O R L D C L A S S P E O P L E . W O R L D C L A S S S O L U T I O N S .
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O R P O R A T E P R O F I L E
C
O R P O R A T E I N F O R M A T I O N
Microchip Technology Incorporated is a leading provider of microcontroller and
analog semiconductors, providing low-risk product development, lower total
system cost and faster time to market for thousands of diverse customer
applications worldwide. Headquartered in Chandler, Arizona, Microchip offers
outstanding technical support along with dependable delivery and quality.
For more information, visit the Microchip Web site at www.microchip.com.
• Founded in 1989
• Approximately 4,300 employees worldwide
• Quality systems are ISO/TS-16949:2002 certifi ed
• More than 45 sales offi ces worldwide
• Manufacturing facilities: Tempe, Arizona; Gresham, Oregon;
Bangkok, Thailand
• Design centers: Bangalore, India; Lausanne, Switzerland;
Mountain View, California; Chandler, Arizona
Independent Auditors
Ernst & Young LLP
Phoenix, Arizona
Legal Counsel
Wilson, Sonsini, Goodrich & Rosati, P. C.
Palo Alto, California
Austin, Texas
Transfer Agent & Registrar
Wells Fargo Bank Minnesota, N.A.
Shareowner Services
161 North Concord Exchange
P. O. Box 64854
St. Paul, Minnesota 55075-1139
800-468-9716
Form 10-K
A copy of the Company’s Form 10-K as fi led with
the Securities and Exchange Commission is
available upon request to:
Investor Relations
Microchip Technology Incorporated
2355 West Chandler Boulevard
Chandler, Arizona 85224-6199
480-792-7761
Annual Meeting
The annual meeting of the stockholders of Microchip
Technology Incorporated will be held at the Company’s
Chandler facility, 2355 West Chandler Boulevard,
Chandler, Arizona, on Friday, August 18, 2006
at 9:00 a.m. Pacifi c Standard Time.
Common Stock
Microchip Technology’s common stock is traded on
the Nasdaq National Market under the symbol “MCHP. ”
The following table sets forth the quarterly high and
low closing prices as reported by the Nasdaq National
Market for the last two years.
Fiscal 2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Low
$30.68
$32.61
$34.64
$37.74
$24.60
$28.52
$27.30
$32.13
Fiscal 2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$32.63
$30.61
$30.63
$28.49
Low
$26.80
$25.26
$26.03
$24.28
Corporate Facilities
Microchip Technology Incorporated
2355 West Chandler Boulevard
Chandler, Arizona 85224-6199
Microchip Technology Incorporated
1200 South 52nd Street
Tempe, Arizona 85281
Microchip Technology Incorporated
21015 SE Stark Street
Gresham, Oregon 97030
Internet Address
Additional Company information, along with the most
recent fi nancial and product information and press
releases, can be accessed at: www.microchip.com.
Microchip Technology (Thailand) Co., Ltd.
14 Moo 1 T. Wangtakien
A. Muangchachoengsao
Chacherngsao, 24000, Thailand
The statements contained in this annual report relating to producing signifi cant value to our shareholders, reaching ever new highs across all segments of
our business, our expectations for continued performance gains, long-term gross margin guidance, demand creation initiatives enhancing our competitive
advantage, commitment to offering the best possible service and support, becoming the leading microcontroller architecture in the 16-bit market, our goal to
continue to outpace the semiconductor industry, our commitment to support 8-bit applications, development tool sales being a leading indicator of continued
customer acceptance of our microcontrollers and digital signal controllers, our serial EEPROM product line continuing to grow, being well positioned for con-
tinued market share gains in fi scal year 2007, leverage of customer relationships to win additional sockets, delivering a competitive advantage in the automo-
tive, home appliance and medical equipment markets, the continuation of the embedded revolution, our ability to overcome technical challenges, technology
advancements giving us a substantial technical edge, enhancements to internal systems facilitating further innovation, delivering die yields that are the envy
of the industry, our ability to offer lower pricing and respond to competition while achieving high gross margins, ample production capacity, products providing
unmatched fl exibility and competitive advantage and technical training providing increased sales demand, are forward looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially because of the following factors, among
others: changes in demand or market acceptance of our products and the products of our customers; our ability to ramp products into volume production; the
level of orders that are received and can be shipped in a quarter; levels of inventories at our distributors and other customers; the level of sell-through of our
products through distribution; the mix of inventory we hold and our ability to satisfy short-term orders from our inventory; changes or fl uctuations in customer
order patterns and seasonality; the level at which design wins become actual orders and sales; changes in utilization of our manufacturing capacity; our ability
to continue to secure suffi cient assembly and testing capacity; competitive developments including pricing pressures; disruptions to our business or the busi-
nesses of our customers or suppliers due to natural disaster, terrorist activity, armed confl ict, war, worldwide oil prices and supply; disruptions in the worldwide
transportation system; impact of events outside the United States, such as the business impact of fl uctuating currency rates or unrest or political instability;
general industry, economic and political conditions; the impact on our business and on customer order patterns due to public health concerns; fi nancial stability
in foreign markets; our ability to maintain operating margins; our timely introduction of new technologies, market acceptance of our new products and those
of our customers; competitive factors, such as competing architectures and manufacturing technologies and acceptance of new products in the markets we
generally serve; the costs and outcome of any current or future tax audit or any litigation involving intellectual property, customers or other issues; and our
ability to attract and retain qualifi ed personnel.
For a detailed discussion of these and other risk factors, please refer to Microchip’s fi lings with the Securities and Exchange Commission on Forms 10-K and
10-Q. Our fi scal 2006 Form 10-K follows this letter to shareholders. Additionally, you can obtain copies of our Forms 10-K and 10-Q and other documents fi led
with the SEC for free at the SEC’s web site (www.sec.gov) or from commercial, document retrieval services.
©2006 Microchip Technology Incorporated. All rights reserved. The Microchip name and logo, PIC, dsPIC and KEELOQ are registered trademarks of
Microchip Technology Inc. in the USA and in other countries. I2C is a trademark of Philips Corporation. All other trademarks mentioned herein are the
property of their respective companies. Printed in U.S.A. 6/06
F
I N A N C I A L H I G H L I G H T S
All charts are based on fiscal year data, except where noted.
$928
$847
$716
$699
$651
$571
$553
$461
$1.27
$1.07
$0.76
$0.74
$0.64
$0.58
$0.37
$0.45
9
0
0
0
0
0
0
0
9
0
0
0
0
0
0
0
9
0
1
2
3
4
5
6
9
0
1
2
3
4
5
6
Net Sales (Millions of Dollars)
Non-GAAP Diluted Earnings Per Share*
2002
2003
2004
Net Sales
Non-GAAP Net Income*
GAAP Net Income
Non-GAAP Diluted Earnings Per Share*
GAAP Diluted Earnings Per Share
Stockholders’ Equity
Annual Cash Dividend Per Share
In thousands, except per share and dividend amounts.
$571,254
$94,814
$94,814
$0.45
$0.45
$1,075,779
_
$651,462
$133,875
$88,232
$0.64
$0.42
$1,178,949
$0.040
$699,260
$156,834
$137,262
$0.74
$0.65
$1,320,517
$0.113
2005
$846,936
$226,761
$213,785
$1.07
$1.01
$1,485,734
$0.208
2006
$927,893
$272,979
$242,369
$1.27
$1.13
$1,726,189
$0.570
313
283
449
408
377
340
214
187
159
142
129
299
261
199
9
0
0
0
0
0
0
9
0
0
0
0
0
0
9
0
1
2
3
4
5
9
0
1
2
3
4
5
Microcontroller Portfolio
(Number of Products at Calendar Year End)
Analog and Interface Portfolio
(Number of Products at Calendar Year End)
*Excludes restructuring and acquisition-related special charges/special income and costs associated with the closure of Fab 1 and charges related to the
settlement of patent license litigation and a tax charge associated with the repatriation of foreign earnings under the American Jobs Creation Act. Please see
“Reconciliation of Non-GAAP Net Income to Reported Results” located at the end of this document following our Form 10-K for our reported GAAP results and
additional information. Also see our Form 10-K for additional detail and discussion of our GAAP results.
Steve Sanghi
President and CEO
T
O O U R S H A R E H O L D E R S
Microchip Technology continued
to deliver outstanding performance
throughout all segments of our
strong enterprise during fiscal
year 2006.
For the fi scal year ending March 31,
2006, Microchip’s net sales were
$927.9 million, increasing 9.6%
from net sales of $846.9 million
for the fi scal year ending March 31,
2005 and establishing a new
record level. Non-GAAP net
income for fiscal 2006 was
$273.0 million, an increase of
20.4% over non-GAAP net income
in the prior fiscal year of $226.8
million. We achieved record gross
margins and operating margins of
59.4% and 35.2%, respectively,
in fiscal 2006. Our balance sheet
continued to strengthen, and
we generated $450.4 million of
net cash (prior to our dividend
payments of $120.1 million and
stock buy-back activity of $3.3
million), driven by our sound
operating results and successful
business model.
Microchip increased its cash
dividend payment every quarter
during fiscal 2006, resulting
from strong net cash generation
throughout the fiscal year. This
allowed shareholders to benefit
even further from the Company’s
solid performance. Microchip’s
total annual dividend payment in
fiscal 2006 was $0.57 per share,
an increase of 174% over the
annual dividend payment of
$0.208 per share in fiscal 2005.
Cash dividend payments to
shareholders in fiscal 2006
totaled $120.1 million.
Superior Financial
Performance
These outstanding financial results
place Microchip in a leadership
position when compared to most
other semiconductor manufactur-
ers in areas such as sales growth,
operating profit, gross margin,
operating margin, earnings per
share, cash generation, stock price
performance and dividend payment
and growth – which all lead to
Microchip producing significant
value to our shareholders.
“These
outstanding
financial
results place
Microchip
in a
leadership
position...”
We consider our employees to
be Microchip’s greatest strength –
the critical ingredient that
continues to power Microchip
ahead in reaching ever new
highs across all segments of
the business.
In the fourth quarter of fi scal 2006,
we reached our long-term gross
margin target of a record 60%.
Microchip achieved the 60%
target earlier than anticipated
thanks to our richening product mix,
an aggressive conversion to Flash
and mixed-signal microcontrollers
by our customers, continued
strong execution in Fab 4 and
depreciation rolling off in our other
factories. Given our expectations
for continued performance gains,
we raised our long-term (two to
three years out) gross margin
guidance to a record 62%.
New Initiatives for
Additional Growth
In order to take higher levels of
direct control over demand
creation for our products, Microchip
undertook several key initiatives in
fi scal 2006.
Our sustained growth and
accomplishments are the result
of many factors, including a
successful business model that
has thrived in both the ups
and downs of the cyclical
semiconductor industry
and a unique company
culture that embraces
continuous improvement,
teamwork and employee
empowerment.
Microchip Technology’s Board of Directors and Executive Offi cers Pictured Front Row: Mitch Little, Wade Meyercord, L.B. Day,
Steve Sanghi, Gordon Parnell, Albert Hugo-Martinez, Dave Lambert; Back Row: Steve Drehobl, John Oatley, Matt Chapman,
Lauren Carr, Ganesh Moorthy, Rich Simoncic
The microchipDIRECT online
procurement site debuted,
expanding our e-commerce
services and customer support
functions. This comprehensive
online resource provides Micro-
chip’s customers worldwide with
additional features previously only
available through Microchip sales
offices, including credit lines,
credit-card payments, competitive
pricing from local sales teams,
and e-mail notification of orders,
deliveries and quote status.
Additional investments in fiscal
2006 enabled us to provide 24/7
technical support, hire additional
local field applications engineers,
establish 23 Regional Training
Centers worldwide and offer
direct production programming
services for our 8- and 16-bit
microcontrollers. Other technical
training included the annual
MASTERs Conference, which
was held in several worldwide
locations and attracted record
numbers of engineering custom-
ers who learned more about our
products as well as new embedded
design techniques.
These demand creation initiatives
provide a multitude of resources
that our customer base can truly
appreciate, and we are confident
they can further enhance our
competitive advantage. Microchip
is committed to offering the best
possible service and technical
support for our 50,000+
customers around the globe.
Successful, Early
Conversion to
Lead (Pb) Free
One key business issue faced
by the worldwide semiconductor
industry in fiscal 2006 was the
European Union “Restrictions on
Hazardous Substances” (RoHS)
directive. This directive limits the
amount of lead (Pb) in electronic
equipment. It was scheduled to
go into effect on July 1, 2006,
and governs all electronic equip-
ment manufactured or sold in the
European Union member countries.
Understanding the potential
impact on our business and
Microchip’s commitment to
environmental responsibility,
a dedicated cross-functional
team began planning four years
ago for the necessary conversion
of our manufacturing activities.
Our employees executed this plan
flawlessly, allowing Microchip to
become one of the first semi-
conductor companies to convert
product packaging to environ-
mentally friendly Pb-free plating.
This in turn enabled our
customers to eliminate Pb from
their manufacturing processes
well ahead of schedule.
Aggressive New
Product Development
During the fiscal year, our
employees carried out numerous
new product development
strategies in many important
areas, further expanding our
strong product portfolio of 8- and
16-bit microcontrollers, 16-bit
digital signal controllers, analog
ICs and serial EEPROMs.
Microchip aggressively pushed
into the 16-bit controller space
by announcing 49 new 16-bit
PIC® microcontrollers and dsPIC®
digital signal controllers. These
devices offer critical advantages
such as pinout compatibility,
software compatibility, peripheral
compatibility and common
development tools.
The PIC24 family of 16-bit
microcontrollers is comprised
of two series. The PIC24F offers
a cost-effective step up in perfor-
mance, memory and peripherals
for many applications that are
pushing the envelope of 8-bit
microcontroller capabilities.
** Gartner Dataquest, “Top Companies Revenue from
Shipments of 16-bit MCU – Worldwide,” April 2006.
For more demanding applica-
tions, the PIC24H offers 40 MIPS
performance, more memory and
additional peripherals.
innovations to ensure the largest
segment of our product portfolio
continues to meet the evolving
design needs of our customers.
“Working together,
our goal is to continue
to outpace the
semiconductor industry.”
Many 8-bit devices were launched
across our entire 6- to 80-pin
families, offering additional
memory, faster speeds and richer
on-chip features based upon cus-
tomer demand. Microchip remains
steadfast in our commitment to
supporting 8-bit applications.
For the ultra-small 6-pin
microcontrollers, Microchip
added an analog-to-digital (A/D)
converter and doubled the
operating speed, which helps
further expand non-traditional
applications for digital
intelligence. New 8- to 64-pin
low-power Flash microcontrollers
debuted with richer on-chip
features such as advanced
analog and digital peripherals,
integrated KEELOQ ® technology
and on-chip LCD drivers.
The new dsPIC33 family of 16-bit
digital signal controllers targets
embedded designers who need
high levels of performance,
memory, on-chip peripherals and
I/O without the complexity of
traditional digital signal processors.
All new 16-bit family members
range from 64 to 256 Kbytes of
self-programming Flash memory
and 64- to 100-pin packages.
Today, we have a total of 70
16-bit devices sampling or in
volume production that address
the $3.8 billion 16-bit controller
market space**. More products
are in design. We are pursuing
16-bit customer opportunities in
a wide range of high-performance
applications that are separate from
and incremental to those being
served by an 8-bit microcontroller
today. We believe we have the right
silicon and development tool
solutions in place to reach our
long-term goal of becoming the
leading microcontroller architec-
ture in the 16-bit market, duplicat-
ing the leadership we achieved in
the 8-bit microcontroller space.
Looking at our 8-bit PIC
microcontrollers, in fiscal 2006
Microchip drove further
Microchip announced 14 new
PIC18F 8-bit microcontrollers
that deliver 40 MHz at 3 volts
and 16 to 128 Kbytes of Flash
memory in 28-, 40-, 64- and 80-pin
packages. As the performance
levels among 8-, 16- and 32-bit
microcontrollers continue to blur
and more designs migrate to
lower voltages, embedded
engineers are looking for cost-
effective, yet peripheral-rich,
8-bit microcontrollers with high
memory densities and pin counts
that help them preserve their
legacy 8-bit code and
development tool investments.
In certain applications, designers
are faced with ever-increasing
demands for processing power
and connectivity, while simultane-
ously facing the challenge to
lower power consumption and
overall system costs. Microchip
introduced a new series of
PIC18F microcontrollers that
features an extra serial port
for expanded connectivity and
a faster A/D converter for
quicker measurement – all
at a 30% lower price than
the previous generation.
A leading indicator of the
continued acceptance of our
microcontrollers and digital signal
controllers is the number of
related development systems
shipments. Engineers utilize
these high-performance systems
to evaluate, compile, edit,
debug, program or emulate our
controllers. In fiscal 2006, our
development tools continued their
robust growth with 73,705 total
shipments, up from 53,311 total
shipments in fiscal 2005. Total
cumulative shipments now stand
at 432,016.
In fiscal 2006, our analog and
interface products enjoyed strong
market acceptance with sales up
16.6% over fiscal 2005. This high
demand outpaced the growth of
most of our analog competitors.
Microchip succeeds by offering
a broad line of analog devices,
including linear, mixed signal,
power management, thermal
management and battery
management products, that are
required in microcontroller-based
designs today.
Many analog innovations brought
to market this year target key
design opportunities with the
precision, performance and price
benefits ideally suited for
embedded designs. For example,
the MCP355X family of delta-
sigma A/D converters offers
22-bit resolution with the lowest
power consumption in the indus-
try. It is also one of the smallest
in an 8-pin MSOP package.
Our serial EEPROM product line
continues to grow with a new I2C™
family that has 1 Mbit of memory –
the highest memory density
available for such devices.
From our serial EEPROMs to
analog products to 8- and 16-bit
microcontrollers to 16-bit digital
signal controllers, Microchip’s
business is exceptionally strong
today. We are well positioned for
continued market share gains in
fiscal year 2007, thanks to the
tireless dedication and unlimited
contributions of our employees
worldwide. Working together,
our goal is to continue to outpace
the semiconductor industry.
With sincere appreciation to our
shareholders, customers and
employees for your continued
confidence in Microchip,
Steve Sanghi
President and CEO
Microchip Technology Incorporated
T
H E P E O P L E O F M I C R O C H I P
Microchip Technology Incorporated is
comprised of approximately 4,300 dedicated
individuals committed to delivering compre-
hensive solutions that address embedded
design challenges and critical business
issues for our customers throughout the world.
This commitment is reinforced by a unique
corporate culture that embraces teamwork,
open communication, continuous learning and
improvement, and empowering employees.
Empowerment is based on a bottoms-up
organizational structure in which the individual
closest to the issue is in the best position to
make the decision. The cumulative effect of
everyone constantly pushing to work smarter
and continuously improve the performance of
the Company is a key competitive advantage.
The following pages present employees from
different, yet interrelated, disciplines within
the Company who work together to deliver
world-class solutions to our customers.
For long-time readers of Microchip’s annual
reports, their portraits may seem familiar.
These same four individuals were featured in
our 1995 annual report in a similar manner.
They have chosen to build their careers at
Microchip and, like the Company over the
same period, have thrived. Although a very
small sample of our entire workforce, these
individuals embody Microchip’s greatest
strength – our employees.
Want to Learn More About How Microchip’s Culture
and Employees Help Drive Its Success?
DRIVING EXCELLENCE: How the Aggregate System Turned Microchip Technology from a Failing Company to a Market Leader
(ISBN 0-471-78484-2) is the story of how authors Steve Sanghi and Michael J. Jones designed and implemented the Aggregate
System at Microchip Technology, and how this systematic and comprehensive approach to building an exceptional corporate
culture was responsible for the Company’s amazing turnaround. The Aggregate System is about uniting employees through
shared workplace values, and guiding them through decisions, strategies, actions and job performance. It is achieved by
aligning, integrating and uniting all elements of the enterprise that infl uence an employee’s performance.
Willie Fitzgerald
Director, Worldwide Automotive
Product Marketing
P
R O D U C T M A R K E T I N G
In the semiconductor
industry, Microchip is
known for pioneering
reprogrammable memory
technology in the very large
8-bit microcontroller
market, and today we are
number one based on
worldwide unit
shipments***.
In achieving this leadership
position, our product
marketing teams have
accumulated substantial
market knowledge by in-
terfacing with engineering
customers across many
applications and geographies
to identify future design
requirements, by correctly
pinpointing emerging
market and technology
trends, and by repeatedly
producing “whole product
solutions” that suit new
embedded designs. Armed
with this broad insight,
*** Gartner Dataquest, “Top Companies Revenue
from Shipments of 8-bit MCU – Worldwide”
and Microchip estimates, April 2006.
these marketing profes-
sionals define products
that exploit new growth
areas – where opportunities
exist today and where we
can apply our innovative
technology tomorrow.
We leverage our strong
customer relationships to
win additional component
sockets in their designs,
and we offer complemen-
tary products that enable
us to gain entry into
applications that we have
not previously served.
Today this market strategy
is successfully unfolding on
multiple fronts with analog
products that support the
signal chain around the
microcontroller and an
expanding portfolio of 16-bit
microcontrollers and digital
signal controllers ideal for
applications demanding
higher performance.
Beyond developing the right
products, certain industry
segments require unique
solutions. Microchip has
dedicated teams that
focus the Company’s
expertise on the special
needs of the automotive,
home appliance and medical
equipment markets,
ensuring we can deliver
a competitive advantage
here. In addition, groups
of employees are analyzing
emerging and high-growth
design functions in motor
control, lighting, metering
and intelligent power
applications, so that we
can utilize our product
portfolio strengths to
attack windows of
opportunity.
Career Accomplishments:
Position Then: Senior Product Line Marketing Manager
Position Now: Director, Worldwide Automotive Product Marketing
Advanced relationships with key automotive accounts. Start-up
member of the Automotive Products Group, helping to launch the
overall strategy and built a global automotive marketing team that
has become a model for other internal groups.
“ Our company culture is teamwork oriented,
results oriented and values based – and it can be
addicting. To succeed here, new employees should
bring fl exibility, competency, a strong work ethic
and an open creative mind, while leaving egos
at the door. Expect to be challenged. So buckle
up and contribute to making your professional
journey a fantastic experience.”
Lee Furey
Director of Engineering
Enhancements to Microchip’s
internal systems and method-
ologies are facilitating even
further innovations. As a result
of these product development
efforts, Microchip’s customers
benefit from an ever-growing
portfolio of products to solve
their own design challenges.
T
E C H N O L O G Y
The embedded revolution
continues unabated, and
Microchip remains at the
forefront. Our silicon devices
provide electronic intelligence
to an expanding list of
applications worldwide.
Accomplishing this requires
relentless technology
innovation.
Microchip’s engineers and
their support teams bring the
right mix of talent, experience
and hard work that converges
in a unique environment
dedicated to continuous
improvement. What transpires
here is the ability to overcome
the numerous technical
challenges in creating silicon
devices with higher perfor-
mance, more peripherals,
more memory, lower power
consumption, smaller form
factors, power management
features, and the ability to
connect or interface with
other devices and systems –
all while being cost effective,
easy to use and meeting or
exceeding competitive offerings.
Over the years the tireless
efforts by our engineers
have yielded industry-leading
technology advancements that
give Microchip a meaningful
technical edge. A few
examples include the
industry’s highest endurance
for serial EEPROMs,
industry-leading low power
in our analog products,
nanoWatt Technology for power-
managed microcontroller
applications and constant
package size reductions
across all product families.
Microchip has amassed a
deep patent portfolio and
other valuable intellectual
property that represent the
numerous innovations made
by our employees.
Career Accomplishments:
Position Then: Design and Technology Development Manager
Position Now: Director of Engineering
Part of the group that started the Analog and Interface Products
Division for Microchip. Helped manage and participate in the
various engineering teams who delivered the technology
innovation and new product development to help grow this
division to an $80 million annual run rate.
“ In our empowerment culture, employees are
encouraged to challenge management and team
decisions. Very often team members come to
management with data or a different way to
implement a task and change the direction in
which the team is going. Empowerment produces
shorter new product development times, less
rework and highly motivated employees.”
Kathy Clevenger
Vice President of Fab 4 Operations
M
A N U F A C T U R I N G
The semiconductor
manufacturing process
starts with raw silicon
wafers. Using these wafers,
our production specialists
combine the right mix of
art and science to create
devices capable of providing
electronic intelligence for
an ever-growing list of
applications. These
professionals are at the
very heart of this molecular
transformation to produce
semiconductor products.
Working with structures
far smaller than visible
to the naked eye, our
manufacturing personnel
faithfully handle more than
140 separate processing
steps over several weeks,
generating hundreds of
millions of high quality
devices every year.
Their ongoing focus on
continuous improvement at
each of these steps helps
deliver average die yields
that are the envy of the
semiconductor industry.
This allows Microchip to
lower silicon device pricing
and respond to competitive
pressures as needed, while
continuing to achieve high
gross profit margins.
Keeping manufacturing
costs low is essential.
