ |
1.01 |
|
|
$ |
0.65 |
|
Dividends
declared per common share
|
|
$ |
1.205 |
|
|
$ |
0.965 |
|
|
$ |
0.570 |
|
|
$ |
0.208 |
|
|
$ |
0.113 |
|
Basic
common shares outstanding
|
|
|
207,220 |
|
|
|
215,498 |
|
|
|
210,104 |
|
|
|
206,740 |
|
|
|
206,032 |
|
Diluted
common shares outstanding
|
|
|
212,048 |
|
|
|
220,848 |
|
|
|
215,024 |
|
|
|
211,962 |
|
|
|
212,172 |
|
Balance
Sheet Data:
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Working
capital
|
|
$ |
1,526,649 |
|
|
$ |
828,817 |
|
|
$ |
509,860 |
|
|
$ |
768,683 |
|
|
$ |
613,894 |
|
Total
assets
|
|
|
2,512,307 |
|
|
|
2,269,541 |
|
|
|
2,350,596 |
|
|
|
1,817,554 |
|
|
|
1,622,143 |
|
Long-term
obligations, less current portion
|
|
|
1,150,128 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Stockholders’
equity
|
|
|
1,036,223 |
|
|
|
2,004,368 |
|
|
|
1,726,189 |
|
|
|
1,485,734 |
|
|
|
1,320,517 |
|
|
(1)
|
There
were no special charges during the fiscal years ended March 31, 2007 and
2006. Detailed discussions of the special charges for the
fiscal year ended March 31, 2008 are contained in Note 2 to our
Consolidated Financial Statements. Detailed explanations of the
special charges for the fiscal year ended March 31, 2005 and 2004 are
provided below. The following table presents a summary of
special charges for the five-year period ended March 31,
2008:
|
|
|
Year
ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Loss
on sale of Fab 3
|
|
$ |
26,763 |
|
|
$ |
--- |
|
|
$ |
--- |
|
|
$ |
--- |
|
|
$ |
--- |
|
Intellectual
property settlement
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
21,100 |
|
|
|
--- |
|
Contract
cancellation, severance and other costs related to Fab 1
closure
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
26,763 |
|
|
$ |
--- |
|
|
$ |
--- |
|
|
$ |
21,100 |
|
|
$ |
865 |
|
Fiscal
2005 Special Charges
Settlement
with U.S. Philips Corporation
In fiscal
2005, we reached an agreement with U.S. Philips Corporation and Philips
Electronics North America Corp. (together “Philips”) regarding patent license
litigation between Philips and Microchip. The agreement included
dismissal of the then pending litigation and the cross-license of certain
patents between Philips and Microchip. We recorded a special charge
of $21.1 million in the quarter that ended June 30, 2004 associated with this
matter. Pursuant to this cross-license, we licensed certain of our
patents related to 8-pin microcontrollers to Philips, and Philips licensed its
patents related to I2C serial
communications to us, each on fully-paid up, non-royalty bearing worldwide
licenses. We finalized and executed the definitive settlement
agreement related to this matter and made the cash payment to Philips during the
fiscal quarter ending September 30, 2004.
Fiscal
2004 Special Charges
Closure
of Fab 1
On April
7, 2003, we announced our intention to close our Chandler, Arizona (Fab 1) wafer
fabrication facility and integrate certain Fab 1 personnel and processes into
its Tempe, Arizona (Fab 2) wafer fabrication facility. We completed
this integration process during the three-month period ended June 30,
2003. The closure of Fab 1 and the integration of certain Fab 1
personnel into Fab 2 operations resulted in a reduction in force of 207
employees who were either directly involved in our manufacturing operations or
provided support functions to Fab 1. The detail of the charges
incurred related to the closure of Fab 1 that were included in cost of
sales for the three-month period ended June 30, 2003 is as follows (amounts in
thousands):
Accelerated
depreciation for Fab 1
|
|
$ |
30,608 |
|
Fab
1 related charges including severance,
|
|
|
|
|
material
and other costs
|
|
|
1,147 |
|
Total
charges in cost of sales
|
|
$ |
31,755 |
|
The
facility where Fab 1 was located is an integral part of our overall campus in
Chandler, Arizona. Within this same facility resides a portion of our
wafer probe, mask making and other manufacturing related
activities. Consequently it is not possible to abandon or otherwise
dispose of this facility. We have accelerated depreciation that was
taken only related to assets used in the wafer fabrication operations at the
facility. We have no specific plans for utilizing the space formerly
housing the wafer fabrication operations, and intend to leave it in an idle
state. The property, plant and equipment that was subject to the
accelerated depreciation is reflected in the gross and accumulated depreciation
carrying values in the property, plant and equipment section of the our balance
sheet and related footnote disclosures.
We
incurred $865,000 of special charges recorded principally for contract
cancellation, severance and other costs related to the closure of Fab 1 and
other actions.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Note
Regarding Forward-looking Statements
This
report, including “Item 1 – Business,” “Item 1A – Risk Factors,” and “Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding our strategy, financial
performance and revenue sources. We use words such as “anticipate,”
“believe,” “plan,” “expect,” “estimate,” “future,” “intend” and similar
expressions to identify forward-looking statements. These
forward-looking statements include, without limitation, statements regarding the
following:
|
·
|
The
effects and amount of competitive pricing pressure on our product
lines;
|
|
·
|
Our
ability to moderate future average selling price
declines;
|
|
·
|
The
effect of product mix on gross
margin;
|
|
·
|
The
amount of changes in demand for our products and those of our
customers;
|
|
·
|
The
level of orders that will be received and shipped within a
quarter;
|
|
·
|
The
effect that distributor and customer inventory holding patterns will have
on us;
|
|
·
|
Our
belief that customers recognize our products and brand name and use
distributors as an effective supply
channel;
|
|
·
|
Our
ability to increase the proprietary portion of our analog and interface
product lines and the effect of such an
increase;
|
|
·
|
The
impact of any supply disruption we may
experience;
|
|
·
|
Our
ability to effectively utilize our facilities at appropriate capacity
levels and anticipated costs;
|
|
·
|
That
our existing facilities and planned expansion activities provide
sufficient capacity to respond to increases in
demand;
|
|
·
|
That
manufacturing costs will be reduced by transition to advanced process
technologies;
|
|
·
|
Our
ability to absorb fixed costs, labor and other direct manufacturing
costs;
|
|
·
|
Our
ability to maintain manufacturing
yields;
|
|
·
|
Continuing
our investments in new and enhanced
products;
|
|
·
|
The
ability to attract and retain qualified personnel, and the accuracy of our
assessment of the status of our employee
relations;
|
|
·
|
The
cost effectiveness of using our own assembly and test
operations;
|
|
·
|
Our
anticipated level of capital
expenditures;
|
|
·
|
The
adequacy of our patent strategy;
|
|
·
|
Continuation
of quarterly cash dividends;
|
|
·
|
The
sufficiency of our existing sources of
liquidity;
|
|
·
|
The
impact of seasonality on our
business;
|
|
·
|
The
accuracy of our estimates used in valuing employee equity
awards;
|
|
·
|
That
the resolution of legal actions will not harm our business, and the
accuracy of our assessment of the probability of loss and range of
potential loss;
|
|
·
|
That
the idling of assets will not impair the value of such
assets;
|
|
·
|
The
recoverability of our deferred tax
assets;
|
|
·
|
The
adequacy of our tax reserves to offset any potential tax liabilities,
having the appropriate support for our income tax positions and the
accuracy of our estimated tax rate;
|
|
·
|
Our
belief that the expiration of any tax holidays will not have a material
impact;
|
|
·
|
The
accuracy of our estimates of the useful life and values of our
property;
|
|
·
|
The
timing and amounts of future contractual
obligations;
|
|
·
|
The
effect that expiration of any particular patent may
have;
|
|
·
|
Our
ability to obtain intellectual property licenses and minimize the effects
of litigation;
|
|
·
|
The
level of risk we are exposed to for product liability
claims;
|
|
·
|
The
amount of labor unrest, political instability, governmental interference
and changes in general economic conditions that we
experience;
|
|
·
|
The
effect of fluctuations in market interest rates on income and/or cash
flows;
|
|
·
|
The
effect of fluctuations in currency
rates;
|
|
·
|
Our
ability to collect accounts
receivable;
|
|
·
|
Our
belief that the combination of distributors we have chosen will support
the needs of our customers and not adversely impact our net
sales;
|
|
·
|
Our
belief that our investments in student loan auction rate municipal bond
offerings are of high credit
quality;
|
|
·
|
Our
ability to hold our fixed income investments and auction rate securities
until the market recovers, and the immaterial impact this will have on our
liquidity;
|
|
·
|
The
accuracy of our estimation of the cost effectivity of our insurance
coverage;
|
|
·
|
Our
belief that our activities are conducted in compliance with environmental
regulations; and
|
|
·
|
Our
belief that deferred cost of sales will have low risk of material
impairment.
|
Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of certain factors including those set
forth in “Item 1A – Risk Factors,” and elsewhere in this Form
10-K. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place
undue reliance on these forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking
statement.
Introduction
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and the related notes that appear elsewhere in
this document, as well as with other sections of this Annual Report on Form
10-K, including “Item 1 –
Business;” “Item 6 –
Selected Financial Data;” and “Item 8 – Financial Statements and
Supplementary Data.”
We begin
our Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) with a summary of Microchip’s overall business strategy to
give the reader an overview of the goals of our business and the overall
direction of our business and products. This is followed by a
discussion of the Critical Accounting Policies and Estimates that we believe are
important to understanding the assumptions and judgments incorporated in our
reported financial results. In the next section, beginning at page
30, we discuss our Results of Operations for fiscal 2008 compared to fiscal
2007, and for fiscal 2007 compared to fiscal 2006. We then provide an
analysis of changes in our balance sheet and cash flows, and discuss our
financial commitments in sections titled “Liquidity and Capital Resources,”
“Contractual Obligations” and “Off-Balance Sheet Arrangements.”
Strategy
Our goal
is to be a worldwide leader in providing specialized semiconductor products for
a wide variety of embedded control applications. Our strategic focus
is on embedded control products, which include microcontrollers,
high-performance linear and mixed signal devices, power management and thermal
management devices, interface devices, Serial EEPROMs, and our patented KeeLoq security
devices. We provide highly cost-effective embedded control products
that also offer the advantages of small size, high performance, low
voltage/power operation and ease of development, enabling timely and
cost-effective embedded control product integration by our
customers.
