form_10q.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009.
OR
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 85224-6199
(480)
792-7200
(Address,
Including Zip Code, and Telephone Number,
Including
Area Code, of Registrant's
Principal
Executive Offices)
Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act:
Large
accelerated filer
|
ý
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company
|
¨
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). (Check One)
Yes ¨ No x
Shares
Outstanding of Registrant's Common Stock
|
Class
|
Outstanding
at October 30, 2009
|
Common
Stock, $0.001 par value
|
183,591,698 shares
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
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Page
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PART
I. FINANCIAL INFORMATION
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PART
II. OTHER INFORMATION
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CERTIFICATIONS
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EXHIBITS
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MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in
thousands, except share and per share amounts)
ASSETS
|
|
|
|
September
30,
|
|
|
As
adjusted
March
31,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(See
Notes 1 and 2)
|
|
Cash
and cash equivalents
|
|
$ |
541,045 |
|
|
$ |
446,329 |
|
Short-term
investments
|
|
|
822,949 |
|
|
|
943,616 |
|
Accounts
receivable, net
|
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|
106,651 |
|
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|
88,525 |
|
Inventories
|
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|
108,451 |
|
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|
131,510 |
|
Prepaid
expenses
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|
14,055 |
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|
11,447 |
|
Deferred
tax assets
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|
78,076 |
|
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75,681 |
|
Other
current assets
|
|
|
56,229 |
|
|
|
51,736 |
|
Total current
assets
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|
1,727,456 |
|
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|
1,748,844 |
|
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Property,
plant and equipment, net
|
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|
497,958 |
|
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531,687 |
|
Long-term
investments
|
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|
108,729 |
|
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50,826 |
|
Goodwill
|
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|
36,165 |
|
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36,165 |
|
Intangible
assets, net
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|
28,775 |
|
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|
25,718 |
|
Other
assets
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|
19,202 |
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18,526 |
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Total assets
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$ |
2,418,285 |
|
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$ |
2,411,766 |
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Accounts
payable
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$ |
33,926 |
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$ |
29,228 |
|
Accrued
liabilities
|
|
|
50,163 |
|
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|
42,486 |
|
Deferred
income on shipments to distributors
|
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|
86,261 |
|
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83,931 |
|
Total current
liabilities
|
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|
170,350 |
|
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155,645 |
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Junior
convertible debentures
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337,403 |
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334,184 |
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Long-term
income tax payable
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75,522 |
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70,051 |
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Deferred
tax liability
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372,700 |
|
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365,734 |
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Other
long-term liabilities
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|
3,993 |
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3,834 |
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Stockholders'
equity:
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Preferred
stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or
outstanding
|
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|
--- |
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--- |
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Common
stock, $0.001 par value; 450,000,000 shares authorized, 218,789,994 shares
issued and 183,578,105 shares outstanding at September 30, 2009;
218,789,994 shares issued and 182,769,124 shares outstanding
at March 31, 2009
|
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184 |
|
|
|
183 |
|
Additional
paid-in capital
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|
1,276,206 |
|
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1,273,876 |
|
Retained
earnings
|
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1,247,094 |
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1,299,317 |
|
Accumulated
other comprehensive income
|
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|
4,349 |
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4,312 |
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Common
stock held in treasury: 35,211,889 shares at September 30, 2009;
36,020,870 shares at March 31, 2009
|
|
|
(1,069,516 |
) |
|
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(1,095,370 |
) |
Total
stockholders’ equity
|
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1,458,317 |
|
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1,482,318 |
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Total
liabilities and stockholders’ equity
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$ |
2,418,285 |
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$ |
2,411,766 |
|
See
accompanying notes to condensed consolidated financial
statements
|
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in
thousands, except per share amounts)
(Unaudited)
|
|
Three
Months Ended September 30,
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Six
Months Ended September 30,
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2009
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As
Adjusted
2008
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2009
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As
Adjusted
2008
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(See
Note 2)
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(See
Note 2)
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Net
sales
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$ |
226,661 |
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$ |
269,706 |
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$ |
419,610 |
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$ |
537,878 |
|
Cost
of sales (1)
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|
103,321 |
|
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|
105,553 |
|
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|
199,835 |
|
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210,128 |
|
Gross
profit
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123,340 |
|
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|
164,153 |
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219,775 |
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327,750 |
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Operating
expenses:
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Research
and development (1)
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29,568 |
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31,343 |
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57,204 |
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62,895 |
|
Selling,
general and administrative (1)
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41,046 |
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45,629 |
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77,429 |
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91,042 |
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Special
charge
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|
--- |
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--- |
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1,238 |
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--- |
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70,614 |
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76,972 |
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135,871 |
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153,937 |
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Operating
income
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52,726 |
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87,181 |
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83,904 |
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173,813 |
|
Other
income (expense):
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Interest
income
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4,479 |
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10,152 |
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7,781 |
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|
20,351 |
|
Interest
expense
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|
(8,030 |
) |
|
|
(6,870 |
) |
|
|
(15,549 |
) |
|
|
(14,512 |
) |
Other,
net
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|
2,107 |
|
|
|
1,671 |
|
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|
7,801 |
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|
4,416 |
|
Income
before income taxes
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|
51,282 |
|
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|
92,134 |
|
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|
83,937 |
|
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|
184,068 |
|
Income
tax provision
|
|
|
6,797 |
|
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|
16,414 |
|
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|
12,084 |
|
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|
32,801 |
|
Net
income
|
|
$ |
44,485 |
|
|
$ |
75,720 |
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$ |
71,853 |
|
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$ |
151,267 |
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Basic
net income per common share
|
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$ |
0.24 |
|
|
$ |
0.41 |
|
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$ |
0.39 |
|
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$ |
0.82 |
|
Diluted
net income per common share
|
|
$ |
0.24 |
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$ |
0.40 |
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$ |
0.39 |
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$ |
0.80 |
|
Dividends
declared per common share
|
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$ |
0.339 |
|
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$ |
0.338 |
|
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$ |
0.678 |
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$ |
0.668 |
|
Basic
common shares outstanding
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|
183,190 |
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|
183,615 |
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|
183,023 |
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|
184,139 |
|
Diluted
common shares outstanding
|
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|
186,922 |
|
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|
187,936 |
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|
186,224 |
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|
189,493 |
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(1)
Includes share-based compensation expense as follows:
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Cost
of sales
|
|
$ |
1,869 |
|
|
$ |
2,053 |
|
|
$ |
3,579 |
|
|
$ |
3,678 |
|
Research
and development
|
|
|
3,108 |
|
|
|
2,640 |
|
|
|
6,097 |
|
|
|
5,075 |
|
Selling,
general and administrative
|
|
|
4,523 |
|
|
|
3,800 |
|
|
|
8,822 |
|
|
|
7,439 |
|
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|
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|
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|
|
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|
See
accompanying notes to condensed consolidated financial
statements
|
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in
thousands)
(Unaudited)
|
|
Six
Months Ended September 30,
|
|
|
|
2009
|
|
|
As
adjusted
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
(See
Note 2)
|
|
Net
income
|
|
$ |
71,853 |
|
|
$ |
151,267 |
|
Adjustments
to reconcile net income to net cash provided by operating
|
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
45,298 |
|
|
|
48,181 |
|
Deferred
income taxes
|
|
|
5,545 |
|
|
|
8,534 |
|
Share-based
compensation expense related to equity incentive plans
|
|
|
18,498 |
|
|
|
16,192 |
|
Tax
benefit from equity incentive plans
|
|
|
716 |
|
|
|
9,350 |
|
Excess
tax benefit from share-based compensation
|
|
|
(709 |
) |
|
|
(8,555 |
) |
Convertible
debt derivatives - revaluation and amortization
|
|
|
152 |
|
|
|
(624 |
) |
Amortization
of convertible debenture issuance costs
|
|
|
247 |
|
|
|
383 |
|
Gain
on sale of assets
|
|
|
--- |
|
|
|
(98 |
) |
Special
charge
|
|
|
1,238 |
|
|
|
--- |
|
(Purchases)/sales
of trading securities, net
|
|
|
86,970 |
|
|
|
(15,945 |
) |
Gain
on trading securities
|
|
|
(7,425 |
) |
|
|
(4,060 |
) |
Unrealized
impairment loss on available-for-sale investments
|
|
|
1,642 |
|
|
|
1,196 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
(18,126 |
) |
|
|
17,431 |
|
Decrease
(increase) in inventories
|
|
|
23,050 |
|
|
|
(2,962 |
) |
Increase
in deferred income on shipments to distributors
|
|
|
2,330 |
|
|
|
8,066 |
|
Increase
in accounts payable and accrued liabilities
|
|
|
11,137 |
|
|
|
22,332 |
|
Change
in other assets and liabilities
|
|
|
676 |
|
|
|
16,799 |
|
Net
cash provided by operating activities
|
|
|
243,092 |
|
|
|
267,487 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of available-for-sale investments
|
|
|
(551,394 |
) |
|
|
(344,992 |
) |
Sales
and maturities of available-for-sale investments
|
|
|
532,034 |
|
|
|
183,028 |
|
Investment
in other assets
|
|
|
(4,893 |
) |
|
|
(596 |
) |
Proceeds
from sale of assets
|
|
|
--- |
|
|
|
144 |
|
Capital
expenditures
|
|
|
(9,733 |
) |
|
|
(68,016 |
) |
Net
cash used in investing activities
|
|
|
(33,986 |
) |
|
|
(230,432 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment
of cash dividend
|
|
|
(124,074 |
) |
|
|
(123,145 |
) |
Repurchase
of common stock
|
|
|
--- |
|
|
|
(123,929 |
) |
Proceeds
from sale of common stock
|
|
|
8,975 |
|
|
|
25,466 |
|
Excess
tax benefit from share-based compensation
|
|
|
709 |
|
|
|
8,555 |
|
Net
cash used in financing activities
|
|
|
(114,390 |
) |
|
|
(213,053 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
94,716 |
|
|
|
(175,998 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
446,329 |
|
|
|
487,736 |
|
Cash
and cash equivalents at end of period
|
|
$ |
541,045 |
|
|
$ |
311,738 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements
|
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(Unaudited)
(1)
|
Basis of
Presentation
|
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries
(the Company). All intercompany balances and transactions have been
eliminated in consolidation. The Company owns 100% of the outstanding
stock in all of its subsidiaries.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America, pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). In the opinion of
management, all adjustments of a normal recurring nature which are necessary for
a fair presentation have been included. Certain information and
footnote disclosures normally included in audited consolidated financial
statements have been condensed or omitted pursuant to such SEC rules and
regulations. It is suggested that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2009. The
results of operations for the three and six months ended September 30, 2009 are
not necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2010 or for any other period.
Subsequent
events have been evaluated through November 6, 2009, which is the date the
financial statements were issued.
(2)
|
Adopted
and Recently Issued Accounting
Pronouncements
|
Accounting Standards Codification.
Effective July 1, 2009, the Financial Accounting Standards Board's (FASB)
Accounting Standards Codification (ASC) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (GAAP)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the Securities and Exchange Commission. The codification
was effective for interim and annual reporting periods ending after September
15, 2009, except for certain nonpublic nongovernmental entities. The
Company's accounting policies were not affected by the conversion to
ASC. However, references to specific accounting standards in the
footnotes to the Company's consolidated financial statements have been changed
to refer to the appropriate section of ASC.
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion. On
April 1, 2009, the Company adopted the Cash Conversion Subsections of ASC
Subtopic 470-20, Debt with
Conversion and Other Options – Cash Conversion (the Cash Conversion
Subsections), which clarify the accounting for convertible debt instruments that
may be settled in cash (including partial cash settlement) upon
conversion. The Cash Conversion Subsections require issuers to
account separately for the liability and equity components of certain
convertible debt instruments in a manner that reflects the issuer's
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. The Cash Conversion Subsections require bifurcation of a
component of the debt, classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of
interest expense in the Company's consolidated statements of
operations.
The Cash
Conversion Subsections require retrospective application to the terms of
instruments as they existed for all periods presented. The adoption
of the Cash Conversion Subsections affects the accounting for the Company's
2.125% junior subordinated convertible debentures issued in December 2007 and
due in December 2037. The retrospective application of this guidance
affects the Company's fiscal years 2008 and 2009.
The
following table sets forth the effect of the retrospective application of the
Cash Conversion Subsections on certain previously reported line items (in
thousands, except per share data):
Condensed
Consolidated Statements of Income:
|
|
|
|
Three
Months Ended
September
30, 2008
|
|
|
Six
Months Ended
September
30, 2008
|
|
|
|
As
Reported
|
|
|
As
Adjusted
|
|
|
As
Reported
|
|
|
As
Adjusted
|
|
Interest
expense
|
|
$ |
(5,582 |
) |
|
$ |
(6,870 |
) |
|
$ |
(11,983 |
) |
|
$ |
(14,512 |
) |
Income
before income taxes
|
|
$ |
93,422 |
|
|
$ |
92,134 |
|
|
$ |
186,597 |
|
|
$ |
184,068 |
|
Income
tax provision
|
|
$ |
16,910 |
|
|
$ |
16,414 |
|
|
$ |
33,775 |
|
|
$ |
32,801 |
|
Net
income
|
|
$ |
76,512 |
|
|
$ |
75,720 |
|
|
$ |
152,822 |
|
|
$ |
151,267 |
|
Basic
net income per common share
|
|
$ |
0.42 |
|
|
$ |
0.41 |
|
|
$ |
0.83 |
|
|
$ |
0.82 |
|
Diluted
net income per common share
|
|
$ |
0.41 |
|
|
$ |
0.40 |
|
|
$ |
0.81 |
|
|
$ |
0.80 |
|
Condensed
Consolidated Balance Sheet:
|
|
|
|
March
31, 2009
|
|
|
|
As Reported
|
|
|
As Adjusted
|
|
Deferred
tax assets
|
|
$ |
69,626 |
|
|
$ |
75,681 |
|
Total
current assets
|
|
$ |
1,742,789 |
|
|
$ |
1,748,844 |
|
Other
assets
|
|
$ |
34,254 |
|
|
$ |
18,526 |
|
Total
assets
|
|
$ |
2,421,439 |
|
|
$ |
2,411,766 |
|
|
|
|
|
|
|
|
|
|
Junior
convertible debentures
|
|
$ |
1,149,184 |
|
|
$ |
334,184 |
|
Deferred
tax liability
|
|
$ |
51,959 |
|
|
$ |
365,734 |
|
Additional
paid-in capital
|
|
$ |
778,204 |
|
|
$ |
1,273,876 |
|
Retained
earnings
|
|
$ |
1,303,437 |
|
|
$ |
1,299,317 |
|
Total
stockholders' equity
|
|
$ |
990,766 |
|
|
$ |
1,482,318 |
|
Total
liabilities and stockholders' equity
|
|
$ |
2,421,439 |
|
|
$ |
2,411,766 |
|
Fair Value Measurements.
In September 2006, the FASB issued guidance which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. In February 2008, the FASB issued additional
guidance which deferred the effective date for the Company to April
1, 2009 for all nonfinancial assets and liabilities, except for those that are
recognized or disclosed at fair value on a recurring basis (that is, at least
annually). The Company adopted the deferred provisions of this
guidance on April 1, 2009. The adoption of these provisions did not have a
material effect on the Company's consolidated financial statements.
In
April 2009, the FASB provided additional guidance on estimating fair value
when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity for the asset or
liability. This guidance also addressed circumstances that may
indicate that a transaction is not orderly. The Company adopted this
guidance on April 1, 2009 and the adoption had no impact upon the Company's
consolidated financial statements.
Interim Disclosures about Fair
Value. In April 2009, the FASB issued accounting guidance that
requires disclosures by publicly traded companies about the fair value of
financial instruments for interim periods as well as in annual financial
statements. This guidance is effective for interim reporting periods
ending after June 15, 2009, was adopted by the Company on April 1, 2009 and had
no impact on the Company's consolidated balance sheets or statements of income
or cash flows.