When adding manufacturing
facilities, Microchip is very
opportunistic. For example,
Microchip purchased our
Fab 4 facility in Gresham,
Oregon, during the midst
of the technology sector
meltdown. While many
questioned the move, the
timing and resourceful
negotiating yielded an
exceptionally low price.
We are now enjoying the
benefits of this acquisition
in today’s accelerating
market with ample produc-
tion capacity at a very low
cost structure.
Career Accomplishments:
Position Then: Engineering Group Leader
Position Now: Vice President of Fab 4 Operations
Director of manufacturing at various semiconductor fabrication
facilities. Responsible for production, process engineering,
equipment engineering and material control. For the Fab 4 facility
in Gresham, Oregon, responsible for leading the start-up team of
this large-scale operation.
“ Microchip is results oriented, which keeps
employees and activities focused and relevant.
I enjoy the opportunity to work on any issue that
is important to our success without having to deal
with artifi cial barriers or politics. Each day is spent
on adding value to the organization.”
Roy Sasaki
Principal Field Applications
Engineer
C
U S T O M E R S U P P O R T
Microchip employees serve
50,000+ diverse customers
worldwide and the number
keeps growing, from
electronics hobbyists
working in their garages to
cross-functional product
development teams at
Fortune 500 firms located
in multiple offices around
the globe.
Achieving market leader-
ship requires extensive
market coverage. Our field
applications engineers
provide the front-line
interface to customers,
cementing relationships
with their superior technical
skills and extensive embed-
ded design experience. We
have a strong, yet nimble,
worldwide network of sales
offices, direct salespeople,
global and regional
distributors, manufacturers’
representatives and third-
party design consultants –
all dedicated to serving our
customers. Our salespeople
do not work on commission,
which translates into a global
enterprise truly operating in
unison to support customers
everywhere.
Today’s customers face
similar challenges in
being under resourced
and carrying increasing
workloads while confronting
mounting competition
and global pressures. We
win designs by helping
customers solve their
toughest business issues:
getting them to market
faster, lowering their
total system cost and
reducing risk in product
development. Our high-
performance products
provide unmatched fl exibility
to deliver a meaningful
competitive advantage.
Certain customers desire
to be self-sufficient and
work on their own sched-
ules. They need answers
no matter the time or
day. To serve this group,
Microchip launched the
microchipDIRECT online
resource so they can
directly manage most
facets of their accounts.
In addition, our employees
are providing more frequent
technical training for
customers, as this trans-
lates into increased sales
demand while making our
engineering customers
more efficient in their
design efforts.
Career Accomplishments:
Position Then: Senior Field Applications Engineer
Position Now: Principal Field Applications Engineer
Support customers in their designs. Address customers’
technical issues on hundreds of devices across the whole product
portfolio. Provide a technical interface between the customer
and the factory.
“ Even though the Company has grown substantially,
we still have a family atmosphere that I enjoy.
Members of the executive staff are very
approachable. They sit down with you and want
to know how you’re doing – in short, people care.”
O
U R E M P L O Y E E S A R E O U R
G R E A T E S T S T R E N G T H
Microchip wants to
recognize and give thanks
to the tireless contributions
of our many team members
worldwide.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
X
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended March 31, 2006
___
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
(State of Incorporation)
86-0629024
(IRS Employer Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224
(Address of Principal Executive Offices, Including Zip Code)
(480) 792-7200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:58) Yes (cid:133) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:133) Yes (cid:58) No
Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(cid:58) Yes (cid:133) No
(2) has been subject to such filing requirements for the past 90 days:
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of Form 10-K or any amendment to this Form 10-K
(cid:133)
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
(cid:58)
Accelerated filer
(cid:133)
Non-accelerated filer
(cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
(cid:133) Yes (cid:58) No
Aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 2005 based upon the
closing price of the common stock as reported by The NASDAQ® National Market on such date was approximately $6,207,573,870.
Number of shares of Common Stock, $.001 par value, outstanding as of May 25, 2006: 214,380,218.
Proxy Statement for the 2006 Annual Meeting of Stockholders
Document
Part of Form 10-K
III
Documents Incorporated by Reference
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
PART II
Purchases of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
2
Page
3
11
18
18
19
19
19
20
23
36
37
37
37
40
40
41
41
41
41
42
43
PART I
This Form 10-K contains certain forward-looking statements that involve risks and uncertainties, including statements
regarding our strategy and future financial performance and those statements identified under "Item 7 - Note Regarding
Forward-looking Statements.” Our actual results could differ materially from the results described in these forward-looking
statements as a result of certain factors including those set forth under “Item 1A – Risk Factors,” beginning below at
page 11, and elsewhere in this Form 10-K. Although we believe that the matters reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place
undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any
forward-looking statement.
Item 1.
BUSINESS
We develop and manufacture specialized semiconductor products used by our customers for a wide variety of embedded
control applications. Our product portfolio comprises 8- and 16-bit PIC® microcontrollers and 16-bit dsPIC® digital signal
controllers, which feature on-board Flash (reprogrammable) memory technology. In addition, we offer a broad spectrum of
high-performance linear, mixed-signal, power management, thermal management, battery management and interface devices.
We also make serial EEPROMs and complementary microperipheral products. Our synergistic product portfolio targets
thousands of applications and a growing demand for high-performance designs in the automotive, communications,
computing, consumer and industrial control markets. Our quality systems are ISO/TS16949 (2002 version) certified.
Microchip Technology Incorporated was incorporated in Delaware in 1989. In this Form 10-K, “we,” “us,” and “our”
each refers to Microchip Technology Incorporated and its subsidiaries. Our executive offices are located at 2355 West
Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone number is (480) 792-7200.
Our Internet address is www.microchip.com. We post the following filings on our Web site as soon as reasonably
practicable after they are electronically filed with or furnished to the Securities and Exchange Commission:
• Our annual report on Form 10-K
• Our quarterly reports on Form 10-Q
• Our current reports on Form 8-K
• Any amendments to the above-listed reports filed or furnished pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934
All SEC filings on our Web site are available free of charge. The information on our Web site is not incorporated into
this Form 10-K.
Industry Background
Competitive pressures require manufacturers of a wide variety of products to expand product functionality and provide
differentiation while maintaining or reducing cost. To address these requirements, manufacturers often use integrated circuit-
based embedded control systems that enable them to:
•
•
•
•
•
•
differentiate their products
replace less efficient electromechanical control devices
reduce the number of components in their system
add product functionality
decrease time to market for their products
significantly reduce product cost
3
Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of
applications and markets worldwide, including:
•
•
•
•
•
•
automotive comfort, safety and
entertainment applications
remote control devices
handheld tools
home appliances
portable computers
robotics
•
cordless and cellular telephone
accessories
• motor controls
•
•
•
•
security systems
educational and entertainment devices
consumer electronics
power supplies
Embedded control systems also facilitate the emergence of new classes of products. Embedded control systems typically
incorporate a microcontroller as the principal active, and sometimes sole, component. A microcontroller is a self-contained
computer-on-a-chip consisting of a central processing unit, non-volatile program memory, random access memory for data
storage and various input/output peripheral capabilities. In addition to the microcontroller, a complete embedded control
system incorporates application-specific software and may include specialized peripheral device controllers, non-volatile
memory components such as EEPROMs, and various analog and interface products.
The increasing demand for embedded control has made the market for microcontrollers one of the larger segments of the
semiconductor market. Microcontrollers are currently available in 4-bit through 32-bit architectures. 4-bit microcontrollers
are relatively inexpensive, but they generally lack the minimum functionality required in most applications and are typically
used in relatively simple applications. 8-bit microcontrollers remain very cost-effective for a wide range of high volume
embedded control applications and, as a result, continue to represent the largest portion of the overall microcontroller market.
16-bit and 32-bit microcontrollers provide higher performance and functionality, and are generally found in more complex
embedded control applications.
Most microcontrollers shipped today are ROM-based and must be programmed by the semiconductor supplier during
manufacturing, resulting in 8-12-week lead times, based on market conditions, for delivery of such microcontrollers. In
addition to delayed product introduction, these long lead times can result in potential inventory obsolescence and temporary
factory shutdowns when changes in the firmware are required. To address these issues, some suppliers offer programmable
microcontrollers that can be configured by the customer in the customer’s manufacturing line, thus significantly reducing
lead time and inventory risks when the inevitable firmware changes occur. While these microcontrollers were initially
expensive relative to ROM-based microcontrollers, manufacturing technology has evolved over time to the point where
reprogrammable microcontrollers are now available for little to no premium over ROM-based microcontrollers, thus
providing significant value to microcontroller customers. As a result, reprogrammable microcontrollers are the fastest
growing segment of the microcontroller market.
Our Products
Our strategic focus is on embedded control solutions, including:
• microcontrollers
•
•
•
• memory products
development tools
application-specific standard products
analog and interface products
We provide highly cost-effective embedded control solutions that also offer the advantages of small size, high
performance, low voltage/power operation and ease of development, enabling timely and cost-effective embedded control
product integration by our customers.
4
Microcontrollers
We offer a broad family of microcontroller products featuring a unique, proprietary architecture marketed under the
PIC® brand name. We believe that our PIC product family is a price/performance leader in the worldwide microcontroller
market. We have shipped over 4 billion PIC microcontrollers to customers worldwide since their introduction in 1990. Our
PIC products are designed for applications requiring field-programmability, high performance, low power and cost
effectiveness. They feature a variety of memory technology configurations, low voltage and power, small footprint and ease
of use. Our performance results from a product architecture which features dual data and instruction pathways, referred to as
a Harvard dual-bus architecture; a Reduced Instruction Set Computer, referred to as RISC; and variable length instructions;
all of which provide significant speed advantages over alternative single-bus, Complex Instruction Set Computer
architectures, referred to as CISC. With almost 350 microcontrollers in our product portfolio, we target the 8-bit and 16-bit
microcontroller markets. Additionally, our scalable product architecture allows us to successfully target both the entry-level
of the 32-bit microcontroller market, as well as the 4-bit microcontroller marketplace, significantly enlarging our addressable
market.
Digital Signal Controllers (DSC) are a subset of our 16-bit Microcontroller offering. Our dsPIC® Digital Signal
Controller families integrate the control features of high-performance 16-bit microcontrollers with the computation
capabilities of Digital Signal Processors (DSPs), along with a wide variety of peripheral functions making them suitable for a
large number of embedded control applications. Our dsPIC product family offers a broad suite of hardware and software
development tools, software application libraries, development boards and reference designs to ease and expedite the
customer application development cycle. With its field-re-programmability, large selection of peripheral functions, small
footprint and ease of use, we believe that our dsPIC Digital Signal Controllers enlarge our addressable market.
We have used our manufacturing experience and design and process technology to bring additional enhancements and
manufacturing efficiencies to the development and production of our PIC family of microcontroller products. Our extensive
experience base has enabled us to develop our advanced, low cost user programmability feature by incorporating non-volatile
memory, such as Flash, EEPROM and EPROM Memory, into the microcontroller, and to be a leader in reprogrammable
microcontroller product offerings.
Development Tools
We offer a comprehensive set of low-cost and easy-to-learn application development tools. These tools enable system
designers to quickly and easily program a PIC microcontroller and dsPIC Digital Signal Controllers for specific applications
and, we believe are a key factor for obtaining design wins.
Our family of development tools operates in the standard Windows® environment on standard PC hardware. These tools
range from entry-level systems, which include an assembler and programmer or in-circuit debugging hardware, to fully
configured systems that provide in-circuit emulation hardware. Customers moving from entry-level designs to those
requiring real-time emulation are able to preserve their investment in learning and tools as they migrate to future PIC devices
since all of our systems share the same integrated development environment.
Many independent companies also develop and market application development tools that support our standard
microcontroller product architecture. Currently, there are more than 150 third-party tool suppliers worldwide whose products
support our proprietary microcontroller architecture.
We believe that familiarity with and adoption of both our and third-party development tools by an increasing number of
product designers will be an important factor in the future selection of our embedded control products. These development
tools allow design engineers to develop thousands of application-specific products from our standard microcontrollers. To
date, we have shipped more than 430,000 development tools.
ASSPs
Our application-specific standard products, referred to as ASSPs, are specialized products designed to perform specific
end-user applications, compared to our other products that are more general purpose in nature. Our ASSP device families
currently include, among others, our KEELOQ family of secure data transmission products.
5
Analog and Interface Products
Our analog and interface products now consist of several families with over 450 power management, linear, mixed-
signal, thermal management and interface products. At the end of fiscal 2006, our mixed-signal analog and interface
products were being shipped to more than 10,000 end customers.
We continue marketing and selling our analog and interface products into our existing microcontroller customer base,
which we refer to as our analog “attach” strategy, as well as to new customers. In addition to our “attach” strategy, we
market and sell other products that may not fit our traditional PIC microcontroller and memory products customer base. We
market these, and all of our products, based on an application segment approach targeted, to provide customers with
application solutions.
Memory Products
Our memory products consist primarily of serial electrically erasable programmable read only memory, referred to as
Serial EEPROMs. We sell these devices primarily into the embedded control market, and we are one of the largest suppliers
of such devices worldwide. Serial EEPROM products are used for non-volatile program and data storage in systems where
such data must be either modified frequently or retained for long periods. Serial EEPROMs have a very low I/O pin
requirement, permitting production of very small devices.
We address customer requirements by offering products with extremely small package sizes and very low operating
voltages for both read and write functions. Our memory products also feature long data retention and high erase/write
endurance.
Manufacturing
Our manufacturing operations include wafer fabrication and assembly and test. The ownership of our manufacturing
resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control
resulting in us being one of the lowest cost producers in the embedded control industry. By owning our wafer fabrication
facilities and much of our assembly and test operations, and by employing proprietary 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 testing profit margin.
Our manufacturing facilities are located in:
• Tempe, Arizona (Fab 2)
• Chandler, Arizona (probe operations)
• Puyallup, Washington (Fab 3) (non-operational)
• Gresham, Oregon (Fab 4)
• Bangkok, Thailand (assembly, probe and test)
Wafer Fabrication
Fab 2 currently produces 8-inch wafers and supports manufacturing processes from 0.35 to 5.0 microns. During fiscal
2006, Fab 2 operated at approximately 98% of its capacity compared to approximately 96% during fiscal 2005. Operating at
higher percentages of capacity has a positive impact on our operating results due to the relatively high fixed costs inherent in
wafer fabrication manufacturing.
Fab 3 is currently non-operational and being held-for-future-use. See “Item 6 – Selected Financial Data – Fiscal 2003 –
Fab 3 Impairment Charge,” below at page 22, for a discussion of the status of Fab 3.
We acquired Fab 4 in August 2002 and began production on October 31, 2003. At March 31, 2006, Fab 4 produced 8-
inch wafers using predominantly 0.5 micron manufacturing processes and is capable of supporting technologies below 0.18
microns. A significant amount of clean room capacity and equipment acquired with Fab 4 can be brought on line in the
future to support incremental wafer fabrication capacity needs. We believe the combined capacity of Fab 2, Fab 4 and Fab 3
will provide sufficient capacity to allow us to respond to increases in future demand.
6
We continue to transition products to more advanced process technologies to reduce future manufacturing costs. We
believe that our ability to successfully transition to more advanced process technologies is important for us to remain
competitive.
We outsource a small percentage of our wafer production requirements to third-party wafer foundries to augment our
internal manufacturing capabilities.
Assembly and Test
We perform product assembly and testing at our facilities located near Bangkok, Thailand. At March 31, 2006,
approximately 66% of our assembly requirements were being performed in our Thailand facility. As of March 31, 2006, our
Thailand facility was testing substantially all of our wafer production. We use third-party assembly and test contractors in
several Asian countries for the balance of our assembly and test requirements.
General Matters Impacting Our Manufacturing Operations
We employ proprietary design and manufacturing processes in developing our microcontroller and memory products.
We believe our processes afford us both cost-effective designs in existing and derivative products and greater functionality in
new product designs. While many of our competitors develop and optimize separate processes for their logic and memory
product lines, we use a common process technology for both microcontroller and non-volatile memory products. This allows
us to more fully absorb our process research and development costs and to deliver new products to market more rapidly. Our
engineers utilize advanced Computer Aided Design tools and software to perform circuit design, simulation and layout, and
our in-house photomask and wafer fabrication facilities enable us to rapidly verify design techniques by processing test
wafers quickly and efficiently.
Due to the high fixed costs inherent in semiconductor manufacturing, consistently high manufacturing yields have
significant positive effects on our gross profit and overall operating results. Our continuous focus on manufacturing
productivity has allowed us to maintain excellent manufacturing yields at our facilities. Our manufacturing yields are
primarily driven by a comprehensive implementation of statistical process control, extensive employee training and selective
upgrading of our manufacturing facilities and equipment. Maintenance of manufacturing productivity and yields are
important factors in the achievement of our operating results. 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 and the performance of our wafer fabrication personnel and equipment. As is
typical in the semiconductor industry, we have from time to time experienced lower than anticipated manufacturing yields.
Our operating results will suffer if we are unable to maintain yields at approximately the current levels.
At the end of fiscal 2006, we owned long-lived assets (consisting of property, plant and equipment and goodwill) in the
United States amounting to $576.9 million and $124.5 million in other countries, including $118.0 million in Thailand. At
the end of fiscal 2005, we owned long-lived assets in the United States amounting to $628.0 million and $106.4 million in
other countries, including $100.6 million in Thailand.
Research and Development (R&D)
We are committed to continuing our investment in new and enhanced products, including development systems, and in
our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our
competitive position. Our current R&D activities focus on the design of new microcontrollers, digital signal controllers,
ASSPs, Serial EEPROM memory, analog and interface products, new development systems, software and application-
specific software libraries. We are also developing new design and process technologies to achieve further cost reductions
and performance improvements in existing products.
In fiscal 2006, our R&D expenses were $94.9 million, compared to $93.0 million in fiscal 2005 and $85.4 million in
fiscal 2004.
7
Sales and Distribution
General
We market our products worldwide primarily through a network of direct sales personnel and distributors.
Our direct sales force focuses on a wide variety of strategic accounts in three geographical markets: the Americas,
Europe and Asia. We currently maintain sales and technical support centers in major metropolitan areas in North America,
Europe and Asia. We believe that a strong technical service presence is essential to the continued development of the
embedded control market. The majority of our field sales engineers (FSEs), field application engineers (FAEs), and sales
management have technical degrees or backgrounds and have been previously employed in high technology environments.
We believe that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The
primary mission of our FAE team is to provide technical assistance to customers and to conduct periodic training sessions for
the balance of our sales team. FAEs also frequently conduct technical seminars and workshops in major cities around the
world.
Distribution
Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe
that distributors can provide an effective means of reaching this broad and diverse customer base. We believe that customers
recognize Microchip for its products and brand name and use distributors as an effective supply channel. During fiscal 2006
and fiscal 2005, we added significant resources to our internal sales force to provide technical sales support for our customers
in both the OEM and distribution channels. We believe that some of our distribution partners have limited internal resources
to support the technical sales activities associated with selling our products, and we have added our own employees to
support these activities.
In fiscal 2006 and fiscal 2005, we derived 65% of our net sales from sales through distributors and 35% of our net sales
from customers serviced directly by Microchip. Distributors accounted for 64% of our net sales in fiscal 2004. Our largest
distributor accounted for approximately 14% of our net sales in fiscal 2006 and approximately 13% of our net sales in fiscal
2005 and fiscal 2004. Our second largest distributor accounted for approximately 11% of our net sales in fiscal 2006 and
approximately 12% of our net sales in fiscal 2005 and fiscal 2004. No other distributor or end customer accounted for more
than 10% of our net sales in fiscal 2006, 2005 or 2004.
Distributors generally have broad-based rights to return product to us. As revenue on distributor shipments is not
recognized until the distributors sell our product to their end customers, distributor returns have no impact on our revenue.
We also grant certain credits to our distributors. The credits are granted to the distributors on specifically 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 information regarding the
sale to their end customer. The effect of granting these credits establishes the net selling price from us to our distributors for
the products and results in the net revenue recognized by us when the product is sold by the distributors to their end
customers.
We also provide these distributors with price protection by reducing product pricing 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 selling price of our products, it allows the distributors to
claim a credit against their outstanding accounts receivable balances based on the new price of the inventory they have on
hand as of the date of the price reduction. There is no revenue recognition impact from the price protection activity.
We do not offer material incentive programs to our distributors.
We do not have long-term agreements with our distributors and we, or our distributors, may each terminate our
relationship with little or no advanced notice. The loss of, or the disruption in the operations of, one or more of our
distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.
8
Sales by Geography
Sales by geography for fiscal 2006, 2005 and 2004 were as follows (dollars in thousands):
Year Ended March 31,
Americas
Europe
Asia
2006
$ 266,353
255,367
406,173
%
28.7
27.5
43.8
2005
$ 248,881
232,493
365,562
%
29.4
27.4
43.2
2004
$ 219,641
194,187
285,432
%
31.4
27.8
40.8
Total Sales
$ 927,893
100.0%
$ 846,936
100.0% $ 699,260
100.0%
Sales to customers in Asia have increased as a percentage of sales from fiscal 2004 to fiscal 2005 and from fiscal 2005 to
fiscal 2006. We attribute this to the fact that many of our customers are transitioning their manufacturing operations to Asia,
as well as to the growth in the demand of customers in Asia.
Sales to foreign customers accounted for approximately 74% of our net sales in fiscal 2006, 73% of our net sales in fiscal
2005 and 71% of our net sales in fiscal 2004. Our sales to foreign customers have been predominately in Asia and Europe,
which we attribute to the manufacturing strength in those areas for automotive, communications, computing, consumer and
industrial control products. Americas sales include sales to customers in the United States, Canada, Central America and
South America.
Sales to customers in China, including Hong Kong, accounted for approximately 17% of our net sales in fiscal 2006,
approximately 16% of our net sales in fiscal 2005 and approximately 14% of our net sales in fiscal 2004. In fiscal 2006 and
fiscal 2005, sales to customers in Taiwan accounted for approximately 10% of our net sales. We did not have sales into any
other foreign countries that exceeded 10% of our net sales during fiscal 2006, 2005 or 2004.
Our international sales are predominately U.S. dollar denominated. Although foreign sales are subject to certain
government export restrictions, we have not experienced any material difficulties as a result of export restrictions to date.
The semiconductor industry is characterized by seasonality and wide fluctuations of supply and demand. Since a
significant portion of our revenue is from consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal year. However, broad strength in our overall business
in recent periods has had a more significant impact on our results than seasonality, and has made it difficult to assess the
impact of seasonal factors on our business.
Backlog
As of April 30, 2006 our backlog was approximately $231.2 million, compared to $166.9 million as of April 29, 2005.
Our backlog includes all purchase orders scheduled for delivery within the subsequent 12 months.
We primarily produce standard products that can be shipped from inventory within a short time after we receive an order.
Our business and, to a large extent, that of the entire semiconductor industry, is characterized by short-term orders and
shipment schedules. Orders constituting our current backlog are subject to changes in delivery schedules, or to cancellation
at the customer’s option without significant penalty. Thus, while backlog is useful for scheduling production, backlog as of
any particular date may not be a reliable measure of sales for any future period.
Competition
The semiconductor industry is intensely competitive and has been characterized by price erosion and rapid technological
change. We compete with major domestic and international semiconductor companies, many of which have greater market
recognition and greater financial, technical, marketing, distribution and other resources than we have with which to pursue
engineering, manufacturing, marketing and distribution of their products. Furthermore, capacity in the semiconductor
industry is generally increasing over time and such increased capacity or improved product availability could adversely affect
our competitive position.
9
We currently compete principally on the basis of the technical innovation and performance of our embedded control
products, including the following product characteristics:
•
•
•
•
speed
functionality
density
power consumption
•
•
•
•
reliability
packaging alternatives
price
availability
We believe that other important competitive factors in the embedded control market include:
•
•
•
•
ease of use
functionality of application development systems
dependable delivery and quality
technical service and support
We believe that we compete favorably with other companies on all of these factors, but we may be unable to compete
successfully in the future, which could harm our business.
Patents, Licenses and Trademarks
We maintain a portfolio of United States and foreign patents, expiring on various dates between 2006 and 2024. We also
have numerous additional United States and foreign patent applications pending. We do not expect that the expiration of any
particular patent will have a material impact on our business. While we intend to continue to seek patents on our inventions
and manufacturing processes, we believe that our continued success depends primarily on the technological skills and
innovative capabilities of our personnel and our ability to rapidly commercialize product developments, rather than on our
patents. Our existing patents and any new patents that are issued may not be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us. In addition, the laws of certain foreign countries do not protect
our intellectual property rights to the same extent as the laws of the United States.
We have entered into certain intellectual property licenses and cross-licenses with other companies related to
semiconductor products and manufacturing processes. As is typical in the semiconductor industry, we and our customers
have from time to time received, and may in the future receive, communications from third parties asserting patent or other
intellectual property rights on certain of our products or technologies. We investigate all such notices and respond as we
believe is appropriate. Based on industry practice, we believe that in most cases we can obtain any necessary licenses or
other rights on commercially reasonable terms, but we cannot assure that all licenses would be on acceptable terms, that
litigation would not ensue or that damages for any past infringement would not be assessed. Litigation, which could result in
substantial cost to us and require significant attention from management, may be necessary to enforce our patents or other
intellectual property rights, or to defend us against claimed infringement of the rights of others. The failure to obtain
necessary licenses or other rights, or litigation arising out of infringement claims, could harm our business.