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. The recent weakness in
the U.S. housing market and general economic conditions have adversely
impacted our net sales to customers in the markets we
serve.
Our
manufacturing operations include wafer fabrication and assembly and
test. The ownership of our manufacturing resources is an important
component of our business strategy, enabling us to maintain a high level of
manufacturing control resulting in us being one of the lowest cost producers in
the embedded control industry. By owning our wafer fabrication
facilities and much of our assembly and test operations, and by employing
statistical process control techniques, we have been able to achieve and
maintain high production yields. Direct control over manufacturing
resources allows us to shorten our design and production cycles. This
control also allows us to capture the wafer manufacturing and a portion of the
assembly and test profit margin.
We employ
proprietary design and manufacturing processes in developing our embedded
control products. We believe our processes afford us both
cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully leverage
our process research and development costs and to deliver new products to market
more rapidly. Our engineers utilize advanced computer-aided design
(CAD) tools and software to perform circuit design, simulation and layout, and
our in-house photomask and wafer fabrication facilities enable us to rapidly
verify design techniques by processing test wafers quickly and
efficiently.
We are
committed to continuing our investment in new and enhanced products, including
development systems, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. Our current research and
development activities focus on the design of new microcontrollers, digital
signal controllers, memory and mixed-signal products, new development systems,
software and application-specific software libraries. We are also
developing new design and process technologies to achieve further cost
reductions and performance improvements in existing 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 Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. We review the accounting policies we use in
reporting our financial results on a regular basis. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition,
share-based compensation, inventories, investments, income taxes, property plant
and equipment, impairment of property, plant and equipment, junior subordinated
convertible debentures and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Results may differ from these
estimates due to actual outcomes being different from those on which we based
our assumptions. We review these estimates and judgments on an ongoing
basis. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements. We also have other policies that we
consider key accounting policies, such as our policy regarding revenue
recognition to OEMs; however, we do not believe these policies require us to
make estimates or judgments that are as difficult or subjective as our policies
described below.
Revenue
Recognition - Distributors
Our
distributors worldwide generally have broad price protection and product return
rights, so we defer revenue recognition until the distributor sells the product
to their customer. Revenue is recognized when the distributor sells
the product to an end-user, at which time the sales price becomes fixed or
determinable. Revenue is not recognized upon shipment to our
distributors since, due to discounts from list price as well as price protection
rights, the sales price is not substantially fixed or determinable at that
time. At the time of
shipment to these distributors, we record a trade receivable for the selling
price as there is a legally enforceable right to payment, relieve inventory for
the carrying value of goods shipped since legal title has passed to the
distributor, and record the gross margin in deferred income on shipments to
distributors on our consolidated balance sheets.
Deferred
income on shipments to distributors effectively represents the gross margin on
the sale to the distributor; however, the amount of gross margin that we
recognize in future periods could be less than the deferred margin as a result
of credits granted to distributors on specifically identified
products and customers to allow the distributors to earn a competitive gross
margin on the sale of our products to their end customers and price
protection concessions related to market pricing conditions.
We sell
the majority of the items in our product catalog to our distributors worldwide
at a uniform list price. However, distributors resell our products to
end customers at a very broad range of individually negotiated price
points. The majority of our distributors’ resales require a reduction
from the original list price paid. Often, under these circumstances,
we remit back to the distributor a portion of their original purchase price
after the resale transaction is completed in the form of a credit against the
distributors’ outstanding accounts receivable balance. The credits
are on a per unit basis and are not given to the distributor until they provide
information to us regarding the sale to their end customer. The price
reductions vary significantly based on the customer, product, quantity ordered,
geographic location and other factors and discounts to a price less than our
cost have historically been rare. The effect of granting these
credits establishes the net selling price to our distributors for the product
and results in the net revenue recognized by us when the product is sold by the
distributors to their end customers. Thus, a portion of the “Deferred
income on shipments to distributors” balance represents the amount of
distributors’ original purchase price that will be credited back to the
distributor in the future. The wide range and variability of
negotiated price concessions granted to distributors does not allow us to
accurately estimate the portion of the balance in the deferred income on
shipments to distributors account that will be credited back to the
distributors. Therefore, we do not reduce deferred income on
shipments to distributors or accounts receivable by anticipated future
concessions; rather, price concessions are typically recorded against deferred
income on shipments to distributors and accounts receivable when incurred, which
is generally at the time the distributor sells the product. At March
31, 2008, we had approximately $130.4 million of deferred revenue and $35.0
million in deferred cost of sales recognized as $95.4 million of deferred income
on shipments to distributors. At March 31, 2007, we had approximately
$126.4 million of deferred revenue and $35.0 million of deferred cost of sales
recognized as $91.4 million of deferred income on shipments to
distributors. The deferred income on shipments to distributors that
will ultimately be recognized in our income statement will be lower than the
amount reflected on the balance sheet due to additional price credits to be
granted to the distributors when the product is sold to their
customers. These additional price credits historically have resulted
in the deferred income approximating the overall gross margins that we recognize
in the distribution channel of our business.
We reduce
product pricing through price protection based on market conditions, competitive
considerations and other factors. Price protection is granted to
distributors on the inventory they have on hand at the date the price protection
is offered. When we reduce the price of our products, it allows the
distributor to claim a credit against its outstanding accounts receivable
balances based on the new price of the inventory it has on hand as of the date
of the price reduction. There is no immediate revenue impact from the
price protection, as it is reflected as a reduction of the deferred income on
shipments to distributors’ balance.
Products
returned by distributors and subsequently scrapped have historically been
immaterial to our consolidated results of operations. We routinely
evaluate the risk of impairment of the deferred cost of sales component of the
deferred income on shipments to distributors account. Because of the
historically immaterial amounts of inventory that have been scrapped, and
historically rare instances where discounts given to a distributor result in a
price less than our cost, we believe the deferred costs are approximately
recorded at their carrying value.
Share-based
Compensation
In the
first quarter of fiscal 2007, we adopted SFAS No. 123R, which requires
the measurement at fair value and recognition of compensation expense for all
share-based payment awards, including grants of employee stock options, RSUs and
employee stock purchase rights, to be recognized in our financial statements
based on their respective grant date fair values. Total share-based
compensation in fiscal 2008 was $33.4 million, of which $26.7 million
was reflected in operating expenses and $6.2 million was reflected in cost
of goods sold. Total share-based compensation which was included in
inventory at March 31, 2008 was $3.8 million.
Determining
the appropriate fair-value model and calculating the fair value of share-based
awards at the date of grant requires judgment. The fair value of our RSUs
is based on the fair market value of our common stock on the date of grant
discounted for expected future dividends. We use the Black-Scholes option
pricing model to estimate the fair value of employee stock options and rights to
purchase shares under stock participation plans, consistent with the provisions
of SFAS No. 123R. Option pricing models, including the
Black-Scholes model, also require the use of input assumptions, including
expected volatility, expected life, expected dividend rate, and expected
risk-free rate of return. We use a blend of historical and implied
volatility based on options freely traded in the open market as we believe this
is more reflective of market conditions and a better indicator of expected
volatility than using purely historical volatility. The expected life of
the awards is based on historical and other economic data trended into the
future. The risk-free interest rate assumption is based on observed interest
rates appropriate for the terms of our awards. The dividend yield
assumption is based on our history and expectation of future dividend payouts.
SFAS No. 123R requires us to develop an estimate of the number
of share-based awards which will be forfeited due to employee turnover.
Quarterly changes in the estimated forfeiture rate can have a significant
effect on reported share-based compensation, as the effect of adjusting the rate
for all expense amortization after April 1, 2006 is recognized in the period the
forfeiture estimate is changed. If the actual forfeiture rate is higher
than the estimated forfeiture rate, then an adjustment is made to increase the
estimated forfeiture rate, which will result in a decrease to the expense
recognized in the financial statements. If the actual forfeiture rate is
lower than the estimated forfeiture rate, then an adjustment is made to decrease
the estimated forfeiture rate, which will result in an increase to the expense
recognized in the financial statements. If forfeiture adjustments are
made, they would affect our gross margin, research and development expenses, and
selling, general, administrative expenses. The effect of forfeiture
adjustments in fiscal 2008 was immaterial.
We
evaluate the assumptions used to value our awards on a quarterly basis. If
factors change and we employ different assumptions, share-based compensation
expense may differ significantly from what we have recorded in the past.
If there are any modifications or cancellations of the underlying unvested
securities, we may be required to accelerate, increase or cancel any remaining
unearned share-based compensation expense. Future share-based compensation
expense and unearned share-based compensation will increase to the extent that
we grant additional equity awards to employees or we assume unvested equity
awards in connection with acquisitions. Had we adopted
SFAS No. 123R in prior periods, the magnitude of the impact of that
standard on our results of operations would have approximated the impact of
SFAS No. 123 assuming the application of the Black-Scholes option
pricing model as described in the disclosure of pro forma net income and pro
forma net income per share in Note 14 to our Consolidated Financial
Statements.
Inventories
Inventories
are valued at the lower of cost or market using the first-in, first-out
method. We write down our inventory for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less
favorable than those we projected, additional inventory write-downs may be
required. Inventory impairment charges establish a new cost basis for
inventory and charges are not subsequently reversed to income even if
circumstances later suggest that increased carrying amounts are
recoverable. In estimating our inventory obsolescence, we primarily
evaluate estimates of demand over a 12-month period and record impairment
charges for inventory on hand in excess of the estimated 12-month
demand.
Investments
We
classify our investments as trading securities or available-for-sale securities
based upon management’s intent with regard to the investments and the nature of
the underlying securities.
Our
trading securities consist of strategic investments in shares of publicly traded
common stock and restricted cash representing cash collateral for put options we
have sold on one of our trading securities. Our investments in trading
securities are carried at fair value with unrealized gains and losses reported
in other income, net.
Our
available-for-sale investments consist of government agency bonds, municipal
bonds, auction rate securities (ARS) and corporate bonds. Our investments
are carried at fair value with unrealized gains and losses reported in
stockholders’ equity. Premiums and discounts are amortized or accreted
over the life of the related available-for-sale security. Dividend and
interest income are recognized when earned. The cost of securities sold is
calculated using the specific identification method.
