SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended September 30, 2007.
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from __________ to __________
Commission
File Number: 0-21184
MICROCHIP
TECHNOLOGY INCORPORATED
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
86-0629024
|
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(IRS
Employer Identification No.)
|
2355
W. Chandler Blvd., Chandler, AZ 85224-6199
(480)
792-7200
(Address,
Including Zip Code, and Telephone Number,
Including
Area Code, of Registrant’s
Principal
Executive Offices)
Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements
for
the past 90 days.
Yes x No ¨
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
|
Large
Accelerated Filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). (Check One)
Yes ¨ No x
|
Shares
Outstanding of Registrant’s Common Stock
|
|
|
Class
|
Outstanding
at October 31, 2007
|
|
Common
Stock, $0.001 par value
|
214,240,668
shares
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
|
Page
|
||
|
PART
I. FINANCIAL INFORMATION
|
||
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
PART
II. OTHER INFORMATION
|
||
|
CERTIFICATIONS
|
||
|
EXHIBITS
|
||
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
ASSETS
|
||||||||
|
September
30,
|
March
31,
|
|||||||
|
2007
|
2007
|
|||||||
|
(Unaudited)
|
(Note
1)
|
|||||||
|
Cash
and cash equivalents
|
$ |
174,225
|
$ |
167,477
|
||||
|
Short-term
investments
|
659,081
|
583,000
|
||||||
|
Accounts
receivable, net
|
125,912
|
124,559
|
||||||
|
Inventories
|
124,587
|
121,024
|
||||||
|
Prepaid
expenses
|
22,161
|
15,547
|
||||||
|
Deferred
tax assets
|
64,361
|
61,983
|
||||||
|
Other
current assets
|
72,184
|
11,147
|
||||||
|
Total
current
assets
|
1,242,511
|
1,084,737
|
||||||
|
Property,
plant and equipment, net
|
536,316
|
605,722
|
||||||
|
Long-term
investments
|
415,543
|
527,910
|
||||||
|
Goodwill
|
31,886
|
31,886
|
||||||
|
Intangible
assets, net
|
10,199
|
8,456
|
||||||
|
Other
assets
|
12,224
|
10,830
|
||||||
|
Total
assets
|
$ |
2,248,679
|
$ |
2,269,541
|
||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Accounts
payable
|
$ |
39,654
|
$ |
34,675
|
||||
|
Accrued
liabilities
|
52,824
|
129,882
|
||||||
|
Deferred
income on shipments to distributors
|
93,383
|
91,363
|
||||||
|
Total
current
liabilities
|
185,861
|
255,920
|
||||||
|
Long-term
income tax payable
|
106,031
|
---
|
||||||
|
Deferred
tax liability
|
13,830
|
8,327
|
||||||
|
Other
long-term liabilities
|
984
|
926
|
||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $0.001 par value; authorized 5,000,000 shares; noshares issued
or
outstanding.
|
---
|
---
|
||||||
|
Common
stock, $0.001 par value; authorized 450,000,000 shares;
|
||||||||
|
issued
218,789,994 and
outstanding 215,464,994 shares at September 30, 2007;
issued
and outstanding 217,439,960 shares at March 31, 2007.
|
215
|
217
|
||||||
|
Additional
paid-in capital
|
798,680
|
755,834
|
||||||
|
Retained
earnings
|
1,271,242
|
1,255,486
|
||||||
|
Accumulated
other comprehensive loss
|
(3,015 | ) | (7,169 | ) | ||||
|
Less
shares of common stock held in treasury at cost; 3,325,000 shares
at
September 30, 2007;
and
no shares at March 31, 2007.
|
(125,149 | ) |
---
|
|||||
|
Net
stockholders’
equity
|
1,941,973
|
2,004,368
|
||||||
|
Total
liabilities and
stockholders’ equity
|
$ |
2,248,679
|
$ |
2,269,541
|
||||
|
See
accompanying notes to condensed consolidated financial
statements
|
||||||||
-3-
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(in
thousands except per share amounts)
(Unaudited)
|
Three
Months Ended September 30,
|
Six
Months Ended September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Net
sales
|
$ |
258,647
|
$ |
267,934
|
$ |
522,719
|
$ |
530,491
|
||||||||
|
Cost
of sales (1)
|
103,935
|
105,973
|
209,462
|
210,046
|
||||||||||||
|
Gross
profit
|
154,712
|
161,961
|
313,257
|
320,445
|
||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Research
and development (1)
|
29,306
|
29,084
|
59,052
|
57,108
|
||||||||||||
|
Selling,
general and administrative (1)
|
42,969
|
41,518
|
86,749
|
82,297
|
||||||||||||
|
Loss
on sale of Fab 3
|
26,763
|
---
|
26,763
|
---
|
||||||||||||
|
99,038
|
70,602
|
172,564
|
139,405
|
|||||||||||||
|
Operating
income
|
55,674
|
91,359
|
140,693
|
181,040
|
||||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
14,418
|
14,981
|
29,320
|
28,908
|
||||||||||||
|
Interest
expense
|
---
|
(1,767 | ) |
---
|
(4,256 | ) | ||||||||||
|
Other,
net
|
52
|
16
|
874
|
192
|
||||||||||||
|
Income
before income taxes
|
70,144
|
104,589
|
170,887
|
205,884
|
||||||||||||
|
Income
tax provision
|
9,465
|
25,101
|
29,915
|
49,412
|
||||||||||||
|
Net
income
|
$ |
60,679
|
$ |
79,488
|
$ |
140,972
|
$ |
156,472
|
||||||||
|
Basic
net income per common share
|
$ |
0.28
|
$ |
0.37
|
$ |
0.65
|
$ |
0.73
|
||||||||
|
Diluted
net income per common share
|
$ |
0.27
|
$ |
0.36
|
$ |
0.63
|
$ |
0.71
|
||||||||
|
Dividends
declared per common share
|
$ |
0.295
|
$ |
0.235
|
$ |
0.575
|
$ |
0.450
|
||||||||
|
Basic
common shares outstanding
|
216,797
|
215,025
|
217,432
|
214,362
|
||||||||||||
|
Diluted
common shares outstanding
|
222,004
|
220,128
|
222,806
|
220,869
|
||||||||||||
|
(1)
Includes share-based compensation expense as follow:
|
||||||||||||||||
|
Cost
of sales
|
$ |
1,493
|
$ |
---
|
$ |
3,083
|
$ |
---
|
||||||||
|
Research
and development
|
2,509
|
2,522
|
5,095
|
4,813
|
||||||||||||
|
Selling,
general and administrative
|
3,769
|
3,646
|
7,626
|
7,160
|
||||||||||||
|
See
accompanying notes to condensed consolidated financial
statements
|
||||||||||||||||
-4-
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(Unaudited)
|
Six
months ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ |
140,972
|
$ |
156,472
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
|
||||||||
|
activities:
|
||||||||
|
Depreciation
and amortization
|
52,791
|
58,210
|
||||||
|
Deferred
income taxes
|
(4,875 | ) |
8,642
|
|||||
|
Share-based
compensation expense related to equity incentive plans
|
15,804
|
11,973
|
||||||
|
Excess
tax benefit from share-based compensation
|
(13,737 | ) | (11,250 | ) | ||||
|
Tax
benefit from equity incentive plans
|
14,260
|
11,255
|
||||||
|
Gain
on sale of assets
|
(450 | ) | (364 | ) | ||||
|
Loss
on sale of Fab 3
|
26,763
|
---
|
||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
(Increase)
decrease in accounts receivable
|
(1,353 | ) |
16,249
|
|||||
|
(Increase)
decrease in inventories
|
(3,421 | ) |
768
|
|||||
|
Increase
(decrease) in deferred income on shipments to distributors
|
2,020
|
(1,274 | ) | |||||
|
Increase
in accounts payable and accrued liabilities
|
8,918
|
6,166
|
||||||
|
Change
in other assets and liabilities
|
(9,655 | ) | (6,112 | ) | ||||
|
Net
cash provided by operating activities
|
228,037
|
250,735
|
||||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of investments
|
(928,663 | ) | (976,124 | ) | ||||
|
Sales
and maturities of investments
|
970,275
|
567,725
|
||||||
|
Investment
in other assets
|
(2,668 | ) | (478 | ) | ||||
|
Proceeds
from sale of assets
|
1,000
|
1,746
|
||||||
|
Capital
expenditures
|
(37,245 | ) | (35,914 | ) | ||||
|
Net
cash used provided by (used in) investing activities
|
2,699
|
(443,045 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Payment
of cash dividend
|
(125,214 | ) | (96,573 | ) | ||||
|
Repurchase
of common stock
|
(150,172 | ) |
---
|
|||||
|
Proceeds
from sale of common stock
|
37,661
|
33,083
|
||||||
|
Excess
tax benefit from share-based compensation
|
13,737
|
11,250
|
||||||
|
Payments
on short-term borrowings
|
---
|
(188,154 | ) | |||||
|
Net
cash used in financing activities
|
(223,988 | ) | (240,394 | ) | ||||
|
Net
increase (decrease) in cash and cash equivalents
|
6,748
|
(432,704 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
167,477
|
565,273
|
||||||
|
Cash
and cash equivalents at end of period
|
$ |
174,225
|
$ |
132,569
|
||||
|
See
accompanying notes to condensed consolidated financial
statements
|
||||||||
-5-
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
(1)
|
Basis
of Presentation
|
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries
(the Company). All intercompany balances and transactions have been
eliminated in consolidation. We own 100% of the outstanding stock in
all of our subsidiaries.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America, pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). In the opinion of
management, all adjustments of a normal recurring nature which are necessary
for
a fair presentation have been included. Certain information and
footnote disclosures normally included in audited consolidated financial
statements have been condensed or omitted pursuant to such SEC rules and
regulations. It is suggested that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended March 31, 2007. The
results of operations for the three and six months ended September 30, 2007
are
not necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2008 or for any other period.
|
(2)
|
Recently
Issued Accounting
Pronouncements
|
In
June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 48, Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement 109 (FIN 48). FIN 48 establishes a single
model to address accounting for uncertain tax positions. FIN 48
clarifies the accounting for income taxes by prescribing a minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on
de-recognition, measurement classification, interest and penalties, accounting
in interim periods, disclosure and transition. The Company adopted
FIN 48 on April 1, 2007, and did not recognize any cumulative-effect adjustment
associated with its unrecognized tax benefits, interest, and
penalties. See further discussion in Note 8.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurement (SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements, but does not require any new fair value
measurement. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal
years. The Company is in the process of determining the effect, if
any, that the adoption of SFAS No. 157 will have on the Company’s consolidated
financial statements. Because SFAS No. 157 does not require any new
fair value measurements or re-measurements of previously computed fair values,
the Company does not believe the adoption of this Statement will have a material
effect on the Company’s results of operations or financial
condition.
On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). Under
this Statement, we may elect to report financial instruments and certain other
items at fair value on a contract-by-contract basis with changes in value
reported in earnings. This election is irrevocable. SFAS
No. 159 provides an opportunity to mitigate volatility in reported earnings
that
is caused by measuring hedged assets and liabilities that were previously
required to use a different accounting method than the related hedging contracts
when the complex provisions of SFAS No. 133 hedge accounting are not
met. SFAS No. 159 is effective for years beginning after November 15,
2007. The Company is currently evaluating the potential impact of
adopting this Statement.
-6-
(3) Loss
on Sale of Fab 3
The
Company received an unsolicited
offer on its Puyallup, Washington facility (Fab 3) in September
2007. The Company assessed its available capacity in its current
facilities, along with potential available capacity from outside foundries
and
determined the capacity of Fab 3 would not be required in the near
term. As a result of this assessment, the Company accepted the offer
on September 21, 2007 and the transaction closed on October 19,
2007. The Company received $27.5 million in cash, net of expenses
associated with the sale, and recognized a loss on sale of $26.8 million,
representing the difference between the carrying value of the assets at
September 30, 2007 and the amounts realized subsequent to September 30,
2007. At September 30, 2007, the $27.5 million of net cash from
the sale, which was received in October 2007, was included as a component of
other current assets.
(4) Investments
The
Company’s investments are intended to establish a high-quality portfolio that
preserves principal, meets liquidity needs, avoids inappropriate concentrations
and delivers an appropriate yield in relationship to the Company’s investment
guidelines and market conditions. The following is a summary of
available-for-sale securities at September 30, 2007 (amounts in
thousands):
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Government
agency bonds
|
$ |
634,742
|
$ |
268
|
$ |
3,128
|
$ |
631,882
|
||||||||
|
Auction
rate securities
|
159,475
|
---
|
---
|
159,475
|
||||||||||||
|
Floating
rate securities
|
105,105
|
---
|
80
|
105,025
|
||||||||||||
|
Municipal
bonds
|
88,730
|
153
|
---
|
88,883
|
||||||||||||
|
Corporate
bonds and certificates of deposit
|
90,000
|
---
|
641
|
89,359
|
||||||||||||
| $ |
1,078,052
|
$ |
421
|
$ |
3,849
|
$ |
1,074,624
|
|||||||||
At September
30, 2007, the Company evaluated its investment portfolio, and noted unrealized
losses of $3.8 million due to fluctuations in interest
rates. Management does not believe any of the unrealized losses
represented an other-than-temporary impairment based on its evaluation of
available evidence as of September 30, 2007. The Company’s intent is
to hold these investments until such time as these assets are no longer
impaired. For those investments not scheduled to mature until after
September 30, 2008, such recovery is not anticipated to occur in the next year
and these investments have been classified as long-term
investments. At September 30, 2007, short-term investments consisted
of $659.1 million and long-term investments consisted of
$415.5 million.
