form10-q.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
quarterly period ended December 31, 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 February 1, 2008
|
Common
Stock, $0.001 par value
|
188,804,070
shares
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
|
|
Page
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PART
I. FINANCIAL INFORMATION
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|
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Item
1.
|
Financial
Statements (Unaudited)
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PART
II. OTHER INFORMATION
|
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SIGNATURES
|
43
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|
CERTIFICATIONS
|
|
|
|
EXHIBITS
|
|
(in
thousands, except share and per share amounts)
ASSETS
|
|
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Note
1)
|
|
Cash
and cash equivalents
|
|
$ |
831,005 |
|
|
$ |
167,477 |
|
Short-term
investments
|
|
|
607,011 |
|
|
|
583,000 |
|
Accounts
receivable, net
|
|
|
114,396 |
|
|
|
124,559 |
|
Inventories
|
|
|
124,801 |
|
|
|
121,024 |
|
Prepaid
expenses
|
|
|
21,332 |
|
|
|
15,547 |
|
Deferred
tax assets
|
|
|
60,658 |
|
|
|
61,983 |
|
Other
current assets
|
|
|
38,019 |
|
|
|
11,147 |
|
Total
current
assets
|
|
|
1,797,222 |
|
|
|
1,084,737 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
524,769 |
|
|
|
605,722 |
|
Long-term
investments
|
|
|
215,384 |
|
|
|
527,910 |
|
Goodwill
|
|
|
31,886 |
|
|
|
31,886 |
|
Intangible
assets, net
|
|
|
11,789 |
|
|
|
8,456 |
|
Other
assets
|
|
|
35,698 |
|
|
|
10,830 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,616,748 |
|
|
$ |
2,269,541 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
35,596 |
|
|
$ |
34,675 |
|
Accrued
liabilities
|
|
|
47,859 |
|
|
|
129,882 |
|
Deferred
income on shipments to distributors
|
|
|
93,349 |
|
|
|
91,363 |
|
Total
current
liabilities
|
|
|
176,804 |
|
|
|
255,920 |
|
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
|
|
1,150,103 |
|
|
|
--- |
|
Long-term
income tax payable
|
|
|
111,512 |
|
|
|
--- |
|
Deferred
tax liability
|
|
|
14,112 |
|
|
|
8,327 |
|
Other
long-term liabilities
|
|
|
1,022 |
|
|
|
926 |
|
|
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|
|
|
|
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|
Stockholders’
equity:
|
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|
|
|
|
|
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|
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|
|
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|
Preferred
stock, $0.001 par value; authorized 5,000,000 shares; no shares issued
or
outstanding.
|
|
|
--- |
|
|
|
--- |
|
Common
stock, $0.001 par value; authorized 450,000,000 shares; issued
218,789,994
and outstanding
|
|
|
|
|
|
|
|
|
189,013,788 shares at December 31, 2007; issued
and outstanding 217,439,960 shares at March 31, 2007.
|
|
|
189 |
|
|
|
217 |
|
Additional
paid-in capital
|
|
|
797,433 |
|
|
|
755,834 |
|
Retained
earnings
|
|
|
1,284,989 |
|
|
|
1,255,486 |
|
Accumulated
other comprehensive loss
|
|
|
(168 |
) |
|
|
(7,169 |
) |
Less
shares of common stock held in treasury at cost; 29,776,206 shares
at
December 31, 2007; and no shares at March 31, 2007.
|
|
|
(919,248 |
) |
|
|
--- |
|
Total
stockholders’
equity
|
|
|
1,163,195 |
|
|
|
2,004,368 |
|
|
|
|
|
|
|
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Total
liabilities and
stockholders’ equity
|
|
$ |
2,616,748 |
|
|
$ |
2,269,541 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements
|
|
(in
thousands except per share amounts)
(Unaudited)
|
|
Three
Months Ended December 31,
|
|
|
Nine
Months Ended December 31,
|
|
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|
2007
|
|
|
2006
|
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|
2007
|
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|
2006
|
|
|
|
|
|
|
|
|
|
|
|
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Net
sales
|
|
$ |
252,600 |
|
|
$ |
251,004 |
|
|
$ |
775,319 |
|
|
$ |
781,495 |
|
Cost
of sales (1)
|
|
|
99,553 |
|
|
|
101,294 |
|
|
|
309,015 |
|
|
|
311,340 |
|
Gross
profit
|
|
|
153,047 |
|
|
|
149,710 |
|
|
|
466,304 |
|
|
|
470,155 |
|
|
|
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|
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|
|
|
|
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|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development (1)
|
|
|
30,306 |
|
|
|
28,043 |
|
|
|
89,358 |
|
|
|
85,151 |
|
Selling,
general and administrative (1)
|
|
|
43,501 |
|
|
|
40,185 |
|
|
|
130,250 |
|
|
|
122,482 |
|
Loss
on sale of Fab 3
|
|
|
--- |
|
|
|
--- |
|
|
|
26,763 |
|
|
|
--- |
|
|
|
|
73,807 |
|
|
|
68,228 |
|
|
|
246,371 |
|
|
|
207,633 |
|
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|
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|
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|
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|
|
|
|
|
|
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|
Operating
income
|
|
|
79,240 |
|
|
|
81,482 |
|
|
|
219,933 |
|
|
|
262,522 |
|
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|
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|
Other
income (expense):
|
|
|
|
|
|
|
|
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|
|
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|
|
Interest
income
|
|
|
13,467 |
|
|
|
15,002 |
|
|
|
42,787 |
|
|
|
43,910 |
|
Interest
expense
|
|
|
(1,635 |
) |
|
|
(890 |
) |
|
|
(1,635 |
) |
|
|
(5,146 |
) |
Other,
net
|
|
|
205 |
|
|
|
260 |
|
|
|
1,079 |
|
|
|
452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
91,277 |
|
|
|
95,854 |
|
|
|
262,164 |
|
|
|
301,738 |
|
Income
tax provision
|
|
|
11,153 |
|
|
|
23,005 |
|
|
|
41,068 |
|
|
|
72,417 |
|
Net
income
|
|
$ |
80,124 |
|
|
$ |
72,849 |
|
|
$ |
221,096 |
|
|
$ |
229,321 |
|
|
|
|
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|
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|
|
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|
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|
|
|
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|
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|
|
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|
Basic
net income per common share
|
|
$ |
0.39 |
|
|
$ |
0.34 |
|
|
$ |
1.02 |
|
|
$ |
1.07 |
|
Diluted
net income per common share
|
|
$ |
0.38 |
|
|
$ |
0.33 |
|
|
$ |
1.00 |
|
|
$ |
1.04 |
|
Dividends
declared per common share
|
|
$ |
0.300 |
|
|
$ |
0.250 |
|
|
$ |
0.885 |
|
|
$ |
0.700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
common shares outstanding
|
|
|
207,002 |
|
|
|
215,710 |
|
|
|
216,046 |
|
|
|
214,603 |
|
Diluted
common shares outstanding
|
|
|
211,337 |
|
|
|
220,920 |
|
|
|
221,097 |
|
|
|
219,837 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
(1)
Includes share-based compensation expense as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
1,555 |
|
|
$ |
1,595 |
|
|
$ |
4,638 |
|
|
$ |
1,595 |
|
Research
and development
|
|
|
2,729 |
|
|
|
2,431 |
|
|
|
7,824 |
|
|
|
7,244 |
|
Selling,
general and administrative
|
|
|
4,073 |
|
|
|
3,714 |
|
|
|
11,699 |
|
|
|
10,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements
|
|
(in
thousands)
(Unaudited)
|
|
Nine
Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
221,096 |
|
|
$ |
229,321 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
76,605 |
|
|
|
87,792 |
|
Deferred
income taxes
|
|
|
(1,558 |
) |
|
|
7,563 |
|
Share-based
compensation expense related to equity incentive plans
|
|
|
24,161 |
|
|
|
19,714 |
|
Excess
tax benefit from share-based compensation
|
|
|
(16,811 |
) |
|
|
(14,648 |
) |
Tax
benefit from equity incentive plans
|
|
|
18,047 |
|
|
|
14,659 |
|
Convertible
debt derivative revaluation and amortization
|
|
|
103 |
|
|
|
--- |
|
Gain
on sale of assets
|
|
|
(625 |
) |
|
|
(364 |
) |
Write-down
of investments
|
|
|
892 |
|
|
|
--- |
|
Loss
on sale of Fab 3
|
|
|
26,763 |
|
|
|
--- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
10,163 |
|
|
|
19,276 |
|
Increase
in inventories
|
|
|
(3,444 |
) |
|
|
(3,422 |
) |
Increase
(decrease) in deferred income on shipments to distributors
|
|
|
1,986 |
|
|
|
(7,346 |
) |
(Decrease)
increase in accounts payable and accrued liabilities
|
|
|
(105 |
) |
|
|
12,702 |
|
Change
in other assets and liabilities
|
|
|
2,862 |
|
|
|
(7,422 |
) |
Net
cash provided by operating activities
|
|
|
360,135 |
|
|
|
357,825 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of investments
|
|
|
(1,158,361 |
) |
|
|
(1,087,068 |
) |
Sales
and maturities of investments
|
|
|
1,454,825 |
|
|
|
700,620 |
|
Investment
in other assets
|
|
|
(4,717 |
) |
|
|
(673 |
) |
Proceeds
from sale of Fab 3
|
|
|
27,523 |
|
|
|
--- |
|
Proceeds
from sale of assets
|
|
|
1,175 |
|
|
|
1,746 |
|
Capital
expenditures
|
|
|
(49,053 |
) |
|
|
(51,416 |
) |
Net
cash used provided by (used in) investing activities
|
|
|
271,392 |
|
|
|
(436,791 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment
of cash dividend
|
|
|
(191,592 |
) |
|
|
(150,526 |
) |
Repurchase
of common stock
|
|
|
(964,767 |
) |
|
|
--- |
|
Proceeds
from issuance of convertible debentures, net of issuance
costs
|
|
|
1,127,000 |
|
|
|
--- |
|
Proceeds
from sale of common stock
|
|
|
44,549 |
|
|
|
42,302 |
|
Excess
tax benefit from share-based compensation
|
|
|
16,811 |
|
|
|
14,648 |
|
Payments
on short-term borrowings
|
|
|
--- |
|
|
|
(239,454 |
) |
Net
cash provided by (used in) financing activities
|
|
|
32,001 |
|
|
|
(333,030 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
663,528 |
|
|
|
(411,996 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
167,477 |
|
|
|
565,273 |
|
Cash
and cash equivalents at end of period
|
|
$ |
831,005 |
|
|
$ |
153,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements
|
|
MICROCHIP
TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(Unaudited)
(1)
|
Basis
of
Presentation
|
The
accompanying unaudited condensed
consolidated financial statements include the accounts of Microchip Technology
Incorporated and its wholly-owned subsidiaries (the Company). All
intercompany balances and transactions have been eliminated in
consolidation. 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 nine
months ended December 31, 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 accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years and will
be adopted by the Company in the first quarter of fiscal 2009. 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.