We
include within our short-term investments our trading securities, as well as our
income yielding available-for-sale securities that can be readily converted to
cash and includes within long-term investments those income yielding
available-for-sale securities with maturities of over one year that have
unrealized losses attributable to them. We have the ability to hold
our long-term investments until such time as these assets are no longer
impaired. Such recovery is not expected to occur within the next
year.
Due to
the lack of availability of observable market quotes on certain of the our
investment portfolio of ARS, we utilize valuation models including those that
are based on expected cash flow streams and collateral values, including
assessments of counterparty credit quality, default risk underlying the
security, discount rates and overall capital market liquidity. The valuation of
our ARS investment portfolio is subject to uncertainties that are difficult to
predict. Factors that may impact our ARS valuation include changes to
credit ratings of the securities as well as to the underlying assets supporting
those securities, rates of default of the underlying assets, underlying
collateral value, discount rates, counterparty risk and ongoing strength and
quality of market credit and liquidity.
The
credit markets continued to deteriorate in the second half of fiscal
2008. If uncertainties in these markets continue, these markets
deteriorate further or we experiences any additional ratings downgrades on any
investments in our portfolio (including our ARS), we may incur additional
impairments to our investment portfolio, which could negatively affect our
financial condition, cash flow and reported earnings.
Income
Taxes
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income within the relevant
jurisdiction and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. We have not provided for a valuation
allowance because we believe that it is more likely than not that our deferred
tax assets will be recovered from future taxable income. Should we
determine that we would not be able to realize all or part of our net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made. At
March 31, 2008, our gross deferred tax asset was
$63.3 million.
Various
taxing authorities in the United States and other countries in which we do
business are increasing their scrutiny of the tax structures employed by
businesses. Companies of our size and complexity are regularly audited by
the taxing authorities in the jurisdictions in which they conduct significant
operations. We are currently under audit by the United States Internal
Revenue Service (“IRS”) for our fiscal years ended March 31, 2002, 2003 and
2004. We recognize liabilities for anticipated tax audit issues in the
United States 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 United States and other
countries in which we do business. If such amounts ultimately prove to be
unnecessary, the resulting reversal of such reserves would result in tax
benefits being recorded in the period the reserves are no longer deemed
necessary. If such amounts ultimately prove to be less than an ultimate
assessment, a future charge to expense would be recorded in the period in which
the assessment is determined.
Property,
Plant & Equipment
Property,
plant and equipment are stated at cost. Major renewals and improvements
are capitalized, while maintenance and repairs are expensed when incurred.
At March 31, 2008, the carrying value of our property and equipment totaled
$522.3 million, which represents 20.8% of our total assets. This
carrying value reflects the application of our property and equipment accounting
policies, which incorporate estimates, assumptions and judgments relative to the
useful lives of our property and equipment. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets, which
range from five to seven years on manufacturing equipment and approximately 30
years on buildings.
We began
production activities at Fab 4 on October 31, 2003. We began to depreciate
the Fab 4 assets as they were placed in service for production purposes.
As of March 31, 2008, all of the buildings and supporting facilities were being
depreciated as well as the manufacturing equipment that had been placed in
service. All manufacturing equipment that was not being used in production
activities was maintained in projects in process and is not being depreciated
until it is placed into service since management believes there will be no
change to its utility from the present time until it is placed into productive
service. The lives to be used for depreciating this equipment at Fab 4
will be evaluated at such time as the assets are placed in service. We do
not believe that the temporary idling of such assets has impaired the estimated
life or carrying values of the underlying assets.
The
estimates, assumptions and judgments we use in the application of our property
and equipment policies reflect both historical experience and expectations
regarding future industry conditions and operations. The use of different
estimates, assumptions and judgments regarding the useful lives of our property
and equipment and expectations regarding future industry conditions and
operations, could result in materially different carrying values of assets and
results of operations.
Impairment
of Property, Plant and Equipment
We assess
whether indicators of impairment of long-lived assets are present. If such
indicators are present, we determine whether the sum of the estimated
undiscounted cash flows attributable to the assets in question is less than
their carrying value. If less, we recognize an impairment loss based on
the excess of the carrying amount of the assets over their respective fair
values. Fair value is determined by discounted future cash flows,
appraisals or other methods. If the assets determined to be impaired are
to be held and used, we recognize an impairment loss through a charge to our
operating results to the extent the present value of anticipated net cash flows
attributable to the asset are less than the asset’s carrying value, which we
depreciate over the remaining estimated useful life of the asset. We may incur
impairment losses, or additional losses on already impaired assets, in future
periods if factors influencing our estimates change.
Junior
Subordinated Convertible Debentures
We
account for our junior subordinated convertible debentures and related
provisions in accordance with the provisions of Emerging Issues Task Force Issue
(EITF) No. 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, EITF No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, EITF No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, EITF No. 01-6, The Meaning of “Indexed to a
Company’s Own Stock”, and EITF No. 04-08, The Effect of Contingently
Convertible Debt on Diluted Earn. We also evaluate the
instruments in accordance with SFAS No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, which requires bifurcation of
embedded derivative instruments and measurement of fair value of accounting
purposes. EITF No. 04-08 requires us to include the dilutive effect
of the shares of our common stock issuable upon conversion of the outstanding
junior subordinated convertible debentures in our diluted income per share
calculation regardless of whether the market price trigger or other contingent
conversion feature has been met. We apply the treasury stock method
as we have the intent and current ability to settle the principal amount of the
junior subordinated convertible debentures in cash. This method
results in incremental dilutive shares when the average fair value of our common
stock for a reporting period exceeds the conversion price per share which was
$33.81 at March 31, 2008 and adjusts as dividends are recorded in the
future.
Litigation
Our
current estimated range of liability related to pending litigation is based on
the probable loss of claims for which we can estimate the amount and range of
loss. Recorded reserves were immaterial at March 31, 2008.
Because
of the uncertainties related to both the probability of loss and the amount and
range of loss on our pending litigation, we are unable to make a reasonable
estimate of the liability that could result from an unfavorable outcome.
As additional information becomes available, we will assess the potential
liability related to our pending litigation and revise our estimates.
Revisions in our estimates of the potential liability could materially affect
our results of operation and financial position.
Results
of Operations
The
following table sets forth certain operational data as a percentage of net sales
for the years indicated:
|
|
Year
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
39.7 |
% |
|
|
39.9 |
% |
|
|
40.6 |
% |
Gross
profit
|
|
|
60.3 |
% |
|
|
60.1 |
% |
|
|
59.4 |
% |
Research
and development
|
|
|
11.7 |
% |
|
|
10.9 |
% |
|
|
10.2 |
% |
Selling,
general and administrative
|
|
|
16.9 |
% |
|
|
15.7 |
% |
|
|
14.0 |
% |
Special
charges
|
|
|
2.6 |
% |
|
|
--- |
% |
|
|
--- |
% |
Operating
income
|
|
|
29.1 |
% |
|
|
33.5 |
% |
|
|
35.2 |
% |
Net
Sales
We
operate in one industry segment and engage primarily in the design, development,
manufacture and marketing of semiconductor products. We sell our
products to distributors and original equipment manufacturers, referred to as
OEMs, in a broad range of market segments, perform ongoing credit evaluations of
our customers and generally require no collateral. In certain
circumstances, a customer's financial condition may require collateral,
and, in such cases, the collateral would be provided primarily by letters of
credit.
Our net
sales of $1,035.7 million in fiscal 2008 decreased by $3.9 million, or 0.4%,
over fiscal 2007, and net sales of $1,039.7 million in fiscal 2007 increased by
$111.8 million, or 12.0%, over fiscal 2006. The decrease in net sales
in fiscal 2008 compared to fiscal 2007 resulted primarily from adverse economic
conditions in the markets we serve, particularly the housing and consumer
markets. The increase in net sales in fiscal 2007 compared to fiscal
2006 resulted primarily from increased demand, predominantly for our proprietary
microcontroller and analog products. Average selling prices for our
products were down approximately 3% in fiscal 2008 over fiscal 2007 and were
flat in fiscal 2007 over fiscal 2006. The number of units of our
products sold was up approximately 3% in fiscal 2008 over fiscal 2007 and up
approximately 12% in fiscal 2007 over fiscal 2006. The average
selling prices and the unit volumes of our sales are impacted by the mix of our
products sold and overall semiconductor market conditions. We believe
that we have continued to grow our percentage of market share in the embedded
control market over the last three fiscal years. Key factors in
achieving the amount of net sales during the last three fiscal years
include:
|
·
|
continued
market share gains;
|
|
·
|
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;
|
|
·
|
increasing
demand for our products;
|
|
·
|
economic
conditions in the markets we serve;
and
|
|
·
|
inventory
holding patterns of our customers.
|
Sales by
product line for the fiscal years ended March 31, 2008, 2007 and 2006 were as
follows (dollars in thousands):
|
|
Year
Ended March 31,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
Microcontrollers
|
|
$ |
832,921 |
|
|
|
80.4 |
% |
|
$ |
834,293 |
|
|
|
80.2 |
% |
|
$ |
736,179 |
|
|
|
79.3 |
% |
Memory
products
|
|
|
120,280 |
|
|
|
11.6 |
|
|
|
122,748 |
|
|
|
11.8 |
|
|
|
125,335 |
|
|
|
13.5 |
|
Analog
and interface products
|
|
|
82,536 |
|
|
|
8.0 |
|
|
|
82,630 |
|
|
|
8.0 |
|
|
|
66,379 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
$ |
1,035,737 |
|
|
|
100.0 |
% |
|
$ |
1,039,671 |
|
|
|
100.0 |
% |
|
$ |
927,893 |
|
|
|
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 80.4% of our total net sales in fiscal 2008,
approximately 80.2% of our total net sales in fiscal 2007 and approximately
79.3% of our total net sales in fiscal 2006.
Net sales
of our microcontroller products decreased approximately 0.2% in fiscal 2008
compared to fiscal 2007, and increased approximately 13.3% in fiscal 2007
compared to fiscal 2006. The decrease in net sales in fiscal 2008
compared to fiscal 2007 resulted primarily from adverse economic conditions in
the markets we serve, particularly the housing and consumer
markets. The increase in net sales in fiscal 2007 compared to fiscal
2006 was primarily due to increased demand for our microcontroller products in
end markets, driven principally by market share gains and those factors
described above under “Net Sales” at page 30. The end markets that we
serve include the consumer, automotive, industrial control, communications and
computing control markets.