The
amortized cost and estimated fair value of the available-for-sale securities
at
September 30, 2007, by maturity, are shown below (amounts in
thousands). Expected maturities can differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties, and the Company views its
available-for-sale securities as available for current operations.
|
Adjusted
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair
Value
|
|||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
Due
in one year or
less
|
$ |
228,444
|
$ |
30
|
$ |
785
|
$ |
227,689
|
||||||||
|
Due
after one year and through
five years
|
611,400
|
342
|
3,064
|
608,678
|
||||||||||||
|
Due
after five years and
through ten years
|
7,843
|
17
|
---
|
7,860
|
||||||||||||
|
Due
after ten
years
|
230,365
|
32
|
---
|
230,397
|
||||||||||||
| $ |
1,078,052
|
$ |
421
|
$ |
3,849
|
$ |
1,074,624
|
|||||||||
-7-
During
the three and six months ended September 30, 2007, the Company did not have
any
gross realized gains or losses on sales of available-for-sale
securities.
Included
within the Company’s short-term investments are AA and AAA rated investments in
auction rate securities. Auction rate securities are variable rate
debt instruments whose interest rates are reset approximately every 7 to 35
days. The underlying securities generally have longer dated
contractual maturities. The auction rate securities are classified as
available for sale and are recorded at fair value. Typically, the
carrying value of auction rate securities approximates fair value due to the
frequent resetting of the interest rates. In September 2007, auctions
for $24.9 million of the Company’s investments in auction rate securities
failed. The failures resulted in the interest rate on these
investments resetting at Libor plus 125 or 175 basis points. The
investments are not liquid, and the Company now earns a premium interest rate
on
the investments. In the event the Company needed to access these
funds, it would not be able to until a future auction on these investments
was
successful. If the issuers are unable to successfully close future
auctions and their credit ratings deteriorate, the Company may be required
to
adjust the carrying value of these investments through an impairment charge
to
earnings. There are $22.4 million of the failed auctions that are
insured for their principal and interest in the case of default. The
fair value of the failed auction rate securities has been estimated based on
prices provided by the firms managing the Company’s investments, which could
change significantly based on market conditions. The Company has not
recognized any unrealized losses or impairment charges on these investments
in
the three and six months ended September 30, 2007. Based on the
Company’s ability to access its cash and other short-term investments, its
expected operating cash flows, and its other sources of cash, it does not
anticipate the lack of liquidity on these investments will affect its ability
to
operate its business as usual.
|
(5)
|
Accounts
Receivable
|
Accounts
receivable consists of the following (amounts in thousands):
|
September
30,
2007
|
March
31,
2007
|
|||||||
|
Trade
accounts receivable
|
$ |
128,916
|
$ |
127,467
|
||||
|
Other
|
295
|
636
|
||||||
|
129,211
|
128,103
|
|||||||
|
Less
allowance for doubtful accounts
|
3,299
|
3,544
|
||||||
| $ |
125,912
|
$ |
124,559
|
|||||
|
(6)
|
Inventories
|
The
components of inventories consist of the following (amounts in
thousands):
|
September
30,
2007
|
March
31,
2007
|
|||||||
|
Raw
materials
|
$ |
4,653
|
$ |
5,118
|
||||
|
Work
in process
|
91,947
|
83,783
|
||||||
|
Finished
goods
|
27,987
|
32,123
|
||||||
| $ |
124,587
|
$ |
121,024
|
|||||
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.
-8-
|
(7)
|
Property,
Plant and Equipment
|
Property,
plant and equipment consists of the following (amounts in
thousands):
|
September
30,
2007
|
March
31,
2007
|
|||||||
|
Land
|
$ |
35,065
|
$ |
47,212
|
||||
|
Building
and building improvements
|
325,663
|
372,149
|
||||||
|
Machinery
and equipment
|
1,083,266
|
1,059,565
|
||||||
|
Projects
in process
|
76,053
|
69,040
|
||||||
|
1,520,047
|
1,547,966
|
|||||||
|
Less
accumulated depreciation and
amortization
|
983,731
|
942,244
|
||||||
| $ |
536,316
|
$ |
605,722
|
|||||
Depreciation
expense attributed to property and equipment was $51.9 million in the six
months ended September 30, 2007 and $57.3 million in the six months ended
September 30, 2006.
As
a
result of the sale of Fab 3, $54.2 million of net fixed assets were removed
from property, plant and equipment as of September 30, 2007.
(8) Income
Taxes
Effective
at the beginning of the first quarter of fiscal 2008, the Company adopted the
provision of FIN 48, Accounting for Uncertainty in Income Taxes–an
Interpretation of FASB Statement No. 109. The adoption of FIN 48
did not impact the Company’s consolidated balance sheets, statements of
operations or statements of cash flows. The total amount of gross unrecognized
tax benefits as of the date of adoption was $102.8 million. The
Company historically classified unrecognized tax benefits in current income
taxes payable. As a result of the adoption of FIN 48, unrecognized tax
benefits were reclassified to long-term income taxes payable.
The
Company’s policy to include interest and penalties related to unrecognized tax
benefits within the provision for taxes on the consolidated condensed statements
of income did not change as a result of implementing the provisions of FIN
48.
As of the date of adoption of FIN 48, the Company did not have an accrued
liability for the payment of interest and penalties relating to unrecognized
tax
benefits.
The
Company files U.S. federal, U.S. state, and foreign income tax returns.
For U.S. federal, and in general for state tax returns, the fiscal 2002
through fiscal 2007 tax years remain open for examination by
tax
authorities. For foreign tax returns, the Company is generally no longer
subject to income tax examinations for years prior to fiscal 2002.
The
Company recognizes liabilities for anticipated tax audit issues in the United
States and other tax jurisdictions based on its estimate of whether, and the
extent to which, additional tax payments are more likely than not. The
Company believes that it maintains adequate reserves to offset any potential
income tax liabilities that may arise upon final resolution of matters for
open
tax years. The IRS is currently auditing the Company’s fiscal years ended
March 31, 2002, 2003 and 2004. 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 adequate for all
open
years based on an assessment of many factors including past experience and
interpretations of tax law applied to the facts of each matter.
If
such
amounts ultimately prove to be unnecessary, the resulting reversal of such
reserves would result in tax benefits being recorded in the period the reserves
are no longer deemed necessary. If such amounts 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. Although timing of
the resolution and/or closure on audits is highly uncertain, the Company does
not believe it is reasonably possible that the unrecognized tax benefits would
materially change in the next 12 months.
-9-
Loss
on Sale of Fab 3
The
income tax provision that the Company recorded in the three and six-month
periods ended September 30, 2007 was impacted by loss on sale of Fab
3. There were no such losses in the three and six-month periods ended
September 30, 2006. The following table displays the impact the loss
had on the income tax provision that the Company recorded in the three and
six-month periods ended September 30, 2007 (amounts in thousands):
|
Three
Months Ended September 30, 2007
|
Six
Months Ended September 30, 2007
|
|||||||
|
Income
before taxes
|
$ |
70,144
|
$ |
170,887
|
||||
|
Loss
on sale of Fab
3
|
26,763
|
26,763
|
||||||
|
Income
before taxes excluding loss on sale
|
96,907
|
197,650
|
||||||
|
Effective
tax rate
|
20.40 | % | 20.35 | % | ||||
|
Income
tax provision excluding effect of loss on sale
|
19,769
|
40,219
|
||||||
|
Tax
benefit of loss on sale of Fab 3 at 38.5%
|
10,304
|
10,304
|
||||||
|
Income
tax
provision
|
$ |
9,465
|
$ |
29,915
|
||||
|
(9)
|
Comprehensive
Income
|
Comprehensive
income consists of net income offset by net unrealized losses on
available-for-sale investments. The components of other comprehensive
loss and related tax effects were as follows (amounts in
thousands):
|
Three
Months Ended
September
30,
|
Six
Months Ended
September
30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Decrease
in unrealized losses on investments, net of tax effect of $1,513,
$1,055,
$1,172, and $670,
respectively
|
$ |
5,175
|
$ |
5,306
|
$ |
4,153
|
$ |
3,939
|
||||||||
Comprehensive income
was $55.5 million and $136.8 million for the three and six months ended
September 30, 2007, respectively. Comprehensive income was
$74.2 million and $152.5 million for the three and six months ended
September 30, 2006, respectively.
|
(10)
|
Employee
Benefit Plans
|
Equity
Incentive Plans
The
Company has equity incentive plans under which incentive stock options,
restricted stock units (RSUs) and non-qualified stock options have been granted
to employees and under which non-qualified stock options have been granted
to
non-employee members of the Board of Directors. The Company’s 2004
Equity Incentive Plan, as amended and restated (2004 Plan), is shareholder
approved and permits the grant of stock options and RSUs to employees,
non-employee members of the Board of Directors and consultants. At
September 30, 2007, 11.7 million shares remained available for future grant
under the 2004 Plan.
The
Board
of Directors or the plan administrator determines eligibility, vesting schedules
and exercise prices for equity incentives granted under the
plans. Equity incentives granted generally have a term of 10
years,
-10-
Share-Based
Compensation Expense
The
following table presents details of share-based compensation expense resulting
from the application of SFAS No. 123 (revised 2004), Share-Based
Payments (SFAS 123R) (amounts in thousands):
|
Three
Months Ended
September
30,
|
Six
Months Ended
September
30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Cost
of sales
|
$ | 1,493 | (1) | $ |
---
|
$ | 3,083 | (1) | $ |
---
|
||||||
|
Research
and development
|
2,509
|
2,522
|
5,095
|
4,813
|
||||||||||||
|
Selling,
general and administrative
|
3,769
|
3,646
|
7,626
|
7,160
|
||||||||||||
|
Pre-tax
effect of share-based compensation
|
7,771
|
6,168
|
15,804
|
11,973
|
||||||||||||
|
Income
tax benefit
|
1,586
|
1,481
|
3,217
|
2,874
|
||||||||||||
|
Net
income effect of share-based compensation
|
$ |
6,185
|
$ |
4,687
|
$ |
12,587
|
$ |
9,099
|
||||||||
|
Effect
on basic net income per common share
|
$ |
0.02
|
$ |
0.02
|
$ |
0.06
|
$ |
0.04
|
||||||||
|
Effect
on diluted net income per share
|
$ |
0.03
|
$ |
0.02
|
$ |
0.06
|
$ |
0.05
|
||||||||
|
|
(1)
During the three and six months ended September 30, 2007,
$1.6 million and $3.2 million, respectively, was
capitalized to inventory and $1.5 million and $3.1 million, respectively,
of capitalized inventory was sold. During the three and six
months ended September 30, 2006, $1.7 million and $3.3 million,
respectively, was capitalized to
inventory.
|
The
amount of unearned share-based compensation currently estimated to be expensed
in the remainder of fiscal 2008 through fiscal 2012 related to unvested
share-based payment awards at September 30, 2007 is
$66.0 million. The weighted average period over which the
unearned share-based compensation is expected to be recognized is approximately
2.57 years.
Combined
Incentive Plan Information
RSU
activity under the 2004 Plan for the six months ended September 30, 2007 is
set
forth below:
|
Number
of Shares
|
||||
|
Nonvested
shares at March 31, 2007
|
1,687,443
|
|||
|
Granted
|
524,822
|
|||
|
Cancelled
|
(49,768 | ) | ||
|
Vested
|
(68,667 | ) | ||
|
Nonvested
shares at September 30, 2007
|
2,093,830
|
|||
The
total
pre-tax intrinsic value of RSUs which vested during the three and six months
ended September 30, 2007 was $1.4 million and $2.7 million,
respectively. The aggregate pre-tax intrinsic value of RSUs
outstanding at September 30, 2007 was $75.9 million. The
aggregate pre-tax intrinsic value was calculated based on the closing price
of
the Company’s common stock of $36.32 on September 28, 2007. At
September 30, 2007, the weighted average remaining expense recognition period
was 2.99 years.
The
weighted average fair values per share of the RSUs awarded are calculated based
on the fair market value of the Company’s common stock on the respective grant
dates discounted for the Company’s expected
-11-
Option
activity under the Company’s stock incentive plans for the six months ended
September 30, 2007 is set forth below:
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
per Share
|
|||||||
|
Outstanding
at March 31, 2007
|
14,740,546
|
$ |
21.88
|
|||||
|
Granted
|
27,586
|
37.78
|
||||||
|
Exercised
|
(1,761,310 | ) |
18.09
|
|||||
|
Cancelled
|
(89,879 | ) |
24.65
|
|||||
|
Outstanding
at September 30, 2007
|
12,916,943
|
$ |
22.42
|
|||||
The
total
pre-tax intrinsic value of options exercised during the three and six months
ended September 30, 2007 was $13.8 million and $37.8 million,
respectively. This intrinsic value represents the difference between
the fair market value of the Company’s common stock on the date of exercise and
the exercise price of each equity award.
