SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 2012 |
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
(Address of Principal Executive Offices, Including Zip Code)
(480) 792-7200
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $0.001 Par Value Per Share | NASDAQ® Global Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
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: x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge,in definitive proxy or information statements incorporated by reference in Part III of Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is 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 | x | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | o |
(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). ¨ Yes x No
Aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 2011 based upon the closing price of the common stock as reported by the NASDAQ Global Market on such date was approximately $5,787,068,543
Number of Shares of Common Stock, $0.001 par value, outstanding as of May 25, 2012: 193,583,220 shares
Documents Incorporated by Reference | ||
Document | Part of Form 10-K | |
Proxy Statement for the 2012 Annual Meeting of Stockholders | III | |
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Page | ||
PART I | ||
PART II | ||
PART III | ||
PART IV | ||
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PART I
This Form 10-K contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy and future financial performance and those statements identified under "Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Note Regarding Forward-looking Statements." Our actual results could differ materially from the results described in these forward-looking statements as a result of certain factors including those set forth under "Item 1A – Risk Factors," beginning below at page 11, and elsewhere in this Form 10-K. Although we believe that the matters reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement.
Item 1. BUSINESS
We develop and manufacture specialized semiconductor products used by our customers for a wide variety of embedded control applications. Our product portfolio comprises 8-bit, 16-bit, and 32-bit PIC® microcontrollers and 16-bit dsPIC® digital signal controllers, which feature on-board Flash (reprogrammable) memory technology. In addition, we offer a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, RF, safety and security, and interface devices, as well as serial EEPROMs, Serial Flash memories and Parallel Flash memories. We also license Flash-IP solutions that are incorporated in a broad range of products. Our synergistic product portfolio targets thousands of applications worldwide and a growing demand for high-performance designs in the automotive, communications, computing, consumer and industrial control markets. Our quality systems are ISO/TS16949 (2002 version) certified.
Microchip Technology Incorporated was incorporated in Delaware in 1989. In this Form 10-K, "we," "us," and "our" each refers to Microchip Technology Incorporated and its subsidiaries. Our executive offices are located at 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone number is (480) 792-7200.
Our Internet address is www.microchip.com. We post the following filings on our website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission:
• | our annual report on Form 10-K |
• | our quarterly reports on Form 10-Q |
• | our current reports on Form 8-K |
• | our proxy statement |
• | any amendments to the above-listed reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 |
All SEC filings on our website are available free of charge. The information on our website is not incorporated into this Form 10-K.
Recent Developments
On May 2, 2012, we announced that we had signed a definitive agreement to acquire Standard Microsystems Corporation (“SMSC”) for $37.00 per share in cash, which represents a total equity value of about $939 million, and a total enterprise value of about $766 million, after excluding SMSC's cash and investments on its balance sheet at February 29, 2012 of approximately $173 million. The acquisition has been approved by our Board of Directors and by the SMSC Board of Directors and is expected to close in the third quarter of calendar 2012, subject to approval by SMSC stockholders, regulatory approvals and other customary closing conditions. SMSC is a leading developer of Smart Mixed-Signal Connectivity™ solutions. SMSC employs a unique systems level approach that incorporates a broad set of technologies and intellectual property to deliver differentiating products to its customers. SMSC is focused on delivering connectivity solutions that enable the proliferation of data in automobiles, consumer devices, PCs and other applications. SMSC's feature-rich products drive a number of industry standards and include USB, MOST® automotive networking, Kleer® and JukeBlox® wireless audio, embedded system control and analog solutions, including thermal management and RightTouch® capacitive sensing. SMSC is headquartered in New York and has offices and research facilities in North America, Asia and Europe.
Industry Background
Competitive pressures require manufacturers of a wide variety of products to expand product functionality and provide differentiation while maintaining or reducing cost. To address these requirements, manufacturers often use integrated circuit-based embedded control systems that enable them to:
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• | differentiate their products |
• | replace less efficient electromechanical control devices |
• | reduce the number of components in their system |
• | add product functionality |
• | reduce the system level energy consumption |
• | decrease time to market for their products |
• | significantly reduce product cost |
Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of applications and markets worldwide, including:
• | automotive comfort, safety and entertainment applications |
• | remote control devices |
• | handheld tools |
• | home appliances |
• | portable computers |
• | robotics |
• | accessories |
• | cordless and cellular telephones |
• | motor controls |
• | security systems |
• | educational and entertainment devices |
• | consumer electronics |
• | power supplies |
• | touch screens |
• | medical products |
Embedded control systems typically incorporate a microcontroller as the principal active, and sometimes sole, component. A microcontroller is a self-contained computer-on-a-chip consisting of a central processing unit, non-volatile program memory, random access memory for data storage and various input/output peripheral capabilities. In addition to the microcontroller, a complete embedded control system incorporates application-specific software and may include specialized peripheral device controllers, non-volatile memory components such as EEPROMs, Flash memory and various analog and interface products.
The increasing demand for embedded control has made the market for microcontrollers one of the larger segments of the semiconductor market at approximately $15 billion in calendar year 2011. Microcontrollers are currently available in 4-bit through 32-bit architectures. 4-bit microcontrollers are the smallest segment of the microcontroller market and have been in decline for several years. 8-bit microcontrollers remain very cost-effective for a wide range of high-volume embedded control applications and, as a result, continue to represent a significant portion of the overall microcontroller market. 16-bit and 32-bit microcontrollers provide higher performance and functionality, and are generally found in more complex embedded control applications.
Our Products
Our strategic focus is on embedded control solutions, including:
• | microcontrollers |
• | development tools |
• | analog and interface products |
• | memory products |
• | technology licensing |
We provide highly cost-effective embedded control solutions that also offer the advantages of small size, high performance, extreme low power, wide voltage range operation, mixed signal integration, and ease of development, enabling timely and cost-effective embedded control product integration by our customers.
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Microcontrollers
We offer a broad family of proprietary microcontroller products marketed under the PIC brand name. We believe that our PIC product family is a price/performance leader in the worldwide microcontroller market. We have shipped over 10 billion PIC microcontrollers to customers worldwide since their introduction in 1990. Our PIC products are designed for applications requiring field programmability, high performance, low power and cost effectiveness. Our performance results from a product architecture which features dual data and instruction pathways, referred to as a Harvard dual-bus architecture; a Reduced Instruction Set Computer, referred to as RISC; and variable length instructions; all of which provide significant speed advantages over alternative single-bus, Complex Instruction Set Computer architectures, referred to as CISC. With close to 900 microcontrollers in our product portfolio, we target the 8-bit, 16-bit, and 32-bit microcontroller markets.
Digital Signal Controllers (DSC) are a subset of our 16-bit microcontroller offering. Our dsPIC DSC families integrate the control features of high-performance 16-bit microcontrollers with the computation capabilities of Digital Signal Processors (DSPs), along with a wide variety of peripheral functions making them suitable for a large number of embedded control applications. Our dsPIC product family offers a broad suite of hardware and software development tools, software application libraries, development boards and reference designs to ease and expedite the customer application development cycle. With its field-reprogrammability, large selection of peripheral functions, small footprint and ease of use, we believe that our dsPIC DSCs expand our addressable market.
We have used our manufacturing experience and design and process technology to bring additional enhancements and manufacturing efficiencies to the development and production of our PIC family of microcontroller products. Our extensive experience base has enabled us to develop our small footprint, flexible, extreme low power, low-cost user programmability feature by incorporating non-volatile memory, such as Flash, EEPROM and EPROM Memory, into the microcontroller, and to be a leader in reprogrammable microcontroller product offerings.
Development Tools
We offer a comprehensive set of low-cost and easy-to-learn application development tools. These tools enable system designers to quickly and easily program a PIC microcontroller and dsPIC DSC for specific applications and, we believe, are a key factor for obtaining design wins.
Our family of development tools for PIC and dsPIC products range from entry-level systems, which include an assembler and programmer or in-circuit debugging hardware, to fully configured systems that provide in-circuit emulation capability. Customers moving from entry-level designs to those requiring real-time emulation are able to preserve their investment in learning and tools as they migrate to future PIC devices since all of our PIC and dsPIC development tools share the same integrated development environment.
Many independent companies also develop and market application development tools that support our standard microcontroller product architecture. Currently, there are approximately 200 third-party tool suppliers worldwide whose products support our proprietary microcontroller architecture.
We believe that familiarity with and adoption of both our and third-party development tools by an increasing number of product designers will be an important factor in the future selection of our embedded control products. These development tools allow design engineers to develop thousands of application-specific products from our standard microcontrollers. To date, we have shipped almost 1.3 million development tools.
Analog and Interface Products
Our analog and interface products consist of several families with approximately 800 power management, linear, mixed-signal, thermal management, RF Linear drivers, safety and security, and interface products. At the end of fiscal 2012, our mixed-signal analog and interface products were being shipped to more than 18,500 end customers.
We market and sell our analog and interface products into our microcontroller customer base, to customers who use microcontrollers from other suppliers and to customers who use other products that may not fit our traditional PIC microcontroller and memory products customer base. We market these, and all of our products, based on an application segment approach targeted to provide customers with application solutions.
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Memory Products
Our memory products consist of serial electrically erasable programmable read-only memory (referred to as Serial EEPROMs), Serial Flash Memories, Parallel Flash Memories and Serial SRAM memories. Serial EEPROMs, Serial Flash memories and Serial SRAM have a very low I/O pin requirement, permitting production of very small footprint devices. We sell our memory products primarily into the embedded control market, complementing our microcontroller offerings.
Technology Licensing
Our technology licensing business includes license fees and royalties associated with technology licenses for the use of our SuperFlash technology and fees for engineering services. We license our SuperFlash® technology to foundries, integrated device manufacturers and design partners throughout the world for use in the manufacture of their advanced microcontroller products, gate array, RF and analog products that require embedded flash.
Manufacturing
Our manufacturing operations include wafer fabrication and assembly and test. The ownership of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry. By owning our wafer fabrication facilities and our assembly and test operations, and by employing statistical techniques (statistical process control, designed experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture the wafer manufacturing and a portion of the assembly and testing profit margin.
Our manufacturing facilities are located in:
• | Tempe, Arizona (Fab 2) |
• | Gresham, Oregon (Fab 4) |
• | Chandler, Arizona (wafer probe) |
• | Bangkok, Thailand (wafer probe, assembly and test) |
Wafer Fabrication
Fab 2 currently produces 8-inch wafers and supports manufacturing processes from 0.35 to 5.0 microns. During the first half of fiscal 2012, Fab 2 operated at or above normal capacity levels, which we typically consider to be in the range of 90% to 95% of the actual capacity of the installed equipment. During the second half of fiscal 2012, due to weak economic and semiconductor industry conditions, Fab 2 operated slightly below normal capacity levels. Fab 2's capacity to support more advanced technologies was increased during fiscal 2012 by making process improvements, upgrading existing equipment, and adding equipment as required.
Fab 4 currently produces 8-inch wafers using predominantly 0.22 to 0.5 micron manufacturing processes and is capable of supporting technologies below 0.18 microns. Similar to Fab 2, Fab 4 was operating at or above normal capacity levels during the first half of fiscal 2012 and slightly below normal capacity levels during the second half of fiscal 2012. The capacity of Fab 4 increased during fiscal 2012 to support our most advanced technology and support new technology development. The capacity increase was completed by starting up more of the tools we acquired when we purchased Fab 4 in fiscal 2003 and installing new tools. A significant amount of additional clean room capacity and equipment acquired with Fab 4 can be brought on line in the future to support incremental wafer fabrication capacity needs. We believe the combined capacity of Fab 2 and Fab 4 will provide sufficient capacity to allow us to respond to increases in future demand over the next several years with modest incremental capital expenditures.
We continue to transition products to more advanced process technologies to reduce future manufacturing costs. We believe that our ability to successfully transition to more advanced process technologies is important for us to remain competitive.
We have, in recent years, outsourced a portion of our wafer production requirements to third-party wafer foundries to augment our internal manufacturing capabilities. As a result of our acquisition of SST in fiscal 2011, we have become more reliant on outside wafer foundries for our wafer fabrication requirements. In fiscal 2012, approximately 20% of our sales came from products that were produced at outside wafer foundries.
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Wafer Probe, Assembly and Test
We perform wafer probe, product assembly and testing at our facilities located near Bangkok, Thailand. We also perform a limited amount of wafer probe at our Chandler, Arizona facility. As of March 31, 2012, approximately 67% of our assembly requirements were being performed in our Thailand facilities. As of March 31, 2012, approximately 95% of our test requirements were performed in our Thailand facilities. We use third-party assembly and test contractors in several Asian countries for the balance of our assembly and test requirements. During the first half of fiscal 2012, we operated at normal capacity levels and selectively increased our probe, assembly and test capacity at our Thailand facilities. During the second half of fiscal 2012, due to weak economic and semiconductor industry conditions, we operated at levels below the total operating capacity of our Thailand facilities.
General Matters Impacting Our Manufacturing Operations
We employ proprietary design and manufacturing processes in developing our microcontroller, analog and memory products. We believe our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new product designs. While many of our competitors develop and optimize separate processes for their logic, analog and memory product lines, we use a common process technology for our microcontroller, analog, and non-volatile memory products. This allows us to more fully absorb our process research and development costs and to deliver new products to market more rapidly. Our engineers utilize advanced computer-aided design tools and software to perform circuit design, simulation and layout, and our in-house photomask and wafer fabrication facilities enable us to rapidly verify design techniques by processing test wafers quickly and efficiently.
Due to the high fixed costs inherent in semiconductor manufacturing, consistently high manufacturing yields have significant positive effects on our gross profit and overall operating results. Our continuous focus on manufacturing productivity has allowed us to maintain excellent manufacturing yields at our facilities. Our manufacturing yields are primarily driven by a comprehensive implementation of statistical process control, extensive employee training and our effective use of our manufacturing facilities and equipment. Maintenance of manufacturing productivity and yields are important factors in the achievement of our operating results. The manufacture of integrated circuits, particularly non-volatile, erasable CMOS memory and logic devices, such as those that we produce, are complex processes. These processes are sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and the performance of our manufacturing personnel and equipment. As is typical in the semiconductor industry, we have from time to time experienced lower than anticipated manufacturing yields. Our operating results will suffer if we are unable to maintain yields at approximately the current levels.
Historically, we have relied on our ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with relatively short delivery schedules. In order to respond to such requirements, we have historically maintained a significant work-in-process and finished goods inventory.
At the end of fiscal 2012, we owned identifiable long-lived assets (consisting of property, plant and equipment) in the U.S. with a carrying value, net of accumulated depreciation, of $314.3 million and $202.3 million in other countries, including $186.1 million in Thailand. At the end of fiscal 2011, we owned identifiable long-lived assets in the U.S. with a carrying value, net of accumulated depreciation, of $330.0 million and $210.5 million in other countries, including $193.7 million in Thailand.
Research and Development (R&D)
We are committed to continuing our investment in new and enhanced products, including development systems, and in our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our competitive position. Our current R&D activities focus on the development of microcontrollers, digital signal controllers, Serial EEPROM memory, NOR FLASH Memory, Embedded FLASH technologies, RF products, analog and interface products, development systems, user interface products, software and application-specific software libraries. We are also developing design and process technologies to enable new products and innovative features as well as achieve further cost reductions and performance improvements in existing products.
In fiscal 2012, our R&D expenses were $182.7 million, compared to $170.6 million in fiscal 2011 and $120.8 million in fiscal 2010. R&D expenses included share-based compensation expense of $14.7 million in fiscal 2012, $12.9 million in fiscal 2011 and $12.2 million in fiscal 2010.
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Sales and Distribution
General
We market our products worldwide primarily through a network of direct sales personnel and distributors.
Our direct sales force focuses on a wide variety of strategic accounts in three geographical markets: the Americas, Europe and Asia. We currently maintain sales and technical support centers in major metropolitan areas in all three geographic markets. We believe that a strong technical service presence is essential to the continued development of the embedded control market. Many of our field sales engineers (FSEs), field application engineers (FAEs), and sales management have technical degrees or backgrounds and have been previously employed in high technology environments. We believe that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The primary mission of our FAE team is to provide technical assistance to customers and to conduct periodic training sessions for the balance of our sales team. FAEs also frequently conduct technical seminars and workshops in major cities around the world.
Our licensing division has dedicated sales, technology, design, product, test and reliability personnel that support the requirements of our licensees.
Distribution
Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base. We believe that customers recognize us for our products and brand name and use distributors as an effective supply channel.
In fiscal 2012, we derived 59% of our net sales through distributors and 41% of our net sales from customers serviced directly by us. In fiscal 2011, we derived 58% of our net sales through distributors and 42% of our net sales from customers serviced directly by us. In fiscal 2010, we derived 61% of our net sales through distributors and 39% of our net sales from customers serviced directly by us. Our largest distributor accounted for approximately 10% of our net sales in each of fiscal 2012 and 2011 and 12% of our net sales in fiscal 2010. No other distributor or end customer accounted for more than 10% of our net sales in fiscal 2012, fiscal 2011 or fiscal 2010.
We do not have long-term agreements with our distributors and we, or our distributors, may each terminate our relationship with little or no advanced notice. The loss of, or the disruption in the operations of, one or more of our distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.
Sales by Geography
Sales by geography for fiscal 2012, fiscal 2011 and fiscal 2010 were as follows (dollars in thousands):
Year Ended March 31, | |||||||||||||||||||||
2012 | % | 2011 | % | 2010 | % | ||||||||||||||||
Americas | $ | 290,392 | 21.0 | $ | 310,735 | 20.9 | $ | 231,398 | 24.4 | ||||||||||||
Europe | 319,881 | 23.1 | 334,911 | 22.5 | 237,354 | 25.1 | |||||||||||||||
Asia | 772,903 | 55.9 | 841,559 | 56.6 | 478,977 | 50.5 | |||||||||||||||
Total Sales | $ | 1,383,176 | 100.0 | $ | 1,487,205 | 100.0 | $ | 947,729 | 100.0 | ||||||||||||
Sales to foreign customers accounted for approximately 82% of our net sales in fiscal 2012, approximately 80% of our net sales in fiscal 2011 and approximately 77% of our net sales in fiscal 2010. 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 customers in China, including Hong Kong, accounted for approximately 24% of our net sales in fiscal 2012, approximately 25% of our net sales in fiscal 2011 and approximately 25% of our net sales in fiscal 2010. Sales to customers in Taiwan accounted for approximately 15% of our net sales in fiscal 2012, approximately 13% of our net sales in fiscal 2011 and approximately 10% of our net sales in fiscal 2010. We did not have sales into any other foreign countries that exceeded 10% of our net sales during fiscal 2012, fiscal 2011 or fiscal 2010.
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Our international sales are substantially all U.S. dollar denominated. Although foreign sales are subject to certain government export restrictions, we have not experienced any material difficulties to date as a result of export restrictions.
The semiconductor industry is characterized by seasonality and wide fluctuations of supply and demand. Since a significant portion of our revenue is from consumer markets and international sales, our business is subject to seasonally lower revenues in the third and fourth quarters of our fiscal year. However, in recent periods, changes in global economic and semiconductor industry conditions have had a more significant impact on our results than seasonality, and has made it difficult to assess the impact of seasonal factors on our business.
Backlog
As of April 30, 2012, our backlog was approximately $328.8 million, compared to $544.9 million as of April 30, 2011. Our backlog includes all purchase orders scheduled for delivery within the subsequent 12 months.
We primarily produce standard products that can be shipped from inventory within a relatively short time after we receive an order. Our business and, to a large extent, that of the entire semiconductor industry, is characterized by short-term orders and shipment schedules. Orders constituting our current backlog are subject to changes in delivery schedules, or to cancellation at the customer's option without significant penalty. Thus, while backlog is useful for scheduling production, backlog as of any particular date may not be a reliable measure of sales for any future period.
Competition
The semiconductor industry is intensely competitive and has been characterized by price erosion and rapid technological change. We compete with major domestic and international semiconductor companies, many of which have greater market recognition and greater financial, technical, marketing, distribution and other resources than we have with which to pursue engineering, manufacturing, marketing and distribution of their products. We also compete with a number of companies that we believe have copied, cloned, pirated or reverse engineered our proprietary product lines in such countries as China, Korea and Taiwan. We are continuing to take actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis.
We currently compete principally on the basis of the technical innovation and performance of our embedded control products, including the following product characteristics:
• | speed |
• | functionality |
• | density |
• | low power consumption |
• | reliability |
• | packaging alternatives |
We believe that other important competitive factors in the embedded control market include:
• | ease of use |
• | functionality of application development systems |
• | dependable delivery, quality and availability |
• | technical and innovative service and support |
• | price |
We believe that we compete favorably with other companies on all of these factors, but we may be unable to compete successfully in the future, which could harm our business.
Patents, Licenses and Trademarks
We maintain a portfolio of U.S. and foreign patents, expiring on various dates between 2012 and 2030. We also have numerous additional U.S. and foreign patent applications pending. We do not expect that the expiration of any particular patent will have a material impact on our business. While we intend to continue to seek patents on our technology and manufacturing processes, we believe that our continued success depends primarily on the technological skills and innovative capabilities of our personnel and our ability to rapidly commercialize product developments, rather than on our patents. Our existing and new patents, trademarks and copyrights that issue may not be of sufficient scope or strength to provide meaningful intellectual
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property protection or any commercial advantage to us. Pursuing violations of our intellectual property rights on a worldwide basis is a complex business area involving patent law, trademark law, copyright law and the laws of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of the U.S.
We have entered into certain intellectual property licenses and cross-licenses with other companies related to semiconductor products and manufacturing processes. As is typical in the semiconductor industry, we and our customers have from time to time received, and may in the future receive, communications from third parties asserting patent or other intellectual property rights on certain of our products or technologies. We investigate all such notices and respond as we believe is appropriate. Based on industry practice, we believe that in most cases we can obtain necessary licenses or other rights on commercially reasonable terms, but we cannot assure that all licenses would be on acceptable terms, that litigation would not ensue or that damages for any past infringement would not be assessed. Litigation, which could result in substantial costs to us and require significant attention from management, may be necessary to enforce our patents or other intellectual property rights, or to defend us against claimed infringement of the rights of others. The failure to obtain necessary licenses or other rights, or litigation arising out of infringement claims, could harm our business.
Environmental Regulation
We must comply with many different federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of certain chemicals and gases used in our manufacturing processes. Our facilities have been designed to comply with these regulations and we believe that our activities are conducted in material compliance with such regulations. Any changes in such regulations or in their enforcement could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. Any failure by us to adequately control the storage, use, discharge and disposal of regulated substances could result in significant future liabilities.
Increasing public attention has been focused on the environmental impact of electronic manufacturing operations. While we have not experienced any materially adverse effects on our operations from recently adopted environmental regulations, our business and results of operations could suffer if for any reason we fail to control the storage or use of, or to adequately restrict the discharge or disposal of, hazardous substances under present or future environmental regulations.
Employees
As of March 31, 2012, we had 6,923 employees. None of our employees are represented by a labor organization. We have never had a work stoppage and believe that our employee relations are good.
Executive Officers of the Registrant
The following sets forth certain information regarding our executive officers as of April 30, 2012:
Name | Age | Position | ||
Steve Sanghi | 56 | Chairman of the Board, President and Chief Executive Officer | ||
Ganesh Moorthy | 52 | Executive Vice President & Chief Operating Officer | ||
J. Eric Bjornholt | 41 | Vice President, Chief Financial Officer | ||
Stephen V. Drehobl | 50 | Vice President, Security, Microcontroller and Technology Division | ||
David S. Lambert | 60 | Vice President, Fab Operations | ||
Mitchell R. Little | 60 | Vice President, Worldwide Sales and Applications | ||
Richard J. Simoncic | 48 | Vice President, Analog and Interface Products Division | ||
Mr. Sanghi has been President since August 1990, CEO since October 1991, and Chairman of the Board since October 1993. He has served as a director since August 1990. Mr. Sanghi holds an M.S. degree in Electrical and Computer Engineering from the University of Massachusetts and a B.S. degree in Electronics and Communication from Punjab University, India. Since May 2004, he has been a member of the Board of Directors of Xyratex Ltd., a storage and network
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technology company. Since May 2007, he has been a member of the Board of Directors of FIRST (For Inspiration and Recognition of Science and Technology).
Mr. Moorthy has served as Chief Operating Officer since June 2009, as Executive Vice President since October 2006 and as a Vice President in various roles since he joined Microchip in 2001. Prior to this time, he served in various executive capacities with other semiconductor companies. Mr. Moorthy holds an M.B.A. in Marketing from National University, a B.S. degree in Electrical Engineering from the University of Washington and a B.S. degree in Physics from the University of Mumbai, India.
Mr. Bjornholt has served as Vice President of Finance since 2008 and as Chief Financial Officer since January 1, 2009. He has served in various financial management capacities since he joined Microchip in 1995. Mr. Bjornholt holds a Masters degree in Taxation from Arizona State University and a B.S. degree in accounting from the University of Arizona.
Mr. Drehobl has served as Vice President of the Security, Microcontroller, and Technology Division since July 2001. He has been employed by Microchip since August 1989 and has served as a Vice President in various roles since February 1997. Mr. Drehobl holds a Bachelor of Technology degree from the University of Dayton.
Mr. Lambert has served as Vice President, Fab Operations since November 1993. From 1991 to November 1993, he served as Director of Manufacturing Engineering, and from 1989 to 1991, he served as Engineering Manager of Fab Operations. Mr. Lambert holds a B.S. degree in Chemical Engineering from the University of Cincinnati.
Mr. Little has served as Vice President, Worldwide Sales and Applications since July 2000. He has been employed by Microchip since 1989 and has served as a Vice President in various roles since September 1993. Mr. Little holds a B.S. degree in Engineering Technology from United Electronics Institute.
Mr. Simoncic has served as Vice President, Analog and Interface Products Division since September 1999. From October 1995 to September 1999, he served as Vice President in various roles. Joining Microchip in 1990, Mr. Simoncic held various roles in Design, Device/Yield Engineering and Quality Systems. Mr. Simoncic holds a B.S. degree in Electrical Engineering Technology from DeVry Institute of Technology.
Item 1A. RISK FACTORS
When evaluating Microchip and its business, you should give careful consideration to the factors listed below, in addition to the information provided elsewhere in this Form 10-K and in other documents that we file with the Securities and Exchange Commission.
Our operating results are impacted by global economic conditions and may fluctuate in the future due to a number of factors that could reduce our net sales and profitability.
Our operating results are affected by a wide variety of factors that could reduce our net sales and profitability, many of which are beyond our control. Some of the factors that may affect our operating results include:
• | general economic, industry or political conditions in the U.S. or internationally; |
• | changes in demand or market acceptance of our products and products of our customers; |
• | changes in utilization of our manufacturing capacity and fluctuations in manufacturing yields; |
• | the mix of inventory we hold and our ability to satisfy orders from our inventory; |
• | levels of inventories at our customers; |
• | risk of excess and obsolete inventories; |
• | our ability to secure sufficient wafer foundry, assembly and testing capacity; |
• | availability of raw materials and equipment; |
• | competitive developments including pricing pressures; |
• | unauthorized copying of our products resulting in pricing pressure and loss of sales; |
• | the level of orders that are received and can be shipped in a quarter; |
• | the level of sell-through of our products through distribution; |
• | fluctuations in the mix of products; |
• | changes or fluctuations in customer order patterns and seasonality; |
• | announcements of significant acquisitions or any delays or unexpected developments with respect to previously announced acquisitions; |
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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, natural disasters or disruptions in the transportation system; |
• | constrained availability from other electronic suppliers impacting our customers' ability to ship their products, which in turn may adversely impact our sales to those customers; |
• | costs and outcomes of any current or future tax audits or any litigation involving intellectual property, customers or other issues; |
• | changes in tax regulations and policies in the U.S. and other countries in which we do business; |
• | fluctuations in commodity prices; and |
• | property damage or other losses, whether or not covered by insurance. |
We believe that period-to-period comparisons of our operating results are not necessarily meaningful and that you should not rely upon any such comparisons as indications of our future performance. In future periods, our operating results may fall below our public guidance or the expectations of public market analysts and investors, which would likely have a negative effect on the price of our common stock. Adverse global economic conditions, the subsequent economic recovery and recent economic uncertainty have caused our operating results to fluctuate significantly 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 and assembly and test personnel and equipment, and other quality issues. As is typical in the semiconductor industry, we have from time to time experienced lower than anticipated manufacturing yields. Our operating results will suffer if we are unable to maintain yields at approximately the current levels. This could include delays in the recognition of revenue, loss of revenue or future orders, and customer-imposed penalties for failure to meet contractual shipment deadlines. Our operating results are also adversely affected when we operate at less than optimal capacity. During the third and fourth quarters of fiscal 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 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. From the March 2010 quarter through the September 2011 quarter, we were running at more optimal levels of capacity utilization. However, in the third quarter of fiscal 2012, we reduced wafer starts to control inventory balances in response to a slowdown in global economic conditions. We continued with the reduced level of wafer starts in the fourth quarter of fiscal 2012. These recent actions had a negative impact on our gross margins.