Historically,
average selling prices in the semiconductor industry decrease over the life of
any particular product. The overall average selling prices of our
microcontroller products have remained relatively constant over time due to the
proprietary nature of these products. We have experienced, and expect
to continue to experience, moderate pricing pressure in certain microcontroller
product lines, primarily due to competitive conditions. We have in
the past been able to, and expect in the future to be able to, moderate average
selling price declines in our microcontroller product lines by introducing new
products with more features and higher prices. We may be unable to
maintain average selling prices for our microcontroller products as a result of
increased pricing pressure in the future, which could adversely affect our
operating results.
Memory
Products
Sales of
our memory products accounted for approximately 11.6% of our total net sales in
fiscal 2008, approximately 11.8% of our total net sales in fiscal 2007 and
approximately 13.5% of our total net sales in fiscal 2006.
Net sales
of our memory products decreased approximately 2.0% in fiscal 2008 compared to
fiscal 2007, and decreased approximately 2.1% in fiscal 2007 compared to fiscal
2006, driven primarily by customer demand conditions within the Serial EEPROM
market, which products comprise substantially all of our memory product net
sales.
Serial
EEPROM product pricing has historically been cyclical in nature, with steep
price declines followed by periods of relative price stability, driven by
changes in industry capacity at different stages of the business
cycle. We have experienced, and expect to continue to experience,
varying degrees of competitive pricing pressures in our Serial EEPROM
products. We may be unable to maintain the average selling prices of
our Serial EEPROM products as a result of increased pricing pressure in the
future, which could adversely affect our operating results.
Analog and Interface
Products
Sales of
our analog and interface products accounted for approximately 8.0% of our total
net sales in fiscal 2008, approximately 8.0% of our total net sales in fiscal
2007 and approximately 7.2% of our total net sales in fiscal 2006.
Net sales
of our analog and interface products were essentially flat in fiscal 2008
compared to fiscal 2007 and increased approximately 24.5% in fiscal 2007
compared to fiscal 2006. The changes in net sales of our analog and
interface products in these periods were driven primarily by economic
conditions, market share gains and supply and demand conditions within the
analog and interface market.
Analog
and interface products can be proprietary or non-proprietary in
nature. Currently, we consider more than half of our analog and
interface product mix to be proprietary in nature, where prices are relatively
stable, similar to the pricing stability experienced in our microcontroller
products. The non-proprietary portion of our analog and interface
business will experience price fluctuations, driven primarily by the current
supply and demand for those products. We may be unable to maintain
the average selling prices of our analog and interface products as a result of
increased pricing pressure in the future, which could adversely affect our
operating results. We anticipate the proprietary portion of our
analog and interface products will increase over time.
Distribution
Distributors
accounted for 64% of our net sales in fiscal 2008 and 65% of our net sales in
each of fiscal 2007 and 2006.
Our
largest distributor accounted for approximately 12% of our net sales in fiscal
2008, approximately 11% of our net sales in fiscal 2007 and approximately 13% of
our net sales in fiscal 2006. Our two largest distributors together
accounted for 19% of our net sales in fiscal 2008, 21% of our net sales in
fiscal 2007 and 24% of our net sales in fiscal 2006.
Generally,
we do not have long-term agreements with our distributors and either party may
terminate the relationship with little or no advanced notice. The
loss of, or the disruption in the operations of, one or more of our distributors
could reduce our future net sales in a given quarter and could result in an
increase in inventory returns.
At March
31, 2008, distributors were maintaining an average of approximately 1.8 months
of inventory of our products calculated based on the prior three months of their
sell-through activity. Over the past three fiscal years, the months
of inventory maintained by our distributors have fluctuated between
approximately 1.8 months and 2.5 months. Thus, inventory levels at
our distributors are at the low end of the range we have experienced over the
last three years. We do not believe that inventory holding patterns
at our distributors will materially impact our net sales, due to the fact that
we recognize revenue based on sell-through for all of our
distributors.
Sales by
Geography
Sales by
geography for the fiscal years ended March 31, 2008, 2007 and 2006 were as
follows (dollars in thousands):
|
|
Year
Ended March 31,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
Americas
|
|
$ |
273,363 |
|
|
|
26.4 |
% |
|
$ |
287,371 |
|
|
|
27.6 |
% |
|
$ |
266,353 |
|
|
|
28.7 |
% |
Europe
|
|
|
308,171 |
|
|
|
29.8 |
|
|
|
302,708 |
|
|
|
29.1 |
|
|
|
255,367 |
|
|
|
27.5 |
|
Asia
|
|
|
454,203 |
|
|
|
43.8 |
|
|
|
449,592 |
|
|
|
43.3 |
|
|
|
406,173 |
|
|
|
43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
$ |
1,035,737 |
|
|
|
100.0 |
% |
|
$ |
1,039,671 |
|
|
|
100.0 |
% |
|
$ |
927,893 |
|
|
|
100.0 |
% |
Our sales
to foreign customers have been predominately in Asia and Europe, which we
attribute to the manufacturing strength in those areas for automotive,
communications, computing, consumer and industrial control
products. Americas sales include sales to customers in the United
States, Canada, Central America and South America.
Sales to
foreign customers accounted for approximately 75% of our net sales in fiscal
2008, 74% of our net sales in fiscal 2007 and 74% of our net sales in fiscal
2006. Substantially all of our foreign sales are U.S. dollar
denominated.
Sales to
customers in China, including Hong Kong, accounted for approximately 20% of our
net sales in fiscal 2008, approximately 18% of our net sales in fiscal 2007 and
approximately 17% of our net sales in fiscal 2006. Sales to customers
in Taiwan accounted for approximately 10% of our net sales in each of fiscal
2008, 2007 and 2006. We did not have sales into any other countries
that exceeded 10% of our net sales during the last three fiscal
years.
Gross
Profit
Our gross
profit was $624.9 million in fiscal 2008, $624.8 million in fiscal 2007 and
$550.9 million in fiscal 2006. Gross profit as a percent of sales was
60.3% in fiscal 2008, 60.1% in fiscal 2007 and 59.4% in fiscal
2006.
The most
significant factors affecting our gross profit over the past three fiscal years
were:
|
·
|
lower
depreciation as a percentage of cost of sales driven by reduced capital
requirements in our business due to our purchase of Fab
4.
|
|
·
|
increased
cost of sales of $2.9 million in fiscal 2008 over fiscal 2007, and $3.2
million in fiscal 2007 over fiscal 2006 associated with share-based
compensation expense under SFAS No.
123R.
|
|
·
|
fluctuations
in the product mix of microcontrollers, proprietary and non-proprietary
analog products and Serial EEPROM products resulting in higher average
selling prices for our products.
|
|
·
|
continual
cost reductions in wafer fabrication and assembly and test manufacturing
such as new manufacturing technologies and more efficient manufacturing
techniques.
|
Other
factors that impacted our gross profit percentage in the periods covered by this
report include:
|
·
|
changes
in capacity utilization and absorption of fixed costs,
and
|
|
·
|
inventory
write-offs and the sale of inventory that was previously written
off.
|
During
fiscal 2008 and fiscal 2007, we operated at approximately 99% of our Fab 2
capacity. During fiscal 2006, we operated at approximately 98% of our
Fab 2 capacity. Our utilization of Fab 4’s total capacity is at
relatively low levels although we are utilizing all of the installed equipment
base. We expect to maintain the current level of capacity utilization
at Fab 2 during the first quarter of fiscal 2009 and to modestly increase the
current level of capacity utilization at Fab 4 during the first quarter of
fiscal 2009.
The
process technologies utilized impact our gross margins. Fab 2
currently utilizes various manufacturing process technologies, but predominantly
utilizes our 0.5 to 1.0 micron processes. At March 31, 2008, Fab 4
predominantly utilized our 0.35 to 0.5 micron processes. We continue
to transition products to more advanced process technologies to reduce future
manufacturing costs. All of our production has been on 8-inch wafers
during the periods covered by this report.
Our
overall inventory levels were $124.5 million at March 31, 2008, compared to
$121.0 million at March 31, 2007 and $115.0 million at March 31,
2006. We maintained 112 days of inventory on our balance sheet at
March 31, 2008 compared to 107 days of inventory at March 31, 2007 and 106 days
at March 31, 2006.
We
anticipate that our gross margins will fluctuate over time, driven primarily by
the overall product mix of microcontroller, analog and interface and memory
products and the percentage of net sales of each of these products in a
particular quarter, as well as manufacturing yields, fixed cost absorption,
capacity utilization levels, particularly those at Fab 4, and competitive
and economic conditions.
At March
31, 2008, approximately 67% of our assembly requirements were performed in our
Thailand facility, compared to approximately 72% as of March 31, 2007 and
approximately 66% at March 31, 2006. Contractors located in Asia
perform the balance of our assembly operations. Substantially all of
our test requirements were performed in our Thailand facility over the last
three fiscal years. We believe that the assembly and test operations
performed at our Thailand facility provide us with significant cost savings when
compared to contractor assembly and test costs, as well as increased control
over these portions of the manufacturing process.
We rely
on outside wafer foundries for a small portion of our wafer fabrication
requirements.
Our use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. While we review the
quality, delivery and cost performance of our third party contractors, our
future operating results could suffer if any third party contractor is unable to
maintain manufacturing yields, assembly and test yields and costs at
approximately their current levels.
Research
and Development (R&D)
R&D
expenses for fiscal 2008 were $120.9 million, or 11.7% of sales, compared to
$113.7 million, or 10.9% of sales, for fiscal 2007 and $94.9 million, or 10.2%
of sales, for fiscal 2006. 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 $7.2 million, or 6.3%, for fiscal 2008 over fiscal
2007. The primary reasons for the dollar increase in R&D costs in
fiscal 2008 compared to fiscal 2007 were higher labor costs as a result of
expanding our internal R&D headcount and $1.1 million of additional
share-based compensation expense. R&D expenses increased $18.8
million, or 19.8%, for fiscal 2007 over fiscal 2006. The primary
reasons for the dollar increase in R&D costs in fiscal 2007 compared to
fiscal 2006 were higher labor and recruitment costs as a result of expanding our
technical resources and $9.6 million of share-based compensation as a result of
the adoption of SFAS No. 123R.