The
following table summarizes information about the stock options outstanding
at
September 30, 2007:
|
Range
of Exercise
Prices
|
Number
of
Outstanding
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Life
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
||||||||||||
|
(in
years)
|
|||||||||||||||||
| $ |
4.72 – $15.86
|
1,466,692
|
$ |
10.44
|
1.68
|
1,466,692
|
$ |
10.44
|
|||||||||
|
15.87 – 15.92
|
926,769
|
15.92
|
3.47
|
926,769
|
15.92
|
||||||||||||
|
15.93 – 18.48
|
1,733,144
|
18.40
|
5.31
|
1,105,248
|
18.35
|
||||||||||||
|
18.49 – 23.39
|
1,589,791
|
22.38
|
3.05
|
1,589,772
|
22.38
|
||||||||||||
|
23.40 – 25.26
|
898,501
|
24.19
|
4.62
|
898,177
|
24.19
|
||||||||||||
|
25.27 – 25.29
|
1,619,111
|
25.29
|
7.49
|
28,271
|
25.29
|
||||||||||||
|
25.30 – 27.00
|
694,489
|
26.21
|
6.26
|
671,780
|
26.21
|
||||||||||||
|
27.01 – 27.05
|
1,422,574
|
27.05
|
6.49
|
66,772
|
27.05
|
||||||||||||
|
27.06 – 27.15
|
1,510,015
|
27.15
|
4.49
|
1,510,014
|
27.15
|
||||||||||||
|
27.16 – 37.84
|
1,055,857
|
29.96
|
6.20
|
781,033
|
29.50
|
||||||||||||
|
12,916,943
|
$ |
22.42
|
4.87
|
9,044,528
|
$ |
21.21
|
|||||||||||
The
aggregate pre-tax intrinsic value of options outstanding and options exercisable
at September 30, 2007 was $179.7 million and $136.7 million,
respectively. The aggregate pre-tax intrinsic values were calculated
based on the closing price of the Company’s common stock of $36.32 per share on
September 28, 2007.
The
weighted average fair value per share of stock options granted in the three
and
six months ended September 30, 2007 was $12.16 and $12.20,
respectively.
-12-
The
fair
value of each stock option award is estimated on the date of the grant using
the
Black-Scholes-Merton (Black-Scholes) option pricing model. The
following are the weighted average assumptions used in the Black-Scholes model
to value the options:
|
Six
Months Ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Expected
life (in years)
|
6.50
|
5.46
|
||||||
|
Expected
volatility
|
38 | % | 41 | % | ||||
|
Risk-free
interest rate
|
4.50 | % | 4.67 | % | ||||
|
Expected
dividend yield
|
3.00 | % | 3.00 | % | ||||
Employee
Stock Purchase Plan
The
Company has an employee stock purchase plan and an international employee stock
purchase plan (the Purchase Plans) for all eligible employees. Under
the Purchase Plans, employees may purchase shares of the Company’s common stock
at six-month intervals at 85% of fair market value (calculated in the manner
provided in the plan). Employees purchase such stock using payroll
deductions, which may not exceed 10% of their total cash
compensation. The Purchase Plans impose certain limitations upon an
employee’s right to acquire common stock, including the
following: (i) no employee may purchase more than 7,500 shares of
common stock on any purchase date and (ii) no employee may be granted rights
to
purchase more than $25,000 of common stock for each calendar year in which
such
rights are at any time outstanding. At September 30, 2007,
4.5 million shares were available for future issuance under the Purchase
Plans. The Company issued 198,768 shares under the Purchase Plans in
the six months ended September 30, 2007.
The
weighted average fair values per share of stock purchased in connection with
the
Company’s stock purchase plan have been estimated using the Black-Scholes option
pricing model with the following assumptions:
|
Six
Months Ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Expected
life (in years)
|
0.50
|
0.50
|
||||||
|
Expected
volatility
|
27 | % | 31 | % | ||||
|
Risk-free
interest rate
|
4.20 | % | 5.25 | % | ||||
|
Expected
dividend yield
|
3.00 | % | 3.00 | % | ||||
|
(11)
|
Net
Income Per Share
|
The
following table sets forth the computation of basic and diluted net income
per
share (in thousands, except per share amounts):
|
Three
Months Ended
September
30,
|
Six
Months Ended
September
30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Net
income
|
$ |
60,679
|
$ |
79,488
|
$ |
140,972
|
$ |
156,472
|
||||||||
|
Weighted
average common shares outstanding
|
216,797
|
215,025
|
217,432
|
214,362
|
||||||||||||
|
Dilutive
effect of stock options and RSUs
|
5,207
|
5,103
|
5,374
|
6,507
|
||||||||||||
|
Weighted
average common and potential common shares outstanding
|
222,004
|
220,128
|
222,806
|
220,869
|
||||||||||||
|
Basic
net income per common share
|
$ |
0.28
|
$ |
0.37
|
$ |
0.65
|
$ |
0.73
|
||||||||
|
Diluted
net income per common share
|
$ |
0.27
|
$ |
0.36
|
$ |
0.63
|
$ |
0.71
|
||||||||
-13-
|
(12)
|
Stock
Repurchase
|
On
April
22, 2004, the Company announced that its Board of Directors had authorized
the
Company to purchase up to 2.5 million shares of its common stock in the open
market or in privately negotiated transactions. As of September 30,
2007, the Company had repurchased 2.5 shares under this authorization for
$82.0 million. On October 25, 2006, the Company announced that
its Board of Directors had authorized the repurchase of up to an additional
10 million shares of its common stock in the open market or in privately
negotiated transactions. As of September 30, 2007, the Company had
repurchased 2,506,565 shares under this authorization for $94.7
million. As of September 30, 2007, approximately 3,325,000 shares
remained as treasury shares with the balance of the shares being used to fund
share issuance requirements under the Company’s equity incentive
plans. The timing and amount of future repurchases will depend upon
market conditions, interest rates and corporate considerations.
|
(13)
|
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. A
quarterly cash dividend of $0.295 per share was paid on August 23, 2007 in
the aggregate amount of $64.1 million. A quarterly cash dividend
of $0.31 per share was declared on October 23, 2007 and will be paid on November
20, 2007 to shareholders of record as of November 6, 2007. The
Company expects the November 2007 payment of its quarterly cash dividend to
be
approximately $67.0 million.
|
(14)
|
Subsequent
Events
|
In
October 2007, the Company obtained notification from a foreign taxing
authority that previously filed tax returns for fiscal 2004 and fiscal 2005
that were under examination would not be adjusted and would be accepted as
filed. As a result, the Company changed its judgment about certain
unrecognized tax benefits resulting in a tax benefit of approximately
$5.7 million which will be recognized in the quarter ending December 31,
2007. The accrued liability of $5.7 million has been
reclassified from long-term income tax payable to accrued liabilities at
September 30, 2007.
The
Company purchased 2,046,900 shares of its common stock in open market
transactions for $65.9 million in October and November 2007 up through
November 5, 2007. The timing and amount of future repurchases will
depend upon market conditions, interest rates and corporate
considerations.
-14-
|
Item
2.
|
Management’s
Discussion and Analysis of Financial
Condition and
Results of Operations
|
This report, including “Part I – Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II - Item 1A Risk Factors” contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance and revenue sources. We use words such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend” and similar expressions to identify forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under “Risk Factors,” beginning at page 30 and elsewhere in this Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement. These forward-looking statements include, without limitation, statements regarding the following:
|
|
·
|
The
effects and amount of competitive pricing pressure on our product
lines;
|
|
|
·
|
Our
ability to moderate future average selling price
declines;
|
|
|
·
|
The
effect of product mix on gross
margin;
|
|
|
·
|
The
amount of changes in demand for our products and those of our
customers;
|
|
|
·
|
The
level of orders that will be received and shipped within a
quarter;
|
|
|
·
|
The
effect that distributor and customer inventory holding patterns
will have
on us;
|
|
|
·
|
Our
belief that customers recognize our products and brand name and
use
distributors as an effective supply
channel;
|
|
|
·
|
Our
belief that our direct sales personnel combined with our distributors
provide an effective means of reaching our customer
base;
|
|
|
·
|
Our
ability to increase the proprietary portion of our analog and interface
product lines and the effect of such an
increase;
|
|
|
·
|
The
impact of any supply disruption we may
experience;
|
|
|
·
|
Our
ability to effectively utilize our facilities at appropriate capacity
levels and anticipated costs;
|
|
|
·
|
That
our capital expenditures over the next 12 months will provide sufficient
manufacturing capability to meet our anticipated
needs;
|
|
|
·
|
That
manufacturing costs will be reduced by our transition to advanced
process
technologies;
|
|
|
·
|
Our
ability to maintain manufacturing
yields;
|
|
|
·
|
Continuing
our investments in new and enhanced
products;
|
|
|
·
|
Continuing
our investments in auction rate
securities;
|
|
|
·
|
The
ability to attract and retain qualified
personnel;
|
|
|
·
|
The
cost effectiveness of using our own assembly and test
operations;
|
|
|
·
|
Our
anticipated level of capital
expenditures;
|
|
|
·
|
Continuing
to receive patents on our
inventions;
|
|
|
·
|
Continuation
of quarterly cash dividends;
|
|
|
·
|
The
sufficiency of our existing sources of
liquidity;
|
|
|
·
|
The
impact of seasonality on our
business;
|
|
|
·
|
Expected
impact of SFAS 123R on our business and related assumptions used
in such
analysis;
|
|
|
·
|
That
the resolution and costs of legal actions will not harm our
business;
|
|
|
·
|
That
the idling of assets will not impair the value of such
assets;
|
|
|
·
|
The
recoverability of our deferred tax
assets;
|
|
|
·
|
The
adequacy of our tax reserves to offset any potential tax
liabilities;
|
|
|
·
|
Our
belief that the expiration of any tax holidays will not have a
material
impact;
|
|
|
·
|
The
ability to obtain title to land underlying our Thailand facility,
its fair
value and adequacy of associated
reserves;
|
|
|
·
|
The
accuracy of our estimates of the useful life and values of our
property
and equipment;
|
|
|
·
|
Our
ability to obtain intellectual property licenses and minimize the
effects
of litigation;
|
|
|
·
|
The
level of risk we are exposed to for product liability
claims;
|
|
|
·
|
The
amount of labor unrest, political instability, governmental interference
and changes in general economic conditions that we
experience;
|
|
|
·
|
The
effect of changes in market interest rates on income and/or cash
flows;
|
|
|
·
|
The
effect of fluctuations in currency
rates;
|
|
|
·
|
The
timing and amount of repurchases of our common
stock;
|
|
|
·
|
The
availability of financing on acceptable
terms;
|
|
|
·
|
The
effect of expansion of environmental laws;
and
|
|
|
·
|
The
impact of export regulations on our
business.
|
-15-
We
begin
our Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) with a summary of Microchip’s overall business strategy to
give the reader an overview of the goals of our business and the overall
direction of our business and products. This is followed by a
discussion of the Critical Accounting Policies and Estimates that we believe
are
important to understanding the assumptions and judgments incorporated in our
reported financial results. We then discuss our Results of Operations
for the three and six months ended September 30, 2007 compared to the three
and
six months ended September 30, 2006. We then provide an analysis of
changes in our balance sheet and cash flows, and discuss our financial
commitments in sections titled “Liquidity and Capital Resources,” “Contractual
Obligations” and “Off-Balance Sheet Arrangements.”
Strategy
Our
goal
is to be a worldwide leader in providing specialized semiconductor products
for
a wide variety of embedded control applications. Our strategic focus
is on embedded control products, which include microcontrollers,
high-performance linear and mixed signal devices, power management and thermal
management devices, interface devices, Serial EEPROMs, and our patented
KeeLoq security
devices. We provide highly cost-effective embedded control products
that also offer the advantages of small size, high performance, low
voltage/power operation and ease of development, enabling timely and
cost-effective embedded control product integration by our
customers.
Our
manufacturing operations include wafer fabrication and assembly and
test. The ownership of our manufacturing resources is an important
component of our business strategy, enabling us to maintain a high level of
manufacturing control resulting in us being one of the lowest cost producers
in
the embedded control industry. By owning our wafer fabrication
facilities and much of our assembly and test operations, and by employing
statistical process control techniques, we have been able to achieve and
maintain high production yields. Direct control over manufacturing
resources allows us to shorten our design and production cycles. This
control also allows us to capture the wafer manufacturing and a portion of
the
assembly and test profit margin.
We
employ
proprietary design and manufacturing processes in developing our embedded
control products. We believe our processes afford us both
cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully leverage
our process research and development costs and to deliver new products to market
more rapidly. Our engineers utilize advanced computer-aided design
(CAD) tools and software to perform circuit design, simulation and layout,
and
our in-house photomask and wafer fabrication facilities enable us to rapidly
verify design techniques by processing test wafers quickly and
efficiently.