We are dependent on orders that are received and shipped in the same quarter and are therefore limited in our visibility of future product shipments.
Our net sales in any given quarter depend upon a combination of shipments from backlog and orders received in that quarter for shipment in that quarter, which we refer to as turns orders. We measure turns orders at the beginning of a quarter based on the orders needed to meet the shipment targets that we set entering the quarter. Historically, we have relied on our ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with relatively short delivery schedules. Shorter lead times generally mean that turns orders as a percentage of our business are relatively high in any particular quarter and 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 will likely suffer.
Intense competition in the markets we serve may lead to pricing pressures, reduced sales of our products or reduced market share.
The semiconductor industry is intensely competitive and has been characterized by price erosion and rapid technological change. We compete with major domestic and international semiconductor companies, many of which have greater market recognition and substantially greater financial, technical, marketing, distribution and other resources than we do. We may be unable to compete successfully in the future, which could harm our business. Our ability to compete successfully depends on a number of factors both within and outside our control, including, but not limited to:
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• | the quality, performance, reliability, features, ease of use, pricing and diversity of our products; |
• | our success in designing and manufacturing new products including those implementing new technologies; |
• | the rate at which customers incorporate our products into their own applications; |
• | product introductions by our competitors; |
• | the number, nature and success of our competitors in a given market; |
• | our ability to obtain adequate supplies of raw materials and other supplies at acceptable prices; |
• | our ability to protect our products and processes by effective utilization of intellectual property rights; |
• | our ability to remain price competitive against companies that have copied our proprietary product lines, especially in countries where intellectual property rights protection is difficult to achieve and maintain; |
• | our ability to address the needs of our customers; and |
• | general market and economic conditions. |
Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. The overall average selling prices of our microcontroller and proprietary analog and interface products have remained relatively constant, while average selling prices of our memory 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 memory and non-proprietary analog products. We may be unable to maintain average selling prices for our products as a result of increased pricing pressure in the future, which could adversely impact our operating results.
Our business is dependent on selling through distributors.
Sales through distributors accounted for approximately 59% of our net sales in fiscal 2012 and approximately 58% of our net sales in fiscal 2011. Our largest distributor accounted for approximately 10% of our net sales in each of fiscal 2012 and fiscal 2011. We do not have long-term agreements with our distributors and we and our distributors may each terminate our relationship with little or no advance notice.
Any future adverse conditions in the U.S. or global economies or in the U.S. or global credit markets could materially impact the operations of our distributors. Any deterioration in the financial condition of our distributors or any disruption in the operations of our distributors could adversely impact the flow of our products to our end customers and adversely impact our results of operation. In addition, during an industry or economic downturn, it is possible there will be an oversupply of products and a decrease in sell-through of our products by our distributors which could reduce our net sales in a given period and result in an increase in inventory returns.
Our success depends on our ability to introduce new products on a timely basis.
Our future operating results will depend on our ability to develop and introduce new products on a timely basis that can compete effectively on the basis of price and performance and which address customer requirements. The success of our new product introductions depends on various factors, including, but not limited to:
• | proper new product selection; |
• | timely completion and introduction of new product designs; |
• | timely filing and protection of intellectual property rights for new product designs; |
• | availability of development and support tools and collateral literature that make complex new products easy for engineers to understand and use; and |
• | market acceptance of our customers' end products. |
Because our products are complex, we have experienced delays from time to time in completing development of new products. In addition, our new products may not receive or maintain substantial market acceptance. We may be unable to design, develop and introduce competitive products on a timely basis, which could adversely impact our future operating results.
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Our success also depends upon our ability to develop and implement new design and process technologies. Semiconductor design and process technologies are subject to rapid technological change and require significant R&D expenditures. We and other companies in the industry have, from time to time, experienced difficulties in effecting transitions to advanced process technologies and, consequently, have suffered reduced manufacturing yields or delays in product deliveries. Our future operating results could be adversely affected if any transition to future process technologies is substantially delayed or inefficiently implemented.
Our technology licensing business exposes us to various risks.
In connection with our acquisition of SST in April 2010, we acquired SST's intellectual property licensing business which is based on its SuperFlash technology. The success of our licensing business will depend on the continued market acceptance of this technology and on our ability to further develop and enhance such technology and to introduce new technologies in the future. To be successful, any such technology must be able to be repeatably implemented by licensees, provide satisfactory yield rates, address licensee and customer requirements, and perform competitively. The success of our technology licensing business depends on various other factors, including, but not limited to:
• | proper identification of licensee requirements; |
• | timely development and introduction of new or enhanced technology; |
• | our ability to protect our intellectual property rights for our licensed technology; |
• | availability of sufficient development and support services to assist licensees in their design and manufacture of products integrating our technology; |
• | availability of foundry licensees with sufficient capacity to support OEM production; and |
• | market acceptance of our customers' end products. |
Because our SuperFlash technology is complex, there may be delays from time to time in developing and enhancing such technology. There can be no assurance that our existing or any enhanced or new technology will achieve or maintain substantial market acceptance. Our licensees may experience disruptions in production or lower than expected production levels which would adversely affect the revenue that we receive from them. Our technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from intellectual property matters. We could be exposed to substantial liability for claims or damages related to intellectual property matters or indemnification claims. Any claim, with or without merit, could result in significant legal fees and require significant attention from our management. Any of the foregoing issues may adversely impact the success of our licensing business and adversely affect our future operating results.
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, and our licensees of our SuperFlash technology also rely on foundries and other contractors.
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, operational or production difficulties or situations when demand exceeds capacity, or if they were unable to maintain manufacturing yields, assembly and test yields and costs at approximately their current levels, or if due to their locations in foreign countries they were to experience political upheaval or infrastructure disruption. 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
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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 or a decline in product reliability, and our business and operating results could be adversely affected.
Certain of our SuperFlash technology licensees also rely on outside wafer foundries for wafer fabrication services. If the licensees were to experience any disruption in supply from the wafer foundries, this would reduce the revenue we receive in our technology licensing business and would harm our operating results.
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 is subject to seasonally lower revenues in the third and fourth quarters of our fiscal year. However, broad fluctuations in our overall business in recent periods and changes in semiconductor industry and global economic conditions have had a more significant impact on our results than seasonality, and have made it difficult to assess the impact of seasonal factors on our business. The industry has also experienced significant economic downturns, characterized by diminished product demand and production over-capacity. We have sought to reduce our exposure to this industry cyclically by selling proprietary products that cannot be easily or quickly replaced to a geographically diverse base of customers across a broad range of market segments. However, we have experienced substantial period-to-period fluctuations in operating results and expect, in the future, to experience period-to-period fluctuations in operating results due to general industry or economic conditions.
We are exposed to various risks related to legal proceedings or claims.
We are currently, and in the future may be, involved in legal proceedings or claims regarding patent infringement, intellectual property rights, contracts and other matters. As is typical in the semiconductor industry, we receive notifications from customers or licensees from time to time who believe that we owe them indemnification or other obligations related to infringement claims made against us or the customers or licensees 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, settle a matter, obtain necessary licenses on commercially reasonable terms, reengineer our products or processes to avoid infringement, and/or successfully prosecute or defend our position, we could incur uninsured liability in any of them, be required to take an appropriate charge to operations, be enjoined from selling a material portion of our products or using certain processes, suffer a reduction or elimination in the value of our inventories, and our business, financial condition or results of operations could be harmed.
It is also possible that from time to time we may be subject to claims related to the manufacture, performance or use of our products. These claims may be due to injuries or environmental exposures related to manufacturing, a product's nonconformance to our specifications, or specifications agreed upon with the customer, changes in our manufacturing processes, or unexpected end customer system issues due to the interaction with our products or insufficient design or testing by our customers. We could incur significant expenses related to such matters, including, but not limited to:
• | costs related to writing off the value of our inventory of nonconforming products; |
• | recalling nonconforming products; |
• | providing support services, product replacements, or modifications to products and the defense of such claims; |
• | diversion of resources from other projects; |
• | lost revenue or a delay in the recognition of revenue due to cancellation of orders and unpaid receivables; |
• | customer imposed fines or penalties for failure to meet contractual requirements; and |
• | a requirement to pay damages. |
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Because the systems into which our products are integrated have a higher cost of goods than the products we sell, our expenses and damages may be significantly higher than the sales and profits we received from the products involved. While we specifically exclude consequential damages in our standard terms and conditions, 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 technology and manufacturing processes. The process of seeking patent protection can be long and expensive, and patents may not be issued from currently pending or future applications. In addition, our existing and new patents, trademarks and copyrights that issue may not be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. We may be subject to or may ourselves initiate interference proceedings in the U.S. Patent and Trademark Office, patent offices of a foreign country or U.S. or foreign courts, which can require significant financial and management resources. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of the U.S. Infringement of our intellectual property rights by a third party could result in uncompensated lost market and revenue opportunities for us. Although we continue to vigorously and aggressively defend and protect our intellectual property on a worldwide basis, there can be no assurance that we will be successful in our endeavors.
Our operating results may be adversely impacted if economic conditions impact the financial viability of our licensees, customers, distributors, or suppliers.
We regularly review the financial performance of our licensees, customers, distributors and suppliers. However, any downturn in global economic conditions may adversely impact the financial viability of our licensees, customers, distributors or suppliers. The financial failure of a large licensee, customer or distributor, an important supplier, or a group thereof, could have an adverse impact on our operating results and could result in our not being able to collect our accounts receivable balances, higher reserves for doubtful accounts, write-offs for accounts receivable, and higher operating costs as a percentage of revenues.
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 had approximately 74,000 customers and our ten largest direct customers made up approximately 8% of our total net sales in fiscal 2012, cancellation of customer contracts could have an adverse 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. For example, under these contracts we may commit to supply specific quantities of products on scheduled delivery dates, or agree to extend our obligations for certain liabilities such as warranties or indemnification for claims of intellectual property infringement. If we agree to special supply terms and 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. If we agree to special warranty or indemnification provisions, we may be liable for the customer's costs, expenses and damages associated with their claims and we may be obligated to defend the customer against claims of intellectual property infringement and pay the associated legal fees. While we try to limit the number of contracts that we sign which contain such special provisions, manage the risks underlying such liabilities and set caps on our liability exposure, such provisions do expose us to significant additional risks and could result in a material adverse impact on our results of operation and financial condition.
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Business interruptions to our operations or the operations of our key vendors, subcontractors, licensees or customers, whether due to natural disasters or other events, could harm our business.
Operations at any of our facilities, at the facilities of any of our wafer fabrication or assembly and test subcontractors, or at any of our significant vendors or customers may be disrupted for reasons beyond our control. These reasons may include work stoppages, power loss, incidents of terrorism or security risk, political instability, public health issues, telecommunications, transportation or other infrastructure failure, radioactive contamination, fire, earthquake, floods, volcanic eruptions or other natural disasters. We have taken steps to mitigate the impact of some of these events should they occur; however, we cannot be certain that our actions will be effective to avoid a significant impact on our business in the event of a disaster or other business interruption.
In particular, Thailand has experienced periods of severe flooding in recent years; however, our facilities in Thailand have continued to operate normally. There can be no assurance that any future flooding in Thailand would not have a material adverse impact on our operations. If operations at any of our facilities, or our subcontractors' facilities are interrupted, we may not be able to shift production to other facilities on a timely basis, and we may need to spend significant amounts to repair or replace our facilities and equipment. If we experienced business interruptions, we would likely experience delays in shipments of products to our customers and alternate sources for production may be unavailable on acceptable terms. This could result in reduced revenues and profits and the cancellation of orders or loss of customers. Although we maintain business interruption insurance, such insurance will likely not be enough to compensate us for any losses that may occur and any losses or damages incurred by us as a result of business interruptions could significantly harm our business.
Additionally, as described above, operations at our customers and licensees may be disrupted for a number of reasons. In the event of customer disruptions, sales of our products may decline and our revenue, profitability and financial condition could suffer. Likewise, if our licensees are unable to manufacture and ship products incorporating our technology, or if there is a decrease in product demand due to a business disruption, our royalty revenue may decline as our licenses are based on per unit royalties.
We are highly dependent on foreign sales and operations, which exposes us to foreign political and economic risks.
Sales to foreign customers account for a substantial portion of our net sales. During fiscal 2012, approximately 82% of our net sales were made to foreign customers. During fiscal 2011, approximately 80% 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 instability in the past. From time to time, Thailand has also experienced periods of severe flooding; however, our facilities have continued to operate normally. There can be no assurance that any future flooding in Thailand would not have a material adverse impact on our operations. We 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:
• | political, social and economic instability; |
• | public health conditions; |
• | trade restrictions and changes in tariffs; |
• | import and export license requirements and restrictions; |
• | difficulties in staffing and managing international operations; |
• | employment regulations; |
• | disruptions in international transport or delivery; |
• | difficulties in collecting receivables; |
• | economic uncertainty in the worldwide markets served by us; and |
• | potentially adverse tax consequences. |
If any of these risks materialize, our sales could decrease and our operating results could suffer.
Fluctuations in foreign currency exchange rates could impact our operating results.
We use forward currency exchange contracts in an attempt to reduce the adverse earnings impact from the effect of exchange rate fluctuations on our non-U.S. dollar net balance sheet exposures. Nevertheless, in periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in which we transact business, the value of our non-U.S. dollar
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transactions can have an adverse effect on our results of operations and financial condition. In particular, in periods when a foreign currency significantly declines in value in relation to the U.S. dollar, such as past declines in the Euro relative to the U.S. dollar, customers transacting in that foreign currency may find it more difficult to fulfill their previously committed contractual obligations or to undertake new obligations to make payments or purchase products. In periods when the U.S. dollar is significantly declining in relation to the British pound, Euro and Thai baht, the operational costs in our European and Thailand subsidiaries are adversely affected.
Interruptions in our information technology systems could adversely affect our business.
We rely on the efficient and uninterrupted operation of complex information technology systems and networks to operate our business. Any significant system or network disruption, including, but not limited to, new system implementations, computer viruses, security breaches, facility issues or energy blackouts could have a material adverse impact on our operations, sales and operating results. Such network disruption could result in a loss of our intellectual property or the release of sensitive competitive information or partner, customer or employee personal data. Any loss of such information could harm our competitive position, result in a loss of customer confidence, and cause us to incur significant costs to remedy the damages caused by the disruptions or security breaches. From time to time, we have experienced verifiable attacks on our data by unauthorized parties; however, such attacks have not resulted in any material damage to us. In recent years, we have implemented improvements to our protective measures which are not limited to the following: firewalls, antivirus, patches, log monitors, routine backups with offsite retention of storage media, system audits, data partitioning and routine password
modifications. There can be no assurance that such system improvements will be sufficient to prevent or limit the damage from any future cyber attack or disruptions and any such attack or disruption could have a material adverse impact on our business, operations and financial results.
Third-party service providers, such as foundries, assembly and test contractors, distributors, credit card processors and other vendors have access to certain portions of our sensitive data. In the event that these service providers do not properly safeguard our data that they hold, security breaches and loss of our data could result. Any such loss of data by our third-party service providers could negatively impact our business, operations and financial results.
The occurrence of events for which we are self-insured, or which exceed our insurance limits, may adversely affect our profitability and liquidity.
We have insurance contracts with independent insurance companies related to many different types of risk; however, we self-insure for some potentially significant risks and obligations. In these circumstances, we 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 intellectual property matters. Should there be a loss or adverse judgment or other decision in an area for which we are self-insured, then our financial condition, results of operations and liquidity may be adversely affected.
We are subject to stringent environmental 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 substances used in our products and manufacturing processes. Our failure to comply with applicable regulations could result in the imposition of fines, suspension of production, cessation of operations or future liabilities. Such environmental regulations have required us in the past and could require us in the future to 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 also restrict our ability to ship certain products to certain countries, require us to modify our operations logistics, or require us to incur other significant costs and expenses. Over the past several years, there has been an expansion in environmental laws focusing on reducing or eliminating hazardous substances in electronic products. The European Union and countries such as the U.S., China, Korea and Brazil, have enacted or may enact such laws or regulations. 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. In addition, 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.
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Customer demands and new regulations related to conflict-free minerals may force us to incur additional expenses.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to establish new disclosure and reporting requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in products, whether or not these products are manufactured by third parties. When these new requirements are implemented, they could affect the sourcing and availability of minerals used in the manufacture of semiconductor devices (including our products), and there will be additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. Also, since our supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins for all metals used in our products through the procedures we may implement. We may also encounter challenges to satisfy those customers who require that all of the components of our products are certified as conflict free. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier and we may have to write off inventory in the event that it cannot be sold.
Climate change regulations and sustained adverse climate change poses both regulatory and physical risks that could harm our results of operations or affect the way we conduct our business.
New climate change regulations could require us to limit emissions, change our manufacturing processes, obtain substitute materials that may cost more or be less available, increase our investment in control technology for greenhouse gas emissions, fund offset projects or undertake other costly activities. These regulations could significantly increase our costs and restrict our manufacturing operations by virtue of requirements for new equipment. It is possible that new permits will be required for our current or any expansion of our operations. Failure to receive timely permits could result in the imposition of fines, suspension of production, or cessation of operations at one or more facilities. In addition, new restrictions on carbon dioxide or other greenhouse gas emissions could result in significant costs such as higher energy costs, and utility companies passing down carbon taxes, emission cap and trade programs and renewable portfolio standards. The cost of complying, or of failing to comply, with these and other climate change and emissions regulations could have an adverse effect on our operating results.
Further, any sustained adverse change in climate could have a direct adverse economic impact on us such as water and power shortages or higher costs for water or energy to control the temperature inside of our facilities. Also, certain of our operations are located in tropical regions, such as Thailand. Some environmental experts predict that these regions may become vulnerable to storms, severe floods and droughts due to climate change. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can be disruptive to our business, we cannot be certain that our plans will protect us from all such disasters or events.
Regulatory authorities in jurisdictions into which we ship our products could levy fines or restrict our ability to export products.
A significant portion of our sales are made outside of the U.S. through the exporting and re-exporting of products. In addition to local jurisdictions' export regulations, our U.S.-manufactured products or products based on U.S. technology are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the Foreign Corrupt Practices Act, Export Administration Regulations (EAR), and trade sanctions against embargoed countries and destinations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC). Licenses or proper license exceptions are required for the shipment of our products to certain countries. A determination by the U.S. or local government that we have failed to comply with these or other export regulations or anti-bribery regulations can result in penalties which may include denial of export privileges, fines, civil or criminal penalties, and seizure of products. Such penalties could have a material adverse effect on our business, sales and earnings. Further, a change in these laws and regulations could restrict our ability to export to previously permitted countries, customers, distributors or other third parties. Any one or more of these sanctions or a change in laws or regulations could have a material adverse effect on our business, financial condition and results of operations.
The outcome of currently ongoing and future examinations of our income tax returns by the IRS could have an adverse effect on our results of operations.
We are subject to examination of our income tax returns by the I.R.S. and other tax authorities for fiscal 2009 and later. We are currently being audited by the I.R.S. for fiscal 2009 and fiscal 2010. We are subject to certain income tax examinations in foreign jurisdictions for fiscal 2005 and later. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuing examinations will not have an adverse effect on our future operating results.
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The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate in the future. The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of which are beyond our control, including, but not limited to:
• | quarterly variations in our operating results and the operating results of other technology companies; |
• | actual or anticipated announcements of technical innovations or new products by us or our competitors; |
• | changes in analysts' estimates of our financial performance or buy/sell recommendations; |
• | changes in our financial guidance or our failure to meet such guidance; |
• | any acquisitions we pursue or complete; |
• | general conditions in the semiconductor industry; and |
• | global economic and financial conditions. |
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for many companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations and other factors have harmed and may harm the market price of our common stock. Some or all of the foregoing factors could also cause the market price of our convertible debentures to decline or fluctuate substantially.
We may not fully realize the anticipated benefits of our completed or future acquisitions or divestitures, including our recently announced agreement to acquire SMSC.
We have acquired, and expect in the future to acquire, additional businesses that we believe will complement or augment our existing businesses. In this regard, in May 2012, we announced the execution of a definitive agreement to acquire SMSC, a publicly traded semiconductor company. The integration process for our acquisitions, including our acquisition of SMSC, may be complex, costly and time consuming and include unanticipated issues, expenses and liabilities. We may not be able to successfully or profitably integrate, operate, maintain and manage any newly acquired operations or employees. We may not be able to maintain uniform standards, procedures and policies and we may be unable to realize the expected synergies and cost savings from the integration. There may be increased risk due to integrating financial reporting and internal control systems. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company, or in growing the business at the rate we anticipate. Following an acquisition, we may not achieve the revenue or net income levels that justify the acquisition. We may suffer loss of key employees, customers and strategic partners of acquired companies and it may be difficult to implement our corporate culture at acquired companies. We may be subject to claims by terminated employees, shareholders of acquired companies and other third parties related to the transaction. Acquisitions may also result in one-time charges (such as acquisition-related expenses, write-offs, restructuring charges, or future impairment of goodwill), contingent liabilities, adverse tax consequences, additional stock-based compensation expense and other charges that adversely affect our operating results. Additionally, we may fund acquisitions of new businesses or strategic alliances by utilizing cash, raising debt, issuing shares of common stock, or other mechanisms.
While the risks above may be relevant to all of our acquisitions, our recently announced acquisition of SMSC, when completed, will be a larger and more complex transaction than our other recent transactions and exposes us to greater risks and liabilities than we have encountered in the past.
Further, when we decide to sell assets or a business, we may encounter difficulty in finding or completing divestiture opportunities or alternative exit strategies on acceptable terms or in a timely manner. These circumstances could delay the accomplishment of our strategic objectives or cause us to incur additional expenses with respect to a business that we want to dispose of, or we may dispose of a business at a price or on terms that are less favorable than we had anticipated. Even following a divestiture, we may be contractually obligated with respect to certain continuing obligations to customers, vendors or other third parties and such obligations may have a material adverse impact on our results of operation and financial condition.
In addition to acquisitions, we have in the past and expect in the future to enter into joint development agreements or other business or strategic relationships with other companies. These transactions are subject to a number of risks similar to those we face with our acquisitions including our ability to realize the expected benefits of any such transaction, to successfully market and sell any products resulting from such transactions or to successfully integrate any technology developed through such transactions.
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We may in the future incur impairments to goodwill or long-lived assets.
We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth fiscal quarter or whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Factors that may be considered in assessing whether goodwill or intangible assets may not be recoverable include a decline in our stock price or market capitalization, reduced estimates of future cash flows and slower growth rates in our industry. Our valuation methodology for assessing impairment requires management to make judgments and assumptions
based on historical experience and to rely heavily on projections of future operating performance. Because we operate in highly competitive environments, projections of future operating results and cash flows may vary significantly from our actual results. No goodwill or long-lived asset impairment charges were recorded in fiscal 2011 or fiscal 2012.
Our financial condition and results of operations could be adversely affected if we do not effectively manage our current or future debt.
As a result of our sale of $1.15 billion of principal value 2.125% junior subordinated convertible debentures in December 2007, we have a substantially greater amount of long-term debt than we have maintained in the past. In August 2011, we entered into a $750 million revolving credit agreement. Although we have not yet borrowed under such credit agreement, we expect to borrow a significant amount under such agreement in connection with the closing of our acquisition of SMSC later this year. Our maintenance of substantial levels of debt could adversely affect our ability to take advantage of corporate opportunities and could adversely affect our financial condition and results of operations. We may need or desire to refinance all or a portion of our debentures or any other future indebtedness and there can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms, if at all.
Conversion of our debentures will dilute the ownership interest of existing stockholders, including holders who had previously converted their debentures.
The conversion of some or all of our outstanding debentures will dilute the ownership interest of existing stockholders to the extent we deliver common stock upon conversion of the debentures. Upon conversion, we may satisfy our conversion obligation by delivering cash, shares of common stock or any combination, at our option. If upon conversion we elect to deliver cash for the lesser of the conversion value and principal amount of the debentures, we would pay the holder the cash value of the applicable number of shares of our common stock. Upon conversion, we intend to satisfy the lesser of the principal amount or the conversion value of the debentures in cash. If the conversion value of a debenture exceeds the principal amount of the debenture, we may also elect to deliver cash in lieu of common stock for the conversion value in excess of the one thousand dollars principal amount (i.e., the conversion spread). There would be no adjustment to the numerator in the net income per common share computation for the cash settled portion of the debentures as that portion of the debt instrument will always be settled in cash. The conversion spread will be included in the denominator for the computation of diluted net income per common share. Any sales in the public market of any common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the debentures may encourage short selling by market participants because the conversion of the debentures could be used to satisfy short positions, or anticipated conversion of the debentures into shares of our common stock could depress the price of our common stock.
Our reported financial results may be adversely affected by new accounting pronouncements or changes in existing accounting standards and practices.
We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation or changes by the FASB and the SEC. New accounting pronouncements and varying interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future. New accounting pronouncements or a change in the interpretation of existing accounting standards or practices may have a significant effect on our reported financial results and may even affect our reporting of transactions completed before the change is announced or effective.
Potential U.S. tax legislation regarding our foreign earnings could materially and adversely impact our business and financial results.
Currently, a majority of our revenue is generated from customers located outside the U.S., and a substantial portion of our assets, including employees, are located outside the U.S. Present U.S. income taxes and foreign withholding taxes have not been provided on undistributed earnings for certain of our non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. In recent years, there have been a number of initiatives proposed by the Obama administration and members of Congress regarding the tax treatment of such undistributed earnings. If adopted,
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certain of these initiatives would substantially reduce our ability to defer U.S. taxes including repealing the deferral of U.S. taxation of foreign earnings, eliminating utilization of or substantially reducing our ability to claim foreign tax credits, and eliminating various tax deductions until foreign earnings are repatriated to the U.S. Changes in tax law such as these proposals could have a material negative impact on our financial position and results of operations.
The value of our investments in marketable equity investments could change materially.
Our investments in available-for-sale marketable securities at March 31, 2012 consist of shares of public company 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 our balance sheet date. The market value of these investments was approximately $5.3 million at March 31, 2012. The stock prices of these securities could materially decrease due to company performance or market-related activity, negatively affecting the value of these investments. If we wanted to liquidate these investments at a time in which the stock prices had decreased from current levels, our realized return would be materially and adversely affected. Depending on the number of shares we desire to sell relative to the daily trading volume in the shares, in the event we desire to sell our marketable securities, it may take several weeks or months to dispose of our position and our efforts to sell could drive down the price of the shares we are selling.
We may not realize a return on our non-marketable equity investments.
At March 31, 2012, we had investments of $7.7 million in several privately held companies, including those that we acquired as a result of our acquisition of SST. These companies range from early-stage companies to more mature companies with established revenue and business models. Many factors are critical to the success of these companies, including product and technology development, market acceptance of their products and technology, and achievement of financial and operational efficiencies. If any of these private companies are unsuccessful as a result of these or other factors, we could lose all or part of our investment in that company. Also, if we determine that an other-than-temporary impairment to fair value exists in any of our non-marketable equity investments, we will need to write down the investment to its fair value and recognize the related impairment charge.
Additionally, we may desire to dispose of one or more of these non-marketable equity investments from time to time. However, our investments in these private companies are not liquid and we may not be able to dispose of the investments to our advantage or even at all. Also, for investments accounted for under the equity method of accounting, the income or loss we are required to share from the investee's income or loss could affect our earnings. Gains or losses from equity securities could vary from our expectations depending on gains or losses realized on the sale or exchange of securities, gains or losses from equity method investments, and impairment charges.