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, the Company may elect to report financial instruments and certain
other items at fair value on a contract-by-contract basis with changes in value
reported in earnings. SFAS No. 159 is effective for years beginning
after November 15, 2007 and will be adopted by the Company in the first quarter
of fiscal 2009. The Company is currently evaluating the potential
impact of adopting this Statement.
In
June
2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable
Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF 07-3). EITF 07-3
requires that nonrefundable advance payments for goods or services that will
be
used or rendered for future research and development activities be deferred
and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a prospective
basis, for fiscal years beginning after December 15,
2007 and will be adopted by the Company in the first quarter of fiscal
2009. The Company does not expect the adoption of EITF 07-3 to
have a material effect on its consolidated results of operations and financial
condition.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141R). SFAS No. 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS No. 141R also
establishes disclosure requirements to enable the evaluation of the nature
and
financial effects of the business combination. SFAS No. 141R is effective
for fiscal years beginning after December 15, 2008, and will be adopted by
the Company in the first quarter of fiscal 2010. The Company is
currently evaluating the potential impact, if any, of the adoption of
SFAS No. 141R on its consolidated results of operations and financial
condition.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (SFAS No. 160). SFAS No. 160 establishes
accounting and reporting standards for ownership interests in subsidiaries
held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent's ownership interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008, and will be adopted by the Company in the first
quarter of fiscal 2010. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS 160 on its consolidated
results of operations and financial condition.
Potential
Changes in Accounting Pronouncements
In
August
2007, the FASB released proposed FSP APB 14-a Accounting For Convertible
Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial
Cash
Settlement) (FSP APB 14-a) that would alter the accounting treatment for
convertible debt instruments that allow for either mandatory or optional cash
settlements. FSP APB 14-a, if adopted as proposed, would impact the
accounting associated with the Company's $1.15 billion junior convertible
debentures. If adopted as proposed, this FSP would require the
Company to recognize additional (non-cash) interest expense based on the market
rate for similar debt instruments without the conversion feature. Furthermore,
it would require recognizing interest expense in prior periods pursuant to
retrospective accounting treatment. The proposed FSP was issued for a
45-day comment period that ended on October 15, 2007 but has not been issued
in
final form. The FASB is expected to begin its re-deliberations of the
guidance in FSP APB 14-a in the first quarter of calendar 2008 and the ultimate
effective date and outcome of such re-deliberations is unknown at this
time.
(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 and the
amounts received.
The
Company’s investments are intended to establish a high-quality portfolio that
preserves principal, meets liquidity needs, avoids inappropriate concentrations
and delivers an appropriate yield in relationship to the Company’s investment
guidelines and market conditions. The following is a summary of
available-for-sale securities at December 31, 2007 (amounts in
thousands):
|
|
Adjusted
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agency bonds
|
|
$ |
506,138 |
|
|
$ |
229 |
|
|
$ |
958 |
|
|
$ |
505,409 |
|
Auction
rate securities
|
|
|
60,433 |
|
|
|
--- |
|
|
|
--- |
|
|
|
60,433 |
|
Floating
rate securities
|
|
|
56,080 |
|
|
|
150 |
|
|
|
--- |
|
|
|
56,230 |
|
Municipal
bonds
|
|
|
109,656 |
|
|
|
685 |
|
|
|
60 |
|
|
|
110,281 |
|
Corporate
bonds and certificates of deposit
|
|
|
90,000 |
|
|
|
103 |
|
|
|
61 |
|
|
|
90,042 |
|
|
|
$ |
822,307 |
|
|
$ |
1,167 |
|
|
$ |
1,079 |
|
|
$ |
822,395 |
|
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 estimated fair
value. Typically, the carrying value of auction rate securities
approximates estimated fair value due to the frequent resetting of the interest
rates. In September 2007, auction rate securities that were
originally purchased for $24.9 million failed the auction
process. The failures resulted in the interest rates on these
investments resetting at Libor plus 125 or 175 basis points. The
$24.9 million in auctions have continued to fail through the date of the
filing of this report. The investments are not liquid, and the
Company now earns a higher rate of interest 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. The fair
value of the failed auction rate securities has been estimated by management
based upon pricing data provided by the firms managing the Company’s investments
and could change significantly based on market conditions. Based on
the estimated values, the Company concluded these investments were other than
temporarily impaired, and recognized an impairment charge on these investments
of $0.9 million in the three months ended December 31, 2007. If
the issuers are unable to successfully close future auctions or if their credit
ratings deteriorate, the Company may be required to further adjust the carrying
value of these investments through an additional impairment charge to
earnings. There are $22.4 million in original purchase value of the
failed auction rate securities that are insured for their principal and interest
in the case of default by Ambac, FGIC and MBIA. Based on information
available at December 31, 2007, management has no reason to beleive the
counterparties or the insurers will be unable to fulfill these obligastions,
however, there can be no assurance that such obligations could be fulfilled
in
future periods. As a result of the $0.9 million impairment
charge taken on the failed auction rate securities in the three months ended
December 31, 2007, the securities have a carrying value of $24.0 million
and the adjusted cost of these investments in the table above reflects this
carrying value. 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.
At December
31, 2007, the Company evaluated
the other
investments within its investment portfolio and noted other unrealized losses
of
$1.1 million due to fluctuations in interest rates. Management
does not believe any of these unrealized losses represented an
other-than-temporary impairment based on its evaluation of available evidence
as
of December 31, 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
December 31, 2008, such recovery is not anticipated to occur in the next year
and these investments have been classified as long-term
investments. At December 31, 2007, short-term investments consisted
of $607.0 million and long-term investments consisted of
$215.4 million.
The
amortized cost and estimated fair value of the available-for-sale securities
at
December 31, 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
|
|
$ |
192,315 |
|
|
$ |
179 |
|
|
$ |
357 |
|
|
$ |
192,137 |
|
Due
after one year and through
five years
|
|
|
514,946 |
|
|
|
789 |
|
|
|
722 |
|
|
|
515,013 |
|
Due
after five years and
through ten years
|
|
|
10,309 |
|
|
|
75 |
|
|
|
--- |
|
|
|
10,384 |
|
Due
after ten
years
|
|
|
104,737 |
|
|
|
124 |
|
|
|
--- |
|
|
|
104,861 |
|
|
|
$ |
822,307 |
|
|
$ |
1,167 |
|
|
$ |
1,079 |
|
|
$ |
822,395 |
|
During
the three and nine months ended December 31, 2007, the Company did not have
any
gross realized gains or losses on sales of available-for-sale
securities.
Accounts
receivable consists of the
following (amounts in thousands):
|
|
December
31,
2007
|
|
|
March
31,
2007
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
$ |
117,228 |
|
|
$ |
127,467 |
|
Other
|
|
|
451 |
|
|
|
636 |
|
|
|
|
117,679 |
|
|
|
128,103 |
|
Less
allowance for doubtful accounts
|
|
|
3,283 |
|
|
|
3,544 |
|
|
|
$ |
114,396 |
|
|
$ |
124,559 |
|
The
components of inventories consist of the following (amounts in
thousands):
|
|
December
31,
2007
|
|
|
March
31,
2007
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
4,591 |
|
|
$ |
5,118 |
|
Work
in process
|
|
|
94,355 |
|
|
|
83,783 |
|
Finished
goods
|
|
|
25,855 |
|
|
|
32,123 |
|
|
|
$ |
124,801 |
|
|
$ |
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.
(7)
|
Property,
Plant and
Equipment
|
Property,
plant and equipment consists
of the following (amounts in thousands):
|
|
December
31,
2007
|
|
|
March
31,
2007
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
35,065 |
|
|
$ |
47,212 |
|
Building
and building improvements
|
|
|
327,232 |
|
|
|
372,149 |
|
Machinery
and equipment
|
|
|
1,087,133 |
|
|
|
1,059,565 |
|
Projects
in process
|
|
|
82,305 |
|
|
|
69,040 |
|
|
|
|
1,531,735 |
|
|
|
1,547,966 |
|
Less
accumulated depreciationand
amortization
|
|
|
1,006,966 |
|
|
|
942,244 |
|
|
|
$ |
524,769 |
|
|
$ |
605,722 |
|
Depreciation
expense attributed to property and equipment was $75.2 million in the nine
months ended December 31, 2007 and $86.4 million in the nine months ended
December 31, 2006.