We
are
committed to continuing our investment in new and enhanced products, including
development systems, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. Our current research and
development activities focus on the design of new microcontrollers, digital
signal controllers, memory and mixed-signal products, new development systems,
software and application-specific software libraries. We are also
developing new design and process technologies to achieve further cost
reductions and performance improvements in existing products.
We
market
our products worldwide primarily through a network of direct sales personnel
and
distributors. Our distributors focus primarily on servicing the
product and technical support requirements of a broad base of diverse
customers. We believe that our direct sales personnel combined with
our distributors provide an effective means of reaching this broad and diverse
customer base. Our direct sales force focuses primarily on major
strategic accounts in three geographical markets: the Americas, Europe and
Asia. We currently maintain sales and support centers in major
metropolitan areas in North America, Europe and Asia. We believe that
a strong technical service presence is essential to the continued development
of
the embedded control market. Many of our field sales engineers
(FSEs), field application engineers (FAEs), and sales management have technical
degrees and have been previously employed in an engineering
environment. We believe that the technical knowledge of our sales
force is a key competitive advantage in the sale of our products. The
primary mission of our FAE team is to provide technical assistance to strategic
accounts and to conduct periodic training sessions for FSEs and distributor
sales teams. FAEs also frequently conduct technical seminars for our
customers in major cities around the world, and work closely with our
distributors to provide technical assistance and end-user support.
-16-
Critical
Accounting Policies and Estimates
General
Our
discussion and analysis of Microchip’s financial condition and results of
operations is based upon our Consolidated Financial Statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States of America. We review the accounting policies we use in
reporting our financial results on a regular basis. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition,
share-based compensation, inventories, income taxes, property plant and
equipment, impairment of property, plant and equipment and
litigation. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent
from
other sources. Results may differ from these estimates due to actual
outcomes being different from those on which we based our
assumptions. We review these estimates and judgments on an ongoing
basis. We believe the following critical accounting policies affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements. We also have other policies that
we consider key accounting policies, such as our policy regarding revenue
recognition to OEMs; however, we do not believe these policies require us to
make estimates or judgments that are as difficult or subjective as our policies
described below.
Revenue
Recognition– Distributors
Our
distributors worldwide have broad rights to return products and price protection
rights, so we defer revenue recognition until the distributor sells the product
to their customers. 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 that 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 revenue impact to us
from the price protections. We also grant certain credits to our
distributors. The credits are granted to the distributors on
specially identified pieces of the distributors’ business to allow them to earn
a competitive gross margin on the sale of our products to their end customers.
The credits are on a per unit basis and are not given to the distributor until
they provide documentation of the sale to their end customer. The effect of
granting these credits establishes the net selling price from us 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. Upon our
shipment to distributors, amounts billed are included as accounts receivable,
inventory is relieved, and the sale and the gross margin are deferred and are
reflected as a current liability until the product is sold by the distributor
to
their customers.
Share-based
Compensation
In
the
first quarter of fiscal 2007, we adopted SFAS No. 123R, which requires
the measurement at fair value and recognition of compensation expense for all
share-based payment awards, including grants of employee stock options, RSUs
and
employee stock purchase rights, to be recognized in our financial statements
based on their respective grant date fair values. Total share-based
compensation during the six months ended September 30, 2007 was
$15.9 million, of which $12.7 million was reflected in operating
expenses and $3.2 million was capitalized to
inventory. Share-based compensation reflected in cost of sales during
the six months ended September 30, 2007 was $3.1 million.
Determining
the appropriate fair-value model and calculating the fair value of share-based
awards at the date of grant requires judgment. The fair value of our RSUs
is based on the fair market value of our common stock on the date of grant
discounted for expected future dividends. We use the Black-Scholes
option pricing model to estimate the fair value of employee stock options and
rights to purchase shares under stock participation
-17-
We
evaluate the assumptions used to value our awards on a quarterly basis. If
factors change and we employ different assumptions, share-based compensation
expense may differ significantly from what we have recorded in the past.
If there are any modifications or cancellations of the underlying unvested
securities, we may be required to accelerate, increase or cancel any remaining
unearned share-based compensation expense. Future share-based compensation
expense and unearned share-based compensation will increase to the extent that
we grant additional equity awards to employees or we assume unvested equity
awards in connection with acquisitions.
Inventories
Inventories
are valued at the lower of cost or market using the first-in, first-out
method. We write down our inventory for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost
of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less
favorable than those we projected, additional inventory write-downs may be
required. Inventory impairment charges establish a new cost basis for
inventory and charges are not subsequently reversed to income even if
circumstances later suggest that increased carrying amounts are
recoverable. In estimating our inventory obsolescence, we primarily
evaluate estimates of demand over a 12-month period and record impairment
charges for inventory on hand in excess of the estimated 12-month
demand.
Income
Taxes
As
part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which
we
operate. This process involves estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income within
the
relevant jurisdiction and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. We have not provided for a
valuation allowance because we believe that it is more likely than not that
our
deferred tax assets will be recovered from future taxable
income. Should we determine that we would not be able to realize all
or part of our net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such determination
was made. At September 30, 2007, our gross deferred tax asset
was $64.4 million.
Various
taxing authorities in the United States 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
-18-
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed when
incurred. At September 30, 2007, the carrying value of our property
and equipment totaled $536.3 million, which represents 23.9% of our total
assets. This carrying value reflects the application of our property
and equipment accounting policies, which incorporate estimates, assumptions
and
judgments relative to the useful lives of our property and
equipment. Depreciation is provided on a straight-line basis over the
estimated useful lives of the related assets, which range from five to seven
years on manufacturing equipment and approximately 30 years on
buildings.
We
began
production activities at Fab 4 on October 31, 2003. We began to depreciate
the Fab 4 assets as they were placed in service for production purposes.
As of September 30, 2007, all of the buildings and supporting facilities were
being depreciated as well as the manufacturing equipment that had been placed
in
service. All manufacturing equipment that was not being used in production
activities was maintained in projects in process and is not being depreciated
until it is placed into service since management believes there will be no
change to its utility from the present time until it is placed into productive
service. The lives to be used for depreciating this equipment at Fab 4
will be evaluated at such time as the assets are placed in service. We do
not believe that the temporary idling of such assets has impaired the estimated
life or carrying values of the underlying assets.
The
estimates, assumptions and judgments we use in the application of our property
and equipment policies reflect both historical experience and expectations
regarding future industry conditions and operations. The use of different
estimates, assumptions and judgments regarding the useful lives of our property
and equipment and expectations regarding future industry conditions and
operations, could result in materially different carrying values of assets
and
results of operations.
We
do not
currently hold title to the land on which our Thailand facility
resides. The land is subject to a bankruptcy relating to the seller
of the land. We are currently working with the creditors in attempts
to reach resolution on this matter. We have provided reserves that we
estimate will be adequate to obtain full title. Such reserves are set
at the estimated fair value of the land. However, timing of the
resolution is difficult to predict and the ultimate amount to be paid could
change.
Impairment
of Property, Plant and Equipment
We
assess
whether indicators of impairment of long-lived assets are present. If such
indicators are present, we determine whether the sum of the estimated
undiscounted cash flows attributable to the assets in question is less than
their carrying value. If less, we recognize an impairment loss based on
the excess of the carrying amount of the assets over their respective fair
values. Fair value is determined by discounted future cash flows,
appraisals or other methods. If the assets determined to be impaired are
to be held and used, we recognize an impairment loss through a charge to our
operating results to the extent the present value of anticipated net cash flows
attributable to the asset are less than the asset’s carrying value, which we
depreciate over the remaining estimated useful life of the asset. We may incur
impairment losses, or additional losses on already impaired assets, in future
periods if factors influencing our estimates change.
-19-
Litigation
Our
current estimated range of liability related to pending litigation is based
on
the probable loss of claims for which we can estimate the amount and range
of
loss. Recorded reserves were not significant at September 30,
2007.
Because
of the uncertainties related to both the probability of loss and the amount
and
range of loss on our pending litigation, we are unable to make a reasonable
estimate of the liability that could result from an unfavorable
outcome. As additional information becomes available, we will assess
the potential liability related to our pending litigation and revise our
estimates. Revisions in our estimates of the potential liability
could materially impact our results of operation and financial
position.
Results
of Operations
The
following table sets forth certain operational data as a percentage of net
sales
for the periods indicated:
|
Three
Months Ended
September
30,
|
Six
Months Ended
September
30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of sales
|
40.2 | % | 39.5 | % | 40.1 | % | 39.6 | % | ||||||||
|
Gross
profit
|
59.8 | % | 60.5 | % | 59.9 | % | 60.4 | % | ||||||||
|
Research
and development
|
11.3 | % | 10.9 | % | 11.3 | % | 10.8 | % | ||||||||
|
Selling,
general and administrative
|
16.6 | % | 15.5 | % | 16.6 | % | 15.5 | % | ||||||||
|
Loss
on sale of Fab 3
|
10.4 | % | --- | % | 5.1 | % | --- | % | ||||||||
|
Operating
income
|
21.5 | % | 34.1 | % | 26.9 | % | 34.1 | % | ||||||||
Net
Sales
We
operate in one industry segment and engage primarily in the design, development,
manufacture and marketing of semiconductor products. We sell our
products to distributors and original equipment manufacturers, referred to
as
OEMs, in a broad range of market segments, perform ongoing credit evaluations
of
our customers and generally require no collateral.
Our
net
sales for the quarter ended September 30, 2007 were $258.6 million, a
decrease of 2.1% from the previous quarter’s sales of $264.1 million, and a
decrease of 3.5% from net sales of $267.9 million in the quarter ended
September 30, 2006. The changes in net sales in these periods
resulted primarily from changes in market conditions across all of our product
lines. Average selling prices for our products were down
approximately 6% for the three and six-month periods ended September 30,
2007 over the corresponding periods of the previous fiscal year. The
number of units of our products sold were up approximately 3% and 2% for the
three and six-month periods ended September 30, 2007 over the corresponding
periods of the previous fiscal year. The average selling prices and
the unit volumes of our sales are impacted by the mix of our products
sold. Key factors in achieving the amount of net sales during the
three and six-month periods ended September 30, 2007 include:
|
|
·
|
overall
demand for our products;
|
|
|
·
|
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;
|
|
|
·
|
economic
conditions in the markets we serve, specifically housing and consumer;
and
|
|
|
·
|
inventory
holding patterns of our
customers.
|
-20-
We
recognize revenue from product sales upon shipment to OEMs. Under our
shipping terms, legal title passes to the customer upon shipment from
Microchip. We have no post-shipment
obligations. Distributors generally have broad rights to return
products and price protection rights, so we defer revenue recognition until
the
distributors sell the product to their customers. Upon shipment,
amounts billed to distributors are included in accounts receivable, inventory
is
relieved, the sale is deferred and the gross margin is reflected as a current
liability until the product is sold by the distributors to their
customers.
Sales
by
product line for the three and six months ended September 30, 2007 and 2006
were
as follows (dollars in thousands):
|
Three
Months Ended
September
30,
(unaudited)
|
Six
Months Ended
September
30,
(unaudited)
|
|||||||||||||||||||||||||||||||
|
2007
|
%
|
2006
|
%
|
2007
|
%
|
2006
|
%
|
|||||||||||||||||||||||||
|
Microcontrollers
|
$ |
205,529
|
79.5 | % | $ |
214,778
|
80.2 | % | $ |
418,834
|
80.1 | % | $ |
426,094
|
80.3 | % | ||||||||||||||||
|
Memory
products
|
32,637
|
12.6 | % |
32,131
|
12.0 | % |
62,928
|
12.0 | % |
62,738
|
11.8 | % | ||||||||||||||||||||
|
Analog
and interface products
|
20,481
|
7.9 | % |
21,025
|
7.8 | % |
40,957
|
7.9 | % |
41,659
|
7.9 | % | ||||||||||||||||||||
|
Total
sales
|
$ |
258,647
|
100.0 | % | $ |
267,934
|
100.0 | % | $ |
522,719
|
100.0 | % | $ |
530,491
|
100.0 | % | ||||||||||||||||
Microcontrollers
Our
microcontroller product line represents the largest component of our total
net
sales. Microcontrollers and associated application development
systems accounted for approximately 79.5% of our total net sales for the
three-month period ended September 30, 2007 and approximately
80.1% of our total net sales for the six-month period
ended September 2007 compared to approximately 80.2% of
our total net sales for the three-month period ended September 30, 2006 and
approximately 80.3% of our total net sales for the six-month period ended
September 30, 2006.
Net
sales
of our microcontroller products decreased approximately 4.3% in the three-month
period ended September 30, 2007 and 1.7% in the six-month period ended September
30, 2007 compared to the three and six-month periods ended September 30,
2006. These sales decreases were primarily due to economic conditions
in the markets we serve and other factors described on page 20
above. The end markets that we serve include the consumer,
automotive, industrial control, communications and computing
markets.