Credit conditions have adversely impacted our holdings of auction rate securities.
At March 31, 2012, $10.2 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 and capital markets, our ARS have experienced multiple failed auctions. As a result, we will not be able to access such funds until a future auction on these investments is successful.
Our ARS have experienced multiple rating downgrades by the major rating agencies. The fair value of these 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 have recognized impairment charges on these investments in prior periods. In fiscal 2012, we recognized a $0.3 million gain on our ARS positions as a gain on redemption at par value of one ARS position offset impairment charges recognized during the year. We recognized impairment charges of $1.6 million in fiscal 2011. 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 majority of our short and long-term investments are in highly rated government agency bonds and corporate bonds. Other than with respect to our holdings of ARS, we have not experienced any liquidity or impairment issues with such investments. However, there can be no assurance that credit market conditions will not in the future adversely affect the liquidity or value of our investments in government agency bonds or corporate bonds.
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Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
At March 31, 2012, we owned the facilities described below:
Location | Approximate Total Sq. Ft. | Uses | ||
Chandler, Arizona | 415,000 | Executive and Administrative Offices; Wafer Probe; R&D Center; Sales and Marketing; and Computer and Service Functions | ||
Tempe, Arizona | 379,000 | Wafer Fabrication (Fab 2); R&D Center; Administrative Offices; and Warehousing | ||
Gresham, Oregon | 826,500 | Wafer Fabrication (Fab 4); R&D Center; Administrative Offices; and Warehousing | ||
Chacherngsao, Thailand | 489,000 | Test and Assembly; Wafer Probe; Sample Center; Warehousing; and Administrative Offices | ||
Chacherngsao, Thailand | 215,000 | Assembly and Test | ||
Bangalore, India | 67,174 | Research and Development; Marketing Support and Administrative Offices | ||
In addition to the facilities we own, we lease several research and development facilities and sales offices in North America, Europe and Asia. Our aggregate monthly rental payment for our leased facilities is approximately $0.8 million.
We currently believe that our existing facilities are suitable and will be adequate to meet our requirements for at least the next 12 months.
See page 37 for a discussion of the capacity utilization of our manufacturing facilities.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are involved in a limited number of legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. We also periodically receive notification from various third parties alleging infringement of patents, intellectual property rights or other matters. With respect to these pending legal actions to which we are a party, although the outcome of these actions are generally not determinable, we believe that the ultimate resolution of these matters will not harm our business and will not have a material adverse effect on our financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon, and we are, and from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ Global Market under the symbol "MCHP." Our common stock has been quoted on such market since our initial public offering on March 19, 1993. The following table sets forth the quarterly high and low closing prices of our common stock as reported by NASDAQ for our last two fiscal years.
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Fiscal 2012 | High | Low | Fiscal 2011 | High | Low | |||||
First Quarter | $41.33 | $35.69 | First Quarter | $30.62 | $26.61 | |||||
Second Quarter | $38.39 | $29.60 | Second Quarter | $31.56 | $27.60 | |||||
Third Quarter | $37.09 | $30.43 | Third Quarter | $36.31 | $30.46 | |||||
Fourth Quarter | $38.42 | $35.17 | Fourth Quarter | $38.31 | $34.72 | |||||
Stock Price Performance Graph
The following graph and table show a comparison of the five-year cumulative total stockholder return, calculated on a dividend reinvestment basis, for Microchip Technology Incorporated, the Standard & Poor's (S&P) 500 Stock Index, and the Philadelphia Semiconductor Index.
Cumulative Total Return | ||||||||||||
March 2007 | March 2008 | March 2009 | March 2010 | March 2011 | March 2012 | |||||||
Microchip Technology Incorporated | 100.00 | 95.35 | 65.13 | 91.36 | 128.84 | 131.12 | ||||||
S&P 500 Stock Index | 100.00 | 94.92 | 58.77 | 88.02 | 101.79 | 110.48 | ||||||
Philadelphia Semiconductor Index | 100.00 | 96.18 | 74.68 | 104.58 | 122.11 | 145.95 | ||||||
Data acquired by Research Data Group, Inc. (www.researchdatagroup.com)
On May 18, 2012, there were approximately 340 holders of record of our common stock. This figure does not reflect beneficial ownership of shares held in nominee names.
We have been declaring and paying quarterly cash dividends on our common stock since the third quarter of fiscal 2003. Our total cash dividends paid were $266.2 million, $256.8 million and $249.6 million in fiscal 2012, fiscal 2011 and fiscal 2010, respectively. The following table sets forth our quarterly cash dividends per common share and the total amount of the dividend payment for each quarter in fiscal 2012 and fiscal 2011. At the end of our fiscal 2011 third quarter, a second cash dividend of $0.345 per share was paid in the aggregate amount of $65.0 million which was an acceleration of the dividend that would normally have been paid in March 2011 (amounts in thousands, except per share amounts):
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Fiscal 2012 | Dividends per Common Share | Aggregate Amount of Dividend Payment | Fiscal 2011 | Dividends per Common Share | Aggregate Amount of Dividend Payment | |||||
First Quarter | $0.346 | $65,900 | First Quarter | $0.342 | $63,452 | |||||
Second Quarter | 0.347 | 66,206 | Second Quarter | 0.343 | 63,908 | |||||
Third Quarter | 0.348 | 66,813 | Third Quarter | 0.344 | 64,496 | |||||
Fourth Quarter | 0.349 | 67,259 | Third Quarter* | 0.345 | 64,952 | |||||
Fourth Quarter | None | None | ||||||||
*This dividend would normally have been paid in the fourth fiscal quarter.
On May 1, 2012, we declared a quarterly cash dividend of $0.35 per share, which will be paid on May 31, 2012 to stockholders of record on May 17, 2012 and the total amount of such dividend is expected to be approximately $67.8 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.
Please refer to "Item 12 - Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters," at page 48 below, for the information required by Item 201(d) of Regulation S-K with respect to securities authorized for issuance under our equity compensation plans at March 31, 2012.
Item 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data for the five-year period ended March 31, 2012 in conjunction with our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Items 7 and 8 of this Form 10-K. Our consolidated statements of income data for each of the years in the three-year period ended March 31, 2012, and the balance sheet data as of March 31, 2012 and 2011, are derived from our audited consolidated financial statements, included in Item 8 of this Form 10-K. The statements of operations data for the years ended March 31, 2009 and 2008 and balance sheet data as of March 31, 2010, 2009 and 2008 have been derived from our audited consolidated financial statements not included herein (for information below all amounts are in thousands, except per share data).
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Statement of Income Data:
Year ended March 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Net sales | $ | 1,383,176 | $ | 1,487,205 | $ | 947,729 | $ | 903,297 | $ | 1,035,737 | ||||||||||
Cost of sales | 590,782 | 612,769 | 413,487 | 386,793 | 410,799 | |||||||||||||||
Research and development | 182,650 | 170,607 | 120,823 | 115,524 | 120,864 | |||||||||||||||
Selling, general and administrative | 212,391 | 227,781 | 167,222 | 161,218 | 175,646 | |||||||||||||||
Special charges (1) | 837 | 1,865 | 1,238 | 6,434 | 26,763 | |||||||||||||||
Operating income | 396,516 | 474,183 | 244,959 | 233,328 | 301,665 | |||||||||||||||
(Losses) gains on equity method investments | (195 | ) | 157 | — | — | — | ||||||||||||||
Interest income | 17,992 | 16,002 | 15,325 | 32,545 | 54,851 | |||||||||||||||
Interest expense | (34,266 | ) | (31,521 | ) | (31,150 | ) | (29,440 | ) | (9,495 | ) | ||||||||||
Other (expense) income, net | (352 | ) | 1,877 | 8,679 | (4,354 | ) | 2,435 | |||||||||||||
Income from continuing operations before income taxes | 379,695 | 460,698 | 237,813 | 232,079 | 349,456 | |||||||||||||||
Income tax provision (benefit) | 42,990 | 31,531 | 20,808 | (13,508 | ) | 52,663 | ||||||||||||||
Net income from continuing operations | $ | 336,705 | $ | 429,167 | $ | 217,005 | $ | 245,587 | $ | 296,793 | ||||||||||
Basic net income per common share – continuing operations | $ | 1.76 | $ | 2.29 | $ | 1.18 | $ | 1.34 | $ | 1.43 | ||||||||||
Diluted net income per common share – continuing operations | $ | 1.65 | $ | 2.20 | $ | 1.16 | $ | 1.31 | $ | 1.40 | ||||||||||
Dividends declared per common share | $ | 1.390 | $ | 1.374 | $ | 1.359 | $ | 1.346 | $ | 1.205 | ||||||||||
Basic common shares outstanding | 191,283 | 187,066 | 183,642 | 183,158 | 207,220 | |||||||||||||||
Diluted common shares outstanding | 203,519 | 194,715 | 187,339 | 186,788 | 212,048 | |||||||||||||||
Balance Sheet Data:
March 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Working capital | $ | 1,767,988 | $ | 1,434,667 | $ | 1,407,579 | $ | 1,587,144 | $ | 1,526,649 | ||||||||||
Total assets | 3,083,776 | 2,968,058 | 2,516,313 | 2,405,711 | 2,496,031 | |||||||||||||||
Long-term obligations, less current portion | 355,050 | 347,334 | 340,672 | 334,184 | 329,409 | |||||||||||||||
Stockholders' equity | 1,990,673 | 1,812,438 | 1,533,380 | 1,490,311 | 1,539,000 | |||||||||||||||
(1) | Discussions of the special charges for the fiscal years ended March 31, 2012, 2011 and 2010 are contained in Note 4 to our consolidated financial statements. An explanation of the special charges for the fiscal years ended March 31, 2009 and 2008 is provided below. |
The following table presents a summary of special charges for the five-year period ended March 31, 2012:
Year ended March 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Acquisition related (income) expenses | $ | (660 | ) | $ | 1,865 | $ | — | $ | — | $ | — | |||||||||
Patent licenses | 1,497 | — | 1,238 | 4,000 | — | |||||||||||||||
In-process research and development expenses | — | — | — | 860 | — | |||||||||||||||
Abandoned acquisition related expenses | — | — | — | 1,574 | — | |||||||||||||||
Loss on sale of Fab 3 | — | — | — | — | 26,763 | |||||||||||||||
Totals | $ | 837 | $ | 1,865 | $ | 1,238 | $ | 6,434 | $ | 26,763 | ||||||||||
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Fiscal 2009 Special Charges
Patent Licenses
We entered into a patent portfolio license effective March 31, 2009 with an unrelated third-party that covers both issued patents and patent applications and settled alleged infringement claims. The total payment made to the third-party was $8.25 million, $4.0 million of which was expensed in the fourth quarter of fiscal 2009 and the remaining $4.25 million was recorded as a prepaid royalty that will be amortized over the estimated 20-year remaining life of the patents. We entered into another patent portfolio license with the same unrelated third party in March 2011 and $2.75 million was paid covering patent applications and was recorded as a prepaid royalty that will be amortized over the life of the patents.
In-Process Research and Development
During the third quarter of fiscal 2009, we completed our acquisition of Hampshire Company, a leader in the large format touch screen controller market. As a result of the acquisition, we incurred a $0.5 million in-process research and development charge in the third quarter of fiscal 2009.
During the fourth quarter of fiscal 2009, we completed the acquisition of HI-TECH Software, a provider of software development tools and compilers. As a result of the acquisition, we incurred a $0.2 million in-process research and development charge in the fourth quarter of fiscal 2009.
During the fourth quarter of fiscal 2009, we completed our acquisition of R&E International, a leader in developing innovative integrated circuits for smoke and carbon monoxide detectors and other life-safety systems. As a result of the acquisition, we incurred a $0.2 million in-process research and development charge in the fourth quarter of fiscal 2009.
Abandoned Acquisition Expenses
During the third quarter of fiscal 2009, we pursued a potential acquisition and such efforts were subsequently terminated during the fourth quarter of fiscal 2009. As such, during the fourth quarter of fiscal 2009, we expensed $1.6 million of various costs associated with the terminated acquisition.
Fiscal 2008 Special Charge – Loss on Sale of Fab 3
We received an unsolicited offer on our Puyallup, Washington facility (Fab 3) in September 2007. We assessed our available capacity in our current facilities, along with potential available capacity from outside foundries and determined the capacity of Fab 3 would not be required in the near term. As a result of this assessment, we accepted the offer on September 21, 2007, and the transaction closed on October 19, 2007. We received $27.5 million in cash, net of expenses associated with the sale, and recognized a loss on sale of $26.8 million, representing the difference between the carrying value of the assets and the amounts received.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Note Regarding Forward-looking Statements
This report, including "Item 1 – Business," "Item 1A – Risk Factors," and "Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations," contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance and revenue sources. We use words such as "anticipate," "believe," "plan," "expect," "estimate," "future," "continue," "intend" and similar expressions to identify forward-looking statements. These forward-looking statements include, without limitation, statements regarding the following:
• | The effects that adverse global economic conditions and fluctuations in the global credit and equity markets may have on our financial condition and results of operations; |
• | The effects and amount of competitive pricing pressure on our product lines; |
• | Our ability to moderate future average selling price declines; |
• | The effect of product mix, capacity utilization, yields, fixed cost absorption, competition and economic conditions on gross margin; |
• | The amount of, and changes in, demand for our products and those of our customers; |
• | The level of orders that will be received and shipped within a quarter; |
• | Our expectation that our inventory levels will stay about flat in the June 2012 quarter compared to the March 2012 quarter and that it will allow us to maintain competitive lead times; |
• | The effect that distributor and customer inventory holding patterns will have on us; |
• | Our belief that customers recognize our products and brand name and use distributors as an effective supply channel; |
• | Our belief that deferred cost of sales are recorded at their approximate carrying value and will have low risk of material impairment; |
• | Our belief that our direct sales personnel combined with our distributors provide an effective means of reaching our customer base; |
• | Our ability to increase the proprietary portion of our analog and interface product lines and the effect of such an increase; |
• | Our belief that our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new product designs; |
• | The impact of any supply disruption we may experience; |
• | Our ability to effectively utilize our facilities at appropriate capacity levels and anticipated costs; |
• | That we adjust capacity utilization to respond to actual and anticipated business and industry-related conditions; |
• | That our existing facilities will provide sufficient capacity to respond to increases in demand with modest incremental capital expenditures; |
• | That manufacturing costs will be reduced by transition to advanced process technologies; |
• | Our ability to maintain manufacturing yields; |
• | Continuing our investments in new and enhanced products; |
• | The cost effectiveness of using our own assembly and test operations; |
• | Our anticipated level of capital expenditures; |
• | Continuation and amount of quarterly cash dividends; |
• | The sufficiency of our existing sources of liquidity to finance anticipated capital expenditures and otherwise meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on them; |
• | The impact of seasonality on our business; |
• | The accuracy of our estimates used in valuing employee equity awards; |
• | That the resolution of legal actions will not have a material effect on our business, and the accuracy of our assessment of the probability of loss and range of potential loss; |
• | The recoverability of our deferred tax assets; |
• | The adequacy of our tax reserves to offset any potential tax liabilities, having the appropriate support for our income tax positions and the accuracy of our estimated tax rate; |
• | Our belief that the expiration of any tax holidays will not have a material impact on our overall tax expense or effective tax rate; |
• | Our belief that the estimates used in preparing our consolidated financial statements are reasonable; |
• | Our belief that recently issued accounting pronouncements listed in this document will not have a significant impact on our consolidated financial statements; |
• | The accuracy of our estimates of the useful life and values of our property, assets and other liabilities; |
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• | The adequacy of our patent strategy, and our belief that the impact of the expiration of any particular patent will not have a material effect on our business; |
• | Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis; |
• | Our ability to obtain patents and intellectual property licenses and minimize the effects of litigation; |
• | The level of risk we are exposed to for product liability or indemnification claims; |
• | The effect of fluctuations in market interest rates on our income and/or cash flows; |
• | The effect of fluctuations in currency rates; |
• | The accuracy of our estimates of market information that determines the value of our Auction Rate Securities (ARS), and that the lack of markets for the ARS will not have a material impact on our liquidity, cash flow, or ability to fund operations; |
• | Our intention to satisfy the lesser of the principal amount or the conversion value of our debenture in cash; |
• | Our intention to indefinitely reinvest undistributed earnings of certain non-US subsidiaries in those subsidiaries; |
• | Our intent to maintain a high-quality investment portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield; |
• | Our intention to fund the SMSC acquisition purchase price using a portion of our existing balance of cash, cash equivalents or short-term investments and borrowings under our credit agreement; and |
• | Our ability to collect accounts receivable. |
Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth in "Item 1A – Risk Factors," and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement.
Introduction
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document, as well as with other sections of this Annual Report on Form 10-K, including "Item 1 – Business;" "Item 6 – Selected Financial Data;" and "Item 8 – Financial Statements and Supplementary Data."
We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a summary of our overall business strategy to give the reader an overview of the goals of our business and the overall direction of our business and products. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. In the next section, beginning at page 34, we discuss our Results of Operations for fiscal 2012 compared to fiscal 2011, and for fiscal 2011 compared to fiscal 2010. 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. With our acquisition of SST in April 2010, we added Flash-IP solutions and SuperFlash memory products to our strategic focus. We license SuperFlash technology to foundries, integrated device manufacturers and design partners throughout the world for use in the manufacture of their advanced microcontroller products.
We sell our products to a broad base of domestic and international customers across a variety of industries. The principal markets that we serve include consumer, automotive, industrial, office automation and telecommunications. Our business is subject to fluctuations based on economic conditions within these markets.
Our manufacturing operations include wafer fabrication 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
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achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture a portion of the wafer manufacturing and the assembly and test profit margin. We do outsource a portion of our manufacturing requirements to third parties.
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, Flash-IP systems, new development systems, software and application-specific software libraries. We are also developing new design and process technologies to achieve further cost reductions and performance improvements in our products.
We market our products worldwide primarily through a network of direct sales personnel and distributors. Our distributors focus primarily on servicing the product and technical support requirements of a broad base of diverse customers. We believe that our direct sales personnel combined with our distributors provide an effective means of reaching this broad and diverse customer base. Our direct sales force focuses primarily on major strategic accounts in three geographical markets: the Americas, Europe and Asia. We currently maintain sales and support centers in major metropolitan areas in North America, Europe and Asia. We believe that a strong technical service presence is essential to the continued development of the embedded control market. Many of our field sales engineers (FSEs), field application engineers (FAEs), and sales management have technical degrees and have been previously employed in an engineering environment. We believe that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The primary mission of our FAE team is to provide technical assistance to strategic accounts and to conduct periodic training sessions for FSEs and distributor sales teams. FAEs also frequently conduct technical seminars for our customers in major cities around the world, and work closely with our distributors to provide technical assistance and end-user support.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, business combinations, share-based compensation, inventories, income taxes, junior subordinated convertible debentures and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We review these estimates and judgments on an ongoing basis. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We also have other policies that we consider key accounting policies, such as our policy regarding revenue recognition to OEMs; however, we do not believe these policies require us to make estimates or judgments that are as difficult or subjective as our policies described below.
Revenue Recognition – Distributors
Our distributors worldwide generally have broad price protection and product return rights, so we defer revenue recognition until the distributor sells the product to their customer. Revenue is recognized when the distributor sells the product to an end-user, at which time the sales price becomes fixed or determinable. Revenue is not recognized upon shipment to our distributors since, due to discounts from list price as well as price protection rights, the sales price is not substantially fixed or determinable at that time. At the time of shipment to these distributors, we record a trade receivable for the selling
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price as there is a legally enforceable right to payment, relieve inventory for the carrying value of goods shipped since legal title has passed to the distributor, and record the gross margin in deferred income on shipments to distributors on our consolidated balance sheets.
Deferred income on shipments to distributors effectively represents the gross margin on the sale to the distributor; however, the amount of gross margin that we recognize in future periods could be less than the deferred margin as a result of credits granted to distributors on specifically identified products and customers to allow the distributors to earn a competitive gross margin on the sale of our products to their end customers and price protection concessions related to market pricing conditions.
We sell the majority of the items in our product catalog to our distributors worldwide at a uniform list price. However, distributors resell our products to end customers at a very broad range of individually negotiated price points. The majority of our distributors' resales require a reduction from the original list price paid. Often, under these circumstances, we remit back to the distributor a portion of their original purchase price after the resale transaction is completed in the form of a credit against the distributors' outstanding accounts receivable balance. The credits are on a per unit basis and are not given to the distributor until they provide information to us regarding the sale to their end customer. The price reductions vary significantly based on the customer, product, quantity ordered, geographic location and other factors and discounts to a price less than our cost have historically been rare. The effect of granting these credits establishes the net selling price to our distributors for the product and results in the net revenue recognized by us when the product is sold by the distributors to their end customers. Thus, a portion of the "deferred income on shipments to distributors" balance represents the amount of distributors' original purchase price that will be credited back to the distributor in the future. The wide range and variability of negotiated price concessions granted to distributors does not allow us to accurately estimate the portion of the balance in the deferred income on shipments to distributors account that will be credited back to the distributors. Therefore, we do not reduce deferred income on shipments to distributors or accounts receivable by anticipated future concessions; rather, price concessions are typically recorded against deferred income on shipments to distributors and accounts receivable when incurred, which is generally at the time the distributor sells the product. At March 31, 2012, we had approximately $159.1 million of deferred revenue and $50.4 million in deferred cost of sales recognized as $108.7 million of deferred income on shipments to distributors. At March 31, 2011, we had approximately $208.1 million of deferred revenue and $68.1 million in deferred cost of sales recognized as $140.0 million of deferred income on shipments to distributors. The deferred income on shipments to distributors that will ultimately be recognized in our income statement will be lower than the amount reflected on the balance sheet due to additional price credits to be granted to the distributors when the product is sold to their customers. These additional price credits historically have resulted in the deferred income approximating the overall gross margins that we recognize in the distribution channel of our business.
Distributor advances, reflected as a reduction of deferred income on shipments to distributors on our consolidated balance sheets, totaled $51.7 million at March 31, 2012 and $71.9 million at March 31, 2011. On sales to distributors, our payment terms generally require the distributor to settle amounts owed to us for an amount in excess of their ultimate cost. The sales price to our distributors may be higher than the amount that the distributors will ultimately owe us because distributors often negotiate price reductions after purchasing products from us and such reductions are often significant. It is our practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle receivable balances, on a current basis, generally within 30 days, for amounts originally invoiced. This practice has an adverse impact on the working capital of our distributors. As such, we have entered into agreements with certain distributors whereby we advance cash to the distributors to reduce the distributor's working capital requirements. These advances are reconciled at least on a quarterly basis and are estimated based on the amount of ending inventory as reported by the distributor multiplied by a negotiated percentage. Such advances have no impact on our revenue recognition or our consolidated statements of income. We process discounts taken by distributors against our deferred income on shipments to distributors' balance and true-up the advanced amounts generally after the end of each completed fiscal quarter. The terms of these advances are set forth in binding legal agreements and are unsecured, bear no interest on unsettled balances and are due upon demand. The agreements governing these advances can be canceled by us at any time.
We reduce product pricing through price protection based on market conditions, competitive considerations and other factors. Price protection is granted to distributors on the inventory they have on hand at the date the price protection is offered. When we reduce the price of our products, it allows the distributor to claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it has on hand as of the date of the price reduction. There is no immediate revenue impact from the price protection, as it is reflected as a reduction of the deferred income on shipments to distributors' balance.
Products returned by distributors and subsequently scrapped have historically been immaterial to our consolidated results of operations. We routinely evaluate the risk of impairment of the deferred cost of sales component of the deferred income on
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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.
Business Combinations
All of our business combinations are accounted for at fair value under the acquisition method of accounting. Under the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at fair value as an intangible asset at the acquisition date and amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will be recognized through income tax expense or directly in contributed capital. The measurement of fair value of assets accrued and liabilities assumed requires significant judgment. The valuation of intangible assets and acquired investments in privately held companies, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows. The valuation of non-marketable equity investments acquired also takes into account variables such as conditions reflected in the capital markets, recent financing activity by the investees, the investees' capital structure and the terms of the investees' issued interests.
Share-based Compensation
We measure at fair value and recognize compensation expense for all share-based payment awards, including grants of employee stock options, restricted stock units (RSUs) and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. Total share-based compensation in fiscal 2012 was $38.3 million, of which $32.7 million was reflected in operating expenses. Total share-based compensation included in cost of sales in fiscal 2012 was $5.6 million. Total share-based compensation included in our inventory balance was $4.6 million at March 31, 2012.
Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant requires judgment. The fair value of our RSUs is based on the fair market value of our common stock on the date of grant discounted for expected future dividends. We use the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase shares under our employee stock purchase plans. Option pricing models, including the Black-Scholes model, 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 most 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 in fiscal 2012 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
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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, the reduced production levels of our manufacturing facilities are charged directly to cost of sales. As a result of decreased production in our wafer fabs, approximately $6.7 million and $22.3 million was charged directly to cost of sales in fiscal 2012 and 2010, respectively. There were no such charges in fiscal 2011.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and to the extent we believe that recovery is not likely, we must establish a valuation allowance. We have provided valuation allowances for certain of our deferred tax assets where it is more likely than not that some portion, or all of such assets, will not be realized. At March 31, 2012, the valuation allowances totaled $78.5 million and consists of state net operating loss carryforwards, foreign tax credits and state tax credits. Should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. At March 31, 2012, our gross deferred tax asset was $91.2 million.
Various taxing authorities in the U.S. and other countries in which we do business scrutinize the tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. We are currently under audit by the U.S. Internal Revenue Service (IRS) for our fiscal years 2009 and 2010. Fiscal years 2011 and 2012 are open for examination by tax authorities. 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 appropriate tax reserves to offset any potential tax liabilities that may arise upon these and other pending audits in the U.S. and other countries in which we do business. If such amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed necessary. If such amounts ultimately prove to be less than an ultimate assessment, a future charge to expense would be recorded in the period in which the assessment is determined.
Junior Subordinated Convertible Debentures
We separately account for the liability and equity components of our junior subordinated convertible debentures in a manner that reflects our nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. This results in a bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statements of income. Additionally, certain embedded features of the debentures qualify as derivatives and are bundled as a compound embedded derivative that is measured at fair value. Lastly, we include the dilutive effect of the shares of our common stock issuable upon conversion of the outstanding junior subordinated convertible debentures in our diluted income per share calculation regardless of whether the market price trigger or other contingent conversion feature has been met. We apply the treasury stock method as we have the intent and have adopted an accounting policy to settle the principal amount of the junior subordinated convertible debentures in cash. This method results in incremental dilutive shares when the average fair value of our common stock for a reporting period exceeds the conversion price per share, which was $27.94 at March 31, 2012, and adjusts as dividends are recorded in the future.
Contingencies
In the ordinary course of our business, we are involved in a limited number of legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. We also periodically receive notifications from various third parties alleging infringement of patents, intellectual property rights or other matters. With respect to pending legal actions to which we are a party, although the outcomes of these actions are not generally determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon, and we are, and from time to time have been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
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Results of Continuing Operations
The following table sets forth certain operational data as a percentage of net sales for the years indicated:
Year Ended March 31, | |||||||||
2012 | 2011 | 2010 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales | 42.7 | 41.2 | 43.6 | ||||||
Gross profit | 57.3 | 58.8 | 56.4 | ||||||
Research and development | 13.2 | 11.5 | 12.8 | ||||||
Selling, general and administrative | 15.3 | 15.3 | 17.7 | ||||||
Special charges | 0.1 | 0.1 | 0.1 | ||||||
Operating income | 28.7 | % | 31.9 | % | 25.8 | % | |||
Net Sales
We operate in two industry segments and engage primarily in the design, development, manufacture and marketing of semiconductor products as well as the licensing of Flash intellectual property. 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 typically provided by letters of credit.