Other-Than-Temporary
Impairments. In
April 2009, the FASB issued guidance changing existing guidance for
determining whether an impairment of debt securities is other than
temporary. This guidance requires other than temporary impairments to
be separated into the amount representing the decrease in cash flows expected to
be collected from a security (referred to as credit losses) which is recognized
in earnings and the amount related to other factors which is recognized in other
comprehensive income. This noncredit loss
component of the impairment may only be
classified in other comprehensive income if the holder of the security concludes
that it does not intend to sell and it will not more likely than not be required
to sell the security before it recovers its value. If these
conditions are not met, the noncredit loss must also be recognized in
earnings. When adopting this guidance, an entity is required to
record a cumulative effect adjustment as of the beginning of the period of
adoption to reclassify the noncredit component of a previously recognized other
than temporary impairment from retained earnings to accumulated other
comprehensive income. The Company adopted this guidance on April 1,
2009. The Company does not meet the conditions necessary to recognize
the noncredit loss component of its auction rate securities in other
comprehensive income. Accordingly, the Company did not reclassify any
previously recognized other-than-temporary impairment losses from retained
earnings to accumulated other comprehensive income and the adoption of this
guidance had no impact on the Company's consolidated financial
statements. Refer to Note 4 for further discussion of the Company's
investments in marketable securities.
Business Combinations.
On April 1, 2009, the Company adopted new accounting guidance for
business combinations as issued by the FASB. The new accounting
guidance establishes principles and requirements for how an acquirer in a
business combination recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, and any noncontrolling
interests in the acquiree, as well as the goodwill acquired. Significant changes
from previous guidance resulting from this new guidance include the expansion of
the definitions of a "business" and a "business combination." For all
business combinations (whether partial, full or step acquisitions), the acquirer
will record 100% of all assets and liabilities of the acquired business,
including goodwill, generally at their fair values; contingent consideration
will be recognized at its fair value on the acquisition date and; for certain
arrangements, changes in fair value will be recognized in earnings until
settlement; and acquisition-related transaction and restructuring costs will be
expensed rather than treated as part of the cost of the
acquisition. The new accounting guidance also establishes disclosure
requirements to enable users to evaluate the nature and financial effects of the
business combination. Because the majority of the provisions of the
new accounting guidance are applicable to future transactions, the adoption
of this guidance did not have a material impact on the Company's consolidated
financial statements.
On
April 1, 2009, the Company adopted new accounting guidance for assets
acquired and liabilities assumed in a business combination as issued by the
FASB. The new guidance amends the provisions previously issued by the
FASB related to the initial recognition and measurement, subsequent measurement
and accounting and disclosures for assets and liabilities arising from
contingencies in business combinations. The new guidance eliminates
the distinction between contractual and non-contractual contingencies, including
the initial recognition and measurement. The adoption of this
accounting guidance did not have a material impact on the Company's consolidated
financial statements.
Noncontrolling interests.
On April 1, 2009, the Company adopted new accounting guidance for
noncontrolling interests in subsidiaries as issued by the FASB. The
new accounting guidance establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary,
which is sometimes referred to as a minority interest, is a third-party
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, the new guidance requires the consolidated statement of income to
be reported at amounts that include the amounts attributable to both the parent
and the noncontrolling interest. The new guidance also requires
disclosure on the face of the consolidated statement of income of the amounts of
consolidated net income attributable to the parent and to the noncontrolling
interest. The adoption of this accounting guidance did not have an
impact on the Company's consolidated financial statements.
Determining the Useful Life of
Intangible Assets. During the first quarter of fiscal 2010,
the Company adopted new accounting guidance for the determination of the useful
life of intangible assets as issued by the FASB. The new guidance amends
the factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible
asset. The new guidance also requires expanded disclosure regarding the
determination of intangible asset useful lives. Because this accounting
guidance is applicable to future transactions, the adoption of this accounting
guidance did not have an impact on the Company's consolidated financial
statements.
Subsequent
Events. During the first quarter of fiscal 2010, the Company
adopted new accounting guidance related to subsequent events as issued by the
FASB. The new requirement establishes the accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were or were available to be issued. The adoption of these provisions did
not have a material effect on the Company's consolidated financial
statements. See Note 1 for additional discussion of the Company's
evaluation of subsequent events.
Transfers of Financial Assets.
In June 2009, the FASB issued guidance that changes the information a
reporting entity provides in its financial statements about the transfer of
financial assets and continuing interests held in transferred financial
assets. The standard amends previous accounting guidance by removing
the concept of qualified special purpose entities. This accounting
standard is effective for the Company for transfers occurring on or after April
1, 2010. The Company does not expect the adoption of this accounting
standard to have a material effect on its consolidated financial statements and
related disclosures.
Variable Interest
Entities. In June 2009, the FASB issued guidance to change
financial reporting by enterprises involved with variable interest entities
(VIEs). The standard replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a VIE with an approach focused on identifying which enterprise has
the power to direct the activities of a VIE and the obligation to absorb losses
of the entity or the right to receive the entity's residual
returns. This accounting standard is effective for the Company on
April 1, 2010. The Company does not expect the adoption of this
accounting standard to have a material effect on its consolidated financial
statements and related disclosures.
Fair Value Measurement of
Liabilities. In August 2009, FASB issued guidance providing
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following techniques:
|
1. A
valuation technique that uses:
|
|
a. The
quoted price of the identical liability when traded as an
asset.
|
|
b. Quoted
prices for similar liabilities or similar liabilities when traded as
assets.
|
|
2. Another
valuation technique that is consistent with the principles in the FASB's
guidance (two examples would be an income approach or a market
approach).
|
This
guidance also clarifies that (i) when estimating the fair value of a liability,
a reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability and (ii) both a quoted price in an active market for
the identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. This guidance is effective for the first reporting period
(including interim periods) beginning after issuance. The Company does not
expect this guidance to have a material impact on its consolidated financial
statements and disclosures.
Multiple Element
Arrangements. In September 2009, the FASB issued new accounting
guidance related to the revenue recognition of multiple element arrangements.
The new guidance states that if vendor specific objective evidence or third
party evidence for deliverables in an arrangement cannot be determined,
companies will be required to develop a best estimate of the selling price to
separate deliverables and allocate arrangement consideration using the relative
selling price method. The Company is currently evaluating the impact of this
accounting guidance on its consolidated financial statements.
Certain Revenue Arrangements that
include Software Elements. In September 2009, the FASB issued new
accounting guidance related to certain revenue arrangements that include
software elements. Previously, companies that sold tangible products with "more
than incidental" software were required to apply software revenue recognition
guidance. This guidance often delayed revenue recognition for the delivery of
the tangible product. Under the new guidance, tangible products that have
software components that are "essential to the functionality" of the tangible
product will be excluded from the software revenue recognition guidance.
The new guidance will include factors to help companies determine what is
"essential to the functionality." Software-enabled products will now be
subject to other revenue guidance including that for multiple deliverable
arrangements issued by the FASB in September 2009. The Company is
currently evaluating the impact of this accounting guidance on its consolidated
financial statements.
(3) Special
Charge
During
the three months ended June 30, 2009, the Company agreed to the terms of a
patent license with an unrelated third-party and signed an agreement on July 9,
2009. The patent license settled alleged infringement claims. The
total payment made to the third-party in July 2009 was $1.4 million, $1.2
million of which was expensed in the first quarter of fiscal 2010 and the
remaining $0.2 million was recorded as a prepaid royalty that will be amortized
over the remaining life of the patent, which expires in June 2010.
(4) Investments
The
Company's investments are intended to establish a high-quality portfolio that
preserves principal, meets liquidity needs, and delivers an appropriate yield in
relationship to the Company's investment guidelines and market
conditions. The following is a summary of available-for-sale and
trading securities at September 30, 2009 (amounts in thousands):
|
|
Available-for-sale
Securities
|
|
|
|
Adjusted
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair
Value
|
|
Government
agency bonds
|
|
$ |
398,086 |
|
|
$ |
981 |
|
|
$ |
55 |
|
|
$ |
399,012 |
|
Municipal
bonds
|
|
|
302,925 |
|
|
|
3,710 |
|
|
|
--- |
|
|
|
306,635 |
|
Auction
rate securities
|
|
|
17,259 |
|
|
|
--- |
|
|
|
--- |
|
|
|
17,259 |
|
Corporate
bonds
|
|
|
177,126 |
|
|
|
1,390 |
|
|
|
273 |
|
|
|
178,243 |
|
|
|
$ |
895,396 |
|
|
$ |
6,081 |
|
|
$ |
328 |
|
|
$ |
901,149 |
|
|
|
Trading
Securities
|
|
|
Adjusted
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair
Value
|
Marketable
equity securities
|
|
$ |
5 |
|
|
$ |
--- |
|
|
$ |
1 |
|
|
$ |
4 |
|
Auction
rate securities
|
|
|
28,021 |
|
|
|
--- |
|
|
|
--- |
|
|
|
28,021 |
|
Put
option on auction rate securities
|
|
|
2,504 |
|
|
|
--- |
|
|
|
--- |
|
|
|
2,504 |
|
|
|
$ |
30,530 |
|
|
$ |
--- |
|
|
$ |
1 |
|
|
$ |
30,529 |
|
At
September 30, 2009, the Company's available-for-sale and trading securities are
presented on the condensed consolidated balance sheets as short-term investments
of $822.9 million and long-term investments of $108.7 million.
The
Company has classified its strategic investments in publicly traded companies as
trading securities. During the three months ended September 30, 2009, the
Company sold all but $4,000 of the $29.8 million of trading securities that
it owned at June 30, 2009. During the three and six months ended
September 30, 2009, the Company recognized a gain in earnings of $1.9 million
and $6.6 million, respectively, on these trading securities. The
Company had a net realized gain of $4.9 million and $1.0 million, respectively,
on trading securities that it sold during the three and six months ended
September 30, 2009.
At
September 30, 2009, $45.3 million of the fair value of the Company's investment
portfolio was invested in auction rate securities (ARS). With the
continuing liquidity issues in the global credit markets, the Company's ARS have
experienced multiple failed auctions. In September 2007 and
February 2008, auctions for $24.9 million and $34.8 million, respectively,
of the original purchase value of the Company's investments in ARS first
failed. While the Company continues to earn interest on these investments
based on a pre-determined formula with spreads tied to particular interest rate
indices, the estimated market value for these ARS no longer approximates the
original purchase value.
The $24.9
million in failed auctions have continued to fail through the filing date of
this Quarterly Report on Form 10-Q. The fair value of the failed ARS
of $17.3 million has been estimated based on market information and
estimates determined by management and could change significantly based on
market conditions. The Company evaluated the impairments in the value of
these ARS, determining its intent to sell these securities prior to the recovery
of its amortized cost basis resulted in the securities being
other-than-temporarily impaired and has recognized an impairment charge on these
investments of $0.4 million in the quarter
ended September 30, 2009. The Company intends to sell the $24.9
million of ARS.
The $34.8
million of ARS that failed during February 2008 are investments in student
loan-backed ARS. Approximately $1.4 million and $2.9 million of these
ARS were redeemed at par by the issuers in the six months ended September 30,
2009 and fiscal 2009, respectively, reducing the Company's overall position to
$30.5 million. Based upon the Company's evaluation of available
information, it believes these investments are of high credit quality, as all of
the investments carry AAA credit ratings by one or more of the major credit
rating agencies and are largely backed by the federal government (Federal Family
Education Loan Program). The fair value of the failed ARS has been
estimated based on market information and estimates determined by management and
could change significantly based on market conditions. In November 2008, the
Company executed an ARS rights agreement (the Rights) with the broker through
which the Company purchased the $30.5 million in ARS that provides (1) the
Company with the right to put these ARS back to the broker at par anytime during
the period from June 30, 2010 through July 2, 2012, and (2) the broker with the
right to purchase or sell the ARS at par on the Company's behalf anytime through
July 2, 2012. The Company accounted for the acceptance of the Rights
as the receipt of a put option for no consideration and recognized a gain with a
corresponding recognition as a long-term investment. The Company
expects any future changes in the fair value of the ARS to be largely offset by
changes in the fair value of the related Rights without any significant net
impact to the Company's income statement. The Company will continue
to measure the ARS and the Rights at fair value (utilizing Level 3 inputs) until
the earlier of maturity or exercise. The Company intends and has the
ability to hold the $30.5 million of ARS until the market recovers or until
June 30, 2010 when it has the right to sell the ARS at par to the broker as it
does not anticipate having to sell these securities to fund the operations of
its business.
The
Company believes that, based on its current unrestricted cash, cash equivalents
and short-term investment balances, the current lack of liquidity in the credit
markets will not have a material impact on its liquidity, cash flow or ability
to fund its operations.
At
September 30, 2009, the Company evaluated its investment portfolio and noted
unrealized losses of $0.3 million which were due to fluctuations in interest
rates and credit market conditions. Management does not believe any
of the unrealized losses represent other-than-temporary impairment based on its
evaluation of available evidence as of September 30, 2009. The
Company's intent is to hold these investments until these assets are no longer
impaired. For those investments not scheduled to mature until after
June 30, 2010, such recovery is not anticipated to occur in the next year and
these investments have been classified as long-term investments.
The
amortized cost and estimated fair value of the available-for-sale securities at
September 30, 2009, by maturity, are shown below (amounts in
thousands). Expected maturities can differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties, and the Company views its
available-for-sale securities as available for current operations.
|
|
Adjusted
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair
Value
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
461,993 |
|
|
$ |
3,003 |
|
|
$ |
--- |
|
|
$ |
464,996 |
|
Due
after one year and through five years
|
|
|
416,144 |
|
|
|
3,078 |
|
|
|
328 |
|
|
|
418,894 |
|
Due
after five years and through ten years
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Due
after ten years
|
|
|
17,259 |
|
|
|
--- |
|
|
|
--- |
|
|
|
17,259 |
|
|
|
$ |
895,396 |
|
|
$ |
6,081 |
|
|
$ |
328 |
|
|
$ |
901,149 |
|
During
the quarter ended September 30, 2009, the Company had a realized gain of $7,000
from sales of available-for-sale securities compared to no realized gains or
losses in the quarter ended June 30, 2009.
(5) Fair
Value Measurements
Accounting
rules for fair value clarify that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value
is a market-based measurement that should be determined based on assumptions
that market participants would use in pricing an asset or liability. As a
basis for considering such assumptions, the Company utilizes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
|
Level
1 – Observable inputs such as quoted prices in active
markets;
|
|
Level
2 – Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly;
and
|
|
Level
3 – Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own
assumptions.
|
Assets
and liabilities measured at fair value on a recurring basis at September 30,
2009 are as follows (amounts in thousands):
|
|
Quoted
Prices in Active Markets for Identical Instruments
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Total
Balance
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market fund deposits
|
|
$ |
329,339 |
|
|
$ |
--- |
|
|
$ |
--- |
|
|
$ |
329,339 |
|
Deposit
accounts
|
|
|
--- |
|
|
|
211,706 |
|
|
|
--- |
|
|
|
211,706 |
|
Government
agency bonds
|
|
|
--- |
|
|
|
399,012 |
|
|
|
--- |
|
|
|
399,012 |
|
Municipal
bonds
|
|
|
--- |
|
|
|
306,635 |
|
|
|
--- |
|
|
|
306,635 |
|
Auction
rate securities
|
|
|
--- |
|
|
|
--- |
|
|
|
45,280 |
|
|
|
45,280 |
|
Put
option on auction rate securities
|
|
|
--- |
|
|
|
--- |
|
|
|
2,504 |
|
|
|
2,504 |
|
Corporate
bonds
|
|
|
--- |
|
|
|
178,243 |
|
|
|
--- |
|
|
|
178,243 |
|
Marketable
securities
|
|
|
4 |
|
|
|
--- |
|
|
|
--- |
|
|
|
4 |
|
Total
assets measured at fair value
|
|
$ |
329,343 |
|
|
$ |
1,095,596 |
|
|
$ |
47,784 |
|
|
$ |
1,472,723 |
|
For Level
3 valuations, the Company estimated the fair value of its ARS based on the
following: (i) the underlying structure of each security; (ii) the
present value of future principal and interest payments discounted at rates
considered to reflect current market conditions; (iii) consideration of the
probabilities of default, auction failure, or repurchase at par for each period;
and (iv) estimates of the recovery rates in the event of default for each
security. The Company estimated the value of the put option on the
ARS by evaluating the estimated cash flows before and after the receipt of the
put option, discounted at rates reflecting the likelihood of default and lack of
liquidity, or in the case of the payment of the par value to be paid by the
broker at exercise of the put option, the counterparty credit
risk. The estimated fair values that are categorized as Level 3 as
well as the marketable securities and put options on publicly traded stock could
change significantly based on future market conditions. Refer to Note 4
for further discussion of the Company's investments in ARS.