As
a
result of the sale of Fab 3, the amounts at December 31, 2007 reflect the
removal of $54.2 million of net property, plant and equipment.
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 due to tax overpayments.
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.
The
income tax provision in the three-month period ended December 31, 2007 was
impacted by a $5.7 million favorable resolution of a foreign tax matter and
for the nine-month period ended December 31, 2007 the income tax provision
was impacted by the loss on sale of Fab 3 and the resolution of the foreign
tax
matter. There were no such losses or settlements in the three and
nine-month periods ended December 31, 2006. The following table
displays the impact the loss and settlement had on the income tax provision
that
the Company recorded in the three and nine-month periods ended December 31,
2007
(amounts in thousands):
|
|
Three
Months Ended December 31, 2007
|
|
|
Nine
Months Ended December 31, 2007
|
|
Income
before taxes
|
|
$ |
91,277 |
|
|
$ |
262,164 |
|
|
|
|
|
|
|
|
|
|
Loss
on sale of Fab
3
|
|
|
--- |
|
|
|
26,763 |
|
|
|
|
|
|
|
|
|
|
Income
before taxes excluding loss on sale
|
|
|
91,277 |
|
|
|
288,927 |
|
Effective
tax rate
|
|
|
18.50 |
%
|
|
|
19.76 |
%
|
Income
tax provision excluding effect of loss on sale
|
|
|
16,886 |
|
|
|
57,105 |
|
Tax
benefit of loss on sale of Fab 3 at 38.5%
|
|
|
--- |
|
|
|
10,304 |
|
Tax
benefit from resolution of foreign tax matter
|
|
|
5,733 |
|
|
|
5,733 |
|
Income
tax
provision
|
|
$ |
11,153 |
|
|
$ |
41,068 |
|
(9)
2.125% Junior
Subordinated Convertible Debentures
In
December 2007, the Company issued $1.15 billion principal amount of 2.125%
convertible debentures due December 15, 2037, to two initial purchasers in
a
private offering. The debentures are subordinated in right of payment
to any future senior debt of the Company and are effectively subordinated in
right of payment to the liabilities of the Company’s
subsidiaries. The debentures are convertible, subject to certain
conditions, into shares of the Company’s common stock at an initial conversion
rate of 29.2783 shares of common stock per one thousand dollar principal amount
of debentures, representing an initial conversion price of approximately $34.16
per share of common stock. As of December 31, 2007, none of the
conditions allowing holders of the debentures to convert had been
met. The conversion rate will be subject to adjustment for certain
events as outlined in the indenture governing the debentures but will not be
adjusted for accrued interest. The Company received net proceeds of
$1,127.0 million after deduction of issuance costs of $23.0
million. The debt issuance costs are recorded in long-term other
assets and are being amortized to interest expense over 30
years. Interest is payable in cash semiannually in arrears on June 15
and December 15, beginning on June 15, 2008. Interest expense related
to the debentures for the third quarter and the first nine months of fiscal
2008
totaled $1.6 million and $1.6 million, respectively, and was included in
interest expense on the condensed consolidated statements of
income. The debentures also have a contingent interest component that
will require the Company to pay interest during any semiannual interest period
if the average trading price of the debenture is greater or less than certain
thresholds beginning with the semiannual interest period commencing on December
15, 2017 (the maximum amount of contingent interest that will accrue is 0.50%
of
such average trading price per year) and upon the occurrence of certain events,
as outlined in the indenture governing the debentures.
On
or
after December 15, 2017, the Company may redeem all or part of the debentures
for the principal amount plus any accrued and unpaid interest if the closing
price of the Company’s common stock has been at least 150% of the conversion
price then in effect for at least 20 trading days during any 30 consecutive
trading-day period prior to the date on which the Company provides notice of
redemption. The debentures are also redeemable on or prior to June 7,
2008 if certain U.S. federal tax rules are enacted.
Prior
to
September 1, 2037, holders of the debentures may convert their debentures only
upon the occurrence of certain events, as outlined in the
indenture. Upon conversion, the Company will satisfy its conversion
obligation by delivering cash, shares of common stock or any combination, at
the
Company’s option. If holders of the debentures convert their
debentures in connection with a fundamental change, as defined in the indenture,
the Company will, in certain circumstances, be required to pay a make-whole
premium in the form of an increase in the conversion
rate. Additionally, in the event of a fundamental change, the holders
of the debentures may require the Company to purchase all or a portion of their
debentures at a purchase price equal to 100% of the principal amount of
debentures, plus accrued and unpaid interest, if any.
If
upon
conversion the Company elects to deliver cash for the principal amount of the
debentures and shares of common stock, if any, the Company would pay the holder
the cash value of the applicable number of shares of the Company’s common stock,
up to the principal amount of the debentures and shares of common stock for
any
conversion value in excess of the principal amount. If the conversion
value exceeds one thousand dollars, the Company may also elect to deliver cash
in lieu of common stock for the conversion value in excess of one thousand
dollars (conversion spread).
There
would be no adjustment to the numerator in the net income per common share
computation for the cash settled portion of the debentures as that portion
of
the debt instrument will always be settled in cash. The conversion
spread will be included in the denominator for the computation of diluted net
income per common share.
The
Company concluded the embedded features related to the contingent interest
payments and the Company making specific types of distributions (e.g.,
extraordinary dividends) qualify as derivatives and should be bundled as a
compound embedded derivative under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). The fair value of the
derivative at the date of issuance of the debentures was $1.3 million and
is accounted for as a discount on the debentures. The initial fair
value of the debentures of $1,148.7 million will be accreted to par value
over the term of the debt resulting in $1.3 million being amortized to interest
expense over 30 years. Any change in fair value of this embedded
derivative will be included in interest expense on the Company’s consolidated
statement of income. The fair value of the derivative as of December 31,
2007 was $1.4 million, resulting in $0.1 million of additional interest
expense in the three months ended December 31, 2007. The balance of
the debentures on the Company’s condensed consolidated balance sheet at December
31, 2007 was $1,150.1 million, including the fair value of the embedded
derivative. The Company also concluded that the debentures are not conventional
convertible debt instruments and that the embedded stock conversion option
qualifies as a derivative under SFAS 133. In addition, in accordance
with Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative
Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock,
the Company has concluded that the embedded conversion option would be
classified in stockholders’ equity if it were a freestanding
instrument. Accordingly, the embedded conversion option is not
required to be accounted for separately as a derivative.
Under
the
terms of a registration rights agreement entered into in connection with
the offering of the debentures, the Company is required to file a shelf
registration statement covering resales of the debentures and any common stock
issuable upon conversion of the debentures with the SEC within 120 days of
the closing of the offering of the debentures and to cause such shelf
registration statement to be declared effective within 180 days of the
closing of the offering of the debentures. In addition, the Company must
maintain the effectiveness of the shelf registration statement until all of
the
debentures and all shares of common stock issuable upon conversion of the
debentures cease to be outstanding, have been sold or transferred pursuant
to an
effective registration statement, have been sold pursuant to Rule 144 under
the
Securities Act of 1933, as amended, or the period of time specified in Rule
144(k) for the holding period has passed. If the Company fails to comply
with the terms of the registration rights agreement, it will be required to
pay
additional interest on the debentures at a rate per annum equal to 0.25% for
the
first 90 days after the date of such failure and 0.50% thereafter.
(10)
|
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
December
31,
|
|
|
Nine
months Ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in unrealized losses on investments, net of tax effect
of $668,
$(112), $1,840, and $558,
respectively
|
|
$ |
2,847 |
|
|
$ |
487 |
|
|
$ |
7,001 |
|
|
$ |
4,426 |
|
Comprehensive income
was
$77.3 million and $214.1 million for the three and nine months ended
December 31, 2007, respectively. Comprehensive income was
$72.4 million and $224.9 million for the three and nine months ended
December 31, 2006, respectively.
(11)
|
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
December 31, 2007, 11.5 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,
and
in
the case of newly hired employees, generally vest and become exercisable at
the
rate of 25% after one year of service and ratably on a monthly or quarterly
basis over a period of 36 months thereafter; subsequent equity incentive grants
to existing employees generally vest and become exercisable ratably on a monthly
or quarterly basis over a period starting in 48 months and ending in 60 months
after the date of grant. Beginning in fiscal 2008, the Company
converted its equity granting practices to a quarterly process instead of an
annual process. The quarterly grants generally vest 48 months from
the date of grant.
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
December
31,
|
|
|
Nine
Months Ended
December
31,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Cost
of sales
|
|
$ |
1,555 |
(1) |
|
$ |
1,595 |
(1) |
|
$ |
4,638 |
(1) |
|
$ |
1,595 |
(1) |
Research
and development
|
|
|
2,729 |
|
|
|
2,431 |
|
|
|
7,824 |
|
|
|
7,244 |
|
Selling,
general and administrative
|
|
|
4,073 |
|
|
|
3,714 |
|
|
|
11,699 |
|
|
|
10,874 |
|
Pre-tax
effect of share-based compensation
|
|
|
8,357 |
|
|
|
7,740 |
|
|
|
24,161 |
|
|
|
19,713 |
|
Income
tax benefit
|
|
|
1,546 |
|
|
|
1,857 |
|
|
|
4,763 |
|
|
|
4,730 |
|
Net
income effect of share-based compensation
|
|
$ |
6,811 |
|
|
$ |
5,883 |
|
|
$ |
19,398 |
|
|
$ |
14,983 |
|
(1)
During the three and nine months
ended December 31, 2007, $1.7 million and $5.0 million,
respectively, was capitalized
to inventory and $1.6 million and $4.6 million,
respectively, of capitalized
inventory was sold. During the three and nine months ended December
31, 2006, $1.7 million and $5.0 million, respectively, was capitalized to
inventory and $1.6 million of capitalized inventory was
sold.