Our net sales of $1,383.2 million in fiscal 2012 decreased by $104.0 million, or 7.0%, over fiscal 2011, and our net sales of $1,487.2 million in fiscal 2011 increased by $539.5 million, or 56.9%, over fiscal 2010. The decrease in net sales in fiscal 2012 over fiscal 2011 was due primarily to weak general economic and semiconductor industry conditions. The increase in net sales in fiscal 2011 over fiscal 2010 was due primarily to improving semiconductor industry conditions, market share gains in our microcontroller and analog product lines, and an increase in net sales due to our acquisition of SST. Average selling prices for our semiconductor products were essentially flat in fiscal 2012 over fiscal 2011 and were down approximately 1% in fiscal 2011 over fiscal 2010. The number of units of our semiconductor products sold was down approximately 8% in fiscal 2012 over fiscal 2011 and up approximately 54% in fiscal 2011 over fiscal 2010. 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 impacting the amount of net sales during the last three fiscal years include:
• | global economic conditions in the markets we serve; |
• | semiconductor industry conditions; |
• | our acquisition of SST; |
• | inventory holding patterns of our customers; |
• | increasing semiconductor content in our customers' products; |
• | customers' increasing needs for the flexibility offered by our programmable solutions; |
• | our new product offerings that have increased our served available market; and |
• | continued market share gains in the segments of the markets we address. |
Sales by product line for the fiscal years ended March 31, 2012, 2011 and 2010 were as follows (dollars in thousands):
Year Ended March 31, | |||||||||||||||||||||
2012 | % | 2011 | % | 2010 | % | ||||||||||||||||
Microcontrollers | $ | 928,509 | 67.1 | $ | 1,013,937 | 68.2 | $ | 767,723 | 81.0 | ||||||||||||
Memory products | 179,217 | 13.0 | 221,219 | 14.9 | 80,158 | 8.5 | |||||||||||||||
Analog and interface products | 171,165 | 12.4 | 177,994 | 12.0 | 99,848 | 10.5 | |||||||||||||||
Technology licensing | 87,001 | 6.3 | 72,068 | 4.8 | — | — | |||||||||||||||
Other | 17,284 | 1.2 | 1,987 | 0.1 | — | — | |||||||||||||||
Total Sales | $ | 1,383,176 | 100.0 | $ | 1,487,205 | 100.0 | $ | 947,729 | 100.0 | ||||||||||||
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Microcontrollers
Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and associated application development systems accounted for approximately 67.1% of our total net sales in fiscal 2012, approximately 68.2% of our total net sales in fiscal 2011 and 81.0% of our total net sales in fiscal 2010. The primary reason for the decrease in our microcontroller net sales as a percentage of our total net sales in fiscal 2011 compared to fiscal 2010 was our acquisition of SST which resulted in an increase in our memory product and technology licensing sales.
Net sales of our microcontroller products decreased approximately 8.4% in fiscal 2012 compared to fiscal 2011, and increased approximately 32.1% in fiscal 2011 compared to fiscal 2010. The decrease in net sales in fiscal 2012 compared to fiscal 2011 and the increase in net sales in fiscal 2011 compared to fiscal 2010 resulted primarily from changes in general economic and semiconductor industry conditions in the end markets that we serve including the consumer, automotive, industrial control, communications and computing markets, as well as market share gains.
Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. The overall average selling prices of our microcontroller products have remained relatively constant over time due to the proprietary nature of these products. We have experienced, and expect to continue to experience, moderate pricing pressure in certain microcontroller product lines, primarily due to competitive conditions. We have in the past been able to, and expect in the future to be able to, moderate average selling price declines in our microcontroller product lines by introducing new products with more features and higher prices. We may be unable to maintain average selling prices for our microcontroller products as a result of increased pricing pressure in the future, which could adversely affect our operating results.
Memory Products
Sales of our memory products accounted for approximately 13.0% of our total net sales in fiscal 2012, approximately 14.9% of our total net sales in fiscal 2011 and approximately 8.5% of our total net sales in fiscal 2010. The primary reason for the increase in our memory product net sales as a percentage of our total net sales in fiscal 2011 compared to the prior fiscal year was our acquisition of SST’s SuperFlash memory products.
Net sales of our memory products decreased approximately 19.0% in fiscal 2012 compared to fiscal 2011, and increased approximately 176% in fiscal 2011 compared to fiscal 2010. Excluding our SST memory product sales, our memory product sales increased approximately 20.0% in fiscal 2011 compared to fiscal 2010. The decrease in memory product net sales in fiscal 2012 compared to fiscal 2011 was driven primarily by adverse customer demand conditions within the Serial EEPROM and Flash memory markets and weak general economic and semiconductor industry conditions. The increase in memory product net sales in fiscal 2011 compared to fiscal 2010 was driven primarily by increased revenue due to our acquisition of SST, improving semiconductor industry conditions and by customer demand conditions within the Serial EEPROM and Flash memory markets.
Memory product pricing has historically been cyclical in nature, with steep price declines followed by periods of relative price stability, driven by changes in industry capacity at different stages of the business cycle. We have experienced, and expect to continue to experience, varying degrees of competitive pricing pressures in our memory products. We may be unable to maintain the average selling prices of our memory products as a result of increased pricing pressure in the future, which could adversely affect our operating results.
Analog and Interface Products
Sales of our analog and interface products accounted for approximately 12.4% of our total net sales in fiscal 2012, approximately 12.0% of our total net sales in fiscal 2011 and approximately 10.5% of our total net sales in fiscal 2010.
Net sales of our analog and interface products decreased approximately 3.8% in fiscal 2012 compared to fiscal 2011 and increased approximately 78.3% in fiscal 2011 compared to fiscal 2010. The decrease in net sales in fiscal 2012 compared to fiscal 2011 was driven primarily by weak general economic and semiconductor industry conditions which offset market share gains achieved within the analog and interface market. The increase in net sales in fiscal 2011 compared to fiscal 2010 was driven primarily by improving semiconductor industry conditions, market share gains achieved within the analog and interface market and increased revenue due to our acquisition of SST.
Analog and interface products can be proprietary or non-proprietary in nature. Currently, we consider more than 70% of our analog and interface product mix to be proprietary in nature, where prices are relatively stable, similar to the pricing
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stability experienced in our microcontroller products. The non-proprietary portion of our analog and interface business will experience price fluctuations, driven primarily by the current supply and demand for those products. We may be unable to maintain the average selling prices of our analog and interface products as a result of increased pricing pressure in the future, which could adversely affect our operating results. We anticipate the proprietary portion of our analog and interface products will increase over time.
Technology Licensing
Technology licensing revenue includes a combination of royalties associated with technology licensed for the use of our SuperFlash technology and fees for engineering services. Technology licensing accounted for approximately 6.3% of our total net sales in fiscal 2012 and approximately 4.8% of our total net sales in fiscal 2011. Technology licensing revenue is the result of our acquisition of SST in the first quarter of fiscal 2011.
Net sales related to our technology licensing increased approximately 20.7% in fiscal 2012 compared to fiscal 2011 driven primarily by the adoption of our technology by more manufacturers of semiconductors.
Revenue from technology licensing can fluctuate over time due to general economic and semiconductor industry conditions.
Other
Revenue from assembly and test subcontracting services accounted for approximately 1.2% of our total net sales in fiscal 2012 and approximately 0.1% of our total net sales in fiscal 2011. Our assembly and test subcontractors services are a result of our acquisition of Millennium Microtech Thailand (MMT) in the fourth quarter of fiscal 2011.
Distribution
Distributors accounted for approximately 59% of our net sales in fiscal 2012, approximately 58% of our net sales in fiscal 2011 and approximately 61% of our net sales in fiscal 2010.
Our largest distributor accounted for approximately 10% of our net sales in each of fiscal 2012 and fiscal 2011, and approximately 12% of our net sales in fiscal 2010. Our two largest distributors together accounted for approximately 14% of our net sales in each of fiscal 2012 and fiscal 2011, and approximately 17% of our net sales in fiscal 2010.
Generally, we do not have long-term agreements with our distributors and we, or our distributors, may terminate our relationship with each other with little or no advanced notice. The loss of, or the disruption in the operations of, one or more of our distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.
At March 31, 2012, our distributors maintained 31 days of inventory of our products compared to 40 days at March 31, 2011 and 41 days at March 31, 2010. Over the past three fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 31 days and 46 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 of our distributors.
Sales by Geography
Sales by geography for the fiscal years ended March 31, 2012, 2011 and 2010 were as follows (dollars in thousands):
Year Ended March 31, | ||||||||||||||||||
2012 | % | 2011 | % | 2010 | % | |||||||||||||
Americas | $ | 290,392 | 21.0 | $ | 310,735 | 20.9 | $ | 231,398 | 24.4 | |||||||||
Europe | 319,881 | 23.1 | 334,911 | 22.5 | 237,354 | 25.1 | ||||||||||||
Asia | 772,903 | 55.9 | 841,559 | 56.6 | 478,977 | 50.5 | ||||||||||||
Total Sales | $ | 1,383,176 | 100.0 | $ | 1,487,205 | 100.0 | $ | 947,729 | 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.
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Sales to foreign customers accounted for approximately 82% of our net sales in fiscal 2012, approximately 80% of our net sales in fiscal 2011 and approximately 77% of our net sales in fiscal 2010. Substantially all of our foreign sales are U.S. dollar denominated. Sales to customers in Asia have generally increased over time due to many of our customers transitioning their manufacturing operations to Asia and growth in demand from the emerging Asian market. Our sales force in the Americas and Europe supports a significant portion of the design activity for products which are ultimately shipped to Asia.
Sales to customers in China, including Hong Kong, accounted for approximately 24% of our net sales in fiscal 2012 and approximately 25% of our net sales in each of fiscal 2011 and 2010. Sales to customers in Taiwan accounted for approximately 15% of our net sales in fiscal 2012, approximately 13% of our net sales in fiscal 2011 and approximately 10% of our net sales in fiscal 2010. We did not have sales into any other countries that exceeded 10% of our net sales during the last three fiscal years.
Gross Profit
Our gross profit was $792.4 million in fiscal 2012, $874.4 million in fiscal 2011 and $534.2 million in fiscal 2010. Gross profit as a percent of sales was 57.3% in fiscal 2012, 58.8% in fiscal 2011 and 56.4% in fiscal 2010.
The most significant factors affecting our gross profit percentage in the periods covered by this report were:
• | production levels being below the range of our normal capacity, resulting in under absorption of fixed costs, in the first half of fiscal 2010 and second half of fiscal 2012, compared to production levels being at or above the range of our normal capacity levels in the second half of fiscal 2010, all of fiscal 2011 and the first half of fiscal 2012; |
• | for each of fiscal 2012 and fiscal 2011, inventory write-downs being higher than the gross margin impact of sales of inventory that was previously written down; |
• | the addition of licensing and SuperFlash Memory revenue starting in fiscal 2011 as a result of our acquisition of SST; and |
• | fluctuations in the product mix of microcontrollers, analog products, memory products and technology licensing. |
Other factors that impacted our gross profit percentage in the periods covered by this report include:
• | continual cost reductions in wafer fabrication and assembly and test manufacturing, such as new manufacturing technologies and more efficient manufacturing techniques; and |
• | lower depreciation as a percentage of cost of sales. |
We adjust our wafer fabrication and assembly and test capacity utilization as required to respond to actual and anticipated business and industry-related conditions. Our wafer fabrication facilities operated at or above normal capacity levels, which we typically consider to be 90% to 95% of the actual capacity of the installed equipment, during the second half of fiscal 2010 through the first half of fiscal 2012. However, during the first half of fiscal 2010 and the second half of fiscal 2012, we operated below normal capacity levels in our wafer fabrication facilities in response to weaker economic conditions. As a result of decreased production in our wafer fabs, approximately $6.7 million was charged to cost of sales in fiscal 2012 and approximately $22.3 million was charged to cost of sales in fiscal 2010. There were no such charges in fiscal 2011. In the future, if production levels are below normal capacity, we will charge cost of sales for the unabsorbed capacity. During the first half of fiscal 2010 and the second half of fiscal 2012, we operated at levels below the total operating capacity of our Thailand facility due to adverse business conditions and these actions had a negative impact on our gross margins. During the second half of fiscal 2010 through the first half of fiscal 2012, we operated at normal levels of capacity at our Thailand facility, and we selectively increased our assembly and test capacity at such facility.
The process technologies utilized in our wafer fabs impact our gross margins. Fab 2 currently utilizes various manufacturing process technologies, but predominantly utilizes our 0.5 to 1.0 micron processes. Fab 4 predominantly utilizes our 0.22 to 0.5 micron processes. We continue to transition products to more advanced process technologies to reduce future manufacturing costs. All of our production has been on 8-inch wafers during the periods covered by this report.
Our overall inventory levels were $217.3 million at March 31, 2012, compared to $180.8 million at March 31, 2011 and $116.6 million at March 31, 2010. We maintained 137 days of inventory on our balance sheet at March 31, 2011 compared to 107 days of inventory at March 31, 2011 and 97 days at March 31, 2010. We expect our inventory levels in the June 2012 quarter to be about flat to the levels at March 31, 2012. We believe this level of inventory will allow us to maintain competitive lead times and provide strong delivery performance to our customers and allow us to keep our fiscal 2013 capital expenditures at low levels.
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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, memory products and technology licensing revenue and the percentage of net sales of each of these products in a particular quarter, as well as manufacturing yields, fixed cost absorption, and competitive and economic conditions in the markets we serve.
At March 31, 2012, approximately 67% of our assembly requirements were performed in our Thailand facility, compared to approximately 61% at March 31, 2011 and approximately 65% at March 31, 2010. The percentage of our assembly work that is performed internally fluctuates over time based on supply and demand conditions in the semiconductor industry and our internal capacity capabilities. Third-party contractors located in Asia perform the balance of our assembly operations. At March 31, 2012, approximately 95% of our test requirements were performed in our Thailand facility compared to approximately 88% in fiscal 2011. In fiscal 2010, substantially all of our test requirements were performed in our Thailand facility. We believe that the assembly and test operations performed at our Thailand facility provide us with significant cost savings compared to contractor assembly and test costs, as well as increased control over these portions of the manufacturing process. The primary reason for the decrease in the portion of assembly and test operations performed in our Thailand facility in fiscal 2011 compared to fiscal 2010 was due to our acquisition of SST which had outsourced 100% of its assembly and test operations prior to being acquired by Microchip. We plan to continue to bring a portion of SST's assembly and test volume into our Thailand facilities over time.
We rely on outside wafer foundries for a portion of our wafer fabrication requirements. As a result of our acquisition of SST in the first quarter of fiscal 2011, we have become more reliant on outside foundries for our wafer fabrication requirements. In fiscal 2012, approximately 20% of our total net sales related to products which were purchased from outside wafer foundries.
Our use of third parties involves some reduction in our level of control over the portions of our business that we subcontract. While we review the quality, delivery and cost performance of our third-party contractors, our future operating results could suffer if any third-party contractor is unable to maintain manufacturing yields, assembly and test yields and costs at approximately their current levels.
Research and Development (R&D)
R&D expenses for fiscal 2012 were $182.7 million, or 13.2% of sales, compared to $170.6 million, or 11.5% of sales, for fiscal 2011 and $120.8 million, or 12.8% of sales, for fiscal 2010. We are committed to investing in new and enhanced products, including development systems software, and in our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our competitive position. R&D costs are expensed as incurred. Assets purchased to support our ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their expected useful lives. R&D expenses include labor, depreciation, masks, prototype wafers, and expenses for the development of process technologies, new packages, and software to support new products and design environments.
R&D expenses increased $12.1 million, or 7.1%, for fiscal 2012 over fiscal 2011. The primary reasons for the dollar increase in R&D costs in fiscal 2012 compared to fiscal 2011 were an increased number of employees driving higher employee costs and higher discretionary expenses offset by lower bonus costs. R&D expenses increased $49.8 million, or 41.2%, for fiscal 2011 over fiscal 2010. The primary reasons for the dollar increase in R&D costs in fiscal 2011 compared to fiscal 2010 were higher salary and bonus costs and additional costs from our acquisition of SST.
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2012 were $212.4 million, or 15.3% of sales, compared to $227.8 million, or 15.3% of sales, for fiscal 2011, and $167.2 million, or 17.7% of sales, for fiscal 2010. Selling, general and administrative expenses include salary expenses related to field sales, marketing and administrative personnel, advertising and promotional expenditures and legal expenses. Selling, general and administrative expenses also include costs related to our direct sales force and field applications engineers who work in sales offices worldwide to stimulate demand by assisting customers in the selection and use of our products.
Selling, general and administrative expenses decreased $15.4 million, or 6.8%, for fiscal 2012 over fiscal 2011. The primary reasons for the dollar decrease in selling, general and administrative expenses in fiscal 2012 over fiscal 2011 were
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lower bonus costs. Selling, general and administrative expenses increased $60.6 million, or 36.2%, for fiscal 2011 over fiscal 2010. The primary reasons for the dollar increase in selling, general and administrative expenses in fiscal 2011 over fiscal 2010 were higher salary and bonus costs and additional costs from our acquisition of SST.
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense investment levels.
Special Charges
Acquisition Related Expenses
During fiscal 2012, special charges included a benefit of $0.7 million comprised of a $1.0 million favorable adjustment to contingent consideration offset by $0.3 million of severance-related charges related to a prior year acquisition. During fiscal 2011, we incurred $1.9 million of severance-related and office closure costs associated with our acquisition of SST.
Patent Licenses
During the fourth quarter of fiscal 2012, we agreed to the terms of a patent license with an unrelated third party and signed an agreement on March 20, 2012. The patent license settled alleged infringement claims. The total payment made to the third-party in March 2012 was $2.8 million, $1.5 million of which was expensed in the fourth quarter of fiscal 2012 and the remaining $1.3 million was recorded as a prepaid royalty which will be amortized over the remaining life of the patents, which expire in December 2018.
During the first quarter of fiscal 2010, 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 was amortized over the remaining life of the patents, which expired in June 2010.
Other Income (Expense)
Interest income in fiscal 2012 increased to $18.0 million from $16.0 million in fiscal 2011 and from $15.3 million in fiscal 2010. The primary reasons for the increase in interest income in fiscal 2012 over fiscal 2011 relates to the redemption of a previously written down auction rate security at par value and higher invested cash balances. The primary reason for the increase in interest income in fiscal 2011 over fiscal 2010 was a higher rate of return realized on certain of our investments. Interest expense in fiscal 2012 was $34.3 million compared to $31.5 million in fiscal 2011 and $31.2 million in fiscal 2010. The primary reasons for the increase in interest expense in fiscal 2012 over fiscal 2011 were $1.7 million related to our credit facility and $0.7 million of additional non-cash interest expense on our 2.125% junior subordinated convertible debentures. Other expense, net in fiscal 2012 was $0.4 million compared to other income, net of $1.9 million in fiscal 2011 and other income, net of $8.7 million in fiscal 2010. The change in other (expense) income, net during fiscal 2012 compared to fiscal 2011 primarily relates to $1.3 million of losses on equity securities during fiscal 2012 compared to $2.4 million of gains on equity securities during fiscal 2011. These losses and gains were a result of impairment charges due to market fluctuations in the value of certain investments in publicly traded companies, as well as dividends received and losses and gains recognized on the sale of these equity securities. The decrease in other income, net during fiscal 2011 compared to fiscal 2010 primarily relates to $7.5 million of gains on trading securities during fiscal 2010. These gains were a result of market fluctuations in the value of certain strategic investments in publicly traded companies, which we classified as trading securities.
Provision for Income Taxes
Provisions for income taxes reflect tax on our foreign earnings and federal and state tax on our U.S. earnings. Our effective tax rate on income from continuing operations was 11.3% in fiscal 2012, 6.8% in fiscal 2011 and 8.8% in fiscal 2010. Excluding one-time tax events described below, 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, changes in tax regulations and the R&D tax credit. During fiscal 2012, we completed a project that led to additional R&D tax credit claims in the amount of $4.1 million which reduced our effective tax rate by 1.1% to 11.3%. Our effective tax rate in fiscal 2011 includes a $24.4 million benefit related to various items including a settlement with the IRS for our fiscal 2006 through fiscal 2008 tax audits, the expiration of the statute of limitations on various tax reserves, and a charge related to a corporate restructuring. This benefit reduced our effective tax rate from continuing operations by 5.4 percentage points to an effective tax rate of 6.8%. Our effective tax rate in
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fiscal 2010 includes a $8.5 million U.S. tax benefit related to our settlement with the IRS for our fiscal 2002 through fiscal 2004 tax audits. This benefit reduced our effective tax rate by 3.6 percentage points to an effective tax rate of 8.8%.
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 2009 and 2010. Fiscal years 2011 and 2012 are open for examination by tax authorities. 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 and any expiration of our tax holidays in Thailand are expected to have a minimal impact on our overall tax expense due to other tax holidays and increases in income in other taxing jurisdictions with lower statutory rates.
Results of Discontinued Operations
As a result of our acquisition of SST, certain of SST's product lines were marketed for sale based on management's decision regarding them not being a strategic fit into our product portfolio. The discontinued businesses include various memory product lines. For financial statement purposes, the net assets and results of operations for these discontinued businesses have been segregated from those of the continuing operations and are presented in our consolidated financial statements as discontinued operations and assets held for sale. On May 21, 2010, we completed a transaction to sell one of the businesses acquired from SST to Greenliant Systems, Ltd. The sale price in this transaction was determined by management to represent fair value, and accordingly, no gain or loss was recognized on the sale of the net assets. In this sale, we disposed of approximately $23.6 million of assets held for sale, primarily comprised of inventory, property, plant and equipment, intangible assets and non-marketable securities. Consideration in the transaction was in the form of cash and notes receivable from Greenliant Systems, Ltd. On July 8, 2010, we granted an exclusive limited license for certain Serial NOR-Flash products to Professional Computer Technology, Ltd. (PCT). The license is limited to certain industry segments and geographic regions and excludes certain multinational customers. PCT has no license to sell these products to any other industry segment or geographic region other than as set forth in our agreement with them.
The net loss from discontinued operations in fiscal 2011 was $10.2 million, or $0.05 per diluted share. Contributing to the net loss from discontinued operations in fiscal 2011 was $9.4 million of inventory write-downs related to discontinued operations. There were no assets held for sale on our consolidated balance sheet for the fiscal years ended March 31, 2012 or March 31, 2011.
Liquidity and Capital Resources
We had $1,787.6 million in cash, cash equivalents and short-term and long-term investments at March 31, 2012, an increase of $79.3 million from the March 31, 2011 balance. The increase in cash, cash equivalents and short-term and long-term investments over this time period is primarily attributable to cash generated by operating activities being offset by dividend payments of $266.2 million during fiscal 2012.
Net cash provided from operating activities was $396.5 million for fiscal 2012, $582.7 million for fiscal 2011 and $452.0 million for fiscal 2010. The decrease in cash flow from operations in fiscal 2012 compared to fiscal 2011 was primarily due to changes in our operating assets and liabilities and lower net income in fiscal 2012. The increase in cash flow from operations in fiscal 2011 compared to fiscal 2010 was primarily due to higher net income in fiscal 2011 partially offset by fiscal 2010 proceeds of $87.0 million of trading securities which were sold during that year.
Net cash used in investing activities was $256.5 million for fiscal 2012, $187.9 million for fiscal 2011 and $195.3 million in fiscal 2010. The increase in net cash used in investing activities in fiscal 2012 compared to fiscal 2011 was primarily due to a decrease in cash related to changes in our net purchases, sales and maturities of short-term and long-term investments which offset lower capital expenditures in fiscal 2012. The decrease in net cash used in investing activities in fiscal 2011 compared to fiscal 2010 was primarily due to an increase in cash related to changes in our net purchases, sales and maturities of short-term and long-term investments being partially offset by cash used to acquire SST and higher capital expenditures in fiscal 2011.
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Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions. Capital expenditures were $62.4 million in fiscal 2012, $124.5 million in fiscal 2011 and $47.6 million in fiscal 2010. The lower capital expenditure activity in fiscal 2012 compared to fiscal 2011 was primarily driven by decreased production requirements as a result of economic conditions. Capital expenditures are primarily for the expansion of production capacity and the addition of research and development equipment. We currently intend to spend approximately $70 million during the next twelve months to invest in equipment and facilities to maintain, and selectively increase, capacity to meet our currently anticipated needs.
We expect to finance our capital expenditures through our existing cash balances and cash flows from operations. We believe that the capital expenditures anticipated to be incurred over the next twelve months will provide sufficient manufacturing capacity to meet our currently anticipated needs.
Net cash used in financing activities was $208.1 million for fiscal 2012, $183.0 million for fiscal 2011 and $211.0 million for fiscal 2010. Proceeds from the exercise of stock options and employee purchases under our employee stock purchase plans were $57.5 million for fiscal 2012, $71.9 million for fiscal 2011 and $36.5 million for fiscal 2010. We paid cash dividends to our shareholders of $266.2 million in fiscal 2012, $256.8 million in fiscal 2011, and $249.6 million in fiscal 2010.
On August 12, 2011, we entered into a credit agreement with certain lenders. The credit agreement provides for a $750 million revolving credit facility, with a $100 million foreign currency sublimit, a $25 million letter of credit sublimit and a $15 million swingline loan sublimit, terminating on August 12, 2016. The credit agreement also contains an increase option permitting us, subject to certain requirements, to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $250 million in additional commitments, which may be for revolving loans or term loans. Proceeds of loans made under the credit agreement may be used for working capital and general corporate purposes. No loans were made nor letters of credit issued under the credit agreement at closing, and no amounts were outstanding and no letters of credit were issued at March 31, 2012. See Note 15 of the notes to consolidated financial statements for more information regarding the credit agreement.
We enter into derivative transactions from time to time in an attempt to reduce our exposure to currency rate fluctuations. Although none of the countries in which we conduct significant foreign operations have had a highly inflationary economy in the last five years, there is no assurance that inflation rates or fluctuations in foreign currency rates in countries where we conduct operations will not adversely affect our operating results in the future. At March 31, 2012, we had no foreign currency-forward contracts outstanding.
On December 11, 2007, we announced that our Board of Directors had authorized the repurchase of up to 10 million shares of our common stock in the open market or in privately negotiated transactions. As of March 31, 2012, we had repurchased 7.5 million shares under this 10 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 March 31, 2012, we held approximately 25.6 million shares as treasury shares.
On October 28, 2002, we announced that our Board of Directors had approved and instituted a quarterly cash dividend on our common stock. The initial quarterly dividend of $0.02 per share was paid on December 6, 2003 in the amount of $4.1 million. To date, our cumulative dividend payments have totaled approximately $1.67 billion. During fiscal 2012, we paid dividends in the amount of $1.390 per share for a total dividend payment of $266.2 million. During fiscal 2011, we paid dividends in the amount of $1.374 per share for a total dividend payment of $256.8 million. During fiscal 2010, we paid dividends in the amount of $1.359 per share for a total dividend payment of $249.6 million. On May 1, 2012, we declared a quarterly cash dividend of $0.35 per share, which will be paid on May 31, 2012, to stockholders of record on May 17, 2012 and the total amount of such dividend is expected to be approximately $67.8 million. Our Board is free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend, on our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and other factors deemed relevant by our Board. Our current intent is to provide for ongoing quarterly cash dividends depending upon market conditions and our results of operations.
On May 2, 2012, we announced that we had signed a definitive agreement to acquire SMSC for $37.00 per share in cash, which represents a total equity value of about $939 million, and a total enterprise value of about $766 million, after excluding SMSC's cash and investments on its balance sheet of approximately $173 million. The acquisition has been approved by our Board of Directors and by the SMSC Board of Directors and is expected to close in the third quarter of calendar 2012, subject
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to approval by SMSC stockholders, regulatory approvals and other customary closing conditions. We plan to fund the acquisition purchase price using a portion of our existing balance of cash, cash equivalents and short-term investments and borrowings under our credit agreement.
