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$30
$20
$10
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15
Annual Report 2008
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Celebrating the 15th Anniversary of
Microchip Technology’s Initial Public Offering
Microchip Technology is proud of the many accomplishments we have achieved for our customers,
shareholders and employees during our 15 years as a publicly traded company on the NASDAQ®
Stock Market (Ticker: MCHP). Microchip launched its initial public offering (IPO) on March 19, 1993,
and in the subsequent 15 years, we have created a high-performance stock investment that has
yielded consistent returns and significant value to our shareholders:
• At the time of the IPO, a share of Microchip stock was offered for $0.57 (split adjusted)
compared to $32.73 on March 31, 2008. An investment of $16,000 in Microchip common stock
on March 19, 1993 would have been worth approximately $1 million at the end of fiscal 2008
inclusive of stock price appreciation and dividends paid.
• Microchip’s market capitalization has jumped from approximately $81 million at the IPO to more
than $6 billion at the end of fiscal year 2008.
• Microchip’s annual net revenues have increased from $89 million in fiscal year 1993 to
$1.036 billion in fiscal year 2008.
• Our annual non-GAAP diluted net income per share, before non-operating charges and one-time
events, has grown from $0.04 to $1.57 (split adjusted) in the same period.*
• We have implemented seven stock splits and initiated a quarterly cash dividend in fiscal year
2003 with 20 quarters of consecutive increases in the dividend payment as of March 31, 2008.
Corporate Profile
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
•More than 4,800 employees worldwide
•Quality systems are ISO/TS-16949:2002 certified
•More than 45 sales offices worldwide
•Manufacturing facilities: Tempe, Arizona USA; Gresham, Oregon USA; Bangkok, Thailand
•Development centers: Bangalore, India; Bangkok, Thailand; Manila, the Philippines; Lausanne,
Switzerland; Bucharest, Romania; Budapest, Hungary; Santa Clara, California USA; Chandler,
Arizona USA
•Major products: PIC® Microcontrollers, dsPIC® Digital Signal Controllers, Analog & Interface
Products and Serial EEPROMs
•S&P 500 Index member
•Approximately 60,000 customers worldwide
*Microchip’s annual GAAP diluted net income per share has grown from $0.04 to $1.40 (split adjusted) in the same period. Also, please see note ** at the
bottom of the next page (Financial Highlights page) for additional information.
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Financial Highlights
All charts are based on fiscal year data, except where noted.
Net Sales (Millions of Dollars)
Non-GAAP Diluted Earnings Per Share**
$1,040 $1,036
$928
$847
$716
$699
$651
$571
$1.57
$1.48
$1.27
$1.07
$0.76
$0.74
$0.64
$0.45
01
02
03
04
05
06
07
08
01
02
03
04
05
06
07
08
Net Sales
Non-GAAP Net Income**
GAAP Net Income
2004
$699,260
2005
$846,936
2006
$927,893
2007
$1,039,671
2008
$1,035,737
$156,834
$226,761
$272,979
$325,638
$330,396
$137,262
$213,785
$242,369
$357,029
$297,748
Non-GAAP Diluted Earnings Per Share**
GAAP Diluted Earnings Per Share
$0.74
$0.65
$1.07
$1.01
$1.27
$1.13
$1.48
$1.62
$1.57
$1.40
Stockholders’ Equity
$1,320,517
$1,485,734
$1,726,189
$2,004,368
$1,036,223
Annual Cash Dividend Per Share
In thousands, except per share amounts.
$0.113
$0.208
$0.570
$0.965
$1.205
Microcontroller Portfolio
(Number of Products at Calendar Year End)
Analog and Interface Products Portfolio
(Number of Products at Calendar Year End)
484
414
313
283
490
468
449
408
377
340
299
261
214
187
142 159
00 01
02
03
04 05
06 07
00
01
02
03
04
05
06
07
**Our non-GAAP results exclude the effect of share-based compensation associated with our adoption of SFAS No. 123R, a loss on the sale of Fab 3, a tax
benefit from the resolution of a foreign tax matter, a benefit from the release of previously established tax reserves, the tax benefits associated with a tax audit
settlement, a tax charge associated with the repatriation of foreign earnings under the American Jobs Creation Act, charges related to the settlement of patent
license litigation, costs associated with the closure of Fab 1, an impairment charge associated with Fab 3, and restructuring and acquisition-related special
charges/income. 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.
Letter to Shareholders
“What were the key challenges and opportunities
for Microchip in fiscal year 2008?”
Microchip Technology’s fiscal
year 2008 was exceptionally
challenged due to global
economic factors including
recessionary pressures and
the U.S. credit and housing
crisis. These external conditions
adversely impacted our revenue
during the first three fiscal
quarters with the Company
posting a modest rebound in the
fourth quarter.
For the fiscal year ending March 31, 2008, Microchip’s
net sales were $1.036 billion, essentially on par with net
sales of $1.040 billion for the fiscal year ending March
31, 2007. Clearly, achieving flat revenue did not meet
our expectations. One positive, though, was that our total
sales year over year fared better than most companies in
the semiconductor industry.
Non-GAAP net income for the fiscal 2008 period was
$330.4 million, an increase of 1.5% over non-GAAP net
income in the prior fiscal year of $325.6 million. We
achieved record gross margins and posted non-GAAP
operating margins of 34.9% in fiscal 2008. Our balance
sheet is strong, and we generated $476.2 million of net
cash in fiscal 2008 (prior to our dividend payments of
$252 million, net cash generation from our convertible
debt transaction of $1.13 billion and stock buy-back
activity of $1.14 billion), driven by our sound operating
results and successful business model.
As slowing economic conditions negatively impacted the
U.S. stock market, Microchip initiated several actions to
boost shareholder return at a time when we believed our
stock price was undervalued.
adding to an October 2006 authorization to repurchase
10 million shares. During fiscal 2008, a total of 36.5
million shares of common stock was purchased for
$1.14 billion.
The Company sold its idled Fab 3 in Puyallup,
Washington, adding approximately $27.5 million to its
treasury balance. Through reduced operating expenses,
the sale is contributing to increased gross margins.
With the current equipment in our remaining two wafer
fabrication facilities (“fabs”), Microchip can support
$1.6 billion in sales today – and can expand revenue
capacity to $2.2 billion with additional capital equipment
investments at such facilities.
Microchip increased the cash dividend payment every
quarter during fiscal 2008, passing along the results
of our strong net cash generation throughout the fiscal
year to shareholders. With 20 quarters of consecutive
increases in the dividend payment, our shareholders
continued to benefit from the Company’s performance.
Microchip’s total annual dividend payment in fiscal 2008
was $1.205 per share, a rise of 24.9% over the annual
dividend payment of $0.965 per share in fiscal 2007.
Cash dividend payments to shareholders in fiscal 2008
totaled $252 million.
In spite of the difficult economic head winds, Microchip
remained in a leadership position when compared to
most other semiconductor manufacturers in areas such
as sales, gross margin, operating margin, earnings
per share, cash generation, stock price performance,
dividend payment and dividend growth – which all
contribute to Microchip continuing to deliver value to
its shareholders.
As a result of this consistent leadership performance,
Standard & Poor’s added Microchip to its S&P 500
Index, a world-renowned stock index of leading large-cap
companies in major industries of the U.S. economy.
Positive financial results are largely based on having
Positive financial results are largely based on having
a strong product foundation. During the fiscal year,
a strong product foundation. During the fiscal year,
the Company’s aggressive
technology development
efforts and new product
pipelines continued to yield
pipelines continued to yield
many new innovations
targeting a wide variety of
targeting a wide variety of
high-volume embedded
high-volume embedded
control applications.
control applications.
In spite of the difficult economic head
winds, Microchip remained in a leadership
position when compared to most other
semiconductor manufacturers...
In December 2007, the Company completed an offering
of $1.15 billion aggregate principal amount of 2.125%
junior convertible subordinated debentures which were
sold to institutional buyers. Microchip also authorized a
21.5 million share repurchase in conjunction with the
convertible debt transaction and an additional stock
repurchase of up to 10 million shares of common stock,
Watch a video-recorded version of the Letter to Shareholders on the Microchip Web site (www.microchip.com) by clicking the
“Corporate” tab and selecting the “Investors” option.
Microchip entered the $3.8 billion 32-bit microcontroller
market*** with the launch of the PIC32 family of 32-bit
devices. The PIC32 family extends our PIC® micro-
controller line with more performance and memory while
maintaining pin, peripheral and software compatibility
with Microchip’s 16-bit PIC24 microcontroller and
dsPIC® digital signal controller families.
Our 8- and 16-bit product families experienced another
year of strong new product growth with solutions for
Universal Serial Bus (USB) connectivity, liquid crystal
displays (LCD), lower power consumption, rich on-
chip analog peripherals, smart sensor processing and
advanced, energy-efficient motor control.
As our customers’ end products require even more user
interface capabilities, Microchip took advantage of two
key design trends driving new, high-volume embedded
applications today: incorporating graphics display and
touch sense technology. We debuted whole product
solutions for both, and customer response has been
robust.
The Company’s 16-bit Embedded Control Seminar
series concluded with more than 6,000 engineers
from about 100 worldwide locations in attendance
who were trained on designing with our 16-bit families.
Worldwide 16-bit design contests and other promotions
experienced strong participation from engineers who
were eager to engage with these new products.
Development system shipments supporting our
8-, 16- and 32-bit microcontrollers and 16-bit digital
signal controllers achieved another year of record growth
with 116,832 shipments compared to 83,937 in fiscal
2007 – a 39% increase. The total cumulative number of
development systems shipped now stands at 632,785
indicating a strong interest in Microchip’s products.
We also continued to invest in our analog and interface
product lines. Key innovations here included a 2 MHz
high-speed pulse-width modulator, low-power high-
accuracy operational amplifiers, and the industry’s
first digital-to-analog converter to combine integrated
EEPROM memory and 12-bit resolution in a miniature
6-pin SOT-23 package.
Microchip Technology’s Board of Directors
Microchip Technology’s Board of Directors
Wade Meyercord, Albert Hugo-Martinez, Steve Sanghi, L.B. Day, Matt Chapman
Wade Meyercord, Albert Hugo-Martinez, Steve Sanghi, L.B. Day, Matt Chapman
with our numerous regional and specialty distribution
partners, supported more than 64% of our worldwide
sales in fiscal 2008.
Demonstrating Microchip’s ongoing commitment to
provide outstanding technical assistance, the Company
garnered record attendance at Microchip’s MASTERs
Conference series with nearly 3,000 embedded
designers attending 13 separate conferences, which
were held in seven countries. Separately, more than
16,000 engineers attended additional classes at our
37 Regional Training Center sites worldwide.
In closing, fiscal 2008 was indeed a challenging year.
As we look to fiscal year 2009 and beyond, Microchip
is well-positioned for further market share gains and to
outpace the semiconductor industry.
With sincere appreciation to our shareholders,
customers and employees for your continued confidence
in Microchip during the past 15 years,
Steve Sanghi
President and CEO
Microchip Technology Incorporated
Microchip also unveiled the fastest (20 MHz)
1 megabit SPI serial EEPROM devices in the industry,
adding to our very deep non-volatile memory portfolio.
While new products are critical to our success, the
Company also delivered higher levels of customer
support across the globe to complement our product
strategy.
Microchip partnered with Avnet Electronics Marketing
and Future Electronics to provide global distribution
services. These two global distributors, combined
***Gartner Dataquest, “Top 20 Companies Revenue from Shipments of
***Gartner Dataquest, “Top 20 Companies Revenue from Shipments of
32-bit MCU - All Applications (Millions of $US),” 2008.
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Steve Sanghi rings the NASDAQ® Stock Market Opening Bell on March 19,
Steve Sanghi rings the NASDAQ® Stock Market Opening Bell on March 19,
2008, recognizing Microchip’s 15 years as a NASDAQ-listed company and
2008, recognizing Microchip’s 15 years as a NASDAQ-listed company and
the 15th anniversary of Microchip’s IPO.
the 15th anniversary of Microchip’s IPO.
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“What has changed most about Microchip
in the past 15 years?”
Albert Hugo-Martinez
Member, Board of Directors
Everything has changed –
and that is what has
made the last 15 years
so exciting for me. In
1993, Microchip was
in the midst of its well-
known turnaround phase.
The transition from a
money-losing enterprise
to a Wall Street success
story was led by the
exceptional leadership
of Steve Sanghi and an
impressive executive
management team.
Their leadership has
helped steer the substan-
tial growth and strong
tial growth and strong
tial growth and strong
tial growth and strong
market position of the
8-bit PIC microcontrollers,
rising from number 20
in 1990 to number one
today. This was no small
feat in that Microchip
had to overtake many
large semiconductor
industry players along the
way. To accomplish this,
the Company was – and
remains so today –
obsessively focused on
new design wins,
customer support, contin-
uous improvement, cost
reduction and employee
empowerment.
Today, Microchip is
firmly entrenched in the
worldwide embedded
control market space,
with an organization that
is firing on all cylinders
and new product efforts
pushing into many
technology areas that
offer substantial growth
potential for years to
come.
come.
come.
Ganesh Moorthy
Executive Vice President
“Why has the PIC® microcontroller
architecture been so successful?”
At the time of our IPO,
Microchip had just seven
PIC microcontrollers in
the product line. These
devices targeted the then
emerging low-cost and low-
pin-count segment of the
8-bit field-programmable
microcontroller space. Over
time, Microchip pioneered
the use of field-program-
mable memory technolo-
gies, such as Flash and
one time programmable,
in microcontrollers – and
helped revolutionize the
entire market.
Today, Microchip has
achieved the number one
position in 8-bit micro-
controllers, shipped more
than six billion devices,
and put together a broad
portfolio of 484 controller
products in volume produc-
tion. We are aggressively
tion. We are aggressively
pushing the PIC microcon-
troller architecture into
significantly new design
territories with our rapidly
expanding portfolio of 16-bit
microcontrollers and digital
signal controllers and new
32-bit microcontrollers.
With the recent
announcement of
the PIC32 32-bit
microcontrollers,
Microchip is the
only supplier to
offer an 8-, 16- &
32-bit product line
supported by a
single development
environment.
the PIC microcontroller
architecture because
of the many advantages
Microchip delivers to the
customer’s overall business,
in addition to offering the
right price/performance
ratio for the design.
PIC microcontrollers
deliver low-risk product
development by providing
seamless program size
expansion. Pin compatibil-
ity enables drop-in replace-
ments of package types,
as well as variations of
memories, without having
to completely rewrite code.
The Company’s MPLAB®
Integrated Development
Environment offers low-
risk product development
by delivering a complete
management solution for
all development systems in
Engineers worldwide
continue to embrace
“Why has the PIC® microcontroller architecture been so successful?” (continued)
one free tool. Customers simply need
to learn this one design environment
that provides the platform for all PIC
microcontroller design activities.
Microchip’s seamless migration
path with standard pin schemes
and code compatibility enables
engineers to reuse verified code
and a proven printed circuit board
layout. Designers can add higher
memory options, incremental I/O
and complex digital and analog
peripherals without losing their
software investments, lowering total
system costs.