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 December 31, 2007 is
$63.1 million. The weighted average period over which the
unearned share-based compensation is expected to be recognized is approximately
2.52 years.
Combined
Incentive Plan Information
RSU
activity under the 2004 Plan for the nine months ended December 31, 2007 is
set
forth below:
|
|
Number
of Shares
|
|
Nonvested
shares at March 31, 2007
|
|
|
1,687,443 |
|
Granted
|
|
|
781,594 |
|
Cancelled
|
|
|
(126,617 |
) |
Vested
|
|
|
(101,931 |
)
|
Nonvested
shares at December 31, 2007
|
|
|
2,240,489 |
|
The
total
pre-tax intrinsic value of RSUs which vested during the three and nine months
ended December 31, 2007 was $1.1 million and $3.7 million,
respectively. The aggregate pre-tax intrinsic value of RSUs
outstanding at December 31, 2007 was $70.3 million. The
aggregate pre-tax intrinsic value was calculated based on the closing price
of
the Company’s common stock of $31.42 per share on December 31,
2007. At December 31, 2007, the weighted average remaining expense
recognition period was 2.85 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 dividend yield. The
weighted average fair value per share of RSUs awarded in the three and nine
months ended December 31, 2007 was $29.81 and $31.60,
respectively.
Option
activity under the Company’s stock incentive plans for the nine months ended
December 31, 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
|
|
|
29,400 |
|
|
|
37.73 |
|
Exercised
|
|
|
(2,251,169 |
) |
|
|
16.88 |
|
Cancelled
|
|
|
(139,121 |
)
|
|
|
25.01 |
|
Outstanding
at December 31, 2007
|
|
|
12,379,656 |
|
|
$ |
22.79 |
|
The
total
pre-tax intrinsic value of options exercised during the three and nine months
ended December 31, 2007 was $9.2 million and $47.1 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
December 31, 2007:
Range
of
Exercise
Prices
|
|
|
Number
of
Outstanding
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average Remaining
Life
|
|
|
Number
Exercisable
|
|
|
WeightedAverage
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
(in
years)
|
|
|
|
|
|
|
|
$ |
4.72 – $15.92
|
|
|
|
2,012,238 |
|
|
$ |
13.04
|
|
|
|
2.27 |
|
|
|
2,012,238 |
|
|
$ |
13.04 |
|
|
15.93 – 17.85 |
|
|
|
125,874 |
|
|
|
17.37 |
|
|
|
2.71 |
|
|
|
125,874 |
|
|
|
17.37 |
|
|
17.86 – 18.48 |
|
|
|
1,544,030 |
|
|
|
18.48 |
|
|
|
5.21 |
|
|
|
1,233,703 |
|
|
|
18.48 |
|
|
18.49 – 23.39 |
|
|
|
1,564,098 |
|
|
|
22.38 |
|
|
|
2.79 |
|
|
|
1,564,088 |
|
|
|
22.38 |
|
|
23.40 – 25.26 |
|
|
|
892,699 |
|
|
|
24.18 |
|
|
|
4.37 |
|
|
|
892,699 |
|
|
|
24.19 |
|
|
25.27 – 25.29 |
|
|
|
1,601,438 |
|
|
|
25.29 |
|
|
|
7.22 |
|
|
|
35,822 |
|
|
|
25.29 |
|
|
25.30 – 27.00 |
|
|
|
691,099 |
|
|
|
26.21 |
|
|
|
6.00 |
|
|
|
672,515 |
|
|
|
26.21 |
|
|
27.01 – 27.05 |
|
|
|
1,406,484 |
|
|
|
27.05 |
|
|
|
6.23 |
|
|
|
80,232 |
|
|
|
27.05 |
|
|
27.06 – 27.15 |
|
|
|
1,498,782 |
|
|
|
27.15 |
|
|
|
4.20 |
|
|
|
1,498,782 |
|
|
|
27.15 |
|
|
27.16 – 37.84 |
|
|
|
1,042,914 |
|
|
|
29.98 |
|
|
|
5.86 |
|
|
|
826,536 |
|
|
|
29.59 |
|
|
|
|
|
|
12,379,656 |
|
|
$ |
22.79 |
|
|
|
4.69 |
|
|
|
8,942,489 |
|
|
$ |
21.66 |
|
The
aggregate pre-tax intrinsic value of options outstanding and options exercisable
at December 31, 2007 was $107.3 million and $87.5 million,
respectively. The aggregate pre-tax intrinsic values were calculated
based on the closing price of the Company’s common stock of $31.42 per
share on December 31, 2007.
The
weighted average fair value per share of stock options granted in the three
and
nine months ended December 31, 2007 was $11.19 and $12.14,
respectively.
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:
|
|
Nine
Months Ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Expected
life (in years)
|
|
|
6.50 |
|
|
|
5.44 |
|
Expected
volatility
|
|
|
38 |
% |
|
|
40 |
% |
Risk-free
interest rate
|
|
|
4.30 |
% |
|
|
4.83 |
% |
Expected
dividend yield
|
|
|
3.20 |
% |
|
|
3.20 |
% |
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 December 31, 2007,
4.5 million shares were available for future issuance under the Purchase
Plans. The Company issued 227,034 shares under the Purchase
Plans in the nine months ended December 31, 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:
|
|
Nine
Months Ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Expected
life (in years)
|
|
|
0.50 |
|
|
|
0.50 |
|
Expected
volatility
|
|
|
29 |
% |
|
|
30 |
% |
Risk-free
interest rate
|
|
|
4.24 |
% |
|
|
5.22 |
% |
Expected
dividend yield
|
|
|
3.20 |
% |
|
|
3.20 |
% |
(12)
|
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
December
31,
|
|
|
Nine
Months Ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
80,124 |
|
|
$ |
72,849 |
|
|
$ |
221,096 |
|
|
$ |
229,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
207,002 |
|
|
|
215,710 |
|
|
|
216,046 |
|
|
|
214,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of stock options and RSUs
|
|
|
4,335 |
|
|
|
5,210 |
|
|
|
5,051 |
|
|
|
5,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and potential common shares outstanding
|
|
|
211,337 |
|
|
|
220,920 |
|
|
|
221,097 |
|
|
|
219,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
0.39 |
|
|
$ |
0.34 |
|
|
$ |
1.02 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per common share
|
|
$ |
0.38 |
|
|
$ |
0.33 |
|
|
$ |
1.00 |
|
|
$ |
1.04 |
|
On
October 25, 2006, the Company announced that its Board of Directors had
authorized the repurchase of up to 10.0 million shares of its common stock
in the open market or in privately negotiated transactions. As of
December 31, 2007, the Company had repurchased 8,009,969 shares under this
authorization for $270.8 million. On December 11, 2007, the Company
announced that its Board of Directors had authorized the repurchase of up to
an
additional 10.0 million shares of its common stock in the open market or in
privately negotiated transactions. As of December 31, 2007, all
of this authorization remained outstanding and there is no expiration date
associated with this program.
The
Company’s Board of Directors authorized the repurchase of 21.5 million
shares of its common stock concurrent with the convertible debenture transaction
described in Note 9 and no further shares are available to be repurchased under
this authorization.
As
of
December 31, 2007, approximately 29.8 million 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.
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 $0.31 per share was paid on November 20, 2007 in
the aggregate amount of $66.4 million. A quarterly cash dividend
of $0.32 per share was declared on January 24, 2008 and will be paid on
February 21, 2008 to shareholders of record as of February 7, 2008, representing
an increase of 20.8% over the per share amount in the same quarter of the
previous year. The Company expects the February 2008 payment of its
quarterly cash dividend to be approximately $60.6 million.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
This
report,
including “Part I – Item 2Management’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 33 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 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
and
the outcomes of examinations by the IRS and other tax authorities;
|
|
·
|
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;
|
|
·
|
The
effect of fluctuations in currency rates;
|
|
·
|
The
timing and amount of repurchases of our common stock;
|
|
·
|
Our
financial condition and results of operations could be adversely
affected
if we do not effectively manage our liabilities;
|
|
·
|
The
effect of any interruption in information technology systems;
|
|
·
|
The
integration of operations and personnel in an acquisition
|
|
·
|
The
conversion of our debentures will dilute the ownership interest
of
existing stockholders
|
|
·
|
The
availability of financing on acceptable terms;
|
|
·
|
The
effect of expansion of environmental laws; and
|
|
·
|
The
impact of export regulations on our business.
|
We
begin
our Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) with a summary of Microchip’s overall business strategy to
give the reader an overview of the goals of our business and the overall
direction of our business and products. This is followed by a
discussion of the Critical Accounting Policies and Estimates that we believe
are
important to understanding the assumptions and judgments incorporated in our
reported financial results. We then discuss our Results of Operations
for the three and nine months ended December 31, 2007 compared to the three
and
nine months ended December 31, 2006. We then provide an analysis of
changes in our balance sheet and cash flows, and discuss our financial
commitments in sections titled “Liquidity and Capital Resources,” “Contractual
Obligations” and “Off-Balance Sheet Arrangements.”