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
The following table summarizes our significant contractual obligations at March 31, 2012, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes amounts already recorded on our balance sheet as current liabilities at March 31, 2012 (dollars in thousands):
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | ||||||||||||||||
Operating lease obligations | $ | 30,477 | $ | 9,293 | $ | 11,815 | $ | 6,676 | $ | 2,693 | ||||||||||
Capital purchase obligations (1) | 13,265 | 13,265 | — | — | — | |||||||||||||||
Other purchase obligations and commitments (2) | 21,360 | 21,062 | 193 | 105 | — | |||||||||||||||
2.125% junior convertible debentures – principal and interest (3) | 1,778,247 | 24,438 | 48,875 | 48,875 | 1,656,059 | |||||||||||||||
Total contractual obligations (4) | $ | 1,843,349 | $ | 68,058 | $ | 60,883 | $ | 55,656 | $ | 1,658,752 | ||||||||||
(1) Capital purchase obligations represent commitments for construction or purchases of property, plant and equipment. These obligations were not recorded as liabilities on our balance sheet as of March 31, 2012, as we have not yet received the related goods or taken title to the property. | |
(2) Other purchase obligations and commitments include payments due under various types of licenses and outstanding purchase commitments with our wafer foundries of approximately $19.5 million for delivery in fiscal 2013. | |
(3) For purposes of this table we have assumed that the principal of our convertible debentures will be paid on December 31, 2037. | |
(4) Total contractual obligations do not include contractual obligations recorded on the balance sheet as current liabilities, or certain purchase obligations as discussed below. The contractual obligations also do not include amounts related to uncertain tax positions because reasonable estimates cannot be made. | |
Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For the purpose of this table, contractual obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors with short time horizons. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.
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The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
Off-Balance Sheet Arrangements
As of March 31, 2012, 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
Goodwill. In September 2011, the FASB issued an amendment to the existing guidance on the annual testing of goodwill for impairment. The amended guidance allows companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This guidance is effective for annual and interim periods beginning after December 15, 2011, with early adoption permitted. We early adopted this pronouncement, effective for our March 31, 2012 impairment assessment.
Comprehensive Income. In June 2011, the FASB issued an amendment to the existing guidance on the presentation of comprehensive income. Under the amended guidance, entities have the option to present the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Entities no longer have the option of presenting the components of other comprehensive income within the statement of changes in stockholders' equity. This amendment is effective on a retrospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2011, which for us is the first quarter in fiscal 2013. The adoption of this amendment will result in a change to the current presentation of comprehensive income, but will not have any impact on our consolidated financial statements and related disclosures.
Fair Value Measurement. In May 2011, the FASB issued amendments to the existing guidance on fair value measurement. The amendments are intended to create consistency between U.S. generally accepted accounting standards and International Financial Reporting Standards on measuring fair value and disclosing information about fair value measurements. The amendments clarify the application of existing fair value measurement requirements including (i) the application of the highest and best use valuation premise concepts, (ii) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity, and (iii) quantitative information required for fair value measurements categorized within Level 3. In addition, the amendments require additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. These amendments are effective for interim and annual periods beginning after December 15, 2011, which for us is our fiscal year 2013. These changes are required to be applied prospectively. We do not anticipate that the adoption of these amendments will have a material impact on our consolidated financial statements and related disclosures.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Our investment portfolio, consisting of fixed income securities, money market funds, cash deposits, and marketable securities that we hold on an available-for-sale basis, was $1,787.6 million as of March 31, 2012 compared to $1,708.3 million as of March 31, 2011. The available-for-sale debt securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. We have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize any material adverse impact in income or cash flows if market interest rates increase. The following table provides information about our available-for-sale securities that are sensitive to changes in interest rates. We have aggregated our available-for-sale securities for presentation purposes since they are all very similar in nature (dollars in thousands):
Financial instruments maturing during the fiscal year ended March 31, | ||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | |||||||||||||||||
Available-for-sale securities | $ | 270,017 | $ | 356,718 | $ | 484,985 | — | — | $ | 30,230 | ||||||||||||
Weighted-average yield rate | 1.93 | % | 1.51 | % | 1.11 | % | — | — | 1.43 | % | ||||||||||||
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At March 31, 2012, $10.2 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. 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. While we continue to earn interest on these investments
based on a pre-determined formula with spreads tied to particular interest rate indices, the estimated market value for a portion of these ARS no longer approximates the original purchase value.
The fair value of the failed ARS of $10.2 million has been estimated based on market information and estimates determined by management and could change significantly based on market conditions. We evaluated the impairments in the value of these ARS, determining our intent to sell these securities prior to the recovery of our amortized cost basis resulted in the securities being other-than-temporarily impaired. In fiscal 2012, we recognized a $0.3 million gain on our ARS positions as a gain on redemption at par value of one ARS position offset impairment charges recognized during the year. We recognized impairment charges of $1.6 million on our ARS in fiscal 2011. 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.
Investments in Marketable Equity Investments
Our available-for-sale marketable equity investments at March 31, 2012 consist of shares of public company 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 marketable securities and accounted for under the provisions of ASC 320 Investments -- Debt and Equity Securities. The market value of these investments was approximately $5.3 million at March 31, 2012 compared to our cost basis of approximately $5.9 million. The value of our investments in these securities would be materially impacted if there was a significant change in the market price of the shares. A hypothetical 30% favorable or unfavorable change in the stock prices compared to the stock prices at March 31, 2012 would have affected the value of our investments in marketable equity securities by approximately $1.6 million. See Note 5 to our consolidated financial statements for additional information about our investments in these marketable securities.
Investments in Non-Marketable Equity Investments
We have non-marketable equity investments in several companies, including those that we acquired as a result of our acquisition of SST. These companies range from early-stage companies to more mature companies with established revenue and business models. These companies are dependent upon successful execution of their product and technology development objectives, acceptance of their products and technology in the markets they serve, and achievement of financial and operational efficiencies. If any of these private companies are unsuccessful in these and other related initiatives, or if there are factors beyond their control in the markets which they serve, their performance could be affected materially and adversely, resulting in a loss of some or all of their value, which would in turn require us to determine if an other-than-temporary impairment to fair value exists in such private equity or debt investments. If an other-than-temporary impairment of fair value exists, we will need to write down the investment to its fair value and recognize the related impairment charge to our income statement. Our non-marketable equity investments, excluding those accounted for under the equity method, had a carrying amount of $5.6 million as of March 31, 2012. As of March 31, 2012, the carrying amount of our non-marketable equity method investments was $2.1 million.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed in the index appearing under Item 15(a)(1) hereof are filed as part of this Form 10-K. See also Index to Financial Statements below.
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we evaluated under the supervision
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of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act. 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 Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on our financial statements.
Management assessed our internal control over financial reporting as of March 31, 2012, the end of our fiscal year. Management based its assessment on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our finance organization.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We reviewed the results of management's assessment with the Audit Committee of our Board of Directors.
Ernst & Young LLP, an independent registered public accounting firm, who audited our consolidated financial statements included in this Form 10-K has issued an attestation report on our internal control over financial reporting, which is included in Part II, Item 9A.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2012, 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.
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Microchip Technology Incorporated and subsidiaries
We have audited Microchip Technology Incorporated and subsidiaries' internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Microchip Technology Incorporated and subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Microchip Technology Incorporated and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the March 31, 2012 consolidated financial statements of Microchip Technology Incorporated and subsidiaries and our report dated May 30, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 30, 2012
46
Item 9B. OTHER INFORMATION
In fiscal 2012, each of J. Eric Bjornholt, our Chief Financial Officer, Mitch Little, our Vice President, Worldwide Sales and Applications, Steve Drehobl, our Vice President, Security, Microcontroller and Technology Division, and Rich Simoncic, our Vice President, Analog and Interface Products Division, entered into trading plans as contemplated by Rule 10b-5-1 under the Exchange Act and periodic sales of our common stock are expected to occur under such plans.
The foregoing disclosure is being made on a voluntary basis and not pursuant to any specific requirement under Form 10-K, Form 8-K or otherwise.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information on the members of our Board of Directors is incorporated herein by reference to our proxy statement for our 2012 annual meeting of stockholders under the captions "The Board of Directors," and "Proposal One – Election of Directors."
Information on the composition of our audit committee and the members of our audit committee, including information on our audit committee financial experts, is incorporated by reference to our proxy statement for our 2012 annual meeting of stockholders under the caption "The Board of Directors – Committees of the Board of Directors – Audit Committee."
Information on our executive officers is provided in Item 1, Part I of this Form 10-K under the caption "Executive Officers of the Registrant" at page 10, above.
Information with respect to compliance with Section 16(a) of the Exchange Act, is incorporated herein by reference to our proxy statement for our 2012 annual meeting of stockholders under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."
Information with respect to our code of ethics that applies to our directors, executive officers (including our principal executive officer and our principal financial and accounting officer) and employees is incorporated by reference to our proxy statement for our 2012 annual meeting of stockholders under the caption "Code of Ethics." A copy of our Code of Ethics is available on our website at the Investor Relations section under Mission Statement/Corporate Governance on www.microchip.com.
Information regarding material changes, if any, to procedures by which security holders may recommend nominees to our Board of Directors is incorporated by reference to our proxy statement for the 2012 annual meeting of stockholders under the caption "Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the 2012 Annual Meeting of Stockholders; Discretionary Authority to Vote on Stockholder Proposals."
Item 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to the information under the caption "Executive Compensation" in our proxy statement for our 2012 annual meeting of stockholders.
Information with respect to director compensation is incorporated herein by reference to the information under the caption "The Board of Directors – Director Compensation" in our proxy statement for our 2012 annual meeting of stockholders.
Information with respect to compensation committee interlocks and insider participation in compensation decisions is incorporated herein by reference to the information under the caption "The Board of Directors – Compensation Committee Interlocks and Insider Participation" in our proxy statement for our 2012 annual meeting of stockholders.
Our Board compensation committee report on executive compensation is incorporated herein by reference to the information under the caption "Executive Compensation – Compensation Committee Report on Executive Compensation" in our proxy statement for our 2012 annual meeting of stockholders.
47
Item 12. | SECURITY OWNERSHIP OF CERTIAN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information with respect to securities authorized for issuance under our equity compensation plans is incorporated herein by reference to the information under the caption "Executive Compensation – Equity Compensation Plan Information" in our proxy statement for our 2012 annual meeting of stockholders.
Information with respect to security ownership of certain beneficial owners, members of our Board of Directors and management is incorporated herein by reference to the information under the caption "Security Ownership of Principal Stockholders, Directors and Executive Officers" in our proxy statement for our 2012 annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item pursuant to Item 404 of Regulation S-K is incorporated by reference to the information under the caption "Certain Transactions" contained in our proxy statement for our 2012 annual meeting of stockholders.
The information required by this Item pursuant to Item 407(a) of Regulation S-K regarding the independence of our directors is incorporated by reference to the information under the caption "Meetings of the Board of Directors" contained in our proxy statement for our 2012 annual meeting of stockholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item related to principal accountant fees and services as well as related pre-approval policies is incorporated by reference to the information under the caption "Independent Registered Public Accounting Firm" contained in our proxy statement for our 2012 annual meeting of stockholders.
48
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K:
Page No. | ||
(1) | Financial Statements: | |
Report of Independent Registered Public Accounting Firm | F-1 | |
Consolidated Balance Sheets as of March 31, 2012 and 2011 | F-2 | |
Consolidated Statements of Income for each of the three years in the period ended March 31, 2012 | F-3 | |
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2012 | F-4 | |
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 2012 | F-5 | |
Notes to Consolidated Financial Statements | F-6 | |
(2) | Financial Statement Schedules | None |
(3) | The Exhibits filed with this Form 10-K or incorporated herein by reference are set forth in the Exhibit Index beginning on page 51 hereof, which Exhibit Index is incorporated herein by this reference. | |
(b) See Item 15(a)(3) above.
(c) See "Index to Financial Statements" included under Item 8 to this Form 10-K.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED | |
(Registrant) | |
Date: May 30, 2012 | By: /s/ Steve Sanghi |
Steve Sanghi | |
President and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature | Title | Date | |||
/s/ Steve Sanghi | Director, President and Chief Executive Officer | May 30, 2012 | |||
Steve Sanghi | |||||
/s/ Albert J. Hugo-Martinez | Director | May 30, 2012 | |||
Albert J. Hugo-Martinez | |||||
/s/ L.B. Day | Director | May 30, 2012 | |||
L.B. Day | |||||
/s/ Matthew W. Chapman | Director | May 30, 2012 | |||
Matthew W. Chapman | |||||
/s/ Wade F. Meyercord | Director | May 30, 2012 | |||
Wade F. Meyercord | |||||
/s/ J. Eric Bjornholt | Vice President and Chief Financial Officer | May 30, 2012 | |||
J. Eric Bjornholt | (Principal Financial and Accounting Officer) | ||||
50
EXHIBITS
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed Herewith | ||||||
2.1 | Purchase and Sale Agreement, dated as of July 18, 2002 between Registrant and Fujitsu Microelectronics, Inc. | 8-K | 000-21184 | 2.1 | 7/18/2002 | |||||||
2.2 | Agreement and Plan of Merger dated as of May 1, 2012 by and among Microchip Technology Incorporated, Microchip Technology Management Co. and Standard Microsystems Corporation, including Form of Voting Agreement | X | ||||||||||
2.3 | Agreement and Plan of Merger dated as of February 2, 2010 by and among Microchip Technology Incorporated, Sun Acquisition Corporation and Silicon Storage Technology, Inc. | 10-Q | 000-21184 | 2.1 | 2/9/2010 | |||||||
2.4 | Amendment No. 1 to Agreement and Plan of Merger by and among Microchip Technology Incorporated, Sun Acquisition Corporation and Silicon Storage Technology, Inc. | 8-K | 000-21184 | 2.1 | 2/23/2009 | |||||||
2.5 | Amendment No. 2 to Agreement and Plan of Merger by and among Microchip Technology Incorporated, Sun Acquisition Corporation and Silicon Storage Technology, Inc. | 8-K | 000-21184 | 2.1 | 3/8/2010 | |||||||
3.1 | Restated Certificate of Incorporation of Registrant | 10-Q | 000-21184 | 3.1 | 11/12/2002 | |||||||
3.2 | Amended and Restated By-Laws of Registrant, as amended through January29, 2007 | 10-Q | 000-21184 | 3.1 | 2/6/2007 | |||||||
4.1 | Indenture, dated as of December 7, 2007, by and between Wells Fargo Bank, National Association, as Trustee, and Microchip Technology Incorporated | 8-K | 000-21184 | 4.1 | 12/7/2007 | |||||||
4.2 | Registration Rights Agreement, dated as of December 7, 2007, by and between J.P. Morgan Securities Inc. and Microchip Technology Incorporated | 8-K | 000-21184 | 4.2 | 12/7/2007 | |||||||
10.1 | Credit Agreement, dated August 12, 2011, among Microchip Technology Incorporated, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent | 8-K | 000-21184 | 10.1 | 8/18/2011 | |||||||
10.2 | Amendment No. 1 to Credit Agreement dated as of February 6, 2012 | X | ||||||||||
10.3 | Amendment No. 2 to Credit Agreement dated as of April 10, 2012 | X | ||||||||||
51
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed Herewith | ||||||
10.4 | Form of Indemnification Agreement between Registrant and its directors and certain of its officers | S-1 | 33-57960 | 10.1 | 2/5/1993 | |||||||
10.5 | *2004 Equity Incentive Plan as amended and restated by the Board on May 10, 2011 | 10-Q | 000-21184 | 10.1 | 8/9/2011 | |||||||
10.6 | *Form of Notice of Grant for 2004 Equity Incentive Plan (including Exhibit A Stock Option Agreement) | S-8 | 333-119939 | 4.5 | 10/25/2004 | |||||||
10.7 | Form of Notice of Grant (Foreign) for 2004 Equity Incentive Plan (including Exhibit A Stock Option Agreement (Foreign)) | 10-K | 000-21184 | 10.4 | 5/23/2005 | |||||||
10.8 | *Form of Notice of Grant of Restricted Stock Units for 2004 Equity Incentive Plan (including Exhibit A Restricted Stock Units Agreement) | 10-K | 000-21184 | 10.6 | 5/31/2006 | |||||||
10.9 | *Restricted Stock Units Agreement (Domestic) for 2004 Equity Incentive Plan | 10-Q | 000-21184 | 10.3 | 11/7/2007 | |||||||
10.10 | Restricted Stock Units Agreement (Foreign) for 2004 Equity Incentive Plan | 10-Q | 000-21184 | 10.4 | 11/7/2008 | |||||||
10.11 | *Form of Global RSU Agreement for 2004 Equity Incentive Plan (including Notice of Grant of Restricted Stock Units) | 8-K | 000-21184 | 10.1 | 9/27/2010 | |||||||
10.12 | *1993 Stock Option Plan, as Amended through August 16, 2002 | 10-Q | 000-21184 | 10.1 | 11/12/2002 | |||||||
10.13 | *Form of Notice of Grant For 1993 Stock Option Plan, with Exhibit A thereto, Form of Stock Option Agreement; and Exhibit B thereto, Form of Stock Purchase Agreement | S-8 | 333-872 | 10.6 | 1/23/1996 | |||||||
10.14 | *Microchip Technology Incorporated 2001 Employee Stock Purchase Plan as amended through March 1, 2012 | 10-Q | 000-21184 | 10.1 | 2/6/2012 | |||||||
10.15 | *1997 Nonstatutory Stock Option Plan, as Amended Through March 3, 2003 | 10-K | 000-21184 | 10.13 | 6/5/2003 | |||||||
10.16 | *Form of Notice of Grant For 1997 Nonstatutory Stock Option Plan, with Exhibit A thereto, Form of Stock Option Agreement | 10-K | 000-21184 | 10.17 | 5/27/1998 | |||||||
10.17 | Microchip Technology Incorporated International Employee Stock Purchase Plan as amended through August 19, 2011, including Purchase Agreement, Enrollment Form and Change Form | S-8 | 333-177889 | 4.2 | 11/10/2011 | |||||||
52
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed Herewith | ||||||
10.18 | *Executive Management Incentive Compensation Plan as amended on August 19, 2011 | 8-K | 000-21184 | 10.1 | 8/24/2011 | |||||||
10.19 | *Discretionary Executive Management Incentive Compensation Plan | 10-Q | 000-21184 | 10.5 | 2/6/2007 | |||||||
10.20 | *Management Incentive Compensation Plan amended by Board of Directors May 10, 2011 | 10-K | 000-21184 | 10.19 | 5/31/2011 | |||||||
10.21 | PowerSmart, Inc. 1998 Stock Incentive Plan, Including Forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement | S-8 | 333-96791 | 4.1 | 7/19/2002 | |||||||
10.22 | *Microchip Technology Incorporated Supplemental Retirement Plan | S-8 | 333-101696 | 4.1.1 | 4/1/2009 | |||||||
10.23 | *Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan dated January 1, 1997 | S-8 | 333-101696 | 4.1.3 | 4/1/2003 | |||||||
10.24 | *Amendment dated December 9, 1999 to the Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan | S-8 | 333-101696 | 4.1.4 | 4/1/2004 | |||||||
10.25 | *February 3, 2003 Amendment to the Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan | 10-K | 000-21184 | 10.28 | 6/5/2003 | |||||||
10.26 | *Amendments to Supplemental Retirement Plan | 10-Q | 000-21184 | 10.1 | 2/9/2006 | |||||||
10.27 | *Change of Control Severance Agreement | 8-K | 000-21184 | 10.1 | 12/18/2008 | |||||||
10.28 | *Change of Control Severance Agreement | 8-K | 000-21184 | 10.2 | 12/18/2008 | |||||||
10.29 | Development Agreement dated as of August 29, 1997 by and between Registrant and the City of Chandler, Arizona | 10-Q | 000-21184 | 10.1 | 2/13/1998 | |||||||
10.30 | Addendum to Development Agreement by and between Registrant and the City of Tempe, Arizona, dated May 11, 2000 | 10-K | 000-21184 | 10.14 | 5/15/2001 | |||||||
10.31 | Development Agreement dated as of July 17, 1997 by and between Registrant and the City of Tempe, Arizona | 10-Q | 000-21184 | 10.2 | 2/13/1998 | |||||||
10.32 | Amended Strategic Investment Program Contract dated as of June 8, 2009 between, Multnomah County, Oregon, City of Gresham, Oregon and Microchip Technology Incorporated | 8-K | 000-21184 | 10.1 | 6/11/2009 | |||||||
53
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed Herewith | ||||||
21.1 | Subsidiaries of Registrant | X | ||||||||||
23.1 | Consent of Independent Registered Public Accounting Firm | X | ||||||||||
24.1 | Power of Attorney re: Microchip Technology Incorporated, the Registrant | 10-K | 000-21184 | 24.1 | 5/29/2009 | |||||||
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) | X | ||||||||||
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) | X | ||||||||||
32 | Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | ||||||||||
*Compensation plans or arrangements in which directors or executive officers are eligible to participate. | ||||||||||||
54
Annual Report on Form 10-K
Item 8, Item 15(a)(1) and (2), (b) and (c)
_________________________________
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
_________________________________
YEAR ENDED MARCH 31, 2012
MICROCHIP TECHNOLOGY INCORPORATED
AND SUBSIDIARIES
CHANDLER, ARIZONA
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page Number | |
Report of Independent Registered Public Accounting Firm | F-1 |
Consolidated Balance Sheets as of March 31, 2012 and 2011 | F-2 |
Consolidated Statements of Income for each of the three years in the period ended March 31, 2012 | F-3 |
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2012 | F-4 |
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 2012 | F-5 |
Notes to Consolidated Financial Statements | F-6 |
i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Microchip Technology Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheets of Microchip Technology Incorporated and subsidiaries as of March 31, 2012 and 2011, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Microchip Technology Incorporated and subsidiaries at March 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Microchip Technology Incorporated and subsidiaries' internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 30, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 30, 2012
F-1
Item1. | Financial Statements |
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS | |||||||
March 31, | |||||||
2012 | 2011 | ||||||
Cash and cash equivalents | $ | 635,755 | $ | 703,924 | |||
Short-term investments | 823,254 | 539,572 | |||||
Accounts receivable, net | 170,201 | 181,202 | |||||
Inventories | 217,278 | 180,800 | |||||
Prepaid expenses | 25,658 | 22,234 | |||||
Deferred tax assets | 91,191 | 88,822 | |||||
Other current assets | 52,524 | 58,429 | |||||
Total current assets | 2,015,861 | 1,774,983 | |||||
Property, plant and equipment, net | 516,611 | 540,513 | |||||
Long-term investments | 328,586 | 464,838 | |||||
Goodwill | 93,513 | 76,018 | |||||
Intangible assets, net | 90,436 | 77,929 | |||||
Other assets | 38,769 | 33,777 | |||||
Total assets | $ | 3,083,776 | $ | 2,968,058 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Accounts payable | $ | 50,287 | $ | 68,433 | |||
Accrued liabilities | 88,877 | 131,839 | |||||
Deferred income on shipments to distributors | 108,709 | 140,044 | |||||
Total current liabilities | 247,873 | 340,316 | |||||
Junior convertible debentures | 355,050 | 347,334 | |||||
Long-term income tax payable | 70,490 | 58,125 | |||||
Deferred tax liability | 411,368 | 399,527 | |||||
Other long-term liabilities | 8,322 | 10,318 | |||||
Stockholders' equity: | |||||||
Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued or outstanding | — | — | |||||
Common stock, $0.001 par value; authorized 450,000,000 shares; 218,789,994 shares issued and 193,150,532 shares outstanding at March 31, 2012; 218,789,994 shares issued and 189,541,707 shares outstanding at March 31, 2011 | 193 | 190 | |||||
Additional paid-in capital | 1,268,907 | 1,268,128 | |||||
Common stock held in treasury: 25,639,462 shares at March 31, 2012; 29,248,287 shares at March 31, 2011 | (780,893 | ) | (888,075 | ) | |||
Accumulated other comprehensive income | 3,101 | 3,357 | |||||
Retained earnings | 1,499,365 | 1,428,838 | |||||
Total stockholders' equity | 1,990,673 | 1,812,438 | |||||
Total liabilities and stockholders' equity | $ | 3,083,776 | $ | 2,968,058 | |||
See accompanying notes to consolidated financial statements
F-2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year ended March 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Net sales | $ | 1,383,176 | $ | 1,487,205 | $ | 947,729 | |||||
Cost of sales (1) | 590,782 | 612,769 | 413,487 | ||||||||
Gross profit | 792,394 | 874,436 | 534,242 | ||||||||
Operating expenses: | |||||||||||
Research and development (1) | 182,650 | 170,607 | 120,823 | ||||||||
Selling, general and administrative (1) | 212,391 | 227,781 | 167,222 | ||||||||
Special charges, net | 837 | 1,865 | 1,238 | ||||||||
395,878 | 400,253 | 289,283 | |||||||||
Operating income | 396,516 | 474,183 | 244,959 | ||||||||
(Losses) gains on equity method investments | (195 | ) | 157 | — | |||||||
Other income (expense): | |||||||||||
Interest income | 17,992 | 16,002 | 15,325 | ||||||||
Interest expense | (34,266 | ) | (31,521 | ) | (31,150 | ) | |||||
Other (expense) income, net | (352 | ) | 1,877 | 8,679 | |||||||
Income from continuing operations before income taxes | 379,695 | 460,698 | 237,813 | ||||||||
Income tax provision | 42,990 | 31,531 | 20,808 | ||||||||
Net income from continuing operations | 336,705 | 429,167 | 217,005 | ||||||||
Discontinued operations: | |||||||||||
Loss from discontinued operations before income taxes | — | (11,126 | ) | — | |||||||
Income tax benefit | — | (909 | ) | — | |||||||
Net loss from discontinued operations | — | (10,217 | ) | — | |||||||
Net income | $ | 336,705 | $ | 418,950 | $ | 217,005 | |||||
Basic net income per common share – continuing operations | $ | 1.76 | $ | 2.29 | $ | 1.18 | |||||
Basic net loss per common share – discontinued operations | — | (0.05 | ) | — | |||||||
Basic net income per common share | $ | 1.76 | $ | 2.24 | $ | 1.18 | |||||
Diluted net income per common share – continuing operations | $ | 1.65 | $ | 2.20 | $ | 1.16 | |||||
Diluted net loss per common share – discontinued operations | — | (0.05 | ) | — | |||||||
Diluted net income per common share | $ | 1.65 | $ | 2.15 | $ | 1.16 | |||||
Dividends declared per common share | $ | 1.390 | $ | 1.374 | $ | 1.359 | |||||
Basic common shares outstanding | 191,283 | 187,066 | 183,642 | ||||||||
Diluted common shares outstanding | 203,519 | 194,715 | 187,339 | ||||||||
(1) Includes share-based compensation expense as follows: | |||||||||||
Cost of sales | $ | 5,648 | $ | 6,825 | $ | 7,054 | |||||
Research and development | 14,719 | 12,874 | 12,194 | ||||||||
Selling, general and administrative | 17,922 | 17,113 | 17,530 | ||||||||
See accompanying notes to consolidated financial statements
F-3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended March 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 336,705 | $ | 418,950 | $ | 217,005 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 99,424 | 106,612 | 90,057 | ||||||||
Deferred income taxes | 21,954 | 24,003 | 22,330 | ||||||||
Share-based compensation expense related to equity incentive plans | 38,289 | 36,812 | 36,778 | ||||||||
Excess tax benefit from share-based compensation | (576 | ) | (1,854 | ) | (2,094 | ) | |||||
Convertible debt derivatives - revaluation and amortization | 204 | (185 | ) | 230 | |||||||
Amortization of convertible debenture issuance costs | 219 | 219 | 215 | ||||||||
Amortization of debt discount on convertible debentures | 7,512 | 6,847 | 6,258 | ||||||||
Losses (gains) on equity method investments | 195 | (157 | ) | — | |||||||
Gain on sale of assets | (411 | ) | (89 | ) | (100 | ) | |||||
Unrealized impairment loss on available-for-sale investments | 2,158 | 4,659 | 4,750 | ||||||||
Special (income) charges | (1,000 | ) | — | 1,238 | |||||||
Sales of trading securities, net | — | — | 86,970 | ||||||||
Gain on trading securities | — | — | (7,425 | ) | |||||||
Changes in operating assets and liabilities: | |||||||||||
Decrease (increase) in accounts receivable | 11,845 | 6,341 | (49,078 | ) | |||||||
(Increase) decrease in inventories | (35,240 | ) | (22,068 | ) | 15,239 | ||||||
(Decrease) increase in deferred income on shipments to distributors | (31,335 | ) | 38,781 | 15,010 | |||||||
(Decrease) increase in accounts payable and accrued liabilities | (61,455 | ) | (638 | ) | 29,583 | ||||||
Change in other assets and liabilities | 7,970 | (35,572 | ) | (14,919 | ) | ||||||
Net cash provided by operating activities | 396,458 | 582,661 | 452,047 | ||||||||
Cash flows from investing activities: | |||||||||||
Purchases of available-for-sale investments | (1,133,625 | ) | (1,008,056 | ) | (1,576,044 | ) | |||||
Sales and maturities of available-for-sale investments | 983,500 | 1,055,286 | 1,502,127 | ||||||||
Purchase of Silicon Storage Technology, Inc., net of cash received | — | (112,707 | ) | — | |||||||
Investment in Silicon Storage Technology, Inc. | — | — | (58,402 | ) | |||||||
Investments in other assets | (44,398 | ) | (29,587 | ) | (15,439 | ) | |||||
Proceeds from sale of assets | 411 | 31,668 | 100 | ||||||||
Capital expenditures | (62,370 | ) | (124,454 | ) | (47,604 | ) | |||||
Net cash used in investing activities | (256,482 | ) | (187,850 | ) | (195,262 | ) | |||||
Cash flows from financing activities: | |||||||||||
Payment of cash dividend | (266,178 | ) | (256,811 | ) | (249,556 | ) | |||||
Proceeds from sale of common stock | 57,457 | 71,940 | 36,478 | ||||||||
Excess tax benefit from share-based compensation | 576 | 1,854 | 2,094 | ||||||||
Net cash used in financing activities | (208,145 | ) | (183,017 | ) | (210,984 | ) | |||||
Net (decrease) increase in cash and cash equivalents | (68,169 | ) | 211,794 | 45,801 | |||||||
Cash and cash equivalents at beginning of period | 703,924 | 492,130 | 446,329 | ||||||||
Cash and cash equivalents at end of period | $ | 635,755 | $ | 703,924 | $ | 492,130 | |||||
See accompanying notes to consolidated financial statements
F-4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES | ||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Common Stock and Additional Paid-in-Capital | Common Stock Held in Treasury | Accumulated Other Comprehensive Income | Retained Earnings | Net Stockholders' Equity | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||
Balance at March 31, 2009 | 218,790 | $ | 1,282,119 | 36,021 | $ | (1,095,370 | ) | $ | 4,312 | $ | 1,299,250 | $ | 1,490,311 | |||||||||||||
Components of other comprehensive income: | ||||||||||||||||||||||||||
Net income | — | — | — | — | — | 217,005 | 217,005 | |||||||||||||||||||
Net unrealized losses on available-for-sale securities, net of $1,778 of tax | — | — | — | — | (1,280 | ) | — | (1,280 | ) | |||||||||||||||||
Total comprehensive income | 215,725 | |||||||||||||||||||||||||
Issuances from equity incentive plans | 1,955 | 27,108 | — | — | — | — | 27,108 | |||||||||||||||||||
Employee stock purchase plan | 605 | 9,370 | — | — | — | — | 9,370 | |||||||||||||||||||
Treasury stock used for new issuances | (2,560 | ) | (82,012 | ) | (2,560 | ) | 82,012 | — | — | — | ||||||||||||||||
Tax benefit from equity incentive plans | — | 3,709 | — | — | — | — | 3,709 | |||||||||||||||||||
Share-based compensation | — | 36,713 | — | — | — | — | 36,713 | |||||||||||||||||||
Cash dividend | — | — | — | — | — | (249,556 | ) | (249,556 | ) | |||||||||||||||||
Balance at March 31, 2010 | 218,790 | 1,277,007 | 33,461 | (1,013,358 | ) | 3,032 | 1,266,699 | 1,533,380 | ||||||||||||||||||
Components of other comprehensive income: | ||||||||||||||||||||||||||
Net income | — | — | — | — | — | 418,950 | 418,950 | |||||||||||||||||||
Net unrealized gains on available-for-sale securities, net of $493 of tax | — | — | — | — | 325 | — | 325 | |||||||||||||||||||
Total comprehensive income | 419,275 | |||||||||||||||||||||||||
Issuances from equity incentive plans | 3,591 | 57,396 | — | — | — | — | 57,396 | |||||||||||||||||||
Employee stock purchase plan | 622 | 14,544 | — | — | — | — | 14,544 | |||||||||||||||||||
Treasury stock used for new issuances | (4,213 | ) | (125,283 | ) | (4,213 | ) | 125,283 | — | — | — | ||||||||||||||||
Tax benefit from equity incentive plans | — | 7,523 | — | — | — | — | 7,523 | |||||||||||||||||||
Share-based compensation | — | 37,131 | — | — | — | — | 37,131 | |||||||||||||||||||
Cash dividend | — | — | — | — | — | (256,811 | ) | (256,811 | ) | |||||||||||||||||
Balance at March 31, 2011 | 218,790 | 1,268,318 | 29,248 | (888,075 | ) | 3,357 | 1,428,838 | 1,812,438 | ||||||||||||||||||
Components of other comprehensive income: | ||||||||||||||||||||||||||
Net income | — | — | — | — | — | 336,705 | 336,705 | |||||||||||||||||||
Net unrealized losses on available-for-sale securities, net of $281 of tax | — | — | — | — | (256 | ) | — | (256 | ) | |||||||||||||||||
Total comprehensive income | 336,449 | |||||||||||||||||||||||||
Issuances from equity incentive plans | 3,000 | 42,596 | — | — | — | — | 42,596 | |||||||||||||||||||
Employee stock purchase plan | 609 | 14,861 | — | — | — | — | 14,861 | |||||||||||||||||||
Treasury stock used for new issuances | (3,609 | ) | (107,182 | ) | (3,609 | ) | 107,182 | — | — | — | ||||||||||||||||
Tax benefit from equity incentive plans | — | 10,980 | — | — | — | — | 10,980 | |||||||||||||||||||
Share-based compensation | — | 39,527 | — | — | — | — | 39,527 | |||||||||||||||||||
Cash dividend | — | — | — | — | — | (266,178 | ) | (266,178 | ) | |||||||||||||||||
Balance at March 31, 2012 | 218,790 | $ | 1,269,100 | 25,639 | $ | (780,893 | ) | $ | 3,101 | $ | 1,499,365 | $ | 1,990,673 | |||||||||||||
See accompanying notes to consolidated financial statements | ||||||||||||||||||||||||||
F-5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Microchip develops, manufactures and sells specialized semiconductor products used by its customers for a wide variety of embedded control applications. Microchip's product portfolio comprises 8-bit, 16-bit and 32-bit PIC® microcontrollers and 16-bit dsPIC® digital signal controllers, which feature on-board Flash (reprogrammable) memory technology. In addition, Microchip offers a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, RF, safety and security and interface devices, as well as serial EEPROMs, Serial Flash memories and Parallel Flash memories. Microchip also licenses Flash-IP solutions that are incorporated in a broad range of products.