With the recent announcement of
the PIC32 32-bit microcontrollers,
Microchip is the only supplier to
offer an 8-, 16- and 32-bit product
line supported by a single develop-
ment environment. This becomes
a significant differentiator because
it enables customers with multiple
designs to invest in just one micro-
controller architecture that can
serve as the technology platform for
all of their requirements today and
in the future, while reducing overall
design costs and time to market.
“What is the Company’s philosophy on creating
and delivering shareholder value?”
Gordon Parnell
Chief Financial Officer
Microchip has generated
substantial shareholder
value since going public.
Microchip’s stock price
has appreciated 5,642%,
from $0.57 per share
(split adjusted) on March
19, 1993 to $32.73 per
share on March 31,
2008. The Company has
delivered seven stock
splits, and more recently,
20 quarters of consecu-
tive increases in the
dividend payment.
In fact, an investment
of $16,000 in Microchip
common stock on March
19, 1993 would have
been worth approximately
$1 million at the end of
fiscal 2008 inclusive of
stock price appreciation
and dividends paid.
We have thrived in a
highly volatile technol-
ogy industry by creating
a strong business model
based on customer and
product diversification.
This model has been
successfully tested now
through numerous
semiconductor business
cycles, during which we
delivered consistently
higher performance that
outpaced most peer
companies in our market
segment.
…an investment
of $16,000 in
Microchip common
stock on March 19,
1993 would have
been worth
approximately
$1 million at the
end of fiscal 2008...
For example, as of March
31, 2008, Microchip had
approximately 60,000
customers, with the top
10 customers represent-
ing about 9% of total
sales. Our silicon solu-
tions are used across
hundreds of applications
in industry segments such
as automotive, consumer,
communications, industri-
al control and office auto-
mation. Geographically,
total sales were divided
in fiscal 2008 with 43.8%
from Asia, 29.8% from
Europe, and 26.4% from
the Americas. About 64%
of total revenue in fiscal
2008 was generated by
our distribution and sales
channel partners with the
remaining 36% originat-
ing from our direct sales
force.
Most Microchip employ-
ees are eligible to receive
stock ownership in the
Company. This aligns their
contributions with the
interests of our share-
holders, creating a unified
enterprise dedicated to
cost containment and
continuous improvement
continuous improvement
driving revenue growth
driving revenue growth
and high profit margins.
and high profit margins.
Dave Lambert
Vice President, Fab Operations
“Describe Microchip’s manufacturing strategy.”
Semiconductor manufac-
turing has a reputation
for using next-generation
technology and process
equipment along with fab-
rication facilities (“fabs”)
that require billions of
dollars of investments.
Based on Microchip’s
product mix, our manu-
facturing strategy rests
with employing older-
generation equipment
and maximizing its
potential output through
ongoing continuous
improvement activities.
Using this highly
optimized equipment
today, our Fab 2 in
Tempe, Arizona, and
Fab 4 in Gresham,
Oregon, produce die
yields that are among
the best in the industry.
We took advantage of
the cyclical nature of our
industry by acquiring
Fab 4 during a down cycle
when its valuation was
depressed.
Following wafer manu-
facturing, the test and
assembly functions are
handled at our facility
near Bangkok, Thailand.
All of these actions form
a low-cost manufacturing
structure that contributes
high gross profit margins
to the business. This also
enables Microchip to
respond quickly to com-
petitive pricing pressures,
and still maintain healthy
margins.
Our quality systems are
ISO/TS-16949 certified
by the Organization for
Standards/Technical
Specification. In addition,
Microchip has a long
history of consistent
delivery times, and
product obsolescence
has been minimal.
“What trends are occurring in research &
development for embedded control?”
Microchip a competitive
edge. In the past 15 years,
Microchip has produced an
impressive return on our
technology development
activities through revenue
growth, strong profit
margins, continued market
share gains, and a deep
patent portfolio and other
valuable intellectual
property.
Steve Drehobl
Vice President, Security,
Microcontroller and Technology
Development Division
As the electronics intel-
ligence required in most
embedded systems contin-
ues to expand, Microchip’s
research and development
teams are working to
overcome the numerous
technical challenges in
creating the latest silicon
devices that meet our
customers’ design
challenges.
We have set up numerous
development centers
worldwide to utilize local,
expert talent in a variety of
technologies.
Areas we believe have
the best opportunity for
high-volume growth today
include delivering higher
performance, adding more
peripherals, expanding
memory options, lowering
power consumption, using
smaller packages, develop-
ing more power manage-
ment features and enabling
additional connectivity
among other devices and
systems.
The efforts of our
employees have
been instrumental
in yielding
industry-leading
technological
advancements that
give Microchip a
competitive edge.
The efforts of our
employees have been
instrumental in yielding
industry-leading technologi-
cal advancements that give
cal advancements that give
“How does analog deliver more value
to embedded designs – and to Microchip?”
Rich Simoncic
Vice President, Analog
& Interface Products Division
The world is still funda-
mentally analog-based,
even though we are sur-
rounded by digital tech-
nology. Analog refers to
real-world signals (also
called inputs and outputs)
which can be a user inter-
face, such as a key button
press or LCD display, or
anything that a sensor
measures, such as tem-
perature, speed, humidity
and pressure.
Electronic designs,
including those using
microcontrollers, are
digital-based. Any incom-
ing analog input must be
converted into a digital
reading in order for the
microcontroller to process
it. Likewise, any output
must first be converted
from the digital reading
into an analog output.
To make these signal
changes, various analog
products may be required
depending upon the
system design.
Microchip has a growing
portfolio of analog circuit-
ry, including linear, power
management, mixed sig-
nal, thermal management
and battery management.
Today, Microchip
continues to
leverage our
approximately
60,000 customers
worldwide to
sell solutions of
microcontrollers,
digital signal
controllers, analog
components and
serial EEPROMs.
Today, Microchip
continues to leverage our
approximately 60,000
customers worldwide
to sell solutions of
microcontrollers, digital
signal controllers, analog
components and serial
EEPROMs. Attaching
analog and memory
products to current
microcontroller designs
has been at the very core
of our sales strategy. In
addition, we have seen
design wins in analog
products from companies
not currently using our
microcontroller solutions –
strong validation of
the industry-leading
performance that many of
our products deliver.
As our microcontroller
solutions have evolved
into the 16- and now
32-bit spaces, applica-
tions using these higher-
performance processors
typically require even
greater numbers of
analog products to
further refine and execute
the signal integrity in the
design.
“How do Microchip’s sales strategies
ensure continued growth?”
Microchip is committed
to providing the many
resources our custom-
ers desire to be truly
successful, including
extensive support, techni-
cal training and multiple
channels through which
they can acquire our
products.
Microchip’s direct sales
force is non-commis-
sioned. This offers
significant benefits to
our customers by having
a global team truly com-
mitted to delivering out-
standing communication
and support in their
multiple locations. We
continue to add more
field applications engi-
neers who share their
technical skills and
embedded design experi-
ence in person with
customers worldwide.
Mitch Little
Vice President, Worldwide
Sales and Applications
We offer various types
of technical training,
depending upon the
customer’s needs and
timeline. Engineers can
view online Webinars for
a 20-minute discussion
on a given topic, and,
for more detail, attend
half-day or multi-day
courses through any
of our 37 worldwide
Regional Training
Centers. Our annual
I am confident our continued focus
on helping customers succeed
can provide opportunities to grow
revenue.
“How do Microchip’s sales strategies ensure continued growth?” (continued)
MASTERs Conferences have become
a key event for leading designers
worldwide interested in learning
about the latest embedded control
technologies and trends.
Our microchipDIRECT online pro-
curement site supports a growing
number of customers who wish to
directly manage their accounts,
taking advantage of a feature-rich
portal of options such as production
programming, credit lines, credit-
card payments, competitive pricing
and e-mail notifications.
We work with leading channel
organizations who have established
strong brand affinity among their
embedded engineering customers –
and the strategy is working well by
delivering critical new designs wins.
These important sales partners
include global distributors, regional
distributors, catalog suppliers,
design houses, design consultants,
manufacturers’ representatives and
third-party consultants.
Today the Microchip sales organiza-
tion proudly serves approximately
60,000 customers worldwide, and
“Describe the unique corporate culture at
Microchip, and how it makes a difference.”
Lauren Carr
Vice President,
Human Resources
Microchip’s corporate
culture of empowerment
and continuous improve-
ment has been at the
core of our success since
the early 1990s. At that
time, as the turnaround
phase of the Company
was just taking off, our
employees were the one
constant asset we could
count on, and they remain
a compelling competitive
advantage today.
Our culture is driven by a
set of guiding values that
embrace teamwork, open
communication, continu-
ous learning and improve-
ment, and employee
empowerment. Executives
are assessed every year
on their ability to lead,
manage and follow based
on these guiding values.
Our culture is
driven by a set
of guiding values
that embrace
teamwork, open
communication,
continuous learning
and improvement,
and employee
empowerment.
best position to make
the correct decision. To
reinforce this key concept,
organizational charts are
literally turned upside
down, demonstrating the
important role managers
play in supporting their
team members’ success.
Continuous learning and
improvement is further
enabled through hundreds
of available employee
development courses.
The result is a global
enterprise composed of a
highly engaged workforce
dedicated to working
smarter and constantly
striving to improve all
aspects of the business.
Team members at all
levels are empowered to
make decisions every day
because management
believes they are in the
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:95)
(cid:134)
Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934
For the fiscal year ended March 31, 2008
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 or Other Jurisdiction of
Incorporation or Organization)
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:
Title of Each Class
Common Stock, $0.001 Par Value Per Share
Preferred Share Purchase Rights
Name of Each Exchange on Which Registered
Nasdaq Global Market
None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (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, or smaller reporting
company. See definitions of “large accelerated filer” “accelerated file” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act):
Large accelerated filer (cid:58)
Accelerated filer
(cid:133)
Non-accelerated filer
(cid:133)
Smaller reporting company (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 28, 2007 based upon the
closing price of the common stock as reported by the NASDAQ® Global Market on such date was approximately $7,668,164,565.
Number of shares of Common Stock, $.001 par value, outstanding as of May 22, 2008: 184,952,497.
Proxy Statement for the 2008 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
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
Page
3
10
18
18
18
19
20
22
23
38
39
39
39
42
42
42
42
43
43
44
45
2
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 10, and elsewhere in this Form 10-K. Although we believe that the matters reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place
undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any
forward-looking statement.
Item 1.
BUSINESS
We develop and manufacture specialized semiconductor products used by our customers for a wide variety of embedded
control applications. Our product portfolio comprises 8-bit, 16-bit, and 32-bit PIC® microcontrollers and 16-bit dsPIC®
digital signal controllers, which feature on-board Flash (reprogrammable) memory technology. In addition, we offer a broad
spectrum of high-performance linear, mixed-signal, power management, thermal management, battery management and
interface devices. We also make serial EEPROMs. 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 website as soon as reasonably
practicable after they are electronically filed with or furnished to the Securities and Exchange Commission:
•
•
•
•
•
our annual report on Form 10-K
our quarterly reports on Form 10-Q
our current reports on Form 8-K
our proxy statement
any amendments to the above-listed reports filed or furnished pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934
All SEC filings on our website are available free of charge. The information on our website is not incorporated into this
Form 10-K.
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
Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of
applications and markets worldwide, including:
•
•
•
•
•
•
•
•
automotive comfort, safety and entertainment applications
remote control devices
handheld tools
home appliances
portable computers
robotics
accessories
cordless and cellular telephone
3
• motor controls
•
•
•
•
security systems
educational and entertainment devices
consumer electronics
power supplies
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 at approximately $14 billion in calendar year 2007. 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.
Many of the microcontrollers shipped today are ROM-based and must be programmed by the semiconductor supplier
during manufacturing, resulting in long 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, we 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
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.
Microcontrollers
We offer a broad family of microcontroller products featuring our 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 6 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 over 550 microcontrollers in our product portfolio, we target the 8-bit, 16-bit, and
32-bit microcontroller markets.
Digital Signal Controllers (DSC) are a subset of our 16-bit microcontroller offering. Our dsPIC® 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
4
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 190 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 600,000 development tools.
Analog and Interface Products
Our analog and interface products consist of several families with over 500 power management, linear, mixed-signal,
thermal management and interface products. At the end of fiscal 2008, our mixed-signal analog and interface products were
being shipped to more than 13,400 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.
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 statistical techniques (statistical process control,
designed experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct
control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to
capture the wafer manufacturing and a portion of the assembly and testing profit margin.
Our manufacturing facilities are located in:
• Tempe, Arizona (Fab 2)
• Chandler, Arizona (probe operations)
• Gresham, Oregon (Fab 4)
• Bangkok, Thailand (assembly, probe and test)
5
Wafer Fabrication
Fab 2 currently produces 8-inch wafers and supports manufacturing processes from 0.35 to 5.0 microns. During fiscal
2008 and fiscal 2007, Fab 2 operated at approximately 99% of its capacity. 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.
We acquired Fab 4 in August 2002 and began production on October 31, 2003. Fab 4 currently produces 8-inch wafers
using predominantly 0.35 to 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 and Fab 4 will
provide sufficient capacity to allow us to respond to increases in future demand.
In September 2007, we received an unsolicited offer on our Fab 3 facility located in Puyallup, Washington. We assessed
our available capacity in our current facilities, along with our capacity available from outside foundries and determined the
capacity of Fab 3 would not be required in the near term. As a result of this assessment, we accepted the purchase offer to
sell Fab 3 on September 21, 2007 and the transaction closed on October 19, 2007. We received $27.5 million in cash net of
expenses associated with the sale and recognized an impairment charge of $26.8 million on the sale of Fab 3, representing the
difference between the carrying value of the assets at September 30, 2007 and the amounts realized subsequent to
September 30, 2007.
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. As of March 31, 2008,
approximately 67% of our assembly requirements were being performed in our Thailand facility. As of March 31, 2008, 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 our
effective use of our manufacturing facilities and equipment. Maintenance of manufacturing productivity and yields are
important factors in the achievement of our operating results. The manufacture of integrated circuits, particularly non-
volatile, erasable CMOS memory and logic devices, such as those that we produce, are complex processes. These processes
are sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in
the materials used and the performance of our manufacturing personnel and equipment. As is typical in the semiconductor
industry, we have from time to time experienced lower than anticipated manufacturing yields. Our operating results will
suffer if we are unable to maintain yields at approximately the current levels.
At the end of fiscal 2008, we owned long-lived assets (consisting of property, plant and equipment) in the United States
amounting to $400.6 million and $121.7 million in other countries, including $113.1 million in Thailand. At the end of fiscal
2007, we owned long-lived assets in the United States amounting to $488.7 million and $117.0 million in other countries,
including $114.6 million in Thailand.
6
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,
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 enable new products and innovative
features as well as achieve further cost reductions and performance improvements in existing products.
In fiscal 2008, our R&D expenses were $120.9 million, compared to $113.7 million in fiscal 2007 and $94.9 million in
fiscal 2006. R&D expenses included $10.7 million in fiscal 2008 and $9.6 million in fiscal 2007 of share-based
compensation as a result of the adoption of FASB Statement of Financial Accounting Standard (SFAS) No. 123 (revised
2004) Share-Based Payment (SFAS No. 123R).