Strategy
Our
goal
is to be a worldwide leader in providing specialized semiconductor products
for
a wide variety of embedded control applications. Our strategic focus
is on embedded control products, which include microcontrollers,
high-performance linear and mixed signal devices, power management and thermal
management devices, interface devices, Serial EEPROMs, and our patented
KeeLoq security
devices. We provide highly cost-effective embedded control products
that also offer the advantages of small size, high performance, low
voltage/power operation and ease of development, enabling timely and
cost-effective embedded control product integration by our
customers.
We
sell
our products to a broad base of domestic and international customers
across a variety of industries. The principal markets that
we serve include consumer, automotive, industrial, office automation and
telecommunications. Our business is subject to fluctuations based on
economic conditions within these markets. The recent weakness in
the U.S. housing market and general economic conditions have impacted
our net sales to customers that serve the consumer
market.
Our
manufacturing operations include wafer fabrication and assembly and
test. The ownership of our manufacturing resources is an important
component of our business strategy, enabling us to maintain a high level of
manufacturing control resulting in us being one of the lowest cost producers
in
the embedded control industry. By owning our wafer fabrication
facilities and much of our assembly and test operations, and by employing
statistical process control techniques, we have been able to achieve and
maintain high production yields. Direct control over manufacturing
resources allows us to shorten our design and production cycles. This
control also allows us to capture the wafer manufacturing and a portion of
the
assembly and test profit margin.
We
employ
proprietary design and manufacturing processes in developing our embedded
control products. We believe our processes afford us both
cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully leverage
our process research and development costs and to deliver new products to
market
more rapidly. Our engineers utilize advanced computer-aided design
(CAD) tools and software to perform circuit design, simulation and layout,
and
our in-house photomask and wafer fabrication facilities enable us to rapidly
verify design techniques by processing test wafers quickly and
efficiently.
We
are
committed to continuing our investment in new and enhanced products, including
development systems, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. Our current research and
development activities focus on the design of new microcontrollers, digital
signal controllers, memory and mixed-signal products, new development systems,
software and application-specific software libraries. We are also
developing new design and process technologies to achieve further cost
reductions and performance improvements in existing products.
We
market
our products worldwide primarily through a network of direct sales personnel
and
distributors. Our distributors focus primarily on servicing the
product and technical support requirements of a broad base of diverse
customers. We believe that our direct sales personnel combined with
our distributors provide an effective means of reaching this broad and diverse
customer base. Our direct sales force focuses primarily on major
strategic accounts in three geographical markets: the Americas, Europe and
Asia. We currently maintain sales and support centers in major
metropolitan areas in North America, Europe and Asia. We believe that
a strong technical service presence is essential to the continued development
of
the embedded control market. Many of our field sales engineers
(FSEs), field application engineers (FAEs), and sales management have technical
degrees and have been previously employed in an engineering
environment. We believe that the technical knowledge of our sales
force is a key competitive advantage in the sale of our products. The
primary mission of our FAE team is to provide technical assistance to strategic
accounts and to conduct periodic training sessions for FSEs and distributor
sales teams. FAEs also frequently conduct technical seminars for our
customers in major cities around the world, and work closely with our
distributors to provide technical assistance and end-user support.
Critical
Accounting Policies and Estimates
General
Our
discussion and analysis of Microchip’s financial condition and results of
operations is based upon our Consolidated Financial Statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States of America. We review the accounting policies we use in
reporting our financial results on a regular basis. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition,
share-based compensation, inventories, income taxes, property, plant and
equipment, impairment of property, plant and equipment, convertible debentures
and litigation. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent
from
other sources. Results may differ from these estimates due to actual
outcomes being different from those on which we based our
assumptions. We review these estimates and judgments on an ongoing
basis. We believe the following critical accounting policies affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements. We also have other policies that
we consider key accounting policies, such as our policy regarding revenue
recognition to OEMs; however, we do not believe these policies require us to
make estimates or judgments that are as difficult or subjective as our policies
described below.
Revenue
Recognition– Distributors
Our
distributors worldwide 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 cost
of
sale are deferred and are reflected net 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 nine months
ended December 31, 2007 was $24.5 million,
of which $19.5 million was reflected
in operating
expenses and
$5.0 million was capitalized
to
inventory. Share-based compensation
reflected in cost of sales during the nine months ended December 31, 2007 was
$4.6 million.
Determining
the appropriate fair-value
model and calculating the fair value of share-based awards at the date of grant
requires judgment. The
fair value of our RSUs is based on
the fair market value of our common stock on the date of grant discounted for
expected future dividends. We use the Black-Scholes option pricing
model to estimate the fair value of employee stock options and rights to
purchase shares under stock participation plans,
consistent with the provisions of
SFAS No. 123R. Option
pricing models, including the
Black-Scholes model, also require the use of input assumptions, including
expected volatility, expected life, expected dividend rate, and expected
risk-free rate of return. We
use a blend of historical and implied
volatility based on options freely traded in the open market as we believe
this
is more reflective of market conditions and a better indicator of expected
volatility than using purely historical volatility. The
expected life of the awards is based
on historical and other economic data trended into the future. The
risk-free interest rate assumption
is based on observed interest rates appropriate for the terms of our
awards. The dividend yield assumption is based on our history and
expectation of future dividend payouts.
SFAS No. 123R
requires
us to develop an estimate of the number of share-based awards which will
be
forfeited due to employee turnover. Quarterly
changes in the estimated
forfeiture rate can have a significant effect on reported share-based
compensation, as the effect of adjusting the rate for all expense amortization
after April 1, 2006 is recognized in the period the forfeiture estimate
is
changed. If the
actual forfeiture rate is higher or lower than
the estimated forfeiture rate, then
an adjustment is made to increase or decrease the
estimated forfeiture rate, which
will result in a decrease or increase to
the expense recognized in the
financial statements. If
forfeiture adjustments are made, they
would affect our gross margin, research and development expenses, and selling,
general, administrative expenses. The
effect of forfeiture adjustments in
fiscal 2007 and the first
three quarters of fiscal 2008 were immaterial.
We
evaluate the assumptions used to
value our awards on a quarterly basis. If
factors change and we employ
different assumptions, share-based compensation expense may differ significantly
from what we have recorded in the past. If
there are any modifications or
cancellations of the underlying unvested securities, we may be required to
accelerate, increase or cancel any remaining unearned share-based compensation
expense. Future
share-based compensation expense
and unearned share-based compensation will increase to the extent that we grant
additional equity awards to employees or we assume unvested equity awards in
connection with acquisitions.
Inventories
Inventories
are valued at the lower of cost or market using the first-in, first-out
method. We write down our inventory for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost
of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less
favorable than those we projected, additional inventory write-downs may be
required. Inventory impairment charges establish a new cost basis for inventory
and
charges are not subsequently reversed to income even if circumstances later
suggest that increased carrying amounts are recoverable. In
estimating our inventory obsolescence, we primarily evaluate estimates of demand
over a 12-month period and record impairment charges for inventory on hand
in
excess of the estimated 12-month demand.
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 December 31, 2007, our gross deferred tax asset was
$60.7 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 United
States Internal Revenue Service (IRS) for our fiscal years ended March 31,
2002, 2003 and 2004. We recognize liabilities for anticipated tax
audit issues in the United States and other tax jurisdictions based on our
estimate of whether, and the extent to which, additional tax payments are
probable. We believe that we maintain adequate tax reserves to offset
any potential tax liabilities that may arise upon these and other pending audits
in the United States and other countries in which we do business. If
such amounts ultimately prove to be unnecessary, the resulting reversal of
such
reserves would result in tax benefits being recorded in the period the reserves
are no longer deemed necessary. If such amounts ultimately prove to
be less than an ultimate assessment, a future charge to expense would be
recorded in the period in which the assessment is determined.
Property,
Plant 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 December 31, 2007, the carrying value of our property
and equipment totaled $524.8 million, which represents 20.1% 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 December 31, 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.
Convertible
Debentures
We
account for our contingent convertible debentures and related provisions in
accordance with the provisions of Emerging Issues Task Force Issue (EITF) No.
98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, EITF No. 00-27, Application of Issue
No. 98-5 to
Certain Convertible Instruments, EITF No. 00-19 (EITF 00-19), Accounting for Derivative
Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, and EITF No. 01-6, The Meaning of “Indexed to a
Company’s Own Stock,” EITF No. 04-08 (EITF 04-08), The Effect of Contingently
Convertible Debt on Diluted Earn. We also evaluate the
instruments in accordance with SFAS No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, which requires bifurcation of
embedded derivative instruments and measurement of fair value of accounting
purposes. EITF 04-08 requires us to include the dilutive effect of
the shares of our common stock issuable upon conversion of the outstanding
convertible debentures in our diluted income per share calculation regardless
of
whether the market price trigger or other contingent conversion feature has
been
met. We apply the treasury stock method as we have the intent and
current ability to settle the principal amount of the convertible debentures
in
cash. This method results in incremental dilutive shares when the
average fair value of our common stock for a reporting period exceeds the
initial conversion price per share of $34.16.