Historically,
average selling prices in the semiconductor industry decrease over the life
of
any particular product. The overall average selling prices of our
microcontroller products have remained relatively constant over time due to
the
proprietary nature of these products. We have experienced, and expect
to continue to experience, moderate pricing pressure in certain microcontroller
product lines, primarily due to competitive conditions. We have been
able to in the past, and expect to be able to in the future, moderate average
selling price declines in our microcontroller product lines by introducing
new
products with more features and higher prices. We may be unable to
maintain average selling prices for our microcontroller products as a result
of
increased pricing pressure in the future, which would adversely affect our
operating results.
Memory
Products
Sales
of
our memory products accounted for approximately 12.6% of our total net sales
for
the three-month period ended September 30, 2007 and 12.0% of our total net
sales for the six-month period ended September 30, 2007 compared to
approximately 12.0% of our total net sales for the three-month period ended
September 30, 2006 and 11.8% of our total net sales in the six-month period
ended September 30, 2006.
-21-
Net
sales
of our memory products increased approximately 1.6% in the three-month period
ended September 30, 2007 and 0.3% in the six-month period ended
September 30, 2007 compared to the three and six-month periods ended September
30, 2006. These sales increases were driven by customer demand
conditions within the Serial EEPROM market which products comprise substantially
all of our memory product net sales.
Serial
EEPROM product pricing has historically been cyclical in nature, with steep
price declines followed by periods of relative price stability, driven by
changes in industry capacity at different stages of the business
cycle. We have experienced, and expect to continue to experience,
varying degrees of competitive pricing pressures in our Serial EEPROM
products. We may be unable to maintain the average selling prices of
our Serial EEPROM products as a result of increased pricing pressure in the
future, which could adversely affect our operating results.
Analog
and Interface Products
Sales
of
our analog and interface products accounted for approximately 7.9% of our total
net sales for the three-month period ended September 30, 2007 and 7.9% of
our total net sales for the six-month period ended September 30, 2007 compared
to approximately 7.8% of our total net sales for the three-month period ended
September 30, 2006 and 7.9% of our total net sales for the six-month period
ended September 30, 2006.
Net
sales
of our analog and interface products decreased approximately 2.6% in the
three-month period ended September 30, 2007 and 1.7% in the six-month
period ended September 30, 2007 compared to the three and six-month periods
ended September 30, 2006. These sales decreases in our analog and
interface products were driven by supply and demand conditions within the analog
and interface market.
Analog
and interface products can be proprietary or non-proprietary in
nature. Currently, we consider more than half of our analog and
interface product mix to be proprietary in nature, where prices are relatively
stable, similar to the pricing stability experienced in our microcontroller
products. The non-proprietary portion of our analog and interface
business will experience price fluctuations, driven primarily by the current
supply and demand for those products. We may be unable to maintain
the average selling prices of our analog and interface products as a result
of
increased pricing pressure in the future, which would adversely affect our
operating results. We anticipate the proprietary portion of our
analog and interface products will continue to increase over time.
Turns
Orders
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. Historically, we have proven our ability to
respond quickly to customer orders as part of our competitive strategy,
resulting in customers placing orders with 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. Turns orders are difficult to predict, and we may not
experience the combination of turns orders and shipments from backlog in a
quarter that would be sufficient to achieve anticipated net sales. If
we do not achieve a sufficient level of turns orders in a particular quarter,
our net sales and operating results may suffer.
Distribution
Distributors
accounted for approximately 64% of our net sales in the three-month periods
ended September 30, 2007 and 2006. Distributors accounted for
approximately 65% of our net sales in the six-month periods ended September
30,
2007 and 2006.
Our
largest distributor accounted for approximately 12% of our net sales in the
three-month period ended September 30, 2007 and 11% in the six months ended
September 30, 2007. Our two largest distributors accounted for
approximately 21% of our net sales in the three and six-month periods ended
September 30, 2006.
-22-
Generally,
we do not have long-term agreements with our distributors and we, or our
distributors, may terminate our relationships with each other with little or
no
advanced notice. The loss of, or the disruption in the operations of,
one or more of our distributors could reduce our future net sales in a given
quarter and could result in an increase in inventory returns.
At
September 30, 2007, our distributors were maintaining an average of
approximately 1.9 months of inventory of our products. Over the past
three fiscal years, the months of inventory maintained by our distributors
have
fluctuated between approximately 1.8 and 2.8 months. Thus, inventory
levels at our distributors are at the low end of the range we have experienced
over the last three years. As we recognize revenue based on sell
through for all of our distributors, we do not believe that inventory holding
patterns at our distributors will materially impact our net sales.
Sales
by Geography
Sales
by
geography for the three and six-month periods ended September 30, 2007 and
2006
were as follows (dollars in thousands):
|
Three
Months Ended
September
30,
(unaudited)
|
Six
Months Ended
September
30,
(unaudited)
|
|||||||||||||||||||||||||||||||
|
2007
|
%
|
2006
|
%
|
2007
|
%
|
2006
|
%
|
|||||||||||||||||||||||||
|
Americas
|
$ |
69,900
|
27.0 | % | $ |
73,629
|
27.5 | % | $ |
140,305
|
26.8 | % | $ |
147,208
|
27.8 | % | ||||||||||||||||
|
Europe
|
75,195
|
29.1 | % |
73,857
|
27.6 | % |
155,036
|
29.7 | % |
147,599
|
27.8 | % | ||||||||||||||||||||
|
Asia
|
113,552
|
43.9 | % |
120,448
|
44.9 | % |
227,378
|
43.5 | % |
235,684
|
44.4 | % | ||||||||||||||||||||
|
Total
sales
|
$ |
258,647
|
100.0 | % | $ |
267,934
|
100.0 | % | $ |
522,719
|
100.0 | % | $ |
530,491
|
100.0 | % | ||||||||||||||||
Our
sales
to foreign customers have been predominately in Asia and Europe, which we
attribute to the manufacturing strength in those areas for automotive,
communications, computing, consumer and industrial control
products. Americas sales include sales to customers in the United
States, Canada, Central America and South America. Sales to 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.
Sales
to
foreign customers accounted for approximately 74% of our net sales in the three
and six-month periods ended September 30, 2007 and 73% in the three and
six-month periods ended September 30, 2006. Substantially all of our
foreign sales are U.S. dollar denominated.
Gross
Profit
Our
gross
profit was $154.7 million in the three months ended
September 30, 2007 and $162.0 million in the three months ended September
30, 2006. Our gross profit was $313.3 in the six months ended
September 30, 2007 and $320.4 million in the six months ended September 30,
2006. Gross profit as a percentage of sales was 59.8% in the three
months ended September 30, 2007 and 60.5% in the three months ended September
30, 2006. Gross profit as a percentage of sales was 59.9% in the six
months ended September 30, 2007 and 60.4% in the six months ended September
30,
2006.
The
most
significant factors affecting our gross profit percentage in the periods covered
by this report were:
-23-
|
|
·
|
increased
cost of sales of $1.5 million and $3.1 million in the three and
six months
ended September 30, 2007, respectively, compared to the prior year
periods, associated with share-based compensation expense under
the SFAS
123R;
|
|
|
·
|
fluctuations
in the product mix of microcontrollers, proprietary and non-proprietary
analog products and Serial EEPROM products resulting in lower average
selling prices for our products;
|
|
|
·
|
lower
depreciation expense as a percentage of cost of sales;
and
|
|
|
·
|
unfavorable
foreign exchange rate fluctuations impacting our Thailand manufacturing
operations.
|
Other factors that impacted gross profit percentage in the periods covered
by
this report include:
|
|
·
|
changes
in capacity utilization and absorption of fixed
costs;
|
|
|
·
|
gross
profit on products sold through the distribution
channel;
|
|
|
·
|
continued
cost reductions in wafer fabrication and assembly and test manufacturing
such as new manufacturing technologies and more efficient manufacturing
techniques; and
|
|
|
·
|
inventory
write-offs and the sale of inventory that was previously written
off.
|
During
the three-month period ended September 30, 2007, we operated at approximately
99% of our Fab 2 capacity, which is approximately the same level of
utilization from the same period of the previous fiscal year. Our
utilization of Fab 4’s total capacity is at relatively low levels although we
are utilizing all of the installed equipment base. We expect to
maintain approximately the same levels of capacity utilization at Fab 2 and
Fab 4 during the third quarter of fiscal 2008.
The
process technologies utilized impact our gross margins. Fab 2
currently utilizes various manufacturing process technologies, but predominantly
utilizes our 0.5 to 1.0 micron processes. At September 30, 2007,
Fab 4 predominantly utilized our 0.5 micron process technology. We
continue to transition products to more advanced process technologies to reduce
future manufacturing costs. All of our production has been on 8-inch
wafers for the periods covered by this report.
Our
overall inventory levels were $124.6 million at September 30, 2007 compared
to
$121.0 million at March 31, 2007. We had
109 days of inventory on our balance sheet at September
30, 2007 compared to 107 days at March 31, 2007 and 101 days at September
30, 2006. At September 30, 2007, $3.4 million of
share-based compensation expense was included in inventory compared to
$3.2 million at March 31, 2007, as a result of the adoption of
SFAS 123R. The adoption of this accounting standard adversely
impacted our gross profit in the quarter ending September 30, 2007, as inventory
including share-based compensation was sold.
We
anticipate that our gross margins will fluctuate over time, driven primarily
by
the overall product mix of microcontroller, analog and interface and memory
products and the percentage of net sales of each of these products in a
particular quarter, as well as manufacturing yields, fixed cost absorption,
capacity utilization levels, particularly those at Fab 4, and competitive and
economic conditions.
At
September 30, 2007, approximately 68% of our assembly requirements were being
performed in our Thailand facility, compared to approximately 75% as of
September 30, 2006. Third-party contractors located in Asia perform
the balance of our assembly operations. Substantially all of our test
requirements were being performed in our Thailand facility as of September
30,
2007 and September 30, 2006. We believe that the assembly and test
operations performed at our Thailand facility provide us with significant cost
savings when compared to third-party contractor assembly and test costs, as
well
as increased control over these portions of the manufacturing
process.
We
rely
on outside wafer foundries for a small portion of our wafer fabrication
requirements.
Our
use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. While we review the
quality, delivery and cost performance of our third-party
contractors,
-24-
Research
and Development (R&D)
R&D
expenses for the three months ended September 30, 2007 were $29.3 million,
or 11.3% of sales, compared to $29.1 million, or 10.9% of sales, for the
three months September 30, 2006. R&D expenses for the six months
ended September 30, 2007 were $59.1 million, or 11.3% of sales, compared to
$57.1 million, or 10.8% of sales, for the six months ended September 30,
2006. We are committed to investing in new and enhanced products,
including development systems software, and in our design and manufacturing
process technologies. We believe these investments are significant
factors in maintaining our competitive position. We expense all
R&D costs as incurred. 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 $0.2 million, or 0.8%, for the three months ended
September 30, 2007 over the same period last year. R&D expenses
increased $1.9 million, or 3.4%, for
the six months ended September 30, 2007 over the same period last
year. The primary reasons for the increases in R&D expenses in
these periods was higher labor costs as a result of expanding our internal
R&D headcount.
Selling,
General and Administrative
Selling,
general and administrative expenses for the three months ended September 30,
2007 were $43.0 million, or 16.6% of sales, compared to
$41.5 million, or 15.5% of sales, for the three months ended September 30,
2006. Selling, general and administrative expense for the six months
ended September 30, 2007 were $86.7 million, or 16.6% of sales, compared to
$82.3 million or 15.5% of sales, for the six months ended September 30,
2006. Selling, general and administrative expenses include salary
expenses related to field sales, marketing and administrative personnel,
advertising and promotional expenditures and legal expenses. Selling,
general and administrative expenses also include costs related to our direct
sales force and field applications engineers who work in sales offices worldwide
to stimulate demand by assisting customers in the selection and use of our
products.
Selling,
general and administrative expenses increased $1.5 million, or 3.5%, for
the three months ended September 30, 2007 over the same period last
year. Selling, general and administrative expenses increased
$4.4 million, or 5.4%, for the six months ended September 30, 2007 over the
same period last year. The primary reason for the increases in
selling, general and administrative expenses in these periods was higher labor
costs as a result of expanding our internal resources involved in the technical
aspect of selling our products.
Selling,
general and administrative expenses fluctuate over time, primarily due to
revenue and operating expense levels.
Loss
on Sale of Fab 3
In
August
2002, we acquired a semiconductor manufacturing facility in Gresham, Oregon,
referred to as Fab 4. After the acquisition of Fab 4 was completed,
we undertook an analysis of the potential production capacity at Fab
4. The results of the production capacity analysis led us to
determine that Fab 3’s capacity would not be needed in the foreseeable future
and during the second quarter of fiscal 2003 we committed to a plan to sell
Fab
3. Accordingly, Fab 3 was classified as an asset held-for-sale as of
September 30, 2002, and we maintained that classification until March 31,
2005.