Principles of Consolidation
The consolidated financial statements include the accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries (Microchip or the Company). The Company does not have any subsidiaries in which it does not own 100% of the outstanding stock. All of the Company's subsidiaries are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title as well as fixed or determinable pricing and collectability is reasonably assured. The Company recognizes revenue from product sales to original equipment manufacturers (OEMs) upon shipment and records reserves for estimated customer returns.
For license and other arrangements for SuperFlash® technology that the Company is continuing to enhance and refine or under which it is obligated to provide unspecified enhancements, non-royalty revenue is recognized over the lesser of (1) the estimated period that the Company has historically enhanced and developed refinements to the specific technology, typically one to three years (the "upgrade period"), and (2) the remaining portion of the upgrade period after the date of delivery of all specified technology and documentation, provided that the fee is fixed or determinable and collection of the fee is reasonably assured. Royalties received during the upgrade period are recognized as revenue based on an amortization calculation of the elapsed portion of the upgrade period compared to the entire estimated upgrade period. Royalties received after the upgrade period has elapsed are recognized when reported to the Company, which generally coincides with the receipt of payment. For licenses or other technology arrangements without an upgrade period, non-royalty revenue from license is recognized upon delivery of the technology if the fee is fixed or determinable and collection of the fee is reasonably assured. Royalties are recognized when reported to the Company, which generally coincides with the receipt of payment.
Distributors worldwide generally have broad price protection and product return rights, so the Company defers revenue recognition until the distributor sells the product to their customer. Revenue is recognized when the distributor sells the product to their end customer, at which time the sales price becomes fixed or determinable. Revenue is not recognized upon the Company's shipment to the distributors since, due to discounts from list price as well as price protection rights, the sales price is not substantially fixed or determinable at that time. At the time of shipment to these distributors, the Company records a trade receivable for the selling price as there is a legally enforceable right to payment, relieves inventory for the carrying value of goods shipped since legal title has passed to the distributor, and records the gross margin in deferred income on shipments to distributors on the consolidated balance sheets.
Deferred income on shipments to distributors effectively represents the gross margin on the sale to the distributor; however, the amount of gross margin recognized by the Company in future periods will be less than the deferred margin as a result of credits granted to distributors on specifically identified products and customers to allow the distributors to earn a competitive gross margin on the sale of the Company's products to their end customers and price protection concessions related to market pricing conditions.
The Company sells the majority of the items in its product catalog to its distributors worldwide at a uniform list price. However, distributors resell the Company's products to end customers at a very broad range of individually negotiated price points. The majority of the Company's distributors' resales require a reduction from the original list price paid. Often, under these circumstances, the Company remits back to the distributor a portion of their original purchase price after the resale
F-6
transaction is completed in the form of a credit against the distributors' outstanding accounts receivable balance. The credits are on a per unit basis and are not given to the distributor until they provide information regarding the sale to their end customer. The price reductions vary significantly based on the customer, product, quantity ordered, geographic location and other factors and discounts to a price less than the Company's cost have historically been rare. The effect of granting these credits establishes the net selling price from the Company to its distributors for the product and results in the net revenue recognized by the Company when the product is sold by the distributors to their end customers. Thus, a portion of the "deferred income on shipments to distributors" balance represents the amount of distributors' original purchase price that will be credited back to the distributor in the future. The wide range and variability of negotiated price concessions granted to distributors does not allow the Company to accurately estimate the portion of the balance in the deferred income on shipments to distributors account that will be credited back to the distributors. Therefore, the Company does not reduce deferred income on shipments to distributors or accounts receivable by anticipated future price concessions; rather, price concessions are recorded against deferred income on shipments to distributors when incurred, which is generally at the time the distributor sells the product.
At March 31, 2012, the Company had approximately $159.1 million of deferred revenue and $50.4 million in deferred cost of sales recognized as $108.7 million of deferred income on shipments to distributors. At March 31, 2011, the Company had approximately $208.1 million of deferred revenue and $68.1 million of deferred cost of sales recognized as $140.0 million of deferred income on shipments to distributors. The deferred income on shipments to distributors that will ultimately be recognized in the Company's income statement will be lower than the amount reflected on the balance sheet due to price credits to be granted to the distributors when the product is sold to their customers. These price credits historically have resulted in the deferred income approximating the overall gross margins that the Company recognizes in the distribution channel of its business.
The Company reduces product pricing through price protection based on market conditions, competitive considerations and other factors. Price protection is granted to distributors on the inventory they have on hand at the date the price protection is offered. When the Company reduces the price of its products, it allows the distributor to claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it has on hand as of the date of the price reduction. There is no immediate revenue impact from the price protection, as it is reflected as a reduction of the deferred income on shipments to distributors' balance.
Products returned by distributors and subsequently scrapped have historically been immaterial to the Company's consolidated results of operations. The Company routinely evaluates the risk of impairment of the deferred cost of sales component of the deferred income on shipments to distributors account. Because of the historically immaterial amounts of inventory that have been scrapped, and historically rare instances where discounts given to a distributor result in a price less than the Company's cost, the Company believes the deferred costs have a low risk of material impairment.
Shipping charges billed to customers are included in net sales, and the related shipping costs are included in cost of sales.
Product Warranty
The Company generally sells its products with a limited warranty related to product quality and a limited indemnification of customers against intellectual property infringement claims related to the Company's products. Due to comprehensive product testing, the short time between product shipment and the detection and correction of product failures, and a low historical rate of payments on indemnification claims, the accrual based on historical activity and the related expense were immaterial as of and for the fiscal years ended March 31, 2012, 2011 and 2010.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were immaterial for the fiscal years ended March 31, 2012, 2011 and 2010.
Research and Development
Research and development costs are expensed as incurred. Assets purchased to support the Company's ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their estimated useful lives. Research and development expenses include expenditures for labor, share-based payments, depreciation, masks, prototype wafers, and expenses for development of process technologies, new packages, and software to support new products and design environments.
F-7
Foreign Currency Translation and Forward Contracts
The Company's foreign subsidiaries are considered to be extensions of the U.S. Company and any translation gains and losses related to these subsidiaries are included in other income (expense) in the consolidated statements of income. As the U.S. dollar is utilized as the functional currency, gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the subsidiaries' functional currency) are also included in income. Gains and losses associated with currency rate changes on forward contracts are recorded currently in income. These gains and losses have been immaterial to the Company's financial statements.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company's actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, it must establish a valuation allowance. The Company has provided valuation allowances for certain of its deferred tax assets where it is more likely than not that some portion, or all of such assets, will not be realized.
Cash and Cash Equivalents
All highly liquid investments, including marketable securities purchased with a remaining maturity of three months or less when acquired are considered to be cash equivalents.
Investments – Available-for-Sale and Trading Securities
The Company classifies its investments in debt and marketable equity securities as available-for-sale or trading securities based upon management's intent with regard to the investments and the nature of the underlying securities.
The Company's available-for-sale investments consist of government agency bonds, municipal bonds, auction rate securities (ARS), corporate bonds and marketable equity securities. The Company's investments are carried at fair value with unrealized gains and losses reported in stockholders' equity. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. Dividend and interest income are recognized when earned. The cost of securities sold is calculated using the specific identification method.
The Company includes within short-term investments its trading securities, as well as its income yielding available-for-sale securities that can be readily converted to cash and includes within long-term investments those income yielding available-for-sale securities with maturities of over one year that have unrealized losses attributable to them or those that cannot be readily liquidated. Except as discussed in Note 5, the Company intends and has the ability to hold its long-term investments with temporary impairments until such time as these assets are no longer impaired. 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 the Company's investment portfolio of ARS, it utilizes valuation models including those that are based on expected cash flow streams and collateral values, including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of the Company's ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the Company's ARS valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk, the ongoing strength and quality of the credit markets and market liquidity.
The credit markets experienced significant deterioration and uncertainty beginning in the second half of fiscal 2008. If these conditions recur, or the Company experiences any additional ratings downgrades on any investments in its portfolio (including its ARS), the Company may incur additional impairments to its investment portfolio, which could negatively affect the Company's financial condition, cash flows and reported earnings.
F-8
Non-Marketable Investments
The Company's non-marketable equity investments are recorded using adjusted cost basis or the equity method of accounting, depending on the circumstances of each investment. The Company's non-marketable investments are classified within other assets on the Company's consolidated balance sheet. The Company's non-marketable equity investments include:
Equity Method Investments: When the Company has the ability to exercise significant influence, but not control, over the investee, it records equity method gain or loss as "gain or loss from equity investments." Equity method adjustments include the Company's proportionate share of the investee's income or loss.
Cost Method Investments: When the Company does not have the ability to exercise significant influence over the investee, it records such investments at cost.
The Company reviews its investments quarterly for indicators of impairment. The impairment review requires significant judgment and includes quantitative and qualitative analysis of identified events or circumstances that impact the fair value of the investment, such as:
• | the investee's revenue and trends in earnings or losses relative to pre-defined milestones and overall business prospects; |
• | the technological feasibility of the investee's products and technologies; |
• | the general market conditions in the investee's industry or geographic area, including adverse regulatory or economic changes; |
• | factors related to the investee's ability to remain in business, such as the investee's liquidity, debt ratios, and the rate at which the investee is using its cash; and |
• | the investee's receipt of additional funding at a lower valuation. |
If the fair value of an investment is below the Company's carrying value, the Company determines if the investment is other than temporarily impaired based on a quantitative and qualitative analysis, which includes assessing the severity and duration of the impairment and the likelihood of recovery before disposal. If the investment is considered to be other than temporarily impaired, the Company writes down the investment to its fair value.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which is included in bad debt expense. The Company determines the adequacy of this allowance by regularly reviewing the composition of its accounts receivable aging and evaluating individual customer receivables, considering such customer's financial condition, credit history and current economic conditions.
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable. In estimating reserves for obsolescence, the Company primarily evaluates estimates of demand over a twelve-month period and provides reserves for inventory on hand in excess of the estimated twelve-month demand.
In periods where the Company's production levels are substantially below normal operating capacity, such as in the first half of fiscal 2010 and the second half of fiscal 2012, unabsorbed overhead production associated with the reduced production levels of the Company's manufacturing facilities are charged directly to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. The Company's property and equipment accounting policies incorporate estimates, assumptions and judgments relative to the useful lives of its property and equipment. Depreciation is provided for assets placed in service on a straight-line basis over the estimated useful lives of the relative assets, which range from 3 to
F-9
30 years. The Company evaluates the carrying value of its property and equipment when events or changes in circumstances indicate that the carrying value of such assets may be impaired. Asset impairment evaluations are, by nature, highly subjective.
Junior Subordinated Convertible Debentures
The Company separately accounts for the liability and equity components of its junior subordinated convertible debentures in a manner that reflects its 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 its consolidated statements of income. Additionally, certain embedded features of the debentures qualify as derivatives and are bundled as a compound embedded derivative that is measured at fair value. Lastly, the Company includes the dilutive effect of the shares of its common stock issuable upon conversion of the outstanding junior subordinated convertible debentures in its diluted income per share calculation regardless of whether the market price trigger or other contingent conversion feature has been met. The Company applies the treasury stock method as it has the intent and current ability to settle the principal amount of the junior subordinated convertible debentures in cash. This method results in incremental dilutive shares when the average market value of the Company's common stock for a reporting period exceeds the conversion price per share which was $27.94 at March 31, 2012 and adjusts as dividends are recorded in the future.
Litigation
The Company's estimated range of liability related to pending litigation is based on claims for which management believes a loss is probable and it can estimate the amount or range of loss. Because of the uncertainties related to both the outcome and range of any potential losses on the pending litigation, the Company is generally unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, the Company will assess the potential liability related to its pending litigation and revise its estimates, if necessary.
Goodwill and Other Intangible Assets
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company is required to perform an annual impairment review, and more frequently under certain circumstances. The goodwill is subjected to this test during the fourth quarter of the Company's fiscal year. The Company engages primarily in the design, development, manufacture and marketing of semiconductor products as well as technology licensing. As a result, the Company concluded there are two reporting units, semiconductor products and technology licensing. The Company has early adopted the qualitative goodwill impairment assessment standard which it applied as of March 31, 2012. Under this standard, management evaluates whether it is more likely than not that goodwill is impaired. If it is determined that it is more likely than not, the Company proceeds with the next step of the impairment test, which compares the fair value of the reporting unit to its carrying value. If the Company determines through the impairment process that goodwill has been impaired, the Company will record the impairment charge in its results of operation. Through March 31, 2012, the Company has not had impaired goodwill. The Company's other intangible assets represent existing technologies, core and developed technology, in-process research and development, trademarks and trade names, and customer-related intangibles. Other intangible assets are amortized over their respective estimated lives, ranging from one year to ten years. In the event that facts and circumstances indicate intangibles or other long-lived assets may be impaired, the Company evaluates the recoverability and estimated useful lives of such assets. In-process research and development is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.
Impairment of Long-Lived Assets
The Company assesses whether indicators of impairment of long-lived assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss through a charge to operating results to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset's carrying value. The Company would depreciate the remaining value over the remaining estimated useful life of the asset.
F-10
Share-Based Compensation
The Company has equity incentive plans under which non-qualified stock options and restricted stock units (RSUs) have been granted to employees and non-employee members of the Board of Directors. In the second half of fiscal 2006, the Company adopted RSUs as its primary equity incentive compensation instrument for employees. The Company also has an employee stock purchase plan for all eligible employees.
The Company estimates the fair value of share-based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each award as of the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company's stock price.
Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant requires judgment. The fair value of RSUs is based on the fair market value of the Company's common stock on the date of grant discounted for expected future dividends. The Company uses the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase shares under stock participation plans. Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The Company uses a blend of historical and implied volatility based on options freely traded in the open market as it believes this is more reflective of market conditions and a better indicator of expected volatility than using purely historical volatility. The expected life of the awards is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the Company's awards. The dividend yield assumption is based on the Company's history and expectation of future dividend payouts. The Company estimates the number of share-based awards which will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate would affect share-based compensation, as the effect of adjusting the rate for all expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. If forfeiture adjustments are made, they would affect the Company's results of operations. The effect of forfeiture adjustments in the years ended March 31, 2012, 2011 and 2010 was immaterial.
The Company evaluates the assumptions used to value its awards on a quarterly basis. If factors change and the Company employs different assumptions, share-based compensation expense may differ significantly from what was recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate or increase any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that the Company grants additional equity awards to employees or it assumes unvested equity awards in connection with acquisitions.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investments in debt securities and trade receivables. Investments in debt securities with original maturities of greater than six months consist primarily of AAA and AA rated financial instruments and counterparties. The Company's investments are primarily in direct obligations of the U.S. government or its agencies, corporate bonds, and municipal bonds.
Concentrations of credit risk with respect to accounts receivable are generally not significant due to the diversity of the Company's customers and geographic sales areas. The Company sells its products primarily to OEMs and distributors in the Americas, Europe and Asia. The Company performs ongoing credit evaluations of its customers' financial condition and, as deemed necessary, may require collateral, primarily letters of credit.
Distributor advances, included in deferred income on shipments to distributors in the consolidated balance sheets, totaled $51.7 million at March 31, 2012 and $71.9 million at March 31, 2011. On sales to distributors, the Company's payment terms generally require the distributor to settle amounts owed to the Company for an amount in excess of their ultimate cost. The Company's sales price to its distributors may be higher than the amount that the distributors will ultimately owe the Company because distributors often negotiate price reductions after purchasing the product from the Company and such reductions are often significant. It is the Company's practice to apply these negotiated price discounts to future purchases, requiring the
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distributor to settle receivable balances, on a current basis, generally within 30 days, for amounts originally invoiced. This practice has an adverse impact on the working capital of the Company's distributors. As such, the Company has entered into agreements with certain distributors whereby it advances cash to the distributors to reduce the distributor's working capital requirements. These advances are reconciled at least on a quarterly basis and are estimated based on the amount of ending inventory as reported by the distributor multiplied by a negotiated percentage. Such advances have no impact on revenue recognition or the Company's consolidated statements of income. The Company processes discounts taken by distributors against its deferred income on shipments to distributors' balance and trues-up the advanced amounts generally after the end of each completed fiscal quarter. The terms of these advances are set forth in binding legal agreements and are unsecured, bear no interest on unsettled balances and are due upon demand. The agreements governing these advances can be canceled by the Company at any time.
Use of Estimates
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare its consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In the fourth quarter of fiscal 2012, the Company early adopted a new standard for the assessment of goodwill impairment, which permits an entity to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. After assessing qualitative factors, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no further testing is necessary. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the traditional two-step goodwill impairment test must be performed. The Company applied this standard to its March 31, 2012 goodwill impairment test, concluding that it was not more likely than not that the fair value of its two reporting units were less than the carrying amounts.
In the first quarter of fiscal 2012, the Company adopted new standards for revenue recognition with multiple deliverables. These new standards change the determination of whether the individual deliverables included in a multiple-element arrangement may be treated as separate units for accounting purposes. Additionally, these new standards modify the method in which revenue is allocated to the separately identified deliverables. The adoption of these new standards did not have a significant impact on the Company's consolidated financial statements.
In the first quarter of fiscal 2012, the Company adopted new standards that remove certain tangible products and associated software from the scope of the software revenue recognition guidance. The adoption of these new standards did not have a significant impact on the Company's consolidated financial statements.
In the first quarter of fiscal 2012, the Company adopted new standards for the application of the milestone method of revenue recognition for certain research and development arrangements entered into by its technology licensing segment. Under this standard, the Company will recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met for the milestones to be considered substantive. This standard was adopted prospectively, and its adoption is not expected to have a significant impact on the Company's consolidated financial statements.
2. BUSINESS ACQUISITIONS
Acquisition of Ident Technology AG
On February 9, 2012, the Company acquired Ident Technology AG, a privately-held semiconductor company that offers intellectual property and semiconductor solutions for the touch screen markets of the semiconductor and consumer electronics industries. The business acquisition was accounted for under the purchase method of accounting. Total consideration paid for this business was approximately $39.5 million. The initial purchase price of the acquisition resulted in purchased intangible assets of approximately $18.1 million, of which $8.2 million relates to in-process technology, and goodwill of approximately $17.4 million. Goodwill recognized in this transaction is non-deductible. The purchased intangible assets (other than goodwill and the in-process technology intangible asset) are being amortized over a period of 10 years. The Company's purchase price allocation is not yet finalized, as management is still evaluating the deferred taxes associated with the transaction.
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Acquisition of Silicon Storage Technology, Inc. (SST)
On April 8, 2010, the Company acquired SST, a publicly traded company based in Sunnyvale, California, in a merger transaction for $3.05 per share, or a total of $353.8 million, which included $295.4 million of cash consideration for the outstanding shares of SST common stock, and $58.4 million of SST shares acquired by the Company on March 8, 2010. The SST business acquired included a variety of different business units including a licensing business focused on opportunities in the embedded control market, a microcontroller business, a variety of memory businesses and a Wi-Fi power-amplifier business. The Company's primary reason for this acquisition was to gain access to SST's SuperFlash® technology and extensive patent portfolio, which it believes are critical building blocks for advanced microcontrollers.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of SST have been included in the Company's consolidated financial statements as of the effective date of the acquisition. The purchase price of the acquisition resulted in purchased intangible assets of approximately $50.9 million and goodwill of approximately $25.0 million of which $19.2 million was allocated to the technology licensing reporting unit and approximately $5.8 million was allocated to the semiconductor products reporting unit. Purchased intangible assets included $32.9 million of core and developed technology, $13.1 million of customer-related intangibles, $2.3 million of acquisition-date backlog, $1.7 million of trademarks and trade names and $0.9 million of in-process research and development. The purchased intangible assets, other than acquisition-date backlog and in-process research and development, are being amortized over their expected useful lives which range between five to ten years. Acquisition-date backlog was amortized over one year and in-process research and development is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.
Other Acquisitions
During the year ended March 31, 2011, the Company completed two business acquisitions, in addition to SST, which were accounted for under the purchase method of accounting. Total consideration paid for these businesses, net of cash acquired of $2.5 million, was $6.5 million. As part of one of the acquisitions, the Company assumed a bankruptcy reorganization liability in the amount of approximately $19.4 million which was partially funded by the acquired company prior to the acquisition. The bankruptcy reorganization liability was settled in the second quarter of fiscal 2012. The purchase price of the acquisitions resulted in purchased intangible assets of approximately $5.6 million and goodwill of approximately $1.0 million. The purchased intangible assets are being amortized over a weighted average period of approximately seven years. In addition, one of the acquisitions resulted in contingent consideration with an estimated fair value at the date of purchase of $2.0 million.
During the year ended March 31, 2010, the Company completed one business acquisition which was accounted for under the purchase method of accounting. Total consideration paid for this business was approximately $9.3 million. The purchase price of the acquisition resulted in purchased intangible assets of approximately $7.0 million, of which $2.9 million relates to in-process technology, and goodwill of approximately $4.2 million. The purchased intangible assets (other than goodwill and the in-process technology intangible asset) are being amortized over an average period of seven years. In addition, the acquisition resulted in contingent consideration with an estimated fair value at the date of purchase of $1.3 million. During the year ended March 31, 2012, a favorable adjustment to the contingent consideration of $1.0 million was included in special charges on the consolidated statements of income.