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 December 31,
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 periodsindicated:
|
|
Three
Months Ended
December
31,
|
|
|
Nine
Months Ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
39.4 |
%
|
|
|
40.4 |
%
|
|
|
39.9 |
%
|
|
|
39.8 |
%
|
Gross
profit
|
|
|
60.6 |
% |
|
|
59.6 |
% |
|
|
60.1 |
% |
|
|
60.2 |
% |
Research
and development
|
|
|
12.0 |
% |
|
|
11.1 |
% |
|
|
11.5 |
% |
|
|
10.9 |
% |
Selling,
general and administrative
|
|
|
17.2 |
% |
|
|
16.0 |
% |
|
|
16.8 |
% |
|
|
15.7 |
% |
Loss
on sale of Fab 3
|
|
|
--- |
%
|
|
|
--- |
%
|
|
|
3.4 |
%
|
|
|
--- |
%
|
Operating
income
|
|
|
31.4 |
%
|
|
|
32.5 |
%
|
|
|
28.4 |
%
|
|
|
33.6 |
%
|
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 three months ended December 31, 2007 were $252.6 million, a
decrease of 2.3% from the previous quarter’s sales of $258.6 million, and an
increase of 0.6% from net sales of $251.0 million in the three months ended
December 31, 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 for the three-month
period ended December 31, 2007 were flat compared to the three-month period
ended December 31, 2006. For the nine-month period ended December 31,
2007, average selling prices for our products were down approximately 4% over
the nine-month period ended December 31, 2006. The number of units of
our products sold for the three-month period ended December 31, 2007 was flat
compared to the three-month period ended December 31, 2006. For
the nine-month period ended December 31, 2007, the number of units of our
products sold was up approximately 3% over the nine-month period ended December
31, 2006. 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 nine-month periods ended
December 31, 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.
|
We
recognize revenue from product sales upon shipment to OEMs. Under our
shipping terms, legal title passes to the customer upon shipment from Microchip
and 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 and the sale and cost of sales
is
deferred and reflected net as a current liability until the product is sold
by
the distributors to their customers.
Sales by product line for the three and nine months ended December 31, 2007
and
2006 were as follows (dollars in thousands):
|
|
Three
Months Ended December
31,
(unaudited)
|
|
|
Nine
Months Ended December
31,
(unaudited)
|
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Microcontrollers
|
|
$ |
202,942 |
|
|
|
80.3 |
% |
|
$ |
200,073 |
|
|
|
79.7 |
% |
|
$ |
621,776 |
|
|
|
80.1 |
% |
|
$ |
626,167 |
|
|
|
80.1 |
% |
Memory
products
|
|
|
29,672 |
|
|
|
11.8 |
% |
|
|
30,105 |
|
|
|
12.0 |
% |
|
|
92,600 |
|
|
|
12.0 |
% |
|
|
92,843 |
|
|
|
11.9 |
% |
Analog
and interface products
|
|
|
19,986 |
|
|
|
7.9 |
%
|
|
|
20,826 |
|
|
|
8.3 |
%
|
|
|
60,943 |
|
|
|
7.9 |
%
|
|
|
62,485 |
|
|
|
8.0 |
%
|
Total
sales
|
|
$ |
252,600 |
|
|
|
100.0 |
%
|
|
$ |
251,004 |
|
|
|
100.0 |
%
|
|
$ |
775,319 |
|
|
|
100.0 |
%
|
|
$ |
781,495 |
|
|
|
100.0 |
%
|
Microcontrollers
Our
microcontroller product line
represents the largest component of our total net
sales. Microcontrollers and associated application development
systems accounted for approximately 80.3%
of our total net sales for the
three-month
period ended December 31, 2007 and
approximately 80.1% of
our total net sales for the
nine-month
period ended December 2007 compared
to approximately 79.7% of our
total net sales for the three-month period ended December 31, 2006 and
approximately 80.1% of our total net sales for the nine-month period ended
December 31, 2006.
Net
sales
of our microcontroller products increased approximately 1.4% in the three-month
period ended December 31, 2007 and decreased approximately 0.7% in the
nine-month period ended December 31, 2007 compared to the three and nine-month
periods ended December 31, 2006. These sales changes were primarily
due to economic conditions in the markets we serve and other factors described
on page 22
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 11.8%
of our total net sales for the
three-month period ended December 31, 2007 and
12.0% of our total net sales for the
nine-month period ended December 31, 2007 compared to approximately
12.0%
of our total net sales for the
three-month
period ended December 31, 2006 and
11.9% of our total
net sales in the nine-month period ended December 31, 2006.
Net
sales of our memory products
decreased approximately
1.4%
in the three-month period ended
December 31,
2007 and
0.3% in the nine-month period ended
December 31, 2007 compared
to the three and
nine-month
periods ended
December
31, 2006. These
sales
decreases
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 December 31, 2007 and
7.9% of our total net sales for the
nine-month period ended December 31, 2007 compared to approximately
8.3%
of our total net sales for the
three-month
period ended December 31, 2006 and
8.0% of our total
net sales for the nine-month period ended December 31, 2006.
Net
sales of our analog and interface
products decreased
approximately
4.0%
in the three-month period ended
December 31,
2007 and
2.5% in the nine-month period ended
December 31, 2007 compared
to the three and
nine-month
periods ended
December
31, 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
65% of our net sales in the three-month period ended December 31, 2007 and
64% in the three-month period ended December 31, 2006. Distributors
accounted for approximately 65% of our net sales in the nine-month periods
ended
December 31, 2007 and 2006.
Our
largest distributor accounted for
approximately 11% of our net sales in the three and nine-month periods ended
December 31, 2007. Our two largest distributors accounted for
approximately 19% of our net sales in the three-month period ended December
31,
2006 and 21% in the nine-month period ended December 31,
2006.
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
December
31, 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 and earnings.
Sales
by
Geography
Sales
by geography for the three
and nine-month
periods ended December 31, 2007 and
2006
were
as follows (dollars
in thousands):
|
|
Three
Months Ended December
31,
(unaudited)
|
|
|
Nine
Months Ended December
31,
(unaudited)
|
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
65,989 |
|
|
|
26.1 |
% |
|
$ |
70,072 |
|
|
|
27.9 |
% |
|
$ |
206,293 |
|
|
|
26.6 |
% |
|
$ |
217,280 |
|
|
|
27.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
71,026 |
|
|
|
28.1 |
% |
|
|
70,749 |
|
|
|
28.2 |
% |
|
|
226,063 |
|
|
|
29.2 |
% |
|
|
218,348 |
|
|
|
27.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
115,585 |
|
|
|
45.8 |
%
|
|
|
110,183 |
|
|
|
43.9 |
%
|
|
|
342,963 |
|
|
|
44.2 |
%
|
|
|
345,867 |
|
|
|
44.3 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
$ |
252,600 |
|
|
|
100.0 |
%
|
|
$ |
251,004 |
|
|
|
100.0 |
%
|
|
$ |
775,319 |
|
|
|
100.0 |
%
|
|
$ |
781,495 |
|
|
|
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. The
geographic sales information above is based on where the product is shipped
for
manufacturing purposes and does not reflect where the design activity has
occurred or where the end product will ultimately be
consumed.
Sales
to foreign customers accounted for
approximately 75%
of our net sales in the three
and
nine-month periods ended December
31, 2007. Sales to foreign
customers accounted for approximately 75% of our net sales in the three-month
period ended December 31, 2006 and 74% of our net sales in the nine months
ended
December 31, 2006. Substantially all of
our foreign sales
are U.S. dollar denominated.
Gross
Profit
Our
gross
profit was $153.0 million in the three months ended December 31, 2007 and
$149.7 million in the three months ended December 31, 2006. Our
gross profit was $466.3 million in the nine months ended December 31, 2007
and $470.2 million in the nine months ended December 31, 2006. Gross
profit as a percentage of sales was 60.6% in the three months ended December
31,
2007 and 59.6% in the three months ended December 31, 2006. Gross
profit as a percentage of sales was 60.1% in the nine months ended December
31,
2007 and 60.2% in the nine months ended December 31, 2006.
The
most
significant factors affecting our gross profit percentage in the periods covered
by this report were:
|
·
|
increased
cost of sales of $3.0 million in the nine months ended December
31, 2007,
compared to the prior year period, 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
|
|
·
|
the
process technologies used in our wafer fabrication operations.
|
During
the three-month period ended
December 31,
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 fourth 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 December 31, 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
$124.8 million
at December 31, 2007 compared
to $121.0 million
at March 31, 2007. We
had 114 days
of inventory on our balance sheet
at December 31, 2007
compared
to 107 days
at March 31, 2007 and
110 days
at December 31, 2006. At
December 31, 2007,
$3.6 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 three and nine months ending December 31,
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
December
31, 2007, approximately 68%
of our assembly requirements were
being performed in our Thailand facility, compared to approximately 73%
as of December 31, 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 December 31, 2007 and
December
31, 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, our future operating
results could
suffer if any third-party contractor is unable to maintain manufacturing yields,
assembly and test yields and costs at approximately their current
levels.
Research
and Development (R&D)
R&D
expenses for the three months ended December 31, 2007 were $30.3 million,
or 12.0% of sales, compared to $28.0 million, or 11.2% of sales, for the
three months ended December 31, 2006. R&D expenses for the nine
months ended December 31, 2007 were $89.4 million, or 11.5% of sales,
compared to $85.2 million, or 10.9% of sales, for the nine months ended December
31, 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 $2.3 million, or 8.1%, for the three months ended
December 31, 2007 over the same period last year. R&D expenses
increased $4.2 million, or 4.9%, for the nine months
ended December 31, 2007 over the same period last year. The primary
reason 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 December 31,
2007
were $43.5 million,
or 17.2% of sales, compared to $40.2 million, or 16.0% of sales, for the three
months ended December 31, 2006. Selling, general and administrative
expense for the nine months ended December 31, 2007 were $130.3 million, or
16.8% of sales, compared to $122.5 million, or 15.7% of sales, for the nine
months ended December
31, 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 $3.3 million, or 8.3%, for
the three months ended December 31, 2007 over the same period last
year. Selling, general and administrative expenses increased
$7.8 million, or 6.3%, for the nine months ended December 31, 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
December 31, 2002, and we maintained that classification until March 31,
2005.