Selling,
General and Administrative
Selling,
general and administrative expenses for fiscal 2008 were $175.6 million, or 16.9% of
sales, compared to $163.2 million, or 15.7% of sales, for fiscal 2007, and
$129.6 million, or 14.0% of sales, for fiscal 2006. 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 increased $12.4 million, or 7.6%, for
fiscal 2008 over fiscal 2007. The primary reasons for the dollar
increase in selling, general and administrative expenses in fiscal 2008 over
fiscal 2007 were higher labor costs as a result of expanding our internal
resources involved in the technical aspects of selling our products and
$1.5 million of additional share-based compensation
expense. Selling, general and administrative expenses increased
$33.7 million, or 26.0%, for fiscal 2007 over fiscal 2006. The
primary reasons for the dollar increase in selling, general and administrative
expenses in fiscal 2007 over fiscal 2006 were higher labor costs as a result of
expanding our internal resources in the technical aspects of selling our
products and $14.5 million of share-based compensation as a result of the
adoption of SFAS No. 123R.
Selling,
general and administrative expenses fluctuate over time, primarily due to
revenue and operating expense investment levels.
Special
Charge - Loss on Sale of Fab 3
In August
2002, we acquired a semiconductor manufacturing facility in Gresham, Oregon,
referred to as Fab 4. After the acquisition of Fab 4 was completed,
we undertook an analysis of the potential production capacity at Fab
4. The results of the production capacity analysis led us to
determine that Fab 3’s capacity would not be needed in the foreseeable future
and during the second quarter of fiscal 2003 we committed to a plan to sell Fab
3. Accordingly, Fab 3 was classified as an asset held-for-sale as of
December 31, 2002, and we maintained that classification until March 31,
2005.
On March
31, 2005, we changed the classification of Fab 3 from an asset held-for-sale to
an asset held-for-future-use and began to depreciate the asset. Fab 3 had
been on the market for over two years, and we had not received any acceptable
offers on the facility. Over that period of time, our business had
increased significantly and we thought that over the next several years we would
need to begin planning for future wafer fabrication capacity as a larger
percentage of Fab 4’s clean room capacity was utilized. We determined
that the appropriate action to take was to stop actively marketing the Fab 3
facility and hold it for future use. As a result of this change in
classification, we had to assess the fair value of the Fab 3 asset to determine
if any additional impairment charge was required upon the change in
classification from held-for-sale to held-for-future-use under SFAS No.
144. We performed a discounted cash flow analysis of the Fab 3 asset
based on various financial projections in developing the fair value estimate
given that it was the best available valuation technique for the
asset. The discounted cash flow analysis confirmed the carrying value
of the Fab 3 asset at March 31, 2005 was not in excess of its fair
value. No indicators of impairment for the Fab 3 asset arose between
March 31, 2005 and September 30, 2007.
We
received an unsolicited offer on the Fab 3 facility in September
2007. We assessed our available capacity in our current facilities,
along with our capacity available from outside foundries and determined the
capacity of Fab 3 would not be required in the near term. As a result
of this assessment, we accepted the offer to sell Fab 3 on September 21, 2007
and the transaction closed on October 19, 2007. We received
$27.5 million in cash net of expenses associated with the sale and
recognized an impairment charge of $26.8 million on the sale of Fab 3,
representing the difference between the carrying value of the assets at
September 30, 2007 and the amounts realized subsequent to September 30,
2007.
There
were no special charges in fiscal 2007 or 2006.
Other
Income (Expense)
Interest
income in fiscal 2008 decreased to $54.9 million from $58.4 million in fiscal
2007 as the average interest rates on our invested cash balances were at lower
levels during fiscal 2008. Interest income in fiscal 2007 increased
to $58.4 million from $32.8 million in fiscal 2006 as our average invested
balances were at higher levels in fiscal 2007 compared to fiscal 2006, and we
earned a higher interest rate on our invested balances. Interest
expense in fiscal 2008 increased to $8.0 million from $5.4 million in fiscal
2007 due to the $1.15 billion in 2.125% junior subordinated convertible
debentures we issued in December 2007. Interest expense in fiscal
2007 increased to $5.4 million from $2.0 million in fiscal 2006 due to the
short-term debt balances that were outstanding.
Provision
for Income Taxes
Provisions
for income taxes reflect tax on our foreign earnings and federal and state tax
on our U.S. earnings. Our effective tax rate was 15.2% in fiscal
2008, 11.0% in fiscal 2007 and 32.5% in fiscal 2006, and is lower than statutory
rates in the United States due primarily to lower tax rates at our foreign
locations, R&D tax credits and export sales incentives. Our
effective tax rate in fiscal 2008 reflects a $10.3 million U.S. tax benefit
associated with the sale of Fab 3 in the second quarter of fiscal 2008, a $5.7
million tax benefit related to the release of tax reserves associated with a
foreign tax matter in the third quarter of fiscal 2008, a $4.5 million tax
benefit related to the release of tax reserves for certain international tax
exposures in the fourth quarter of fiscal 2008 and approximately $0.8 million
related to accrued interest and other reserve matters. Combined,
these tax benefits decreased our effective tax rate in fiscal 2008 by
approximately 4.4%. Our effective tax rate in fiscal 2007 reflects a
$52.2 million benefit related to a tax settlement for our fiscal 1999 through
fiscal 2001 tax years that occurred in the fourth quarter of fiscal 2007 which
decreased our effective tax rate for fiscal 2007 by 13%. Our
effective tax rate in fiscal 2006 reflects a $30.6 million tax expense related
to the repatriation of $500 million of foreign earnings under the American Jobs
Creation Act (the “Jobs Act”) that was effective for the third quarter of fiscal
2006 which increased our effective tax rate in fiscal 2006 by
8.5%. We expect our effective tax rate for fiscal 2009 to be
approximately 18.2%.
Various
taxing authorities in the United States and other countries in which we do
business are increasing their scrutiny of the tax structures employed by
businesses. Companies of our size and complexity are regularly
audited by the taxing authorities in the jurisdictions in which they conduct
significant operations. We are currently under audit by the IRS for
our fiscal years ended March 31, 2002, 2003 and 2004. We recognize
liabilities for anticipated tax audit issues in the United States 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 United States and other countries in
which we do business. If such amounts ultimately prove to be
unnecessary, the resulting reversal of such reserves would result in tax
benefits being recorded in the period the reserves are no longer deemed
necessary. If such amounts ultimately prove to be less than any final
assessment, a future charge to expense would be recorded in the period in which
the assessment is determined.
Our
Thailand manufacturing operations currently benefit from numerous tax holidays
that have been granted to us by the Thailand government based on our investments
in property, plant and equipment in Thailand. Our tax holiday periods
in Thailand expire at various times in the future. One of our
Thailand tax holidays expired in September 2006 and the expiration did not have
a material impact on our effective tax rate. Any expiration of
our tax holidays in Thailand are expected to have a minimal impact on our
overall tax expense due to other tax holidays and increases in income in other
taxing jurisdictions with lower statutory rates.
Liquidity
and Capital Resources
We had
$1,519.1 million in cash, cash equivalents and short-term and long-term
investments at March 31, 2008, an increase of $240.7 million from the March
31, 2007 balance. The increase in cash, cash equivalents and short-term and
long-term investments over this time period is primarily attributable to cash
generated by operating activities and cash received from the issuance of our
junior subordinated convertible debentures being offset in part by dividends and
stock repurchase activity during the twelve months ended March 31,
2008.
Net cash
provided from operating activities was $447.3 million for fiscal 2008, $429.8
million for fiscal 2007 and $437.3 million for fiscal 2006. The increase in
cash flow from operations in fiscal 2008 compared to fiscal 2007 was primarily
due to changes in accrued liabilities and other assets and
liabilities.
Net cash
provided by investing activities was $55.7 million for fiscal 2008, net cash
used in investing activities was $442.2 million for fiscal 2007 and
$136.6 million in fiscal 2006. The increase in fiscal 2008 over
fiscal 2007 was primarily due to changes in our net purchases, sales and
maturities of investments and cash proceeds from the sale of Fab
3. The increase in cash used in investing activities in fiscal 2007
over fiscal 2006 was primarily due to changes in our net purchases, sales and
maturities of short-term and long-term investments.
Our level
of capital expenditures varies from time to time as a result of actual and
anticipated business conditions. Capital expenditures were
$69.8 million in fiscal 2008, $60.0 million in fiscal 2007 and $76.3
million in fiscal 2006. The primary reason for the dollar differences
in capital expenditures in the periods covered by this report related to
requirements for funding capital expansion activities in our manufacturing
operations. 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, including approximately $30 million to expand our
building footprint in Thailand.
We expect
to finance capital expenditures through our existing cash balances and cash
flows from operations. We believe that the capital expenditures
anticipated to be incurred over the next twelve months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
Net cash
used in financing activities was $182.7 million for fiscal 2008 and $385.3 million for fiscal
2007. Net cash used in financing activities was $195.8 million
for fiscal 2006. Proceeds from the sale of stock, the exercise of
stock options and employee purchases under our employee stock purchase plan were
$59.1 million for fiscal 2008, $68.7 million for fiscal 2007 and $95.8
million for fiscal 2006. During the twelve months ended March 31,
2008, we received net proceeds of $1,127.0 million from the issuance of our
2.125% junior subordinated convertible debentures. Cash expended for
the repurchase of our common stock was $1,138.0 million in fiscal 2008 and
$3.3 million in fiscal 2006. No amounts were expended in fiscal 2007
for the repurchase of common stock. During fiscal 2007, we paid down
$269.0 million in short-term borrowings. During fiscal 2006, we
paid down $45.5 million in short-term borrowings and initiated new
borrowings of $269.0 million. To complete the repatriation of
$500 million in fiscal 2006, we initiated the $269.0 million in
borrowings, which were collateralized against investments that were held in
foreign locations, allowing the investments to reach their normal maturity
date. Effective with the adoption of SFAS No. 123R on April 1,
2006, we began reporting the excess tax benefit from share-based payment
arrangements as a cash flow from financing activities rather than a cash flow
from operating activities. The excess tax benefit from share-based
payment arrangements was $21.2 million in fiscal 2008 and $22.8 million in
fiscal 2007.