Environmental Regulation
We must comply with many different federal, state, local and foreign governmental regulations related to the use,
storage, discharge and disposal of certain chemicals and gases used in our manufacturing processes. Our facilities have been
designed to comply with these regulations and we believe that our activities are conducted in compliance with such
regulations. Any changes in such regulations or in their enforcement could require us to acquire costly equipment or to incur
other significant expenses to comply with environmental regulations. Any failure by us to adequately control the storage, use
and disposal of regulated substances could result in future liabilities.
Increasing public attention has been focused on the environmental impact of electronic manufacturing operations. While
we have not experienced any materially adverse effects on our operations from environmental regulations, our business and
results of operations could suffer if for any reason we fail to control the use of, or to adequately restrict the discharge of,
hazardous substances under present or future environmental regulations.
Employees
As of April 30, 2006, we had 4,336 employees. None of our employees are represented by a labor organization. We
have never had a work stoppage and believe that our employee relations are good.
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Executive Officers
The following sets forth certain information regarding our executive officers as of April 23, 2006:
Name
Steve Sanghi
Stephen V. Drehobl
David S. Lambert
Mitchell R. Little
Ganesh Moorthy
Gordon W. Parnell
Richard J. Simoncic
Age
50
44
54
53
46
56
42
Position
Chairman of the Board, President and Chief Executive Officer
Vice President, Security, Microcontroller and Technology Division
Vice President, Fab Operations
Vice President, Worldwide Sales and Applications
Vice President, Advanced Microcontroller and Memory Division
Vice President, Chief Financial Officer
Vice President, Analog and Interface Products Division
Mr. Sanghi has been President since August 1990, CEO since October 1991, and Chairman of the Board since October
1993. He has served as a director since August 1990. Mr. Sanghi holds an M.S. degree in Electrical and Computer
Engineering from the University of Massachusetts and a B.S. degree in Electronics and Communication from Punjab
University, India.
Mr. Drehobl has served as Vice President of the Security, Microcontroller, and Technology Division since July 2001. He
has been employed by Microchip since August 1989 and has served as a Vice President in various roles since February 1997.
Mr. Drehobl holds a Bachelor of Technology degree from the University of Dayton.
Mr. Lambert has served as Vice President, Fab Operations since November 1993. From 1991 to November 1993, he
served as Director of Manufacturing Engineering, and from 1989 to 1991, he served as Engineering Manager of Fab
Operations. Mr. Lambert holds a B.S. degree in Chemical Engineering from the University of Cincinnati.
Mr. Little has served as Vice President, Worldwide Sales and Applications since July 2000. He has been employed by
Microchip since 1989 and has served as a Vice President in various roles since September 1993. Mr. Little holds a B.S.
degree in Engineering Technology from United Electronics Institute.
Mr. Moorthy has served as Vice President, Advanced Microcontroller and Memory Division, since December 2003.
From November 2001 to December 2003, he served as Vice President, Advanced Microcontroller and Automotive Division.
Prior to this time, he served in various executive capacities with other semiconductor companies. Mr. Moorthy holds an
M.B.A. in Marketing from National University, a B.S. degree in Electrical Engineering from the University of Washington
and a B.S. degree in Physics from the University of Bombay.
Mr. Parnell has served as Vice President and Chief Financial Officer since May 2000. He served as Vice President,
Controller and Treasurer from April 1993 to May 2000. Mr. Parnell holds a finance/accounting qualification with the
Association of Certified Accountants from Edinburgh College, Scotland.
Mr. Simoncic has served as Vice President, Analog and Interface Products Division since September 1999. From
October 1995 to September 1999 he served as Vice President in various roles. Joining Microchip in 1990, Mr. Simoncic held
various roles in Yield Enhancement and Quality Systems. Mr. Simoncic holds a B.S. degree in Electrical Engineering
Technology from DeVry Institute of Technology.
Item 1A. RISK FACTORS
When evaluating Microchip and its business, you should give careful consideration to the factors listed below, in
addition to the information provided elsewhere in this Form 10-K and in other documents that we file with the Securities and
Exchange Commission.
Our 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
levels of inventories at our customers
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
our ability to secure sufficient assembly and testing capacity
availability of raw materials and equipment
competitive developments including pricing pressures
the level of orders that are received and can be shipped in a quarter
the level of sell-through of our products through distribution
changes or fluctuations in customer order patterns and seasonality
constrained availability from other electronic suppliers impacting our customers’ ability to ship their products,
which in turn may adversely impact our sales to those customers
costs and outcomes of any tax audits or any litigation involving intellectual property, customers or other issues
disruptions in our business or our customers’ businesses due to terrorist activity, armed conflict, war, worldwide
oil prices and supply, public health concerns or disruptions in the transportation system
property damage or other losses which are not covered by insurance
general economic, industry or political conditions in the United States or internationally
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 therefore limited in our visibility of
future product shipments.
Our net sales in any given quarter depend upon a combination of shipments from backlog and orders received in that
quarter for shipment in that quarter, which we refer to as turns orders. We measure turns orders at the beginning of a quarter
based on the orders needed to meet the shipment targets that we set entering the quarter. Historically, we have proven our
ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with
relatively short delivery schedules. Shorter lead times generally mean that turns orders as a percentage of our business are
relatively high in any particular quarter and reduces our backlog visibility on future product shipments. Turns orders
correlate to overall semiconductor industry conditions and product lead times. Because turns orders are difficult to predict,
varying levels of turns orders make our net sales more difficult to forecast. If we do not achieve a sufficient level of turns
orders in a particular quarter relative to our revenue targets, our revenue and operating results may suffer.
Intense competition in the markets we serve may lead to pricing pressures, reduced sales of our products or reduced
market share.
The semiconductor industry is intensely competitive and has been characterized by price erosion and rapid technological
change. We compete with major domestic and international semiconductor companies, many of which have greater market
recognition and substantially greater financial, technical, marketing, distribution and other resources than we do with which
to pursue engineering, manufacturing, marketing and distribution of their products. Emerging companies are also increasing
their participation in the market for embedded control applications. We may be unable to compete successfully in the future,
which could harm our business.
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Our ability to compete successfully depends on a number of factors both within and outside our control, including, but
not limited to:
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the quality, performance, reliability, features, ease of use, pricing and diversity of our products
our success in designing and manufacturing new products including those implementing new technologies
the rate at which customers incorporate our products into their own applications
product introductions by our competitors
the number, nature and success of our competitors in a given market
our ability to obtain adequate supplies of raw materials and other supplies at acceptable prices
our ability to protect our products and processes by effective utilization of intellectual property rights
the quality of our customer service and our ability to address the needs of our customers, and
general market and economic conditions.
Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. The
overall average selling prices of our microcontroller and proprietary analog and interface products have remained relatively
constant, while average selling prices of our Serial EEPROM and non-proprietary analog and interface products have
declined over time.
We have experienced, and expect to continue to experience, modest pricing declines in certain of our more mature
proprietary product lines, due primarily to competitive conditions. We have been able to moderate average selling price
declines in many of our proprietary product lines by continuing to introduce new products with more features and higher
prices. We have experienced in the past and expect to continue to experience in the future varying degrees of competitive
pricing pressures in our Serial EEPROM products.
We may be unable to maintain average selling prices for our products as a result of increased pricing pressure in the
future, which could adversely impact our operating results.
Our business is dependent on selling through distributors.
Sales through distributors accounted for 65% of our net sales in fiscal 2006, 65% of our net sales in fiscal 2005 and 64%
of our net sales in fiscal 2004. Our two largest distributors together accounted for approximately 25% of our net sales in
fiscal 2006, fiscal 2005 and fiscal 2004. We do not have long-term agreements with our distributors and both we and our
distributors may each terminate our relationship with little or no advanced notice. We believe that customers recognize
Microchip for its products and brand name and use distributors as an effective supply channel.
During fiscal 2006 we reduced the gross margin that certain of our distributors earn when they sell our products. We
reduced these distributors’ gross margins because we believe these distributors did not have sufficient technical sales
resources to properly address the marketplace for our products. We have added a significant number of technical sales
employees throughout our worldwide sales organization to address the support requirements for both our OEM and
distribution customers. We cannot predict the impact, if any, that our actions will have on our relationships with such
distributors.
The loss of, or a disruption in the operations of, one or more of our distributors could reduce our net sales in a given
period and could result in an increase in inventory returns.
Our success depends on our ability to introduce new products on a timely basis.
Our future operating results will depend on our ability to develop and introduce new products on a timely basis that can
compete effectively on the basis of price and performance and which address customer requirements. The success of our new
product introductions depends on various factors, including, but not limited to:
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proper new product selection
timely completion and introduction of new product designs
development of support tools and collateral literature that make complex new products easy for engineers to
understand and use, and
• market acceptance of our customers’ end products.
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Because our products are complex, we have experienced delays from time to time in completing development of new
products. In addition, our new products may not receive or maintain substantial market acceptance. We may be unable to
design, develop and introduce competitive products on a timely basis, which could adversely impact our future operating
results.
Our success also depends upon our ability to develop and implement new design and process technologies.
Semiconductor design and process technologies are subject to rapid technological change and require significant R&D
expenditures. We and other companies in the industry have, from time to time, experienced difficulties in effecting
transitions to advanced process technologies and, consequently, have suffered reduced manufacturing yields or delays in
product deliveries. Our future operating results could be adversely affected if any transition to future process technologies is
substantially delayed or inefficiently implemented.
We must attract and retain qualified personnel to be successful, and competition for qualified personnel is intense in our
market.
Our success depends upon the efforts and abilities of our senior management, engineering and other personnel. The
competition for qualified engineering and management personnel is intense. We may be unsuccessful in retaining our
existing key personnel or in attracting and retaining additional key personnel that we require. The loss of the services of one
or more of our key personnel or the inability to add key personnel could harm our business. We have no employment
agreements with any member of our senior management team.
We are dependent on several contractors to perform key manufacturing functions for us.
We use several contractors located in Asia for a portion of the assembly and testing of our products. We also rely on
outside wafer foundries for a portion of our wafer fabrication. Although we own the majority of our manufacturing
resources, the disruption or termination of any of our contractors could harm our business and operating results.
Our use of third parties involves some reduction in our level of control over the portions of our business that we
subcontract. Our future operating results could suffer if any contractor were to experience financial, operations or production
difficulties or situations when demand exceeds capacity, or if they were unable to maintain manufacturing yields, assembly
and test yields and costs at approximately their current levels, or if due to their locations in foreign countries they were to
experience political upheaval or infrastructure disruption. Further, procurement from third parties is done by purchase order
and contracts. If these third parties are unable or unwilling to timely deliver products or services conforming to our quality
standards, we may not be able to qualify additional manufacturing sources for our products in a timely manner or at all, and
such arrangements, if any, may not be on favorable terms to us. In such event, we could experience an interruption in
production, an increase in manufacturing and production costs, decline in product reliability, and our business and operating
results could be adversely affected.
We may lose sales if our suppliers of raw materials and equipment fail to meet our needs.
Our semiconductor manufacturing operations require raw materials and equipment that must meet exacting standards.
We generally have more than one source for these supplies, but there are only a limited number of suppliers capable of
delivering various raw materials and equipment that meet our standards. The raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of semiconductors in product applications increases. We
have experienced supply shortages from time to time in the past, and on occasion our suppliers have told us they need more
time than expected to fill our orders or that they will no longer support certain equipment with updates or spare and
replacements parts. An interruption of any raw materials or equipment sources, or the lack of supplier support for a particular
piece of equipment, could harm our business.
Our operating results may be impacted by both seasonality and the wide fluctuations of supply and demand in the
semiconductor industry.
The semiconductor industry is characterized by seasonality and wide fluctuations of supply and demand. Since a
significant portion of our revenue is from consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal year. However, broad strength in our overall business
in recent periods has had a more significant impact on our results than seasonality, and has made it difficult to assess the
impact of seasonal factors on our business. The industry has also experienced significant economic downturns, characterized
by diminished product demand and production over-capacity. We have sought to reduce our exposure to this industry
cyclicality by selling proprietary products that cannot be easily or quickly replaced, to a geographically diverse base of
14
customers across a broad range of market segments. However, we have experienced substantial period-to-period fluctuations
in operating results and expect, in the future, to experience period-to-period fluctuations in operating results due to general
industry or economic conditions.
We are exposed to various risks related to legal proceedings or claims.
We are currently, and in the future may be, involved in legal proceedings or claims regarding patent infringement,
intellectual property rights, contracts and other matters. We were involved in patent infringement litigation with Philips
Corporation which was settled in fiscal 2005. As is typical in the semiconductor industry, we receive notifications from
customers from time to time who believe that we owe them indemnification or other obligations related to infringement
claims made against the customers by third parties. These legal proceedings and claims, whether with or without merit, could
result in substantial cost to us and divert our resources. If we are not able to resolve a claim, negotiate a settlement of a
matter, obtain necessary licenses on commercially reasonable terms, reengineer our products or processes to avoid
infringement, and/or successfully prosecute or defend our position, we could incur uninsured liability in any of them, be
required to take an appropriate charge to operations, be enjoined from selling a material portion of our product line or using
certain processes, suffer a reduction or elimination in value of inventories, and our business, financial condition or results of
operations could be harmed.
It is also possible that from time to time we may be subject to warranty or product liability claims that could lead to
significant expenses related to the defense of such claims, increased costs associated with the replacement of affected
products, and a requirement to pay damages claims. Because the systems into which our products are integrated have a
higher cost of goods than the products we sell, these expenses and damages may be significantly higher than the sales and
profits the company received from the products involved. While we specifically exclude consequential damages in our
standard terms and conditions, our ability to avoid such liabilities may be limited by applicable law. We do have product
liability insurance, but there is no certainty that insurance will cover all claims or be of a sufficient amount to fully protect
against such claims. Costs or payments we may make in connection with warranty or product liability claims may adversely
affect the results of our operations.
Further, we sell to customers in industries such as automotive, aerospace, and medical, where failure of their systems
could cause damage to property or persons. We may be subject to product liability claims if our products cause the system
failures. Based on our historical experience, we believe that the risk of exposure to product liability claims is currently low.
However, we will face increased exposure to product liability claims if there are substantial increases in either the volume of
our sales into these applications and the frequency of system failures caused by our devices.
Failure to adequately protect our intellectual property could result in lost revenue or market opportunities.
Our ability to obtain patents, licenses and other intellectual property rights covering our products and manufacturing
processes is important for our success. To that end, we have acquired certain patents and patent licenses and intend to
continue to seek patents on our inventions and manufacturing processes. The process of seeking patent protection can be
long and expensive, and patents may not be issued from currently pending or future applications. In addition, our existing
patents and any new patents that are issued may not be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to us. We may be subject to or may ourselves initiate interference proceedings in the U.S. Patent and
Trademark Office, which can require significant financial and management resources. In addition, the laws of certain foreign
countries do not protect our intellectual property rights to the same extent as the laws of the United States. Infringement of
our intellectual property rights by a third party could result in uncompensated lost market and revenue opportunities for us.
We do not typically have long-term contracts with our customers.
We do not typically enter into long-term contracts with our customers and we cannot be certain about future order levels
from our customers. When we do enter into customer contracts, the contract is generally cancelable at the convenience of the
customer. Even though we have over 50,000 end customers and our ten largest customers make up approximately 10% of
our total revenue, cancellation of long-term and short-term customer contracts could have an adverse financial impact on our
revenue and profits.
Further, as the practice has become more commonplace in the industry, we have entered into contracts with certain
customers that differ from our standard terms of sale. Under these contracts we commit to supply quantities of products on
scheduled delivery dates. If we become unable to supply the customer as required under the contract, the customer may incur
additional production costs, lost revenues due to subsequent delays in their own manufacturing schedule, or quality related
15
issues. Under these contracts, we may be liable for the costs the customer has incurred. While we try to limit such liabilities,
if they should arise, there may be a material adverse impact on our results of operation and financial condition.
Business interruptions could harm our business.
Operations at any of our manufacturing facilities, or at any of our wafer fabrication or test and assembly subcontractors,
may be disrupted for reasons beyond our control, including work stoppages, power loss, incidents of terrorism or security
risk, political instability, public health issues, telecommunications, transportation or other infrastructure failure, fire,
earthquake, floods, or other natural disasters. If operations at any of our facilities, or our subcontractors’ facilities are
interrupted, we may not be able to shift production to other facilities on a timely basis. If this occurs, we would likely
experience delays in shipments of products to our customers and alternate sources for production may be unavailable on
acceptable terms. This could result in reduced revenues and profits and the cancellation of orders or loss of customers. In
addition, business interruption insurance will likely not be enough to compensate us for any losses that may occur and any
losses or damages incurred by us as a result of business interruptions could significantly harm our business.
We are highly dependent on foreign sales and operations, which exposes us to foreign political and economic risks.
Sales to foreign customers account for a substantial portion of our net sales. During fiscal 2006, approximately 74% of
our net sales were made to foreign customers. During fiscal 2005, approximately 73% of our net sales were made to foreign
customers. During fiscal 2004, approximately 71% of our net sales were made to foreign customers. We purchase a
substantial portion of our raw materials and equipment from foreign suppliers. In addition, we own product assembly and
testing facilities located near Bangkok, Thailand. We also use various foreign contractors for a portion of our assembly and
testing and for a portion of our wafer fabrication requirements. Substantially all of our finished goods inventory is
maintained in Thailand.
Our reliance on foreign operations, foreign suppliers, maintenance of substantially all of our finished goods in inventory
at foreign locations and significant foreign sales exposes us to foreign political and economic risks, including, but not limited
to:
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political, social and economic instability
public health conditions
trade restrictions and changes in tariffs
import and export license requirements and restrictions
difficulties in staffing and managing international operations
employment regulations
disruptions in international transport or delivery
fluctuations in currency exchange rates
difficulties in collecting receivables
economic slowdown in the worldwide markets served by us, and
potentially adverse tax consequences.
If any of these risks materialize, our sales could decrease and our operating results could suffer.
Interruptions in information technology systems could affect our business.
We rely on the efficient and uninterrupted operation of complex information technology systems and networks to operate
our business. Any significant system or network disruption, including but not limited to computer viruses, security breach,
and energy blackouts could have a material adverse impact on our operations, sales and operating results. We have
implemented measures to manage our risks related to such disruptions, but such disruptions could negatively impact our
operations and financial results. In addition, we may incur additional costs to remedy the damages caused by these
disruptions or security breaches.
The occurrence of events for which we are self-insured, or which exceed our insurance limits may affect our profitability
and liquidity.
We have insurance contracts with independent insurance companies related to many different types of risk; however, we
self-insure for some risks and obligations. In these circumstances, we have determined that it is more cost effective to self-
insure certain risks than to pay the increased premium costs in place since the disruption in the insurance market after the
16
events of September 11, 2001. The risks and exposures that we self-insure include, but are not limited to, product defects,
political risks, and patent infringement. Should there be a loss or adverse judgment or other decision in an area for which we
are self-insured, then our financial condition, result of operations and liquidity may be adversely affected.
We are subject to stringent environmental regulations, which may force us to incur significant expenses.
We must comply with many different federal, state, local and foreign governmental regulations related to the use,
storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process.
Although we believe that our activities conform to presently applicable environmental regulations, our failure to comply with
present or future regulations could result in the imposition of fines, suspension of production or a cessation of operations.
Any such environmental regulations could require us to acquire costly equipment or to incur other significant expenses to
comply with such regulations. Any failure by us to control the use of or adequately restrict the discharge of hazardous
substances could subject us to future liabilities. Environmental problems may occur that could subject us to future costs or
liabilities.
Further, certain of our customers shipping their products into European markets are also subject to governmental
environmental regulations such as the Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive
(RoHS) which will be effective July 1, 2006. These directives focus on limiting the amounts of certain elements, such as
lead, in electrical devices. The inability of this sub-set of our customers to use Microchip products which contain lead after
July 2006 may adversely affect our results of operations.
Compliance with future changes to securities laws and related regulations could result in increased costs to us.
Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of
2002 and rules enacted and proposed by the Securities and Exchange Commission (SEC), The NASDAQ Stock Market®
(NASDAQ) and the New York Stock Exchange (NYSE), resulted in significantly increased costs to us in fiscal 2005 as we
responded to their requirements. In particular, complying with the internal control audit requirements of Sarbanes-Oxley
Section 404 in fiscal 2005 resulted in increased internal efforts and significantly higher fees from our independent accounting
firm. In fiscal 2006, our costs associated with these activities were at approximately the same levels as in fiscal 2005.
Further changes in applicable legal or accounting requirements could result in additional costs in future periods.
This report on Form 10-K contains a report by our management on our internal control over financial reporting including
an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2006. This Form 10-K also
contains an attestation and report by our auditors with respect to our management’s assessment of the effectiveness of
internal control over financial reporting under Section 404. While these assessments and reports did not reveal any material
weaknesses in our internal control over financial reporting, compliance with Section 404 is an ongoing process and will be
required for each future fiscal year. We expect that the ongoing compliance with Section 404 will continue to be both very
costly and very challenging and there can be no assurance that material weaknesses with not be identified in future periods.
Any adverse results from such ongoing compliance efforts could result in a loss of investor confidence in our financial
reports and have an adverse effect on our stock price.
Recent regulations related to equity compensation will adversely affect our earnings and our ability to attract and retain
key personnel.
Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of
our employee compensation packages and have accounted for them using the intrinsic value method of APB No. 25,
“Accounting for Stock Issued to Employees.” We believe that stock options and other long-term equity incentives directly
motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to
remain with Microchip. In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payments,” (“SFAS 123R”) which changed
U.S. Generally Accepted Accounting Principles in such a way to require us to record a charge to earnings for the fair value of
employee stock option grants and other share based compensation beginning in the first quarter of fiscal 2007. This
regulation will negatively impact our earnings for those share based awards that vest beginning in fiscal 2007. Furthermore,
adoption of SFAS 123R will require us to make certain assumptions and judgments in the valuation of stock options that we
may grant in the future. A change in any of those assumptions or judgments could change the compensation expense that is
charged against our earnings and, consequently, adversely affect our results of operations. See also Note 1 to the
Consolidated Financial Statements – Significant Accounting Policies: Share-Based Payment.
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In addition, recent regulations implemented by NASDAQ requiring shareholder approval for all stock option plans as
well as recent regulations implemented by the NYSE prohibiting NYSE member organizations from giving a proxy to vote
on equity-compensation plans unless the beneficial owner of the shares has given voting instructions could make it more
difficult for us to grant equity-based awards to employees in the future. To the extent that these or other new regulations
make it more difficult or expensive to grant options to employees, we may incur compensation costs, productivity losses,
change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could
materially and adversely affect our business.
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate in the future. The
future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of
which are beyond our control, including, but not limited to:
quarterly variations in our operating results and the operating results of other technology companies
actual or anticipated announcements of technical innovations or new products by us or our competitors
changes in analysts’ estimates of our financial performance or buy/sell recommendations
changes in our financial guidance or our failure to meet such guidance
general conditions in the semiconductor industry, and
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• worldwide economic and financial conditions.
In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the
market prices for many high technology companies and that often have been unrelated to the operating performance of such
companies. These broad market fluctuations and other factors may harm the market price of our common stock.
The outcome of currently ongoing and future examinations of our income tax returns by the IRS could have an adverse
effect on our results of operations.
We are subject to continued examination of our income tax returns by the Internal Revenue Service and other tax
authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuing examinations
will not have an adverse effect on future operating results.
In the event we make acquisitions, we may not be able to successfully integrate such acquisitions or attain the anticipated
benefits.
While acquisitions do not represent a major part of our growth strategy, from time to time we may consider financially
attractive and strategic acquisitions if such opportunities arise. Any transactions that we complete may involve a number of
risks, including: the diversion of our management’s attention from our existing business to integrate the operations and
personnel of the acquired or combined business or joint venture, or possible adverse effects on our operating results during
the integration process. In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage
our newly acquired operations or employees. We may not be able to maintain uniform standards, controls, procedures and
policies, and this may lead to operational inefficiencies.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
At March 31, 2006, we owned the facilities described below:
18
Approx.
Total Sq.
Ft.
415,000
Location
Chandler,
Arizona (1)
Uses
Executive and Administrative Offices; Wafer Probe; R&D
Center; Sales and Marketing; and Computer and Service
Functions
Tempe, Arizona
379,000 Wafer Fabrication (Fab 2); R&D Center; Administrative
Offices; and Warehousing
Puyallup,
Washington (2)
Gresham,
Oregon
Chacherngsao,
Thailand (3)
700,000 Wafer Fabrication (Fab 3); R&D Center; Administrative
Offices; and Warehousing (non-operational; held-for-future-
use)
826,500 Wafer Fabrication (Fab 4); R&D Center; Administrative
290,000
Offices; and Warehousing
Test and Assembly; Sample Center; Warehousing; and
Administrative Offices
(1) On June 30, 2003, we completed closure of Fab 1 on our Chandler campus, and integrated certain of the personnel and processes into
Fab 2.