On
March
31, 2005, we changed the classification of Fab 3 from an asset held-for-sale
to
an asset held-for-future-use and began to depreciate the asset. Fab 3 had
been on the market for over two years, and we had not received any acceptable
offers on the facility. Over that period of time, our business had
increased significantly and we thought that over the next several years we
would
need to begin planning for future wafer fabrication capacity as a larger
percentage of Fab 4’s clean room capacity was utilized. We determined
that the appropriate action to take was to stop actively marketing the Fab
3
facility and hold it for future use. As a result of this change in
classification, we had to assess the fair value of the Fab 3 asset to determine
if any additional impairment charge was required upon the change in
classification from held-for-sale to held-for-future-use under SFAS No.
144. We performed a discounted cash flow analysis of the Fab 3 asset
based on various financial projections in developing the fair value estimate
given that it was the best available valuation technique for the
asset. The discounted cash flow analysis confirmed the carrying value
of the Fab 3 asset at March 31, 2005 was not in excess of its fair
value. No indicators of impairment for the Fab 3 asset arose between
March 31, 2005 and September 30, 2007.
We
received an unsolicited offer on the Fab 3 facility in September
2007. We assessed our available capacity in our current facilities,
along with our capacity available from outside foundries and determined the
capacity of Fab 3 would not be required in the near term. As a result
of this assessment, we accepted the offer to sell Fab 3 on September 21, 2007
and the transaction closed on October 19, 2007. We received
$27.5 million in cash net of expenses associated with the sale and
recognized an impairment charge of $26.8 million on the sale of Fab 3,
representing the difference between the carrying value of the assets at
September 30, 2007 and the amounts realized subsequent to September 30,
2007.
Other
Income (Expense)
Interest
income in the three
and nine-month
periods ended
December
31, 2007 decreased
from
interest income in the three
and nine-month
periods ended
December
31, 2006 as the average interest
rates on
our invested
cash balances were at
lower levels
in the periods ended
December
31, 2007 compared to the same
periods in
the prior fiscal
year. Interest expense in the
three-month period ended December 31, 2007 was higher than interest expense
in
the three-month period ended December 31, 2006 due to the $1.15 billion in
2.125% convertible debentures we issued in December 2007. Interest
expense in the nine-month period ended December 31, 2007 was lower than the
interest expense in the nine-month period ended December 31, 2006 due to the
paydown of short-term debt that was outstanding in the earlier
period.
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 12.2% for the three-month
period ended December 31, 2007
and 15.7% in the nine-month
period ending December
31, 2007 and 24.0%
for the three and nine-month periods
ending December 31, 2006. The lower tax rates in the three and
nine months ended December 31, 2007 compared to the same periods last year
were
driven by a $5.7 million favorable resolution of a foreign tax matter in
the three months ended December 31, 2007, a $10.3 million U.S. tax benefit
associated with the sale of Fab 3 in the nine months ended December 31,
2007 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
December 31, 2007, our gross deferred tax asset was $60.7 million. Our
gross deferred tax asset decreased by $1.3 million in the nine months ended
December 31, 2007 compared to the level at March 31, 2007, due primarily to
changes in various temporary differences between our book and tax
reporting. At December 31, 2007, our deferred tax liability was
$14.1 million. Our gross deferred tax liability increased by
$5.8 million in the three and nine months ended December 31, 2007 compared
to the level at March 31, 2007, due primarily to temporary differences related
to our outstanding convertible debentures and 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 that 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.
Liquidity
and Capital Resources
Overview
We
had
$1,653.4 million in
cash, cash equivalents and short-term and long-term investments at
December 31, 2007, an increase of $375.0 million from the March 31, 2007
balance. The increase in cash, cash equivalents and short-term and
long-term investments over this time period is primarily attributable to cash
generated from operating activities and cash received from the issuance of
our
convertible debentures being offset by dividends and stock repurchase activity
in the nine months ended December 31, 2007.
Operating
Activities
Net
cash provided from operating
activities was $360.1
million for the nine-month
period ended December 31, 2007
compared to $357.8 million
for the nine-month
period ended December 31, 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.
Investing
Activities
During
the nine months ended December 31, 2007, net cash provided by investing
activities was $271.4 million. During the nine months ended
December 31, 2006, net cash used in investing activities was
$436.8 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 nine-month period ended December 31, 2007 and cash proceeds
from the sale of Fab 3.
See
further discussions of our investment portfolio in Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
Our
level
of capital expenditures varies from time to time as a result of actual and
anticipated business conditions. Capital expenditures in the nine
months ended December 31, 2007 were $49.1 million compared to $51.4 million
for the nine months ended December 31, 2006. Capital expenditures are
primarily for the expansion
of production capacity and the addition of research and development
equipment. We currently anticipate spending approximately
$90 million during the next 12 months to invest in equipment and facilities
to maintain, and selectively increase, capacity to meet our currently
anticipated needs, including approximatley $30 million to expand our building
footprint in Thailand.
We
expect
to finance capital expenditures through our existing cash balances and cash
flows from operations. We believe that the capital expenditures
anticipated to be incurred over the next 12 months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
Financing
Activities
Net
cash
provided by financing activities was $32.0 million for the nine
months ended December 31, 2007. Net cash used in financing activities
was $333.0 million in the nine-month period ended December 31,
2006. During the nine-months ended December 31, 2007, we received net
proceeds of $1,127.0 million from the issuance of our 2.125% convertible
debentures and repurchased $964.8 million of our common
stock. Proceeds from the exercise of stock options and employee
purchases under our employee stock purchase plan were $44.5 million for the
nine months ended December 31, 2007 and $42.3 million for the nine months
ended December 31, 2006. We paid cash dividends to our shareholders
of $191.6 million in the nine months ended December 31, 2007 and
$150.5 million in
the nine months ended December 31, 2006. During the nine months ended
December 31, 2006, we paid down $239.5 million in short-term
borrowings. Excess tax benefits from share-based payment arrangements
were $16.8 million
in the nine months ended December 31, 2007 and $14.7 million in the nine
months ended December 31, 2006.
Hedging
Activities
We
enter
into hedging transactions from time to time in an attempt to reduce our exposure
to currency rate fluctuations. At December 31, 2007, we had
$2.1 million of foreign currency hedges outstanding. 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.
Stock
Repurchases
On
October 25, 2006, our Board of Directors authorized the repurchase of up to
10.0 million shares of our common stock in the open market or in privately
negotiated transactions. As of December 31, 2007, we had repurchased
8,009,969 shares under this authorization for $270.8 million. On
December 11, 2007, our Board of Directors authorized the repurchase of up to
an
additional 10.0 million shares of our common stock in the open market or in
privately negotiated transactions. As of December 31, 2007, all
of this authorization remained outstanding and there is no expiration date
associated with this program.
We
purchased 21.5 million shares of our common stock concurrent with the
convertible debenture transaction described in Note 9 to our financial
statements and no further shares are available to be repurchased under this
authorization.
As
of
December 31, 2007, approximately 29.8 million shares remained as treasury
shares with the balance of the shares being used to fund share issuance
requirements under our equity incentive plans. The timing and amount
of future repurchases will depend upon market conditions, interest rates and
corporate considerations.
Dividends
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 $0.31 per share was paid on
November 20, 2007 in the aggregate amount of
$66.4 million. A quarterly dividend of $0.32 per share was
declared on January 24, 2008 and will be paid on February 21, 2008 to
shareholders of record as of February 7, 2008. We expect the February
2008 cash dividend to be approximately $60.6 million. Since the
inception of our dividend program, we have paid aggregate dividends of
$594.0 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
The
following table summarizes our significant contractual obligations at December
31, 2007, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods. This table excludes amounts already
recorded on our balance sheet as current liabilities at December 31, 2007
(dollars in thousands):
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1
–
3 years
|
|
|
3
–
5 years
|
|
|
More
than
5
years
|
|
Operating
lease obligations
|
|
$ |
16,162 |
|
|
$ |
5,730 |
|
|
$ |
8,226 |
|
|
$ |
2,051 |
|
|
$ |
155 |
|
Capital
purchase obligations (1)
|
|
|
47,198 |
|
|
|
47,198 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Other
purchase obligations andcommitments (2)
|
|
|
2,005 |
|
|
|
808 |
|
|
|
1,197 |
|
|
|
--- |
|
|
|
--- |
|
2.125%
convertible debentures – principal and interest (3)
|
|
|
1,881,564 |
|
|
|
24,438 |
|
|
|
48,875 |
|
|
|
48,875 |
|
|
|
1,759,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations (4)
|
|
$ |
1,946,929 |
|
|
$ |
78,174 |
|
|
$ |
58,298 |
|
|
$ |
50,929 |
|
|
$ |
1,759,531 |
|
|
(1)
Capital
purchase obligations represent commitments for construction or
purchases
of property, plant and equipment. They are not recorded as liabilities
on
our balance sheet as of December 31, 2007, as we have not yet received
the
related goods or taken title to the property.
|
|
(2)
Other
purchase obligations and commitments include payments due under
various
types of licenses.
|
|
(3)
In
December 2007, we issued $1.15 billion principal amount of 2.125%
debentures due December 15, 2037. We will pay cash interest at
a rate of
2.125% payable semiannually on June 15 and December 15 of each
year,
beginning June 15, 2008.
|
|
(4)
Total
contractual obligations do not include contractual obligations
recorded on
the balance sheet as current liabilities, or certain purchase obligations
as discussed below.
|
Purchase
orders or contracts for the purchase of raw materials and other goods and
services are not included in the table above. We are not able to
determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. For the purpose of this
table, contractual obligations for purchase of goods or services are defined
as
agreements that are enforceable and legally binding on Microchip and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Our purchase orders are based on our
current manufacturing needs and are fulfilled by our vendors with short time
horizons. We do not have significant agreements for the purchase of
raw materials or other goods specifying minimum quantities or set prices that
exceed our expected requirements for three months. We also enter into
contracts for outsourced services; however, the obligations under these
contracts were not significant and the contracts generally contain clauses
allowing for cancellation without significant penalty.