On
October 23, 2006, our Board of Directors authorized the repurchase of up to
10,000,000 shares of our common stock in the open market or privately negotiated
transactions. As of March 31, 2008, no shares related to this
authorization remained available for purchase under this program. On
December 11, 2007, our Board of Directors authorized the repurchase of up to an
additional 10,000,000 shares of our common stock in the open market or in
privately negotiated transactions. As of March 31, 2008, 6,492,234
shares related to this authorization remained available for purchase under this
authorization.
Our Board
of Directors authorized the repurchase of 21,500,000 shares of our common stock
concurrent with the junior subordinated convertible debenture transaction
described in Note 10 to our Consolidated Financial Statements and no further
shares are available to be repurchased under this authorization.
On
October 28, 2002, we announced that our Board of Directors had approved and
instituted a quarterly cash dividend on our common stock. The initial
quarterly dividend of $0.02 per share was paid on December 6, 2003 in the amount
of $4.0 million. We have continued to pay quarterly dividends
and have increased the amount of such dividends on a regular
basis. During fiscal 2006, we paid dividends in the amount of $0.57
per share for a total dividend payment of $120.1 million. During
fiscal 2007, we paid dividends in the amount of $0.965 per share for a total
dividend payment of $207.9 million. During fiscal 2008, we paid
dividends in the amount of $1.205 per share for a total dividend payment of
$252.0 million. On April 28, 2008, we declared a quarterly cash
dividend of $0.33 per share, which will be paid on May 27, 2008, to stockholders
of record on May 12, 2008 and the total amount of such dividend is expected to
be $60.9 million. Our Board is free to change our dividend
practices at any time and to increase or decrease the dividend paid, or not to
pay a dividend, on our common stock on the basis of our results of operations,
financial condition, cash requirements and future prospects, and other factors
deemed relevant by our Board. Our current intent is to provide for
ongoing quarterly cash dividends depending upon market conditions and our
results of operations.
We enter
into derivative transactions from time to time in an attempt to reduce our
exposure to currency rate fluctuations. Although none of the
countries in which we conduct significant foreign operations have had a highly
inflationary economy in the last five years, there is no assurance that
inflation rates or fluctuations in foreign currency rates in countries where we
conduct operations will not adversely affect our operating results in the
future. At March 31, 2008, we had foreign currency forward contracts
of $2.4 million outstanding.
We
believe that our existing sources of liquidity combined with cash generated from
operations will be sufficient to meet our currently anticipated cash
requirements for at least the next twelve months. However, the
semiconductor industry is capital intensive. In order to remain
competitive, we must constantly evaluate the need to make significant
investments in capital equipment for both production and research and
development. We may seek additional equity or debt financing from
time to time to maintain or expand our wafer fabrication and product assembly
and test facilities, or for other purposes. The timing and amount of
any such financing requirements will depend on a number of factors, including
demand for our products, changes in industry conditions, product mix, and
competitive factors. There can be no assurance that such financing
will be available on acceptable terms, and any additional equity financing would
result in incremental ownership dilution to our existing
stockholders.
Contractual
Obligations
The
following table summarizes our significant contractual obligations at March 31,
2008, and the effect such obligations are expected to have on our liquidity and
cash flows in future periods. This table excludes amounts already
recorded on our balance sheet as current liabilities at March 31, 2008 (dollars
in thousands):
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1 –
3 years
|
|
|
3 –
5 years
|
|
|
More
than
5
years
|
|
Operating
lease obligations
|
|
$ |
14,826 |
|
|
$ |
5,869 |
|
|
$ |
7,524 |
|
|
$ |
1,433 |
|
|
$ |
--- |
|
Capital
purchase obligations (1)
|
|
|
45,165 |
|
|
|
45,165 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Other
purchase obligations and commitments (2)
|
|
|
1,803 |
|
|
|
808 |
|
|
|
995 |
|
|
|
--- |
|
|
|
--- |
|
2.125%
junior convertible debentures – principal and interest (3)
|
|
|
1,875,997 |
|
|
|
24,437 |
|
|
|
48,875 |
|
|
|
48,875 |
|
|
|
1,753,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations (4)
|
|
$ |
1,937,791 |
|
|
$ |
76,279 |
|
|
$ |
57,394 |
|
|
$ |
50,308 |
|
|
$ |
1,753,810 |
|
(1)
|
Capital
purchase obligations represent commitments for construction or purchases
of property, plant and equipment. They are not recorded as
liabilities on our balance sheet as of March 31, 2008, as we have not yet
received the related goods or taken title to the
property.
|
(2)
|
Other
purchase obligations and commitments include payments due under various
types of licenses.
|
(3)
|
For
purposes of this table we have assumed the principal of our convertible
debentures will be paid on December 31,
2037.
|
(4)
|
Total
contractual obligations do not include contractual obligations recorded on
the balance sheet as current liabilities, or certain purchase obligations
as discussed below. The contractual obligations also do not
include amounts related to uncertain tax positions because reasonable
estimates cannot be made.
|
Purchase
orders or contracts for the purchase of raw materials and other goods and
services are not included in the table above. We are not able to
determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. For the purpose of this
table, contractual obligations for purchase of goods or services are defined as
agreements that are enforceable and legally binding on Microchip and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Our purchase orders are based on our
current manufacturing needs and are fulfilled by our vendors with short time
horizons. We do not have significant agreements for the purchase of
raw materials or other goods specifying minimum quantities or set prices that
exceed our expected requirements for three months. We also enter into
contracts for outsourced services; however, the obligations under these
contracts were not significant and the contracts generally contain clauses
allowing for cancellation without significant penalty.
The
expected timing of payment of the obligations discussed above is estimated based
on current information. Timing of payments and actual amounts paid
may be different depending on the time of receipt of goods or services or
changes to agreed-upon amounts for some obligations.
Off-Balance
Sheet Arrangements
As of
March 31, 2008, we are not involved in any off-balance sheet arrangements, as
defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value
Measurement (SFAS No. 157). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. In February 2008, the FASB issued FASB Staff Position
(FSP) FAS 157-2, Effective
Date of FASB Statement No. 157 (FSP FAS 157-2), which delays the
effective date of SFAS No. 157 for all nonfinancial assets and
liabilities except for those recognized or disclosed at least annually. Except
for the delay for nonfinancial assets and liabilities, SFAS No. 157 is
effective for the us beginning April 1, 2008. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years and will be adopted by us in the first quarter of
fiscal 2009. We are in the process of determining the effect, if any,
that the adoption of SFAS No. 157 will have on our consolidated financial
statements.
On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). Under this
Statement, we may elect to report financial instruments and certain other items
at fair value on a contract-by-contract basis with changes in value reported in
earnings. SFAS No. 159 is effective for years beginning after
November 15, 2007 and will be adopted by us in the first quarter of fiscal
2009. We are in the process of determining the effect, if any, that
the adoption of SFAS No. 159 will have on our consolidated financial
statements.
In June
2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF 07-3). EITF 07-3
requires that nonrefundable advance payments for goods or services that will be
used or rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a
prospective basis, for fiscal years beginning after December 15, 2007 and
will be adopted by us in the first quarter of fiscal 2009. We do not
expect the adoption of EITF 07-3 to have a material effect on our
consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141R). SFAS No. 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS
No. 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. SFAS
No. 141R is effective for fiscal years beginning after December 15,
2008, and will be adopted by us in the first quarter of fiscal
2010. We are currently evaluating the potential impact, if any, that
the adoption of SFAS No. 141R will have on our consolidated results of
operations and financial condition.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (SFAS No. 160). SFAS No. 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent's ownership interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008, and will be adopted by us in the first quarter of
fiscal 2010. We are currently evaluating the potential impact, if
any, that the adoption of SFAS No. 160 will have on our consolidated
results of operations and financial condition.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133 (SFAS No. 161). The standard requires additional
quantitative disclosures (provided in tabular form) and qualitative disclosures
for derivative instruments. The required disclosures include how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows; relative volume of derivative
activity; the objectives and strategies for using derivative instruments; the
accounting treatment for those derivative instruments formally designated as the
hedging instrument in a hedge relationship; and the existence and nature of
credit-related contingent features for derivatives. SFAS No. 161 does not
change the accounting treatment for derivative instruments. SFAS No. 161 is
effective for us beginning April 1, 2009. We do not expect the
adoption of SFAS No. 161 to have a material impact on our financial condition,
results of operations or cash flows.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS No. 162). The standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles (GAAP) for nongovernmental entities. Prior to the issuance of
SFAS No. 162, the GAAP hierarchy was defined in the American Institute of
Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No.
69, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting
Principles. SFAS No. 162 is effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board Auditing amendments to
AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. We are currently evaluating the potential impact, if
any, of the adoption of SFAS No. 162 on our consolidated results of
operations and financial condition.
In May
2008, the FASB released FSP APB 14-1 Accounting For Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1) that alters the accounting treatment for
convertible debt instruments that allow for either mandatory or optional cash
settlements. FSP APB 14-1, will impact the accounting associated with
our $1.15 billion junior subordinated convertible debentures. FSP APB
14-1 specifies that issuers of such instruments should separately account for
the liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods, and will require us to recognize additional (non-cash)
interest expense based on the market rate for similar debt instruments without
the conversion feature. Furthermore, it would require recognizing
interest expense in prior periods pursuant to retrospective accounting
treatment. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and will be adopted by the us on
April 1, 2009. We are currently evaluating the materiality of the
adverse impact the adoption of FSP APB 14-1 will have on our consolidated
results of operations and financial condition.