(2) Currently non-operational and being held-for-future-use. Fab 3 consists of manufacturing buildings and land, with no equipment.
(3) Located in the Alphatechnopolis Industrial Park near Bangkok on land to which we expect to acquire title in accordance with our
agreement with the landowner. Progress towards obtaining full title of the land has been delayed due to a bankruptcy relating to the
seller of the land. At this time it is not possible to estimate when, or if, full title transfer will be completed. 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.
In addition to the facilities we own, we lease several research and development facilities and sales offices in North
America, Europe and Asia. Our aggregate monthly rental payment for our leased facilities is approximately $0.4 million.
We currently believe that our existing facilities will be adequate to meet our production requirements for the next 12
months.
Item 3.
LEGAL PROCEEDINGS
In the ordinary course of our business, we are involved in a limited number of legal actions, both as plaintiff and
defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not
presently determinable, we believe that the ultimate resolution of these matters will not harm our business and will not have a
material adverse effect on our financial position, cash flows or results of operations. Litigation relating to the semiconductor
industry is not uncommon, and we are, and from time to time have been, subject to such litigation. No assurances can be
given with respect to the extent or outcome of any such litigation in the future.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on NASDAQ under the symbol “MCHP.” Our common stock has been quoted on
NASDAQ since our initial public offering on March 19, 1993. The following table sets forth the quarterly high and low
closing prices of our common stock as reported by NASDAQ for our last two fiscal years.
19
Fiscal 2006
High
Low
Fiscal 2005
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 30.68
32.61
34.64
37.74
$ 24.60
28.52
27.30
32.13
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 32.63
30.61
30.63
28.49
$ 26.80
25.26
26.03
24.28
On May 12, 2006, there were approximately 477 holders of record of our common stock. This figure does not reflect
beneficial ownership of shares held in nominee names.
We have been declaring and paying quarterly cash dividends since the third quarter of fiscal 2003. Our total cash
dividends paid were $120.1 million, $43.0 million and $23.3 million in fiscal 2006, fiscal 2005 and fiscal 2004, respectively.
The following table sets forth our quarterly cash dividends per common share and the total amount of the dividend payment
for each quarter in fiscal 2006 and fiscal 2005 (amounts in thousands, except per share amounts).
Fiscal 2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends per
Common
Share
Amount of
Dividend
Payment
Dividends per
Common
Share
Amount of
Dividend
Payment
Fiscal 2005
$
0.095
0.125
0.160
0.190
$ 19,795
26,172
33,645
40,492
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 0.040
0.046
0.052
0.070
$ 8,267
9,473
10,752
14,508
On April 25, 2006, we declared a quarterly cash dividend of $0.215 per share, which was paid on May 23, 2006 to
stockholders of record on May 9, 2006 and the total amount of such dividend was $46.0 million. Our Board is free to change
its dividend practices at any time and to decrease or increase the dividend paid, or not to pay a dividend, on our common
stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and other factors
deemed relevant by our Board. Our current intent is to provide for ongoing quarterly cash dividends depending upon market
conditions and our results of operations.
On April 22, 2004, our Board of Directors authorized the repurchase of up to 2,500,000 shares of our common stock in
the open market or privately negotiated transactions. As of March 31, 2006, 1,495,166 shares related to this authorization
remained available to be purchased under this program. We did not repurchase any shares of our common stock in the fourth
quarter of fiscal 2006.
Please refer to “Item 12, Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters,” at page 41 below, for the information required by Item 201(d) of Regulation S-K with respect to securities
authorized for issuance under our equity compensation plans at March 31, 2006.
Item 6.
SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data for the five-year period ended March 31, 2006 in
conjunction with our Consolidated Financial Statements and Notes thereto and, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in Items 7 and 8 of this Form 10-K. Our consolidated statements of
income data for each of the years in the three-year period ended March 31, 2006, and the balance sheet data as of March 31,
2006 and 2005, are derived from our audited consolidated financial statements, included in Item 8 of this Form 10-K. The
statements of operations data for the years ended March 31, 2003 and 2002 and balance sheet data as of March 31, 2004,
2003 and 2002 have been derived from our consolidated audited financial statements not included herein (for information
below all amounts are in thousands, except per share data).
20
Statement of Income Data:
Net sales
Cost of sales
Research and development
Selling, general and administrative
Special charges (1)
Operating income
Interest income (expense), net
Other income (expense), net
Income before income taxes
Income tax provision
Income before cumulative effect of
change in accounting principle
Cumulative effect of change in accounting
principle (2)
Net income
Basic net income per common share
Diluted net income per common share
Dividends declared per common share
Basic common shares outstanding
Diluted common shares outstanding
Balance Sheet Data:
2006
$ 927,893
377,016
94,926
129,587
---
326,364
30,786
2,035
359,185
116,816
Year Ended March 31,
2004
2005
2003
$ 846,936
362,961
93,040
111,188
21,100
258,647
16,864
1,757
277,268
63,483
$ 699,260
349,301
85,389
92,411
865
171,294
4,639
1,963
177,896
40,634
$ 651,462
299,227
87,963
89,355
50,800
124,117
3,344
871
128,332
28,657
2002
$ 571,254
284,518
81,650
82,615
---
122,471
4,344
376
127,191
32,377
242,369
213,785
137,262
99,675
94,814
---
11,443
---
---
---
$ 94,814
$ 88,232
$ 137,262
$ 213,785
$ 242,369
0.48
$
0.44
$
0.67
$
1.03
$
1.15
$
0.45
0.42
0.65
1.01
1.13
$
$
$
$
$
$
---
0.040 $
0.113 $
0.208 $
0.570 $
199,184
210,104
208,907
215,024
202,483
210,646
206,032
212,172
206,740
211,962
Working capital
Total assets
Long-term obligations, less current
portion
Stockholders’ equity
2006
$ 509,860
2,350,596
2005
$ 768,683
1,817,554
March 31,
2004
$ 613,894
1,622,143
2003
$ 393,979
1,428,275
2002
$ 381,211
1,275,600
---
1,726,189
---
1,485,734
---
1,320,517
---
1,178,949
---
1,075,779
(1) There were no special charges during the fiscal years ended March 31, 2006 and March 31, 2002. Detailed
discussions of the special charges for the fiscal years ended March 31, 2005 and 2004 are contained in Note 2 to
the Consolidated Financial Statements. Detailed explanations of the special charges for the fiscal year ended
March 31, 2003 are provided below. The following table presents a summary of special charges for the five-year
period ended March 31, 2006:
Intellectual property settlement
Contract cancellation, severance and
other costs related to Fab 1 closure
Fab 3 impairment charge
In-process research and development
charge
2006
2005
2004
2003
2002
Year Ended March 31,
$
---
$ 21,100
$
---
$
---
$
---
---
---
---
---
---
865
---
---
41,500
---
9,300
Totals
$
---
$ 21,100
$
865
$ 50,800
$
---
---
---
---
---
(2) We changed our revenue recognition policy as it relates to Asia regional distributors during fiscal 2003. See
“Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Change in
Accounting Principle,” beginning at page 23 below, for a discussion of this change.
21
Fiscal 2003
Fab 3 Impairment Charge
During the September 2002 quarter, we recorded a $41.5 million asset impairment charge as described below.
During July 2000, we acquired a semiconductor manufacturing facility in Puyallup, Washington, referred to as Fab 3. The
original purchase consisted of semiconductor manufacturing facilities and real property. It was our intention to bring Fab 3
to productive readiness and commence volume production of 8-inch wafers using its 0.7 and 0.5 micron process technologies
by August 2001. Due to deteriorating business conditions in the semiconductor industry during fiscal 2002, we delayed the
intended production start up of Fab 3. Fab 3 has never been brought to productive readiness.
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 at that time 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. Subsequently, we retained a third-
party broker to market Fab 3 on our behalf and began actively seeking potential buyers. Accordingly, Fab 3 was classified as
an asset held-for-sale as of September 30, 2002 and maintained that classification until March 31, 2005.
Management determined the value assigned to the Fab 3 assets through various methods including assistance from a third-
party appraisal. The independent third party used the market approach and considered sales of comparable properties in
determining the fair value of Fab 3. The comparable sales included eight properties, including our purchases of Fab 3 in July
2000 and Fab 4 in August 2002. Based on the results of this appraisal, we recorded an asset impairment charge on Fab 3 of
$36.9 million, including estimated costs to sell. The remaining value of $60.2 million was classified as an asset held-for-sale
and was included as a component of other current assets until March 31, 2005.
During the quarter ended September 30, 2002, we recorded an asset impairment charge of $4.6 million to write-down certain
excess manufacturing equipment located at Fab 3 to its net realizable value of $0.2 million. This manufacturing equipment
became “excess” as a result of duplicate equipment acquired in the purchase of Fab 4. The net realizable value for the excess
manufacturing equipment was determined based on management estimates. Substantially all of the other manufacturing
equipment located at Fab 3 has been transferred to and will be used in our other wafer fabrication facilities located in Tempe,
Arizona (Fab 2) and Gresham, Oregon (Fab 4).
At March 31, 2005, we changed the classification of Fab 3 from an asset held-for-sale to an asset held-for-future-use. 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 over the next several years we will need to begin planning for future wafer
fabrication capacity as a larger percentage of Fab 4’s clean room capacity is utilized. We determined that the appropriate
action to take was to stop actively marketing the Fab 3 facility and hold it for its 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 Statement of Financial Accounting
Standards (“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. We began to depreciate the Fab 3 asset in April 2005.
PowerSmart In-Process Research and Development Charge
On June 5, 2002, we completed the acquisition of PowerSmart, Inc. in which we acquired all of PowerSmart’s outstanding
capital stock and assumed certain stock options for consideration of $54.0 million in cash plus other acquisition-related costs
of $1.2 million. The acquisition was accounted for as a purchase business combination in accordance with SFAS No. 141,
“Business Combinations”, and accordingly, the results of PowerSmart’s operations are included in our consolidated results
from the date of the acquisition. The acquisition was not considered significant under the rules and regulations of the SEC
(Rule 3-05 of Regulation S-X).
The purchase price was allocated among PowerSmart’s tangible and intangible assets, in-process research and development
and goodwill. Management determined the value assigned to the assets acquired through various methods including
assistance from a third-party appraisal. An allocation of $9.3 million of the purchase price was assigned to in-process
research and development and was written off at the date of the acquisition. The amount paid in excess of the fair value of
the net tangible assets was allocated to separately identifiable intangible assets based upon an independent valuation analysis.
22
An allocation of $5.6 million of the purchase price was made to core technology and other identifiable intangible assets and
is being amortized over an estimated useful life of seven years. An allocation of approximately $32.3 million of the purchase
price was made to goodwill. None of the goodwill is deductible for tax purposes. The goodwill related to the PowerSmart
acquisition was reduced by $0.4 million to $31.9 million in the year ended March 31, 2005 due to a favorable settlement of a
liability that was recorded as of the original acquisition date.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note Regarding Forward-looking Statements
This report, including “Item 1 – Business,” “Item 1A – Risk Factors,” and “Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains certain forward-looking statements that involve risks
and uncertainties, including statements regarding our strategy, financial performance and revenue sources. We use words
such as “anticipate,” “believe,” “plan,” “expect,” “estimate,” “future,” “intend” and similar expressions to identify forward-
looking statements. These forward-looking statements include, without limitation, statements regarding the following:
• The effects and amount of competitive pricing pressure on our product lines;
• Our ability to moderate future average selling price declines;
• The effect of product mix on gross margin;
• The amount of changes in demand for our products and those of our customers;
• The level of orders that will be received and shipped within a quarter;
• The effect that distributor and customer inventory holding patterns will have on us;
• Our belief that customers recognize our products and brand name and use distributors as an effective supply
channel;
• Our ability to increase the proprietary portion of our analog and interface product lines and the effect of such an
increase;
• The impact of any supply disruption we may experience;
• Our ability to effectively utilize our facilities at appropriate capacity levels and anticipated costs;
• That our existing facilities are adequate to respond to demand for the next 12 months;
• That manufacturing costs will be reduced by transition to advanced process technologies;
• Our ability to absorb fixed costs, labor and other direct manufacturing costs;
• Our ability to maintain manufacturing yields;
• Continuing our investments in new and enhanced products;
• The ability to attract and retain qualified personnel;
• The cost effectiveness of using our own assembly and test operations;
• Our anticipated level of capital expenditures;
• Continuing to see 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;
• That the resolution of legal actions will not harm our business;
• That the idling of assets will not impair the value of such assets;
• Our intent to pay-down short-term borrowings;
• The recoverability of our deferred tax assets;
• The adequacy of our tax reserves to offset any potential tax liabilities;
• Our belief that the expiration of any tax holidays will not have a material impact;
• The ability to obtain title to 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;
• The timing and amounts of future contractual obligations;
• The effect that expiration of any particular patent may have;
• Our ability to obtain intellectual property licenses and minimize the effects of litigation;
• The level of risk we are exposed to for product liability claims;
• The amount of labor unrest, political instability, governmental interference and changes in general economic
conditions that we experience;
23
• The effect of increases in market interest rates on income and/or cash flows; and
• The effect of fluctuations in currency rates;
Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of
certain factors including those set forth in “Item 1A – Risk Factors,” and elsewhere in this Form 10-K. Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We
disclaim any obligation to update information contained in any forward-looking statement.
Introduction
The following discussion should be read in conjunction with the condensed consolidated financial statements and the
related notes that appear elsewhere in this document, as well as with other sections of this Annual Report on Form 10-K,
including “Item 1 – Business;” “Item 6 – Selected Financial Data;” and “Item 8 – Financial Statements and Supplementary
Data.”
We begin our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a
summary of Microchip’s overall business strategy to give the reader an overview of the goals of our business and the overall
direction of our business and products. This is followed by a discussion of the Critical Accounting Policies and Estimates
that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
In the next section, beginning at page 27, we discuss our Results of Operations for fiscal 2006 compared to fiscal 2005, and
for fiscal 2005 compared to fiscal 2004. 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, and complementary microperipheral
security devices. We provide highly cost-
products including interface devices, Serial EEPROMs, and our patented KEELOQ
effective embedded control products that also offer the advantages of small size, high performance, low voltage/power
operation and ease of development, enabling timely and cost-effective embedded control product integration by our
customers.
Our manufacturing operations include wafer fabrication and assembly and test. The ownership of our manufacturing
resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control
resulting in us being one of the lowest cost producers in the embedded control industry. By owning our wafer fabrication
facilities and much of our assembly and test operations, and by employing statistical process control techniques, we have
been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten
our design and production cycles. This control also allows us to capture the wafer manufacturing and a portion of the
assembly and test profit margin.
We employ proprietary design and manufacturing processes in developing our embedded control products. We believe
our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new
product designs. While many of our competitors develop and optimize separate processes for their logic and memory
product lines, we use a common process technology for both microcontroller and non-volatile memory products. This allows
us to more fully leverage our process research and development costs and to deliver new products to market more rapidly.
Our engineers utilize advanced computer-aided design (CAD) tools and software to perform circuit design, simulation and
layout, and our in-house photomask and wafer fabrication facilities enable us to rapidly verify design techniques by
processing test wafers quickly and efficiently.
We are committed to continuing our investment in new and enhanced products, including development systems, and in
our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our
competitive position. Our current research and development activities focus on the design of new microcontrollers, digital
signal controllers, ASSPs, 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.
24
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 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, inventories, income taxes, property plant and equipment,
impairment of property, plant and equipment and assets held for sale 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 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
shipment, amounts billed to distributors are included as accounts receivable, inventory is relieved, and the sale and the gross
margin are deferred and are reflected as a current liability until the product is sold by the distributor to their customers.
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 reserves for obsolescence, we primarily evaluate
estimates of demand over a 12-month period and provide reserves for inventory on hand in excess of the estimated 12-month
demand.
25
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in
each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with
assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from future taxable income within the relevant
jurisdiction and to the extent we believe that recovery is not likely, we must establish a valuation allowance. We have not
provided for a valuation allowance because we believe that it is more likely than not that our deferred tax assets will be
recovered from future taxable income. Should we determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such
determination was made. At March 31, 2006, our gross deferred tax asset was $78.5 million.
Various taxing authorities in the United States and other countries in which we do business are increasing their scrutiny
of various 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, 1998, 1999, 2000 and 2001. As part of this
ongoing audit, the IRS has proposed certain adjustments related to positions reflected on these returns. The IRS has issued
formal assessments for these adjustments. We do not agree with these adjustments and are appealing these assessments. 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 final resolution of the pending audit through either settlement or the
appeals process with the IRS. The IRS is currently auditing our fiscal years ended March 31, 2002, 2003 and 2004. We
believe that we maintain adequate tax reserves to offset any potential tax liabilities that may arise upon these and other audits
in the United States and other countries in which we do business. If such amounts ultimately prove to be unnecessary, the
resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed
necessary. If such amounts ultimately prove to be less than an ultimate assessment, a future charge to expense would be
recorded in the period in which the assessment is determined.
Property, Plant & Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance
and repairs are expensed when incurred. At March 31, 2006, the carrying value of our property and equipment totaled $660.0
million, which represents 28.1% 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 March 31, 2006, 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.
On March 31, 2005, we changed the classification of Fab 3 from an asset held-for-sale to an asset held-for-future-use.
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 over the next several years we will need to begin planning for
future wafer fabrication capacity as a larger percentage of Fab 4’s clean room capacity is utilized. We determined that the
appropriate action to take was to stop actively marketing the Fab 3 facility and hold it for our 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. If indicators of
impairment for the Fab 3 assets arise in the future, we will determine if the sum of the estimated undiscounted cash flows
attributable to the assets in question are less than their carrying value. If less, we would recognize an impairment loss on the
26
excess of the carrying amount of the assets over their respective fair values. We began to depreciate the Fab 3 asset in April
2005.
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 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.
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 March 31, 2006.
Because of the uncertainties related to both the probability of loss and the amount and range of loss on the 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 years indicated:
Net sales
Cost of sales
Gross profit
Research and development
Selling, general and administrative
Special charges
Operating income
Net Sales
2006
100.0%
40.6%
59.4%
10.2%
14.0%
---%
35.2%
Year Ended March 31,
2005
100.0%
42.9%
57.1%
11.0%
13.1%
2.5%
30.5%
2004
100.0%
50.0%
50.0%
12.2%
13.2%
0.1%
24.5%
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 of $927.9 million in fiscal 2006 increased by $81.0 million, or 9.6%, over fiscal 2005, and net sales of
$846.9 million in fiscal 2005 increased by $147.6 million, or 21.1%, over fiscal 2004. The increases in net sales in fiscal
2006 compared to fiscal 2005 and in fiscal 2005 compared to fiscal 2004 resulted primarily from increased demand,
27
predominantly for our proprietary microcontroller and analog products. Average selling prices for our products were down
approximately 4% in fiscal 2006 over fiscal 2005 and approximately 4% in fiscal 2005 over fiscal 2004. The number of units
of our products sold was up approximately 14% in fiscal 2006 over fiscal 2005 and approximately 26% in fiscal 2005 over
fiscal 2004. The average selling prices and the unit volumes of our sales are impacted by the mix of our products sold and
overall semiconductor market conditions. We believe that we have continued to grow our percentage of market share in the
embedded control market over the last three fiscal years. Key factors in achieving the amount of net sales during the last
three fiscal years include:
•
•
•
•
•
continued market share gains
increasing semiconductor content in our customers’ products
customers’ increasing needs for the flexibility offered by our programmable solutions
our new product offerings that have increased our served available market
increasing demand for our products
We recognize revenue from product sales upon shipment to OEMs. Under our shipping terms, legal title passes to the
customer upon shipment from Microchip. We have no post shipment obligations. Distributors worldwide generally have
broad rights to return products and price protection rights, so we defer revenue recognition until the distributors sell the
product to their customers. Upon shipment, amounts billed to distributors are included in accounts receivable, inventory is
relieved, the sale is deferred and the gross margin is reflected as a current liability until the product is sold by the distributors
to their customers.
Sales by product line for the fiscal years ended March 31, 2006, 2005 and 2004 were as follows (dollars in thousands):
2006
%
2005
%
2004
%
Year Ended March 31,
Microcontrollers
Memory products
Analog and interface products
$ 736,179
125,335
66,379
79.3
13.5
7.2
$ 674,902
115,120
56,914
79.7
13.6
6.7
$ 556,764
91,640
50,856
79.6
13.1
7.3
Total Sales
$ 927,893
100.0% $ 846,936
100.0%
$ 699,260
100.0%
Microcontrollers
Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and associated
application development systems accounted for approximately 79.3% of our total net sales in fiscal 2006, approximately
79.7% of our total net sales in fiscal 2005 and approximately 79.6% of our total net sales in fiscal 2004.
Net sales of our microcontroller products increased approximately 9.1% in fiscal 2006 compared to fiscal 2005, and
increased approximately 21.2% in fiscal 2005 compared to fiscal 2004. The increases in net sales were primarily due to
increased demand for our microcontroller products in end markets, driven principally by market share gains and those factors
described above under “Net Sales” at page 27. The end markets that we serve include the automotive, communications,
computing, consumer and industrial control markets.
Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. The
overall average selling prices of our microcontroller products have remained relatively constant over time due to the
proprietary nature of these products. We have experienced, and expect to continue to experience, moderate pricing pressure
in certain microcontroller product lines, primarily due to competitive conditions. We have in the past been able to, and
expect in the future to be able to, moderate average selling price declines in our microcontroller product lines by introducing
new products with more features and higher prices. We may be unable to maintain average selling prices for our
microcontroller products as a result of increased pricing pressure in the future, which could adversely affect our operating
results.
Memory Products
Sales of our memory products accounted for approximately 13.5% of our total net sales in fiscal 2006, approximately
13.6% of our total net sales in fiscal 2005 and approximately 13.1% of our total net sales in fiscal 2004.
28
Net sales of our memory products increased approximately 8.9% in fiscal 2006 compared to fiscal 2005, and increased
approximately 25.6% in fiscal 2005 compared to fiscal 2004, driven primarily by customer demand conditions within the
Serial EEPROM market, which products comprise substantially all of our memory product net sales.
Serial EEPROM product pricing has historically been cyclical in nature, with steep price declines followed by periods of
relative price stability, driven by changes in industry capacity at different stages of the business cycle. We have experienced,
and expect to continue to experience, varying degrees of competitive pricing pressures in our Serial EEPROM products. We
may be unable to maintain the average selling prices of our Serial EEPROM products as a result of increased pricing pressure
in the future, which could adversely affect our operating results.
Analog and Interface Products
Sales of our analog and interface products accounted for approximately 7.2% of our total net sales in fiscal 2006, 6.7%
of our total net sales in fiscal 2005 and approximately 7.3% of our total net sales in fiscal 2004.
Net sales of our analog and interface products increased approximately 16.6% in fiscal 2006 compared to fiscal 2005 and
increased approximately 11.9% in fiscal 2005 compared to fiscal 2004. The increase in net sales of our analog and interface
products in these periods were driven primarily by new proprietary design wins, supply and demand conditions within the
market and our ability to gain market share.
Analog and interface products can be proprietary or non-proprietary in nature. Currently, we consider more than half of
our analog and interface product mix to be proprietary in nature, where prices are relatively stable, similar to the pricing
stability experienced in our microcontroller products. The non-proprietary portion of our analog and interface business will
experience price fluctuations, driven primarily by the current supply and demand for those products. We may be unable to
maintain the average selling prices of our analog and interface products as a result of increased pricing pressure in the future,
which could adversely affect our operating results. We anticipate the proprietary portion of our analog and interface products
will increase over time.
Distribution
Distributors accounted for 65% of our net sales in fiscal 2006 and fiscal 2005, and 64% of our net sales in fiscal 2004.
Our largest distributor accounted for approximately 14% of our net sales in fiscal 2006, and approximately 13% of our
net sales in fiscal 2005 and fiscal 2004. Our two largest distributors together accounted for 25% of our net sales in fiscal
2006, fiscal 2005 and fiscal 2004.
Generally, we do not have long-term agreements with our distributors and we, or our distributors, may terminate their
relationships with us with little or no advanced notice. The loss of, or the disruption in the operations of, one or more of our
distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.
At March 31, 2006, distributors were maintaining an average of approximately 2.0 months of inventory of our products.
Over the past three fiscal years, the months of inventory maintained by our distributors have fluctuated between
approximately 2.0 months and 2.5 months. Thus, inventory levels at our distributors are at the low end of the range we have
experienced over the last three years. We do not believe that inventory holding patterns at our distributors will materially
impact our net sales, due to the fact that we recognize revenue based on sell through for all of our distributors.
Distributors generally have broad-based rights to return product to us. As revenue on distributor shipments is not
recognized until the distributors sell our product on to their end customers, distributor returns have no impact on revenue
recognition.
We also grant certain credits to our distributors and also offer these distributors price protection. The credits are granted
to the distributors on specifically 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 information regarding the sale to their end customer. The effect of granting these credits
establishes the net selling price from us to our distributors for the products and results in the net revenue recognized by us
when the product is sold by the distributors to their end 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
29
offered. When we reduce the selling price of our products, it allows the distributors to claim a credit against its outstanding
accounts receivables 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 recognition impact from the price protection.