3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Discontinued operations includes the following product families that were acquired in the acquisition of SST: NAND Drives, NAND controllers, Smart Card ICs, Combo Memory, Concurrent SuperFlash, Small-Sector Flash and many-time Programmable Flash memories and certain serial NOR Flash products from 512K to 64MB density in the geographic regions of Taiwan, China, Hong Kong, Singapore, Malaysia, Thailand, Indonesia, Vietnam and Philippines. These product lines were marketed for sale since the acquisition of SST on April 8, 2010 based on management's decision regarding them not being a strategic fit into the Company's product portfolio. On May 21, 2010, the Company completed a transaction to sell the NAND Drives, NAND controllers, Smart Card ICs, Combo Memory, Concurrent SuperFlash, Small-Sector Flash and many-time Programmable Flash memories to Greenliant Systems Ltd. The sale price in this transaction was determined by management to represent fair value, and accordingly, no gain or loss was recognized on the sale of the net assets. In this sale, the Company disposed of approximately $23.6 million of assets held for sale, primarily comprised of inventory, property, plant and equipment, intangible assets and non-marketable securities.
On July 8, 2010, the Company granted an exclusive limited license for the manufacture of certain Serial NOR-Flash products to Professional Computer Technology, Ltd. (PCT). The license to PCT is limited to the industry segments of optical disc drives, set top boxes, electronic books, video games, digital displays, DVD player/recorder, notebook computers, netbooks,
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desktop computers, PC monitors, mass storage devices, printers/scanners/copiers/faxes, PC-CAM, point of sale devices, graphic cards, servers/clients/workstations, and mobile phones. PCT has no license to sell these products to any other industry segment or geographic region other than those listed above. Certain multi-national customers are excluded from this license.
For financial statement purposes, the results of operations for these discontinued businesses have been segregated from those of the continuing operations and are presented in the Company's consolidated financial statements as discontinued operations.
The results of discontinued operations for the year ended March 31, 2011 are as follows (amounts in thousands):
Year ended | |||
March 31, 2011 | |||
Net sales | $ | 25,177 | |
Cost of sales | (32,627 | ) | |
Operating expenses | (3,676 | ) | |
Income tax benefit | 909 | ||
Net loss from discontinued operations | $ | (10,217 | ) |
There were no discontinued operations during fiscal years 2012 or 2010.
4. SPECIAL CHARGES
Acquisition Related Expenses
During fiscal 2012, special charges included a benefit of $0.7 million of special income comprised of a $1.0 million favorable adjustment to contingent consideration offset by $0.3 million of severance-related charges related to a prior year acquisition. During fiscal 2011, the Company incurred $1.9 million of severance-related and office closing costs associated with the acquisition of SST.
Patent Licenses
During the fourth quarter of fiscal 2012, the Company agreed to the terms of a patent license with an unrelated third party and signed an agreement on March 20, 2012. The patent license settled alleged infringement claims. The total payment made to the third-party in March 2012 was $2.8 million, $1.5 million of which was expensed in the fourth quarter of fiscal 2012 and the remaining $1.3 million was recorded as a prepaid royalty which will be amortized over the remaining life of the patents, which expires in December 2018.
During the first quarter of fiscal 2010, 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 was amortized over the remaining life of the patents, which expired in June 2010.
5. | INVESTMENTS |
The Company's investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to the Company's investment guidelines and market conditions. The following is a summary of available-for-sale securities at March 31, 2012 (amounts in thousands):
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Available-for-sale Securities | |||||||||||||||
Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Government agency bonds | $ | 342,025 | $ | 476 | $ | (397 | ) | $ | 342,104 | ||||||
Municipal bonds | 19,888 | 234 | — | 20,122 | |||||||||||
Auction rate securities | 10,246 | — | — | 10,246 | |||||||||||
Corporate bonds and debt | 770,891 | 4,150 | (937 | ) | 774,104 | ||||||||||
Marketable equity securities | 5,864 | 188 | (788 | ) | 5,264 | ||||||||||
$ | 1,148,914 | $ | 5,048 | $ | (2,122 | ) | $ | 1,151,840 | |||||||
The following is a summary of available-for-sale securities at March 31, 2011 (amounts in thousands):
Available-for-sale Securities | |||||||||||||||
Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Government agency bonds | $ | 431,355 | $ | 159 | $ | (923 | ) | $ | 430,591 | ||||||
Municipal bonds | 11,445 | 34 | (22 | ) | 11,457 | ||||||||||
Auction rate securities | 12,475 | — | — | 12,475 | |||||||||||
Corporate bonds and debt | 519,499 | 4,116 | (589 | ) | 523,026 | ||||||||||
Marketable equity securities | 26,173 | 688 | — | 26,861 | |||||||||||
$ | 1,000,947 | $ | 4,997 | $ | (1,534 | ) | $ | 1,004,410 | |||||||
At March 31, 2012, the Company's available-for-sale debt securities, and marketable equity securities are presented on the consolidated balance sheets as short-term investments of $823.3 million and long-term investments of $328.6 million. At March 31, 2011, the Company’s available-for-sale debt securities and marketable equity securities are presented on the consolidated balance sheets as short-term investments of $539.6 million and long-term investments of $464.8 million.
At March 31, 2012, $10.2 million of the fair value of the Company's investment portfolio was invested in ARS. With the continuing liquidity issues in the global credit and capital markets, the Company's ARS have experienced multiple failed auctions from September 2007 through the date of this report. 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 fair value of the failed ARS of $10.2 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. In fiscal 2012, the Company recognized a net gain of $0.3 million on these investments due to a redemption at par value of one ARS position offsetting impairment charges. In fiscal 2011, the Company recognized an impairment charge on these investments of $1.6 million.
The Company believes that, based on its current unrestricted cash, cash equivalents and short-term investment balances, the current lack of liquidity in the credit and capital markets for ARS will not have a material impact on its liquidity, cash flow or ability to fund its operations.
At March 31, 2012, the Company evaluated its investment portfolio and noted unrealized losses of $1.3 million on its debt securities, and $0.8 million on its marketable equity securities which were due to fluctuations in interest rates, credit market conditions, and/or market prices. Management does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of March 31, 2012 and the Company's intent is to hold these investments until these assets are no longer impaired, except for the ARS described above and certain equity investments that are actively being sold. For those debt securities not scheduled to mature until after March 31, 2013, 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 March 31, 2012, by maturity, excluding marketable equity securities of $5.3 million and corporate debt of $4.6 million, which have no contractual maturity, are shown
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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 | $ | 268,501 | $ | 1,537 | $ | (21 | ) | $ | 270,017 | ||||||
Due after one year and through five years | 839,677 | 3,323 | (1,297 | ) | 841,703 | ||||||||||
Due after five years and through ten years | 25,177 | — | (16 | ) | 25,161 | ||||||||||
Due after ten years | 5,069 | — | — | 5,069 | |||||||||||
$ | 1,138,424 | $ | 4,860 | $ | (1,334 | ) | $ | 1,141,950 | |||||||
The amortized cost and estimated fair value of the available-for-sale securities at March 31, 2011, by maturity, excluding marketable equity securities of $26.9 million and corporate debt of $3.5 million, which have no contractual maturity, are shown below (amounts in thousands).
Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Available-for-sale | |||||||||||||||
Due in one year or less | $ | 143,447 | $ | 903 | $ | (2 | ) | $ | 144,348 | ||||||
Due after one year and through five years | 815,352 | 3,406 | (1,532 | ) | 817,226 | ||||||||||
Due after five years and through ten years | — | — | — | — | |||||||||||
Due after ten years | 12,475 | — | — | 12,475 | |||||||||||
$ | 971,274 | $ | 4,309 | $ | (1,534 | ) | $ | 974,049 | |||||||
During the year ended March 31, 2012, the Company had net realized gains of $0.4 million from sales of available-for-sale marketable equity securities compared to net realized gains of $3.2 million and $1.1 million, respectively, for the years ended March 31, 2011 and March 31, 2010. The Company had a net realized gain of $0.4 million from sales of available-for-sale debt securities during the year ended March 31, 2012, compared to an immaterial amount of net realized gains and losses during the year ended March 31, 2011 and a net realized gain of $1.2 million during the year ended ended March 31, 2010.
Marketable Equity Investments
The Company had investments in public companies with a fair value of $5.3 million as of March 31, 2012. Cash dividends and other distributions of earnings from the investees, if any, are included in other income at the date of record. The Company has classified the shares owned in these companies as marketable securities. As of March 31, 2012, the Company had a net unrealized loss in other comprehensive income of $0.6 million on these marketable securities compared to an unrealized gain of $0.7 million for the year ended March 31, 2011. During the years ended March 31, 2012 and March 31, 2011, the Company recorded impairment charges of $2.4 million and $3.0 million, respectively, on certain shares that it held due to the current market price and active selling of the shares.
Non-marketable Equity Investments
The Company has certain non-marketable equity investments in several companies with a carrying value of $7.7 million at March 31, 2012. The investments in privately held companies are accounted for using the cost or the equity method of accounting, as appropriate. Each period the Company evaluates whether an event or change in circumstances has occurred that may indicate an investment has been impaired. If upon further investigation of such events the Company determines the investment has suffered a decline in value that is other than temporary, the Company writes down the investment to its estimated fair value. At March 31, 2012, the Company determined there were no such impairments and there were no impairment charges recognized in any of the three years then ended. These investments are included in other assets on the consolidated balance sheet.
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6. FAIR VALUE MEASUREMENTS
Accounting rules for fair value clarify that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1- | Observable inputs such as quoted prices in active markets; |
Level 2- | Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
Level 3- | Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Marketable Debt Instruments
Marketable debt instruments include instruments such as corporate bonds and debt, government agency bonds, bank deposits, municipal bonds, and money market fund deposits. When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroborates non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets measured at fair value on a recurring basis at March 31, 2012 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 | $ | 232,219 | $ | — | $ | — | $ | 232,219 | |||||||
Marketable equity securities | 5,264 | — | — | 5,264 | |||||||||||
Corporate bonds & debt | — | 769,479 | 4,625 | 774,104 | |||||||||||
Government agency bonds | — | 342,104 | — | 342,104 | |||||||||||
Deposit accounts | — | 403,536 | — | 403,536 | |||||||||||
Municipal bonds | — | 20,122 | — | 20,122 | |||||||||||
Auction rate securities | — | — | 10,246 | 10,246 | |||||||||||
Total assets measured at fair value | $ | 237,483 | $ | 1,535,241 | $ | 14,871 | $ | 1,787,595 | |||||||
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Assets measured at fair value on a recurring basis at March 31, 2011 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 | $ | 464,669 | $ | — | $ | — | $ | 464,669 | |||||||
Marketable equity securities | 26,861 | — | — | 26,861 | |||||||||||
Corporate bonds & debt | — | 519,526 | 3,500 | 523,026 | |||||||||||
Government agency bonds | — | 430,591 | — | 430,591 | |||||||||||
Deposit accounts | — | 239,255 | — | 239,255 | |||||||||||
Municipal bonds | — | 11,457 | — | 11,457 | |||||||||||
Auction rate securities | — | — | 12,475 | 12,475 | |||||||||||
Total assets measured at fair value | $ | 491,530 | $ | 1,200,829 | $ | 15,975 | $ | 1,708,334 | |||||||
The Company estimated the fair value of its ARS, which are classified as Level 3 securities, based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security. The estimated fair values that are categorized as Level 3 as well as the marketable equity securities could change significantly based on future market conditions.
When the Company uses observable market prices for identical securities that are traded in less active markets, it classifies such securities as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. There were no transfers between Level 1 and Level 2 during the years ended March 31, 2012 and 2011.
The following tables present a reconciliation for all assets measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the years ended March 31, 2012 and March 31, 2011 (amounts in thousands):
Year ended March 31, 2012 | Auction Rate Securities | Corporate Debt | Total Gains (Losses) | |||||||||
Balance at March 31, 2011 | $ | 12,475 | $ | 3,500 | $ | — | ||||||
Total gains or losses (realized and unrealized): | ||||||||||||
Included in earnings | 271 | — | 271 | |||||||||
Included in other comprehensive income (loss) | — | — | — | |||||||||
Purchases, sales, issuances, and settlements, net | (2,500 | ) | 1,125 | — | ||||||||
Transfer into Level 3 | — | — | — | |||||||||
Transfer out of Level 3 | — | — | — | |||||||||
Balance at March 31, 2012 | $ | 10,246 | $ | 4,625 | $ | 271 | ||||||
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Year ended March 31, 2011 | Auction Rate Securities | Put Option on Auction Rate Securities | Corporate Debt | Total Gains (Losses) | ||||||||||||
Balance at March 31, 2010 | $ | 37,237 | $ | 1,814 | $ | — | $ | — | ||||||||
Total gains or losses (realized and unrealized): | ||||||||||||||||
Included in earnings | 138 | (1,814 | ) | — | (1,676 | ) | ||||||||||
Included in other comprehensive income (loss) | — | — | — | — | ||||||||||||
Purchases, sales, issuances, and settlements, net | (24,900 | ) | — | 3,500 | — | |||||||||||
Transfer into Level 3 | — | — | — | — | ||||||||||||
Transfer out of Level 3 | — | — | — | — | ||||||||||||
Balance at March 31, 2011 | $ | 12,475 | $ | — | $ | 3,500 | $ | (1,676 | ) | |||||||
Assets measured at fair value on a recurring basis are presented/classified on the consolidated balance sheets at March 31, 2012 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 | $ | 232,219 | $ | 403,536 | $ | — | $ | 635,755 | |||||||
Short-term investments | 782 | 822,472 | — | 823,254 | |||||||||||
Long-term investments | 4,482 | 309,233 | 14,871 | 328,586 | |||||||||||
Total assets measured at fair value | $ | 237,483 | $ | 1,535,241 | $ | 14,871 | $ | 1,787,595 | |||||||
Assets and liabilities measured at fair value on a recurring basis are presented/classified in the consolidated balance sheets at March 31, 2011 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 | $ | 464,669 | $ | 239,255 | $ | — | $ | 703,924 | |||||||
Short-term investments | 16,553 | 523,019 | — | 539,572 | |||||||||||
Long-term investments | 10,308 | 438,555 | 15,975 | 464,838 | |||||||||||
Total assets measured at fair value | $ | 491,530 | $ | 1,200,829 | $ | 15,975 | $ | 1,708,334 | |||||||
Financial Assets Not Recorded at Fair Value on a Recurring Basis
The Company's non-marketable equity and cost method investments are not recorded at fair value on a recurring basis. These investments were recorded at fair value as of April 8, 2010, the date of the SST acquisition, and are monitored on a quarterly basis for impairment charges. The investments will only be recorded at fair value when an impairment charge is recognized. During the year ended March 31, 2012, there were no impairment charges recognized on these investments. These investments are included in other assets on the consolidated balance sheet. See further discussion of non-marketable investments in Note 5.
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7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months. Management believes the carrying amount of the equity and cost-method investments materially approximated fair value at March 31, 2012 based upon unobservable inputs. The fair values of these investments have been determined as level 3 fair value measurements. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts. The fair value of the Company's junior subordinated convertible debentures was $1.585 billion at March 31, 2012 and $1.574 billion at March 31, 2011 based on observable market prices for these debentures, which are traded in less active markets and are therefore classified as a Level 2 fair value measurement.
8. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
March 31, 2012 | March 31, 2011 | ||||||
Trade accounts receivable | $ | 171,274 | $ | 181,840 | |||
Other | 1,529 | 2,200 | |||||
172,803 | 184,040 | ||||||
Less allowance for doubtful accounts | 2,602 | 2,838 | |||||
$ | 170,201 | $ | 181,202 | ||||
9. INVENTORIES
The components of inventories consist of the following (amounts in thousands):
March 31, 2012 | March 31, 2011 | ||||||
Raw materials | $ | 8,065 | $ | 8,174 | |||
Work in process | 139,045 | 141,462 | |||||
Finished goods | 70,168 | 31,164 | |||||
$ | 217,278 | $ | 180,800 | ||||
Inventories are valued at the lower of cost or market using the first-in, first-out method. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable.
10. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consists of the following (amounts in thousands):
March 31, 2012 | March 31, 2011 | ||||||
Land | $ | 46,529 | $ | 46,497 | |||
Building and building improvements | 374,042 | 375,611 | |||||
Machinery and equipment | 1,314,303 | 1,306,367 | |||||
Projects in process | 83,676 | 101,202 | |||||
1,818,550 | 1,829,677 | ||||||
Less accumulated depreciation and amortization | 1,301,939 | 1,289,164 | |||||
$ | 516,611 | $ | 540,513 | ||||
Depreciation expense attributed to property, plant and equipment was $86.4 million, $92.7 million and $86.4 million for the fiscal years ending March 31, 2012, 2011 and 2010, respectively.
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11. INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of the following (amounts in thousands):
March 31, 2012 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Developed technology | $ | 94,681 | $ | (35,920 | ) | $ | 58,761 | |||||
Customer-related | 20,400 | (4,633 | ) | 15,767 | ||||||||
Trademarks and trade names | 1,730 | (684 | ) | 1,046 | ||||||||
Backlog | 2,410 | (2,410 | ) | — | ||||||||
In-process technology | 14,086 | — | 14,086 | |||||||||
Distribution rights | 5,236 | (4,660 | ) | 576 | ||||||||
Covenants not to compete | 400 | (200 | ) | 200 | ||||||||
$ | 138,943 | $ | (48,507 | ) | $ | 90,436 | ||||||
March 31, 2011 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Developed technology | $ | 83,751 | $ | (27,705 | ) | $ | 56,046 | |||||
Customer-related | 15,600 | (1,621 | ) | 13,979 | ||||||||
Trademarks and trade names | 1,730 | (250 | ) | 1,480 | ||||||||
Backlog | 2,410 | (1,709 | ) | 701 | ||||||||
In-process technology | 4,300 | — | 4,300 | |||||||||
Distribution rights | 5,236 | (4,147 | ) | 1,089 | ||||||||
Covenants not to compete | 400 | (66 | ) | 334 | ||||||||
$ | 113,427 | $ | (35,498 | ) | $ | 77,929 | ||||||
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 10 years. In fiscal 2012, the Company acquired $10.9 million of developed technology which has a weighted average amortization period of 10 years, $4.8 million of customer-related intangible assets which has a weighted average amortization period of 10 years and $9.8 million of in-process technology which will begin amortization once the technology reaches technological feasibility. The following is an expected amortization schedule for the intangible assets for fiscal year 2013 through fiscal year 2017, absent any future acquisitions or impairment charges (amounts in thousands):
Year ending March 31, | Projected Amortization Expense |
2013 | $13,218 |
2014 | 13,042 |
2015 | 12,901 |
2016 | 10,784 |
2017 | 9,134 |
Amortization expense attributed to intangible assets was $13.0 million, $13.9 million and $3.7 million for fiscal years 2012, 2011 and 2010, respectively. In fiscal year 2012, approximately $8.2 million was charged to cost of sales and approximately $4.8 million was charged to operating expenses. In fiscal year 2011, approximately $7.8 million was charged to cost of sales and approximately $6.1 million was charged to operating expenses. In fiscal 2010, approximately $1.9 million was charged to cost of sales and $1.8 million was charged to operating expenses. The Company found no indication of impairment of its intangible assets in fiscal years 2012, 2011 or 2010.
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Goodwill activity for fiscal years 2012 and 2011 was as follows (amounts in thousands):
Semiconductor Products Reporting Unit | Technology Licensing Reporting Unit | |||||||
Balance at March 31, 2010 | $ | 40,338 | $ | — | ||||
Additions due to the acquisition of SST | 5,761 | 19,200 | ||||||
Additions due to contingent consideration payments to previous owners of R&E International | 9,747 | — | ||||||
Additions due to other acquisitions | 972 | — | ||||||
Balance at March 31, 2011 | 56,818 | 19,200 | ||||||
Additions due to contingent consideration payments to previous owners of R&E International | 120 | — | ||||||
Additions due to other acquisitions | 17,375 | — | ||||||
Balance at March 31, 2012 | $ | 74,313 | $ | 19,200 | ||||
In the year ended March 31, 2011, the Company completed the process of allocating goodwill to its reporting units as it related to the acquisition of SST. As a result, approximately $19.2 million was allocated to the technology licensing reporting unit and approximately $5.8 million was allocated to the semiconductor products reporting unit.
In the years ended March 31, 2012 and 2011, the Company made contingent consideration payments to the previous owners of R&E International in the amount of $0.1 million and $12.1 million, respectively. The Company acquired R&E International on March 31, 2009. The fiscal 2011 contingent consideration payment resulted in the de-recognition of negative goodwill in the amount of approximately $2.4 million recorded on the acquisition date and the recognition of approximately $9.7 million of goodwill which was allocated to the semiconductor products reporting unit.
In the year ended March 31, 2012, the Company acquired Ident Technology AG. This acquisition resulted in approximately $17.4 million of goodwill which was allocated to the semiconductor products reporting unit.
At March 31, 2012, $74.3 million of goodwill was recorded in the Company's semiconductor products reporting unit and $19.2 million was recorded in the Company's technology licensing reporting unit. At March 31, 2012, the Company applied a qualitative goodwill impairment screen to its two reporting units, concluding it was not more likely than not that goodwill was impaired. Through March 31, 2012, the Company has never recorded an impairment charge against its goodwill balance.
12. | ACCRUED LIABILITIES |
Accrued liabilities consist of the following (amounts in thousands):
March 31, 2012 | March 31, 2011 | ||||||
Bankruptcy reorganization liability | $ | — | $ | 19,385 | |||
Other accrued expenses | 88,877 | 112,454 | |||||
$ | 88,877 | $ | 131,839 | ||||
The bankruptcy reorganization liability was incurred as part of an acquisition completed in fiscal 2011 for which the liability was settled in the second quarter of fiscal 2012.
13. | INCOME TAXES |
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. The Company files U.S. federal, U.S. state, and foreign income tax returns. For U.S. federal, and in general for U.S. state tax returns, the fiscal 2009 through fiscal 2012 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 2005.
Significant judgment is required in evaluating the Company's uncertain tax positions and determining its provision for income taxes. Although the Company believes that it has appropriately reserved for its uncertain tax positions, no assurance
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can be given that the final tax outcome of these matters will not be different than expectations. The Company will adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate, the closing of a statutory audit period or changes in applicable tax law. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to the reserves that are considered appropriate, as well as related net interest.
The Company recognizes liabilities for anticipated tax audit issues in the U.S. and other domestic and international tax jurisdictions based on its estimate of whether, and the extent to which, additional tax payments are more likely than not. The Company believes it maintains appropriate reserves to offset potential income tax liabilities that may arise upon final resolution of matters for open tax years. The U.S. Internal Revenue Service (IRS) is currently auditing the Company's fiscal years 2009 and 2010. Fiscal 2011 and fiscal 2012 are currently open for examination by the IRS. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are appropriate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. If such accrued amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed necessary. If such assessments ultimately prove to be greater than anticipated, a future charge to expense would be recorded in the period in which the assessment is determined. Timing of the resolution and/or closure on audits is highly uncertain; however, the Company does not believe that it is reasonably possible that the unrecognized tax benefits could significantly change within the next 12 months as the result of a tax examination closure.
The following table summarizes the activity related to the Company's gross unrecognized tax benefits from April 1, 2009 to March 31, 2012 (amounts in thousands):
Year Ended March 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Beginning balance | $ | 58,125 | $ | 57,140 | $ | 70,051 | ||||||
Increases related to acquisitions | — | 36,587 | — | |||||||||
Decreases related to prior year tax positions | (2,153 | ) | (49,932 | ) | (25,492 | ) | ||||||
Increases related to current year tax positions | 11,992 | 13,951 | 11,332 | |||||||||
Increases related to prior year tax positions | 2,526 | 379 | 1,249 | |||||||||
Ending balance | $ | 70,490 | $ | 58,125 | $ | 57,140 | ||||||
The Company made certain corrections to the presentation of its March 31, 2011 gross unrecognized tax benefits compared to the amounts presented in its fiscal 2011 Notes to Consolidated Financial Statements. The March 31, 2011 corrected balance of gross unrecognized tax benefits is $58.1 million compared to the $45.9 million reflected in the prior year Notes to Consolidated Financial Statements. There were no changes to the consolidated balance sheet as of March 31, 2011, or the results of operations or cash flows for the years then ended resulting from the presentation correction.
As of March 31, 2012, the Company had accrued approximately $3.1 million related to the potential payment of interest on the Company's uncertain tax positions. As of March 31, 2011, the Company had accrued approximately $2.1 million related to the potential payment of interest on the Company's uncertain tax positions. Interest was included in the provision for income taxes. The Company has accrued for approximately $0.9 million and $1.0 million in penalties related to its uncertain tax positions related to its international locations as of March 31, 2012 and March 31, 2011, respectively. Interest and penalties charged or (credited) to operations during the years ended March 31, 2012, 2011 and 2010 related to the Company's uncertain tax positions were $0.9 million, $(3.6) million and $2.5 million, respectively.
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The income tax (benefit) provision from continuing operations consists of the following (amounts in thousands):
Year Ended March 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Current (benefit) expense: | ||||||||||||
Federal | $ | 7,611 | $ | 294 | $ | (4,358 | ) | |||||
State | 544 | 21 | (436 | ) | ||||||||
Foreign | 21,174 | 22,877 | 6,981 | |||||||||
Total current | $ | 29,329 | 23,192 | 2,187 | ||||||||
Deferred expense (benefit): | ||||||||||||
Federal | $ | 14,942 | 11,035 | 16,663 | ||||||||
State | 1,067 | 788 | 1,668 | |||||||||
Foreign | (2,348 | ) | (3,484 | ) | 290 | |||||||
Total deferred | 13,661 | 8,339 | 18,621 | |||||||||
$ | 42,990 | $ | 31,531 | $ | 20,808 | |||||||
The tax benefit associated with the Company's equity incentive plans reduced taxes currently payable by $11.0 million, $7.5 million and $3.7 million for the years ended March 31, 2012, 2011 and 2010, respectively. These amounts were credited to additional paid-in capital in each of the three fiscal years.
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to income before income taxes. The sources and tax effects of the differences in the total income tax (benefit) provision from continuing operations are as follows (amounts in thousands):
Year Ended March 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Computed expected income tax provision | $ | 132,894 | $ | 161,244 | $ | 83,235 | ||||||
State income taxes, net of federal benefits | 1,280 | 1,746 | 915 | |||||||||
Research and development tax credits - current year | (3,750 | ) | (3,691 | ) | (1,500 | ) | ||||||
Research and development tax credits - prior years | (5,894 | ) | — | — | ||||||||
Foreign income taxed at lower than the federal rate | (81,540 | ) | (103,373 | ) | (53,390 | ) | ||||||
Tax benefit from audit settlements net of restructuring taxes | — | (24,395 | ) | (8,452 | ) | |||||||
$ | 42,990 | $ | 31,531 | $ | 20,808 | |||||||
Pretax income from foreign continuing operations was $328.5 million, $390.9 million and $201.2 million for the years ended March 31, 2012, 2011 and 2010, respectively. Unremitted foreign earnings that are considered to be permanently invested outside the U.S., and on which no deferred taxes have been provided, amounted to approximately $1.9 billion at March 31, 2012. The Company has the ability and intent to indefinitely reinvest the foreign earnings. Should the Company elect in the future to repatriate a portion of the foreign earnings so invested, the Company would incur income tax expense on such repatriation, net of any available deductions and foreign tax credits. This would result in additional income tax expense beyond the computed effective tax rate in such periods.
During the year ended March 31, 2011, the Company settled an IRS examination of fiscal years 2006, 2007 and 2008. In addition, the Company benefited from the expiration of the statute of limitations related to previously accrued tax reserves and incurred a tax charge related to a corporate restructuring. The total tax benefit associated with these items resulted in a reduction of income tax provision of approximately $24.4 million and a decrease in the effective tax rate from continuing operations of 5.3%.
In December 2010, the U.S. Congress retroactively reinstated the research and development tax credit from January 1, 2010. As a result, the Company recognized a one-time tax benefit of $1.5 million in the quarter ended December 31, 2010.