Sales and Distribution
General
We market our products worldwide primarily through a network of direct sales personnel and distributors.
Our direct sales force focuses on a wide variety of strategic accounts in three geographical markets: the Americas,
Europe and Asia. We currently maintain sales and technical support centers in major metropolitan areas in all three
geographic markets. We believe that a strong technical service presence is essential to the continued development of the
embedded control market. Many of our field sales engineers (FSEs), field application engineers (FAEs), and sales
management have technical degrees or backgrounds and have been previously employed in high technology environments.
We believe that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The
primary mission of our FAE team is to provide technical assistance to customers and to conduct periodic training sessions for
the balance of our sales team. FAEs also frequently conduct technical seminars and workshops in major cities around the
world.
Distribution
Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe
that distributors provide an effective means of reaching this broad and diverse customer base. We believe that customers
recognize Microchip for its products and brand name and use distributors as an effective supply channel.
In fiscal 2008, we derived 64% of our net sales through distributors and 36% of our net sales from customers serviced
directly by Microchip. In fiscal 2007 and 2006, we derived 65% of our net sales through distributors and 35% of our net
sales from customers serviced directly by Microchip. Our largest distributor accounted for approximately 12% of our net
sales in fiscal 2008, 11% of our net sales in fiscal 2007 and 13% of our net sales in fiscal 2006. Our second largest
distributor accounted for approximately 7% of our net sales in fiscal 2008, 10% of our net sales in fiscal 2007 and 11% of our
net sales in fiscal 2006. No other distributor or end customer accounted for more than 10% of our net sales in fiscal 2008,
2007 or 2006. In February 2008, we terminated our relationship with Arrow Electronics in North America and Europe.
Arrow Electronics in Australia and New Zealand remain as our only Arrow Electronics franchised distributor locations
worldwide. In February 2008, we also entered into a new demand creation relationship with Avnet/Memec in North
America, Avnet/Silica in Europe, and an expanded demand creation relationship with Future Electronics worldwide.
We do not have long-term agreements with our distributors and we, or our distributors, may each terminate our
relationship with little or no advanced notice. The loss of, or the disruption in the operations of, one or more of our
distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.
Sales by Geography
Sales by geography for fiscal 2008, 2007 and 2006 were as follows (dollars in thousands):
Americas
Europe
Asia
2008
$ 273,363
308,171
454,203
26.4%
29.8
43.8
2007
$ 287,371
302,708
449,592
2006
27.6% $ 266,353
255,367
29.1
406,173
43.3
28.7%
27.5
43.8
Year Ended March 31,
Total Sales
$ 1,035,737
100.0%
$ 1,039,671
100.0% $ 927,893
100.0%
7
Sales to foreign customers accounted for approximately 75% of our net sales in fiscal 2008, 74% of our net sales in fiscal
2007 and 74% of our net sales in fiscal 2006. 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 20% of our net sales in fiscal 2008,
18% of our net sales in fiscal 2007 and 17% of our net sales in fiscal 2006. In each of fiscal 2008, 2007 and 2006, 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 2008, 2007 or 2006.
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 to date as a result of export restrictions.
The semiconductor industry is characterized by seasonality and wide fluctuations of supply and demand. Since a
significant portion of our revenue is from consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal year. In recent periods, weakness in the U.S. housing
market and general economic conditions have had a more significant impact on our results than seasonality, and has made it
difficult to assess the impact of seasonal factors on our business.
Backlog
As of April 30, 2008, our backlog was approximately $225.7 million, compared to $185.4 million as of April 30, 2007.
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.
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
We believe that other important competitive factors in the embedded control market include:
•
•
•
•
•
ease of use
functionality of application development systems
dependable delivery, quality and availability
technical service and support
price
We believe that we compete favorably with other companies on all of these factors, but we may be unable to compete
successfully in the future, which could harm our business.
Patents, Licenses and Trademarks
We maintain a portfolio of United States and foreign patents, expiring on various dates between 2008 and 2026. We also
have numerous additional United States and foreign patent applications pending. We do not expect that the expiration of any
8
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 March 31, 2008, we had 4,811 employees. None of our employees are represented by a labor organization. We
have never had a work stoppage and believe that our employee relations are good.
Executive Officers
The following sets forth certain information regarding our executive officers as of April 30, 2008:
Name
Steve Sanghi
Ganesh Moorthy
Stephen V. Drehobl
David S. Lambert
Mitchell R. Little
Gordon W. Parnell
Richard J. Simoncic
Age
52
48
46
56
55
58
44
Position
Chairman of the Board, President and Chief Executive Officer
Executive Vice President
Vice President, Security, Microcontroller and Technology Division
Vice President, Fab Operations
Vice President, Worldwide Sales and Applications
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. Since May 2004, he has been a member of the Board of Directors of Xyratex Ltd., a storage and network
technology company. Since May 2007, he has been a member of the Board of Directors of FIRST (For Inspiration and
Recognition of Science and Technology).
Mr. Moorthy has served as Executive Vice President since October 2006 and served as a Vice President in various roles
since he joined the Company in 2001. Prior to this time, he served in various executive capacities with other semiconductor
companies. Mr. Moorthy holds an M.B.A. in Marketing from National University, a B.S. degree in Electrical Engineering
from the University of Washington and a B.S. degree in Physics from the University of Bombay.
9
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. 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. Since January 2008, he has been a member of the
Board of Directors of Integrated Device Technology, Inc.
Mr. Simoncic has served as Vice President, Analog and Interface Products Division since September 1999. From
October 1995 to September 1999 he served as Vice President in various roles. Joining Microchip in 1990, Mr. Simoncic held
various roles in Design, Device/Yield Engineering and Quality Systems. Mr. Simoncic holds a B.S. degree in Electrical
Engineering Technology from DeVry Institute of Technology.
Item 1A. RISK FACTORS
When evaluating Microchip and its business, you should give careful consideration to the factors listed below, in
addition to the information provided elsewhere in this Form 10-K and in other documents that we file with the Securities and
Exchange Commission.
Our 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;
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;
fluctuations in the mix of products;
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 current or future 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, whether or not covered by insurance; and
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.
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Our operating results will suffer if we ineffectively utilize our manufacturing capacity or fail to maintain manufacturing
yields.
The manufacture and assembly of integrated circuits, particularly non-volatile, erasable CMOS memory and logic
devices such as those that we produce, are complex processes. These processes are sensitive to a wide variety of factors,
including the level of contaminants in the manufacturing environment, impurities in the materials used, the performance of
our wafer fabrication personnel and equipment, and other quality issues. As is typical in the semiconductor industry, we have
from time to time experienced lower than anticipated manufacturing yields. Our operating results will suffer if we are unable
to maintain yields at approximately the current levels. This could include delays in the recognition of revenue, loss of
revenue or future orders, and customer-imposed penalties for failure to meet contractual shipment deadlines. Our operating
results are also adversely affected when we operate at less than optimal capacity. Lower capacity utilization results in certain
costs being charged directly to expense and lower gross margins.
We are dependent on orders that are received and shipped in the same quarter and are therefore limited in our visibility of
future product shipments.
Our net sales in any given quarter depend upon a combination of shipments from backlog and orders received in that
quarter for shipment in that quarter, which we refer to as turns orders. We measure turns orders at the beginning of a quarter
based on the orders needed to meet the shipment targets that we set entering the quarter. Historically, we have relied on our
ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with
relatively short delivery schedules. Shorter lead times generally mean that turns orders as a percentage of our business are
relatively high in any particular quarter and reduces our backlog visibility on future product shipments. Turns orders
correlate to overall semiconductor industry conditions and product lead times. Because turns orders are difficult to predict,
varying levels of turns orders make our net sales more difficult to forecast. If we do not achieve a sufficient level of turns
orders in a particular quarter relative to our revenue targets, our revenue and operating results may suffer.
Intense competition in the markets we serve may lead to pricing pressures, reduced sales of our products or reduced
market share.
The semiconductor industry is intensely competitive and has been characterized by price erosion and rapid technological
change. We compete with major domestic and international semiconductor companies, many of which have greater market
recognition and substantially greater financial, technical, marketing, distribution and other resources than we do with which
to pursue engineering, manufacturing, marketing and distribution of their products. We may be unable to compete
successfully in the future, which could harm our business. Our ability to compete successfully depends on a number of
factors both within and outside our control, including, but not limited to:
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the quality, performance, reliability, features, ease of use, pricing and diversity of our products;
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. However, there can be no assurance that we will be able to do so in the future. We have experienced in the past and
expect to continue to experience in the future varying degrees of competitive pricing pressures in our Serial EEPROM and
non-proprietary analog products.
We may be unable to maintain average selling prices for our products as a result of increased pricing pressure in the
future, which could adversely impact our operating results.
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Our business is dependent on selling through distributors.
Sales through distributors accounted for approximately 64% of our net sales in fiscal 2008 and 65% of our net sales in
each of fiscal 2007 and 2006. Our largest distributor accounted for approximately 12% of our net sales in fiscal 2008, 11% of
our net sales in fiscal 2007 and 13% of our net sales in fiscal 2006. Our two largest distributors accounted for approximately
19% of our net sales in fiscal 2008, 21% of our net sales in fiscal 2007 and 24% of our net sales in fiscal 2006. We do not
have long-term agreements with our distributors and we and our distributors may each terminate our relationship with little or
no advance notice.
On February 4, 2008, we terminated our distributor Arrow Electronics and announced that we had partnered with Avnet
Electronics Marketing and Future Electronics to provide our global distribution services. We believe that these two global
distributors combined with our regional and specialty distributor partners will have a positive long-term impact in supporting
the technical and commercial support needs of our customers. Our net sales of product sold by Arrow Electronics in the year
ended March 31, 2008 represented approximately 7% of our net sales. Although we do not believe the termination of Arrow
Electronics will have a material adverse impact on our net sales, there can be no assurance as to what the long-term or short-
term impact on us will be as a result of these recent actions.
During fiscal 2006, we reduced the gross margin that certain of our distributors earn when they sell our products. We
reduced these distributors’ gross margins because we believed these distributors did not have sufficient technical sales
resources to properly address the marketplace for our products. Since fiscal 2006, we have added over 150 technical sales
employees and added new regional distributors throughout our worldwide sales organization to address the support
requirements for both our OEM and distribution customers. Although these actions have not had a material adverse impact
on the overall effectiveness of our distribution channel, there can be no assurance that there will not be an adverse impact in
the future.
During an industry and/or economic downturn, it is possible there will be an oversupply of products, and a decrease in
sell-through by our distributors. The decline in sell-through of our products by, 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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timely completion and introduction of new product designs;
availability of development and support tools and collateral literature that make complex new products easy for
engineers to understand and use; and
• market acceptance of our customers’ end products.
Because our products are complex, we have experienced delays from time to time in completing development of new
products. In addition, our new products may not receive or maintain substantial market acceptance. We may be unable to
design, develop and introduce competitive products on a timely basis, which could adversely impact our future operating
results.
Our success also depends upon our ability to develop and implement new design and process technologies.
Semiconductor design and process technologies are subject to rapid technological change and require significant R&D
expenditures. We and other companies in the industry have, from time to time, experienced difficulties in effecting transitions
to advanced process technologies and, consequently, have suffered reduced manufacturing yields or delays in product
deliveries. Our future operating results could be adversely affected if any transition to future process technologies is
substantially delayed or inefficiently implemented.
We must attract and retain qualified personnel to be successful, and competition for qualified personnel is intense in our
market.
Our success depends upon the efforts and abilities of our senior management, engineering and other personnel. The
competition for qualified engineering and management personnel is intense.
We may be unsuccessful in retaining our existing key personnel or in attracting and retaining additional key personnel
that we require. The loss of the services of one or more of our key personnel or the inability to add key personnel could harm
our business. We have no employment agreements with any member of our senior management team. As a result of the
anticipated impact that the adoption of SFAS No. 123R in our first fiscal quarter of 2007 would have on our results of
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operations, we changed our equity compensation program during fiscal 2006. We now grant fewer equity-based shares per
employee and the type of equity instrument is generally restricted stock units rather than stock options. This change in our
equity compensation program may make it more difficult for us to attract or retain qualified management and engineering
personnel, which could have an adverse effect on our business.
We are dependent on several contractors to perform key manufacturing functions for us.
We use several contractors located in Asia for a portion of the assembly and testing of our products. We also rely on
outside wafer foundries for a portion of our wafer fabrication. Although we own the majority of our manufacturing
resources, the disruption or termination of any of our contractors could harm our business and operating results.
Our use of third parties involves some reduction in our level of control over the portions of our business that we
subcontract. Our future operating results could suffer if any contractor were to experience financial, operations or production
difficulties or situations when demand exceeds capacity, or if they were unable to maintain manufacturing yields, assembly
and test yields and costs at approximately their current levels, or if due to their locations in foreign countries they were to
experience political upheaval or infrastructure disruption. Further, procurement of required products and services from third
parties is done by purchase order and contracts. If these third parties are unable or unwilling to timely deliver products or
services conforming to our quality standards, we may not be able to qualify additional manufacturing sources for our
products in a timely manner or at all, and such arrangements, if any, may not be on favorable terms to us. In such event, we
could experience an interruption in production, an increase in manufacturing and production costs, decline in product
reliability, and our business and operating results could be adversely affected.
We may lose sales if our suppliers of raw materials and equipment fail to meet our needs.
Our semiconductor manufacturing operations require raw materials and equipment that must meet exacting standards.
We generally have more than one source for these supplies, but there are only a limited number of suppliers capable of
delivering various raw materials and equipment that meet our standards. The raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of semiconductors in product applications increases. We
have experienced supply shortages from time to time in the past, and on occasion our suppliers have told us they need more
time than expected to fill our orders or that they will no longer support certain equipment with updates or spare and
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, fluctuations in our overall business in
certain recent periods and semiconductor industry conditions have had a more significant impact on our results than
seasonality, and has made it difficult to assess the impact of seasonal factors on our business. The industry has also
experienced significant economic downturns, characterized by diminished product demand and production over-capacity.
We have sought to reduce our exposure to this industry cyclically by selling proprietary products that cannot be easily or
quickly replaced, to a geographically diverse base of customers across a broad range of market segments. However, we have
experienced substantial period-to-period fluctuations in operating results and expect, in the future, to experience period-to-
period fluctuations in operating results due to general industry or economic conditions.
We are exposed to various risks related to legal proceedings or claims.
We are currently, and in the future may be, involved in legal proceedings or claims regarding patent infringement,
intellectual property rights, contracts and other matters. As is typical in the semiconductor industry, we receive notifications
from customers 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 claims related to the performance or use of our products.
These claims may be due to products nonconformance to our specifications, or specifications agreed upon with the customer,
changes in our manufacturing processes, and unexpected end customer system issues due to the interaction with our products
or insufficient design or testing by our customers. We could incur significant expenses related to such matters, including
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costs related to writing off the value of inventory of defective products; recalling defective products; providing support
services, product replacements, or modification to products; the defense of such claims; diversion of resources from other
projects; lost revenue or delay in recognition of revenue due to cancellation of orders and unpaid receivables; customer
imposed fines or penalties for failure to meet contractual requirements; and a requirement to pay damages.