We do not offer material incentive programs to our distributors.
Sales by Geography
Sales by geography for the fiscal years ended March 31, 2006, 2005 and 2004 were as follows (dollars in thousands):
Year Ended March 31,
Americas
Europe
Asia
2006
$ 266,353
255,367
406,173
%
28.7
27.5
43.8
2005
$ 248,881
232,493
365,562
%
29.4
27.4
43.2
2004
$ 219,641
194,187
285,432
%
31.4
27.8
40.8
Total Sales
$ 927,893
100.0%
$ 846,936
100.0%
$ 699,260
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 increased during the last three fiscal years due to many of our customers transitioning their manufacturing
operations to Asia and growth in demand from the emerging Asian market.
Sales to foreign customers accounted for approximately 74% of our net sales in fiscal 2006, 73% of our net sales in fiscal
2005, and 71% of our net sales in fiscal 2004. Substantially all of our foreign sales are U.S. dollar denominated.
Sales to customers in China, including Hong Kong, accounted for approximately 17% of our net sales in fiscal 2006 and
fiscal 2005 and approximately 14% of our net sales in fiscal 2004. Sales to customers in Taiwan accounted for
approximately 10% of our net sales in fiscal 2006 and fiscal 2005. We did not have sales into any other countries that
exceeded 10% of our net sales during the last three fiscal years.
Gross Profit
Our gross profit was $550.9 million in fiscal 2006, $484.0 million in fiscal 2005 and $350.0 million in fiscal 2004.
Gross profit as a percent of sales was 59.4% in fiscal 2006, 57.1% in fiscal 2005 and 50.0% in fiscal 2004.
The most significant factors affecting gross profit percentage over the past three fiscal years were:
•
•
Improvements in capacity utilization and product absorption, which positively affected gross margin by
$23.0 million in fiscal 2006 compared to fiscal 2005, and by $11.8 million in fiscal 2005 compared to fiscal
2004.
$31.8 million in accelerated depreciation and other costs associated with the closure of Fab 1, which negatively
affected gross margin in fiscal 2004.
• Changes in period cost of sales in Fab 3 and Fab 4, our non-operational facilities at certain times during the last
three fiscal years, which impact gross margin. Period cost of sales amounted to $5.6 million in fiscal 2006, $3.3
million in fiscal 2005 and $18.1 million in fiscal 2004.
• A one-week unpaid shutdown negatively affecting gross profit by $1.7 million in fiscal 2004. The shutdown
occurred in the three months ended September 30, 2003 and had a negative impact on gross profit due to the
fact that certain fixed costs including depreciation, utilities, property taxes and other ongoing costs continued
when the factory was shut down. There were no shutdowns in fiscal 2006 or fiscal 2005.
Other factors that impacted gross profit percentage in the periods covered by this report include:
•
•
continued cost reductions in wafer fabrication and assembly and test manufacturing such as new manufacturing
technologies and more efficient manufacturing techniques
factors impacting the average selling prices of our products
30
•
•
fluctuations in the product mix of proprietary microcontroller and analog products and related Serial EEPROM
products, and
inventory write-offs and the sale of inventory that was previously written off.
During fiscal 2006, we operated at approximately 98% of our Fab 2 capacity, which favorably impacted gross margins
compared to fiscal 2005. During fiscal 2005, we operated at approximately 96% of our Fab 2 capacity, which favorably
impacted gross margins compared to fiscal 2004. Our utilization of Fab 4’s total capacity is at relatively low levels although
we are utilizing all of the installed equipment base. We expect to maintain the current level of capacity utilization at Fab 2
and Fab 4 during the first quarter of fiscal 2007.
The process technologies utilized impact our gross margins. Fab 2 currently utilizes various manufacturing process
technologies, but predominantly utilizes our 0.5 to 1.0 micron processes. At March 31, 2006, 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. Since the closure of Fab 1 in June 2003, all of our production has been on 8-inch wafers. The
first quarter of fiscal 2004, approximately 80% of our production was on 8-inch wafers.
Our overall inventory levels were $115.0 million at March 31, 2006, compared to $103.7 million at March 31, 2005 and
$94.5 million at March 31, 2004. We maintained 106 days of inventory on our balance sheet at March 31, 2006 compared to
107 days of inventory at March 31, 2005 and 101 days at March 31, 2004.
We anticipate that our gross margins will fluctuate over time, driven primarily by the overall product mix of
microcontroller, analog and interface and memory products and the percentage of net sales of each of these products in a
particular quarter, as well as manufacturing yields, fixed cost absorption, capacity utilization levels, particularly those at
Fab 4, and competitive and economic conditions.
At March 31, 2006, approximately 66% of our assembly requirements were performed in our Thailand facility,
compared to approximately 70% as of March 31, 2005 and approximately 71% at March 31, 2004. Contractors located in
Asia perform the balance of our assembly operations. Substantially all of our test requirements were performed in our
Thailand facility over the last three fiscal years. We believe that the assembly and test operations performed at our Thailand
facility provide us with significant cost savings when compared to contractor assembly and test costs, as well as increased
control over these portions of the manufacturing process.
We rely on outside wafer foundries for a small portion of our wafer fabrication requirements.
Research and Development (R&D)
R&D expenses for fiscal 2006 were $94.9 million, or 10.2% of sales, compared to $93.0 million, or 11.0% of sales, for
fiscal 2005 and $85.4 million, or 12.2% of sales, for fiscal 2004. 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 expenditures for 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 $1.9 million, or 2.0%, for fiscal 2006 over fiscal 2005. The primary reasons for the dollar
increase in R&D costs in fiscal 2006 compared to fiscal 2005 was higher labor and recruitment costs as a result of expanding
our technical resources and increases in bonuses. R&D expenses increased $7.6 million, or 9.0%, for fiscal 2005 over fiscal
2004. The primary reasons for the dollar increase in R&D costs in fiscal 2005 compared to fiscal 2004 was higher labor
costs as a result of expanding our technical resources and increasing bonuses.
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2006 were $129.6 million, or 14.0% of sales, compared to $111.2
million, or 13.1% of sales, for fiscal 2005, and $92.4 million, or 13.2% of sales, for fiscal 2004. 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.
31
Selling, general and administrative expenses increased $18.4 million, or 16.5%, for fiscal 2006 over fiscal 2005. The
primary reasons for the dollar increases in selling, general and administrative expenses in fiscal 2006 over fiscal 2005 were
higher labor costs as a result of expanding our internal resources, increases in bonuses and increases in travel expenses.
Selling, general and administrative expenses increased $18.8 million, or 20.3%, for fiscal 2005 over fiscal 2004. The primary
reasons for the dollar increase in selling, general and administrative expenses in fiscal 2005 over fiscal 2004 were higher
labor costs as a result of expanding our internal resources, increases in bonuses, increases in travel expenses and increases in
audit and legal services.
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense
investment levels.
Special Charges
The following table presents a summary of special charges for the fiscal years ended March 31, 2005 and 2004 (dollars
in thousands).
Year Ended March 31,
2004
2005
Patent license settlement
Contract cancellation, severance and
other costs related to Fab 1 closure
$
21,100
$
---
Totals
$
21,100
$
---
865
865
There were no special charges in fiscal 2006.
Fiscal 2005
Settlement with U.S. Philips Corporation
In fiscal 2005, we reached an agreement with U.S. Philips Corporation and Philips Electronics North America Corp.
(together “Philips”) regarding patent license litigation between Philips and ourselves. The agreement included dismissal of
the then pending litigation and the cross-license of certain patents between Philips and Microchip. We recorded a special
charge of $21.1 million in the quarter ended June 30, 2004 associated with this matter. As part of the settlement, we licensed
certain of our patents related to 8-pin microcontrollers to Philips, and Philips licensed its patents related to I2C serial
communications to us, each on fully-paid up, non-royalty bearing worldwide licenses. The definitive agreement related to
this matter was finalized and executed, and we made a cash payment to Philips during our fiscal quarter ending September
30, 2004.
Fiscal 2004
Fab 1 Closure and Special Charges
On April 7, 2003, we announced our intention to close our Chandler, Arizona (Fab 1) wafer fabrication facility and
integrate certain Fab 1 personnel and processes into our Tempe, Arizona (Fab 2) wafer fabrication facility. We completed
this integration process during the three-month period ended June 30, 2003. The closure of Fab 1 and the integration of
certain Fab 1 personnel into Fab 2 operations resulted in a reduction in force of 207 employees who were either directly
involved in our manufacturing operations or provided support to Fab 1. The detail of the charges incurred related to the
closure of Fab 1 that were included in cost of sales for the three-month period ended June 30, 2003 is as follows (amounts in
thousands):
32
Accelerated depreciation for Fab 1
Fab 1 related charges including severance,
material and other costs
$
30,608
1,147
Total charges in cost of sales
$
31,755
For the quarter ended June 30, 2003, operating expense included $1,612,000 of special charges recorded principally for
contract cancellation, severance and other costs related to the closure of Fab 1 and other actions. We incurred $865,000 of
such expenditures during fiscal 2004. We reversed $747,000 of the special charges recorded in the quarter ended June 30,
2003 in the quarter ended December 31, 2003 as a result of a favorable outcome in the settlement of a contract cancellation.
The facility where Fab 1 is located is an integral part of our overall campus in Chandler, Arizona. Within this same
facility resides our wafer probe, mask making and other manufacturing related activities. The accelerated depreciation that
was taken only related to assets used in the wafer fabrication operations at the facility. The property, plant and equipment
that was subject to the accelerated depreciation is reflected in the gross and accumulated depreciation carrying values in the
property, plant and equipment section of our balance sheet and related footnote disclosures.
Other Income (Expense)
Interest income in fiscal 2006 increased from interest income in fiscal 2005 as our average invested balances were at
higher levels in fiscal 2006 compared to fiscal 2005, and we earned a higher interest rate on our invested balances. Interest
income in fiscal 2005 increased from interest income in fiscal 2004 as our average invested balances were at higher levels in
fiscal 2005 compared to fiscal 2004, and we extended the average maturity term of our invested balances and thus earned a
higher interest rate on our invested balances.
Provision for Income Taxes
Provisions for income taxes reflect tax on our foreign earnings and federal and state tax on our U.S. earnings. Our
effective tax rate was 32.5% in fiscal 2006, 22.9% in fiscal 2005 and 22.8% in fiscal 2004, and is lower than statutory rates in
the United States due primarily to lower tax rates at our foreign locations, R&D tax credits and export sales incentives. Our
effective tax rate in fiscal 2006 reflects a $30.6 million tax expense related to the repatriation of $500 million of foreign
earnings under the American Jobs Creation Act (the “Jobs Act”) that was effective for the third quarter of fiscal 2006 which
increased our effective tax rate in fiscal 2006 by 8.5%.
Various taxing authorities in the United States and other countries in which we do business are increasing their scrutiny
of various tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing
authorities in the jurisdictions in which they conduct significant operations. We are currently under audit by the IRS for our
fiscal years ended March 31, 1998, 1999, 2000 and 2001. As part of this ongoing audit, the IRS has proposed certain
adjustments related to positions reflected on these returns. The IRS has issued formal assessments for these adjustments. We
do not agree with these adjustments and are appealing these assessments. 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 final resolution of the pending audit through either settlement or the appeals process with the IRS. The IRS
recently began an audit of our fiscal years ended March 31, 2002, 2003 and 2004. We believe that we maintain adequate tax
reserves to offset any potential tax liabilities that may arise upon these and other audits in the United States and other
countries in which we do business. If such amounts ultimately prove to be unnecessary, the resulting reversal of such
reserves would result in tax benefits being recorded in the period the reserves are no longer deemed necessary. If such
amounts ultimately prove to be less than any final assessment, a future charge to expense would be recorded in the period in
which the assessment is determined.
Our Thailand manufacturing operations currently benefit from numerous tax holidays that have been granted to us by the
Thailand government based on our investments in property, plant and equipment in Thailand. Our tax holiday periods in
Thailand expire at various times beginning in September 2006. We do not expect the future expiration of any of our tax
holiday periods in Thailand to have a material impact on our overall tax expense due to other tax holidays and an increase in
income in other taxing jurisdictions with lower statutory rates.
33
Liquidity and Capital Resources
We had $1,285.1 million in cash, cash equivalents and short-term and long-term investments at March 31, 2006, an
increase of $550.5 million from the March 31, 2005 balance. The increase in cash, cash equivalents and short-term and long-
term investments over this time period is primarily attributable to our cash flows generated from operations and, to a lesser
extent, from increases in short-term borrowings.
Net cash provided from operating activities was $437.3 million for fiscal 2006, $352.7 million for fiscal 2005 and $343.1
million for fiscal 2004. The increase in cash flow from operations was primarily due to increases in net income and changes
in accounts payable and accrued liabilities.
Net cash used in investing activities was $136.6 million for fiscal 2006, $370.7 million for fiscal 2005 and
$267.6 million in fiscal 2004. The decrease in cash used in investing activities in fiscal 2006 over fiscal 2005 was primarily
due to changes in our net purchases, sales and maturities of investments. The increase in cash used in investing activities in
fiscal 2005 over fiscal 2004 was due to changes in our net purchases, sales and maturities of investments.
Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.
Capital expenditures were $76.3 million in fiscal 2006, $63.2 million in fiscal 2005 and $63.5 million in fiscal 2004. The
primary reasons for the dollar increase in capital expenditures in fiscal 2006 over fiscal 2005 was to fund capital expansion
activities in our manufacturing operations. We currently intend to spend approximately $80 million during the next 12
months to invest in equipment and facilities to maintain, and selectively increase, capacity to meet our currently anticipated
needs.
We expect to finance capital expenditures through our existing cash balances and cash flows from operations. We
believe that the capital expenditures anticipated to be incurred over the next 12 months will provide sufficient manufacturing
capacity to meet our currently anticipated needs.
Net cash provided by financing activities was $195.8 million for fiscal 2006. Net cash used in financing activities was
$18.6 million for fiscal 2005 and $24.0 million for fiscal 2004. Proceeds from the sale of stock, the exercise of stock options
and employee purchases under our employee stock purchase plan were $95.8 million for fiscal 2006, $47.2 million for fiscal
2005 and $53.2 million for fiscal 2004. Cash expended for the repurchase of our common stock was $3.3 million in fiscal
2006, $68.3 million in fiscal 2005 and $53.9 million in fiscal 2004. We had short-term borrowings of $269.0 million at
March 31, 2006 and $45.5 million at March 31, 2005. The short-term borrowings of $269.0 million at March 31, 2006 relate
to transactions associated with the repatriation of foreign earnings under the Jobs Act. During fiscal 2006, we paid down
$45.5 million in short-term borrowings and initiated new borrowings of $269.0 million. To complete the repatriation of $500
million, we initiated the $269.0 million in borrowings, which were collateralized against investments that are held in the
foreign locations, allowing the investments to reach their normal maturity date. We presently intend to pay down the short-
term borrowings as those investments mature and new cash is generated in the foreign locations. The short-term debt is a
result of repurchase agreements that are in place with two investment firms.
On March 11, 2004, our Board of Directors authorized the repurchase of 2,500,000 shares of our common stock in the
open market or in privately negotiated transactions. As of March 31, 2006, we had repurchased the entire 2,500,000 common
shares under this authorization for a total of $66.1 million. On April 22, 2004, our Board of Directors authorized the
repurchase of up to an additional 2,500,000 shares of our common stock in the open market or in privately negotiated
transactions. As of March 31, 2006, we had repurchased 1,004,834 common shares under this authorization for a total of
$26.6 million. As of March 31, 2006, all of the purchased shares under both authorizations had been reissued to fund stock
option exercises and purchases under our employee stock purchase plan. The timing and amount of any future repurchases
will depend upon market conditions and corporate considerations.
On October 28, 2002, we announced that our Board of Directors had approved and instituted a quarterly cash dividend
on our common stock. The initial quarterly dividend of $0.02 per share was paid on December 6, 2003 in the amount of
$4.0 million. We have continued to pay quarterly dividends and have increased the amount of such dividends on a regular
basis. During fiscal 2004, we paid dividends in the amount of $0.113 per share for a total dividend payment of $23.3 million.
During fiscal 2005, we paid dividends in the amount of $0.208 per share for a total dividend payment of $43.0 million.
During fiscal 2006, we paid dividends in the amount of $0.57 per share for a total dividend payment of $120.1 million. On
April 25, 2006, we declared a quarterly cash dividend of $0.215 per share, which was paid on May 23, 2006, to stockholders
of record on May 9, 2006 and the total amount of such dividend was $46.0 million. Our Board is free to change its dividend
practices at any time and to decrease or increase the dividend paid, or not to pay a dividend, on our common stock on the
basis of our results of operations, financial condition, cash requirements and future prospects, and other factors deemed
34
relevant by our Board. Our current intent is to provide for ongoing quarterly cash dividends depending upon market
conditions and our results of operations.
We enter into hedging transactions from time to time in an attempt to minimize our exposure to currency rate
fluctuations. Although none of the countries in which we conduct significant foreign operations have had a highly
inflationary economy in the last five years, there is no assurance that inflation rates or fluctuations in foreign currency rates in
countries where we conduct operations will not adversely affect our operating results in the future. The hedging transactions
outstanding at March 31, 2006 were immaterial.
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 March 31, 2006, and the effect such
obligations are expected to have on our liquidity and cash flows in future periods. This table excludes amounts already
recorded on our balance sheet as current liabilities at March 31, 2006 (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
Capital purchase obligations (1)
Other purchase obligations and
commitments (2)
Long-term debt obligations
$
9,531
31,553
$
4,114
31,553
$
2,576
---
1,140
---
4,195
---
1,218
---
$
1,222
---
$
218
---
Total contractual obligations (3)
$ 43,660
$ 36,807
$
5,413
$
1,440
$
---
---
---
---
---
(1) Capital purchase obligations represent commitments for construction or purchases of property, plant and
equipment. They are not recorded as liabilities on our balance sheet as of March 31, 2006, 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) 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.
35
The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of
payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to
agreed-upon amounts for some obligations.
Off-Balance Sheet Arrangements
As of March 31, 2006, we are not involved in any off-balance sheet arrangements, as defined in Item 3(a)(4)(ii) of SEC
Regulation S-K.
Recently Issued Accounting Pronouncements
During December 2004, the FASB issued SFAS No. 123 (Revised 2004) (“SFAS No. 123R”), Share-Based Payment, a
revision of SFAS No. 123 and supersedes APB Opinion No. 25 and its related implementation guidance. The Statement
focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide service in exchange for the award. On March 29,
2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), which provides the Staff’s views regarding
interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of
share-based payments for public companies.
SFAS No. 123R permits public companies to adopt its requirements using one of two methods:
(1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based
on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain
unvested on the effective date.
(2) A “modified retrospective” method which includes the requirements of the modified prospective method described
above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro
forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
This statement is effective for the beginning of the first annual reporting period that begins after June 15, 2005.
Therefore, we will adopt the standard effective April 1, 2006 using the modified prospective method. As permitted by SFAS
No. 123, we currently account for share-based payments to employees using the intrinsic value method prescribed in APB
No. 25 and, as such, generally recognize no compensation cost for employee stock options. Although we have not completed
our assessment, we believe the impact on our consolidated financial position or results or operations will be material given
the current number of outstanding stock options. The effect on our results of operations of expensing stock options using the
Black-Scholes-Merton method is presented in the disclosure of pro forma net income and earnings per share in Note 1. SFAS
No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing
cash flow, rather than as an operating cash flow as required under current literature. The standard also requires that tax
benefits must be realized through a reduction of income taxes that would otherwise have been paid before the benefit can be
recorded. This requirement will reduce net operating cash flows and may increase net financing cash flows in periods after
adoption. We cannot estimate what those amounts will be in the future because they depend on, among other things, the form
of equity compensation, the number of grants and when employees exercise stock options.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio, consisting of fixed income securities and money market funds that we hold on an available-for-
sale basis, was $1,285.1 million as of March 31, 2006, and $728.7 million as of March 31, 2005. These securities, like all
fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. We have
the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize any material
adverse impact in income or cash flows if market interest rates increase. The following table provides information about our
available-for-sale securities that are sensitive to changes in interest rates. We have aggregated our available-for-sale
securities for presentation purposes since they are all very similar in nature (dollars in thousands):
36
Financial instruments mature during the fiscal year ended March 31,
2007
2008
2009
2010
2011
Thereafter
Available-for-sale securities
$ 76,860
$ 113,473
$ 201,261
$ 205,626
$
Weighted-average yield rate
3.82%
3.38%
3.81%
4.20%
---
---
$ 122,631
4.45%
We have international operations and are thus subject to foreign currency rate fluctuations. To date, our exposure related
to exchange rate volatility has not been significant. Approximately 99% of our sales are denominated in U.S. dollars. We
maintain hedges related to our foreign currency exposure of our net investment in a foreign operation as needed. There were
no hedges outstanding as of March 31, 2005. The amounts of the hedges outstanding as of March 31, 2006 and March 31,
2004 were immaterial. If foreign currency rates fluctuate by 15% from the rates at March 31, 2006 and March 31, 2005, the
effect on our financial position and results of operation would not be material.
During the normal course of business we are routinely subjected to a variety of market risks, examples of which include,
but are not limited to, interest rate movements and foreign currency fluctuations, as we discuss in this Item 7A, and
collectability of accounts receivable. We continuously assess these risks and have established policies and procedures to
protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses
in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements listed in the index appearing under Item 15(a)(1) hereof are filed as part of this
Form 10-K. See also Index to Financial Statements, below.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K, as required by paragraph (b) of Rule 13a-15 or
Rule 15d-15 under the Securities Exchange Act of 1934, as amended, we evaluated under the supervision of our Chief
Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to
ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of
1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange
Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our
disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and
communicated to our management. Our disclosure controls and procedures include components of our internal control over
financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is
expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can
provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to
provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
37
management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial
statements.
Management assessed our internal control over financial reporting as of March 31, 2006, the end of our fiscal year.
Management based its assessment on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of
such elements as the design and operating effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed
by our finance organization.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as
of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We
reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Our independent registered public accounting firm, Ernst & Young LLP, who also audited the Company’s consolidated
financial statements, audited management’s assessment and independently assessed the effectiveness of our internal control
over financial reporting. Ernst & Young LLP has issued their attestation report, which is included in Part II, Item 9A of this
Form 10-K.
Changes in Internal Control over Financial Reporting.
During the three months ended March 31, 2006, 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.
[Remainder of page intentionally left blank.]
38
r Ernst & Young LLP
Ernst & Young Tower
One Renaissance Square
2 North Central Avenue
Suite 2300
Phoenix, Arizona 85004
r Phone: 602 322 3000
www.ey.com
Attestation Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Microchip Technology Incorporated and subsidiaries
We have audited management’s assessment, included in the accompanying Management Report on Internal Control
Over Financial Reporting, that Microchip Technology Incorporated and subsidiaries maintained effective internal
control over financial reporting as of March 31, 2006, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Microchip Technology Incorporated’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that Microchip Technology Incorporated maintained effective internal
control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Microchip Technology Incorporated maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the March 31, 2006 consolidated financial statements of Microchip Technology Incorporated and our report
dated May 17, 2006 expressed an unqualified opinion thereon.
ey
May 17, 2006
A Member Practice of Ernst & Young Global
39
Item 9B.
OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the members of our Board of Directors is incorporated herein by reference to our proxy statement for the
2006 annual meeting of stockholders under the captions “The Board of Directors,” and “Proposal One – Election of
Directors.”
Information on the composition of our audit committee and the members of our audit committee, including information
on our audit committee financial experts, is incorporated by reference to our proxy statement for our 2006 annual meeting of
stockholders under the caption “The Board of Directors – Committees of the Board of Directors – Audit Committee.”
Information on our executive officers is provided in Item 1, Part I of this Form 10-K under the caption “Executive
Officers” at page 11, above.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is
incorporated herein by reference to our proxy statement for our 2006 annual meeting of stockholders under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance.”
Information with respect to our code of ethics that applies to our directors, executive officers (including our principal
executive officer and our principal financial and accounting officer) and employees is incorporated by reference to our proxy
statement for our 2006 annual meeting of stockholders under the caption “Code of Ethics.” A copy of the Code of Ethics is
available on our website at the Investor Relations section under Mission Statement/Corporate Governance on
www.microchip.com.
40
Item 11.
EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to the information under the
caption “Executive Compensation” in our proxy statement for our 2006 annual meeting of stockholders.
Information with respect to director compensation is incorporated herein by reference to the information under the
caption “The Board of Directors – Director Compensation” in our proxy statement for our 2006 annual meeting of
stockholders.
Information with respect to compensation committee interlocks and insider participation in compensation decisions is
incorporated herein by reference to the information under the caption “The Board of Directors – Compensation Committee
Interlocks and Insider Participation” in our proxy statement for our 2006 annual meeting of stockholders.