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During the year ended March 31, 2010, the Company settled an IRS examination of fiscal years 2002, 2003 and 2004 which resulted in a one-time tax benefit of $8.5 million. This tax benefit decreased the Company's effective tax rate by approximately 3.6%.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (amounts in thousands):
March 31, | ||||||||
2012 | 2011 | |||||||
Deferred tax assets: | ||||||||
Deferred intercompany profit | $ | 14,624 | $ | 11,031 | ||||
Deferred income on shipments to distributors | 23,646 | 33,304 | ||||||
Inventory valuation | 6,245 | 5,740 | ||||||
Net operating loss carryforward | 33,639 | 2,884 | ||||||
Share-based compensation | 25,693 | 25,195 | ||||||
Income tax credits | 103,882 | 68,647 | ||||||
Accrued expenses and other | 10,770 | 11,052 | ||||||
Gross deferred tax assets | 218,499 | 157,853 | ||||||
Valuation allowances | (78,506 | ) | (50,346 | ) | ||||
Deferred tax assets, net of valuation allowances | 139,993 | 107,507 | ||||||
Deferred tax liabilities: | ||||||||
Property, plant and equipment, principally due to differences in depreciation | (7,844 | ) | (5,036 | ) | ||||
Junior convertible debentures | (445,826 | ) | (407,477 | ) | ||||
Other | (6,500 | ) | (5,699 | ) | ||||
Deferred tax liabilities | (460,170 | ) | (418,212 | ) | ||||
Net deferred tax liability | $ | (320,177 | ) | $ | (310,705 | ) | ||
Reported as: | ||||||||
Current deferred tax assets | $ | 91,191 | $ | 88,822 | ||||
Non-current deferred tax liability | (411,368 | ) | (399,527 | ) | ||||
Net deferred tax liability | (320,177 | ) | (310,705 | ) | ||||
The Company had federal, state and foreign net operating loss carryforwards with an estimated tax effect of $33.6 million available at March 31, 2012. The state net operating loss carryforwards expire at various times between 2014 and 2029. The Company believes that it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk, at March 31, 2012, the Company has provided a valuation allowance of $5.4 million. The Company also has state tax credits with an estimated tax effect of $53.2 million available at March 31, 2012. These state tax credits expire at various times between 2012 and 2027. The Company believes that it is more likely than not that the benefit from these state tax credits will not be realized, and therefore has provided a valuation allowance against the full amount. The Company has U.S foreign tax credits with an estimated tax effect of $20.0 million that expire at various times between 2013 and 2017. The Company believes it is more likely than not that the benefit from these credits will not be fully realized and has provided a valuation allowance of $19.9 million. At March 31, 2012, the Company had credits for increasing research activity in the amount of $28.5 million that expire at various times between 2017 and 2032. In addition, the Company had $2.2 million of alternative minimum tax credits that do not expire. At March 31, 2012, the Company had alternative minimum tax net operating loss carryforwards of approximately $52.7 million that expire in 2032.
The Company's Thailand manufacturing operations currently benefit from numerous tax holidays granted to the Company based on its investment in property, plant and equipment in Thailand. The Company's tax holiday periods in Thailand expire at various times in the future, however, the Company actively seeks to acquire new tax holidays. The Company does not expect the future expiration of any of its tax holiday periods in Thailand to have a material impact on its effective tax rate. The aggregate dollar benefits derived from these tax holidays approximated $6.5 million, $20.9 million and $17.3 million for the years ended March 31, 2012, 2011 and 2010, respectively. The benefit the tax holiday had on diluted net income per share approximated $0.03 in the year ended March 31, 2012, $0.10 for the year ended March 31, 2011 and $0.09 for the year ended March 31, 2010.
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14. | 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 March 31, 2012, none of the conditions allowing holders of the debentures to convert had been met. As a result of cash dividends paid since the issuance of the debentures, the conversion rate has been adjusted to 35.7905 shares of common stock per $1,000 of principal amount of debentures, representing a conversion price of approximately $27.94 per share of common stock.
As the debentures can be settled in cash upon conversion, for accounting purposes, the debentures were bifurcated into a liability component and an equity component, which are both initially recorded at fair value. The carrying value of the equity component at March 31, 2012 and at March 31, 2011 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 which was further discounted due to embedded features as described below. The unamortized debt discount was $794.4 million at March 31, 2012 and $801.9 million at March 31, 2011. The carrying value of the debentures was $355.1 million at March 31, 2012 and $347.3 million at March 31, 2011. The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 25.75 years. In the years ended March 31, 2012, 2011 and 2010 the Company recognized $7.5 million, $6.8 million and $6.3 million, respectively, in non-cash interest expense related to the amortization of the debt discount. The Company recognized $24.4 million of interest expense related to the 2.125% coupon on the debentures in each of fiscal 2012, fiscal 2011 and fiscal 2010.
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 statement. These features qualify as derivatives and are bundled as a compound embedded derivative that is measured at fair value. The fair value of the derivatives as of March 31, 2012 was $0.6 million, compared to the value at March 31, 2011 of $0.4 million, resulting in an increase in interest expense in the year ended March 31, 2012 of $0.2 million. The fair value of the derivatives as of March 31, 2011 was $0.4 million, compared to the value at March 31, 2010 of $0.7 million, resulting in a reduction of interest expense in the year ended March 31, 2011 of approximately $0.3 million. The fair value of the derivatives as of March 31, 2010 was $0.7 million, compared to the value at March 31, 2009 of $0.5 million, resulting in an increase of interest expense in the year ended March 31, 2010 of approximately $0.2 million. The balance of the debentures on the Company's consolidated balance sheet at March 31, 2012 of $355.1 million includes the fair value of the embedded derivatives.
15. | CREDIT FACILITY |
On August 12, 2011, the Company entered into a credit agreement among the Company, the lenders from time to time that are parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (the "Credit Agreement"). The Credit Agreement provides for a $750 million revolving credit facility, with a $100 million foreign currency sublimit, a $25 million letter of credit sublimit and a $15 million swingline loan sublimit, terminating on August 12, 2016 (the "Maturity Date"). The Credit Agreement also contains an increase option permitting the Company, subject to certain requirements, to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $250 million in additional commitments, which may be for revolving loans or term loans. Proceeds of loans made under the Credit Agreement may be used for working capital and general corporate purposes. No loans were made nor letters of credit issued under the Credit Agreement at closing, and no amounts were outstanding and no letters of credit were issued at March 31, 2012.
The loans bear interest, at the Company's option, at the base rate plus a spread of 0.50% to 1.50% or an adjusted LIBOR rate (based on one, two, three, or six-month interest periods) plus a spread of 1.50% to 2.50%, in each case with such spread being determined based on the consolidated leverage ratio for the preceding four fiscal quarter period. The base rate means the highest of JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 1-month interest period plus a margin equal to 1.00%. Swingline loans accrue interest at a per annum rate based on the base rate plus the applicable margin for base rate loans. Base rate loans may only be made in U.S. Dollars. The Company is also obligated to pay other administration fees and letter of credit fees for a credit facility of this size and type.
F-26
Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Principal, together with all accrued and unpaid interest, is due and payable on the maturity date. The Company may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions and reimbursement of certain costs in the case of prepayments of LIBOR loans.
The Company's obligations under the Credit Agreement are guaranteed by certain of its subsidiaries meeting materiality thresholds set forth in the Credit Agreement. To secure the Company's obligations under the Credit Agreement, the Company and its domestic subsidiaries will be required to pledge the equity securities of certain of their respective material subsidiaries, subject to certain exceptions and limitations.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, incur subsidiary indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, repurchase stock, enter into restrictive agreements and enter into sale and leaseback transactions, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. At March 31, 2012, the Company was in compliance with these covenants.
The Credit Agreement includes customary events of default that, include among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts.
16. | CONTINGENCIES |
In the ordinary course of the Company's business, it is involved in a limited number of legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. The Company also periodically receives notifications from various third parties alleging infringement of patents, intellectual property rights or other matters. With respect to pending legal actions to which the Company is a party, although the outcomes of these actions are not generally determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon, and the Company is, and from time to time has been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
The Company's technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or trade secret infringement by the Company's proprietary technology. The terms of these indemnification provisions approximate the terms of the technology license agreements, which typically range from five to ten years. The Company's current license agreements expire from 2012 through 2030. The possible amount of future payments the Company could be required to make based on agreements that specify indemnification limits, if such indemnifications were required on all of these agreements, is approximately $98 million. There are some licensing agreements in place that do not specify indemnification limits. The Company had not recorded any liabilities related to these indemnification obligations as of March 31, 2012, as there are no amounts considered to be probable.
Contingent liabilities in the amount of $13.0 million were recorded in connection with the SST acquisition as an adverse outcome was determined to be probable and estimable. At March 31, 2012, there were no material changes to the amount recognized at the acquisition date for these contingencies.
17. STOCK REPURCHASE ACTIVITY
On December 11, 2007, the Company announced that its Board of Directors had authorized the repurchase of up to 10.0 million shares of its common stock in the open market or in privately negotiated transactions. As of March 31, 2012, the Company had repurchased 7.5 million shares under this authorization for $234.7 million. There is no expiration date associated with this program.
F-27
During the years ended March 31, 2012, 2011 and 2010, the Company did not purchase any of its shares of common stock.
18. EMPLOYEE BENEFIT PLANS
The Company maintains a contributory profit-sharing plan for its domestic employees meeting certain eligibility and service requirements. The plan qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended, and allows employees to contribute up to 60% of their base salary, subject to maximum annual limitations prescribed by the IRS. Through December 31, 2008, the Company made matching contributions of up to 25% of the first 4% of the participant's eligible compensation and could award up to an additional 25% under the discretionary match. The Company eliminated the mandatory matching contribution as of January 1, 2009. All matches are provided on a quarterly basis and require the participant to be an active employee at the end of each quarter. For the fiscal year ended March 31, 2012, the Company contributions to the plan totaled $1.6 million. For the fiscal year ended March 31, 2011, the Company contributions to the plan totaled $2.3 million. Due to expense reduction actions taken in response to adverse economic conditions, the Company did not contribute to the plan for the fiscal year ended March 31, 2010.
The Company's 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) became effective on March 1, 2002. The Board of Directors approved the 2001 Purchase Plan in May 2001 and the stockholders approved it in August 2001. Under the 2001 Purchase Plan, eligible employees of the Company may purchase shares of common stock at semi-annual intervals through periodic payroll deductions. The purchase price in general will be 85% of the lower of the fair market value of the common stock on the first day of the participant's entry date into the offering period or of the fair market value on the semi-annual purchase date. Depending upon a participant's entry date into the 2001 Purchase Plan, purchase periods under the 2001 Purchase Plan consist of overlapping periods of either 24, 18, 12 or 6 months in duration. In May 2003 and August 2003, the Company's Board and stockholders, respectively, each approved an annual automatic increase in the number of shares reserved under the 2001 Purchase Plan. The automatic increase took effect on January 1, 2005, and on each January 1 thereafter during the term of the plan, and is equal to the lesser of (i) 1,500,000, (ii) one half of one percent (0.5%) of the then outstanding shares of the Company's common stock, or (iii) such lesser amount as is approved by board of directors. On January 1, 2012, an additional 960,269 shares were reserved under the 2001 Purchase Plan based on the automatic increase. On January 1, 2011 an additional 941,530 shares were reserved under the 2001 Purchase Plan based on the automatic increase. On January 1, 2010, an additional 921,171 shares were reserved under the 2001 Purchase Plan based on the automatic increase. Since the inception of the 2001 Purchase Plan, 11,277,862 shares of common stock have been reserved for issuance and 4,639,761 shares have been issued under this purchase plan.
During fiscal 1995, a purchase plan was adopted for employees in non-U.S. locations. Such plan provided for the purchase price per share to be 100% of the lower of the fair market value of the common stock at the beginning or end of the semi-annual purchase plan period. Effective May 1, 2006, the Company's Board approved a purchase price per share equal to 85% of the lower of the fair market value of the common stock at the beginning or end of the semi-annual purchase plan period. Since the inception of this purchase plan, 1,500,285 shares of common stock have been reserved for issuance and 610,507 shares have been issued under this purchase plan.
Effective January 1, 1997, the Company adopted a non-qualified deferred compensation arrangement. This plan is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of highly compensated employees as defined in ERISA Sections 201, 301 and 401. There are no Company matching contributions made under this plan.
The Company has management incentive compensation plans which provide for bonus payments, based on a percentage of base salary, from an incentive pool created from operating profits of the Company, at the discretion of the Board of Directors. During the years ended March 31, 2012, 2011 and 2010, $7.8 million, $28.3 million and $16.5 million were charged against operations for these plans, respectively.
The Company also has a plan that, at the discretion of the Board of Directors, provides a cash bonus to all employees of the Company based on the operating profits of the Company. During the years ended March 31, 2012, 2011 and 2010, $3.2 million, $16.0 million and $4.3 million, respectively, were charged against operations for this plan.
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19. | EQUITY INCENTIVE PLANS |
Share-Based Compensation Expense
The following table presents the details of the Company's share-based compensation expense (amounts in thousands):
Year Ended March 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cost of sales | $ | 5,648 | (1) | $ | 6,825 | (1) | $ | 7,054 | (1) | |||
Research and development | 14,719 | 12,874 | 12,194 | |||||||||
Selling, general and administrative | 17,922 | 17,113 | 17,530 | |||||||||
Pre-tax effect of share-based compensation | 38,289 | 36,812 | 36,778 | |||||||||
Income tax benefit | 4,889 | 4,493 | 4,563 | |||||||||
Net income effect of share-based compensation | $ | 33,400 | $ | 32,319 | $ | 32,215 | ||||||
(1) During the year ended March 31, 2012, $6.8 million of share-based compensation expense was capitalized to inventory, and $5.6 million of previously capitalized share-based compensation expenses in inventory was sold. During the year ended March 31, 2011, $7.1 million of share-based compensation expense was capitalized to inventory, and $6.8 million of previously capitalized share-based compensation expense in inventory was sold. During the year ended March 31, 2010, $7.0 million of share-based compensation expense was capitalized to inventory, and $7.1 million of previously capitalized share-based compensation expense in inventory was sold.
The amount of unearned share-based compensation currently estimated to be expensed in the remainder of fiscal 2013 through fiscal 2017 related to unvested share-based payment awards at March 31, 2012 is $69.6 million. The weighted average period over which the unearned share-based compensation is expected to be recognized is approximately 2.02 years.
Combined Incentive Plan Information
RSU share activity under the 2004 Plan is set forth below:
Number of Shares | ||
Nonvested shares at March 31, 2009 | 3,601,772 | |
Granted | 1,846,241 | |
Forfeited/expired | (120,198 | ) |
Vested | (689,867 | ) |
Nonvested shares at March 31, 2010 | 4,637,948 | |
Granted | 1,766,257 | |
Forfeited/expired | (171,967 | ) |
Vested | (990,932 | ) |
Nonvested shares at March 31, 2011 | 5,241,306 | |
Granted | 1,627,191 | |
Forfeited/expired | (184,926 | ) |
Vested | (1,191,351 | ) |
Nonvested shares at March 31, 2012 | 5,492,220 | |
The total intrinsic value of RSUs which vested during the years ended March 31, 2012, 2011 and 2010 was $43.7 million, $32.6 million and $17.5 million, respectively. The aggregate intrinsic value of RSUs outstanding at March 31, 2012 was $204.3 million, calculated based on the closing price of the Company's common stock of $37.20 per share on March 31, 2012. At March 31, 2012, the weighted average remaining expense recognition period was 2.06 years.
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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 years ended March 31, 2012, 2011 and 2010 was $30.48, $26.05 and $20.75, respectively.
Option activity under the Company's stock inventive plans in the three years ended March 31, 2012 is set forth below:
Weighted | ||||||
Number of | Average Exercise | |||||
Shares | Price per Share | |||||
Outstanding at March 31, 2009 | 10,081,533 | $ | 24.20 | |||
Granted | 12,000 | 27.03 | ||||
Exercised | (1,492,866 | ) | 22.03 | |||
Canceled | (140,888 | ) | 27.79 | |||
Outstanding at March 31, 2010 | 8,459,779 | 24.52 | ||||
Granted | — | — | ||||
Exercised | (2,885,365 | ) | 23.09 | |||
Canceled | (77,490 | ) | 29.39 | |||
Outstanding at March 31, 2011 | 5,496,924 | 25.21 | ||||
Granted | — | — | ||||
Exercised | (2,129,260 | ) | 25.53 | |||
Canceled | (6,667 | ) | 25.05 | |||
Outstanding at March 31, 2012 | 3,360,997 | $ | 25.00 | |||
The total intrinsic value of options exercised during the years ended March 31, 2012, 2011 and 2010 was $26.7 million, $29.8 million and $7.6 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.
The aggregate intrinsic value of options outstanding and options exercisable at March 31, 2012 was $41.0 million. The aggregate intrinsic values were calculated based on the closing price of the Company's common stock of $37.20 per share on March 31, 2012.
As of March 31, 2012 and 2011, the number of option shares exercisable was 3,360,997 and 5,491,363, respectively, and the weighted average exercise price per share was $25.00 and $25.20, respectively.
There were no stock options granted in either of the years ended March 31, 2012 and 2011. The weighted average fair values per share of stock options granted in the year ended March 31, 2010 was $5.90. The fair values per share of stock options granted in the year ended March 31, 2010 were estimated utilizing the following assumptions:
Year Ended March 31, | ||
2010 | ||
Expected term (in years) | 6.50 | |
Volatility | 36 | % |
Risk-free interest rate | 2.57 | % |
Dividend yield | 5.00 | % |
20. COMMITMENTS
The Company leases office space, transportation and other equipment under operating leases which expire at various dates through March 31, 2018. The future minimum lease commitments under these operating leases at March 31, 2012 were as follows (amounts in thousands):
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Year Ending March 31, | Amount | |||
2013 | $ | 9,293 | ||
2014 | 7,221 | |||
2015 | 4,594 | |||
2016 | 3,438 | |||
2017 | 3,238 | |||
Thereafter | 2,693 | |||
Total minimum payments | $ | 30,477 | ||
Rental expense under operating leases totaled $15.1 million, $13.0 million and $10.7 million for fiscal years 2012, 2011 and 2010, respectively.
Commitments for construction or purchase of property, plant and equipment totaled $13.3 million as of March 31, 2012, all of which will be due within the next year. Other purchase obligations and commitments totaled approximately $21.4 million as of March 31, 2012. Other purchase obligations and commitments include payments due under various types of licenses and outstanding purchase commitments with the Company's wafer foundries of approximately $19.5 million for delivery in fiscal 2013.
21. | GEOGRAPHIC AND SEGMENT INFORMATION |
The Company's reporting segments include semiconductor products and technology licensing. The Company does not allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income taxes to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is beneficial in evaluating segment performance. Additionally, the Company does not allocate assets to segments for internal reporting purposes as it does not manage its segments by such metrics. The technology licensing segment is the result of the acquisition of SST in the first quarter of fiscal 2011 and thus for fiscal 2010, net sales and gross profit are solely attributable to the semiconductor product segment.
The following table represents revenues and gross profit for each segment (amounts in thousands):
Years ended March 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||
Net Sales | Gross Profit | Net Sales | Gross Profit | Net Sales | Gross Profit | |||||||||||||||
Semiconductor products | $ | 1,296,175 | $ | 709,754 | $ | 1,415,137 | $ | 806,398 | $ | 947,729 | $ | 534,242 | ||||||||
Technology licensing | 87,001 | 82,640 | 72,068 | 68,038 | — | — | ||||||||||||||
$ | 1,383,176 | $ | 792,394 | $ | 1,487,205 | $ | 874,436 | $ | 947,729 | $ | 534,242 | |||||||||
The Company sells its products to distributors and original equipment manufacturers (OEMs) in a broad range of market segments, performs on-going credit evaluations of its customers and, as deemed necessary, may require collateral, primarily letters of credit. The Company's operations outside the U.S. consist of product assembly and final test facilities in Thailand, and sales and support centers and design centers in certain foreign countries. Domestic operations are responsible for the design, development and wafer fabrication of products, as well as the coordination of production planning and shipping to meet worldwide customer commitments. The Thailand assembly and test facility is reimbursed in relation to value added with respect to assembly and test operations and other functions performed, and certain foreign sales offices receive compensation for sales within their territory. Accordingly, for financial statement purposes, it is not meaningful to segregate sales or operating profits for the assembly and test and foreign sales office operations. Identifiable long-lived assets (consisting of property, plant and equipment) by geographic area are as follows (amounts in thousands):
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March 31, | ||||||||
2012 | 2011 | |||||||
United States | $ | 314,339 | $ | 330,046 | ||||
Thailand | 186,098 | 193,729 | ||||||
Various other countries | 16,174 | 16,738 | ||||||
Total long-lived assets | $ | 516,611 | $ | 540,513 | ||||
Sales to unaffiliated customers located outside the U.S., primarily in Asia and Europe, aggregated approximately 82%, 80% and 77% of consolidated net sales for the years ended March 31, 2012, 2011 and 2010, respectively. Sales to customers in Europe represented 23%, 23% and 25% of consolidated net sales for the years ended March 31, 2012, 2011 and 2010, respectively. Sales to customers in Asia represented 56%, 57% and 51% of consolidated net sales for each of the years ended March 31, 2012, 2011 and 2010, respectively. Within Asia, sales into China, including Hong Kong, represented 24%, 25% and 25% of consolidated net sales for the years ended March 31, 2012, 2011 and 2010, respectively. Sales into Taiwan represented 15%, 13% and 10% of consolidated net sales for the years ended March 31, 2012, 2011 and 2010, respectively. Sales into any other individual foreign country did not exceed 10% of the Company's net sales for any of the years presented.
No single end customer accounted for 10% or more of the Company's net sales or accounts receivable balances during the years ended March 31, 2012, 2011 and 2010. The Company's largest distributor accounted for approximately 10% of its net sales in each of fiscal 2012 and fiscal 2011 and approximately 12% of its net sales in fiscal 2010. These net sales are reported in the semiconductor products segment.
22. | DERIVATIVE INSTRUMENTS |
The Company has international operations and is thus subject to foreign currency rate fluctuations. To manage the risk of changes in foreign currency rates, the Company periodically enters into derivative contracts comprised of foreign currency forward contracts to hedge its asset and liability foreign currency exposure and a portion of its foreign currency operating expenses. Approximately 99% of the Company's sales are U.S. Dollar denominated. To date, the exposure related to foreign exchange rate volatility has not been material to the Company's operating results. As of March 31, 2012 and 2011, the Company had no foreign currency derivatives outstanding. The Company recognized an immaterial amount of net realized gains and losses on foreign currency derivatives in the years ended March 31, 2012, 2011 and 2010.
23. | NET INCOME PER COMMON SHARE |
The following table sets forth the computation of basic and diluted net income per common share from continuing operations (in thousands, except per share amounts):
Year ended March 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Net income from continuing operations | $ | 336,705 | $ | 429,167 | $ | 217,005 | |||||
Weighted average common shares outstanding | 191,283 | 187,066 | 183,642 | ||||||||
Dilutive effect of stock options and RSUs | 4,207 | 4,463 | 3,697 | ||||||||
Dilutive effect of convertible debt | 8,029 | 3,186 | — | ||||||||
Weighted average common and potential common shares outstanding | 203,519 | 194,715 | 187,339 | ||||||||
Basic net income per common share – continuing operations | $ | 1.76 | $ | 2.29 | $ | 1.18 | |||||
Diluted net income per common share – continuing operations | $ | 1.65 | $ | 2.20 | $ | 1.16 | |||||
Diluted net income per common share for continuing operations for the years ended March 31, 2012 and 2011 includes 8,029,255 and 3,185,591 shares, respectively, issuable upon the exchange of debentures (see Note 14). There were no shares issuable upon the exchange of the debentures for the year ended March 31, 2010. 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 years ended March 31, 2012, 2011 and 2010 was $28.50, $29.61 and $31.16, respectively.
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Diluted net loss per common share from discontinued operations for the year ended March 31, 2011 was $0.05. There was no diluted net income or loss from discontinued operations for the years ended March 31, 2012 or 2010.
Weighted average common shares exclude the effect of option shares which are not dilutive. For the years ended March 31, 2012, 2011 and 2010, the number of option shares that were antidilutive were 53,374, 132,084 and 4,109,841, respectively.
24. | QUARTERLY RESULTS (UNAUDITED) |
The following table presents the Company's selected unaudited quarterly operating results for the eight quarters ended March 31, 2012. The Company believes that all adjustments of a normal recurring nature have been made to present fairly the related quarterly results (in thousands, except per share amounts):
Fiscal 2012 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||
Net sales | $ | 374,507 | $ | 340,602 | $ | 329,156 | $ | 338,911 | $ | 1,383,176 | ||||||||||
Gross profit | 219,748 | 194,994 | 183,779 | 193,873 | 792,394 | |||||||||||||||
Operating income | 116,860 | 97,620 | 88,127 | 93,909 | 396,516 | |||||||||||||||
Net income | 99,293 | 79,287 | 77,489 | 80,636 | 336,705 | |||||||||||||||
Diluted net income per common share | 0.49 | 0.40 | 0.38 | 0.39 | 1.65 | |||||||||||||||
Fiscal 2011 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||
Net sales | $ | 357,125 | $ | 382,271 | $ | 367,824 | $ | 379,985 | $ | 1,487,205 | ||||||||||
Gross profit | 207,443 | 225,005 | 216,397 | 225,591 | 874,436 | |||||||||||||||
Operating income | 109,226 | 123,143 | 117,453 | 124,361 | 474,183 | |||||||||||||||
Net income from continuing operations | 91,877 | 104,748 | 101,930 | 130,612 | 429,167 | |||||||||||||||
Net loss from discontinued operations | (2,311 | ) | (1,668 | ) | (1,154 | ) | (5,084 | ) | (10,217 | ) | ||||||||||
Net income | 89,566 | 103,080 | 100,776 | 125,528 | 418,950 | |||||||||||||||
Diluted net income per common share – continuing operations | 0.48 | 0.55 | 0.52 | 0.65 | 2.20 | |||||||||||||||
Diluted net loss per common share – discontinued operations | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.03 | ) | (0.05 | ) | ||||||||||
Diluted net income per common share | 0.47 | 0.54 | 0.51 | 0.62 | 2.15 | |||||||||||||||
Refer to Note 4, Special Charges, for an explanation of the special charges included in operating income in fiscal 2012 and fiscal 2011.
25. SUPPLEMENTAL FINANCIAL INFORMATION
Cash paid for income taxes amounted to $20.1 million, $17.0 million and $9.8 million during the years ended March 31, 2012, 2011 and 2010, respectively. Cash paid for interest on borrowings amounted to $24.4 million in each of fiscal 2012, 2011 and 2010.
A summary of additions and deductions related to the allowance for doubtful accounts for the years ended March 31, 2012, 2011 and 2010 follows (amounts in thousands):
Balance at Beginning of Year | Charged to Costs and Expenses | Deductions (1) | Balance at End of Year | |||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||
2012 | $ | 2,838 | $ | 7 | $ | (243 | ) | $ | 2,602 | |||||||
2011 | 3,109 | 31 | (302 | ) | 2,838 | |||||||||||
2010 | 3,176 | 90 | (157 | ) | 3,109 | |||||||||||
(1) Deductions represent uncollectible accounts written off, net of recoveries.
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26. DIVIDENDS
On October 28, 2002, the Company announced that its Board of Directors had approved and instituted a quarterly cash dividend on its common stock. The Company has continued to pay quarterly dividends and has increased the amount of such dividends on a regular basis. Cash dividends paid per share amounted to $1.390 , $1.374 and $1.359 during the years ended March 31, 2012, 2011 and 2010, respectively. Total dividend payments amounted to $266.2 million , $256.8 million and $249.6 million during the years ended March 31, 2012, 2011 and 2010, respectively.
27. SUBSEQUENT EVENTS
On May 2, 2012, the Company announced that it had signed a definitive agreement to acquire Standard Microsystems Corporation ("SMSC") for $37.00 per share in cash, which represents a total equity value of approximately $939 million, and a total enterprise value of approximately $766 million, after excluding SMSC's cash and investments on its balance sheet of approximately $173 million at February 29, 2012. The acquisition has been approved by the Boards of Directors of each company and is expected to close in the second quarter of fiscal 2013, subject to approval by SMSC stockholders, regulatory approvals and other customary closing conditions.
On April 19, 2012, the Company announced the acquisition of Roving Networks, a privately held company. Roving Networks is an innovator in low-power embedded Wi-Fi and Bluetooth solutions based in Los Gatos, California. The acquisition was not material to the Company's financial position.
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