Because the systems into which our products are integrated have a higher cost of goods than the products we sell, these
expenses and damages may be significantly higher than the sales and profits we received from the products involved. While
we specifically exclude consequential damages in our standard terms and conditions, our ability to avoid such liabilities may
be limited by applicable law. We do have product liability insurance, but we do not expect that insurance will cover all
claims or be of a sufficient amount to fully protect against such claims. Costs or payments we may make in connection with
these customer claims may adversely affect the results of our operations.
Further, we sell to customers in industries such as automotive, aerospace, and medical, where failure of their systems
could cause damage to property or persons. We may be subject to customer claims if our products, or interactions with our
products, cause the system failures. We will face increased exposure to customer claims if there are substantial increases in
either the volume of our sales into these applications or the frequency of system failures caused by our products.
Failure to adequately protect our intellectual property could result in lost revenue or market opportunities.
Our ability to obtain patents, licenses and other intellectual property rights covering our products and manufacturing
processes is important for our success. To that end, we have acquired certain patents and patent licenses and intend to
continue to seek patents on our inventions and manufacturing processes. The process of seeking patent protection can be long
and expensive, and patents may not be issued from currently pending or future applications. In addition, our existing patents
and any new patents that are issued may not be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to us. We may be subject to or may ourselves initiate interference proceedings in the U.S. Patent and
Trademark Office, which can require significant financial and management resources. In addition, the laws of certain foreign
countries do not protect our intellectual property rights to the same extent as the laws of the 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 approximately 60,000 end customers and our ten largest customers made up approximately
9% of our total revenue for the year ended March 31, 2008, cancellation of customer contracts could have an adverse
financial impact on our revenue and profits.
Further, as the practice has become more commonplace in the industry, we have entered into contracts with certain
customers that differ from our standard terms of sale. Under these contracts we commit to supply quantities of products on
scheduled delivery dates. If we become unable to supply the customer as required under the contract, the customer may incur
additional production costs, lost revenues due to subsequent delays in their own manufacturing schedule, or quality related
issues. Under these contracts, we may be liable for the costs the customer has incurred. While we try to limit such liabilities,
if they should arise, there may be a material adverse impact on our results of operation and financial condition.
Business interruptions could harm our business.
Operations at any of our 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 2008, approximately 75% of
our net sales were made to foreign customers. During fiscal 2007, approximately 74% of our net sales were made to foreign
customers. We purchase a substantial portion of our raw materials and equipment from foreign suppliers. In addition, we
own product assembly and testing facilities located near Bangkok, Thailand, which has experienced periods of political
uncertainty in the past. We also use various foreign contractors for a portion of our assembly and testing and for a portion of
our wafer fabrication requirements. Substantially all of our finished goods inventory is maintained in Thailand.
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Fluctuations in foreign currency could impact our operating results. We use forward currency exchange contracts to
reduce the adverse earnings impact from the effect of exchange rate fluctuations on our non-U.S. dollar net balance sheet
exposures. Nevertheless, in periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in
which we transact business, the remeasurement of non-U.S. dollar transactions can have an adverse effect on our results of
operations and financial condition.
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
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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;
difficulties in collecting receivables;
economic slowdown in the worldwide markets served by us; and
potentially adverse tax consequences.
If any of these risks materialize, our sales could decrease and/or our operating results could suffer.
A portion of our short-term investment portfolio is invested in auction rate securities. Recent auctions for these securities
have failed and our investment in these securities is not liquid. If the issuer is unable to successfully close future auctions
or their credit rating deteriorates, we may be required to further adjust the carrying value of our investment through an
impairment charge to earnings.
At March 31, 2008, $59.7 million of our investment portfolio was invested in auction rate securities. Historically, the
carrying value of auction rate securities approximated fair value due to the frequent resetting of the interest rates. If an
auction fails for amounts we have invested, our investment will not be liquid. With the recent liquidity issues experienced in
the global credit and capital markets, our auction rate securities have experienced multiple failed auctions. In
September 2007 and February 2008, auctions for $24.9 million and $34.8 million, respectively, of the original purchase value
of our investments in auction rate securities had failed. While we earn interest on these investments based on a pre-
determined formula with spreads tied to particular interest rate indexes, the estimated market value for a portion of these
auction rate securities no longer approximates the original purchase value.
The $24.9 million in failed auctions during September 2007 are all either AA or AAA rated by Standard & Poors and all
but $2.5 million of the securities possesses credit enhancement in the form of insurance for principal and interest. The
underlying characteristics of $22.4 million of these auction rate securities relate to servicing statutory requirements in the life
insurance industry and $2.5 million relate to a specialty finance company that has a AAA rating from Standard & Poors and
the issue we own has a AA rating from Standard & Poors. The $24.9 million in failed auctions have continued to fail through
May 23, 2008. As a result, we will not be able to access such funds until a future auction on these investments is successful.
The fair value of the failed auction rate securities has been estimated based on market information and estimates determined
by management and could change significantly based on market conditions. Based on the estimated values, we concluded
these investments were other than temporarily impaired and recognized an impairment charge on these investments of $2.4
million during fiscal 2008. If the issuers are unable to successfully close future auctions or if their credit ratings deteriorate,
we may be required to further adjust the carrying value of the investments through an impairment charge to earnings.
The $34.8 million in failed auctions during February 2008 are investments in student loan-backed municipal bond
auction rate securities. Based upon our evaluation of available information, we believe these investments are of high credit
quality, as all of the investments carry at least two AAA credit ratings and are largely backed by the federal government
(Federal Family Education Loan Program). The fair value of the failed auction rate securities has been estimated based on
market information and estimates determined by management and could change significantly based on market conditions.
We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of
our investments. If the market conditions deteriorate further, we may be required to record additional unrealized losses in
other comprehensive income or impairment charges. We intend and have the ability to hold these auction rate securities until
the market recovers as we do not anticipate having to sell these securities to fund the operations of our business. We believe
that, based on our current unrestricted cash, cash equivalents and short-term marketable securities balances, the current lack
of liquidity in the markets for auction rate securities will not have a material impact on our liquidity, cash flow or our ability
to fund our operations.
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Interruptions in information technology systems could adversely affect our business.
We rely on the efficient and uninterrupted operation of complex information technology systems and networks to operate
our business. Any significant system or network disruption, including but not limited to computer viruses, security breaches,
or energy blackouts could have a material adverse impact on our operations, sales and operating results. We have
implemented measures to manage our risks related to such disruptions, but such disruptions could negatively impact our
operations and financial results. In addition, we may incur additional costs to remedy the damages caused by these
disruptions or security breaches.
The occurrence of events for which we are self-insured, or which exceed our insurance limits may adversely affect our
profitability and liquidity.
We have insurance contracts with independent insurance companies related to many different types of risk; however, we
self-insure for some risks and obligations. In these circumstances, we have determined that it is more cost effective to self-
insure certain risks than to pay the increased premium costs in place since the disruption in the insurance market after the
events of September 11, 2001. The risks and exposures that we self-insure include, but are not limited to, certain property,
product defects, political risks, and patent infringement. Should there be a loss or adverse judgment or other decision in an
area for which we are self-insured, then our financial condition, result of operations and liquidity may be adversely affected.
We are subject to stringent environmental regulations, which may force us to incur significant expenses.
We must comply with many different federal, state, local and foreign governmental regulations related to the use,
storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our products and manufacturing
process. Our failure to comply with present or future regulations could result in the imposition of fines, suspension of
production or a cessation of operations. Such environmental regulations have required us in the past and could require us in
the future to acquire costly equipment or to incur other significant expenses to comply with such regulations. Any failure by
us to control the use of or adequately restrict the discharge of hazardous substances could subject us to future liabilities.
Environmental problems may occur that could subject us to future costs or liabilities.
Over the past few years, there has been an expansion in environmental laws focusing on reducing or eliminating
hazardous substances in electronic products. For example, the EU RoHS Directive provided that beginning July 1, 2006,
electronic products sold into Europe were required to meet stringent chemical restrictions, including the absence of lead.
Other countries, such as the United States, China and Korea, have enacted or may enact laws or regulations similar to those
of the EU. These and other future environmental regulations could require us to reengineer certain of our existing products
and may make it more expensive for us to manufacture and sell our products. Over the last several years, the number and
complexity of laws focused on the energy efficiency of electronic products and accessories; the recycling of electronic
products; and the reduction in quantity and the recycling of packaging materials have expanded significantly. It may be
difficult for us to timely comply with these laws and we may not have sufficient quantities of compliant materials to meet
customers’ needs, thereby adversely impacting our sales and profitability. We may also have to write off inventory in the
event that we hold inventory that is not saleable as a result of changes to regulations. We expect these trends to continue. In
addition, we anticipate increased customer requirements to meet voluntary criteria related to reduction or elimination of
hazardous substances in our products and energy efficiency measures.
Regulatory authorities in jurisdictions into which we ship our products could levy fines or restrict our ability to export
products.
A significant portion of our sales are made outside of the United States through exporting and re-exporting of products.
In addition to local jurisdictions’ export regulations, our U.S. manufactured products or products based on U.S. technology
are subject to Export Administration Regulations (“EAR”) when exported and re-exported to and from all international
jurisdictions. Licenses or proper license exceptions may be required for the shipment of our products to certain countries.
Non-compliance with the EAR or other export regulations can result in penalties including denial of export privileges, fines,
criminal penalties, and seizure of products. Such penalties could have a material adverse effect on our business including our
ability to meet our net sales and earnings targets.
The 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 for fiscal year 2002 and later. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes
from these continuing examinations will not have an adverse effect on our future operating results.
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The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate in the future. The
future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of
which are beyond our control, including, but not limited to:
quarterly variations in our operating results and the operating results of other technology companies;
actual or anticipated announcements of technical innovations or new products by us or our competitors;
changes in analysts’ estimates of our financial performance or buy/sell recommendations;
changes in our financial guidance or our failure to meet such guidance;
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.
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 strategic
acquisitions if such opportunities arise. Any transactions that we complete may involve a number of risks, including: the
diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired
business, or possible adverse effects on our operating results during the integration process. In addition, we may not be able
to successfully or profitably integrate, operate, maintain and manage any newly acquired operations or employees. We may
not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies.
We have not historically maintained substantial levels of indebtedness, and our financial condition and results of
operations could be adversely affected if we do not effectively manage our liabilities.
As a result of our sale of $1.15 billion of 2.125% junior subordinated convertible debentures in December 2007, we have a
substantially greater amount of long-term debt than we have maintained in the past. Our maintenance of substantial levels of
debt could adversely affect our flexibility to take advantage of corporate opportunities and could adversely affect our
financial condition and results of operations. We may need or desire to refinance all or a portion of our debentures or any other
future indebtedness that we incur on or before the maturity of the debentures. There can be no assurance that we will be able to
refinance any of our indebtedness on commercially reasonable terms, if at all.
Conversion of our debentures will dilute the ownership interest of existing stockholders, including holders who had
previously converted their debentures.
The conversion of some or all of our outstanding debentures will dilute the ownership interest of existing stockholders to
the extent we deliver common stock upon conversion of the debentures. Upon conversion, we may satisfy our conversion
obligation by delivering cash, shares of common stock or any combination, at our option. If upon conversion we elect to deliver
cash for the lesser of the conversion value and principal amount of the debentures, we would pay the holder the cash value of the
applicable number of shares of our common stock. If the conversion value of a debenture exceeds the principal amount of the
debenture, we may also elect to deliver in cash in lieu of common stock for the conversion value in excess of one thousand dollars
principal amount (conversion spread). There would be no adjustment to the numerator in the net income per common share
computation for the cash settled portion of the debentures as that portion of the debt instrument will always be settled in cash. The
conversion spread will be included in the denominator for the computation of diluted net income per common share. Any sales in
the public market of any common stock issuable upon such conversion could adversely affect prevailing market prices of our
common stock. In addition, the existence of the debentures may encourage short selling by market participants because the
conversion of the debentures could be used to satisfy short positions, or anticipated conversion of the debentures into shares of our
common stock could depress the price of our common stock.
There will likely be potential new accounting pronouncements or regulatory rulings which may have an adverse impact on our
future financial condition and results of operations.
There will likely be potential new accounting pronouncements of regulatory rulings, which may have an adverse impact
on our future financial condition and results of operations. For example, in May 2008, the FASB issued FASB Staff
Position (FSP) No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (FSP APB 14-1), that alters the accounting treatment for convertible debt that allows for
either mandatory or optional cash settlements, including our outstanding debentures. The FSP requires the issuer to
separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic
17
interest cost. Further, the FSP will require bifurcation of a component of the debt, classification of that component as equity,
and then accretion of the resulting discount on the debt to result in the “economic interest cost” being reflected in the
condensed consolidated statements of operations. In issuing this FSP, the FASB emphasized that the FSP will be applied to
the terms of the instruments as they exited for the time periods existed, therefore, the application of the FSP would be
applied retrospectively to all periods presented. The FSP is effective for fiscal years beginning after December 15, 2008,
and will require retrospective application. We will be required to implement the proposed standard during the first quarter
of fiscal 2010, which begins on April 1, 2009. Although FSP APB 14-1 will have no impact on our actual past or future
cash flows, it would require us to record a significant amount of non-cash interest expense as the debt discount is amortized.
In addition, if our convertible debt is redeemed or converted prior to maturity, any unamortized debt discount would result
in a loss on extinguishment. As a result, there could be a material adverse impact on our results of operations and earnings
per share. These impacts could adversely affect the trading price of our common stock and the trading price of our
debentures.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
At March 31, 2008, we owned the facilities described below:
Location
Chandler, Arizona
Tempe, Arizona
Gresham, Oregon
Approximate
Total Sq. Ft.
415,000
379,000
826,500
Chacherngsao, Thailand (1)
290,000
Uses
Executive and Administrative Offices; Wafer Probe;
R&D Center; Sales and Marketing; and Computer and
Service Functions
Wafer Fabrication (Fab 2); R&D Center;
Administrative Offices; and Warehousing
Wafer Fabrication (Fab 4), R&D Center, Administrative
Offices, and Warehousing
Test and Assembly; Wafer Probe; Sample Center;
Warehousing; and Administrative Offices
(1) Located in the Alphatechnopolis Industrial Park near Bangkok on land to which title was acquired by us in the fourth quarter
of fiscal 2008. Obtaining full title of the land had been delayed due to a bankruptcy relating to the seller of the land.
We own a 67,174 square foot building in Bangalore, India which is used for research and development, marketing
support and other administrative functions.