The
following table presents a reconciliation for all assets and liabilities
measured at fair value on a recurring basis, excluding accrued interest
components, using significant unobservable inputs (Level 3) for the three months
ended September 30, 2009 (amounts in thousands):
|
|
Three
Months Ended September 30, 2009
|
|
|
Six
Months Ended September 30, 2009
|
|
Balance
at June 30, 2009 and March 31, 2009, respectively
|
|
$ |
49,511 |
|
|
$ |
50,826 |
|
Securities
redeemed at par
|
|
|
(1,350 |
) |
|
|
(1,400 |
) |
Impairment
losses included in interest income
|
|
|
(377 |
) |
|
|
(1,642 |
) |
Balance
at September 30, 2009
|
|
$ |
47,784 |
|
|
$ |
47,784 |
|
Assets
and liabilities measured at fair value on a recurring basis are
presented/classified on the condensed consolidated balance sheets at September
30, 2009 as follows (amounts in thousands):
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Instruments
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Total
Balance
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
329,339 |
|
|
$ |
211,706 |
|
|
$ |
--- |
|
|
$ |
541,045 |
|
Short-term
investments
|
|
|
4 |
|
|
|
792,420 |
|
|
|
30,525 |
|
|
|
822,949 |
|
Long-term
investments
|
|
|
--- |
|
|
|
91,470 |
|
|
|
17,259 |
|
|
|
108,729 |
|
Total
assets measured at fair value
|
|
$ |
329,343 |
|
|
$ |
1,095,596 |
|
|
$ |
47,784 |
|
|
$ |
1,472,723 |
|
(6)
|
Fair Value of
Financial Instruments
|
The
carrying amount of cash equivalents approximates fair value because their
maturity is less than three months. The carrying amount of short-term
and long-term investments approximates fair value as the securities are marked
to market as of each balance sheet date with any unrealized gains and losses
reported in stockholders' equity. The carrying amount of accounts
receivable, accounts payable and accrued liabilities approximates fair value due
to the short-term maturity of the amounts. The fair value of the
Company's junior subordinated convertible debentures was $1,055.2 million at
September 30, 2009, based on the trading price of the bonds, compared to the
carrying value of $337.4 million. See Note 11 for additional
information regarding the carrying value of the Company's junior subordinated
convertible debentures.
Accounts
receivable consists of the following (amounts in thousands):
|
|
September
30,
2009
|
|
|
March
31,
2009
|
|
Trade
accounts receivable
|
|
$ |
109,315 |
|
|
$ |
91,325 |
|
Other
|
|
|
556 |
|
|
|
376 |
|
|
|
|
109,871 |
|
|
|
91,701 |
|
Less
allowance for doubtful accounts
|
|
|
3,220 |
|
|
|
3,176 |
|
|
|
$ |
106,651 |
|
|
$ |
88,525 |
|
The
components of inventories consist of the following (amounts in
thousands):
|
|
September
30,
2009
|
|
|
March
31,
2009
|
|
Raw
materials
|
|
$ |
3,886 |
|
|
$ |
3,693 |
|
Work
in process
|
|
|
91,770 |
|
|
|
114,676 |
|
Finished
goods
|
|
|
12,795 |
|
|
|
13,141 |
|
|
|
$ |
108,451 |
|
|
$ |
131,510 |
|
Inventory
impairment charges establish a new cost basis for inventory and charges are not
subsequently reversed to income even if circumstances later suggest that
increased carrying amounts are recoverable.
(9)
|
Property, Plant and
Equipment
|
Property,
plant and equipment consists of the following (amounts in
thousands):
|
|
September
30,
2009
|
|
|
March
31,
2009
|
|
Land
|
|
$ |
39,671 |
|
|
$ |
39,671 |
|
Building
and building improvements
|
|
|
335,578 |
|
|
|
334,717 |
|
Machinery
and equipment
|
|
|
1,162,588 |
|
|
|
1,148,588 |
|
Projects
in process
|
|
|
104,341 |
|
|
|
114,478 |
|
|
|
|
1,642,178 |
|
|
|
1,637,454 |
|
Less
accumulated depreciation and
amortization
|
|
|
1,144,220 |
|
|
|
1,105,767 |
|
|
|
$ |
497,958 |
|
|
$ |
531,687 |
|
Depreciation
expense attributed to property, plant and equipment was $43.5 million in
the six months ended September 30, 2009 and $47.2 million in the six months
ended September 30, 2008.
(10) Income
Taxes
The
provision for income taxes reflects tax on foreign earnings and federal and
state tax on U.S. earnings. The Company had an effective tax rate of
14.4% for the six-month period ended September 30, 2009 and 17.8% for the
six-month period ended September 30, 2008. The Company's effective
tax rate is lower than statutory rates in the U.S. due primarily to its mix of
earnings in foreign jurisdictions with lower tax rates.
At
March 31, 2009, the Company had $70.1 million of unrecognized tax
benefits. Unrecognized tax benefits increased by $5.5 million in the
six months ended September 30, 2009 compared to the March 31, 2009 balances as a
result of the accrual for uncertain tax positions and the accrual of deficiency
interest on these positions.
The
Company files U.S. federal, U.S. state, and foreign income tax returns.
For U.S. federal, and in general for U.S. state tax returns, the fiscal
2002 through fiscal 2004 and fiscal 2006 through fiscal 2009 tax years remain
open for examination by tax authorities. For foreign tax returns, the
Company is generally no longer subject to income tax examinations for years
prior to fiscal 2002.
The
Company recognizes liabilities for anticipated tax audit issues in the U.S. and
other tax jurisdictions based on its estimate of whether, and the extent to
which, additional tax payments are more likely than not. The
Company believes that it maintains adequate reserves to offset any potential
income tax liabilities that may arise upon final resolution of matters for open
tax years. The U.S. IRS is currently auditing the Company's fiscal years
ended March 31, 2002, 2003, 2004, 2006, 2007 and 2008. The Company
believes that it has appropriate support for the income tax positions taken on
its tax returns and that its accruals for tax liabilities are adequate for all
open years based on an assessment of many factors including past experience and
interpretations of tax law applied to the facts of each
matter.
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 prove to be less than an
ultimate assessment, a future charge to expense would be recorded in the period
in which the assessment is determined. Although the timing of the
resolution and/or closure on audits is highly uncertain, the Company does not
believe it is reasonably possible that its unrecognized tax benefits would
materially change in the next 12 months.
(11) 2.125%
Junior Subordinated Convertible Debentures
The
Company's $1.15 billion principal amount of 2.125% junior subordinated
convertible debentures due December 15, 2037, are subordinated in right of
payment to any future senior debt of the Company and are effectively
subordinated in right of payment to the liabilities of the Company's
subsidiaries. The debentures are convertible, subject to certain
conditions, into shares of the Company's common stock at an initial conversion
rate of 29.2783 shares of common stock per $1,000 principal amount of
debentures, representing an initial conversion price of approximately $34.16 per
share of common stock. As of September 30, 2009, none of the
conditions allowing holders of the debentures to convert had been
met. As a result of a cash dividend of $0.339 per share paid in
September 2009, the conversion rate was adjusted to 32.1283 shares of common
stock per $1,000 of principal amount of debentures, representing a conversion
price of approximately $31.13 per share of common stock.
As the
debentures can be settled in cash upon conversion, for accounting purposes, the
debentures were bifurcated into a liability component and an equity component,
which are initially recorded at fair value. The carrying value of the equity
component at September 30, 2009 and at March 31, 2009 was $822.4 million. The
estimated fair value of the liability component of the debentures at the
issuance date was $327.6 million, resulting in a debt discount of $822.4
million. The unamortized debt discount was $811.9 million at September 30, 2009
and $815.0 million at March 31, 2009. The carrying value of the debentures was
$337.4 million at September 30, 2009 and $334.2 million at March 31, 2009. The
remaining period over which the unamortized debt discount will be recognized as
non-cash interest expense is 28.25 years. In the three and six months ended
September 30, 2009, the Company recognized $1.6 million and
$3.1 million, respectively, in non-cash interest expense related to the
amortization of the debt discount. In the three and six months ended
September 30, 2008, the Company recognized $1.4 million and
$2.8 million, respectively, in non-cash interest expense related to the
amortization of the debt discount. The Company recognized $6.1
million and $12.2 million of interest expense related to the 2.125% coupon on
the debentures in the three and six months ended September 30, 2009 and
2008, respectively.
The
debentures also include certain embedded features related to the contingent
interest payments, the Company making specific types of distributions (e.g.,
extraordinary dividends), the redemption feature in the event of changes in tax
law, and penalty interest in the event of a failure to maintain an effective
registration. These features qualify as derivatives and are bundled as a
compound embedded derivative that is measured at fair value. The fair
value of the derivative as of September 30, 2009 was $0.6 million, compared
to the value at March 31, 2009 of $0.5 million, resulting in an increase of
interest expense in the first six months of fiscal 2010 of $0.1 million. The
balance of the debentures on the Company's condensed consolidated balance sheet
at September 30, 2009 of $337.4 million includes the fair value
of the embedded derivative.
(12) Derivative
Instruments
The
Company has international operations and is thus subject to foreign currency
rate fluctuations. To manage the risk of changes in foreign currency
rates, the Company periodically enters into derivative contracts comprised
of foreign currency forward contracts to hedge its asset and liability
foreign currency exposure and a portion of its foreign currency operating
expenses. Approximately 99% of the Company's sales are U.S. Dollar
denominated. To
date, the exposure related to foreign exchange rate volatility has not been
material to the Company's operating results. As of September 30, 2009
and March 31, 2009, the Company had no foreign currency derivatives
outstanding. The Company recognized an immaterial amount of net
realized gains on foreign currency derivatives in the six months ended September
30, 2009.
(13)
|
Comprehensive
Income
|
Comprehensive
income consists of net income offset by net unrealized gains and losses on
available-for-sale investments. The components of other comprehensive
income and related tax effects were as follows (amounts in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Six
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Change
in unrealized gains and losses on investments, net of tax effect of $432,
$67, $975 and $942, respectively
|
|
$ |
(68 |
) |
|
$ |
(18 |
) |
|
$ |
(37 |
) |
|
$ |
3,201 |
|
Comprehensive income was $44.6 million
and $71.9 million for the three and six months ended September 30, 2009 and
$75.7 million and $148.1 million for the three and six months ended
September 30, 2008, respectively.
(14)
|
Employee Benefit
Plans
|
Share-Based
Compensation Expense
The
following table presents details of share-based compensation expense (amounts in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Six
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Cost
of sales
|
|
$ |
1,869 |
(1) |
|
$ |
2,053 |
(1) |
|
$ |
3,579 |
(1) |
|
$ |
3,678 |
(1) |
Research
and development
|
|
|
3,108 |
|
|
|
2,640 |
|
|
|
6,097 |
|
|
|
5,075 |
|
Selling,
general and administrative
|
|
|
4,523 |
|
|
|
3,800 |
|
|
|
8,822 |
|
|
|
7,439 |
|
Pre-tax
effect of share-based compensation
|
|
|
9,500 |
|
|
|
8,493 |
|
|
|
18,498 |
|
|
|
16,192 |
|
Income
tax benefit
|
|
|
1,235 |
|
|
|
1,537 |
|
|
|
2,405 |
|
|
|
2,930 |
|
Net
income effect of share-based compensation
|
|
$ |
8,265 |
|
|
$ |
6,956 |
|
|
$ |
16,093 |
|
|
$ |
13,262 |
|
|
(1)
During the three and six months ended September 30, 2009, $1.8 million and
$3.6 million, respectively, was capitalized to inventory and $1.9 million and $3.6
million, respectively, of previously capitalized inventory was
sold. During the three and six months ended September 30, 2008,
$1.7 million
and $3.1 million, respectively, was capitalized to inventory and $2.1
million and $3.7 million, respectively, of previously capitalized
inventory was sold.
|
The
amount of unearned share-based compensation currently estimated to be expensed
in the remainder of fiscal 2010 through fiscal 2014 related to unvested
share-based payment awards at September 30, 2009 is
$54.1 million. The weighted average period over which the
unearned share-based compensation is expected to be recognized is approximately
2.27 years.
Combined
Incentive Plan Information
The total
intrinsic value of restricted stock units (RSUs) which vested during the three
and six months ended September 30, 2009 was $4.2 million and $6.7 million,
respectively. The aggregate intrinsic value of RSUs outstanding at
September 30, 2009 was $109.5 million, calculated based on the closing
price of the Company's common stock of $26.50 per share on September 30,
2009. At September 30, 2009, the weighted average remaining expense
recognition period was 2.37 years.
The
weighted average fair value per share of the RSUs awarded is calculated based on
the fair market value of the Company's common stock on the respective grant
dates discounted for the Company's expected dividend yield. The
weighted average fair value per share of RSUs awarded in the three and six
months ended September 30, 2009 was $19.10 and $18.08,
respectively. The weighted average fair value per share of RSUs
awarded in the three and six months ended September 30, 2008 was $26.74 and
$27.36, respectively.
The total
intrinsic value of options exercised during the three and six months ended
September 30, 2009 was $2.0 million and $2.3 million,
respectively. This intrinsic value represents the difference between
the fair market value of the Company's common stock on the date of exercise and
the exercise price of each equity award.
For the
three months ended September 30, 2009 and 2008, the number of option shares
exercisable was 8,930,713 and 8,310,342, respectively, and the weighted average
exercise price per share was $24.24 and $23.02, respectively.
The
weighted average fair value per share of stock options granted in the three
months ended September 30, 2009 was $5.90. The weighted average
fair value per share of stock options granted in the three months ended
September 30, 2008 was $10.39. There were no stock options granted in
the three-month periods ended June 30, 2009 and 2008.
(15)
|
Net Income Per Common
Share
|
The
following table sets forth the computation of basic and diluted net income per
common share (in thousands, except per share amounts):
|
|
Three
Months Ended
September
30,
|
|
|
Six
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
44,485 |
|
|
$ |
75,720 |
|
|
$ |
71,853 |
|
|
$ |
151,267 |
|
Weighted
average common shares outstanding
|
|
|
183,190 |
|
|
|
183,615 |
|
|
|
183,023 |
|
|
|
184,139 |
|
Dilutive
effect of stock options and RSUs
|
|
|
3,732 |
|
|
|
4,321 |
|
|
|
3,201 |
|
|
|
4,765 |
|
Dilutive
effect of convertible debt
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
589 |
|
Weighted
average common and potential common shares outstanding
|
|
|
186,922 |
|
|
|
187,936 |
|
|
|
186,224 |
|
|
|
189,493 |
|
Basic
net income per common share
|
|
$ |
0.24 |
|
|
$ |
0.41 |
|
|
$ |
0.39 |
|
|
$ |
0.82 |
|
Diluted
net income per common share
|
|
$ |
0.24 |
|
|
$ |
0.40 |
|
|
$ |
0.39 |
|
|
$ |
0.80 |
|
Diluted
net income per common share for the three and six months ended September 30,
2009 does not include any incremental shares issuable upon the exchange of the
debentures (see Note 11). The three-month period ended September 30,
2008 does not include any incremental shares issuable upon the exchange of the
debentures. The six-month period ended September 30, 2008 includes
588,892 incremental shares issuable upon the exchange of the
debentures. The debentures have no impact on diluted net income per
common share unless the average price of the Company's common stock exceeds the
conversion price because the principal amount of the
debentures will be settled in cash upon conversion. Prior to
conversion, the Company will include, in the diluted net income per common share
calculation, the effect of the additional shares that may be issued when the
Company's common stock price exceeds the conversion price using the treasury
stock method. The weighted average conversion price per share used in
calculating the dilutive effect of the convertible debt for the three and six
months ended September 30, 2009 was $31.35 and $31.59,
respectively.
Weighted
average common shares exclude the effect of anti-dilution option
shares. As of the three and six-month periods ended September 30,
2009, the number of option shares that were antidilutive was 4,250,079 and
6,033,106, respectively. As of the three and six-month periods ended
September 30, 2008, the number of option shares that were antidilutive was
275,102 and 149,529, respectively.
During
the three and six months ended September 30, 2009, the Company did not
repurchase any of its shares of common stock. During the three and
six months ended September 30, 2008, the Company purchased 3.3 million and 4.0
million shares of its common stock for a total of $100.3 million and $123.9
million, respectively. The timing and amount of future repurchases
will depend upon market conditions, interest rates, and corporate
considerations.
As of
September 30, 2009, the Company held approximately 35.2 million shares as
treasury shares.