The
expected timing of payment of the obligations discussed above is estimated
based
on current information. Timing of payments and actual amounts paid
may be different depending on the time of receipt of goods or services or
changes to agreed-upon amounts for some obligations.
Off-Balance
Sheet Arrangements
As of December 31, 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
September2006,
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 accordance with in generally accepted accounting
principles, and expands disclosures about fair value
measurements. 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.
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. SFAS No. 159 is effective for years beginning after
November 15, 2007. We are currently evaluating the potential impact
of adopting this Standard.
In
June
2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable
Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF 07-3). EITF 07-3
requires that nonrefundable advance payments for goods or services that will
be
used or rendered for future research and development activities be deferred
and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a
prospective basis, for fiscal years beginning after December 15, 2007 and
will be adopted by us in the first quarter of fiscal 2009. We do not expect
the
adoption of EITF 07-3 to have a material effect on our consolidated results
of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141R). SFAS No. 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS No. 141R also
establishes disclosure requirements to enable the evaluation of the nature
and
financial effects of the business combination. SFAS No. 141R is effective
for fiscal years beginning after December 15, 2008, and will be adopted by
us in the first quarter of fiscal 2010. We are currently evaluating the
potential impact, if any, of the adoption of SFAS No. 141R on our
consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to
the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when
a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of
the
parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective for fiscal
years beginning after December 15, 2008, and will be adopted by us in the
first quarter of fiscal 2010. We are currently evaluating the
potential impact, if any, of the adoption of SFAS 160 on our consolidated
results of operations and financial condition.
Potential
Changes in Accounting Pronouncements
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Quantitative
and Qualitative Disclosures About Market Risk
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Included
within our investment portfolio are $60.4 million of AA and AAA rated
investments in auction rate securities. In September 2007, auction rate
securities that were originally purchased for $24.9 million failed the auction
process. The failures resulted in the interest rate on these
investments resetting at LIBOR plus 125 or 175 basis points. While we
now earn a higher rate of interest on the investments, the investments are
not liquid. The $24.9 million in auctions have continued to fail
through the date of the filing of this report. 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. The fair value of the failed auction rate securities
has been estimated by management using pricing information provided by the
firms
managing our investments and could change significantly based on market
conditions. Based on the estimated valuations provided, we concluded
the investments in auction rate securities were other than temporarily impaired,
and recognized a $0.9 million impairment charge on these investments in the
three months ended December 31, 2007. If the issuers are unable
to successfully close future auctions or if their credit ratings deteriorate,
we
may be required to further adjust the carrying value of these investments
through an impairment charge to earnings. There are $22.4 million in
original purchase value of the failed auction rate securities that are insured
for their principal and interest in the case of default by Ambac, FGIC and
MBIA. Based on information available at December 31, 2007, management
has no reason to beleive the counterparties or the insurers will be unable
to
fulfill these obligations, however, there can be no assurance that such
obligations could be fulfilled in future periods. As a result of the
$0.9 million impairment charge taken on the failed auction rate securities
in the three months ended December 31, 2007, the securities have a carrying
value of $24.0 million. 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 nine months ended December
31, 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.
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 and procedures are designed to provide reasonable assurance that
such
information is accumulated and communicated to our management. Our
disclosure controls and procedures include components of our internal control
over financial reporting. Management’s assessment of the
effectiveness of our internal control over financial reporting is expressed
at
the level of reasonable assurance because a control system, no matter how
well
designed and operated, can provide only reasonable, but not absolute, assurance
that the control system’s objectives will be met.
Changes
in Internal Control over
Financial Reporting
During
the three months ended
December
31, 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
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.
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:
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changes
in demand or market
acceptance of our products and products of our
customers;
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levels
of inventories at our
customers;
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the
mix of inventory we hold and
our ability to satisfy orders from our
inventory;
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changes
in utilization of our
manufacturing capacity and fluctuations in manufacturing yields;
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our
ability to secure sufficient
assembly and testing
capacity;
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availability
of raw materials and
equipment;
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competitive
developments including
pricing pressures;
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the
level of orders that are
received and can be shipped in a
quarter;
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the
level of sell-through of our
products through
distribution;
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changes
or fluctuations in
customer order patterns and
seasonality;
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constrained
availability from
other electronic suppliers impacting our customers’ability
to ship their
products, which in turn
may adversely impact our sales to those
customers;
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costs
and outcomes of any tax
audits or any litigation involving intellectual property, customers
or other issues;
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disruptions
in our business or our
customers' businesses due to terrorist activity, armed conflict,
war, worldwide oil prices and supply, public health concerns or
disruptions in the transportation
system;
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property
damage or other losses,
whether or not covered by insurance;
and
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general
economic, industry or
political conditions in the United States or
internationally.
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We
believe that period-to-period
comparisons of our operating results are not necessarily meaningful and that
you
should not rely upon any such comparisons as indications of future performance.
In future periods our operating results may fall below our public guidance
or
the expectations of public
market analysts and investors, which would likely have a negative effect
on the price of our
common
stock.
Our
operating results will suffer if we
ineffectively utilize our manufacturing capacity or fail to maintain manufacturing
yields.
The
manufacture and assembly of
integrated circuits, particularly non-volatile, erasable CMOS memory
and logic devices such
as
those that we produce, are complex processes. These processes are sensitive
to a wide
variety of factors, including the level of contaminants in the manufacturing environment,
impurities in
the materials used, the performance of our wafer fabrication personnel
and equipment, and
other quality issues. As is typical in the semiconductor industry,
we have from
time to time experienced lower than anticipated manufacturing yields. Our
operating results will suffer if we are unable to maintain yields at
approximately the current
levels. This could include delays in the recognition of revenue, loss
of revenue or future
orders, and customer-imposed penalties for failure to meet contractual
shipment
deadlines.
Our
operating results are also adversely
affected when we operate at less than optimal capacity. Lower capacity
utilization results in certain costs being charged directly to expense
and lower gross
margins.
We
are dependent on orders that are
received and shipped in the same quarter and are therefore limited in our
visibility of future product shipments.
Our
net sales in any given quarter
depend upon a combination of shipments from backlog and orders received in
that quarter for
shipment in that quarter, which we refer to as turns orders. We measure turns
orders at the beginning of a quarter based on the orders needed to meet the
shipment targets that we set entering the quarter. Historically, we have
relied
on our ability to respond quickly to customer orders as part of our competitive
strategy, resulting in customers placing orders
with relatively
short delivery schedules. Shorter lead times generally mean that turns orders
as a percentage
of our business are relatively high in any particular quarter and reduces
our
backlog visibility on future product shipments. Turns orders
correlate to overall
semiconductor industry conditions and product lead times. Because
turns orders are difficult
to predict, varying levels of turns orders make our net sales more difficult
to
forecast. If we
do not achieve a sufficient level of turns orders in a particular quarter
relative to our revenue
targets, our revenue and operating results may suffer.
Intense
competition in the markets we
serve may lead to pricing pressures, reduced sales of our products or reduced
market share.
The
semiconductor industry is intensely
competitive and has been characterized by price erosion and rapid technological
change. We compete with major domestic and international
semiconductor companies, many of which have greater market recognition and
substantially greater financial, technical, marketing, distribution and other
resources than we do with which to pursue engineering,
manufacturing,
marketing and distribution of their products. We may be unable to compete
successfully in the
future, which could harm our business.
Our
ability to compete successfully
depends on a number of factors both within and outside our control, including,
but not limited
to:
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the
quality, performance,
reliability, features, ease of use, pricing and diversity of
our
products;
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our
success in designing and
manufacturing new products including those implementing new
technologies;
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the
rate at which customers
incorporate our products into their own
applications;
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product
introductions by our
competitors;
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the
number, nature and success of
our competitors in a given
market;
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our
ability to obtain adequate
supplies of raw materials and other supplies at acceptable
prices;
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our
ability to protect our
products and processes by effective utilization of intellectual
property rights;
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the
quality of our customer
service and our ability to address the needs of our customers;
and
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general
market and economic
conditions.
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Historically,
average selling prices in
the semiconductor industry decrease over the life of any particular product. The
overall average selling prices of our microcontroller and proprietary
analog and interface
products have remained relatively constant, while average selling prices
of
our Serial EEPROM and
non-proprietary analog and interface products have declined over
time.
We
have experienced, and expect to
continue to experience, modest pricing declines in certain of our more mature
proprietary product
lines, due primarily to competitive conditions. We have been able to moderate
average
selling price declines in many of our proprietary product lines by continuing
to
introduce new products with more features and higher prices. However,
there can be no assurance
that we will be able to do so in the future. We have experienced in
the past and expect
to
continue to experience in the future varying degrees of competitive pricing pressures in
our Serial EEPROM
and non-proprietary analog products.
We
may be unable to maintain average
selling prices for our products as a result of increased pricing pressure in
the future, which
could adversely impact our operating results.
Our
business is dependent on selling
through distributors.
Sales
through distributors accounted for
approximately 65% of our
net sales in fiscal 2007 and the first nine 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 nine 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 advance notice.
On
February 4, 2008 we terminated our
distributor Arrow Electronics and announced that
we have partnered
with Avnet Electronics Marketing and Future Electronics to provide our global
distribution services.