Item
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
investment portfolio, consisting of fixed income securities and money market
funds that we hold on an available-for-sale basis, was $1,001.7 million as
of March 31, 2008, and $1,278.4 million as of March 31, 2007. These
securities, like all fixed income instruments, are subject to interest rate risk
and will decline in value if market interest rates increase. We have
the ability to hold our fixed income investments until maturity and, therefore,
we would not expect to recognize any material adverse impact in income or cash
flows if market interest rates increase. The following table provides
information about our available-for-sale securities that are sensitive to
changes in interest rates. We have aggregated our available-for-sale
securities for presentation purposes since they are all very similar in nature
(dollars in thousands):
|
|
Financial
instruments mature during the fiscal year ended March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
Available-for-sale
securities
|
|
$ |
100,190 |
|
|
$ |
405,055 |
|
|
$ |
435,264 |
|
|
$ |
--- |
|
|
$ |
5,042 |
|
|
$ |
56,142 |
|
Weighted-average
yield rate
|
|
|
3.23 |
% |
|
|
3.13 |
% |
|
|
3.26 |
% |
|
|
--- |
|
|
|
5.75 |
% |
|
|
4.85 |
% |
We have
international operations and are thus subject to foreign currency rate
fluctuations. To date, our exposure related to exchange rate
volatility has not been material to our operating
results. Approximately 99% of our sales are denominated in U.S.
dollars. We maintain hedges related to our foreign currency exposure
of our net investment in a foreign operation as needed. As of March
31, 2008, there were $2.4 million of foreign currency hedges
outstanding. There were no hedges outstanding as of March 31,
2007 and the amount of the hedges outstanding as of March 31, 2006 was
immaterial. If foreign currency rates fluctuate by 15% from the rates
at March 31, 2008 and 2007, the effect on our financial position and results of
operation would be immaterial.
Our
investment in marketable equity securities at March 31, 2008 consists of shares
of common stock, the value of which is determined by the closing price of such
shares on the respective markets on which the shares are traded as of
the
balance
sheet date. These investments are classified as trading securities and accounted
for under the provisions of SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The market value of these investments was
approximately $12.4 million at March 31, 2008 compared to our adjusted cost
basis of approximately $12.2 million. The value of our investment in marketable
equity securities would be materially impacted if there were a significant
change in the market price of the shares. A hypothetical 30% favorable or
unfavorable change in the stock price compared to the stock price at
March 31, 2008 would have affected the value of our investment in
marketable equity securities by less than $4 million. Additionally, we have sold
put options on one of the trading securities, which are recorded as an accrued
liability, and are marked to market value. A decline in the stock
price of the underlying security prior to the expiration date of the puts would
cause an increase to the liability, which would result in a charge to our
results of operations, and could result in the put being exercised by the
holder. If the put is exercised by the holder, we could be required
to pay up to $17.3 million for additional shares of the common stock, at a
price potentially in excess of the then fair market value of the common
stock. A hypothetical 30% unfavorable change in the stock price of
the trading security on which we have sold the puts, compared to the stock price
at March 31, 2008 could potentially result in the puts being exercised and would
result in our paying $17.3 million to acquire the shares of common
stock. The stock would then be marked to market value, reducing the
value of our investment by an additional $3.4 million. See Note
4 to our consolidated financial statements, included in Item 15(a)(1) for
additional information about our investments in marketable equity
securities.
During
the normal course of business we are routinely subjected to a variety of market
risks, examples of which include, but are not limited to, interest rate
movements and foreign currency fluctuations, as we discuss in this Item 7A, and
collectability of accounts receivable. We continuously assess these risks
and have established policies and procedures to protect against the adverse
effects of these and other potential exposures. Although we do not
anticipate any material losses in these risk areas, no assurance can be
made that material losses will not be incurred in these areas in the
future.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
Consolidated Financial Statements listed in the index appearing under Item
15(a)(1) hereof are filed as part of this Form 10-K. See also Index
to Financial Statements, below.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
|
None.
Evaluation of Disclosure Controls and
Procedures.
As of the
end of the period covered by this Annual Report on Form 10-K, as required by
paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of
1934, as amended, we evaluated under the supervision of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended). Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and (ii) is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Our disclosure controls and
procedures are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and
procedures include components of our internal control over financial reporting.
Management’s assessment of the effectiveness of our internal control over
financial reporting is expressed at the level of reasonable assurance because a
control system, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that the control system’s objectives
will be met.
Management
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on our financial statements.
Management
assessed our internal control over financial reporting as of March 31, 2008, the
end of our fiscal year. Management based its assessment on criteria
established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Management’s assessment included evaluation of such
elements as the design and operating effectiveness of key financial reporting
controls, process documentation, accounting policies, and our overall control
environment. This assessment is supported by testing and monitoring
performed by our finance organization.
Based on
our assessment, management has concluded that our internal control over
financial reporting was effective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with generally accepted accounting principles. We reviewed
the results of management’s assessment with the Audit Committee of our Board of
Directors.
Ernst
& Young LLP, an independent registered public accounting firm, who audited
our consolidated financial statements included in this Form 10-K has issued
an attestation report on the Company’s internal control over
financial reporting, which is included in Part II, Item 9A.
Changes in Internal Control over
Financial Reporting.
During
the three months ended March 31, 2008, there was no change in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders of
Microchip
Technology Incorporated and subsidiaries
We have
audited Microchip Technology Incorporated’s internal control over financial
reporting as of March 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Microchip Technology
Incorporated’s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Microchip Technology Incorporated maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2008, based
on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the March 31, 2008 consolidated financial
statements of Microchip Technology Incorporated and our report dated May 23,
2008 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Phoenix,
Arizona
May 23,
2008
In fiscal
2008, each of Steve Sanghi, our Chairman, Chief Executive Officer and President,
Mitch Little, our Vice President, Worldwide Sales and Applications, Steve
Drehobl, our Vice President, Security, Microcontroller and Technology Division,
and Rich Simoncic, our Vice President, Analog and Interface Products Division,
entered into trading plans as contemplated by Rule 10b-5-1 under the Securities
Exchange Act of 1934 and periodic sales of our common stock are expected to
occur under such plans.
The
foregoing disclosure is being made on a voluntary basis and not pursuant to any
specific requirement under Form 10-K, Form 8-K or otherwise.
.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
on the members of our Board of Directors is incorporated herein by reference to
our proxy statement for our 2008 annual meeting of stockholders under the
captions “The Board of Directors,” and “Proposal One – Election of
Directors.”
Information
on the composition of our audit committee and the members of our audit
committee, including information on our audit committee financial experts, is
incorporated by reference to our proxy statement for our 2008 annual meeting of
stockholders under the caption “The Board of Directors – Committees of the Board
of Directors – Audit Committee.”
Information
on our executive officers is provided in Item 1, Part I of this Form 10-K under
the caption “Executive Officers” at page 9, above.
Information
with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, is incorporated herein by reference to our proxy statement for
our 2008 annual meeting of stockholders under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance.”
Information
with respect to our code of ethics that applies to our directors, executive
officers (including our principal executive officer and our principal financial
and accounting officer) and employees is incorporated by reference to our proxy
statement for our 2008 annual meeting of stockholders under the caption “Code of
Ethics.” A copy of the Code of Ethics is available on our website at
the Investor Relations section under Mission Statement/Corporate Governance on
www.microchip.com.
Information
regarding material changes, if any, to procedures by which security holders may
recommend nominees to our Board of Directors is incorporated by reference to our
proxy statement for the 2008 annual meeting of stockholders under the caption
“Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the
2008 Annual Meeting of Stockholders; Discretionary Authority to Vote on
Stockholder Proposals.”
Information
with respect to executive compensation is incorporated herein by reference to
the information under the caption “Executive Compensation” in our proxy
statement for our 2008 annual meeting of stockholders.
Information
with respect to director compensation is incorporated herein by reference to the
information under the caption “The Board of Directors – Director Compensation”
in our proxy statement for our 2008 annual meeting of stockholders.
Information
with respect to compensation committee interlocks and insider participation in
compensation decisions is incorporated herein by reference to the information
under the caption “The Board of Directors – Compensation Committee Interlocks
and Insider Participation” in our proxy statement for our 2008 annual meeting of
stockholders.
Our Board
compensation committee report on executive compensation is incorporated herein
by reference to the information under the caption “Executive Compensation –
Compensation Committee Report on Executive Compensation” in our proxy statement
for our 2008 annual meeting of stockholders.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
with respect to securities authorized for issuance under our equity compensation
plans is incorporated herein by reference to the information under the caption
“Executive Compensation – Equity Compensation Plan Information” in our proxy
statement for our 2008 annual meeting of stockholders.
Information
with respect to security ownership of certain beneficial owners, members of our
Board of Directors and management is incorporated herein by reference to the
information under the caption “Security Ownership of Principal Stockholders,
Directors and Executive Officers” in our proxy statement for our 2008 annual
meeting of stockholders.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this Item pursuant to Item 404 of Regulation S-K is
incorporated by reference to the information under the caption “Certain
Transactions” contained in our proxy statement for our 2008 annual meeting of
stockholders.
The
information required by this Item pursuant to Item 407(a) of Regulation S-K
regarding the independence of our directors is incorporated by reference to the
information under the caption “Meetings of the Board of Directors” contained in
our proxy statement for our 2008 annual meeting of stockholders.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
information required by this Item related to principal accountant fees and
services as well as related pre-approval policies is incorporated by reference
to the information under the caption “Independent Registered Public Accounting
Firm” contained in our proxy statement for our 2008 annual meeting of
stockholders.
[Remainder
of page intentionally left blank.]
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a) The
following documents are filed as part of this Form 10-K:
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Page
No.
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(1)
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Financial
Statements:
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(2)
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Financial
Statement Schedules
|
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(3)
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The
Exhibits filed with this Form 10-K or incorporated herein by reference are
set
forth
in the Exhibit Index beginning on page 46 hereof, which Exhibit Index is
incorporated herein by this reference.
|
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(b) See
Item 15(a)(3) above.
(c) See
“Index to Financial Statements” included under Item 8 to this Form
10-K.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
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MICROCHIP
TECHNOLOGY INCORPORATED
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(Registrant)
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Date: May
28, 2008
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By: |
/s/
Steve Sanghi
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Steve
Sanghi
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President
and Chief Executive Officer
|
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name and Signature
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Title
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Date
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/s/
Steve Sanghi
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Director,
President and Chief
Executive Officer
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May
28, 2008
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Steve
Sanghi
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/s/
Albert J. Hugo-Martinez
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Director
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May
28, 2008
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Albert
J. Hugo-Martinez
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/s/
L.B. Day
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Director
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May
28, 2008
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L.B.