A
quarterly cash dividend of $0.339 per share was paid on September 3, 2009 in the
aggregate amount of $62.1 million. A quarterly cash dividend of
$0.34 per share was declared on November 4, 2009 and will be paid on December 2,
2009 to shareholders of record as of November 18, 2009. The
Company expects the December 2009 payment of its quarterly cash dividend to be
approximately $62.3 million.
This report, including "Part I –
Item 2 Management’s Discussion and Analysis of Financial Condition and Results
of Operations" and "Part II - Item 1A Risk Factors" contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties, including statements regarding
our strategy, financial performance and revenue sources. We use words
such as "anticipate," "believe," "plan," "expect," "future," "intend" and
similar expressions to identify forward-looking statements. Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of certain factors including those set
forth under "Risk Factors," beginning at page 36 and elsewhere
in this Form 10-Q. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these
forward-looking statements. We disclaim any obligation to update
information contained in any forward-looking statement. These
forward-looking statements include, without limitation, statements regarding the
following:
|
·
|
The
effects that adverse global economic conditions and fluctuations in the
global credit and equity markets may have on our financial condition and
results of operations;
|
|
·
|
The
effects and amount of competitive pricing pressure on our product
lines;
|
|
·
|
Our
ability to moderate future average selling price
declines;
|
|
·
|
The
effect of product mix on gross margin;
|
|
·
|
The
amount of changes in demand for our products and those of our
customers;
|
|
·
|
The
level of orders that will be received and shipped within a
quarter;
|
|
·
|
The
effect that distributor and customer inventory holding patterns will have
on us;
|
|
·
|
Our
belief that deferred cost of sales will have low risk of material
impairment;
|
|
·
|
Our
belief that our direct sales personnel combined with our distributors
provide an effective means of reaching our customer
base;
|
|
·
|
Our
ability to increase the proprietary portion of our analog and interface
product lines and the effect of such an increase;
|
|
·
|
The
impact of any supply disruption we may experience;
|
|
·
|
Our
ability to effectively utilize our facilities at appropriate capacity
levels and anticipated costs;
|
|
·
|
That
our existing facilities and planned expansion activities provide
sufficient capacity to respond to increases in demand;
|
|
·
|
That
manufacturing costs will be reduced by transition to advanced process
technologies;
|
|
·
|
Our
ability to absorb fixed manufacturing costs;
|
|
·
|
Our
ability to maintain manufacturing yields;
|
|
·
|
Continuing
our investments in new and enhanced products;
|
|
·
|
Our
ability to attract and retain qualified personnel;
|
|
·
|
The
cost effectiveness of using our own assembly and test
operations;
|
|
·
|
Our
anticipated level of capital expenditures;
|
|
·
|
Continuation
of quarterly cash dividends;
|
|
·
|
The
sufficiency of our existing sources of liquidity;
|
|
·
|
The
impact of seasonality on our business;
|
|
·
|
The
accuracy of our estimates used in valuing employee equity
awards;
|
|
·
|
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,
assets, and other liabilities;
|
|
·
|
The
adequacy of our patent strategy;
|
|
·
|
Our
ability to obtain patents and intellectual property licenses and minimize
the effects of litigation;
|
|
·
|
The
level of risk we are exposed to for product liability
claims;
|
|
·
|
The
amount of labor unrest, public heath issues, political instability,
governmental interference and changes in general economic conditions that
we experience;
|
|
·
|
The
effect of fluctuations in market interest rates on income and/or cash
flows;
|
|
·
|
The
effect of fluctuations in currency rates;
|
|
·
|
Our
ability to collect accounts receivable;
|
|
·
|
Our
belief that our investments in student loan auction rate municipal bond
offerings are of high credit quality;
|
|
·
|
Our
ability to hold our fixed income investments and certain ARS until the
market recovers, and the immaterial impact this will have on our
liquidity;
|
|
·
|
Our
belief that any future changes in the fair value of the ARS associated
with the ARS rights agreement will be largely offset by changes in the
fair value of the related rights without any significant net impact to our
income statement;
|
|
·
|
The
accuracy of our estimation of the cost effectivity of our insurance
coverage;
|
|
·
|
Our
belief that our activities are conducted in compliance with various
regulations not limited to environmental and export
compliance;
|
|
·
|
Our
ability and intent to settle the principal amount of the junior
subordinated convertible debentures in cash; and
|
|
·
|
Our
expectation that our wafer fabs will operate at below peak
levels.
|
We begin
our Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) with a summary of Microchip's overall business strategy to
give the reader an overview of the goals of our business and the overall
direction of our business and products. This is followed by a
discussion of the Critical Accounting Policies and Estimates that we believe are
important to understanding the assumptions and judgments incorporated in our
reported financial results. We then discuss our Results of Operations
for the three and six months ended September 30, 2009 compared to the three and
six months ended September 30, 2008. We then provide an analysis of
changes in our balance sheet and cash flows, and discuss our financial
commitments in sections titled "Liquidity and Capital Resources," "Contractual
Obligations" and "Off-Balance Sheet Arrangements."
Strategy
Our goal
is to be a worldwide leader in providing specialized semiconductor products for
a wide variety of embedded control applications. Our strategic focus
is on embedded control products, which include microcontrollers,
high-performance linear and mixed signal devices, power management and thermal
management devices, interface devices, Serial EEPROMs, and our patented 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. Beginning with the third quarter
of fiscal 2009, the downturn in the U.S. and global economies has adversely
impacted our key markets resulting in adverse fluctuations in our business;
however, in the first two quarters of fiscal 2010 we saw an upturn in our key
markets, resulting in improvements to our business, though not the levels of
revenue and profitability that we realized in the same periods in fiscal
2009.
Our
manufacturing operations include wafer fabrication and assembly and
test. The ownership of our manufacturing resources is an important
component of our business strategy, enabling us to maintain a high level of
manufacturing control resulting in us being one of the lowest cost producers in
the embedded control industry. By owning our wafer fabrication
facilities and our assembly and test operations, and by employing statistical
process control techniques, we have been able to achieve and maintain high
production yields. Direct control over manufacturing resources allows
us to shorten our design and production cycles. This control also
allows us to capture the wafer manufacturing and a portion of the assembly and
test profit margin.
We employ
proprietary design and manufacturing processes in developing our embedded
control products. We believe our processes afford us both
cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully leverage
our process research and development costs and to deliver new products to market
more rapidly. Our engineers utilize advanced computer-aided design
(CAD) tools and software to perform circuit design, simulation and layout, and
our in-house photomask and wafer fabrication facilities enable us to rapidly
verify design techniques by processing test wafers quickly and
efficiently.
We are
committed to continuing our investment in new and enhanced products, including
development systems, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. Our current research and
development activities focus on the design of new microcontrollers, digital
signal controllers, memory and mixed-signal products, new development systems,
software and application-specific software libraries. We are also
developing new design and process technologies to achieve further cost
reductions and performance improvements in our products.
We market
our products worldwide primarily through a network of direct sales personnel and
distributors. Our distributors focus primarily on servicing the
product and technical support requirements of a broad base of diverse
customers. We believe that our direct sales personnel combined with
our distributors provide an effective means of reaching this broad and diverse
customer base. Our direct sales force focuses primarily on major
strategic accounts in three geographical markets: the Americas, Europe and
Asia. We currently maintain sales and support centers in major
metropolitan areas in North America, Europe and Asia. We believe that
a strong technical service presence is essential to the continued development of
the embedded control market. Many of our field sales engineers
(FSEs), field application engineers (FAEs), and sales management have technical
degrees and have been previously employed in an engineering
environment. We believe that the technical knowledge of our sales
force is a key competitive advantage in the sale of our products. The
primary mission of our FAE team is to provide technical assistance to strategic
accounts and to conduct periodic training sessions for FSEs and distributor
sales teams. FAEs also frequently conduct technical seminars for our
customers in major cities around the world, and work closely with our
distributors to provide technical assistance and end-user support.
Critical
Accounting Policies and Estimates
General
Our
discussion and analysis of Microchip's financial condition and results of
operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. We review the accounting policies we use in reporting our
financial results on a regular basis. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent liabilities. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, share-based compensation,
inventories, investments, income taxes, property plant and equipment, impairment
of property, plant and equipment, junior subordinated convertible debentures and
litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Our results may differ from these estimates due to actual
outcomes being different from those on which we based our assumptions. We
review these estimates and judgments on an ongoing basis. We believe the
following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our condensed consolidated financial
statements. We also have other policies that we consider key accounting
policies, such as our policy regarding revenue recognition to OEMs; however, we
do not believe these policies require us to make estimates or judgments that are
as difficult or subjective as our policies described below.
Revenue
Recognition - Distributors
Our
distributors worldwide generally have broad price protection and product return
rights, so we defer revenue recognition until the distributor sells the product
to their customer. Revenue is recognized when the distributor sells
the product to an end-customer, at which time the sales price becomes fixed or
determinable. Revenue is not recognized upon shipment to our
distributors since, due to discounts from list price as well as price protection
rights, the sales price is not substantially fixed or determinable at that
time. At the time of shipment to these distributors, we record a
trade receivable for the selling price as there is a legally enforceable right
to payment, relieve inventory for the carrying value of goods shipped since
legal title has passed to the distributor, and record the gross margin in
deferred income on shipments to distributors on our condensed consolidated
balance sheets.
Deferred
income on shipments to distributors effectively represents the gross margin on
the sale to the distributor; however, the amount of gross margin that we
recognize in future periods could be less than the deferred margin as a result
of credits granted to distributors on specifically identified products and
customers to allow the distributors to earn a competitive gross margin on the
sale of our products to their end customers and price protection
concessions related to market pricing conditions.
We sell
the majority of the items in our product catalog to our distributors worldwide
at a uniform list price. However, distributors resell our products to
end customers at a very broad range of individually negotiated price
points. The majority of our distributors' resales require a reduction
from the original list price paid. Often, under these circumstances,
we remit back to the distributor a portion of their original purchase price
after the resale transaction is completed in the form of a credit against the
distributors' outstanding accounts receivable balance. The credits
are on a per unit basis and are not given to the distributor until they provide
information to us regarding the sale to their end customer. The price
reductions vary significantly based on the customer, product, quantity ordered,
geographic location and other factors and discounts to a price less than our
cost have historically been rare. The effect of granting these
credits establishes the net selling price to our distributors for the product
and results in the net revenue recognized by us when the product is sold by the
distributors to their end customers. Thus, a portion of the "deferred
income on shipments to distributors" balance represents the amount of
distributors' original purchase price that will be credited back to the
distributor in the future. The wide range and variability of
negotiated price concessions granted to distributors does not allow us to
accurately estimate the portion of the balance in the deferred income on
shipments to distributors account that will be credited back to the
distributors. Therefore, we do not reduce deferred income on
shipments to distributors or accounts receivable by anticipated future
concessions; rather, price concessions are typically recorded against deferred
income on shipments to distributors and accounts receivable when incurred, which
is generally at the time the distributor sells the product. At
September 30, 2009, we had approximately $125.8 million of deferred revenue and
$39.5 million in deferred cost of sales recognized as $86.3 million of deferred
income on shipments to distributors. At March 31, 2009, we had
approximately $118.2 million of deferred revenue and $34.3 million in
deferred cost of sales recognized as $83.9 million of deferred income on
shipments to distributors. The deferred income on shipments to
distributors that will ultimately be recognized in our income statement will be
lower than the amount reflected on the balance sheet due to additional price
credits to be granted to the distributors when the product is sold to their
customers. These additional price credits historically have resulted
in the deferred income approximating the overall gross margins that we recognize
in the distribution channel of our business.
Distributor
advances, reflected as a reduction of deferred income on shipments to
distributors on our condensed consolidated balance sheets, totaled
$47.5 million at September 30, 2009 and $37.6 million at
March 31, 2009. On sales to distributors, our payment terms
generally require the distributor to settle amounts owed to us for an amount in
excess of their ultimate cost. The sales price to our distributors
may be higher than the amount that the distributors will ultimately owe us
because distributors often negotiate price reductions after
purchasing
the product from us and such reductions are often significant. It is
our practice to apply these negotiated price discounts to future purchases,
requiring the distributor to settle receivable balances, on a current basis,
generally within 30 days, for amounts originally invoiced. This
practice has an adverse impact on the working capital of our
distributors. As such, we have entered into agreements with certain
distributors whereby we advance cash to the distributors to reduce the
distributor's working capital requirements. These advances are
reconciled at least on a quarterly basis and are estimated based on the amount
of ending inventory as reported by the distributor multiplied by a negotiated
percentage. Such advances have no impact on our revenue recognition
or our condensed consolidated statements of income. We process
discounts taken by distributors against our deferred income on shipments to
distributors' balance and true-up the advanced amounts generally after the end
of each completed fiscal quarter. The terms of these advances are set
forth in binding legal agreements and are unsecured, bear no interest on
unsettled balances and are due upon demand. The agreements governing
these advances can be cancelled by us at any time.
We reduce
product pricing through price protection based on market conditions, competitive
considerations and other factors. Price protection is granted to
distributors on the inventory they have on hand at the date the price protection
is offered. When we reduce the price of our products, it allows the
distributor to claim a credit against its outstanding accounts receivable
balances based on the new price of the inventory it has on hand as of the date
of the price reduction. There is no immediate revenue impact from the
price protection, as it is reflected as a reduction of the deferred income on
shipments to distributors' balance.
Products
returned by distributors and subsequently scrapped have historically been
immaterial to our consolidated results of operations. We routinely
evaluate the risk of impairment of the deferred cost of sales component of the
deferred income on shipments to distributors account. Because of the
historically immaterial amounts of inventory that have been scrapped, and
historically rare instances where discounts given to a distributor result in a
price less than our cost, we believe the deferred costs are recorded at their
approximate carrying value.
Share-Based
Compensation
We
measure at fair value and recognize compensation expense for all share-based
payment awards, including grants of employee stock options, RSUs and employee
stock purchase rights, to be recognized in our financial statements based on
their respective grant date fair values. Total share-based
compensation during the six months ended September 30, 2009 was
$18.5 million, of which $14.9 million was reflected in operating
expenses. Total share-based compensation reflected in cost of sales
during the six months ended September 30, 2009 was
$3.6 million. Total share-based compensation included in our
inventory balance was $3.2 million at September 30, 2009.
Determining
the appropriate fair-value model and calculating the fair value of share-based
awards at the date of grant requires judgment. The fair value of our
RSUs is based on the fair market value of our common stock on the date of grant
discounted for expected future dividends. We use the Black-Scholes
option pricing model to estimate the fair value of employee stock options and
rights to purchase shares under stock participation plans. Option
pricing models, including the Black-Scholes model, also require the use of input
assumptions, including expected volatility, expected life, expected dividend
rate, and expected risk-free rate of return. We use a blend of
historical and implied volatility based on options freely traded in the open
market as we believe this is more reflective of market conditions and a better
indicator of expected volatility than using purely historical
volatility. The expected life of the awards is based on historical
and other economic data trended into the future. The risk-free
interest rate assumption is based on observed interest rates appropriate for the
terms of our awards. The dividend yield assumption is based on our
history and expectation of future dividend payouts. We estimate the number
of share-based awards that will be forfeited due to employee
turnover. Quarterly changes in the estimated forfeiture rate can have
a significant effect on reported share-based compensation, as the effect of
adjusting the rate for all expense amortization after April 1, 2006 is
recognized in the period the forfeiture estimate is changed. If the actual
forfeiture rate is higher or lower than the estimated forfeiture rate, then an
adjustment is made to increase or decrease the estimated forfeiture rate, which
will result in a decrease or increase to the expense recognized in our financial
statements. If forfeiture adjustments are made, they would affect our
gross margin, research and development expenses, and selling, general, and
administrative expenses. The effect of forfeiture adjustments through
the second quarter of fiscal 2010 was immaterial.
We
evaluate the assumptions used to value our awards on a quarterly
basis. If factors change and we employ different assumptions,
share-based compensation expense may differ significantly from what we have
recorded in the past. If there are any modifications or cancellations
of the underlying unvested securities, we may be required to accelerate,
increase or cancel any remaining unearned share-based compensation
expense. Future share-based compensation expense and unearned
share-based compensation will increase to the extent that we grant additional
equity awards to employees or we assume unvested equity awards in connection
with acquisitions.