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 $0.5 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. On April 18, 2008, LSI Logic and its wholly
owned subsidiary Agere, filed both an action with the International Trade Commission and a complaint in the Eastern District
of Texas alleging patent infringement by Microchip and 17 other semiconductor and foundry companies. These actions
seek monetary damages and injunctive relief against the allegedly infringing products. Due to the very early stage of these
proceedings, the outcome of these actions is not presently determinable, and therefore we can make no assessment of their
18
materiality. Microchip intends to vigorously defend its rights in these matters. We periodically receive notification from
various third parties alleging infringement of patents, intellectual property rights or other matters. With respect to these and
other pending legal actions to which we are a party, although the outcome of these actions is not presently determinable, we
believe that the ultimate resolution of these matters will not harm our business and will not have a material adverse effect on
our financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon,
and we are, and from time to time have been, subject to such litigation. No assurances can be given with respect to the
extent or outcome of any such litigation in the future.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
19
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 the NASDAQ Global Market under the symbol “MCHP.” Our common stock has been
quoted on such market since our initial public offering on March 19, 1993. The following table sets forth the quarterly high
and low closing prices of our common stock as reported by NASDAQ for our last two fiscal years.
Fiscal 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$42.06
$39.53
$36.92
$34.56
Low
$35.47
$36.31
$27.57
$26.86
Fiscal 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$38.15
34.88
34.83
37.49
Low
$31.79
31.11
31.40
33.21
Stock Price Performance Graph
The following graph and table show a comparison of the five-year cumulative total stockholder return, calculated on a
dividend reinvestment basis, for Microchip Technology, The Nasdaq Composite Index, and the Philadelphia Semiconductor
Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Microchip Technology Incorporated, The NASDAQ Composite Index and The Philadelphia Semiconductor Index
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
Microchip Technology Incorporated
NASDAQ Composite
Philadelphia Semiconductor
3/03
3/04
3/05
3/06
3/07
3/08
*$100 invested on 3/31/03 in stock or index - including reinvestment of dividends. Fiscal year ending March 31.
Cumulative Total Return
March 2003 March 2004 March 2005 March 2006 March 2007 March 2008
Microchip Technology Incorporated
NASDAQ Composite
Philadelphia Semiconductor Index
100.00
100.00
100.00
133.30
151.41
170.76
132.21
152.88
146.74
187.86
181.51
161.55
189.14
190.24
154.91
180.35
177.63
141.59
Data acquired by Research Data Group, Inc. (www.researchdatagroup.com)
20
On May 16, 2008, there were approximately 399 holders of record of our common stock. This figure does not reflect
beneficial ownership of shares held in nominee names.
We have been declaring and paying quarterly cash dividends on our common stock since the third quarter of fiscal 2003.
Our total cash dividends paid were $252.0 million, $207.9 million and $120.1 million in fiscal 2008, 2007 and 2006,
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 2008 and 2007 (amounts in thousands, except per share amounts).
Fiscal 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends per
Common
Share
0.280
0.295
0.310
0.320
$
Amount of
Dividend
Payment
$ 61,119
64,095
66,378
60,367
Fiscal 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends per
Common
Share
$
0.215
0.235
0.250
0.265
Amount of
Dividend
Payment
$ 46,064
50,509
53,953
57,374
On April 28, 2008, we declared a quarterly cash dividend of $0.330 per share, which will be paid on May 27, 2008 to
stockholders of record on May 12, 2008 and the total amount of such dividend is expected to be $60.9 million. Our Board is
free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend, on
our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and
other factors deemed relevant by our Board. Our current intent is to provide for ongoing quarterly cash dividends depending
upon market conditions and our results of operations.
Please refer to “Item 12, Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters,” at page 42 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, 2008.
Issuer Purchases of Equity Securities
The following table sets forth our purchases of our common stock in the fourth quarter of fiscal 2008 and the footnote
below the table designates the repurchase programs that the shares were purchased under:
Issuer Purchases of Equity Securities
Period
January 1 – January 31, 2008
February 1 – February 29, 2008
March 1 – March 31, 2008
Total
(a) Total Number
of Shares
Purchased
200,000
3,997,797
1,300,000
5,497,797
(b) Average
Price Paid per
Share
$
$
$
$
31.81
31.45
31.69
31.52
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
200,000
3,997,797
1,300,000
5,497,797
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under
the Programs (1)(2)
11,790,031
7,792,234
6,492,234
(1) On October 23, 2006, our Board of Directors authorized the repurchase of up to 10 million shares of our common
stock in the open market or privately negotiated transactions. As of March 31, 2008, no shares of this authorization
remained available to be purchased under this program.
(2) On December 11, 2007, our Board of Directors authorized the repurchase of up to 10 million shares of our common
stock in open market or privately negotiated transactions. As of March 31, 2008, 6,492,234 shares of this
authorization remained available to be purchased under this program. There is no expiration date associated with
this program.
Our Board of Directors authorized the repurchase of 21,500,000 shares of our common stock concurrent with the junior
subordinated convertible debenture transaction described in Note 10 to our consolidated financial statements and no further
shares are available to be repurchased under this authorization.
21
Item 6.
SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data for the five-year period ended March 31, 2008 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, 2008, and the balance sheet data as of March 31,
2008 and 2007, 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, 2005 and 2004 and balance sheet data as of March 31, 2006,
2005 and 2004 have been derived from our audited consolidated financial statements not included herein (for information
below all amounts are in thousands, except per share data).
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
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
2008
$1,035,737
410,799
120,864
175,646
26,763
301,665
46,885
2,435
350,985
53,237
$ 297,748
1.44
$
1.40
$
1.205
$
207,220
212,048
2007
$1,039,671
414,915
113,698
163,247
---
347,811
52,967
312
401,090
44,061
$ 357,029
1.66
$
1.62
$
0.965
$
215,498
220,848
Balance Sheet Data:
2008
Working capital
$1,526,649
2,512,307
Total assets
Long-term obligations, less current portion 1,150,128
1,036,223
Stockholders’ equity
2007
$ 828,817
2,269,541
---
2,004,368
March 31,
2006
$ 927,893
377,016
94,926
129,587
---
326,364
30,786
2,035
359,185
116,816
$ 242,369
1.15
$
1.13
$
0.570
$
210,104
215,024
March 31,
2006
$ 509,860
2,350,596
---
1,726,189
2005
$ 846,936
362,961
93,040
111,188
21,100
258,647
16,864
1,757
277,268
63,483
$ 213,785
1.03
$
1.01
$
0.208
$
206,740
211,962
2004
$ 699,260
349,301
85,389
92,411
865
171,294
4,639
1,963
177,896
40,634
$ 137,262
0.67
$
0.65
$
0.113
$
206,032
212,172
2005
$ 768,683
1,817,554
---
1,485,734
2004
$ 613,894
1,622,143
---
1,320,517
(1) There were no special charges during the fiscal years ended March 31, 2007 and 2006. Detailed discussions of the
special charges for the fiscal year ended March 31, 2008 are contained in Note 2 to our Consolidated Financial
Statements. Detailed explanations of the special charges for the fiscal year ended March 31, 2005 and 2004 are
provided below. The following table presents a summary of special charges for the five-year period ended
March 31, 2008:
Loss on sale of Fab 3
Intellectual property settlement
Contract cancellation, severance and other
costs related to Fab 1 closure
2008
$ 26,763
---
$
---
Year ended March 31,
2006
2005
2007
---
---
---
$
--- $
---
---
21,100
$
---
---
2004
---
---
865
Totals
$ 26,763
$
---
$
--- $ 21,100
$
865
22
Fiscal 2005 Special Charges
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 Microchip. 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 that ended June 30, 2004 associated with this matter. Pursuant to this cross-license, 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. We 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 Special Charges
Closure of Fab 1
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 its 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 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 our overall campus in Chandler, Arizona. Within this same
facility resides a portion of our wafer probe, mask making and other manufacturing related activities. Consequently it is not
possible to abandon or otherwise dispose of this facility. We have accelerated depreciation that was taken only related to
assets used in the wafer fabrication operations at the facility. We have no specific plans for utilizing the space formerly
housing the wafer fabrication operations, and intend 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 our balance sheet and related footnote disclosures.
We 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.
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;
23
• Our ability to increase the proprietary portion of our analog and interface product lines and the effect of such an
increase;
• The impact of any supply disruption we may experience;
• Our ability to effectively utilize our facilities at appropriate capacity levels and anticipated costs;
• That our existing facilities and planned expansion activities provide sufficient capacity to respond to increases
in demand;
• That manufacturing costs will be reduced by transition to advanced process technologies;
• Our ability to absorb fixed 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, and the accuracy of our assessment of the status of our
employee relations;
• The cost effectiveness of using our own assembly and test operations;
• Our anticipated level of capital expenditures;
• The adequacy of our patent strategy;
• Continuation of quarterly cash dividends;
• The sufficiency of our existing sources of liquidity;
• The impact of seasonality on our business;
• The accuracy of our estimates used in valuing employee equity awards;
• That the resolution of legal actions will not harm our business, and the accuracy of our assessment of the
probability of loss and range of potential loss;
• That the idling of assets will not impair the value of such assets;
• The recoverability of our deferred tax assets;
• The adequacy of our tax reserves to offset any potential tax liabilities, having the appropriate support for our
income tax positions and the accuracy of our estimated tax rate;
• Our belief that the expiration of any tax holidays will not have a material impact;
• The accuracy of our estimates of the useful life and values of our property;
• 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;
• The effect of fluctuations in market interest rates on income and/or cash flows;
• The effect of fluctuations in currency rates;
• Our ability to collect accounts receivable;
• Our belief that the combination of distributors we have chosen will support the needs of our customers and not
adversely impact our net sales;
• Our belief that our investments in student loan auction rate municipal bond offerings are of high credit quality;
• Our ability to hold our fixed income investments and auction rate securities until the market recovers, and the
immaterial impact this will have on our liquidity;
• The accuracy of our estimation of the cost effectivity of our insurance coverage;
• Our belief that our activities are conducted in compliance with environmental regulations; and
• Our belief that deferred cost of sales will have low risk of material impairment.
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.”
24
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 30, we discuss our Results of Operations for fiscal 2008 compared to fiscal 2007, and
for fiscal 2007 compared to fiscal 2006. We then provide an analysis of changes in our balance sheet and cash flows, and
discuss our financial commitments in sections titled “Liquidity and Capital Resources,” “Contractual Obligations” and “Off-
Balance Sheet Arrangements.”
Strategy
Our goal is to be a worldwide leader in providing specialized semiconductor products for a wide variety of embedded
control applications. Our strategic focus is on embedded control products, which include microcontrollers, high-performance
linear and mixed signal devices, power management and thermal management devices, interface devices, Serial EEPROMs,
security devices. We provide highly cost-effective embedded control products that also offer the
and our patented KEELOQ
advantages of small size, high performance, low voltage/power operation and ease of development, enabling timely and cost-
effective embedded control product integration by our customers.
We sell our products to a broad base of domestic and international customers across a variety of industries.
The principal markets that we serve include consumer, automotive, industrial, office automation and telecommunications.
Our business is subject to fluctuations based on economic conditions within these markets. The recent weakness in
the U.S. housing market and general economic conditions have adversely impacted our net sales to customers in the markets
we serve.
Our manufacturing operations include wafer fabrication and assembly and test. The ownership of our manufacturing
resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control
resulting in us being one of the lowest cost producers in the embedded control industry. By owning our wafer fabrication
facilities and much of our assembly and test operations, and by employing statistical process control techniques, we have
been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten
our design and production cycles. This control also allows us to capture the wafer manufacturing and a portion of the
assembly and test profit margin.
We employ proprietary design and manufacturing processes in developing our embedded control products. We believe
our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new
product designs. While many of our competitors develop and optimize separate processes for their logic and memory
product lines, we use a common process technology for both microcontroller and non-volatile memory products. This allows
us to more fully leverage our process research and development costs and to deliver new products to market more rapidly.
Our engineers utilize advanced computer-aided design (CAD) tools and software to perform circuit design, simulation and
layout, and our in-house photomask and wafer fabrication facilities enable us to rapidly verify design techniques by
processing test wafers quickly and efficiently.
We are committed to continuing our investment in new and enhanced products, including development systems, and in
our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our
competitive position. Our current research and development activities focus on the design of new microcontrollers, digital
signal controllers, memory and mixed-signal products, new development systems, software and application-specific software
libraries. We are also developing new design and process technologies to achieve further cost reductions and performance
improvements in existing products.
We market our products worldwide primarily through a network of direct sales personnel and distributors. Our
distributors focus primarily on servicing the product and technical support requirements of a broad base of diverse customers.
We believe that our direct sales personnel combined with our distributors provide an effective means of reaching this broad
and diverse customer base. Our direct sales force focuses primarily on major strategic accounts in three geographical
markets: the Americas, Europe and Asia. We currently maintain sales and support centers in major metropolitan areas in
North America, Europe and Asia. We believe that a strong technical service presence is essential to the continued
development of the embedded control market. Many of our field sales engineers (FSEs), field application engineers (FAEs),
and sales management have technical degrees and have been previously employed in an engineering environment. We
believe that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The
primary mission of our FAE team is to provide technical assistance to strategic accounts and to conduct periodic training
sessions for FSEs and distributor sales teams. FAEs also frequently conduct technical seminars for our customers in major
cities around the world, and work closely with our distributors to provide technical assistance and end-user support.
25
Critical Accounting Policies and Estimates
General
Our discussion and analysis of Microchip’s financial condition and results of operations is based upon our Consolidated
Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United
States of America. We review the accounting policies we use in reporting our financial results on a regular basis. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an ongoing basis, we evaluate
our estimates, including those related to revenue recognition, share-based compensation, inventories, investments, income
taxes, property plant and equipment, impairment of property, plant and equipment, junior subordinated convertible
debentures and litigation. We base our estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value
of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual
outcomes being different from those on which we based our assumptions. We review these estimates and judgments on an
ongoing basis. We believe the following critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements. We also have other policies that we consider key accounting
policies, such as our policy regarding revenue recognition to OEMs; however, we do not believe these policies require us to
make estimates or judgments that are as difficult or subjective as our policies described below.
Revenue Recognition - Distributors
Our distributors worldwide generally have broad price protection and product return rights, so we defer revenue
recognition until the distributor sells the product to their customer. Revenue is recognized when the distributor sells the
product to an end-user, at which time the sales price becomes fixed or determinable. Revenue is not recognized upon
shipment to our distributors since, due to discounts from list price as well as price protection rights, the sales price is not
substantially fixed or determinable at that time. At the time of shipment to these distributors, we record a trade receivable for
the selling price as there is a legally enforceable right to payment, relieve inventory for the carrying value of goods shipped
since legal title has passed to the distributor, and record the gross margin in deferred income on shipments to distributors on
our consolidated balance sheets.
Deferred income on shipments to distributors effectively represents the gross margin on the sale to the distributor;
however, the amount of gross margin that we recognize in future periods could be less than the deferred margin as a result of
credits granted to distributors on specifically identified products and customers to allow the distributors to earn a competitive
gross margin on the sale of our products to their end customers and price protection concessions related to market pricing
conditions.