On
March
31, 2005, we changed the classification of Fab 3 from an asset held-for-sale
to
an asset held-for-future-use and began to depreciate the asset. Fab 3 had
been on the market for over two years, and we had not received any acceptable
offers on the facility. Over that period of time, our business had
increased significantly
-25-
We
received an unsolicited offer on the Fab 3 facility in September
2007. We assessed our available capacity in our current facilities,
along with our capacity available from outside foundries and determined the
capacity of Fab 3 would not be required in the near term. As a result
of this assessment, we accepted the offer on September 21, 2007 and the
transaction closed on October 19, 2007. We received
$27.5 million in cash net of expenses associated with the sale and
recognized an impairment charge of $26.8 million on the sale of Fab 3,
representing the difference between the carrying value of the assets at
September 30, 2007 and the amounts realized subsequent to September 30,
2007. As of September 30, 2007, the $27.5 million of net cash from
the sale, which was received in October 2007, was included as a component of
other current assets.
Other
Income (Expense)
Interest
income in the three and six-month periods ended September 30,
2007 increased from interest income in the three and six-month periods
ended September 30, 2006 as our average invested cash balances and the average
interest rates on those invested cash balances were at higher levels in the
periods ended September 30, 2007 compared to the same periods in the prior
fiscal year.
Provision
for Income Taxes
Provisions
for income taxes reflect tax on foreign earnings and federal and state tax
on
U.S. earnings. We had an effective tax rate of 13.5% for the
three-month period ended September 30, 2007 and 17.5% in the six-month period
ending September 30, 2007 and 24.0% for the three and six-month period ending
September 30, 2006. The lower tax rates in the three and six months
ended September 30, 2007 compared to the same periods last year were driven
by the U.S. tax benefit associated with the sale of Fab 3 and the impact of
the resolution of certain tax matters through a tax settlement that was
finalized with the IRS in the fourth quarter of fiscal 2007.
At
September 30, 2007, our gross deferred tax asset was $64.4
million. Our gross deferred tax asset increased by $2.4 million
in the six months ended September 30, 2007 compared to the level at March 31,
2007, due primarily to changes in various temporary differences between our
book
and tax reporting. At September 30, 2007, our deferred tax liability
was $13.8 million. Our gross deferred tax liability increased by
$5.5 million in the three and six months ended September 30, 2007 compared
to the level at March 31, 2007, due primarily to changes in temporary
differences in depreciation between our book and tax reporting.
Our
Thailand manufacturing operations currently benefit from tax holidays that
have
been granted to us by the Thailand government based on our investments in
property, plant and equipment in Thailand. Our tax holiday periods in
Thailand expire at various times in the future. One of our Thailand
tax holidays expired in September 2006 and the expiration did not have a
material impact on our effective tax rate. We do not expect the
future expiration of any of our tax holiday periods in Thailand to have a
material impact on our effective tax rate. Any expiration of tax
holidays are expected to have a minimal impact on our overall tax expense due
to
other tax holidays and an increase in income in other taxing jurisdictions
with
lower statutory rates.
-26-
Liquidity
and Capital Resources
We
had
$1,248.8 million in cash, cash equivalents and short-term and long-term
investments at September 30, 2007, a decrease of $29.5 million from the
March 31, 2007 balance. The decrease in cash, cash equivalents and
short-term and long-term investments over this time period is primarily
attributable to cash generated from operating activities being offset by
dividends and stock repurchase activity in the six months ended
September 30, 2007.
Net
cash
provided from operating activities was $228.0 million for the six-month
period ended September 30, 2007 compared to $250.7 million for the
six-month period ended September 30, 2006. The change in cash flow
from operations was primarily from changes in accounts receivable, other assets
and liabilities, accounts payable and accrued liability balances, and changes
in
deferred taxes.
During
the six months ended September 30, 2007, net cash provided by investing
activities was $2.7 million. During the six months ended
September 30, 2006, net cash used in investing activities was
$443.0 million. The increase in cash was due primarily to
changes in our net purchases, sales and maturities of short-term and long-term
investments in the six-month period ended September 30, 2007.
We
enter
into hedging transactions from time to time in an attempt to reduce our exposure
to currency rate fluctuations. There were no hedges outstanding at
September 30, 2007. 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.
Our
level
of capital expenditures varies from time to time as a result of actual and
anticipated business conditions. Capital expenditures in the six
months ended September 30, 2007 were $37.2 million compared to
$35.9 million for the six months ended September 30,
2006. Capital expenditures are primarily for the expansion of
production capacity and the addition of research and development
equipment. We currently anticipate spending approximately
$70 million during the next 12 months to invest in equipment and facilities
to maintain, and selectively increase, capacity to meet our currently
anticipated needs.
We
expect
to finance capital expenditures through our existing cash balances and cash
flows from operations. We believe that the capital expenditures
anticipated to be incurred over the next 12 months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
Net
cash
used in financing activities was $224.0 million for the
six months ended September 30, 2007 compared to $240.4 million for the six
months ended September 30, 2006. Proceeds from the exercise of stock
options and employee purchases under our employee stock purchase plan were
$37.7
million for the six months ended September 30, 2007 and $33.1 million for
the six months ended September 30, 2006. We paid cash dividends to
our shareholders of $125.2 million in the six months ended September 30,
2007 and $96.6 million in the six months ended September
30, 2006. During the six months ended September 30, 2007, we
repurchased $150.2 million of our common stock. During the six
months ended September 30, 2006, we paid down $188.2 million in short-term
borrowings. Excess tax benefits from share-based payment arrangements
were $13.7 million in the six months ended September 30,
2007 and $11.3 million in the six months ended September 30,
2006.
On
April
22, 2004, our Board of Directors authorized the repurchase of 2.5 million shares
of our common stock in the open market or in privately negotiated
transactions. As of September 30, 2007, we had repurchased all 2.5
million shares under this authorization for a total of
$82.0 million. On October 25, 2006, our Board of Directors
authorized the repurchase of up to an additional 10 million shares of our
common stock in the open market or in privately negotiated
transactions. As of September 30, 2007, we had repurchased 2,506,565
shares under this authorization for $94.7 million. As of September
30, 2007, approximately 3,325,000 shares remained as treasury shares with the
balance of shares being used to fund share issuance requirements under our
equity incentive plans. The timing and amount of any future
repurchases will depend upon market conditions, interest rates and corporate
considerations.
-27-
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
aggregate amount of $4.0 million. We have continued to pay
quarterly dividends and have increased the amount of such dividends on a regular
basis. A quarterly dividend of $0.295 per share was paid on August
23, 2007 in the aggregate amount of $64.1 million. A quarterly
dividend of $0.31 per share was declared on October 23, 2007 and will be
paid on November 20, 2007 to shareholders of record as of November 6,
2007. We expect the November 2007 cash dividend to be approximately
$67.0 million. Since the inception of our dividend program, we
have paid aggregate dividends of
$527.7 million.
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 other purposes. The timing and amount of
any such financing requirements will depend on a number of factors, including
demand for our products, changes in industry conditions, product mix, and
competitive factors. There can be no assurance that such financing
will be available on acceptable terms, and any additional equity financing
would
result in incremental ownership dilution to our existing
stockholders.
Contractual
Obligations
There
have not been any material changes in our contractual obligations from what
we
disclosed in our Annual Report on Form 10-K for the fiscal year ended March
31,
2007.
Off-Balance
Sheet Arrangements
As
of
September 30, 2007, we are not involved in any off-balance sheet arrangements,
as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement
109 (FIN 48). FIN 48 establishes a single model to
address accounting for uncertain tax positions. FIN 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold
a tax
position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on de-recognition,
measurement classification, interest and penalties, accounting in interim
periods, disclosure and transition. We adopted FIN 48 on April 1,
2007, and did not recognize any cumulative-effect adjustment associated with
our
unrecognized tax benefits, interest, and penalties.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements, but does not require any
new
fair value measurement. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. We are in the process of determining the effect, if any, that
the adoption of SFAS No. 157 will have on our consolidated financial
statements. Because SFAS No. 157 does not require any new fair value
measurements or re-measurements of previously computed fair values, we do not
believe the adoption of this Statement will have a material effect on our
results of operations or financial condition.
-28-
On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). Under
this Standard, we may elect to report financial instruments and certain other
items at fair value on a contract-by-contract basis with changes in value
reported in earnings. This election is irrevocable. SFAS
No. 159 provides an opportunity to mitigate volatility in reported earnings
that
is caused by measuring hedged assets and liabilities that were previously
required to use a different accounting method than the related hedging contracts
when the complex provisions of SFAS No. 133 hedge accounting are not
met. SFAS No. 159 is effective for years beginning after November 15,
2007. We are currently evaluating the potential impact of adopting
this Standard.
|
Item
3.
|
Quantitative
and
Qualitative Disclosures About
Market Risk
|
Included
within our investment portfolio are $159.5 million of AA and AAA rated
investments in auction rate securities. In September 2007, auctions for $24.9
million of our investments in auction rate securities failed. The
failures resulted in the interest rate on these investments resetting at Libor
plus 125 or 175 basis points. While we now earn a premium interest
rate on the investments, the investments are not liquid. All of our
holdings in investments where the auctions have failed are owned by one of
our
non U.S. subsidiaries and these funds are permanently invested offshore and
are
not required for our ongoing operations. In the event we need to
access these funds, we will not be able to until a future auction on these
investments is successful. If the issuers are unable to successfully
close future auctions and their credit ratings deteriorate, we may be required
to adjust the carrying value of these investments through an impairment charge
to earnings. There are $22.4 million of the failed auctions that are
insured for their principal and interest in the case of
default. Based on our ability to access our cash and other short-term
investments, our expected operating cash flows, and our other sources of cash,
we do not anticipate the lack of liquidity on these investments will affect
our
ability to operate our business as usual. We have continued to invest
a portion of our portfolio in auction rate securities where the underlying
assets have not been impacted by the current liquidity issues in the
marketplace. Our continued investments in auction rate securities are
primarily in municipal bond auction rate structures. We have not had
any additional securities fail the auction process.
During
the normal course of business, we are subject to a variety of market risks,
examples of which include, but are not limited to, interest rate movements
and
foreign currency fluctuations and collectability of accounts
receivable. We continuously assess these risks and have established
policies and procedures to help protect against any material adverse effects
of
these and other potential exposures. Although we do not anticipate
any material losses in these risk areas, no assurance can be made that material
losses will not be incurred in these areas in the future. During the
six months ended September 30, 2007, there were no material changes in our
exposure to market risk as disclosed in Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form
10-K
for the year ended March 31, 2007 other than the auction rate securities
described above.
|
Item
4.
|
Controls
and
Procedures
|
Evaluation
of Disclosure Controls and Procedures
As
of the
end of the period covered by this Quarterly Report on Form 10-Q, as required
by
paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act
of
1934, as amended, we evaluated under the supervision of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended). Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms, and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure. Our disclosure controls
-29-
and
procedures are designed to provide reasonable assurance that such information
is
accumulated and communicated to our management. Our disclosure
controls and procedures include components of our internal control over
financial reporting. Management’s assessment of the effectiveness of
our internal control over financial reporting is expressed at the level of
reasonable assurance because a control system, no matter how well designed
and
operated, can provide only reasonable, but not absolute, assurance that the
control system’s objectives will be met.
Changes
in Internal Control over Financial Reporting
During
the six months ended September 30, 2007, there was no change in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Part
II. OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings
|
In
the
ordinary course of our business, we are involved in a limited number of legal
actions, both as plaintiff and defendant, and could incur uninsured liability
in
any one or more of them. Although the outcome of these actions is not
presently determinable, we believe that the ultimate resolution of these matters
will not harm our business and will not have a material adverse effect on our
financial position, cash flows or results of operations. Litigation
relating to the semiconductor industry is not uncommon, and we are, and from
time to time have been, subject to such litigation. No assurances can
be given with respect to the extent or outcome of any such litigation in the
future.
|
Item
1A.
|
Risk
Factors
|
When
evaluating Microchip and its business, you should give careful consideration
to
the factors listed below, in addition to the information provided elsewhere
in
this Form 10-Q and in other documents that we file with the Securities and
Exchange Commission.
Our
quarterly operating results may fluctuate due to factors that could reduce
our
net sales and profitability.
Our
quarterly operating results are affected by a wide variety of factors that
could
reduce our net sales and profitability, many of which are beyond our
control. Some of the factors that may affect our quarterly operating
results include:
|
|
·
|
changes
in demand or market acceptance of our products and products of our
customers
|
|
|
·
|
levels
of inventories at our customers
|
|
|
·
|
the
mix of inventory we hold and our ability to satisfy orders from our
inventory
|
|
|
·
|
changes
in utilization of our manufacturing capacity and fluctuations in
manufacturing yields
|
|
|
·
|
our
ability to secure sufficient assembly and testing
capacity
|
|
|
·
|
availability
of raw materials and equipment
|
|
|
·
|
competitive
developments including pricing
pressures
|
|
|
·
|
the
level of orders that are received and can be shipped in a
quarter
|
|
|
·
|
the
level of sell-through of our products through
distribution
|
|
|
·
|
changes
or fluctuations in customer order patterns and
seasonality
|
|
|
·
|
constrained
availability from other electronic suppliers impacting our customers’
ability to ship their products, which in turn may adversely impact
our
sales to those customers
|
|
|
·
|
costs
and outcomes of any tax audits or any litigation involving intellectual
property, customers or other issues
|
|
|
·
|
disruptions
in our business or our customers’ businesses due to terrorist activity,
armed conflict, war, worldwide oil prices and supply, public health
concerns or disruptions in the transportation
system
|
|
|
·
|
property
damage or other losses which are not covered by
insurance
|
|
|
·
|
general
economic, industry or political conditions in the United States or
internationally
|
-30-
We
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and that you should not rely upon any such comparisons
as
indications of future performance. In future periods our operating
results may fall below our public guidance or the expectations of public market
analysts and investors, which would likely have a negative effect on the price
of our common stock.