Our Board compensation committee report on executive compensation is incorporated herein by reference to the
information under the caption “Executive Compensation – Compensation Committee Report on Executive Compensation” in
our proxy statement for our 2006 annual meeting of stockholders.
Information with respect to changes in our cumulative shareholder return on our common stock is incorporated herein by
reference to the information under the caption “Performance Graph” in our proxy statement for our 2006 annual meeting of
stockholders.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to securities authorized for issuance under our equity compensation plans is incorporated herein
by reference to the information under the caption “Executive Compensation – Equity Compensation Plan Information” in our
proxy statement for our 2006 annual meeting of stockholders.
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by
reference to the information under the caption “Security Ownership of Principal Stockholders, Directors and Executive
Officers” in our proxy statement for our 2006 annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item related to principal accountant fees and services as well as related pre-approval
policies is incorporated by reference to the information under the caption “Independent Registered Public Accounting Firm”
contained in our proxy statement for our 2006 annual meeting of stockholders.
[Remainder of page intentionally left blank.]
41
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K:
PART IV
(1)
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2006 and 2005
Consolidated Statements of Income for each of the three years in the
period ended March 31, 2006
Consolidated Statements of Cash Flows for each of the three years in the
period ended March 31, 2006
Consolidated Statements of Stockholders’ Equity for each of the three years in the
period ended March 31, 2006
Notes to Consolidated Financial Statements
(2)
(3)
Financial Statement Schedules – Applicable schedules have been omitted because
information is included in the footnotes to the Financial Statements.
The Exhibits filed with this Form 10-K or incorporated herein by reference are set
forth in the Exhibit Index appearing on page E-1 hereof, which Exhibit Index is
incorporated herein by this reference.
Page No.
F-1
F-2
F-3
F-4
F-5
F-6
E-1
(b)
See Item 15(a)(3) above.
(c)
See “Index to Financial Statements” included under Item 8 to this Form 10-K.
42
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
MICROCHIP TECHNOLOGY INCORPORATED
(Registrant)
By: /s/ Steve Sanghi
Steve Sanghi
President and Chief Executive Officer
Date May 31, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature
Title
Date
/s/ Steve Sanghi
Steve Sanghi
Director, President and
Chief Executive Officer
/s/ Albert J. Hugo-Martinez
Albert J. Hugo-Martinez
/s/ L.B. Day
L.B. Day
/s/ Matthew W. Chapman
Matthew W. Chapman
/s/ Wade F. Meyercord
Wade F. Meyercord
/s/ Gordon W. Parnell
Gordon W. Parnell
Director
Director
Director
Director
Vice President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
May 31, 2006
May 31, 2006
May 31, 2006
May 31, 2006
May 31, 2006
May 31, 2006
43
Exhibit
Number
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
Incorporated by Reference
2.1
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Purchase and Sale Agreement, dated as of July 18,
2002 between Registrant and Fujitsu
Microelectronics, Inc.
Restated Certificate of Incorporation of Registrant
Amended and Restated By-Laws of Registrant, as
amended through August 16, 2002
Amended and Restated Preferred Shares Rights
Agreement, dated as of October 11, 1999, between
Registrant and Norwest Bank Minnesota, N.A.,
including the Amended Certificate of Designations,
the form of Rights Certificate and the Summary of
Rights, attached as exhibits thereto
Form of Indemnification Agreement between
Registrant and its directors and certain of its officers
*Microchip Technology 2004 Equity Incentive Plan,
effective October 2, 2004
*Form of Notice of Grant for 2004 Equity Incentive
Plan (including Exhibit A Stock Option Agreement)
*Form of Notice of Grant (foreign) for 2004 Equity
Incentive Plan (including Exhibit A Stock Option
Agreement (foreign)
*Form of Notice of Grant of Restricted Stock Units
for 2004 Equity Incentive Plan (including Exhibit A
Restricted Stock Units Agreement)
*Form of Notice of Grant of Restricted Stock Units
for 2004 Equity Incentive Plan (including Exhibit A
Restricted Stock Units Agreement)
*1993 Stock Option Plan, as Amended through
August 16, 2002
*Form of Notice of Grant For 1993 Stock Option
Plan, with Exhibit A thereto, Form of Stock Option
Agreement; and Exhibit B thereto, Form of Stock
Purchase Agreement
*2001 Employee Stock Purchase Plan as Amended
through August 15, 2003 (including Enrollment
Form, Stock Purchase Agreement and Change Form)
*1997 Nonstatutory Stock Option Plan, as Amended
Through March 3, 2003
*Form of Notice of Grant For 1997 Nonstatutory
Stock Option Plan, with Exhibit A thereto, Form of
Stock Option Agreement
10.12
International Employee Stock Purchase Plan as
Amended Through May 1, 2006
E-1
8-K
000-21184
2.1
7/18/02
10-Q
10-Q
000-21184
000-21184
3.1
3.2
11/12/02
11/12/02
8-K
000-21184
4.1
10/12/99
S-1
33-57960
10.1
2/5/93
S-8
333-119939
4.4
10/25/04
S-8
333-119939
4.5
10/25/04
10-K
000-21184
10.4
5/23/05
10-K
000-21184
10.5
5/23/05
10-Q
000-21184
10.1
11/12/02
S-8
333-872
10.6
1/23/96
10-K
000-21184
10.13
6/5/03
10-K
000-21184
10.17
5/27/98
X
X
X
Exhibit
Number
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
10.13 Microchip Technology Inc. Stock Purchase
S-8
333-119939
4.2
10/25/04
Incorporated by Reference
Agreement for the International Employee Stock
Purchase Plan (including attached Form of
Enrollment Form)
*Description of Registrant’s Management Incentive
Compensation Plan
TelCom Semiconductor, Inc. 1994 Stock Option
Plan and forms of agreements thereunder
TelCom Semiconductor, Inc. 2000 Nonstatutory
Stock Option Plan and forms of agreements used
thereunder
PowerSmart, Inc. 1998 Stock Incentive Plan,
Including Forms of Incentive Stock Option
Agreement and Nonqualified Stock Option
Agreement
*February 3, 2003 Amendment to the Adoption
Agreement to the Microchip Technology
Incorporated Supplemental Retirement Plan
*Amendment dated August 29, 2001 to the
Microchip Technology Incorporated Supplemental
Retirement Plan
*Amendment Dated December 9, 1999 to the
Adoption Agreement to the Microchip Technology
Incorporated Supplemental Retirement Plan
*Adoption Agreement to the Microchip Technology
Incorporated Supplemental Retirement Plan dated
January 1, 1997
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10-Q
000-21184
10.1
8/9/02
S-8
333-53876
4.1
1/18/01
S-8
333-53876
4.4
1/18/01
S-8
333-96791
4.1
7/19/02
10-K
000-21184
10.28
6/5/03
S-8
333-101696
4.1.2
12/6/02
S-8
333-101696
4.1.4
12/6/02
S-8
333-101696
4.1.3
12/6/02
10.22
*Microchip Technology Incorporated Supplemental
Retirement Plan
S-8
333-101696
4.1.1
12/6/02
10.23
*Amendments to Supplemental Retirement Plan
10-Q
000-21184
10.24
*Form of Executive Officer Severance Agreement
S-8
333-872
10-Q
000-21184
10.1
10.7
10.1
2/9/06
1/23/96
2/13/98
10.25
10.26
10.27
10.28
Development Agreement dated as of August 29,
1997 by and between Registrant and the City of
Chandler, Arizona
Addendum to Development Agreement by and
between Registrant and the City of Tempe, Arizona,
dated May 11, 2000
Development Agreement dated as of July 17, 1997
by and between Registrant and the City of Tempe,
Arizona
Strategic Investment Program Contract dated as of
August 15, 2002 by and between Registrant,
Multnomah County, Oregon and City of Gresham,
Oregon
10-K
000-21184
10.14
5/15/01
10-Q
000-21184
10.2
2/13/98
8-K
000-21184
2.2
8/23/02
21.1
Subsidiaries of Registrant
X
E-2
Exhibit
Number
23.1
24.1
31.1
31.2
32
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
Incorporated by Reference
10-K
000-21184
24.1
6/7/00
X
X
X
X
Consent of Independent Registered Public
Accounting Firm
Power of Attorney re: Microchip Technology
Incorporated, the Registrant
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended (the Exchange Act)
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended (the Exchange Act)
Certifications Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
*Compensation plans or arrangements in which
directors or executive officers are eligible to
participate
E-3
Annual Report on Form 10-K
Item 8, Item 15(a)(1) and (2), (b) and (c)
_________________________________
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
_________________________________
YEAR ENDED MARCH 31, 2006
MICROCHIP TECHNOLOGY INCORPORATED
AND SUBSIDIARIES
CHANDLER, ARIZONA
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2006 and 2005
Consolidated Statements of Income for each of the three years in the period
ended March 31, 2006
Consolidated Statements of Cash Flows for each of the three years in the
period ended March 31, 2006
Consolidated Statements of Stockholders’ Equity for each of the three years in
the period ended March 31, 2006
Notes to Consolidated Financial Statements
Page Number
F-1
F-2
F-3
F-4
F-5
F-6
i
r Ernst & Young LLP
Ernst & Young Tower
One Renaissance Square
2 North Central Avenue
Suite 2300
Phoenix, Arizona 85004
r Phone: 602 322 3000
www.ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Microchip Technology Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheets of Microchip Technology Incorporated and
subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity,
and cash flows for each of the three years in the period ended March 31, 2006. These financial statements are the
responsibility of the company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Microchip Technology Incorporated and subsidiaries at March 31, 2006 and 2005,
and the consolidated results of their operations and their cash flows for each of the three years in the period ended
March 31, 2006, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of Microchip Technology Incorporated’s internal control over financial reporting as of
March 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated May 17, 2006 expressed an
unqualified opinion thereon.
May 17, 2006
ey
A Member Practice of Ernst & Young Global
F-1
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Prepaid expenses
Deferred tax assets
Other current assets
Total current assets
Property, plant and equipment, net
Long-term investments
Goodwill
Intangible assets, net
Other assets
March 31,
2006
2005
$
$
565,273
199,491
139,361
115,024
11,369
78,544
9,767
1,118,829
659,972
520,360
31,886
9,489
10,060
68,730
665,874
113,088
103,728
10,828
105,097
8,003
1,075,348
693,302
---
31,886
9,289
7,729
Total assets
$
2,350,596
$
1,817,554
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt
Accounts payable
Accrued liabilities
Deferred income on shipments to distributors
Total current liabilities
Pension accrual
Deferred tax liability
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares;
no shares issued or outstanding.
Common stock, $.001 par value; authorized 450,000,000 shares;
issued and outstanding 213,614,343 shares at March 31, 2006;
issued 208,556,546 and outstanding 207,738,214 shares at March 31, 2005.
Additional paid-in capital
Retained earnings
Deferred share-based compensation
Accumulated other comprehensive loss
Less shares of common stock held in treasury at cost; 818,332 shares
at March 31, 2005.
Net stockholders' equity
$
$
268,954
50,847
189,687
99,481
608,969
801
14,637
45,454
34,328
135,153
91,730
306,665
599
24,556
---
---
214
639,238
1,106,355
(5,705)
(13,913)
---
1,726,189
208
532,666
984,095
---
(9,718)
(21,517)
1,485,734
Total liabilities and stockholders' equity
$
2,350,596
$
1,817,554
See accompanying notes to consolidated financial statements
F-2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Special charges
Operating income
Other income (expense):
Interest income
Interest expense
Other, net
Year Ended March 31,
2006
2005
2004
$
927,893
377,016
550,877
$
846,936
362,961
483,975
$
699,260
349,301
349,959
94,926
129,587
---
224,513
93,040
111,188
21,100
225,328
85,389
92,411
865
178,665
326,364
258,647
171,294
32,753
(1,967)
2,035
17,804
(940)
1,757
4,888
(249)
1,963
Income before income taxes
359,185
277,268
177,896
Income tax provision
Net income
Basic net income per common share:
Diluted net income per common share:
Dividends declared per common share
116,816
63,483
40,634
$
242,369
$
213,785
$
137,262
$
$
$
1.15
1.13
0.570
$
$
$
1.03
1.01
0.208
$
$
$
0.67
0.65
0.113
Weighted average common shares outstanding
210,104
206,740
206,032
Weighted average common and potential
common shares outstanding
215,024
211,962
212,172
See accompanying notes to consolidated financial statements
F-3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Deferred income taxes
Share-based compensation
Tax benefit from stock option plans
Gain on sale of fixed assets
Special charges:
Accelerated depreciation - Fab 1
Fab 1 severance and shutdown charges
Special charges - operating expenses
Changes in operating assets and liabilities:
Increase in accounts receivable
(Increase) decrease in inventories
Increase in deferred income on shipments to distributors
Increase in accounts payable and accrued liabilities
Change in other assets and liabilities
Year ended March 31,
2005
2004
2006
$
242,369 $
213,785 $
137,262
110,682
17,516
578
29,377
(998)
---
---
---
(26,273)
(11,296)
7,751
72,053
(4,436)
120,466
16,869
---
15,296
(1,224)
---
---
---
(5,198)
(9,214)
6,914
1,178
(6,162)
111,627
(12,188)
---
37,639
(1,097)
30,608
598
645
(12,503)
7,357
13,828
30,901
(1,597)
Net cash provided by operating activities
437,323
352,710
343,080
Cash flows from investing activities:
Purchases of investments
Sales and maturities of investments
Investment in other assets
Proceeds from sale of assets
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Payment of cash dividend
Repurchase of common stock
Proceeds from sale of common stock
Proceeds from short-term borrowings
Payments on short-term borrowings
(856,748)
797,694
(2,595)
1,341
(76,294)
(1,061,237)
752,060
---
1,659
(63,211)
(1,291,676)
1,085,934
(700)
2,329
(63,507)
(136,602)
(370,729)
(267,620)
(120,109)
(3,320)
95,751
268,954
(45,454)
(42,997)
(68,276)
47,234
45,454
---
(23,321)
(53,864)
53,150
---
---
Net cash provided by (used in) financing activities
195,822
(18,585)
(24,035)
Net increase (decrease) in cash and cash equivalents
496,543
(36,604)
51,425
Cash and cash equivalents at beginning of year
68,730
105,334
53,909
Cash and cash equivalents at end of year
$
565,273 $
68,730 $
105,334
See accompanying notes to consolidated financial statements
F-4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common
Stock and Additional
Paid-in Capital
Common
Stock held in
Treasury
Shares
Amount
Shares
Amount
Accumulated
Deferred
Other
Share-based
Comprehensive
Income (Loss) Compensation
Retained
Earnings
Net
Stockholders’
Equity
Balance at March 31, 2003
203,745
$ 486,518
312 $ (6,935)
$
---
$
--- $
699,366 $
1,178,949
Components of comprehensive income:
Net income
Net unrealized gains on available-for-sale
investments, net of $139 of tax
Total comprehensive income
Exercise of stock options
Employee stock purchase plan
Purchase of treasury stock
Treasury stock used for new issuances
Tax benefit from stock option plans
Unearned compensation amortization
Cash dividend
---
---
---
5,114
477
---
(780)
---
---
---
---
---
---
44,986
8,154
---
(18,782)
37,639
46
---
---
---
---
---
---
2,435
(780)
---
---
---
---
---
---
---
---
(63,931)
18,782
---
---
---
---
733
---
---
---
---
---
---
---
---
Balance at March 31, 2004
208,556
558,561
1,967
(52,084)
733
i
Components of comprehensive income:
Net income
Net unrealized losses on available-for-sale
investments, net of $2,068 of tax
Total comprehensive income
Exercise of stock options
Employee stock purchase plan
Purchase of treasury stock
Treasury stock used for new issuances
Tax benefit from stock option plans
Unearned share-based compensation
amortization
Cash dividend
---
---
---
---
---
---
---
2,882
452
---
(3,334)
---
---
---
---
36,831
10,403
---
(88,233)
15,296
16
---
---
---
---
2,185
(3,334)
---
---
---
---
---
---
(57,666)
88,233
---
---
(10,451)
---
---
---
---
---
---
---
---
---
---
---
---
Balance at March 31, 2005
208,556
532,874
818
(21,517)
(9,718)
i
Components of comprehensive income:
Net income
Net unrealized losses on available-for-sale
investments, net of $882 of tax
Total comprehensive income
Exercise of stock options
Employee stock purchase plan
Purchase of treasury stock
Treasury stock used for new issuances
Tax benefit from stock option plans
Unearned share-based compensation
amortization
Issuance of share-based compensation, net
Cash dividend
---
---
---
---
---
---
---
5,561
435
---
(938)
---
---
---
---
---
---
85,735
10,016
---
(24,837)
29,377
4
6,283
---
---
---
---
---
120
(938)
---
---
---
---
---
---
---
---
(3,320)
24,837
---
---
---
---
(4,195)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
(5,705)
137,262
137,262
---
---
---
---
---
---
---
---
(23,321)
733
137,995
44,986
8,154
(63,931)
---
37,639
46
(23,321)
813,307
1,320,517
213,785
213,785
---
---
---
---
---
---
---
---
(10,451)
203,334
36,831
10,403
(57,666)
---
15,296
16
(42,997)
(42,997)
984,095
1,485,734
242,369
242,369
---
---
---
---
---
---
---
---
---
(4,195)
238,174
85,735
10,016
(3,320)
---
29,377
4
578
---
(120,109)
(120,109)
Balance at March 31, 2006
213,614
$ 639,452
--- $
---
$ (13,913)
$
(5,705) $ 1,106,355
$
1,726,189
See accompanying notes to consolidated financial statements
F-5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Microchip develops and manufactures specialized semiconductor products used by its customers for a wide variety
of embedded control applications. Microchip’s product portfolio comprises 8- and 16-bit PIC® microcontrollers
and 16-bit dsPIC® digital signal controllers, which feature on-board Flash (reprogrammable) memory technology.
In addition, Microchip offers a broad spectrum of high-performance linear, mixed-signal, power management,
thermal management, battery management and interface devices. Microchip also makes serial EEPROMs and
complementary microperipheral products. Microchip’s synergistic product portfolio targets thousands of
applications and a growing demand for high-performance designs in the automotive, communications, computing,
consumer and industrial control markets.
Principles of Consolidation
The consolidated financial statements include the accounts of Microchip Technology Incorporated and its wholly-
owned subsidiaries (“Microchip” or the “Company”). The Company does not have any subsidiaries in which it does
not own 100% of the outstanding stock. All of the Company’s subsidiaries are included in the consolidated financial
statements. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, as evidenced by an agreement with the
customer, transfer of title as well as fixed pricing and probable collectability. The Company recognizes revenue
from product sales to OEMs upon shipment and records reserves for estimated customer returns. Distributors
worldwide generally have broad price protection and product return rights, so the Company defers revenue
recognition until the distributor sells the product to their customer. The Company reduces product pricing through
price protection based on market conditions, competitive considerations and other factors. Price protection is
granted to distributors on the inventory that they have on hand at the date the price protection is offered. When the
Company reduces the price of its products, it allows the distributor to claim a credit against its outstanding accounts
receivable balances based on the new price of the inventory it has on hand as of the date of the price reduction.
There is no revenue impact from the price protections. The Company also grants certain credits to its 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 the Company’s products to their end customers. The credits are on a
per unit basis and are not given to the distributor until they provide information regarding the sale to their end
customer. The effect of granting these credits establishes the net selling price from the Company to its distributors
for the product and results in the net revenue recognized by the Company when the product is sold by the
distributors to their end customers. Upon shipment, amounts billed to distributors are included as accounts
receivable, inventory is relieved, the sale and the gross margin are deferred and reflected as a current liability until
the product is sold by the distributor to its customers. Shipping charges billed to customers are included in net sales,
and the related shipping costs are included in cost of sales.
Product Warranty
The Company generally sells products with a limited warranty related to product quality and a limited
indemnification of customers against intellectual property infringement claims related to the Company’s products.
Due to comprehensive product testing, the short time between product shipment and the detection and correction of
product failures, and a low historical rate of payments on indemnification claims, the accrual based on historical
activity and the related expense were not significant as of and for the fiscal years presented.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were not material in the years ended
March 31, 2006, 2005 and 2004.
F-6
Research and Development
Research and development costs are expensed as incurred. Research and development expenses include
expenditures for labor, masks, prototype wafers, and expenses for development of process technologies, new
packages, and software to support new products and design environments.
Foreign Currency Translation and Forward Contracts
The Company’s foreign subsidiaries are considered to be extensions of the U.S. Company and any translation gains
and losses related to these subsidiaries are included in other income and expense. As the U.S. dollar is utilized as
the functional currency, gains and losses resulting from foreign currency transactions (transactions denominated in a
currency other than the subsidiaries’ functional currency) are also included in income. Gains and losses associated
with currency rate changes on forward contracts are recorded currently in income. These gains and losses are
immaterial to the Company’s financial statements.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its
income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s
actual current tax exposure together with assessing temporary differences resulting from differing treatment of items
for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included
within the Company’s consolidated balance sheet. The Company must then assess the likelihood that its deferred
tax assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, it
must establish a valuation allowance. The Company has not provided for a valuation allowance because
management currently believes that it is “more likely than not” that its deferred tax assets will be recovered from
future taxable income.
Cash and Cash Equivalents
All highly liquid investments, including marketable securities purchased with a remaining maturity of three months
or less when acquired are considered to be cash equivalents.
Short-term and Long-term Investments
The Company’s investments are classified as available-for-sale. These investments consist of government agency
bonds, municipal bonds, state student loan bonds and floating rate securities. The Company defines short-term
investments as income yielding securities which can be readily converted to cash and defines long-term investments
as income yielding securities with maturities of over one year that have unrealized losses attributable to them. The
Company has the ability to hold its long-term investments until such time as these assets are no longer impaired.
Such recovery is not expected to occur within the next year. The Company’s investments are carried at fair value
with unrealized gains and losses reported in stockholders’ equity. Premiums and discounts are amortized or accreted
over the life of the related available-for-sale security. Dividend and interest income are recognized when earned.
The cost of securities sold is calculated using the specific identification method.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments, which is included in bad debt expense. The Company determines the
adequacy of this allowance by regularly reviewing the composition of its accounts receivable aging and evaluating
individual customer receivables, considering such customer’s financial condition, credit history and current
economic conditions.
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out method. The Company writes down
its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the
cost of inventory and the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory
write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges
are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are
recoverable. In estimating reserves for obsolescence, the Company primarily evaluates estimates of demand over a
12-month period and provides reserves for inventory on hand in excess of the estimated 12-month demand.
F-7
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while
maintenance and repairs are expensed when incurred. The Company’s property and equipment accounting policies
incorporate estimates, assumptions and judgments relative to the useful lives of its property and equipment.
Depreciation is provided for assets placed in service on a straight-line basis over the estimated useful lives of the
relative assets, which range from 3 to 30 years. The Company evaluates the carrying value of its property and
equipment when events or changes in circumstances indicate that the carrying value of such assets may be impaired.
Asset impairment evaluations are, by nature, highly subjective.
Litigation
The Company’s estimated range of liability related to pending litigation is based on claims for which management
believes a loss is probable and it can estimate the amount or range of loss. Because of the uncertainties related to
both the amount and range of the loss on the pending litigation, the Company is unable to make a reasonable
estimate of the liability that could result from an unfavorable outcome. As additional information becomes
available, the Company will assess the potential liability related to its pending litigation and revise its estimates, if
necessary.
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net
identified tangible and intangible assets acquired. The Company is required to perform an annual impairment
review, and more frequently under certain circumstances. The goodwill is subjected to this test during the fourth
quarter of the Company’s fiscal year. The Company engages primarily in the design, development, manufacture and
marketing of semiconductor products and, as a result, the Company concluded there is one reporting unit. The
impairment review process compares the fair value of the reporting unit to its carrying value. If the Company
determines through the impairment process that goodwill has been impaired, the Company will record the
impairment charge in the statement of income. As of March 31, 2006, there was no impairment charge related to
goodwill.
Impairment of Long-Lived Assets
The Company assesses whether indicators of impairment of long-lived assets are present. If such indicators are
present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the
assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the
excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted
future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the
Company recognizes an impairment loss through a charge to operating results to the extent the present value of
anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The Company would
depreciate the remaining value over the remaining estimated useful life of the asset.
Share-Based Compensation
The Company grants stock options for a fixed number of shares to certain employees and directors with an exercise
price equal to the fair market value of the shares at the date of grant. The Company accounts for stock option grants
in accordance with Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to
Employees” and related Interpretations, and, accordingly, recognizes no compensation expense for the stock option
grants.
The Company has granted a limited number of restricted stock units (“RSUs”) to its employees. The intrinsic value
of the RSUs is being recorded as compensation expense over the vesting period of the RSUs. There is $5.7 million
of deferred share-based compensation on the Company’s balance sheet at March 31, 2006 representing the future
stock compensation expense to be recorded over the remaining vesting period of the outstanding RSUs. The
Company has decided to use RSUs as its primary long-term equity incentive compensation instrument in the future.