We sell the majority of the items in our product catalog to our distributors worldwide at a uniform list price. However,
distributors resell our products to end customers at a very broad range of individually negotiated price points. The majority
of our distributors’ resales require a reduction from the original list price paid. Often, under these circumstances, we remit
back to the distributor a portion of their original purchase price after the resale transaction is completed in the form of a credit
against the distributors’ outstanding accounts receivable balance. The credits are on a per unit basis and are not given to the
distributor until they provide information to us regarding the sale to their end customer. The price reductions vary
significantly based on the customer, product, quantity ordered, geographic location and other factors and discounts to a price
less than our cost have historically been rare. The effect of granting these credits establishes the net selling price to our
distributors for the product and results in the net revenue recognized by us when the product is sold by the distributors to their
end customers. Thus, a portion of the “Deferred income on shipments to distributors” balance represents the amount of
distributors’ original purchase price that will be credited back to the distributor in the future. The wide range and variability
of negotiated price concessions granted to distributors does not allow us to accurately estimate the portion of the balance in
the deferred income on shipments to distributors account that will be credited back to the distributors. Therefore, we do not
reduce deferred income on shipments to distributors or accounts receivable by anticipated future concessions; rather, price
concessions are typically recorded against deferred income on shipments to distributors and accounts receivable when
incurred, which is generally at the time the distributor sells the product. At March 31, 2008, we had approximately $130.4
million of deferred revenue and $35.0 million in deferred cost of sales recognized as $95.4 million of deferred income on
shipments to distributors. At March 31, 2007, we had approximately $126.4 million of deferred revenue and $35.0 million of
deferred cost of sales recognized as $91.4 million of deferred income on shipments to distributors. The deferred income on
shipments to distributors that will ultimately be recognized in our income statement will be lower than the amount reflected
on the balance sheet due to additional price credits to be granted to the distributors when the product is sold to their
customers. These additional price credits historically have resulted in the deferred income approximating the overall gross
margins that we recognize in the distribution channel of our business.
26
We reduce product pricing through price protection based on market conditions, competitive considerations and other
factors. Price protection is granted to distributors on the inventory they have on hand at the date the price protection is
offered. When we reduce the price of our products, it allows the distributor to claim a credit against its outstanding accounts
receivable balances based on the new price of the inventory it has on hand as of the date of the price reduction. There is no
immediate revenue impact from the price protection, as it is reflected as a reduction of the deferred income on shipments to
distributors’ balance.
Products returned by distributors and subsequently scrapped have historically been immaterial to our consolidated results
of operations. We routinely evaluate the risk of impairment of the deferred cost of sales component of the deferred income
on shipments to distributors account. Because of the historically immaterial amounts of inventory that have been scrapped,
and historically rare instances where discounts given to a distributor result in a price less than our cost, we believe the
deferred costs are approximately recorded at their carrying value.
Share-based Compensation
In the first quarter of fiscal 2007, we adopted SFAS No. 123R, which requires the measurement at fair value and
recognition of compensation expense for all share-based payment awards, including grants of employee stock options, RSUs
and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair
values. Total share-based compensation in fiscal 2008 was $33.4 million, of which $26.7 million was reflected in operating
expenses and $6.2 million was reflected in cost of goods sold. Total share-based compensation which was included in
inventory at March 31, 2008 was $3.8 million.
Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant
requires judgment. The fair value of our RSUs is based on the fair market value of our common stock on the date of grant
discounted for expected future dividends. We use the Black-Scholes option pricing model to estimate the fair value of
employee stock options and rights to purchase shares under stock participation plans, consistent with the provisions of
SFAS No. 123R. Option pricing models, including the Black-Scholes model, also require the use of input assumptions,
including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. We use a blend of
historical and implied volatility based on options freely traded in the open market as we believe this is more reflective of
market conditions and a better indicator of expected volatility than using purely historical volatility. The expected life of the
awards is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based
on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our history and
expectation of future dividend payouts. SFAS No. 123R requires us to develop an estimate of the number of share-based
awards which will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate can have a
significant effect on reported share-based compensation, as the effect of adjusting the rate for all expense amortization after
April 1, 2006 is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the
estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease
to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate,
then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense
recognized in the financial statements. If forfeiture adjustments are made, they would affect our gross margin, research and
development expenses, and selling, general, administrative expenses. The effect of forfeiture adjustments in fiscal 2008 was
immaterial.
We evaluate the assumptions used to value our awards on a quarterly basis. If factors change and we employ different
assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there are
any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel
any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-
based compensation will increase to the extent that we grant additional equity awards to employees or we assume unvested
equity awards in connection with acquisitions. Had we adopted SFAS No. 123R in prior periods, the magnitude of the
impact of that standard on our results of operations would have approximated the impact of SFAS No. 123 assuming the
application of the Black-Scholes option pricing model as described in the disclosure of pro forma net income and pro forma
net income per share in Note 14 to our Consolidated Financial Statements.
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out method. We write down our inventory
for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions
are less favorable than those we projected, additional inventory write-downs may be required. Inventory impairment charges
establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later
suggest that increased carrying amounts are recoverable. In estimating our inventory obsolescence, we primarily evaluate
27
estimates of demand over a 12-month period and record impairment charges for inventory on hand in excess of the estimated
12-month demand.
Investments
We classify our investments as trading securities or available-for-sale securities based upon management’s intent with
regard to the investments and the nature of the underlying securities.
Our trading securities consist of strategic investments in shares of publicly traded common stock and restricted cash
representing cash collateral for put options we have sold on one of our trading securities. Our investments in trading
securities are carried at fair value with unrealized gains and losses reported in other income, net.
Our available-for-sale investments consist of government agency bonds, municipal bonds, auction rate securities (ARS)
and corporate bonds. Our investments are carried at fair value with unrealized gains and losses reported in stockholders’
equity. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. Dividend
and interest income are recognized when earned. The cost of securities sold is calculated using the specific identification
method.
We include within our short-term investments our trading securities, as well as our income yielding available-for-sale
securities that can be readily converted to cash and includes within long-term investments those income yielding available-
for-sale securities with maturities of over one year that have unrealized losses attributable to them. We have the ability to
hold our long-term investments until such time as these assets are no longer impaired. Such recovery is not expected to occur
within the next year.
Due to the lack of availability of observable market quotes on certain of the our investment portfolio of ARS, we utilize
valuation models including those that are based on expected cash flow streams and collateral values, including assessments of
counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The
valuation of our ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact our
ARS valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those
securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing
strength and quality of market credit and liquidity.
The credit markets continued to deteriorate in the second half of fiscal 2008. If uncertainties in these markets continue,
these markets deteriorate further or we experiences any additional ratings downgrades on any investments in our portfolio
(including our ARS), we may incur additional impairments to our investment portfolio, which could negatively affect our
financial condition, cash flow and reported earnings.
Income Taxes
As part of the process of preparing our 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, 2008, our gross deferred tax asset was $63.3 million.
Various taxing authorities in the United States and other countries in which we do business are increasing their scrutiny
of the tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing
authorities in the jurisdictions in which they conduct significant operations. We are currently under audit by the United
States Internal Revenue Service (“IRS”) for our fiscal years ended March 31, 2002, 2003 and 2004. We recognize liabilities
for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the
extent to which, additional tax payments are probable. We believe that we maintain adequate tax reserves to offset any
potential tax liabilities that may arise upon these and other pending audits in the United States and other countries in which
we do business. If such amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in
tax benefits being recorded in the period the reserves are no longer deemed necessary. If such amounts ultimately prove to be
less than an ultimate assessment, a future charge to expense would be recorded in the period in which the assessment is
determined.
28
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, 2008, the carrying value of our property and equipment totaled
$522.3 million, which represents 20.8% 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, 2008, all of the buildings and supporting facilities were being
depreciated as well as the manufacturing equipment that had been placed in service. All manufacturing equipment that was
not being used in production activities was maintained in projects in process and is not being depreciated until it is placed
into service since management believes there will be no change to its utility from the present time until it is placed into
productive service. The lives to be used for depreciating this equipment at Fab 4 will be evaluated at such time as the assets
are placed in service. We do not believe that the temporary idling of such assets has impaired the estimated life or carrying
values of the underlying assets.
The estimates, assumptions and judgments we use in the application of our property and equipment policies reflect both
historical experience and expectations regarding future industry conditions and operations. The use of different estimates,
assumptions and judgments regarding the useful lives of our property and equipment and expectations regarding future
industry conditions and operations, could result in materially different carrying values of assets and results of operations.
Impairment of Property, Plant and Equipment
We assess whether indicators of impairment of long-lived assets are present. If such indicators are present, we determine
whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying
value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective
fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to
be impaired are to be held and used, we recognize an impairment loss through a charge to our operating results to the extent
the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value, which we
depreciate over the remaining estimated useful life of the asset. We may incur impairment losses, or additional losses on
already impaired assets, in future periods if factors influencing our estimates change.
Junior Subordinated Convertible Debentures
We account for our junior subordinated convertible debentures and related provisions in accordance with the provisions
of Emerging Issues Task Force Issue (EITF) No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, EITF No. 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments, EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock, EITF No. 01-6, The Meaning of “Indexed to a Company’s Own Stock”, and EITF No.
04-08, The Effect of Contingently Convertible Debt on Diluted Earn. We also evaluate the instruments in accordance with
SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which requires bifurcation of
embedded derivative instruments and measurement of fair value of accounting purposes. EITF No. 04-08 requires us to
include the dilutive effect of the shares of our common stock issuable upon conversion of the outstanding junior subordinated
convertible debentures in our diluted income per share calculation regardless of whether the market price trigger or other
contingent conversion feature has been met. We apply the treasury stock method as we have the intent and current ability to
settle the principal amount of the junior subordinated convertible debentures in cash. This method results in incremental
dilutive shares when the average fair value of our common stock for a reporting period exceeds the conversion price per share
which was $33.81 at March 31, 2008 and adjusts as dividends are recorded in the future.
Litigation
Our current estimated range of liability related to pending litigation is based on the probable loss of claims for which we
can estimate the amount and range of loss. Recorded reserves were immaterial at March 31, 2008.
Because of the uncertainties related to both the probability of loss and the amount and range of loss on our pending
litigation, we are unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As
additional information becomes available, we will assess the potential liability related to our pending litigation and revise our
estimates. Revisions in our estimates of the potential liability could materially affect our results of operation and financial
position.
29
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
2008
100.0%
39.7%
60.3%
11.7%
16.9%
2.6%
29.1%
Year Ended March 31,
2007
100.0%
39.9%
60.1%
10.9%
15.7%
---%
33.5%
2006
100.0%
40.6%
59.4%
10.2%
14.0%
---%
35.2%
We operate in one industry segment and engage primarily in the design, development, manufacture and marketing of
semiconductor products. We sell our products to distributors and original equipment manufacturers, referred to as OEMs, in
a broad range of market segments, perform ongoing credit evaluations of our customers and generally require no collateral.
In certain circumstances, a customer’s financial condition may require collateral, and, in such cases, the collateral would be
provided primarily by letters of credit.
Our net sales of $1,035.7 million in fiscal 2008 decreased by $3.9 million, or 0.4%, over fiscal 2007, and net sales of
$1,039.7 million in fiscal 2007 increased by $111.8 million, or 12.0%, over fiscal 2006. The decrease in net sales in fiscal
2008 compared to fiscal 2007 resulted primarily from adverse economic conditions in the markets we serve, particularly the
housing and consumer markets. The increase in net sales in fiscal 2007 compared to fiscal 2006 resulted primarily from
increased demand, predominantly for our proprietary microcontroller and analog products. Average selling prices for our
products were down approximately 3% in fiscal 2008 over fiscal 2007 and were flat in fiscal 2007 over fiscal 2006. The
number of units of our products sold was up approximately 3% in fiscal 2008 over fiscal 2007 and up approximately 12% in
fiscal 2007 over fiscal 2006. 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;
economic conditions in the markets we serve; and
inventory holding patterns of our customers.
Sales by product line for the fiscal years ended March 31, 2008, 2007 and 2006 were as follows (dollars in thousands):
Microcontrollers
Memory products
Analog and interface products
2008
$ 832,921
120,280
82,536
80.4%
11.6
8.0
2007
$ 834,293
122,748
82,630
80.2%
11.8
8.0
2006
$ 736,179
125,335
66,379
79.3%
13.5
7.2
Year Ended March 31,
Total Sales
$ 1,035,737
100.0% $ 1,039,671
100.0% $ 927,893
100.0%
30
Microcontrollers
Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and associated
application development systems accounted for approximately 80.4% of our total net sales in fiscal 2008, approximately
80.2% of our total net sales in fiscal 2007 and approximately 79.3% of our total net sales in fiscal 2006.
Net sales of our microcontroller products decreased approximately 0.2% in fiscal 2008 compared to fiscal 2007, and
increased approximately 13.3% in fiscal 2007 compared to fiscal 2006. The decrease in net sales in fiscal 2008 compared to
fiscal 2007 resulted primarily from adverse economic conditions in the markets we serve, particularly the housing and
consumer markets. The increase in net sales in fiscal 2007 compared to fiscal 2006 was 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 30. The end markets that we serve include the consumer, automotive, industrial control,
communications and computing 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 11.6% of our total net sales in fiscal 2008, approximately
11.8% of our total net sales in fiscal 2007 and approximately 13.5% of our total net sales in fiscal 2006.
Net sales of our memory products decreased approximately 2.0% in fiscal 2008 compared to fiscal 2007, and decreased
approximately 2.1% in fiscal 2007 compared to fiscal 2006, 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 8.0% of our total net sales in fiscal 2008,
approximately 8.0% of our total net sales in fiscal 2007 and approximately 7.2% of our total net sales in fiscal 2006.
Net sales of our analog and interface products were essentially flat in fiscal 2008 compared to fiscal 2007 and increased
approximately 24.5% in fiscal 2007 compared to fiscal 2006. The changes in net sales of our analog and interface products
in these periods were driven primarily by economic conditions, market share gains and supply and demand conditions within
the analog and interface market.
Analog and interface products can be proprietary or non-proprietary in nature. Currently, we consider more than half of
our analog and interface product mix to be proprietary in nature, where prices are relatively stable, similar to the pricing
stability experienced in our microcontroller products. The non-proprietary portion of our analog and interface business will
experience price fluctuations, driven primarily by the current supply and demand for those products. We may be unable to
maintain the average selling prices of our analog and interface products as a result of increased pricing pressure in the future,
which 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 64% of our net sales in fiscal 2008 and 65% of our net sales in each of fiscal 2007 and 2006.
Our largest distributor accounted for approximately 12% of our net sales in fiscal 2008, approximately 11% of our net
sales in fiscal 2007 and approximately 13% of our net sales in fiscal 2006. Our two largest distributors together accounted
for 19% of our net sales in fiscal 2008, 21% of our net sales in fiscal 2007 and 24% of our net sales in fiscal 2006.
31
Generally, we do not have long-term agreements with our distributors and either party may terminate the 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.
At March 31, 2008, distributors were maintaining an average of approximately 1.8 months of inventory of our products
calculated based on the prior three months of their sell-through activity. Over the past three fiscal years, the months of
inventory maintained by our distributors have fluctuated between approximately 1.8 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.