Our
operating results will suffer if we ineffectively utilize our manufacturing
capacity or fail to maintain manufacturing yields.
The
manufacture and assembly of integrated circuits, particularly non-volatile,
erasable CMOS memory and logic devices such as those that we produce, are
complex processes. These processes are sensitive to a wide variety of
factors, including the level of contaminants in the manufacturing environment,
impurities in the materials used, the performance of our wafer fabrication
personnel and equipment, and other quality issues. As is typical in
the semiconductor industry, we have from time to time experienced lower than
anticipated manufacturing yields. Our operating results will suffer
if we are unable to maintain yields at approximately the current
levels. This could include delays in the recognition of revenue, loss
of revenue or future orders, and customer-imposed penalties for failure to
meet
contractual shipment deadlines. Our operating results are also
adversely affected when we operate at less than optimal
capacity. Lower capacity utilization results in certain costs being
charged directly to expense and lower gross margins.
We
are dependent on orders that are received and shipped in the same quarter and
are therefore limited in our visibility of future product
shipments.
Our
net
sales in any given quarter depend upon a combination of shipments from backlog
and orders received in that quarter for shipment in that quarter, which we
refer
to as turns orders. We measure turns orders at the beginning of a
quarter based on the orders needed to meet the shipment targets that we set
entering the quarter. Historically, we have proven our ability to
respond quickly to customer orders as part of our competitive strategy,
resulting in customers placing orders with relatively short delivery
schedules. Shorter lead times generally mean that turns orders as a
percentage of our business are relatively high in any particular quarter and
reduces our backlog visibility on future product shipments. Turns
orders correlate to overall semiconductor industry conditions and product lead
times. Because turns orders are difficult to predict, varying levels
of turns orders make our net sales more difficult to forecast. If we
do not achieve a sufficient level of turns orders in a particular quarter
relative to our revenue targets, our revenue and operating results may
suffer.
Intense
competition in the markets we serve may lead to pricing pressures, reduced
sales
of our products or reduced market share.
The
semiconductor industry is intensely competitive and has been characterized
by
price erosion and rapid technological change. We compete with major
domestic and international semiconductor companies, many of which have greater
market recognition and substantially greater financial, technical, marketing,
distribution and other resources than we do with which to pursue engineering,
manufacturing, marketing and distribution of their products. We may
be unable to compete successfully in the future, which could harm our
business.
-31-
Our
ability to compete successfully depends on a number of factors both within
and
outside our control, including, but not limited to:
|
|
·
|
the
quality, performance, reliability, features, ease of use, pricing
and
diversity of our products
|
|
|
·
|
our
success in designing and manufacturing new products including those
implementing new technologies
|
|
|
·
|
the
rate at which customers incorporate our products into their own
applications
|
|
|
·
|
product
introductions by our competitors
|
|
|
·
|
the
number, nature and success of our competitors in a given
market
|
|
|
·
|
our
ability to obtain adequate supplies of raw materials and other supplies
at
acceptable prices
|
|
|
·
|
our
ability to protect our products and processes by effective utilization
of
intellectual property rights
|
|
|
·
|
the
quality of our customer service and our ability to address the needs
of
our customers, and
|
|
|
·
|
general
market and economic conditions.
|
Historically,
average selling prices in the semiconductor industry decrease over the life
of
any particular product. The overall average selling prices of our
microcontroller and proprietary analog and interface products have remained
relatively constant, while average selling prices of our Serial EEPROM and
non-proprietary analog and interface products have declined over
time.
We
have
experienced, and expect to continue to experience, modest pricing declines
in
certain of our more mature proprietary product lines, due primarily to
competitive conditions. We have been able to moderate average selling
price declines in many of our proprietary product lines by continuing to
introduce new products with more features and higher prices. We have
experienced in the past and expect to continue to experience in the future
varying degrees of competitive pricing pressures in our Serial EEPROM and
non-proprietary analog products.
We
may be
unable to maintain average selling prices for our products as a result of
increased pricing pressure in the future, which could adversely impact our
operating results.
Our
business is dependent on selling through
distributors.
Sales
through distributors accounted for 65% of our net sales in fiscal 2007 and
the
first six months of fiscal 2008. Our two largest distributors
together accounted for approximately 21% of our net sales in fiscal
2007. Our largest distributor accounted for approximately 11% of our
net sales during the first six months of fiscal 2008. We do not have
long-term agreements with our distributors and both we and our distributors
may
each terminate our relationship with little or no advanced notice. We
believe that customers recognize Microchip for its products and brand name
and
use distributors as an effective supply channel.
During
fiscal 2006, we reduced the gross margin that certain of our distributors earn
when they sell our products. We reduced these distributors’ gross
margins because we believed these distributors did not have sufficient technical
sales resources to properly address the marketplace for our
products. Since fiscal 2006, we have added a significant number of
technical sales employees throughout our worldwide sales organization to address
the support requirements for both our OEM and distribution
customers. Although these actions have not had a material adverse
impact on the overall effectiveness of our distribution channel, there can
be no
assurance that there will not be an adverse impact in the future.
The
loss
of, or a disruption in the operations of, one or more of our distributors could
reduce our net sales in a given period and could result in an increase in
inventory returns.
Our
success depends on our ability to introduce new products on a timely
basis.
Our
future operating results will depend on our ability to develop and introduce
new
products on a timely basis that can compete effectively on the basis of price
and performance and which address customer requirements. The success
of our new product introductions depends on various factors, including, but
not
limited to:
|
|
·
|
proper
new product selection
|
|
|
·
|
timely
completion and introduction of new product
designs
|
|
|
·
|
development
of 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.
|
-32-
Because
our products are complex, we have experienced delays from time to time in
completing development of new products. In addition, our new products
may not receive or maintain substantial market acceptance. We may be
unable to design, develop and introduce competitive products on a timely basis,
which could adversely impact our future operating results.
Our
success also depends upon our ability to develop and implement new design and
process technologies. Semiconductor design and process technologies
are subject to rapid technological change and require significant R&D
expenditures. We and other companies in the industry have, from time
to time, experienced difficulties in effecting transitions to advanced process
technologies and, consequently, have suffered reduced manufacturing yields
or
delays in product deliveries. Our future operating results could be
adversely affected if any transition to future process technologies is
substantially delayed or inefficiently implemented.
We
must attract and retain qualified personnel to be successful, and competition
for qualified personnel is intense in our market.
Our
success depends upon the efforts and abilities of our senior management,
engineering and other personnel. The competition for qualified
engineering and management personnel is intense.
We
may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the
services of one or more of our key personnel or the inability to add key
personnel could harm our business. We have no employment agreements
with any member of our senior management team. As a result of the
anticipated impact that the adoption of SFAS No. 123R in our first fiscal
quarter of 2007 would have on our results of operations, we changed our equity
compensation program during fiscal 2006. We now grant fewer equity
based shares per employee and the type of equity instrument is generally
restricted stock units rather than stock options. This change in our
equity compensation program may make it more difficult for us to attract or
retain qualified management and engineering personnel, which could have an
adverse effect on our business.
We
are dependent on several contractors to perform key manufacturing functions
for
us.
We
use
several contractors located in Asia for a portion of the assembly and testing
of
our products. We also rely on outside wafer foundries for a portion
of our wafer fabrication. Although we own the majority of our
manufacturing resources, the disruption or termination of any of our contractors
could harm our business and operating results.
Our
use
of third parties involves some reduction in our level of control over the
portions of our business that we subcontract. Our future operating
results could suffer if any contractor were to experience financial, operations
or production difficulties or situations when demand exceeds capacity, or if
they were unable to maintain manufacturing yields, assembly and test yields
and
costs at approximately their current levels, or if due to their locations in
foreign countries they were to experience political upheaval or infrastructure
disruption. Further, procurement from third parties is done by
purchase order and contracts. If these third parties are unable or
unwilling to timely deliver products or services conforming to our quality
standards, we may not be able to qualify additional manufacturing sources for
our products in a timely manner or at all, and such arrangements, if any, may
not be on favorable terms to us. In such event, we could experience
an interruption in production, an increase in manufacturing and production
costs, decline in product reliability, and our business and operating results
could be adversely affected.
-33-
We
may lose sales if our suppliers of raw materials and equipment fail to meet
our
needs.
Our
semiconductor manufacturing operations require raw materials and equipment
that
must meet exacting standards. We generally have more than one source
for these supplies, but there are only a limited number of suppliers capable
of
delivering various raw materials and equipment that meet our
standards. The raw materials and equipment necessary for our business
could become more difficult to obtain as worldwide use of semiconductors in
product applications increases. We have experienced supply shortages
from time to time in the past, and on occasion our suppliers have told us they
need more time than expected to fill our orders or that they will no longer
support certain equipment with updates or spare and replacements
parts. An interruption of any raw materials or equipment sources, or
the lack of supplier support for a particular piece of equipment, could harm
our
business.
Our
operating results may be impacted by both seasonality and the wide fluctuations
of supply and demand in the semiconductor industry.
The
semiconductor industry is characterized by seasonality and wide fluctuations
of
supply and demand. Since a significant portion of our revenue is from
consumer markets and international sales, our business may be subject to
seasonally lower revenues in particular quarters of our fiscal
year. However, broad strength in our overall business in certain
recent periods and semiconductor industry conditions have had a more significant
impact on our results than seasonality, and has made it difficult to assess
the
impact of seasonal factors on our business. The industry has also
experienced significant economic downturns, characterized by diminished product
demand and production over-capacity. We have sought to reduce our
exposure to this industry cyclicality by selling proprietary products that
cannot be easily or quickly replaced, to a geographically diverse base of
customers across a broad range of market segments. However, we have
experienced substantial period-to-period fluctuations in operating results
and
expect, in the future, to experience period-to-period fluctuations in operating
results due to general industry or economic conditions.
We
are exposed to various risks related to legal proceedings or
claims.
We
are
currently, and in the future may be, involved in legal proceedings or claims
regarding patent infringement, intellectual property rights, contracts and
other
matters. As is typical in the semiconductor industry, we receive
notifications from customers from time to time who believe that we owe them
indemnification or other obligations related to infringement claims made against
the customers by third parties. These legal proceedings and claims,
whether with or without merit, could result in substantial cost to us and divert
our resources. If we are not able to resolve a claim, negotiate a
settlement of a matter, obtain necessary licenses on commercially reasonable
terms, reengineer our products or processes to avoid infringement, and/or
successfully prosecute or defend our position, we could incur uninsured
liability in any of them, be required to take an appropriate charge to
operations, be enjoined from selling a material portion of our product line
or
using certain processes, suffer a reduction or elimination in value of
inventories, and our business, financial condition or results of operations
could be harmed.
It
is
also possible that from time to time we may be subject to warranty or product
liability claims that could lead to significant expenses related to the defense
of such claims, diversion of resources, increased costs associated with the
replacement of affected products, lost revenue or delay in recognition of
revenue due to cancellation of orders and unpaid receivables, customer imposed
fines or penalties for failure to meet contractual requirements, and a
requirement to pay damages claims. Because the systems into which our
products are integrated have a higher cost of goods than the products we sell,
these expenses and damages may be significantly higher than the sales and
profits we received from the products involved. While we specifically
exclude consequential damages in our standard terms and conditions, our ability
to avoid such liabilities may be limited by applicable law. We do
have product liability insurance, but we do not expect that insurance will
cover
all claims or be of a sufficient amount to fully protect against such
claims. Costs or payments we may make in connection with warranty or
product liability claims may adversely affect the results of our
operations.
-34-
Further,
we sell to customers in industries such as automotive, aerospace, and medical,
where failure of their systems could cause damage to property or persons. We
may
be subject to product liability claims if our products cause the system
failures. Based on our historical experience, we believe that the risk of
exposure to product liability claims is currently low. However, we will face
increased exposure to product liability claims if there are substantial
increases in either the volume of our sales into these applications or the
frequency of system failures caused by our devices.
Failure
to adequately protect our intellectual property could result in lost revenue
or
market opportunities.
Our
ability to obtain patents, licenses and other intellectual property rights
covering our products and manufacturing processes is important for our
success. To that end, we have acquired certain patents and patent
licenses and intend to continue to seek patents on our inventions and
manufacturing processes. The process of seeking patent protection can
be long and expensive, and patents may not be issued from currently pending
or
future applications. In addition, our existing patents and any new
patents that are issued may not be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us. We may be
subject to or may ourselves initiate interference proceedings in the U.S. Patent
and Trademark Office, which can require significant financial and management
resources. In addition, the laws of certain foreign countries do not
protect our intellectual property rights to the same extent as the laws of
the
United States. Infringement of our intellectual property rights by a
third party could result in uncompensated lost market and revenue opportunities
for us.