Inventories
Inventories
are valued at the lower of cost or market using the first-in, first-out
method. We write down our inventory for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less
favorable than those we projected, additional inventory write-downs may be
required. Inventory impairment charges establish a new cost basis for
inventory and charges are not subsequently reversed to income even if
circumstances later suggest that increased carrying amounts are
recoverable. In estimating our inventory obsolescence, we primarily
evaluate estimates of demand over a 12-month period and record impairment
charges for inventory on hand in excess of the estimated 12-month
demand.
In
periods where our production levels are substantially below our normal operating
capacity, such as in the second half of fiscal 2009 and the first half of fiscal
2010, the reduced production levels of our manufacturing facilities are charged
directly to cost of sales.
Investments
We
classify our investments as trading securities or available-for-sale securities
based upon management's intent with regard to the investments and the nature of
the underlying securities.
Our
trading securities have consisted of strategic investments in shares of publicly
traded common stock and ARS that we intend to dispose of through the exercise of
a put option. (See Note 4 to our condensed consolidated financial
statements for further discussion of the put option.) Our investments in
trading securities are carried at fair value with unrealized gains and losses
reported in Other, net, in the consolidated statements of income.
Our
available-for-sale investments consist of government agency bonds, municipal
bonds, ARS, and corporate bonds. Our investments are carried at fair value
with unrealized gains and losses reported in stockholders'
equity. Premiums and discounts are amortized or accreted over the
life of the related available-for-sale security. Dividend and interest
income are recognized when earned. The cost of securities sold is
calculated using the specific identification method.
We
include within our short-term investments our trading securities, as well as our
income yielding available-for-sale securities that can be readily converted to
cash and include within long-term investments those income yielding
available-for-sale securities with maturities of over one year that have
unrealized losses attributable to them or those that cannot be readily
liquidated. We have the ability to hold our long-term investments with
temporary impairments until such time as these assets are no longer
impaired. Such recovery of unrealized losses is not expected to occur
within the next year.
Due to
the lack of availability of observable market quotes on certain of our
investment portfolio of ARS, we utilize valuation models including those that
are based on expected cash flow streams and collateral values, including
assessments of counterparty credit quality, default risk underlying the
security, discount rates and overall capital market liquidity. The valuation of
our ARS investment portfolio is subject to uncertainties that are difficult to
predict. Factors that may impact our ARS valuation include changes to
credit ratings of the securities as well as to the underlying assets supporting
those securities, rates of default of the underlying assets, underlying
collateral value, discount rates, counterparty risk, the ongoing strength and
quality of the credit markets and market liquidity.
The
credit markets experienced significant deterioration and uncertainty beginning
in the second half of fiscal 2008. If these conditions continue, or we
experience any additional ratings downgrades on any investments in our portfolio
(including our ARS), we may incur additional impairments to our investment
portfolio, which could negatively affect our financial condition, cash flow and
reported earnings.
Income
Taxes
As part
of the process of preparing our condensed consolidated financial statements, we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within our
condensed consolidated balance sheets. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income within the relevant jurisdiction and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. We
have not provided for a valuation allowance because we believe that it is more
likely than not that our deferred tax assets will be recovered from future
taxable income. Should we determine that we would not be able to
realize all or part of our net deferred tax asset in the future, an adjustment
to the deferred tax asset would be charged to income in the period such
determination was made. At September 30, 2009, our gross deferred tax
asset was $78.1 million.
Various
taxing authorities in the U. S. and other countries in which we do business
scrutinize the tax structures employed by businesses. Companies of
our size and complexity are regularly audited by the taxing authorities in the
jurisdictions in which they conduct significant operations. We are
currently under audit by the United States Internal Revenue Service (IRS) for
our fiscal years ended March 31, 2002, 2003, 2004, 2006, 2007 and
2008. We recognize liabilities for anticipated tax audit issues in
the U. S. and other tax jurisdictions based on our estimate of whether, and the
extent to which, additional tax payments are probable. We believe
that we maintain adequate tax reserves to offset any potential tax liabilities
that may arise upon these and other pending audits in the U. S. and other
countries in which we do business. If such amounts ultimately prove
to be unnecessary, the resulting reversal of such reserves would result in tax
benefits being recorded in the period the reserves are no longer deemed
necessary. If such amounts ultimately prove to be less than an
ultimate assessment, a future charge to expense would be recorded in the period
in which the assessment is determined.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed when
incurred. At September 30, 2009, the carrying value of our property
and equipment totaled $498.0 million, which represented 20.6% of our total
assets. This carrying value reflects the application of our property
and equipment accounting policies, which incorporate estimates, assumptions and
judgments relative to the useful lives of our property and
equipment. Depreciation is provided on a straight-line basis over the
estimated useful lives of the related assets, which range from 5 to 7 years on
manufacturing equipment, from 10 to 15 years on leasehold improvements and
approximately 30 years on buildings.
We began
production activities at Fab 4 on October 31, 2003. We began to depreciate
the Fab 4 assets as they were placed in service for production purposes.
As of September 30, 2009, all of the buildings and supporting facilities were
being depreciated as well as the manufacturing equipment that had been placed in
service. All manufacturing equipment that was not being used in production
activities was maintained in projects in process and is not being depreciated
until it is placed into service since management believes there will be no
change to its utility from the present time until it is placed into productive
service. The lives to be used for depreciating this equipment at Fab 4
will be evaluated at such time as the assets are placed in service. We do
not believe that the temporary idling of such assets has impaired the estimated
life or carrying values of the underlying assets.
The
estimates, assumptions and judgments we use in the application of our property
and equipment policies reflect both historical experience and expectations
regarding future industry conditions and operations. The use of different
estimates, assumptions and judgments regarding the useful lives of our property
and equipment and expectations regarding future industry conditions and
operations, could result in materially different carrying values of assets and
results of operations.
Impairment
of Property, Plant and Equipment
We assess
whether indicators of impairment of long-lived assets are present. If
such indicators are present, we determine whether the sum of the estimated
undiscounted cash flows attributable to the assets in question is less than
their carrying value. If less, we recognize an impairment loss based
on the excess of the carrying amount of the assets over their respective fair
values. Fair value is determined by discounted future cash flows,
appraisals or other methods. If the assets determined to be impaired
are to be held and used, we recognize an impairment loss through a charge to our
operating results to the extent the present value of anticipated net cash flows
attributable to the asset are less than the asset's carrying value, which we
depreciate over the remaining estimated useful life of the asset. We may incur
impairment losses, or additional losses on already impaired assets, in future
periods if factors influencing our estimates change.
Junior
Subordinated Convertible Debentures
We
separately account for the liability and equity components of our junior
subordinated convertible debentures in a manner that reflects our nonconvertible
debt (unsecured debt) borrowing rate when interest cost is
recognized. This results in a bifurcation of a component of the debt,
classification of that component in equity and the accretion of the resulting
discount on the debt to be recognized as part of interest expense in our
consolidated statements of operations. Additionally, certain embedded features
of the debentures qualify as derivatives and are bundled as a compound embedded
derivative that is measured at fair value. Lastly,
we include the dilutive effect of the shares of our common stock
issuable upon conversion of the outstanding junior subordinated convertible
debentures in our diluted income per share calculation regardless of whether the
market price trigger or other contingent conversion feature has been
met. We apply the treasury stock method as we have the intent and
current ability to settle the principal amount of the junior subordinated
convertible debentures in cash. This method results in incremental
dilutive shares when the average fair value of our common stock for a reporting
period exceeds the conversion price per share which was $31.13 at
September 30, 2009 and adjusts as dividends are recorded in the
future.
Litigation
Our
current estimated range of liability related to pending litigation is based on
the probable loss of claims for which we can estimate the amount and range of
loss. Recorded reserves were not significant at September 30,
2009.
Because
of the uncertainties related to both the probability of loss and the amount and
range of loss on our pending litigation, we are unable to make a reasonable
estimate of the liability that could result from an unfavorable
outcome. As additional information becomes available, we will assess
the potential liability related to our pending litigation and revise our
estimates. Revisions in our estimates of the potential liability
could materially impact our results of operation and financial
position.
Results
of Operations
The
following table sets forth certain operational data as a percentage of net sales
for the periods indicated:
|
|
Three
Months Ended
September
30,
|
|
|
Six
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
45.6 |
% |
|
|
39.1 |
% |
|
|
47.6 |
% |
|
|
39.1 |
% |
Gross
profit
|
|
|
54.4 |
% |
|
|
60.9 |
% |
|
|
52.4 |
% |
|
|
60.9 |
% |
Research
and development
|
|
|
13.0 |
% |
|
|
11.7 |
% |
|
|
13.6 |
% |
|
|
11.7 |
% |
Selling,
general and administrative
|
|
|
18.1 |
% |
|
|
16.9 |
% |
|
|
18.5 |
% |
|
|
16.9 |
% |
Special
charge
|
|
|
--- |
% |
|
|
--- |
% |
|
|
0.3 |
% |
|
|
--- |
% |
Operating
income
|
|
|
23.3 |
% |
|
|
32.3 |
% |
|
|
20.0 |
% |
|
|
32.3 |
% |
Net
Sales
We
operate in one industry segment and engage primarily in the design, development,
manufacture and marketing of semiconductor products. We sell our
products to distributors and original equipment manufacturers, referred to as
OEMs, in a broad range of market segments, perform ongoing credit evaluations of
our customers and generally require no collateral. In certain
circumstances, a customer's financial condition may require collateral, and, in
such cases, the collateral would be provided primarily by letters of
credit.
Our net
sales for the quarter ended September 30, 2009 were $226.7 million, an
increase of 17.5% from the previous quarter's sales of $192.9 million, and a decrease
of 16.0% from net sales of $269.7 million in the quarter ended September
30, 2008. Our net sales for the six months ended September 30, 2009
were $419.6 million, a decrease of 22.0% from net sales of $537.9 million
in the six months ended September 30, 2008. The increase in net sales
in the quarter ended September 30, 2009 over the previous quarter was due
primarily to improving semiconductor industry conditions and market share gains
in our strategic product lines. The decreases in net sales for the
quarter ended September 30, 2009 compared to the quarter ended September 30,
2008, and for the six months ended September 30, 2009 compared to the six months
ended September 30, 2008, resulted primarily from adverse changes in global
economic and end-market conditions across all of our product
lines. Average selling prices for our products were down
approximately 5% for the three and six-month periods ended September 30, 2009
over the corresponding periods of the previous fiscal year. The
number of units of our products sold was down approximately 11% and 18% for the
three and six-month periods ended September 30, 2009 over the corresponding
periods of the previous fiscal year. The average selling prices and
the unit volumes of our sales are impacted by the mix of our products sold and
overall semiconductor market conditions. Key factors related to the
amount of net sales during the three and six-month periods ended September 30,
2009 include:
|
·
|
adverse
global economic conditions in the markets we
serve;
|
|
·
|
semiconductor
industry conditions;
|
|
·
|
increasing
semiconductor content in our customers'
products;
|
|
·
|
customers'
increasing needs for the flexibility offered by our programmable
solutions;
|
|
·
|
our
new product offerings that have increased our served available
market;
|
|
·
|
continued
market share gains; and
|
|
·
|
inventory
holding patterns of our customers.
|
Sales by
product line for the three and six months ended September 30, 2009 and 2008 were
as follows (dollars in thousands):
|
|
Three
Months Ended
September
30,
(unaudited)
|
|
|
Six
Months Ended
September
30,
(unaudited)
|
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
Microcontrollers
|
|
$ |
184,144 |
|
|
|
81.2 |
% |
|
$ |
217,089 |
|
|
|
80.5 |
% |
|
$ |
342,061 |
|
|
|
81.5 |
% |
|
$ |
434,692 |
|
|
|
80.8 |
% |
Memory
products
|
|
|
19,294 |
|
|
|
8.5 |
|
|
|
27,893 |
|
|
|
10.3 |
|
|
|
35,817 |
|
|
|
8.5 |
|
|
|
56,330 |
|
|
|
10.5 |
|
Analog
and interface products
|
|
|
23,223 |
|
|
|
10.3 |
|
|
|
24,724 |
|
|
|
9.2 |
|
|
|
41,732 |
|
|
|
10.0 |
|
|
|
46,856 |
|
|
|
8.7 |
|
Total
sales
|
|
$ |
226,661 |
|
|
|
100.0 |
% |
|
$ |
269,706 |
|
|
|
100.0 |
% |
|
$ |
419,610 |
|
|
|
100.0 |
% |
|
$ |
537,878 |
|
|
|
100.0 |
% |
Microcontrollers
Our
microcontroller product line represents the largest component of our total net
sales. Microcontrollers and associated application development
systems accounted for approximately 81.2% of our total net sales for the
three-month period ended September 30, 2009 and approximately 81.5% of our total
net sales for the six-month period ended September 30, 2009 compared to
approximately 80.5% of our total net sales for the three-month period ended
September 30, 2008 and approximately 80.8% of our total net sales for the
six-month period ended September 30, 2008.
Net sales
of our microcontroller products decreased approximately 15.1% in the three-month
period ended September 30, 2009 and 21.3% in the six-month period ended
September 30, 2009 compared to the three and six-month periods ended September
30, 2008. These sales decreases were primarily due to adverse global
economic conditions in the markets we serve and the other factors described
above. The end markets that we serve include the consumer,
automotive, industrial control, communications and computing
markets.
Historically,
average selling prices in the semiconductor industry decrease over the life of
any particular product. The overall average selling prices of our
microcontroller products have remained relatively constant over time due to the
proprietary nature of these products. We have experienced, and expect
to continue to experience pricing pressure in certain microcontroller product
lines, primarily due to competitive conditions. We have been able in
the past, and expect to be able in the future, to moderate average selling price
declines in our microcontroller product lines by introducing new products with
more features and higher prices. We may be unable to maintain average
selling prices for our microcontroller products as a result of increased pricing
pressure in the future, which would adversely affect our operating
results.
Memory
Products
Sales of
our memory products accounted for approximately 8.5% of our total net sales for
the three and six-month periods ended September 30, 2009 compared to
approximately 10.3% of our total net sales for the three-month period ended
September 30, 2008 and 10.5% of our total net sales
in the six-month period ended September 30, 2008.
Net sales
of our memory products decreased approximately 30.8% in the three-month period
ended September 30, 2009 and 36.4% in the six-month period ended September
30, 2009 compared to the three and six-month periods ended September 30,
2008. These sales decreases were driven primarily by adverse global
economic conditions and by customer demand conditions within the Serial EEPROM
market which products comprise substantially all of our memory product net
sales.
Serial
EEPROM product pricing has historically been cyclical in nature, with steep
price declines followed by periods of relative price stability, driven by
changes in industry capacity at different stages of the business
cycle. We have experienced, and expect to continue to experience,
varying degrees of competitive pricing pressures in our Serial EEPROM
products. We may be unable to maintain the average selling prices of
our Serial EEPROM products as a result of increased pricing pressure in the
future, which could adversely affect our operating results.
Analog and Interface
Products
Sales of
our analog and interface products accounted for approximately 10.3% of our total net
sales for the three-month period ended September 30, 2009 and 10.0% of our total
net sales for the six-month period ended September 30, 2009 compared to
approximately 9.2% of our total net sales for the three-month period ended
September 30, 2008 and 8.7% of our total net sales for the six-month period
ended September 30, 2008.
Net sales
of our analog and interface products decreased approximately 6.1% in the
three-month period ended September 30, 2009 and 10.9% in the six-month period
ended September 30, 2009 compared to the three and six-month periods ended
September 30, 2008. These sales decreases were driven primarily by
adverse global economic conditions which offset market share gains achieved
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 would adversely affect our
operating results. We anticipate the proprietary portion of our
analog and interface products will continue to increase over
time.
Distribution
Distributors
accounted for approximately 61% of our net sales in the three-month period ended
September 30, 2009 and approximately 63% of our net sales in the
three-month period ended September 30, 2008. Distributors accounted
for approximately 62% of our net sales in the six-month period ended September
30, 2009 and approximately 63% of our net sales in the six-month period ended
September 30, 2008.
Our
largest distributor accounted for approximately 12% of our net sales in the
three and six-month periods ended September 30, 2009 and approximately 13% of
our net sales in the three and six-month periods ended September 30,
2008.
Generally,
we do not have long-term agreements with our distributors and we, or our
distributors, may terminate our relationships with each other with little or no
advanced notice. The loss of, or the disruption in the operations of,
one or more of our distributors could reduce our future net sales in a given
quarter and could result in an increase in inventory returns.
At
September 30, 2009, our distributors maintained 35 days of inventory of our
products which is in line with their inventory levels at March 31,
2009. Over the past three fiscal years, the days of inventory
maintained by our distributors have fluctuated between 31 days and 42
days. We do not believe that inventory holding patterns at our
distributors will materially impact our net sales, due to the fact that we
recognize revenue based on sell-through for all our distributors.