The following table represents the effect on net income and earnings per share (shown in thousands, except for per
share amounts) if the Company had applied the fair value based method and recognition provisions of SFAS
No. 123, “Accounting for Stock-Based Compensation,” to share-based employee and director compensation. For
purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option
pricing model and amortized ratably to expense over the options’ vesting periods. Because the estimated value is
determined as of the date of grant, the actual value ultimately realized by the employee may be significantly
different.
F-8
Year Ended March 31,
2005
2004
2006
Net income, as reported
$
242,369
$
213,785
$
137,262
Deduct: Total share-based employee
compensation expense determined under fair value
methods for all awards less share-based
compensation reflected in the income statement,
net of related tax effects
Pro forma net income
Net income per common share:
Basic, as reported
Basic, pro forma
Diluted, as reported
Diluted, pro forma
16,240
226,129
37,211
176,574
$
1.15
1.08
1.13
1.05
$
$
$
$
1.03
0.85
1.01
0.83
36,821
100,441
0.67
0.49
0.65
0.47
$
$
$
$
$
$
$
$
$
$
See Note 15 for further discussion of the Company’s equity incentive plans.
At a meeting held on February 17, 2005, the Compensation Committee of the Board of Directors and the Board of
Directors of the Company approved the acceleration of the vesting of certain Company stock options with an option
price of $27.153 per share or greater. The purpose of the accelerated vesting was to enable the Company to avoid
recognizing in its income statement compensation expense associated with these options in future periods, upon
adoption of SFAS No. 123R, “Share-Based Payment” in April 2006. The pre-tax charge that was avoided amounted
to approximately $13.7 million and represented the fair value of the unvested awards as of the date of the
acceleration as determined under SFAS No. 123. This amount would otherwise have been required to be recognized
as compensation expense over the vesting period upon adoption of SFAS No. 123R. As a result of the accelerated
vesting, approximately 2.3 million option shares or 25.4% of the total number of the outstanding unvested option
shares as of the date of the acceleration with varying remaining vesting schedules became immediately exercisable.
In connection with the vesting acceleration, the Company required that any shares received through the exercise of
the accelerated options not be sold by the option holder until the first to occur of the original vesting date of the
accelerated option or the termination of the employment of the option holder. On April 25, 2006, in order to
alleviate administrative burdens, the Company waived this requirement as to approximately 1.0 million option
shares held by those employees who are not executive officers, appointed officers or director-level employees of the
Company. As of the date of the acceleration, the fair market value of the Company’s common stock was below the
option price of the accelerated options in all material respects, so no APB No. 25 charges were incurred and future
potential charges are immaterial.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of
investments in debt securities and trade receivables. The Company generally places its investments with high-credit
quality counterparties. Investments in debt securities with original maturities of greater than six months consist
primarily of AAA rated financial instruments and counterparties. The Company’s investments are primarily in
direct obligations of the United States government or its agencies.
Concentrations of credit risk with respect to accounts receivable are generally not significant due to the diversity of
the Company’s customers and geographic sales areas. The Company had two distributors that accounted for more
than 10% of its net sales in the year ended March 31, 2006. The Company sells its products primarily to OEMs and
distributors in the Americas, Europe and Asia. The Company performs ongoing credit evaluations of its customers’
financial condition and requires collateral, primarily letters of credit, as deemed necessary. No single end customer
accounted for 10% or more of the Company’s net sales or accounts receivable balances during the years ended
March 31, 2006, 2005 and 2004. See Note 17, Geographic Information, for additional information on the
Company’s largest distributors.
Use of Estimates
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities to prepare the consolidated financial
F-9
statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those
estimates.
Recently Issued Accounting Pronouncements
SFAS No. 123 (Revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” is a revision of SFAS No. 123 and
supersedes APB No. 25 and its related implementation guidance. The Statement focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R
requires a public entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in exchange for the award. On March 29,
2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), which provides the Staff’s views
regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations
of the valuation of share-based payments for public companies.
SFAS No. 123R permits public companies to adopt its requirements using one of two methods:
(1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date
(a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of
SFAS No. 123R that remain unvested on the effective date.
(2) A “modified retrospective” method which includes the requirements of the modified prospective method
described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123
for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of
adoption.
This statement is effective for the beginning of the first annual reporting period that begins after June 15, 2005.
Therefore, the Company will adopt the standard effective April 1, 2006 using the modified prospective method. As
permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the
intrinsic value method prescribed in APB No. 25 and, as such, generally recognizes no compensation cost for
employee stock options. Although the Company has not completed its assessment, it believes the impact on its
consolidated financial position or results or operations will be material given the current number of outstanding stock
options. The effect on the Company’s results of operations of expensing stock options using the Black-Scholes-
Merton method is presented in the disclosure of pro forma net income and earnings per share in Note 1. SFAS
No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under current literature. The standard also
requires that tax benefits must be realized through a reduction of income taxes that would otherwise have been paid
before the benefit can be recorded. This requirement will reduce net operating cash flows and may increase net
financing cash flows in periods after adoption.
2.
SPECIAL CHARGES
Special charges consist of (in thousands):
Patent license settlement
Year Ended March 31,
2004
2005
$
21,100 $
---
Contract cancellation, severance and other
costs related to Fab 1 closure
---
Totals
$
21,100
$
865
865
There were no special charges in fiscal 2006.
F-10
Fiscal 2005
Settlement with U.S. Philips Corporation
In fiscal 2005, the Company reached an agreement with U.S. Philips Corporation and Philips Electronics North
America Corp. (together “Philips”) regarding patent license litigation. The agreement included dismissal of the then
pending litigation and the cross-license of certain patents between Philips and the Company. The Company
recorded a special charge of $21.1 million in the quarter that ended June 30, 2004 associated with this matter.
Pursuant to this cross-license, the Company licensed certain of its patents related to 8-pin microcontrollers to
Philips, and Philips licensed its patents related to I2C serial communications to the Company, each on fully-paid up,
non-royalty bearing worldwide licenses. The Company finalized and executed the definitive settlement agreement
related to this matter and made the cash payment to Philips during the fiscal quarter ending September 30, 2004.
Fiscal 2004
Closure of Fab 1
On April 7, 2003, the Company announced its intention to close its Chandler, Arizona (Fab 1) wafer fabrication
facility and integrate certain Fab 1 personnel and processes into its Tempe, Arizona (Fab 2) wafer fabrication
facility. The Company completed this integration process during the three-month period ended June 30, 2003. The
closure of Fab 1 and the integration of certain Fab 1 personnel into Fab 2 operations resulted in a reduction in force
of 207 employees who were either directly involved in the Company’s manufacturing operations or provided
support functions to Fab 1. The detail of the charges incurred related to the closure of Fab 1 that were included in
cost of sales for the three-month period ended June 30, 2003 is as follows (amounts in thousands):
Accelerated depreciation for Fab 1
Fab 1 related charges including severance,
material and other costs
Total charges in cost of sales
$ 30,608
1,147
$ 31,755
The facility where Fab 1 was located is an integral part of the Company’s overall campus in Chandler, Arizona.
Within this same facility resides the Company’s wafer probe, mask making and other manufacturing related
activities. Consequently it is not possible to abandon or otherwise dispose of this facility. The accelerated
depreciation that was taken only related to assets used in the wafer fabrication operations at the facility. The
Company has no specific plans for utilizing the space formerly housing the wafer fabrication operations, and intends
to leave it in an idle state. The property, plant and equipment that was subject to the accelerated depreciation is
reflected in the gross and accumulated depreciation carrying values in the property, plant and equipment section of
the Company’s balance sheet and related footnote disclosures.
The Company incurred $865,000 of special charges recorded principally for contract cancellation, severance and
other costs related to the closure of Fab 1 and other actions.
3.
INVESTMENTS
The Company’s investments are intended to establish a high-quality portfolio that preserves principal, meets
liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to the
Company’s investment guidelines and market conditions. The following is a summary of available-for-sale
securities at March 31, 2006 (amounts in thousands):
State student loan bonds
Government agency bonds
Municipal bonds
Floating rate securities
Adjusted
Cost
$ 34,600
616,317
2,583
83,075
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
---
---
---
---
---
$
---
16,644
5
75
$ 16,724
$
34,600
599,673
2,578
83,000
$ 719,851
$ 736,575 $
F-11
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provided guidance on determining
when investments in certain debt and equity securities are considered impaired, whether that impairment is other-
than-temporary, and on measuring such impairment loss. FSP 115-1 was adopted by the Company on January 1,
2006 and at March 31, 2006, the Company evaluated its investment portfolio, and noted unrealized losses of $16.7
million were due to fluctuations in interest rates. Management does not believe any of the unrealized losses
represented an other-than-temporary impairment based on its evaluation of available evidence as of March 31, 2006.
The Company’s intent is to hold these investments to such time as these assets are no longer impaired. For those
investments not scheduled to mature until after March 31, 2007, such recovery is not anticipated to occur in the next
year and these investments have been classified as long-term investments. At March 31, 2006, short-term
investments consist of $199,491 and long-term investments consist of $520,360.
The amortized cost and estimated fair value of the available-for-sale securities at March 31, 2006, 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
Due after one year and through five years
Due after five years and through ten years
Due after ten years
$ 200,178 $
536,397
---
---
$ 736,575 $
--- $
---
---
---
---
16,037
---
---
687 $ 199,491
520,360
---
---
$ 16,724 $ 719,851
The following is a summary of available-for-sale securities at March 31, 2005 (amounts in thousands):
Government agency bonds
Municipal bonds
Corporate preferred stock
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$ 639,720 $
3,626
34,175
$ 677,521 $
---
---
---
---
$ 11,601
46
---
$ 11,647
$ 628,119
3,580
34,175
$ 665,874
All the investments at March 31, 2005 were classified as short-term.
During the year ended March 31, 2006, the Company had gross realized losses on available-for-sale securities of
eight thousand dollars. During the year ended March 31, 2005, the Company did not have any gross realized gains
or losses on sales of available-for-sale securities.
F-12
4.
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
Trade accounts receivable
Other
March 31,
2006
2005
$ 142,703
320
143,023
$ 116,689
216
116,905
Less allowance for doubtful accounts
3,662
3,817
$ 139,361
$ 113,088
5.
INVENTORIES
Inventories consist of the following (amounts in thousands):
Raw materials
Work in process
Finished goods
March 31,
2006
2005
$
3,505
80,947
30,572
$ 115,024
$
4,852
73,295
25,581
$ 103,728
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.
6.
OTHER CURRENT ASSETS
Other current assets consists of the following (amounts in thousands):
March 31,
2006
2005
Accrued interest receivable
Other current assets
$
7,173
2,594
$
6,273
1,730
$
9,767
$
8,003
7.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in thousands):
Land
Building and building improvements
Machinery and equipment
Projects in process
Less accumulated depreciation
and amortization
March 31,
2006
2005
$
47,212
366,055
991,452
87,341
1,492,060
$
45,641
356,233
938,261
84,846
1,424,981
832,088
731,679
$ 659,972
$ 693,302
F-13
Depreciation and amortization expense attributed to property, plant and equipment was $109.3 million, $119.0
million and $109.8 million for the years ending March 31, 2006, 2005 and 2004, respectively.
8.
INTANGIBLE ASSETS
Intangible assets consist of the following (amounts in thousands):
Gross
Amount
March 31, 2006
Accumulated
Amortization
Net
Amount
Developed technology
Distribution rights
$
$
15,729
5,236
20,965
$
(9,864)
(1,612)
$ (11,476)
$
$
5,865
3,624
9,489
Developed technology
Distribution rights
Gross
Amount
$ 14,566
4,804
$ 19,370
March 31, 2005
Accumulated
Amortization
$ (8,793)
(1,288)
$ (10,081)
Net
Amount
$ 5,773
3,516
$ 9,289
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 10 years. The
weighted average total amortization period for the Company’s intangible assets at March 31, 2006 was 7 years,
consisting of 6 years for developed technology and 10 years for distribution rights. The following is an expected
amortization schedule for the intangible assets for the fiscal years March 31, 2007 through March 31, 2011, absent
any future acquisitions or impairment charges (amounts in thousands):
Year Ending
March 31,
Projected
Amortization Expense
2007
2008
2009
2010
2011
$
1,738
2,256
2,071
1,797
1,527
The Company has not recorded any impairment losses associated with the intangible assets acquired.
9.
SHORT-TERM DEBT
The Company had short-term debt of $269.0 million and $45.5 million at March 31, 2006 and March 31, 2005,
respectively. The short-term debt is a result of repurchase agreements that are in place with two investment
brokerages. The short-term debt was collateralized with $277.6 million and $47.5 million of available-for-sale
investments at March 31, 2006 and 2005, respectively. The short-term debt had a weighted average interest rate of
4.83% and 2.71% as of March 31, 2006 and 2005, respectively. In fiscal 2006, the borrowings were made to
complete a $500 million repatriation of foreign earnings under the American Jobs Creation Act. The borrowings
were collateralized against investments that are held by the Company’s offshore subsidiaries. The Company
presently intends to pay down the short-term borrowings as the investments mature and also from future offshore
cash generation. In fiscal 2005, the Company used these borrowings to fund the activity under its stock repurchase
programs beginning in the second quarter of the year ended March 31, 2005. There are no covenants associated
with the repurchase agreements.
F-14
10.
ACCRUED LIABILITIES
Accrued liabilities consist of the following (amounts in thousands):
March 31,
2006
2005
Income taxes
Other accrued expenses
$ 144,838
44,849
$ 101,406
33,747
$ 189,687
$ 135,153
11.
INCOME TAXES
The provision for income taxes consists of the following (amounts in thousands):
Current expense:
Federal
State
Foreign
Total current
Deferred expense (benefit):
Federal
State
Foreign
Total deferred
2006
Year Ended March 31,
2005
2004
$
79,082
5,837
14,381
99,300
$
34,320
3,436
8,858
46,614
$
37,580
3,268
11,974
52,822
16,165
1,618
(267)
17,516
5,908
591
10,370
16,869
(3,795)
(330)
(8,063)
(12,188)
$ 116,816
$
63,483
$
40,634
The tax benefit associated with the exercise of employee stock options reduced taxes currently payable by
$29.4 million, $15.3 million and $37.6 million for the years ended March 31, 2006, 2005 and 2004, respectively.
These amounts were credited to additional paid-in capital in each of the three fiscal years.
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to
income before income taxes. The sources and tax effects of the differences in the total income tax provision are as
follows (amounts in thousands):
2006
Year Ended March 31,
2005
2004
Computed expected provision
$ 125,715
$ 97,044
$ 62,264
State income taxes, net
of federal benefits
Foreign export sales benefit
Research and development
tax credits
3,548
(2,600)
2,738
(1,111)
1,424
(96)
(2,095)
(4,750)
(4,000)
F-15
Foreign income taxed at
lower than the federal rate
Repatriation of Prior Years’
Permanently Reinvested Earnings
(38,362)
(30,438)
(18,958)
30,610
---
---
$ 116,816
$ 63,483
$ 40,634
Pretax income from foreign operations was $257.8 million, $199.0 million and $136.3 million for the years ended
March 31, 2006, 2005 and 2004, respectively. Unremitted foreign earnings that are considered to be permanently
invested outside the United States, and on which no deferred taxes have been provided, amounted to approximately
$483.9 million at March 31, 2006. Should the Company elect in the future to repatriate a portion of the foreign
earnings so invested, the Company would incur income tax expense on such repatriation, net of any available
deductions and foreign tax credits. This would result in additional income tax expense beyond the computed
expected provision in such periods.
The American Jobs Creation Act of 2004 (the “Jobs Act”) created a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85% dividends-received deduction for certain
dividends from controlled non-U.S. corporations. During fiscal 2006, the Company’s Chief Executive Officer
approved a domestic reinvestment plan, under which the Company repatriated $500 million in earnings outside the
U.S. pursuant to the Jobs Act. The Company recorded additional tax expense in fiscal 2006 of approximately
$30.6 million ($0.14 per diluted common share) related to this decision to repatriate non-U.S. earnings. This
repatriation increased the Company’s effective rate for fiscal 2006 by approximately 8.5 percentage points, to
32.5%. This increase is reflected as a separate line item in the rate reconciliation table above.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities are as follows (amounts in thousands):
March 31,
2006
2005
Deferred tax assets:
Deferred intercompany profit
Deferred income on shipments to distributors
Inventory valuation
Net operating loss carryforward
Tax credit carryforward
Accrued expenses and other
Gross deferred tax assets
$
8,266
21,325
1,970
4,916
31,708
10,359
78,544
$ 11,616
22,699
8,020
5,942
47,337
9,483
105,097
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation
Other
Gross deferred tax liability
Net deferred tax asset
(13,655)
(982)
(14,637)
$ 63,907
(23,258)
(1,298)
(24,556)
$ 80,541
Management believes that the Company’s results of future operations will generate sufficient taxable income such
that it is “more likely than not” that the deferred tax assets will be realized.
At March 31, 2006, the Company had a net operating loss carryforward for federal income tax purposes of
approximately $12.8 million, which begins to expire in varying amounts in the years 2020 through 2022. The net
operating loss carryforward is attributable to the acquisition of PowerSmart in fiscal 2003. An analysis of the annual
F-16
limitation on the utilization of the PowerSmart net operating losses was performed in accordance with Internal
Revenue Code Section 382. It was determined that Section 382 will not limit the use of the PowerSmart net
operating losses in full over the carryover period.
At March 31, 2006, the Company had recorded credit carryforwards of approximately $12.9 million for foreign tax
credits and $18.8 million for research and development credits. The foreign tax credits begin to expire in varying
amounts in the years ending March 31, 2014 through March 31, 2016, and the research and development credits
begin to expire in varying amounts in the years ending March 31, 2021 through March 31, 2026. The Company
believes that all of its credit carryforwards will be utilized in future periods.
The Company’s Thailand manufacturing operations currently benefit from numerous tax holidays granted to the
Company based on its investment in property, plant and equipment in Thailand. The Company’s tax holiday periods
in Thailand expire at various times beginning in September 2006. The Company does not expect the future
expiration of any of its tax holiday periods in Thailand to have a material impact on its effective tax rate. The
aggregate dollar benefits derived from these tax holidays approximated $7.9 million, $11.5 million and
$45.3 million for the years ended March 31, 2006, 2005 and 2004, respectively. The benefit the tax holiday had on
net income per share approximated $0.04, $0.05 and $0.21 for the years ended March 31, 2006, 2005 and 2004,
respectively. The reduction in the benefits derived from the Company’s tax holiday in Thailand in the years ended
March 31, 2005 and March 31, 2006 compared to the year ended March 31, 2004 was a result of changes in the
Company’s overall international tax structure. These changes did not have a material impact on the Company’s
overall effective tax rate.
The Company is currently under audit by the United States Internal Revenue Service (“IRS”) for its fiscal years
ended March 31, 1998, 1999, 2000 and 2001. As part of this ongoing audit, the IRS has proposed certain
adjustments related to positions reflected on these returns. The IRS has issued formal assessments for these
adjustments. The Company does not agree with these adjustments and is appealing these assessments. 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 probable. The Company believes
that it maintains adequate tax reserves to offset any potential tax liabilities that may arise upon final resolution of the
pending audit through either settlement or the appeals process with the IRS. The IRS recently began an audit of the
Company’s fiscal years ended March 31, 2002, 2003 and 2004. The Company believes that it maintains adequate
tax reserves to offset any potential tax liabilities that may arise upon these and other audits in the United States and
other countries in which it does 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.
12.
CONTINGENCIES
The Company’s assembly and test facility in Thailand is located in Alphatechnopolis Industrial Park near Bangkok
on land to which the Company expects to acquire title in accordance with its agreement with the landowner.
Progress towards obtaining full title of the land has been delayed due to a bankruptcy relating to the seller of the
land. At this time it is not possible to estimate when, or if, transfer of full title will be completed. The Company has
provided reserves that it estimates will be adequate to obtain full title. Such reserves are set at the estimated fair
value of the land.
In the ordinary course of its business, the Company is involved in a limited number of legal actions, both as plaintiff
and defendant, and could incur uninsured liability in any one or more of them. Litigation relating to the
semiconductor industry is not uncommon, and the Company is, and from time to time has been, subject to such
litigation. In the Company’s opinion, based on consultation with legal counsel, as of March 31, 2006, the effect of
such matters will not have a material adverse effect on the Company’s financial position, cash flows or results of
operations.
13.
STOCKHOLDERS’ EQUITY
Stockholder Rights Plan. Effective October 11, 1999, the Company adopted an Amended and Restated Preferred
Shares Rights Agreement (the “Amended Rights Agreement”). The Amended Rights Agreement amends and
F-17
restates the Preferred Share Rights Agreement adopted by the Company as of February 13, 1995 (the “Prior Rights
Agreement”). Under the Prior Rights Agreement, on February 13, 1995, the Company’s Board of Directors
declared a dividend of one right (a “Right”) to purchase one one-hundredth of a share of the Company’s Series A
Participating Preferred Stock (“Series A Preferred”) for each outstanding share of common stock, $.001 par value, of
the Company. The dividend was payable on February 24, 1995 to stockholders of record as of the close of business
on that date. The Amended Rights Agreement supersedes the Prior Rights Agreement as originally executed. Under
the Amended Rights Agreement, each Right enables the holder to purchase from the Company one one-hundredth of
a share of Series A Preferred at a purchase price of seventy four dollars and seven cents ($74.07) (the “Purchase
Price”), subject to adjustment. Under the Amended Rights Agreement, the rights will become exercisable upon the
earlier of (i) 10 days following a public announcement that a person or a group of affiliated or associated persons
has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Company’s outstanding
common shares, or (ii) 10 days (or such later date as may be determined by action of the Company’s Board of
Directors) following the commencement of, or announcement of an intention to make, a tender offer or exchange
offer the consummation of which would result in a beneficial ownership by a person or group of 15% or more of the
Company’s outstanding common shares.
Stock Repurchase Activity. On August 7, 2002, the Company’s Board of Directors authorized the Company to
repurchase up to 2,500,000 shares of its common stock in the open market or in privately negotiated transactions.
As of March 31, 2006, the Company had repurchased the entire 2,500,000 common share authorization for
$59.3 million. On March 11, 2004, the Company’s Board of Directors authorized the repurchase of an additional
2,500,000 shares of its common stock in the open market or in privately negotiated transactions. As of March 31,
2006, the Company had repurchased the entire 2,500,000 common share authorization for $66.1 million. On April
22, 2004, the Company’s Board of Directors authorized the repurchase of an additional 2,500,000 shares of its
common stock in the open market or in privately negotiated transactions. As of March 31, 2006, the Company had
repurchased 1,004,834 shares under this authorization for $26.6 million. As of March 31, 2006, all of the purchased
shares under the authorizations had been reissued to fund stock option exercises and purchases under the Company’s
employee stock purchase plan. During the year ended March 31, 2006, the Company purchased 119,934 shares of
its common stock for $3.3 million. During the year ended March 31, 2005, the Company purchased 2,184,800
shares of its common stock for $57.7 million. During the year ended March 31, 2004, the Company purchased
2,435,400 shares of its common stock for $63.9 million, of which $10.6 million was not paid until April 2004 and is
reflected in the March 31, 2004 accounts payable balance.
14.
EMPLOYEE BENEFIT PLANS
The Company maintains a contributory profit-sharing plan for its domestic employees meeting certain eligibility and
service requirements. The plan qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended,
and allows employees to contribute up to 60% of their base salary, subject to maximum annual limitations
prescribed by the Internal Revenue Service. The Company shall make a matching contribution of up to 25% of the
first 4% of the participant’s eligible compensation and may award up to an additional 25% under the discretionary
match. All matches are provided on a quarterly basis and require the participant to be an active employee at the end
of each quarter. For the fiscal years ended March 31, 2006, 2005 and 2004, the Company contributions to the plan
totaled $1.5 million, $1.4 million and $1.1 million, respectively.
The Company’s 2001 Employee Stock Purchase Plan (the “2001 Purchase Plan”) became effective on March 1,
2002. The Board of Directors approved the 2001 Purchase Plan in May 2001 and the stockholders approved it in
August 2001. Under the 2001 Purchase Plan, eligible employees of the Company may purchase shares of common
stock at semi-annual intervals through periodic payroll deductions. The purchase price in general will be 85% of the
lower of the fair market value of the common stock on the first day of the participant’s entry date into the offering
period or 85% of the fair market value on the semi-annual purchase date. Depending upon a participant’s entry date
into the 2001 Purchase Plan, purchase periods under the 2001 Purchase Plan consist of overlapping periods of either
24, 18, 12 or 6 months in duration. 2,450,000 shares of common stock have been previously reserved for issuance
under the 2001 Purchase Plan. In May 2003, the Board of Directors reserved an additional 975,000 shares of
common stock for issuance under the 2001 Purchase Plan, which was approved by the stockholders in August 2003.