We
do not typically have long-term contracts with our
customers.
We
do not
typically enter into long-term contracts with our customers and we cannot be
certain about future order levels from our customers. When we do
enter into customer contracts, the contract is generally cancelable at the
convenience of the customer. Even though we have over 58,000 end
customers and our ten largest customers make up approximately 9% of our total
revenue, cancellation of long-term and short-term customer contracts could
have
an adverse financial impact on our revenue and profits.
Further,
as the practice has become more commonplace in the industry, we have entered
into contracts with certain customers that differ from our standard terms of
sale. Under these contracts we commit to supply quantities of
products on scheduled delivery dates. If we become unable to supply
the customer as required under the contract, the customer may incur additional
production costs, lost revenues due to subsequent delays in their own
manufacturing schedule, or quality related issues. Under these
contracts, we may be liable for the costs the customer has
incurred. While we try to limit such liabilities, if they should
arise, there may be a material adverse impact on our results of operation and
financial condition.
Business
interruptions could harm our business.
Operations
at any of our manufacturing facilities, or at any of our wafer fabrication
or
test and assembly subcontractors, may be disrupted for reasons beyond our
control, including work stoppages, power loss, incidents of terrorism or
security risk, political instability, public health issues, telecommunications,
transportation or other infrastructure failure, fire, earthquake, floods, or
other natural disasters. If operations at any of our facilities, or
our subcontractors’ facilities are interrupted, we may not be able to shift
production to other facilities on a timely basis. If this occurs, we
would likely experience delays in shipments of products to our customers and
alternate sources for production may be unavailable on acceptable
terms. This could result in reduced revenues and profits and the
cancellation of orders or loss of customers. In addition, business
interruption insurance will likely not be enough to compensate us for any losses
that may occur and any losses or damages incurred by us as a result of business
interruptions could significantly harm our business.
-35-
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 2007 and the first six months of fiscal 2008,
approximately 74% of our net sales were made to foreign customers. We
purchase a substantial portion of our raw materials and equipment from foreign
suppliers. In addition, we own product assembly and testing
facilities located near Bangkok, Thailand. We also use various
foreign contractors for a portion of our assembly and testing and for a portion
of our wafer fabrication requirements. Substantially all of our
finished goods inventory is maintained in Thailand.
Our
reliance on foreign operations, foreign suppliers, maintenance of substantially
all of our finished goods in inventory at foreign locations and significant
foreign sales exposes us to foreign political and economic risks, including,
but
not limited to:
|
|
·
|
political,
social and economic instability
|
|
|
·
|
public
health conditions
|
|
|
·
|
trade
restrictions and changes in tariffs
|
|
|
·
|
import
and export license requirements and
restrictions
|
|
|
·
|
difficulties
in staffing and managing international
operations
|
|
|
·
|
employment
regulations
|
|
|
·
|
disruptions
in international transport or
delivery
|
|
|
·
|
fluctuations
in currency exchange rates
|
|
|
·
|
difficulties
in collecting receivables
|
|
|
·
|
economic
slowdown in the worldwide markets served by us,
and
|
|
|
·
|
potentially
adverse tax consequences.
|
If
any of
these risks materialize, our sales could decrease and/or our operating results
could suffer.
A
substantial portion of our short-term investment portfolio is invested in
auction rate securities and if an auction fails for amounts we have invested,
our investment will not be liquid. If the issuer is unable to
successfully close future auctions and their credit rating deteriorates, we
may
be required to adjust the carrying value of our investment through an impairment
charge to earnings.
At
September 30, 2007, $159.5 million of our investment portfolio was invested
in
auction rate securities. If an auction fails for amounts we have
invested, our investment will not be liquid. At September 30, 2007,
auctions for $24.9 million of our investments in auction rate securities
had failed. As a result, we will not be able to access such funds
until a future auction on these investments is successful. There are
$22.4 million of the failed auctions that are insured for their principal and
interest in the case of default. If the issuers are unable to
successfully close future auctions and their credit rating deteriorates, we
may
be required to adjust the carrying value of the investment through an impairment
charge to earnings. Our investments in auction rate securities that
have not failed the auction process are primarily invested in municipal bonds
that have no recent history of failed auctions.
Interruptions
in information technology systems could affect our
business.
We
rely
on the efficient and uninterrupted operation of complex information technology
systems and networks to operate our business. Any significant system
or network disruption, including but not limited to computer viruses, security
breaches, or energy blackouts could have a material adverse impact on our
operations, sales and operating results. We
have implemented measures to manage our risks related to such disruptions,
but
such disruptions could negatively impact our operations and financial
results. In addition, we may incur additional costs to remedy the
damages caused by these disruptions or security breaches.
-36-
The
occurrence of events for which we are self-insured, or which exceed our
insurance limits may affect our profitability and
liquidity.
We
have
insurance contracts with independent insurance companies related to many
different types of risk; however, we self-insure for some risks and
obligations. In these circumstances, we have determined that it is
more cost effective to self-insure certain risks than to pay the increased
premium costs in place since the disruption in the insurance market after the
events of September 11, 2001. The risks and exposures that we
self-insure include, but are not limited to, certain property, product defects,
political risks, and patent infringement. Should there be a loss or
adverse judgment or other decision in an area for which we are self-insured,
then our financial condition, result of operations and liquidity may be
adversely affected.
We
are subject to stringent environmental regulations, which may force us to incur
significant expenses.
We
must
comply with many different federal, state, local and foreign governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our products and manufacturing
process. Although we believe that our activities conform to presently
applicable environmental regulations, our failure to comply with present or
future regulations could result in the imposition of fines, suspension of
production or a cessation of operations. Any such environmental
regulations could require us to acquire costly equipment or to incur other
significant expenses to comply with such regulations. Any failure by
us to control the use of or adequately restrict the discharge of hazardous
substances could subject us to future liabilities. Environmental
problems may occur that could subject us to future costs or
liabilities.
Over
the
past few years, there has been an expansion in environmental laws focusing
on
reducing or eliminating hazardous substances in electronic products. For
example, the EU RoHS Directive provided that beginning July 1, 2006, electronic
products sold into Europe were required to meet stringent chemical restrictions,
including the absence of lead. China is adopting similar
requirements. The first phase of the China legislation requires labeling
and chemical content disclosure for all electronic products sold into or within
China after February 28, 2007. While at this time our semiconductor
products do not directly fall under the China legislation, we have complied
with it in order to support our customers' compliance efforts. As the
law is further implemented, we may need to take additional compliance
activities. These laws impact our products and may make it more expensive for
us
to manufacture and sell our products. It may be difficult to timely comply
with these laws and we may not have sufficient quantities of compliant materials
to meet customers’ needs, thereby adversely impacting our sales and
profitability.
Regulatory
authorities in jurisdictions into which we ship our products could levy fines
or
restrict our ability to export products.
A
significant portion of our sales are made outside of the United States through
exporting and re-exporting of products. In addition to local
jurisdictions’ export regulations, our U.S. manufactured products or products
based on U.S. technology are subject to Export Administration Regulations (EAR)
when exported and re-exported to and from all international
jurisdictions. Licenses or proper license exceptions may be required
for the shipment of our products to certain countries. Non-compliance
with the EAR or other export regulations can result in penalties including
denial of export privileges, fines, criminal penalties, and seizure of
products. Such penalties could have a material adverse effect on our
business including our ability to meet our net sales and earnings
targets.
The
future trading price of our common stock could be subject to wide fluctuations
in response to a variety of factors.
The
market price of our common stock has fluctuated significantly in the past and
is
likely to fluctuate in the future. The future trading price of our
common stock could be subject to wide fluctuations in response to a variety
of
factors, many of which are beyond our control, including, but not limited
to:
|
|
·
|
quarterly
variations in our operating results and the operating results of
other
technology companies
|
|
|
·
|
actual
or anticipated announcements of technical innovations or new products
by
us or our competitors
|
|
|
·
|
changes
in analysts’ estimates of our financial performance or buy/sell
recommendations
|
|
|
·
|
changes
in our financial guidance or our failure to meet such
guidance
|
|
|
·
|
general
conditions in the semiconductor industry,
and
|
|
|
·
|
worldwide
economic and financial conditions.
|
-37-
In
addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many high
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations and
other factors may harm the market price of our common stock.
The
outcome of currently ongoing and future examinations of our income tax returns
by the IRS could have an adverse effect on our results of
operations.
We
are
subject to continued examination of our income tax returns by the Internal
Revenue Service and other tax authorities. 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.
In
the event we make acquisitions, we may not be able to successfully integrate
such acquisitions or attain the anticipated benefits.
While
acquisitions do not represent a major part of our growth strategy, from time
to
time we may consider financially attractive and strategic acquisitions if such
opportunities arise. Any transactions that we complete may involve a number
of
risks, including: the diversion of our management’s attention from
our existing business to integrate the operations and personnel of the acquired
business, or possible adverse effects on our operating results during the
integration process. In addition, we may not be able to successfully
or profitably integrate, operate, maintain and manage any newly acquired
operations or employees. We may not be able to maintain uniform standards,
controls, procedures and policies, and this may lead to operational
inefficiencies.
|
Item
2.
|
Unregistered
Sales
of Equity Securities and Use of
Proceeds
|
The
following table sets forth our
purchases of our common stock in the second quarter of fiscal 2008 and the
footnote below the table designates the repurchase programs that the shares
were
purchased under:
|
Issuer
Purchases of Equity Securities
|
||||||||||||||||
|
Period
|
(a)
Total Number of Shares Purchased
|
(b)
Average Price Paid per Share
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced
Programs
|
(d)
Maximum Number of Shares that May Yet Be Purchased Under the
Programs
|
||||||||||||
|
July
1, 2007 – July 31, 2007
|
550,000
|
$ |
37.07
|
550,000
|
10,945,166
|
|||||||||||
|
August
1, 2007 – August 31, 2007
|
3,451,731
|
$ |
37.60
|
3,451,731
|
7,493,435
|
|||||||||||
|
September
1, 2007 – September 30, 2007
|
---
|
---
|
---
|
7,493,435
|
||||||||||||
|
Total
|
4,001,731
|
$ |
37.53
|
4,001,731
|
||||||||||||
|
(1)
|
On
October 26, 2006, our Board of Directors authorized the repurchase
of up
to 10 million shares of our common stock in the open market or privately
negotiated transactions. As of September 30, 2007, 7,493,435
shares of this authorization remained available to be purchased under
this
program. There is no expiration date associated with this
authorization.
|
-38-
|
Item
4.
|
Submission
of
Matters to a Vote of Security
Holders
|
|
|
(a)
|
We
held our Annual Meeting of Stockholders on August 17,
2007.
|
|
|
(b)
|
Steve
Sanghi, Albert J. Hugo-Martinez, L.B. Day, Matthew W. Chapman and
Wade F.
Meyercord were elected as directors at the Annual
Meeting.
|
|
|
(c)
|
The
results of the vote on the matters voted upon at the Annual Meeting
were
as follows:
|
|
|
(1)
|
Election
of Directors:
|
|
Director
|
For
|
Withheld/Abstain
|
||||||
|
Steve
Sanghi
|
203,403,866
|
2,324,562
|
||||||
|
Albert
J. Hugo-Martinez
|
203,845,702
|
1,882,726
|
||||||
|
L.B.
Day
|
193,510,979
|
12,217,449
|
||||||
|
Matthew
W. Chapman
|
205,083,018
|
645,410
|
||||||
|
Wade
F. Meyercord
|
205,068,605
|
659,823
|
||||||
|
|
(2)
|
Approval
of the proposal to amend the Company’s 2004 Equity Incentive
Plan:
|
|
For
|
Against
|
Withheld/Abstain
|
Broker
Non-Votes
|
|||||||||||
|
183,449,159
|
8,354,689
|
349,181
|
13,575,399
|
|||||||||||
|
|
(3)
|
Approval
of the ratification of the appointment of Ernst & Young LLP as the
independent registered public accounting firm of Microchip for the
fiscal
year ending March 31, 2008:
|
|
For
|
Against
|
Withheld/Abstain
|
Broker
Non-Votes
|
|||||||||||
|
204,815,696
|
831,966
|
80,766
|
-0-
|
|||||||||||
The
foregoing matters are described in
more detail in our definitive proxy statement dated June 30, 2006.
Item
6. Exhibits
|
Change
of Control Severance Agreement
|
|
|
Change
of Control Severance Agreement
|
|
|
Restricted
Stock Agreement (Domestic)
|
|
|
Restricted
Stock Agreement (Foreign)
|
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
MICROCHIP
TECHNOLOGY INCORPORATED
|
|
|
Date: November
7, 2007
|
By: /s/
Gordon W. Parnell
|
|
Gordon
W.
Parnell
|
|
|
Vice
President and Chief
Financial Officer
|
|
|
(Duly
Authorized Officer,
and
|
|
|
Principal
Financial
and Accounting Officer)
|
-40-