Sales by
Geography
Sales by
geography for the three and six-month periods ended September 30, 2009 and 2008
were as follows (dollars in thousands):
|
|
Three
Months Ended
September
30,
(unaudited)
|
|
|
Six
Months Ended
September
30,
(unaudited)
|
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
Americas
|
|
$ |
55,892 |
|
|
|
24.7 |
% |
|
$ |
64,623 |
|
|
|
24.0 |
% |
|
$ |
105,367 |
|
|
|
25.1 |
% |
|
$ |
130,751 |
|
|
|
24.3 |
% |
Europe
|
|
|
54,482 |
|
|
|
24.0 |
|
|
|
73,167 |
|
|
|
27.1 |
|
|
|
104,003 |
|
|
|
24.8 |
|
|
|
151,153 |
|
|
|
28.1 |
|
Asia
|
|
|
116,287 |
|
|
|
51.3 |
|
|
|
131,916 |
|
|
|
48.9 |
|
|
|
210,240 |
|
|
|
50.1 |
|
|
|
255,974 |
|
|
|
47.6 |
|
Total
sales
|
|
$ |
226,661 |
|
|
|
100.0 |
% |
|
$ |
269,706 |
|
|
|
100.0 |
% |
|
$ |
419,610 |
|
|
|
100.0 |
% |
|
$ |
537,878 |
|
|
|
100.0 |
% |
Our sales
to foreign customers have been predominately in Asia and Europe, which we
attribute to the manufacturing strength in those areas for automotive,
communications, computing, consumer and industrial control
products. Americas sales include sales to customers in the U.S.,
Canada, Central America and South America.
Sales to
foreign customers accounted for approximately 78% and 77% of our net sales in
the three and six-month periods ended September 30, 2009, respectively, compared
to 76% in each of the three and six-month periods ended September 30,
2008. Substantially all of our foreign sales are U.S. dollar
denominated. Sales to customers in Asia have generally increased over
time due to many of our customers transitioning their manufacturing operations
to Asia and growth in demand from the emerging Asian market. Our
sales force in the Americas and Europe supports a significant portion of the
design activity for products which are ultimately shipped to Asia.
Gross
Profit
Our gross
profit was $123.3 million in the three
months ended September 30, 2009 and $164.2 million in the three months
ended September 30, 2008. Our gross profit was $219.8 million in the
six months ended September 30, 2009 and $327.8 million in the six months ended
September 30, 2008. Gross profit as a percentage of sales was 54.4%
in the three months ended September 30, 2009 and 60.9% in the three months ended
September 30, 2008. Gross profit as a percentage of sales was 52.4%
in the six months ended September 30, 2009 and 60.9% in the six months ended
September 30, 2008.
The most
significant factors affecting our gross profit percentage in the periods covered
by this Quarterly Report on Form 10-Q were:
|
·
|
production
levels being below the range of our normal capacity resulting in under
absorption of fixed costs; and
|
|
·
|
inventory
write-downs partially offset by sales of inventory that was previously
written down.
|
Other
factors that impacted gross profit percentage in the periods covered by this
Quarterly Report on Form 10-Q include:
|
·
|
lower
depreciation as a percentage of cost of
sales;
|
|
·
|
fluctuations
in the product mix of microcontrollers, proprietary and non-proprietary
analog products and Serial EEPROM products resulting in lower overall
average selling prices for our products;
and
|
|
·
|
continual
cost reductions in wafer fabrication and assembly and test manufacturing,
such as new manufacturing technologies and more efficient manufacturing
techniques.
|
During
the three-month period ended September 30, 2009, we operated at approximately
68% of our combined Fab 2 and Fab 4 installed capacity, compared to
approximately 99% for the three-month period ended September 30,
2008. During the third and fourth quarters of fiscal 2009, we reduced
wafer starts at both Fab 2 and Fab 4 and implemented rotating unpaid time off at
both fabrication facilities. The reduction in wafer starts and
rotating unpaid time off were implemented to help control inventory levels due
to adverse economic conditions in the markets we serve. Reduced
levels of production continued through the second quarter of fiscal 2010,
however, we did begin to increase production output from our wafer fabs in the
second quarter of fiscal 2010 to support increasing demand for our
products. During the third quarter of fiscal 2010, we expect our
wafer fabs to continue to operate at levels which are lower than peak
levels.
As a
result of significant reductions in demand and decreased production in our wafer
fabs, approximately $8.5 million and $20.6 million was charged to cost of sales
in the three and six-month periods ended September 30, 2009, as our production
levels for the periods were below the range of normal capacity. There
were no such charges in the three and six-month periods ended September 30,
2008. If production levels stay below our normal capacity, we will
continue to charge cost of sales for the unabsorbed capacity.
The
process technologies utilized impact our gross margins. Fab 2
currently utilizes various manufacturing process technologies, but predominantly
utilizes our 0.5 to 1.0 micron processes. Fab 4 predominantly
utilizes our 0.22 to 0.5 micron processes. We continue to transition
products to more advanced process technologies to reduce future manufacturing
costs. All of our production has been on 8-inch wafers for the
periods covered by this report.
Our
overall inventory levels were $108.5 million at September 30, 2009 compared to
$131.5 million at March 31, 2009. We had 96 days of inventory on our
balance sheet at September 30, 2009 compared to 134 days at March 31, 2009
and 110 days at September 30, 2008. The reduction of our inventory
levels was a result of increased net sales and our efforts to manage inventory
through production cuts.
We
anticipate that our gross margins will fluctuate over time, driven primarily by
capacity utilization levels, the overall product mix of microcontroller, analog
and interface and memory products and the percentage of net sales of each of
these products in a particular quarter, as well as manufacturing yields, fixed
cost absorption, and competitive and economic conditions in the markets we
serve.
At
September 30, 2009, approximately 67% of our assembly requirements were being
performed in our Thailand facility, compared to approximately 68% at September
30, 2008. Third-party contractors located in Asia perform the balance
of our assembly operations. Substantially all of our test
requirements were being performed in our Thailand facility as of September 30,
2009 and September 30, 2008. We believe that the assembly and test
operations performed at our Thailand facility provide us with significant cost
savings when compared to contractor assembly and test costs, as well as
increased control over these portions of the manufacturing process.
We rely
on outside wafer foundries for a portion of our wafer fabrication
requirements.
Our use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. While we review the
quality, delivery and cost performance of our third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain manufacturing yields, assembly and test yields and costs at
approximately their current levels.
Research
and Development (R&D)
R&D
expenses for the three months ended September 30, 2009 were $29.6 million,
or 13.0% of net sales, compared to $31.3 million, or 11.7% of net sales,
for the three months ended September 30, 2008. R&D expenses for
the six months ended September 30, 2009 were $57.2 million, or 13.6% of net
sales, compared to $62.9 million, or 11.7% of net sales for the six months ended
September 30, 2008. We are committed to investing in new and enhanced
products, including development systems software, and in our design and
manufacturing process technologies. We believe these investments are
significant factors in maintaining our competitive position. R&D
costs are expensed as incurred. Assets purchased to support our
ongoing research and development activities are capitalized when related to
products which have achieved technological feasibility or that have alternative
future uses and are amortized over their expected useful
lives. R&D expenses include labor, depreciation, masks, prototype
wafers, and expenses for the development of process technologies, new packages,
and software to support new products and design environments.
R&D
expenses decreased $1.8 million, or 5.7%, for the three months ended
September 30, 2009 over the same period last year. R&D expenses
decreased $5.7 million, or 9.0%, for the six months ended September 30, 2009
over the same period last year. The primary reasons for the dollar
decreases in R&D costs over these periods were cost-cutting actions that
began in the second half of fiscal 2009, including broad-based reductions in
salary and other compensation levels, lower travel costs, and reductions in
other variable expenses.
Selling,
General and Administrative
Selling,
general and administrative expenses for the three months ended September 30,
2009 were $41.0 million, or 18.1% of net
sales, compared to $45.6 million, or 16.9% of net sales, for the three
months ended September 30, 2008. Selling, general and
administrative expenses for the six months ended September 30, 2009 were $77.4
million, or 18.5% of net sales, compared to $91.0 million, or 16.9% of net
sales, for the six months ended September 30, 2008. Selling, general
and administrative expenses include salary and other expenses related to field
sales, marketing and administrative personnel, advertising and promotional
expenditures and legal expenses. Selling, general and administrative
expenses also include costs related to our direct sales force and FAEs who work
in sales offices worldwide to stimulate demand by assisting customers in the
selection and use of our products.
Selling,
general and administrative expenses decreased $4.6 million, or 10.0%, for
the three months ended September 30, 2009 over the same period last
year. Selling, general and administrative expenses decreased
$13.6 million, or 15.0%, for the six months ended September 30, 2009 over
the same period last year. The primary reasons for the dollar
decreases in selling, general and administrative costs over these periods were
cost-cutting actions that began in the second half of fiscal 2009, including
broad-based reductions in salary and other compensation levels, lower travel
costs, and reductions in other variable expenses.
Special
Charge
During
the June 2009 quarter we agreed to the terms of a patent license with an
unrelated third-party and signed an agreement on July 9, 2009. The patent
license settled alleged infringement claims. The total payment made to the
third-party in July 2009 was $1.4 million, $1.2 million of which was expensed in
the first quarter of fiscal 2010 and the remaining $0.2 million was recorded as
a prepaid royalty that will be amortized over the remaining life of the patent,
which expires June 2010.
Other
Income (Expense)
Interest
income in the three-month period ended September 30, 2009 decreased to $4.5
million from $10.2 million in the three-month period ended September 30,
2008. Interest income in the six-month period ended September 30,
2009 decreased to $7.8 from $20.4 million in the six-month period ended
September 30, 2008. The primary reason for the reductions in interest
income was lower interest rates applying to our invested
cash
balances in the three and six-month periods ended September 30, 2009 compared to
the prior year periods. Interest expense related to our 2.125% junior
subordinated convertible debentures in the three and six-month periods ended
September 30, 2009 was $8.0 million and $15.5 million, respectively,
compared to $6.9 million and $14.5 million, respectively, in the three and
six-month periods ended September 30, 2008. Other income, net in the
three-month period ended September 30, 2009 was $2.1 million compared to other
income, net of $1.7 million in the three-month period ended September 30,
2008. Other income, net in the six-month period ended September 30,
2009 was $7.8 million compared to other income, net of $4.4 million in the
six-month period ended September 30, 2008. The increase in other
income, net in the three-month period ended September 30, 2009 over the same
period last year primarily relates to foreign currency
fluctuations. The increase in other income, net in the six-month
period ended September 30, 2009 over the same period last year primarily relates
to a $7.5 million gain on trading securities during the six months ended
September 30, 2009 as a result of market fluctuations in the value of our
trading securities and put options and sales of trading securities as described
in Note 4 to our condensed consolidated financial statements.
Provision
for Income Taxes
The
provision for income taxes reflects tax on foreign earnings and federal and
state tax on U.S. earnings. We had an effective tax rate of 13.3% for
the three-month period ended September 30, 2009, 14.4% for the six-month period
ended September 30, 2009 and 17.8% for each of the three and six-month periods
ended September 30, 2008. Our effective tax rate for the first
six months of fiscal 2010 was lower than our effective tax rate for the first
six months of fiscal 2009 primarily due to a favorable clarification of tax
regulations. Our effective tax rate is lower than statutory rates in
the U.S. primarily due to our mix of earnings in foreign jurisdictions with
lower tax rates.
Various
taxing authorities in the U.S. and other countries in which we do business are
increasing their scrutiny of the tax structures employed by
businesses. Companies of our size and complexity are regularly
audited by the taxing authorities in the jurisdictions in which they conduct
significant operations. We are currently under audit by the IRS for
our fiscal years ended March 31, 2002, 2003, 2004, 2006, 2007 and
2008. We recognize liabilities for anticipated tax audit issues in
the U.S. and other tax jurisdictions based on our estimate of whether, and the
extent to which, additional tax payments are probable. We believe
that we maintain adequate tax reserves to offset any potential tax liabilities
that may arise upon these and other pending audits in the U.S. and other
countries in which we do business. If such amounts ultimately prove
to be unnecessary, the resulting reversal of such reserves would result in tax
benefits being recorded in the period the reserves are no longer deemed
necessary. If such amounts ultimately prove to be less than any final
assessment, a future charge to expense would be recorded in the period in which
the assessment is determined.
Our
Thailand manufacturing operations currently benefit from numerous tax holidays
that have been granted to us by the Thailand government based on our investments
in property, plant and equipment in Thailand. Our tax holiday periods
in Thailand expire at various times in the future. Any expiration of
our tax holidays is expected to have a minimal impact on our overall tax expense
due to other tax holidays and an increase in income in other taxing
jurisdictions with lower statutory rates.
Liquidity
and Capital Resources
We had
$1,472.7 million in cash, cash equivalents and short-term and long-term
investments at September 30, 2009, an increase of $32.0 million from the
March 31, 2009 balance. The increase in cash, cash equivalents and
short-term and long-term investments over this time period is primarily
attributable to cash generated from operating activities being offset by
dividend payments in the six months ended September 30, 2009.
Net cash
provided from operating activities was $243.1 million for the six-month period
ended September 30, 2009 compared to $267.5 million for the six-month
period ended September 30, 2008. The decrease in cash flow from
operations in the six-month period ended September 30, 2009 compared to the
six-month period ended September 30, 2008 was primarily due to lower net income
in the six-month period ended September 30, 2009, and increases in accounts
receivable. These decreases in cash flows were offset primarily by
sales of trading securities, which provided approximately $87.0 million of
operating cash flow in the six-month period
ended September 30, 2009, as compared to sales and purchases of trading
securities which used $15.9 million of operating cash flow in the six months
ended September 30, 2008.
During
the six months ended September 30, 2009, net cash used in investing activities
was $34.0 million. During the six months ended September 30,
2008, net cash used in investing activities was
$230.4 million. The decrease in net cash used in investing
activities was primarily due to changes in our net purchases, sales and
maturities of short-term and long-term investments and higher capital
expenditures in the six-month period ended September 30, 2008.
Net cash
used in financing activities was $114.4 million for the six months ended
September 30, 2009 compared to net cash used in financing activities of
$213.1 million for the six months ended September 30,
2008. Proceeds from the exercise of stock options and employee
purchases under our employee stock purchase plans were $9.0 million for the six
months ended September 30, 2009 and $25.5 million for the six months ended
September 30, 2008. We paid cash dividends to our shareholders of
$124.1 million in the six months ended September 30, 2009 and
$123.1 million in the six months ended September 30, 2008. We
did not repurchase any of our shares of common stock during the six months ended
September 30, 2009. We purchased 4.0 million shares of our common
stock for $123.9 million during the six months ended September 30,
2008. Excess tax benefits from share-based payment arrangements were
$0.7 million in the six months ended September 30, 2009. Excess
tax benefits from share-based payment arrangements were $8.6 million in the six
months ended September 30, 2008.
Our level
of capital expenditures varies from time to time as a result of actual and
anticipated business conditions. Capital expenditures in the six
months ended September 30, 2009 were $9.7 million compared to
$68.0 million for the six months ended September 30,
2008. Capital expenditures are primarily for the expansion of
production capacity and the addition of research and development
equipment. We currently intend to spend approximately
$40 million during the next twelve months to invest in equipment and
facilities to maintain, and selectively increase, capacity to meet our currently
anticipated needs.
We expect
to finance capital expenditures through our existing cash balances and cash
flows from operations. We believe that the capital expenditures
anticipated to be incurred over the next twelve months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
We enter
into derivative transactions from time to time in an attempt to reduce our
exposure to currency rate fluctuations. Although none of the
countries in which we conduct significant foreign operations has had a highly
inflationary economy in the last five years, there is no assurance that
inflation rates or fluctuations in foreign currency rates in countries where we
conduct operations will not adversely affect our operating results in the
future. At September 30, 2009, we had no foreign currency forward
contracts outstanding.
On
December 11, 2007, we announced that our Board of Directors had authorized the
repurchase of up to an additional 10.0 million shares of our common stock in the
open market or in privately negotiated transactions. As of September 30, 2009,
we had repurchased 7.5 million shares under this 10.0 million share
authorization for a total of $234.7 million. There
is no expiration date associated with this program. The timing and
amount of future repurchases will depend upon market conditions, interest rates,
and corporate considerations.