In May 2003 and August 2003, the Company’s Board and stockholders, respectively, each approved an annual
automatic increase in the number of shares reserved under the 2001 Purchase Plan. The automatic increase took
effect on January 1, 2005, and on each January 1 thereafter during the term of the plan, and is equal to the lesser of
(i) 1,500,000 shares, (ii) one half of one percent (0.5%) of the then outstanding shares of the Company’s common
F-18
stock, or (iii) such lesser amount as is approved by the Company’s Board of Directors. On January 1, 2006,
1,058,541 additional shares were reserved under the 2001 Purchase Plan based on the automatic increase. On
January 1, 2005, 1,035,863 additional shares were reserved under the 2001 Purchase Plan based on the automatic
increase. Since the inception of the 2001 Purchase Plan, 5,519,404 shares of common stock have been reserved for
issuance and 1,814,452 shares have been issued under this purchase plan.
During fiscal 1995, a purchase plan was adopted for employees in non-U.S. locations. Such plan allows for the
purchase price per share to be 100% of the lower of the fair market value of the common stock at the beginning or
end of the semi-annual purchase plan period. Effective May 1, 2006, the Company’s Board approved a purchase
price per share equal to eighty-five percent (85%) of the lower of the fair market value of the common stock at the
beginning or end of the semi-annual purchase plan period. Since the inception of this purchase plan, 348,593 shares
of common stock have been reserved for issuance and 245,311 shares have been issued under this purchase plan.
Effective January 1, 1997, the Company adopted a non-qualified deferred compensation arrangement. This plan is
unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of
highly compensated employees as defined in ERISA Sections 201, 301 and 401. There are no Company matching
contributions made under this plan.
The Company has a management incentive compensation plan which provides for bonus payments, based on a
percentage of base salary, from an incentive pool created from operating profits of the Company, at the discretion of
the Board of Directors. During the years ended March 31, 2006, March 31, 2005 and March 31, 2004, $14.1
million, $10.2 million and $1.8 million were charged against operations for this plan, respectively.
The Company also has a plan that, at the discretion of the Board of Directors, provides a cash bonus to all
employees of the Company based on the operating profits of the Company. During the years ended March 31, 2006,
2005 and 2004, $9.4 million, $4.9 million and $2.4 million, respectively, were charged against operations for this
plan.
15.
EQUITY INCENTIVE PLANS
Under the Company’s equity incentive plans (the “Plans”), eligible participants may be granted different types of
equity incentive awards. Officers, key employees, non-employee directors and consultants may be granted non-
statutory stock options to purchase shares of common stock at a price not less than 100% of the fair value of the
option shares on the grant date. Options granted under the Plans vest over the period determined by the Board of
Directors at the date of grant, at periods ranging from one year to five years. The maximum term of options granted
under the Plans is 10 years. Historically the Company has gone through its equity compensation grant process
during the first two weeks of April each year. At March 31, 2006, there were 13,277,078 shares available for grant
under the Plans. The per share weighted average fair value of stock options granted under the Plans for the years
ended March 31, 2006, 2005 and 2004 was $9.89, $15.82 and $12.06, respectively, based on the date of grant using
the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
Expected life (years)
Risk-free interest rate
Volatility
Dividend yield
2006
5.21
4.20%
44%
2.14%
Year Ended March 31,
2005
5.30
3.78%
67%
0.97%
2004
5.19
2.90%
70%
0.48%
In light of recent regulatory guidance, the Company refined the assumptions used to estimate the value of employee
stock options granted in the first quarter of fiscal 2006, and management determined that a blend of implied
volatility and historical volatility is more reflective of market conditions and a better indicator of expected volatility
than using purely historical volatility. Management continued to use this volatility assumption throughout fiscal
2006.
Under the Plans, 105,281,645 shares of common stock had been reserved for issuance since the inception of the
Plans.
F-19
The stock option activity is as follows:
Outstanding at March 31, 2003
25,234,916
$
15.45
Options Outstanding
Shares
Weighted Average
Exercise Price
Granted
Exercised
Canceled
Outstanding at March 31, 2004
Granted
Exercised
Canceled
Outstanding at March 31, 2005
Granted
Exercised
Canceled
4,186,351
(5,114,292)
(947,047)
23,359,928
2,693,824
(2,881,830)
(801,236)
22,370,686
2,204,099
(5,561,188)
(563,237)
20.68
8.79
21.53
17.60
27.35
12.78
23.34
19.19
25.91
15.46
23.81
Outstanding at March 31, 2006
18,450,360
$
20.97
The following table summarizes information about the stock options outstanding at March 31, 2006:
Range
Exercise Price
Number
Outstanding
1.820 -- $ 10.400
3,054,810
10.401 -- $ 16.000
1,970,837
16.001 -- $ 18.500
2,145,553
18.501 -- $ 23.500
2,171,418
23.501 -- $ 25.500
2,866,649
25.501 -- $ 27.100
2,465,699
27.101 -- $ 27.160
2,365,082
27.161 -- $ 34.000
1,387,805
34.001 -- $ 36.000
18,451
36.001 -- $ 36.100
4,056
1.820 -- $
36.100
18,450,360
$
$
$
$
$
$
$
$
$
$
$
Weighted
Average
Remaining
Life
Weighted
Average
Exercise Price
Number
Exercisable
Weighted
Average
Exercise Price
$
$
$
$
$
$
$
$
$
$
$
8.18
3,058,976
$
8.19
15.62
1,955,790
$ 15.62
18.41
714,355
$
8.26
22.37
2,128,557
$ 22.40
24.88
1,076,828
$ 24.22
26.75
662,030
$ 26.24
27.15
2,355,484
$ 27.15
29.38
800,984
$ 29.17
35.08
9,771
$ 35.08
36.10
------
$ -------
20.79
12,762,774
$ 19.39
2.27
4.83
6.86
4.58
7.86
7.89
6.01
7.16
7.67
9.92
5.82
F-20
At March 31, 2006 and 2005, the number of option shares exercisable was 12,762,774 and 16,014,070, respectively,
and the weighted-average exercise price of those options was $19.39 and $18.09, respectively.
The Company received a tax benefit of $29.4 million, $15.3 million and $37.6 million for the years ended March 31,
2006, 2005 and 2004, respectively, from the exercise of non-qualified stock options and the disposition of stock
acquired with incentive stock options or through the Company’s employee stock purchase plan. For financial
reporting purposes, the tax effect of this deduction is accounted for as a credit to additional paid-in capital rather
than as a reduction of income tax expense.
During the year ended March 31, 2006, the Company began issuing Restricted Stock Units (RSUs) under its equity
incentive plan. RSUs entitle the holder to receive shares of the Company’s common stock as the RSU vests. As of
March 31, 2006, the total amount of unrecognized compensation cost related to nonvested restricted stock awards
was approximately $5.7 million, and the related weighted-average period over which it is expected to be recognized
is approximately 2.2 years. A summary of restricted stock units activity for the year ended March 31, 2006 is as
follows:
Outstanding at March 31, 2005
Granted
Vested
Cancelled
Outstanding at March 31, 2006 (unvested)
Shares
---
203,334
(4,727)
(3,083)
195,524
Weighted Average
Fair Value
---
$
$
$
$
31.36
25.29
30.76
31.51
The share-based compensation expensed on the Company’s income statement in fiscal 2006 was $0.6 million.
16.
LEASE COMMITMENTS
The Company leases office space, transportation and other equipment under operating leases, which expire at
various dates through March 31, 2011. The future minimum lease commitments under these leases are payable as
follows (amounts in thousands):
Year Ending
March 31,
2007
2008
2009
2010
2011
Total minimum payments
Operating
Leases
$ 4,114
2,808
1,387
557
665
$ 9,531
Rental expense under operating leases totaled $6.8 million, $5.9 million and $5.4 million for the years ended
March 31, 2006, 2005 and 2004, respectively.
17.
GEOGRAPHIC INFORMATION
The Company operates in one operating segment and engages primarily in the design, development, manufacture
and marketing of semiconductor products. The Company sells its products to distributors and original equipment
manufacturers (OEMs) in a broad range of market segments, performs on-going credit evaluations of its customers
and generally requires no collateral. The Company’s operations outside the United States consist of product
assembly and final test facilities in Thailand, and sales and support centers and design centers in certain foreign
countries. Domestic operations are responsible for the design, development and wafer fabrication of all products, as
well as the coordination of production planning and shipping to meet worldwide customer commitments. The
Thailand assembly and test facility is reimbursed in relation to value added with respect to assembly and test
F-21
operations and other functions performed, and certain foreign sales offices receive compensation for sales within
their territory. Accordingly, for financial statement purposes, it is not meaningful to segregate sales or operating
profits for the assembly and test and foreign sales office operations. Identifiable long-lived assets (consisting of
property, plant and equipment and goodwill) by geographic area are as follows (amounts in thousands):
United States
Thailand
Various
March 31,
2006
2005
$ 576,859
117,975
6,513
$ 628,060
100,622
5,795
Total long-lived assets
$ 701,347
$ 734,477
Sales to unaffiliated customers located outside the United States, primarily in Asia and Europe, aggregated
approximately 74%, 73% and 71% of consolidated net sales for the years ended March 31, 2006, 2005 and 2004,
respectively. Sales to customers in Europe represented 28%, 27% and 28% of consolidated net sales for the years
ended March 31, 2006, 2005 and 2004, respectively. Sales to customers in Asia represented 44%, 43% and 41% of
consolidated net sales for the years ended March 31, 2006, 2005 and 2004, respectively. Sales into China, including
Hong Kong, represented 17%, 16% and 14% of consolidated net sales for the years ended March 31, 2006, 2005 and
2004, respectively. Sales into Taiwan represented 10% of consolidated net sales for the years ended March 31, 2006
and 2005. Sales into any other individual foreign country did not exceed 10% of the Company’s net sales for any of
the years presented.
The Company had two distributors who represented more than 10% of its net sales during fiscal 2006, fiscal 2005
and fiscal 2004. The Company’s largest distributor accounted for approximately 14% of its net sales and its second
largest distributor accounted for approximately 11% of net sales in fiscal 2006. The Company’s largest distributor
accounted for approximately 13% of its net sales and its second largest distributor accounted for approximately 12%
of its net sales in fiscal 2005. The Company’s largest distributor accounted for approximately 13% of its net sales
and its second largest distributor accounted for approximately 12% of its net sales in fiscal 2004.
18.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months.
The carrying amount of short-term and long-term investments approximates fair value as the securities are marked
to market as of each balance sheet date with any unrealized gains and losses reported in stockholders’ equity. The
carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the
short-term maturity of the amounts. The fair value of short-term debt and lines of credit approximates their carrying
value as they are estimated by discounting the future cash flows at rates currently offered to the Company for similar
debt instruments.
The Company has entered into certain financial instruments in the normal course of business to reduce its exposure
to fluctuations in foreign exchange rates. These financial instruments include standby letters of credit and foreign
currency forward contracts. When engaging in forward contracts, risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in securities values, interest rates and
foreign exchange rates. At March 31, 2006, the Company held contracts with nominal amounts totaling
$1.6 million, which were entered into and hedged the Company’s foreign currency risk. The value of the contracts
is based on quoted market prices. The contracts matured in April 2006. At March 31, 2005, there were no foreign
currency forward contracts outstanding. Unrealized gains and losses as of the balance sheet dates and realized gains
and losses for the years ending March 31, 2006, 2005 and 2004 were not material.
19.
NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per
share amounts):
F-22
2006
Year Ended March 31,
2005
2004
Net income
$ 242,369
$ 213,785
$ 137,262
Weighted average common shares
outstanding
210,104
206,740
206,032
Dilutive effect of stock options
4,920
5,222
6,140
Weighted average common and
common
outstanding
equivalent shares
215,024
211,962
212,172
Basic net income per common share
Diluted net income per common share
$
$
1.15
1.13
$
$
1.03
1.01
$
$
0.67
0.65
Weighted average common shares exclude the effect of antidilutive options. As of March 31, 2006, there were no
antidilutive options outstanding. As of March 31, 2005 and 2004, the number of options that were antidilutive were
1,310,018 and 4,532,872, respectively.
20.
QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company’s selected unaudited quarterly operating results for eight quarters ended
March 31, 2006. The Company believes that all necessary adjustments have been made to present fairly the related
quarterly results (in thousands, except per share amounts):
Fiscal 2006
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Net sales
Gross profit
Operating income
Net income
Diluted net income per common share
$ 218,527
127,505
73,029
61,024
0.29
$ 227,298
134,556
79,295
65,653
0.31
$ 234,896
140,270
84,588
40,124
0.19
$ 247,172
148,546
89,452
75,568
0.35
$ 927,893
550,877
326,364
242,369
1.13
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Fiscal 2005
Net sales
Gross profit
Operating income
Net income
Diluted net income per common share
$ 212,775
121,459
49,854
43,799
0.21
$ 220,694
126,377
75,051
60,443
0.29
$ 205,384
116,788
65,622
53,140
0.25
$ 208,083
119,351
68,120
56,403
0.27
$ 846,936
483,975
258,647
213,785
1.01
Refer to Note 2, Special Charges, for an explanation of the unusual and infrequent items that occurred in the
applicable fiscal quarters that materially impacted the Company’s operating results.
Refer to Note 11, Income Taxes, for an explanation of the additional tax expense in the quarter ended December 31,
2005 related to the Company’s repatriation of $500 million in foreign earnings under the Jobs Act.
F-23
21.
SUPPLEMENTAL FINANCIAL INFORMATION
Cash paid for income taxes amounted to $26.4 million, $15.6 million and $4.6 million during the years ended
March 31, 2006, 2005 and 2004, respectively. Cash paid for interest amounted to $1.9 million, $0.8 million and
$0.2 million during the years ended March 31, 2006, 2005 and 2004, respectively.
Treasury stock purchases for which settlement had not occurred are included as treasury stock repurchased in
stockholders’ equity and accounts payable and amounted to $10.6 million as of March 31, 2004.
A summary of additions and deductions related to the allowance for doubtful accounts for the years ended March 31,
2006, 2005 and 2004 follows (amounts in thousands):
Allowance for doubtful accounts:
2006
2005
2004
Balance at
beginning
of year
Charged to
costs and
expenses
Deductions (1)
Balance at
end of year
$ 3,817
3,810
3,768
$
---
7
250
$
(155)
---
(208)
$ 3,662
3,817
3,810
(1) Deductions represent uncollectible accounts written off, net of recoveries.
22.
DIVIDENDS
On October 28, 2002, the Company announced that its Board of Directors had approved and instituted a quarterly
cash dividend on its common stock. The initial quarterly dividend of $0.02 per share was paid on December 6, 2003
in the amount of $4.1 million. The Company has continued to pay quarterly dividends and has increased the amount
of such dividends on a regular basis. During the year ended March 31, 2006, the Company paid dividends totaling
$0.57 per share for a total dividend payment of $120.1 million. During the year ended March 31, 2005, the
Company paid dividends totaling $0.208 per share for a total dividend payment of $43.0 million. During the year
ended March 31, 2004, the Company paid dividends totaling $0.113 per share for a total dividend payout of $23.3
million.
F-24
MICROCHIP TECHNOLOGY INCORPORATED
LIST OF SIGNIFICANT SUBSIDIARIES
Exhibit 21.1
Microchip Technology (Thailand) Co., Ltd.
14 Moo 1, T. Wangtakien
A. Muang Chacherngsao
Chacherngsao 24000
Thailand
Microchip Technology (Barbados) Incorporated
Hastings Business Services Limited
Hastings, Christ Church
Barbados
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-59686, 33-80072, 33-81690,
33-83196, 333-872, 333-40791, 333-67215, 333-93571, 333-51322, 333-53876, 333-73506, 333-96791, 333-99655, 333-
101696, 333-103764, 333-109486 and 333-119939) of Microchip Technology Incorporated of our reports dated May 17,
2006 with respect to the consolidated financial statements of Microchip Technology Incorporated, Microchip Technology
Incorporated management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness
of internal control over financial reporting of Microchip Technology Incorporated, included in this Annual Report (Form 10-
K) for the year ended March 31, 2006.
Phoenix, Arizona
/s/ Ernst & Young LLP
May 24, 2006
CERTIFICATION
Exhibit 31.1
I, Steve Sanghi, certify that:
1.
I have reviewed this Form 10-K of Microchip Technology Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and l5d-l5(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 31, 2006
/s/ Steve Sanghi
Steve Sanghi
President and CEO
CERTIFICATION
Exhibit 31.2
I, Gordon Parnell, certify that:
1.
I have reviewed this Form 10-K of Microchip Technology Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and l5d-l5(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 31, 2006
/s/ Gordon W. Parnell
Gordon W. Parnell
Vice President and CFO
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Steve Sanghi, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that the Annual Report of Microchip Technology Incorporated on Form 10-K for the period
ended March 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that information contained in such Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of Microchip Technology Incorporated.
By: /s/ Steve Sanghi
Name: Steve Sanghi
Title: President and Chief Executive Officer
Date: May 31, 2006
I, Gordon W. Parnell, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Microchip Technology Incorporated on Form 10-K for the
period ended March 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Form 10-K fairly presents, in all material respects,
the financial condition and results of operations of Microchip Technology Incorporated.
By: /s/ Gordon W. Parnell
Name: Gordon W. Parnell
Title: Vice President and Chief Financial Officer
Date: May 31, 2006
B O A R D O F D I R E C T O R S A N D O F F I C E R S
B O A R D O F D I R E C T O R S
C O R P O R A T E O F F I C E R S
Steve Sanghi
Chairman of the Board, President and
Chief Executive Officer
Microchip Technology Inc.
Matthew W. Chapman
President and CEO
Centrisoft Corporation
L.B. Day
President
L.B. Day & Co., Inc.
Albert J. Hugo-Martinez
Chief Executive Officer
Hugo-Martinez & Associates
Wade F. Meyercord
President
Meyercord & Associates, Inc.
A P P O I N T E D O F F I C E R S
J. Eric Bjornholt
Secretary
Paul R. Breault
Vice President, Worldwide Distribution Sales
Derek P. Carlson
Vice President, Development Tools Group
Kathryn A. Clevenger
Vice President, Fab 4 Operations
Randall L. Drwinga
Vice President, ROM Microcontroller and
Memory Division
Michael A. Finley
Vice President, Fab 2 Operations
Bryan J. Liddiard
Vice President, Analog and Interface
Marketing
Gary P. Marsh
Vice President, European Sales
Steve Sanghi
President, Chief Executive Officer and
Chairman of the Board
Stephen V. Drehobl
Vice President, Security, Microcontroller and
Technology Development Division
David S. Lambert
Vice President, Fab Operations
Mitchell R. Little
Vice President, Worldwide Sales and
Applications
Ganesh Moorthy
Vice President, Advanced Microcontroller and
Memory Division
Gordon W. Parnell
Vice President, Chief Financial Officer
Richard J. Simoncic
Vice President, Analog and Interface Products
Division
Sumit K. Mitra
Vice President, Digital Signal Controller Division
John F. Oatley
Vice President, Pacific Rim Manufacturing
Operations
Mitchel Obolsky
Vice President, Advanced Microcontroller and
Architecture Division
Robert H. Owen
Vice President, Information Services
Kenneth N. Pye
Vice President, Worldwide Applications Engineering
Lawrence G. Ross
Vice President, Asia Pacific Sales
Dan L. Termer
Vice President, Vertical Markets Group
William Yang
Vice President, Pacific Rim Finance
C
O R P O R A T E P R O F I L E
C
O R P O R A T E I N F O R M A T I O N
Microchip Technology Incorporated is a leading provider of microcontroller and
analog semiconductors, providing low-risk product development, lower total
system cost and faster time to market for thousands of diverse customer
applications worldwide. Headquartered in Chandler, Arizona, Microchip offers
outstanding technical support along with dependable delivery and quality.
For more information, visit the Microchip Web site at www.microchip.com.
• Founded in 1989
• Approximately 4,300 employees worldwide
• Quality systems are ISO/TS-16949:2002 certifi ed
• More than 45 sales offi ces worldwide
• Manufacturing facilities: Tempe, Arizona; Gresham, Oregon;
Bangkok, Thailand
• Design centers: Bangalore, India; Lausanne, Switzerland;
Mountain View, California; Chandler, Arizona
Independent Auditors
Ernst & Young LLP
Phoenix, Arizona
Legal Counsel
Wilson, Sonsini, Goodrich & Rosati, P. C.
Palo Alto, California
Austin, Texas
Transfer Agent & Registrar
Wells Fargo Bank Minnesota, N.A.
Shareowner Services
161 North Concord Exchange
P. O. Box 64854
St. Paul, Minnesota 55075-1139
800-468-9716
Form 10-K
A copy of the Company’s Form 10-K as fi led with
the Securities and Exchange Commission is
available upon request to:
Investor Relations
Microchip Technology Incorporated
2355 West Chandler Boulevard
Chandler, Arizona 85224-6199
480-792-7761
Annual Meeting
The annual meeting of the stockholders of Microchip
Technology Incorporated will be held at the Company’s
Chandler facility, 2355 West Chandler Boulevard,
Chandler, Arizona, on Friday, August 18, 2006
at 9:00 a.m. Pacifi c Standard Time.
Common Stock
Microchip Technology’s common stock is traded on
the Nasdaq National Market under the symbol “MCHP. ”
The following table sets forth the quarterly high and
low closing prices as reported by the Nasdaq National
Market for the last two years.
Fiscal 2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Low
$30.68
$32.61
$34.64
$37.74
$24.60
$28.52
$27.30
$32.13
Fiscal 2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$32.63
$30.61
$30.63
$28.49
Low
$26.80
$25.26
$26.03
$24.28
Corporate Facilities
Microchip Technology Incorporated
2355 West Chandler Boulevard
Chandler, Arizona 85224-6199
Microchip Technology Incorporated
1200 South 52nd Street
Tempe, Arizona 85281
Microchip Technology Incorporated
21015 SE Stark Street
Gresham, Oregon 97030
Internet Address
Additional Company information, along with the most
recent fi nancial and product information and press
releases, can be accessed at: www.microchip.com.
Microchip Technology (Thailand) Co., Ltd.
14 Moo 1 T. Wangtakien
A. Muangchachoengsao
Chacherngsao, 24000, Thailand
The statements contained in this annual report relating to producing signifi cant value to our shareholders, reaching ever new highs across all segments of
our business, our expectations for continued performance gains, long-term gross margin guidance, demand creation initiatives enhancing our competitive
advantage, commitment to offering the best possible service and support, becoming the leading microcontroller architecture in the 16-bit market, our goal to
continue to outpace the semiconductor industry, our commitment to support 8-bit applications, development tool sales being a leading indicator of continued
customer acceptance of our microcontrollers and digital signal controllers, our serial EEPROM product line continuing to grow, being well positioned for con-
tinued market share gains in fi scal year 2007, leverage of customer relationships to win additional sockets, delivering a competitive advantage in the automo-
tive, home appliance and medical equipment markets, the continuation of the embedded revolution, our ability to overcome technical challenges, technology
advancements giving us a substantial technical edge, enhancements to internal systems facilitating further innovation, delivering die yields that are the envy
of the industry, our ability to offer lower pricing and respond to competition while achieving high gross margins, ample production capacity, products providing
unmatched fl exibility and competitive advantage and technical training providing increased sales demand, are forward looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially because of the following factors, among
others: changes in demand or market acceptance of our products and the products of our customers; our ability to ramp products into volume production; the
level of orders that are received and can be shipped in a quarter; levels of inventories at our distributors and other customers; the level of sell-through of our
products through distribution; the mix of inventory we hold and our ability to satisfy short-term orders from our inventory; changes or fl uctuations in customer
order patterns and seasonality; the level at which design wins become actual orders and sales; changes in utilization of our manufacturing capacity; our ability
to continue to secure suffi cient assembly and testing capacity; competitive developments including pricing pressures; disruptions to our business or the busi-
nesses of our customers or suppliers due to natural disaster, terrorist activity, armed confl ict, war, worldwide oil prices and supply; disruptions in the worldwide
transportation system; impact of events outside the United States, such as the business impact of fl uctuating currency rates or unrest or political instability;
general industry, economic and political conditions; the impact on our business and on customer order patterns due to public health concerns; fi nancial stability
in foreign markets; our ability to maintain operating margins; our timely introduction of new technologies, market acceptance of our new products and those
of our customers; competitive factors, such as competing architectures and manufacturing technologies and acceptance of new products in the markets we
generally serve; the costs and outcome of any current or future tax audit or any litigation involving intellectual property, customers or other issues; and our
ability to attract and retain qualifi ed personnel.
For a detailed discussion of these and other risk factors, please refer to Microchip’s fi lings with the Securities and Exchange Commission on Forms 10-K and
10-Q. Our fi scal 2006 Form 10-K follows this letter to shareholders. Additionally, you can obtain copies of our Forms 10-K and 10-Q and other documents fi led
with the SEC for free at the SEC’s web site (www.sec.gov) or from commercial, document retrieval services.
©2006 Microchip Technology Incorporated. All rights reserved. The Microchip name and logo, PIC, dsPIC and KEELOQ are registered trademarks of
Microchip Technology Inc. in the USA and in other countries. I2C is a trademark of Philips Corporation. All other trademarks mentioned herein are the
property of their respective companies. Printed in U.S.A. 6/06
O R L D C L A S S P E O P L E . W O R L D C L A S S S O L U T I O N S .
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