Day
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/s/
Matthew W. Chapman
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Director
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May
28, 2008
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Matthew
W. Chapman
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/s/
Wade F. Meyercord
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Director
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May
28, 2008
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Wade
F. Meyercord
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/s/
Gordon W. Parnell
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Vice
President and Chief Financial Officer
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May
28, 2008
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Gordon
W. Parnell
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(Principal
Financial and
Accounting Officer)
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EXHIBITS
|
|
Incorporated
by Reference
|
|
Exhibit
Number
|
Exhibit Description
|
Form
|
File Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
|
|
|
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|
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2.1
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Purchase
and Sale Agreement, dated as of July 18, 2002 between Registrant and
Fujitsu Microelectronics, Inc.
|
8-K
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000-21184
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2.1
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7/18/02
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3.1
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Restated
Certificate of Incorporation of Registrant
|
10-Q
|
000-21184
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3.1
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11/12/02
|
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3.2
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Amended
and Restated By-Laws of Registrant, as amended through January 29,
2007
|
10-Q
|
000-21184
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3.1
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2/6/07
|
|
4.1
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First
Amendment to Preferred Shares Rights Agreement dated January 9,
2007
|
10-Q
|
000-21184
|
4.1
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2/6/07
|
|
4.2
|
Amended
and Restated Preferred Shares Rights Agreement, dated as of October 11,
1999, between Registrant and Norwest Bank Minnesota,
N.A., including the Amended Certificate of Designations, the
form of Rights Certificate and the Summary of Rights, attached as exhibits
thereto
|
8-K
|
000-21184
|
4.1
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10/12/99
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|
4.3
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Indenture,
dated as of December 7, 2007, by and between Wells Fargo Bank, National
Association, as Trustee, and Microchip Technology
Incorporated
|
8-K
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000-21184
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4.1
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12/7/07
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4.4
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Registration
Rights Agreement, dated as of December 7, 2007, by and between J.P. Morgan
Securities Inc. and Microchip Technology Incorporated
|
8-K
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000-21184
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4.2
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12/7/07
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10.1
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Form
of Indemnification Agreement between Registrant and its directors and
certain of its officers
|
S-1
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33-57960
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10.1
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2/5/93
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10.2
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*2004
Equity Incentive Plan as amended and restated by the Board on May 1,
2006
|
10-Q
|
000-21184
|
10.3
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2/6/07
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|
10.3
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*Form
of Notice of Grant for 2004 Equity Incentive Plan (including Exhibit A
Stock Option Agreement)
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S-8
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333-119939
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4.5
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10/25/04
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10.4
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*Form
of Notice of Grant (Foreign) for 2004 Equity Incentive Plan (including
Exhibit A Stock Option Agreement (Foreign)
|
10-K
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000-21184
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10.4
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5/23/05
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10.5
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*Restricted
Stock Units Agreement (Domestic) for 2004 Equity Incentive
Plan
|
10-Q
|
000-21184
|
10.3
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11/7/07
|
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10.6
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Restricted
Stock Units Agreement (Foreign) for 2004 Equity Incentive
Plan
|
10-Q
|
000-21184
|
10.4
|
11/7/08
|
|
10.7
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*Form
of Notice of Grant of Restricted Stock Units for 2004 Equity Incentive
Plan (including Exhibit A Restricted Stock Units
Agreement)
|
10-K
|
000-21184
|
10.6
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5/31/06
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10.8
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*1993
Stock Option Plan, as Amended through August 16, 2002
|
10-Q
|
000-21184
|
10.1
|
11/12/02
|
|
10.9
|
*Form
of Notice of Grant For 1993 Stock Option Plan, with Exhibit A thereto,
Form of Stock Option Agreement; and Exhibit B thereto, Form of Stock
Purchase Agreement
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S-8
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333-872
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10.6
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1/23/96
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EXHIBITS
(cont’d.)
|
|
Incorporated
by Reference
|
|
Exhibit
Number
|
Exhibit Description
|
Form
|
File Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
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10.10
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*Microchip
Technology Incorporated 2001 Employee Stock Purchase Plan as amended
through August 15, 2003 (including Enrollment Form, Stock Purchase
Agreement, and Change Form)
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S-8
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333-140773
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4.4
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2/16/07
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10.11
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*1997
Nonstatutory Stock Option Plan, as Amended Through March 3,
2003
|
10-K
|
000-21184
|
10.13
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6/5/03
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10.12
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*Form
of Notice of Grant For 1997 Nonstatutory Stock Option Plan, with Exhibit A
thereto, Form of Stock Option Agreement
|
10-K
|
000-21184
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10.17
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5/27/98
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10.13
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Microchip
Technology Incorporated International Employee Stock Purchase Plan, as
amended through May 1, 2006
|
S-8
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333-140773
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4.1
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2/16/07
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10.14
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Microchip
Technology Incorporated International Stock Purchase Agreement (including
attached Form of Enrollment Form)
|
S-8
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333-140773
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4.2
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2/16/07
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10.15
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Form
of Change Form for Microchip Technology Incorporated International
Employee Stock Purchase Plan
|
S-8
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333-140773
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4.3
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2/16/07
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10.16
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*Executive
Management Incentive Compensation Plan
|
10-Q
|
000-21184
|
10.4
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2/6/07
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10.17
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*Discretionary
Executive Management Incentive Compensation Plan
|
10-Q
|
000-21184
|
10.5
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2/6/07
|
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10.18
|
*Management
Incentive Compensation Plan
|
10-Q
|
000-21184
|
10.6
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2/6/07
|
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10.19
|
TelCom
Semiconductor, Inc. 1994 Stock Option Plan and forms of agreements
thereunder
|
S-8
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333-53876
|
4.1
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1/18/01
|
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10.20
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TelCom
Semiconductor, Inc. 2000 Nonstatutory Stock Option Plan and forms of
agreements used thereunder
|
S-8
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333-53876
|
4.4
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1/18/01
|
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10.21
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PowerSmart,
Inc. 1998 Stock Incentive Plan, Including Forms of Incentive Stock Option
Agreement and Nonqualified Stock Option Agreement
|
S-8
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333-96791
|
4.1
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7/19/02
|
|
10.22
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*February
3, 2003 Amendment to the Adoption Agreement to the Microchip Technology
Incorporated Supplemental Retirement Plan
|
10-K
|
000-21184
|
10.28
|
6/5/03
|
|
10.23
|
*Amendment
dated August 29, 2001 to the Microchip Technology Incorporated
Supplemental Retirement Plan
|
S-8
|
333-101696
|
4.1.2
|
12/6/02
|
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10.24
|
*Amendment
Dated December 9, 1999 to the Adoption Agreement to the Microchip
Technology Incorporated Supplemental Retirement Plan
|
S-8
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333-101696
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4.1.4
|
12/6/02
|
|
EXHIBITS
(cont’d.)
|
|
Incorporated
by Reference
|
|
Exhibit
Number
|
Exhibit Description
|
Form
|
File Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
10.25
|
*Adoption
Agreement to the Microchip Technology Incorporated Supplemental Retirement
Plan dated January 1, 1997
|
S-8
|
333-101696
|
4.1.3
|
12/6/02
|
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10.26
|
*Microchip
Technology Incorporated Supplemental Retirement Plan
|
S-8
|
333-101696
|
4.1.1
|
12/6/02
|
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10.27
|
*Amendments
to Supplemental Retirement Plan
|
10-Q
|
000-21184
|
10.1
|
2/9/06
|
|
10.28
|
*Change
of Control Severance Agreement
|
10-Q
|
000-21184
|
10.1
|
11/7/07
|
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10.29
|
*Change
of Control Severance Agreement
|
10-Q
|
000-21184
|
10.2
|
11/7/07
|
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10.30
|
Development
Agreement dated as of August 29, 1997 by and between Registrant and the
City of Chandler, Arizona
|
10-Q
|
000-21184
|
10.1
|
2/13/98
|
|
10.31
|
Addendum
to Development Agreement by and between Registrant and the City of Tempe,
Arizona, dated May 11, 2000
|
10-K
|
000-21184
|
10.14
|
5/15/01
|
|
10.32
|
Development
Agreement dated as of July 17, 1997 by and between Registrant and the City
of Tempe, Arizona
|
10-Q
|
000-21184
|
10.2
|
2/13/98
|
|
10.33
|
Strategic
Investment Program Contract dated as of August 15, 2002 by and between
Registrant, Multnomah County, Oregon and City of Gresham,
Oregon
|
8-K
|
000-21184
|
2.2
|
8/23/02
|
|
21.1
|
Subsidiaries
of Registrant
|
|
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X
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
|
|
X
|
24.1
|
Power
of Attorney re: Microchip Technology Incorporated, the
Registrant
|
10-K
|
000-21184
|
24.1
|
6/7/00
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act)
|
|
|
|
|
X
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act)
|
|
|
|
|
X
|
32
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
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|
X
|
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*Compensation
plans or arrangements in which directors or executive officers are
eligible to participate
|
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|
Annual
Report on Form 10-K
Item 8,
Item 15(a)(1) and (2), (b) and (c)
_________________________________
INDEX TO
FINANCIAL STATEMENTS
CONSOLIDATED
FINANCIAL STATEMENTS
EXHIBITS
_________________________________
YEAR
ENDED MARCH 31, 2008
MICROCHIP
TECHNOLOGY INCORPORATED
AND
SUBSIDIARIES
CHANDLER,
ARIZONA
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to
Consolidated Financial Statements
The
Board of Directors and Stockholders of
Microchip
Technology Incorporated and subsidiaries
We have
audited the accompanying consolidated balance sheets of Microchip Technology
Incorporated and subsidiaries as of March 31, 2008 and 2007, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each
of the three years in the period ended March 31, 2008. These financial
statements are the responsibility of the company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Microchip
Technology Incorporated and subsidiaries at March 31, 2008 and 2007, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 2008, in conformity with U.S.
generally accepted accounting principles.
As
discussed in Note 1 and Note 9 to the consolidated financial statements,
effective April 1, 2007, the Company adopted Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, and changed its method of accounting for uncertain tax positions,
and effective April 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, and
changed its method of accounting for share-based compensation.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Microchip Technology
Incorporated’s internal control over financial reporting as of March 31, 2008,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated May 23, 2008 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Phoenix,
Arizona
May 23,
2008
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
|
|
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|
|
(in
thousands, except share and per share amounts)
|
|
|
|
ASSETS
|
|
|
|
March
31,
|
|
|
|
2008
|
|