As of
September 30, 2009, we held approximately 35.2 million shares as treasury
shares.
On
October 28, 2002, we announced that our Board of Directors had approved and
instituted a quarterly cash dividend on our common stock. A quarterly
dividend of $0.339 per share was paid on September 3, 2009 in the aggregate
amount of $62.1 million. A quarterly dividend of $0.34 per share
was declared on November 4, 2009 and will be paid on December 2, 2009 to
stockholders of record as of November 18, 2009. We expect the
aggregate December 2009 cash dividend to be approximately
$62.3 million. Our Board of Directors is free to change our
dividend practices at any time and to increase or decrease the dividend paid, or
not to pay a dividend on our common stock on the basis of our results of
operations, financial condition, cash requirements and future prospects, and
other factors deemed relevant by our Board of Directors. Our current
intent is to provide for ongoing quarterly cash dividends depending upon market
conditions and our results of operations.
We
believe that our existing sources of liquidity combined with cash generated from
operations will be sufficient to meet our currently anticipated cash
requirements for at least the next 12 months. However, the
semiconductor
industry is capital intensive. In order to remain competitive, we
must constantly evaluate the need to make significant investments in capital
equipment for both production and research and development. We may
seek additional equity or debt financing from time to time to maintain or expand
our wafer fabrication and product assembly and test facilities, or for
acquisitions or other purposes. The timing and amount of any such
financing requirements will depend on a number of factors, including demand for
our products, changes in industry conditions, product mix, competitive factors
and our ability to identify suitable acquisition candidates. There
can be no assurance that such financing will be available on acceptable terms,
and any additional equity financing would result in incremental ownership
dilution to our existing stockholders.
Contractual
Obligations
There
have not been any material changes in our contractual obligations from what we
disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31,
2009.
Off-Balance
Sheet Arrangements
As of
September 30, 2009, we are not involved in any off-balance sheet arrangements,
as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recently
Issued Accounting Pronouncements
For a
description of recently issued accounting pronouncements, refer to Note 2 of the
Notes to Condensed Consolidated Financial Statements.
Our
investment portfolio, consisting of fixed income securities, money market funds,
and cash deposits that we hold on an available-for-sale basis, was
$1,442.2 million as of September 30, 2009 compared to $1,367.0 million
as of June 30, 2009, and our trading securities totaled $4,000 as of September
30, 2009 compared to $71.1 million as of June 30, 2009. The
available-for-sale securities, like all fixed income instruments, are subject to
interest rate risk and will decline in value if market interest rates
increase. We have the ability to hold our fixed income investments
until maturity and, therefore, we would not expect to recognize any material
adverse impact in income or cash flows if market interest rates
increase.
At
September 30, 2009, $45.3 million of original purchase value of our investment
portfolio was invested in ARS. Historically, the carrying value of
ARS approximated due to the frequent resetting of the interest rates. If
an auction fails for amounts we have invested, our investment will not be
liquid. With the continuing liquidity issues experienced in the global
credit and capital markets, our ARS have experienced multiple failed
auctions. In September 2007 and February 2008, auctions for
$24.9 million and $34.8 million, respectively, of the original purchase value of
our investments in ARS had failed. While we continue to earn interest on
these investments based on a pre-determined formula with spreads tied to
particular interest rate indices, the estimated market value for a portion of
these ARS no longer approximates the original purchase value.
At
September 30, 2009, the $24.9 million of ARS that failed during
September 2007 carried ratings between A- and CC by Standard & Poors
compared to ratings between A- and B at June 30, 2009. All but $2.5
million of the securities possess credit enhancement in the form of insurance
for principal and interest. The underlying characteristics of $22.4
million of these ARS relate to servicing statutory requirements in the life
insurance industry and $2.5 million relate to a specialty finance
company. Subsequent to our investment in these ARS, the ARS have
experienced multiple rating downgrades by the major rating
agencies. All such rating change actions have been factored into the
fair value estimates of the ARS for the period ending September 30,
2009.
The $24.9
million in failed auctions have continued to fail through the filing date of
this Quarterly Report on Form 10-Q. As a result, we will not be able
to access such funds until a future auction on these investments is
successful. The fair value of the failed ARS has been estimated based
on market information and estimates determined by management and could change
significantly based on market conditions. We evaluated the impairments in
the value of these ARS, determining our intent to sell these securities prior to
the recovery of our amortized cost basis resulted in the securities being
other-than-temporarily impaired and have recognized an impairment charge on
these investments of $0.4 million and $1.3 million, respectively, in the
quarters ended September 30, 2009 and June 30, 2009.
The $34.8
million of ARS that failed during February 2008 are investments in student
loan-backed ARS. Approximately $1.4 million and $2.9 million of these
ARS were redeemed at par by the issuers in the first six months of fiscal 2010,
and fiscal 2009, respectively, reducing our overall position to $30.5
million. Based upon our evaluation of available information, we
believe these investments are of high credit quality, as all of the investments
carry AAA credit ratings by one or more of the major credit rating agencies and
are largely backed by the federal government (Federal Family Education Loan
Program). The fair value of the failed ARS has been estimated based
on market information and estimates determined by management and could change
significantly based on market conditions. If the issuers are not able
to successfully close future auctions or over time are not able to obtain more
favorable financing options for their debt issuance needs, including refinancing
these obligations into lower rate securities, the market value of these
investments could be negatively impacted.
In
November 2008, we executed an ARS rights agreement (the Rights) with the broker
through which we purchased the $30.5 million in ARS that provides (1) us
with the right to put these ARS back to the broker at par anytime during the
period from June 30, 2010 through July 2, 2012, and (2) the broker with the
right to purchase or sell the ARS at par on our behalf anytime through July 2,
2012. We accounted for the acceptance of the Rights as the receipt of
a put option for no consideration and recognized a gain with a corresponding
recognition as a long-term investment. We elected to measure the
Rights at fair value and will record changes in the fair value of the Rights in
earnings, as the Rights do not provide for net settlement and therefore are not
otherwise marked to fair value as derivatives. We simultaneously
recognized an other-than-temporary impairment loss of $5.5 million as we no
longer intend to hold these ARS until the fair value recovers, which was
recorded in other comprehensive loss in prior quarters. We have
reclassified the ARS from available-for-sale to trading securities and future
changes in fair value are being recorded in earnings. During the
second quarter of fiscal 2010, we estimated the fair value of the ARS increased
by $1.3 million offset by a change in the fair value of the related Rights of
$1.3 million, with no net impact to our income statement. We expect
any future changes in the fair value of the ARS to be largely offset by changes
in the fair value of the related Rights without any significant net impact to
our income statement. We will continue to measure the ARS and the
Rights at fair value (utilizing Level 3 inputs) until the earlier of its
maturity or exercise.
We
continue to monitor the market for ARS and consider its impact, if any, on the
fair market value of our investments. If the market conditions
deteriorate further, we may be required to record additional impairment
charges. We intend to sell the $24.9 million of ARS. We
intend and have the ability to hold the $30.5 million of ARS until June 30,
2010 when we have the right to sell the auction rates at par to the
broker. We do not anticipate having to sell these securities to fund
the operations of our business. We believe that, based on our current
unrestricted cash, cash equivalents and short-term investment balances, the
current lack of liquidity in the credit markets will not have a material impact
on our liquidity, cash flow or ability to fund our operations.
Our
investment in marketable equity securities at September 30, 2009 consists of
shares of common stock, the value of which is determined by the closing price of
such shares on the respective markets on which the shares are traded as of the
balance sheet date. These investments are classified as trading securities and
measured at fair value with changes in that fair value recorded in income.
The market value of these investments was approximately $4,000 at September 30,
2009 compared to our cost basis of approximately $5,000. Based on the
limited investment in marketable equity securities at September 30, 2009, the
value of our investment in marketable equity securities would not be materially
impacted if there were a significant change in the market price of the shares.
(See Note 4 to our condensed consolidated financial statements for additional
information about our investments in marketable equity securities.)
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Quarterly Report on Form 10-Q, as required by
paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of
1934, as amended, we evaluated under the
supervision
of our Chief Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as
amended). Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 (i)
is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Our disclosure control and
procedures are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure
controls and procedures include components of our internal control over
financial reporting. Management's assessment of the effectiveness of
our internal control over financial reporting is expressed at the level of
reasonable assurance because a control system, no matter how well designed and
operated, can provide only reasonable, but not absolute, assurance that the
control system's objectives will be met.
Changes
in Internal Control over Financial Reporting
During
the three months ended September 30, 2009, there was no change in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Part
II. OTHER INFORMATION
In the ordinary course of our business,
we are involved in a limited number of legal actions, both as plaintiff and
defendant, and could incur uninsured liability in any one or more of them.
We also periodically receive notifications from various third parties alleging
infringement of patents, intellectual property rights or other matters.
With respect to pending legal actions to which we are a party, although the
outcome of these actions is not presently determinable, we believe that the
ultimate resolution of these matters will not harm our business and will not
have a material adverse effect on our financial position, cash flows or results
of operations. Litigation relating to the semiconductor industry is
not uncommon, and we are, and from time to time have been, subject to such
litigation. No assurances can be given with respect to the extent or
outcome of any such litigation in the future.
When
evaluating Microchip and its business, you should give careful consideration to
the factors listed below, in addition to the information provided elsewhere in
this Form 10-Q and in other documents that we file with the Securities and
Exchange Commission.
Our
operating results have been adversely impacted by global economic conditions and
may fluctuate due to a number of other factors that could reduce our net sales
and profitability.
Our
operating results are affected by a wide variety of factors that could reduce
our net sales and profitability, many of which are beyond our
control. Some of the factors that may affect our operating results
include:
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changes
in demand or market acceptance of our products and products of our
customers;
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levels
of inventories at our customers;
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the
mix of inventory we hold and our ability to satisfy orders from our
inventory;
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changes
in utilization of our manufacturing capacity and fluctuations in
manufacturing yields;
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our
ability to secure sufficient assembly and testing
capacity;
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availability
of raw materials and equipment;
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competitive
developments including pricing
pressures;
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the
level of orders that are received and can be shipped in a
quarter;
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the
level of sell-through of our products through
distribution;
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fluctuations
in the mix of products;
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changes
or fluctuations in customer order patterns and
seasonality;
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constrained
availability from other electronic suppliers impacting our customers'
ability to ship their products, which in turn may adversely impact our
sales to those customers;
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costs
and outcomes of any current or future tax audits or any litigation
involving intellectual property, customers or other
issues;
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changes
in tax regulations and policies in the U.S. and other countries in which
we do business;
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disruptions
in our business or our customers' businesses due to terrorist activity,
armed conflict, war, worldwide oil prices and supply, public health
concerns or disruptions in the transportation
system;
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fluctuations
in commodity prices;
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property
damage or other losses, whether or not covered by insurance;
and
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general
economic, industry or political conditions in the U.S. or
internationally.
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We
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and that you should not rely upon any such comparisons as
indications of future performance. In future periods our operating results may
fall below our public guidance or the expectations of public market analysts and
investors, which would likely have a negative effect on the price of our common
stock. Adverse global economic conditions have adversely impacted our
operating results and make comparability between periods less
meaningful.
Our
operating results will suffer if we ineffectively utilize our manufacturing
capacity or fail to maintain manufacturing yields.
The
manufacture and assembly of integrated circuits, particularly non-volatile,
erasable CMOS memory and logic devices such as those that we produce, are
complex processes. These processes are sensitive to a wide variety of
factors, including the level of contaminants in the manufacturing environment,
impurities in the materials used, the performance of our wafer fabrication
personnel and equipment, and other quality issues. As is typical in the
semiconductor industry, we have from time to time experienced lower than
anticipated manufacturing yields. Our operating results will suffer if we
are unable to maintain yields at approximately the current levels. This
could include delays in the recognition of revenue, loss of revenue or future
orders, and customer-imposed penalties for failure to meet contractual shipment
deadlines. Our operating results are also adversely affected when we
operate at less than optimal capacity. In the quarter ended March 31,
2009, we reduced wafer starts in both Fab 2 and Fab 4, implemented rotating
unpaid time off and had multiple planned shutdowns in our Thailand
facility. These actions were implemented to help control inventory
levels in response to adverse economic conditions. This lower
capacity utilization resulted in certain costs being charged directly to expense
and lower gross margins. In the quarter ended September 30, 2009, we
increased our production output in our factories and did not have any shutdowns
in our Thailand operation and reduced the amount of rotating unpaid time off in
Fab 2 and Fab 4. We are unable to predict when we will be able to
return to more optimal levels of capacity utilization.
We
are dependent on orders that are received and shipped in the same quarter and
are therefore limited in our visibility of future product
shipments.
Our net
sales in any given quarter depend upon a combination of shipments from backlog
and orders received in that quarter for shipment in that quarter, which we refer
to as turns orders. We measure turns orders at the beginning of a
quarter based on the orders needed to meet the shipment targets that we set
entering the quarter. Historically, we have relied on our ability to
respond quickly to customer orders as part of our competitive strategy,
resulting in customers placing orders with relatively short delivery
schedules. Shorter lead times generally mean that turns orders as a
percentage of our business are relatively high in any particular quarter and
reduce our backlog visibility on future product shipments. Turns orders
correlate to overall semiconductor industry conditions and product lead
times. Because turns orders are difficult to predict, varying levels of
turns orders make our net sales more difficult to forecast. If we do not
achieve a sufficient level of turns orders in a particular quarter relative to
our revenue targets, our revenue and operating results may suffer.
Intense
competition in the markets we serve may lead to pricing pressures, reduced sales
of our products or reduced market share.
The
semiconductor industry is intensely competitive and has been characterized by
price erosion and rapid technological change. We compete with major
domestic and international semiconductor companies, many of which have greater
market recognition and substantially greater financial, technical, marketing,
distribution and other resources than we do. We may be unable to compete
successfully in the future, which could harm our business. Our
ability to compete successfully depends on a number of factors both within and
outside our control, including, but not limited to:
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the
quality, performance, reliability, features, ease of use, pricing and
diversity of our products;
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our
success in designing and manufacturing new products including those
implementing new technologies;
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the
rate at which customers incorporate our products into their own
applications;
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product
introductions by our competitors;
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the
number, nature and success of our competitors in a given
market;
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our
ability to obtain adequate supplies of raw materials and other supplies at
acceptable prices;
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our
ability to protect our products and processes by effective utilization of
intellectual property rights;
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our
ability to address the needs of our customers;
and
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general
market and economic conditions.
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Historically,
average selling prices in the semiconductor industry decrease over the life of
any particular product. The overall average selling prices of our
microcontroller and proprietary analog and interface products have remained
relatively constant, while average selling prices of our Serial EEPROM and
non-proprietary analog and interface products have declined over
time.
We have
experienced, and expect to continue to experience, modest pricing declines in
certain of our more mature proprietary product lines, primarily due to
competitive conditions. We have been able to moderate average selling
price declines in many of our proprietary product lines by continuing to
introduce new products with more features and higher prices. However,
there can be no assurance that we will be able to do so in the future. We
have experienced in the past, and expect to continue to experience in the
future, varying degrees of competitive pricing pressures in our Serial EEPROM
and non-proprietary analog products. We may be unable to maintain
average selling prices for our products as a result of increased pricing
pressure in the future, which could adversely impact our operating
results.
Our
business is dependent on selling through distributors.
Sales
through distributors accounted for approximately 64% of our net sales in fiscal
2009 and approximately 62% of our net sales in the first six months of fiscal
2010. Our largest distributor accounted for approximately 14% of our
net sales in fiscal 2009 and approximately 12% of our net sales in the first six
months of fiscal 2010. We do not have long-term agreements with our
distributors and we and our distributors may each terminate our relationship
with little or no advance notice.
Recent
credit and equity market conditions have adversely impacted our holdings of
auction rate securities, investments and trading securities which has had a
material adverse impact on our results of operations.