Sales by Geography
Sales by geography for the fiscal years ended March 31, 2008, 2007 and 2006 were as follows (dollars in thousands):
Americas
Europe
Asia
2008
$ 273,363
308,171
454,203
Year Ended March 31,
2007
26.4% $ 287,371
302,708
29.8
449,592
43.8
27.6%
29.1
43.3
2006
$ 266,353
255,367
406,173
28.7%
27.5
43.8
Total Sales
$ 1,035,737
100.0% $ 1,039,671
100.0%
$ 927,893
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 foreign customers accounted for approximately 75% of our net sales in fiscal 2008, 74% of our net sales in fiscal
2007 and 74% of our net sales in fiscal 2006. Substantially all of our foreign sales are U.S. dollar denominated.
Sales to customers in China, including Hong Kong, accounted for approximately 20% of our net sales in fiscal 2008,
approximately 18% of our net sales in fiscal 2007 and approximately 17% of our net sales in fiscal 2006. Sales to customers
in Taiwan accounted for approximately 10% of our net sales in each of fiscal 2008, 2007 and 2006. 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 $624.9 million in fiscal 2008, $624.8 million in fiscal 2007 and $550.9 million in fiscal 2006.
Gross profit as a percent of sales was 60.3% in fiscal 2008, 60.1% in fiscal 2007 and 59.4% in fiscal 2006.
The most significant factors affecting our gross profit over the past three fiscal years were:
•
•
•
•
lower depreciation as a percentage of cost of sales driven by reduced capital requirements in our business due to
our purchase of Fab 4.
increased cost of sales of $2.9 million in fiscal 2008 over fiscal 2007, and $3.2 million in fiscal 2007 over fiscal
2006 associated with share-based compensation expense under SFAS No. 123R.
fluctuations in the product mix of microcontrollers, proprietary and non-proprietary analog products and Serial
EEPROM products resulting in higher average selling prices for our products.
continual cost reductions in wafer fabrication and assembly and test manufacturing such as new manufacturing
technologies and more efficient manufacturing techniques.
Other factors that impacted our gross profit percentage in the periods covered by this report include:
•
•
changes in capacity utilization and absorption of fixed costs, and
inventory write-offs and the sale of inventory that was previously written off.
During fiscal 2008 and fiscal 2007, we operated at approximately 99% of our Fab 2 capacity. During fiscal 2006, we
operated at approximately 98% of our Fab 2 capacity. 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 during the first quarter of fiscal 2009 and to modestly increase the current level of capacity utilization at Fab 4 during
the first quarter of fiscal 2009.
32
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, 2008, Fab 4 predominantly utilized
our 0.35 to 0.5 micron processes. We continue to transition products to more advanced process technologies to reduce future
manufacturing costs. All of our production has been on 8-inch wafers during the periods covered by this report.
Our overall inventory levels were $124.5 million at March 31, 2008, compared to $121.0 million at March 31, 2007 and
$115.0 million at March 31, 2006. We maintained 112 days of inventory on our balance sheet at March 31, 2008 compared
to 107 days of inventory at March 31, 2007 and 106 days at March 31, 2006.
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, 2008, approximately 67% of our assembly requirements were performed in our Thailand facility,
compared to approximately 72% as of March 31, 2007 and approximately 66% at March 31, 2006. 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.
Our use of third parties involves some reduction in our level of control over the portions of our business that we
subcontract. While we review the quality, delivery and cost performance of our third party contractors, our future operating
results could suffer if any third party contractor is unable to maintain manufacturing yields, assembly and test yields and
costs at approximately their current levels.
Research and Development (R&D)
R&D expenses for fiscal 2008 were $120.9 million, or 11.7% of sales, compared to $113.7 million, or 10.9% of sales,
for fiscal 2007 and $94.9 million, or 10.2% of sales, for fiscal 2006. We are committed to investing in new and enhanced
products, including development systems software, and in our design and manufacturing process technologies. We believe
these investments are significant factors in maintaining our competitive position. R&D costs are expensed as incurred.
Assets purchased to support our ongoing research and development activities are capitalized when related to products which
have achieved technological feasibility, or that have alternative future uses and are amortized over their expected useful lives.
R&D expenses include labor, depreciation, masks, prototype wafers, and expenses for the development of process
technologies, new packages, and software to support new products and design environments.
R&D expenses increased $7.2 million, or 6.3%, for fiscal 2008 over fiscal 2007. The primary reasons for the dollar
increase in R&D costs in fiscal 2008 compared to fiscal 2007 were higher labor costs as a result of expanding our internal
R&D headcount and $1.1 million of additional share-based compensation expense. R&D expenses increased $18.8 million,
or 19.8%, for fiscal 2007 over fiscal 2006. The primary reasons for the dollar increase in R&D costs in fiscal 2007 compared
to fiscal 2006 were higher labor and recruitment costs as a result of expanding our technical resources and $9.6 million of
share-based compensation as a result of the adoption of SFAS No. 123R.
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2008 were $175.6 million, or 16.9% of sales, compared to
$163.2 million, or 15.7% of sales, for fiscal 2007, and $129.6 million, or 14.0% of sales, for fiscal 2006. Selling, general and
administrative expenses include salary expenses related to field sales, marketing and administrative personnel, advertising
and promotional expenditures and legal expenses. Selling, general and administrative expenses also include costs related to
our direct sales force and field applications engineers who work in sales offices worldwide to stimulate demand by assisting
customers in the selection and use of our products.
Selling, general and administrative expenses increased $12.4 million, or 7.6%, for fiscal 2008 over fiscal 2007. The
primary reasons for the dollar increase in selling, general and administrative expenses in fiscal 2008 over fiscal 2007 were
higher labor costs as a result of expanding our internal resources involved in the technical aspects of selling our products and
$1.5 million of additional share-based compensation expense. Selling, general and administrative expenses increased
$33.7 million, or 26.0%, for fiscal 2007 over fiscal 2006. The primary reasons for the dollar increase in selling, general and
administrative expenses in fiscal 2007 over fiscal 2006 were higher labor costs as a result of expanding our internal resources
in the technical aspects of selling our products and $14.5 million of share-based compensation as a result of the adoption of
SFAS No. 123R.
33
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense
investment levels.
Special Charge - Loss on Sale of Fab 3
In August 2002, we acquired a semiconductor manufacturing facility in Gresham, Oregon, referred to as Fab 4. After the
acquisition of Fab 4 was completed, we undertook an analysis of the potential production capacity at Fab 4. The results of
the production capacity analysis led us to determine that Fab 3’s capacity would not be needed in the foreseeable future and
during the second quarter of fiscal 2003 we committed to a plan to sell Fab 3. Accordingly, Fab 3 was classified as an asset
held-for-sale as of December 31, 2002, and we maintained that classification until March 31, 2005.
On March 31, 2005, we changed the classification of Fab 3 from an asset held-for-sale to an asset held-for-future-use and
began to depreciate the asset. Fab 3 had been on the market for over two years, and we had not received any acceptable
offers on the facility. Over that period of time, our business had increased significantly and we thought that over the next
several years we would need to begin planning for future wafer fabrication capacity as a larger percentage of Fab 4’s clean
room capacity was utilized. We determined that the appropriate action to take was to stop actively marketing the Fab 3
facility and hold it for future use. As a result of this change in classification, we had to assess the fair value of the Fab 3 asset
to determine if any additional impairment charge was required upon the change in classification from held-for-sale to held-
for-future-use under SFAS No. 144. We performed a discounted cash flow analysis of the Fab 3 asset based on various
financial projections in developing the fair value estimate given that it was the best available valuation technique for the
asset. The discounted cash flow analysis confirmed the carrying value of the Fab 3 asset at March 31, 2005 was not in excess
of its fair value. No indicators of impairment for the Fab 3 asset arose between March 31, 2005 and September 30, 2007.
We received an unsolicited offer on the Fab 3 facility in September 2007. We assessed our available capacity in our
current facilities, along with our capacity available from outside foundries and determined the capacity of Fab 3 would not be
required in the near term. As a result of this assessment, we accepted the offer to sell Fab 3 on September 21, 2007 and the
transaction closed on October 19, 2007. We received $27.5 million in cash net of expenses associated with the sale and
recognized an impairment charge of $26.8 million on the sale of Fab 3, representing the difference between the carrying
value of the assets at September 30, 2007 and the amounts realized subsequent to September 30, 2007.
There were no special charges in fiscal 2007 or 2006.
Other Income (Expense)
Interest income in fiscal 2008 decreased to $54.9 million from $58.4 million in fiscal 2007 as the average interest rates
on our invested cash balances were at lower levels during fiscal 2008. Interest income in fiscal 2007 increased to $58.4
million from $32.8 million in fiscal 2006 as our average invested balances were at higher levels in fiscal 2007 compared to
fiscal 2006, and we earned a higher interest rate on our invested balances. Interest expense in fiscal 2008 increased to $8.0
million from $5.4 million in fiscal 2007 due to the $1.15 billion in 2.125% junior subordinated convertible debentures we
issued in December 2007. Interest expense in fiscal 2007 increased to $5.4 million from $2.0 million in fiscal 2006 due to
the short-term debt balances that were outstanding.
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 15.2% in fiscal 2008, 11.0% in fiscal 2007 and 32.5% in fiscal 2006, 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 2008 reflects a $10.3 million U.S. tax benefit associated with the sale of Fab 3 in the second quarter
of fiscal 2008, a $5.7 million tax benefit related to the release of tax reserves associated with a foreign tax matter in the third
quarter of fiscal 2008, a $4.5 million tax benefit related to the release of tax reserves for certain international tax exposures in
the fourth quarter of fiscal 2008 and approximately $0.8 million related to accrued interest and other reserve matters.
Combined, these tax benefits decreased our effective tax rate in fiscal 2008 by approximately 4.4%. Our effective tax rate in
fiscal 2007 reflects a $52.2 million benefit related to a tax settlement for our fiscal 1999 through fiscal 2001 tax years that
occurred in the fourth quarter of fiscal 2007 which decreased our effective tax rate for fiscal 2007 by 13%. 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%. We expect our effective tax rate for fiscal 2009 to be approximately 18.2%.
Various taxing authorities in the United States and other countries in which we do business are increasing their scrutiny
of the tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing
authorities in the jurisdictions in which they conduct significant operations. We are currently under audit by the IRS for our
fiscal years ended March 31, 2002, 2003 and 2004. We recognize liabilities for anticipated tax audit issues in the United
States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax payments are
probable. We believe that we maintain adequate tax reserves to offset any potential tax liabilities that may arise upon these
34
and other pending audits in the United States and other countries in which we do business. If such amounts ultimately prove
to be unnecessary, the resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves
are no longer deemed necessary. If such amounts ultimately prove to be less than any final assessment, a future charge to
expense would be recorded in the period in which the assessment is determined.
Our Thailand manufacturing operations currently benefit from numerous tax holidays that have been granted to us by the
Thailand government based on our investments in property, plant and equipment in Thailand. Our tax holiday periods in
Thailand expire at various times in the future. One of our Thailand tax holidays expired in September 2006 and the
expiration did not have a material impact on our effective tax rate. Any expiration of our tax holidays in Thailand are
expected to have a minimal impact on our overall tax expense due to other tax holidays and increases in income in other
taxing jurisdictions with lower statutory rates.
Liquidity and Capital Resources
We had $1,519.1 million in cash, cash equivalents and short-term and long-term investments at March 31, 2008, an
increase of $240.7 million from the March 31, 2007 balance. The increase in cash, cash equivalents and short-term and long-
term investments over this time period is primarily attributable to cash generated by operating activities and cash received
from the issuance of our junior subordinated convertible debentures being offset in part by dividends and stock repurchase
activity during the twelve months ended March 31, 2008.
Net cash provided from operating activities was $447.3 million for fiscal 2008, $429.8 million for fiscal 2007 and
$437.3 million for fiscal 2006. The increase in cash flow from operations in fiscal 2008 compared to fiscal 2007 was
primarily due to changes in accrued liabilities and other assets and liabilities.
Net cash provided by investing activities was $55.7 million for fiscal 2008, net cash used in investing activities was
$442.2 million for fiscal 2007 and $136.6 million in fiscal 2006. The increase in fiscal 2008 over fiscal 2007 was primarily
due to changes in our net purchases, sales and maturities of investments and cash proceeds from the sale of Fab 3. The
increase in cash used in investing activities in fiscal 2007 over fiscal 2006 was primarily due to changes in our net purchases,
sales and maturities of short-term and long-term investments.
Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.
Capital expenditures were $69.8 million in fiscal 2008, $60.0 million in fiscal 2007 and $76.3 million in fiscal 2006. The
primary reason for the dollar differences in capital expenditures in the periods covered by this report related to requirements
for funding capital expansion activities in our manufacturing operations. We currently intend to spend approximately
$100 million during the next twelve months to invest in equipment and facilities to maintain, and selectively increase,
capacity to meet our currently anticipated needs, including approximately $30 million to expand our building footprint in
Thailand.
We expect to finance capital expenditures through our existing cash balances and cash flows from operations. We
believe that the capital expenditures anticipated to be incurred over the next twelve months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
Net cash used in financing activities was $182.7 million for fiscal 2008 and $385.3 million for fiscal 2007. Net cash
used in financing activities was $195.8 million for fiscal 2006. Proceeds from the sale of stock, the exercise of stock options
and employee purchases under our employee stock purchase plan were $59.1 million for fiscal 2008, $68.7 million for fiscal
2007 and $95.8 million for fiscal 2006. During the twelve months ended March 31, 2008, we received net proceeds of
$1,127.0 million from the issuance of our 2.125% junior subordinated convertible debentures. Cash expended for the
repurchase of our common stock was $1,138.0 million in fiscal 2008 and $3.3 million in fiscal 2006. No amounts were
expended in fiscal 2007 for the repurchase of common stock. During fiscal 2007, we paid down $269.0 million in short-term
borrowings. 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 in fiscal 2006, we initiated the $269.0 million in borrowings,
which were collateralized against investments that were held in foreign locations, allowing the investments to reach their
normal maturity date. Effective with the adoption of SFAS No. 123R on April 1, 2006, we began reporting the excess tax
benefit from share-based payment arrangements as a cash flow from financing activities rather than a cash flow from
operating activities. The excess tax benefit from share-based payment arrangements was $21.2 million in fiscal 2008 and
$22.8 million in fiscal 2007.
On October 23, 2006, our Board of Directors authorized the repurchase of up to 10,000,000 shares of our common stock
in the open market or privately negotiated transactions. As of March 31, 2008, no shares related to this authorization
remained available for purchase under this program. On December 11, 2007, our Board of Directors authorized the
repurchase of up to an additional 10,000,000 shares of our common stock in the open market or in privately negotiated
transactions. As of March 31, 2008, 6,492,234 shares related to this authorization remained available for purchase under this
authorization.
35
Our Board of Directors authorized the repurchase of 21,500,000 shares of our common stock concurrent with the junior
subordinated convertible debenture transaction described in Note 10 to our Consolidated Financial Statements and no further
shares are available to be repurchased under this authorization.
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 2006, we paid dividends in the amount of $0.57 per share for a total dividend payment of $120.1 million.
During fiscal 2007, we paid dividends in the amount of $0.965 per share for a total dividend payment of $207.9 million.