At
September 30, 2009, $45.3 million of the fair
value of our investment portfolio was invested in ARS. Historically,
the carrying value of ARS approximated fair value due to the frequent resetting
of the interest rates. With the continuing liquidity issues in the global
credit markets, our ARS have experienced multiple failed auctions. As a
result, we will not be able to access such funds until a future auction on these
investments is successful. In November 2008, we executed an ARS
rights agreement (the Rights) with the broker through which we purchased the
$31.9 million in ARS that provides (1) us with the right to put these ARS
back to the broker at par anytime during the period from June 30, 2010 through
July 2, 2012, and (2) the broker with the right to purchase or sell the ARS at
par on our behalf anytime through July 2, 2012. We accounted for the
acceptance of the Rights as the receipt of a put option for no consideration and
recognized a gain with a corresponding recognition as a long-term
investment. We will record changes in the fair value of the Rights in
earnings, as the Rights do not provide for net settlement and therefore are not
otherwise marked to fair value as derivatives. We simultaneously
recognized an other-than-temporary impairment loss of $5.5 million as we no
longer intend to hold the ARS to a time where the fair value recovers, which was
recorded in other comprehensive loss in prior quarters. We have
reclassified the ARS from available-for-sale to trading securities and future
changes in fair value will be recorded in earnings. We expect any
future changes in the fair value of the ARS to be largely offset by changes in
the fair value of the related Rights without any significant net impact to our
income statement. We will continue to measure the ARS and the Rights
at fair value (utilizing Level 3 inputs) until the earlier of its maturity or
exercise.
The fair
value of the failed ARS has been estimated based on market information and
estimates determined by management and could change significantly based on
market conditions. Based on the estimated values, we concluded these
investments were other than temporarily impaired and recognized an impairment
charge on these investments of $0.4 million and $1.3
million, respectively, in the quarters ended September 30, 2009 and June 30,
2009. If the issuers are unable to successfully close future auctions
or if their credit ratings deteriorate further, we may be required to further
adjust the carrying value of the investments through an additional impairment
charge to earnings.
The
substantial majority of our short and long-term investments are in highly rated
government agency bonds and municipal bonds. Other than with respect
to our holdings of ARS, we have not experienced any liquidity or impairment
issues with such investments. However, the credit markets have
continued to be highly volatile and there can be no assurance that these
conditions will not in the future adversely affect the liquidity or value of our
investments in government agency bonds or municipal bonds.
Our
success depends on our ability to introduce new products on a timely
basis.
Our
future operating results will depend on our ability to develop and introduce new
products on a timely basis that can compete effectively on the basis of price
and performance and which address customer requirements. The success
of our new product introductions depends on various factors, including, but not
limited to:
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proper
new product selection;
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timely
completion and introduction of new product
designs;
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availability
of development and support tools and collateral literature that make
complex new products easy for engineers to understand and use;
and
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market
acceptance of our customers' end
products.
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Because
our products are complex, we have experienced delays from time to time in
completing development of new products. In addition, our new products
may not receive or maintain substantial market acceptance. We may be
unable to design, develop and introduce competitive products on a timely basis,
which could adversely impact our future operating results.
Our
success also depends upon our ability to develop and implement new design and
process technologies. Semiconductor design and process technologies
are subject to rapid technological change and
require
significant R&D expenditures. We and other companies in the
industry have, from time to time, experienced difficulties in effecting
transitions to advanced process technologies and, consequently, have suffered
reduced manufacturing yields or delays in product deliveries. Our future
operating results could be adversely affected if any transition to future
process technologies is substantially delayed or inefficiently
implemented.
We
must attract and retain qualified personnel to be successful and competition for
qualified personnel can be intense.
Our
success depends upon the efforts and abilities of our senior management,
engineering and other personnel. The competition for qualified engineering
and management personnel can be intense.
We may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the
services of one or more of our key personnel or the inability to add key
personnel could harm our business. We have no employment agreements
with any member of our senior management team.
We
are dependent on several contractors to perform key manufacturing functions for
us.
We use
several contractors located in Asia for a portion of the assembly and testing of
our products. We also rely on outside wafer foundries for a portion of our wafer
fabrication. Although we own the majority of our manufacturing resources,
the disruption or termination of any of our contractors could harm our business
and operating results.
Our use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. Our future operating results
could suffer if any contractor were to experience financial, operations or
production difficulties or situations when demand exceeds capacity, or if they
were unable to maintain manufacturing yields, assembly and test yields and costs
at approximately their current levels, or if due to their locations in foreign
countries they were to experience political upheaval or infrastructure
disruption. Further, procurement of required products and services from
third parties is done by purchase order and contracts. If these third
parties are unable or unwilling to timely deliver products or services
conforming to our quality standards, we may not be able to qualify additional
manufacturing sources for our products in a timely manner or at all, and such
arrangements, if any, may not be on favorable terms to us. In such event,
we could experience an interruption in production, an increase in manufacturing
and production costs, decline in product reliability, and our business and
operating results could be adversely affected.
We
may lose sales if our suppliers of raw materials and equipment fail to meet our
needs.
Our
semiconductor manufacturing operations require raw materials and equipment that
must meet exacting standards. We generally have more than one source for
these supplies, but there are only a limited number of suppliers capable of
delivering various raw materials and equipment that meet our standards.
The raw materials and equipment necessary for our business could become more
difficult to obtain as worldwide use of semiconductors in product applications
increases. We have experienced supply shortages from time to time in
the past, and on occasion our suppliers have told us they need more time than
expected to fill our orders or that they will no longer support certain
equipment with updates or spare and replacement parts. An interruption of
any raw materials or equipment sources, or the lack of supplier support for a
particular piece of equipment, could harm our business.
Our
operating results may be impacted by both seasonality and the wide fluctuations
of supply and demand in the semiconductor industry.
The
semiconductor industry is characterized by seasonality and wide fluctuations of
supply and demand. Since a significant portion of our revenue is from
consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal
year. However, fluctuations in our overall business in certain recent
periods, semiconductor industry conditions and adverse global economic
conditions have had a more significant impact on our results than seasonality,
and have made it difficult to assess the impact of seasonal factors on our
business. The industry has also experienced significant economic
downturns, characterized by diminished product demand and production
over-capacity. We have sought to reduce our exposure to this industry
cyclically by selling proprietary products that cannot be easily or quickly
replaced to
a
geographically diverse base of customers across a broad range of market
segments. However, we have experienced substantial period-to-period
fluctuations in operating results and expect, in the future, to experience
period-to-period fluctuations in operating results due to general industry or
economic conditions. In particular, our business and operating
results have been adversely impacted by global economic
conditions.
We
are exposed to various risks related to legal proceedings or
claims.
We are
currently, and in the future may be, involved in legal proceedings or claims
regarding patent infringement, intellectual property rights, contracts and other
matters. As is typical in the semiconductor industry, we receive
notifications from customers from time to time who believe that we owe them
indemnification or other obligations related to infringement claims made against
the customers by third parties. These legal proceedings and claims,
whether with or without merit, could result in substantial cost to us and divert
our resources. If we are not able to resolve a claim, negotiate a
settlement of a matter, obtain necessary licenses on commercially reasonable
terms, reengineer our products or processes to avoid infringement, and/or
successfully prosecute or defend our position, we could incur uninsured
liability in any of them, be required to take an appropriate charge to
operations, be enjoined from selling a material portion of our products or using
certain processes, suffer a reduction or elimination in the value of our
inventories, and our business, financial condition or results of operations
could be harmed.
It is
also possible that from time to time we may be subject to claims related to the
performance or use of our products. These claims may be due to
products' nonconformance to our specifications, or specifications agreed upon
with the customer, changes in our manufacturing processes, and unexpected end
customer system issues due to the interaction with our products or insufficient
design or testing by our customers. We could incur significant
expenses related to such matters, including, but not limited to,
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costs
related to writing off the value of inventory of nonconforming
products;
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recalling
nonconforming products;
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providing
support services, product replacements, or modification to products and
the defense of such claims;
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diversion
of resources from other projects;
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lost
revenue or a delay in the recognition of revenue due to cancellation of
orders and unpaid receivables;
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customer
imposed fines or penalties for failure to meet contractual requirements;
and
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a
requirement to pay damages.
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Because
the systems into which our products are integrated have a higher cost of goods
than the products we sell, these expenses and damages may be significantly
higher than the sales and profits we received from the products involved.
While we specifically exclude consequential damages in our standard terms and
conditions, our ability to avoid such liabilities may be limited by applicable
law. We do have liability insurance which covers damages arising out of
product defects, but we do not expect that insurance will cover all claims or be
of a sufficient amount to fully protect against such claims. Costs or
payments we may make in connection with these customer claims may adversely
affect the results of our operations.
Further,
we sell to customers in industries such as automotive, aerospace, and medical,
where failure of the systems in which our products are integrated could cause
damage to property or persons. We may be subject to claims if our
products, or interactions with our products, cause the system failures. We
will face increased exposure to claims if there are substantial increases in
either the volume of our sales into these applications or the frequency of
system failures integrating our products.
Failure
to adequately protect our intellectual property could result in lost revenue or
market opportunities.
Our
ability to obtain patents, licenses and other intellectual property rights
covering our products and manufacturing processes is important for our
success. To that end, we have acquired certain patents and patent
licenses and intend to continue to seek patents on our inventions and
manufacturing processes. The process of seeking patent protection can
be long and expensive, and patents may not be issued from currently pending or
future applications. In addition, our existing patents and any new patents
that are issued may not be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. We may be subject to or
may
ourselves initiate interference proceedings in the U.S. Patent and Trademark
Office, which can require significant financial and management resources.
In addition, the laws of certain foreign countries do not protect our
intellectual property rights to the same extent as the laws of the U.S.
Infringement of our intellectual property rights by a third party could result
in uncompensated lost market and revenue opportunities for
us.
Our
operating results may be adversely impacted if economic conditions impact the
financial viability of our customers, distributors, or suppliers.
We
regularly review the financial performance of our customers, distributors and
suppliers. However, global economic conditions may adversely impact
the financial viability of our customers, distributors or suppliers. The
financial failure of a large customer or distributor, an important supplier, or
a group thereof, could have an adverse impact on our operating results and could
result in us not being able to collect our accounts receivable
balances.
We
do not typically have long-term contracts with our customers.
We do not
typically enter into long-term contracts with our customers and we cannot be
certain about future order levels from our customers. When we do enter
into customer contracts, the contract is generally cancelable at the convenience
of the customer. Even though we have over 60,000 customers and our ten
largest direct customers made up approximately 9% of our total revenue for the
six months ended September 30, 2009, cancellation of customer contracts
could have an adverse financial impact on our revenue and profits.
Further,
as the practice has become more commonplace in the industry, we have entered
into contracts with certain customers that differ from our standard terms of
sale. Under these contracts we commit to supply quantities of products on
scheduled delivery dates. If we become unable to supply the customer as
required under the contract, the customer may incur additional production costs,
lost revenues due to subsequent delays in their own manufacturing schedule, or
quality related issues. Under these contracts, we may be liable for the
costs the customer has incurred. While we try to limit such liabilities,
if they should arise, there may be a material adverse impact on our results of
operation and financial condition.
Business
interruptions could harm our business.
Operations
at any of our facilities, or at any of our wafer fabrication or assembly and
test subcontractors, may be disrupted for reasons beyond our control, including
work stoppages, power loss, incidents of terrorism or security risk, political
instability, public health issues, telecommunications, transportation or other
infrastructure failure, fire, earthquake, floods, or other natural
disasters. If operations at any of our facilities, or our subcontractors'
facilities are interrupted, we may not be able to shift production to other
facilities on a timely basis. If this occurs, we would likely experience
delays in shipments of products to our customers and alternate sources for
production may be unavailable on acceptable terms. This could result in
reduced revenues and profits and the cancellation of orders or loss of
customers. In addition, business interruption insurance will likely not be
enough to compensate us for any losses that may occur and any losses or damages
incurred by us as a result of business interruptions could significantly harm
our business.
We
are highly dependent on foreign sales and operations, which exposes us to
foreign political and economic risks.
Sales to
foreign customers account for a substantial portion of our net
sales. During fiscal 2009, approximately 75% of our net sales were
made to foreign customers. During the first six months of fiscal
2010, approximately 77% of our net sales were made to foreign
customers. We purchase a substantial portion of our raw materials and
equipment from foreign suppliers. In addition, we own product assembly and
testing facilities located near Bangkok, Thailand, which has experienced periods
of political uncertainty in the past. We also use various foreign
contractors for a portion of our assembly and testing and for a portion of our
wafer fabrication requirements. Substantially all of our finished goods
inventory is maintained in Thailand.
Our
reliance on foreign operations, foreign suppliers, maintenance of substantially
all of our finished goods inventory at foreign locations and significant foreign
sales exposes us to foreign political and economic risks, including, but not
limited to:
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political,
social and economic instability;
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public
health conditions;
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trade
restrictions and changes in
tariffs;
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import
and export license requirements and
restrictions;
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difficulties
in staffing and managing international
operations;
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employment
regulations;
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disruptions
in international transport or
delivery;
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difficulties
in collecting receivables;
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economic
slowdown in the worldwide markets served by us;
and
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potentially
adverse tax consequences.
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If any of
these risks materialize, our sales could decrease and/or our operating results
could suffer.
Fluctuations
in foreign currency could impact our operating results. We use
forward currency exchange contracts to reduce the adverse earnings impact from
the effect of exchange rate fluctuations on our non-U.S. dollar net balance
sheet exposures. Nevertheless, in periods when the U.S. dollar
significantly fluctuates in relation to the non-U.S. currencies in which we
transact business, the value of our non-U.S. dollar transactions can have an
adverse effect on our results of operations and financial
condition.
Interruptions
in our information technology systems could adversely affect our
business.
We rely
on the efficient and uninterrupted operation of complex information technology
systems and networks to operate our business. Any significant system or
network disruption, including but not limited to new system implementations,
computer viruses, security breaches, or energy blackouts could have a material
adverse impact on our operations, sales and operating results. We have
implemented measures to manage our risks related to such disruptions, but such
disruptions could still occur and negatively impact our operations and financial
results. In addition, we may incur additional costs to remedy the damages
caused by these disruptions or security breaches.
The
occurrence of events for which we are self-insured, or which exceed our
insurance limits, may adversely affect our profitability and
liquidity.
We have
insurance contracts with independent insurance companies related to many
different types of risk; however, we self-insure for some potentially
significant risks and obligations. In these circumstances, we have determined
that it is more cost effective to self-insure certain risks than to pay the high
premium costs. The risks and exposures that we self-insure include,
but are not limited to, certain property, product defects, political risks, and
patent infringement. Should there be a loss or adverse judgment or
other decision in an area for which we are self-insured, then our financial
condition, result of operations and liquidity may be adversely
affected.
We
are subject to stringent environmental regulations, which may force us to incur
significant expenses.
We must
comply with many different federal, state, local and foreign governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our products and manufacturing
processes. Our failure to comply with present or future regulations could
result in the imposition of fines, suspension of production or a cessation of
operations. Such environmental regulations have required us in the past
and could require us in the future to acquire costly equipment or to incur other
significant expenses to comply with such regulations. Any failure by us to
control the use of or adequately restrict the discharge of hazardous substances
could subject us to future liabilities. Environmental problems may occur
that could subject us to future costs or liabilities.
Over the
past few years, there has been an expansion in environmental laws focusing on
reducing or eliminating hazardous substances in electronic products. For
example, the EU RoHS Directive provided that beginning on July 1, 2006,
electronic products sold into Europe were required to meet stringent chemical
restrictions, including the absence of lead. Other countries, such as the
U.S., China and Korea, have enacted or may enact laws or regulations similar to
those of the EU. These and other future environmental regulations
could require us to reengineer certain of our existing products and may make it more expensive for us to manufacture
and sell
our products. Over the last several years, the number and complexity
of laws focused on the energy efficiency of electronic products and accessories;
the recycling of electronic products; and the reduction in quantity and the
recycling of packaging materials have expanded significantly. It may
be difficult for us to timely comply with these laws and we may not have
sufficient quantities of compliant products to meet customers' needs, thereby
adversely impacting our sales and profitability. We may also have to write
off inventory in the event that we hold inventory that is not saleable as a
result of changes to regulations. We expect these risks and trends to
continue. In addition, we anticipate increased customer requirements
to meet voluntary criteria related to the reduction or elimination of hazardous
substances in our products and energy efficiency measures.
Regulatory
authorities in jurisdictions into which we ship our products could levy fines or
restrict our ability to export products.
A
significant portion of our sales are made outside of the U.S. through the
exporting and re-exporting of products. In addition to local
jurisdictions' export regulations, our U.S.-manufactured products or products
based on U.S. technology are subject to Export Administration Regulations (EAR)
when exported and re-exported to and from international jurisdictions.
Licenses or proper license exceptions may be required for the shipment of our
products to certain countries. Non-compliance with EAR or other export
regulations can result in penalties including denial of export privileges,
fines, criminal penalties,