During fiscal 2008, we paid dividends in the amount of $1.205 per share for a total dividend payment of $252.0 million. On
April 28, 2008, we declared a quarterly cash dividend of $0.33 per share, which will be paid on May 27, 2008, to
stockholders of record on May 12, 2008 and the total amount of such dividend is expected to be $60.9 million. Our Board is
free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend, on
our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and
other factors deemed relevant by our Board. Our current intent is to provide for ongoing quarterly cash dividends depending
upon market conditions and our results of operations.
We enter into derivative transactions from time to time in an attempt to reduce our exposure to currency rate fluctuations.
Although none of the countries in which we conduct significant foreign operations have had a highly inflationary economy in
the last five years, there is no assurance that inflation rates or fluctuations in foreign currency rates in countries where we
conduct operations will not adversely affect our operating results in the future. At March 31, 2008, we had foreign currency
forward contracts of $2.4 million outstanding.
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 twelve 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, 2008, 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, 2008 (dollars in thousands):
Operating lease obligations
Capital purchase obligations (1)
Other purchase obligations and
commitments (2)
2.125% junior convertible debentures –
Payments Due by Period
Total
$ 14,826
45,165
Less than
1 year
$
5,869
45,165
1 – 3 years
7,524
$
---
3 – 5 years
1,433
$
---
1,803
808
995
---
More than
5 years
$
---
---
---
principal and interest (3)
1,875,997
24,437
48,875
48,875
1,753,810
Total contractual obligations (4)
$ 1,937,791 $ 76,279
$ 57,394
$ 50,308
$ 1,753,810
(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, 2008, 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) For purposes of this table we have assumed the principal of our convertible debentures will be paid on
December 31, 2037.
(4) Total contractual obligations do not include contractual obligations recorded on the balance sheet as current
liabilities, or certain purchase obligations as discussed below. The contractual obligations also do not include
amounts related to uncertain tax positions because reasonable estimates cannot be made.
36
Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table
above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as
purchase orders may represent authorizations to purchase rather than binding agreements. For the purpose of this table,
contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding
on Microchip and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum
or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current
manufacturing needs and are fulfilled by our vendors with short time horizons. We do not have significant agreements for
the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected
requirements for three months. We also enter into contracts for outsourced services; however, the obligations under these
contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant
penalty.
The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of
payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to
agreed-upon amounts for some obligations.
Off-Balance Sheet Arrangements
As of March 31, 2008, we are not involved in any off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of
SEC Regulation S-K.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurement (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157 (FSP
FAS 157-2), which delays the effective date of SFAS No. 157 for all nonfinancial assets and liabilities except for those
recognized or disclosed at least annually. Except for the delay for nonfinancial assets and liabilities, SFAS No. 157 is
effective for the us beginning April 1, 2008. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years and will be adopted by us in the first quarter of fiscal 2009. We are in the
process of determining the effect, if any, that the adoption of SFAS No. 157 will have on our consolidated financial
statements.
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159). Under this Statement, we may elect to report financial instruments and certain other items at fair
value on a contract-by-contract basis with changes in value reported in earnings. SFAS No. 159 is effective for years
beginning after November 15, 2007 and will be adopted by us in the first quarter of fiscal 2009. We are in the process of
determining the effect, if any, that the adoption of SFAS No. 159 will have on our consolidated financial statements.
In June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities (EITF 07-3). EITF 07-3 requires that nonrefundable
advance payments for goods or services that will be used or rendered for future research and development activities be
deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.
EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007 and will be adopted by us
in the first quarter of fiscal 2009. We do not expect the adoption of EITF 07-3 to have a material effect on our consolidated
results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R).
SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning after December 15,
2008, and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact, if any,
that the adoption of SFAS No. 141R will have on our consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an
amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first
37
quarter of fiscal 2010. We are currently evaluating the potential impact, if any, that the adoption of SFAS No. 160 will have
on our consolidated results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133 (SFAS No. 161). The standard requires additional quantitative disclosures (provided
in tabular form) and qualitative disclosures for derivative instruments. The required disclosures include how derivative
instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows; relative
volume of derivative activity; the objectives and strategies for using derivative instruments; the accounting treatment for
those derivative instruments formally designated as the hedging instrument in a hedge relationship; and the existence and
nature of credit-related contingent features for derivatives. SFAS No. 161 does not change the accounting treatment for
derivative instruments. SFAS No. 161 is effective for us beginning April 1, 2009. We do not expect the adoption of SFAS
No. 161 to have a material impact on our financial condition, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No.
162). The standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S.
generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS No. 162, the
GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing
Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.
SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board
Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 162 on our consolidated
results of operations and financial condition.
In May 2008, the FASB released FSP APB 14-1 Accounting For Convertible Debt Instruments That May Be Settled in
Cash Upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1) that alters the accounting treatment for
convertible debt instruments that allow for either mandatory or optional cash settlements. FSP APB 14-1, will impact the
accounting associated with our $1.15 billion junior subordinated convertible debentures. FSP APB 14-1 specifies that issuers
of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods, and will require us to recognize
additional (non-cash) interest expense based on the market rate for similar debt instruments without the conversion feature.
Furthermore, it would require recognizing interest expense in prior periods pursuant to retrospective accounting
treatment. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and will
be adopted by the us on April 1, 2009. We are currently evaluating the materiality of the adverse impact the adoption of FSP
APB 14-1 will have on our consolidated results of operations and financial condition.
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 $1,001.7 million as of March 31, 2008, and $1,278.4 million as of March 31, 2007. 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):
Available-for-sale securities
Weighted-average yield rate
Financial instruments mature during the fiscal year ended March 31,
2009
$ 100,190
2010
$ 405,055
2011
$ 435,264
3.23%
3.13%
3.26%
$
2012
---
---
2013
$ 5,042
Thereafter
$ 56,142
5.75%
4.85%
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 material to our operating results. 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. As of March 31, 2008, there were $2.4 million of foreign currency hedges outstanding. There were no hedges
outstanding as of March 31, 2007 and the amount of the hedges outstanding as of March 31, 2006 was immaterial. If foreign
currency rates fluctuate by 15% from the rates at March 31, 2008 and 2007, the effect on our financial position and results of
operation would be immaterial.
Our investment in marketable equity securities at March 31, 2008 consists of shares of common stock, the value of
which is determined by the closing price of such shares on the respective markets on which the shares are traded as of the
38
balance sheet date. These investments are classified as trading securities and accounted for under the provisions of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. The market value of these investments was
approximately $12.4 million at March 31, 2008 compared to our adjusted cost basis of approximately $12.2 million. The
value of our investment in marketable equity securities would be materially impacted if there were a significant change in the
market price of the shares. A hypothetical 30% favorable or unfavorable change in the stock price compared to the stock
price at March 31, 2008 would have affected the value of our investment in marketable equity securities by less than $4
million. Additionally, we have sold put options on one of the trading securities, which are recorded as an accrued liability,
and are marked to market value. A decline in the stock price of the underlying security prior to the expiration date of the puts
would cause an increase to the liability, which would result in a charge to our results of operations, and could result in the put
being exercised by the holder. If the put is exercised by the holder, we could be required to pay up to $17.3 million for
additional shares of the common stock, at a price potentially in excess of the then fair market value of the common stock. A
hypothetical 30% unfavorable change in the stock price of the trading security on which we have sold the puts, compared to
the stock price at March 31, 2008 could potentially result in the puts being exercised and would result in our paying
$17.3 million to acquire the shares of common stock. The stock would then be marked to market value, affecting the value of
our investment by an additional $3.4 million. See Note 4 to our consolidated financial statements, included in Item 15(a)(1)
for additional information about our investments in marketable equity securities.
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
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K, as required by paragraph (b) of Rule 13a-15 or
Rule 15d-15 under the Securities Exchange Act of 1934, as amended, 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
39
management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial
statements.
Management assessed our internal control over financial reporting as of March 31, 2008, the end of our fiscal year.
Management based its assessment on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of
such elements as the design and operating effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed
by our finance organization.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as
of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We
reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Ernst & Young LLP, an independent registered public accounting firm, who audited our consolidated financial
statements included in this Form 10-K has issued an attestation report on the Company’s internal control over financial
reporting, which is included in Part II, Item 9A.
Changes in Internal Control over Financial Reporting.
During the three months ended March 31, 2008, 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.
40
Ernst & Young LLP
Ernst & Young Tower
One Renaissance Square
2 North Central Avenue, Suite 2300
Phoenix, Arizona 85004
Tel: +1 602 322 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 Microchip Technology Incorporated’s internal control over financial reporting as of
March 31, 2008, 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 included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Microchip Technology Incorporated maintained, in all material respects, effective internal
control over financial reporting as of March 31, 2008, 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, 2008 consolidated financial statements of Microchip Technology Incorporated
and our report dated May 23, 2008 expressed an unqualified opinion thereon.
ey
May 23, 2008
41
A member firm of Ernst & Young Global Limited
Item 9B. OTHER INFORMATION
In fiscal 2008, each of Steve Sanghi, our Chairman, Chief Executive Officer and President, Mitch Little, our Vice
President, Worldwide Sales and Applications, Steve Drehobl, our Vice President, Security, Microcontroller and Technology
Division, and Rich Simoncic, our Vice President, Analog and Interface Products Division, entered into trading plans as
contemplated by Rule 10b-5-1 under the Securities Exchange Act of 1934 and periodic sales of our common stock are
expected to occur under such plans.
The foregoing disclosure is being made on a voluntary basis and not pursuant to any specific requirement under
Form 10-K, Form 8-K or otherwise.
.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information on the members of our Board of Directors is incorporated herein by reference to our proxy statement for our
2008 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 2008 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 9, 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 2008 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 2008 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.
Information regarding material changes, if any, to procedures by which security holders may recommend nominees to
our Board of Directors is incorporated by reference to our proxy statement for the 2008 annual meeting of stockholders under
the caption “Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the 2008 Annual Meeting of
Stockholders; Discretionary Authority to Vote on Stockholder Proposals.”
Item 11.
EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to the information under the
caption “Executive Compensation” in our proxy statement for our 2008 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 2008 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 2008 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 2008 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 2008 annual meeting of stockholders.
42
Information with respect to security ownership of certain beneficial owners, members of our Board of Directors and
management is incorporated herein by reference to the information under the caption “Security Ownership of Principal
Stockholders, Directors and Executive Officers” in our proxy statement for our 2008 annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item pursuant to Item 404 of Regulation S-K is incorporated by reference to the
information under the caption “Certain Transactions” contained in our proxy statement for our 2008 annual meeting of
stockholders.
The information required by this Item pursuant to Item 407(a) of Regulation S-K regarding the independence of our
directors is incorporated by reference to the information under the caption “Meetings of the Board of Directors” contained in
our proxy statement for our 2008 annual meeting of stockholders.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item related to principal accountant fees and services as well as related pre-approval
policies is incorporated by reference to the information under the caption “Independent Registered Public Accounting Firm”
contained in our proxy statement for our 2008 annual meeting of stockholders.
[Remainder of page intentionally left blank.]
43
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, 2008 and 2007
Consolidated Statements of Income for each of the three years in the
period ended March 31, 2008
Consolidated Statements of Cash Flows for each of the three years in the
period ended March 31, 2008
Consolidated Statements of Stockholders’ Equity for each of the three years in the
period ended March 31, 2008
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules
(3)
The Exhibits filed with this Form 10-K or incorporated herein by reference are set
forth in the Exhibit Index beginning on page 46 hereof, which Exhibit Index is
incorporated herein by this reference.
(b)
See Item 15(a)(3) above.
(c)
See “Index to Financial Statements” included under Item 8 to this Form 10-K.
Page No.
F-1
F-2
F-3
F-4
F-5
F-6
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
(Registrant)
Date: May 28, 2008
By: /s/ Steve Sanghi
Steve Sanghi
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature
Title
Date
/s/ Steve Sanghi
Steve Sanghi
/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, President and
Chief Executive Officer
Director
Director
Director
Director
Vice President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
May 28, 2008
May 28, 2008
May 28, 2008
May 28, 2008
May 28, 2008
May 28, 2008
45
Exhibit
Number
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
EXHIBITS
Incorporated by Reference
2.1
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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 January 29, 2007
First Amendment to Preferred Shares Rights
Agreement dated January 9, 2007
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
Indenture, dated as of December 7, 2007, by and
between Wells Fargo Bank, National Association, as
Trustee, and Microchip Technology Incorporated
Registration Rights Agreement, dated as of
December 7, 2007, by and between J.P. Morgan
Securities Inc. and Microchip Technology
Incorporated
Form of Indemnification Agreement between
Registrant and its directors and certain of its officers
*2004 Equity Incentive Plan as amended and
restated by the Board on May 1, 2006
*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)
*Restricted Stock Units Agreement (Domestic) for
2004 Equity Incentive Plan
Restricted Stock Units Agreement (Foreign) for
2004 Equity Incentive Plan
*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
46
8-K
000-21184
2.1
7/18/02
10-Q
10-Q
000-21184
000-21184
3.1
3.1
11/12/02
2/6/07
10-Q
000-21184
4.1
2/6/07
8-K
000-21184
4.1
10/12/99
8-K
000-21184
4.1
12/7/07
8-K
000-21184
4.2
12/7/07
S-1
33-57960
10.1
2/5/93
10-Q
000-21184
10.3
2/6/07
S-8
333-119939
4.5
10/25/04
10-K
000-21184
10.4
5/23/05
10-Q
000-21184
10.3
11/7/07
10-Q
000-21184
10.4
11/7/08
10-K
000-21184
10.6
5/31/06
10-Q
000-21184
10.1
11/12/02
S-8
333-872
10.6
1/23/96
Exhibit
Number
10.10
10.11
10.12
EXHIBITS (cont’d.)
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
Incorporated by Reference
*Microchip Technology Incorporated 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
S-8
333-140773
4.4
2/16/07
10-K
000-21184
10.13
6/5/03
10-K
000-21184
10.17
5/27/98
10.13 Microchip Technology Incorporated International
S-8
333-140773
4.1
2/16/07
Employee Stock Purchase Plan, as amended
through May 1, 2006
10.14 Microchip Technology Incorporated International
S-8
333-140773
4.2
2/16/07
Stock Purchase Agreement (including attached
Form of Enrollment Form)
Form of Change Form for Microchip Technology
Incorporated International Employee Stock
Purchase Plan
*Executive Management Incentive Compensation
Plan
*Discretionary Executive Management Incentive
Compensation Plan
10.15
10.16
10.17
S-8
333-140773
4.3
2/16/07
10-Q
000-21184
10.4
2/6/07
10-Q
000-21184
10.5
2/6/07
10.18
*Management Incentive Compensation Plan
10-Q
000-21184
S-8
333-53876
10.6
4.1
2/6/07
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
10.19
10.20
10.21
10.22
10.23
10.24
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
47
EXHIBITS (cont’d.)
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
Incorporated by Reference
S-8
333-101696
4.1.3
12/6/02
S-8
333-101696
4.1.1
12/6/02
10-Q
10-Q
10-Q
10-Q
000-21184
000-21184
000-21184
000-21184
10.1
10.1
10.2
10.1
2/9/06
11/7/07
11/7/07
2/13/98
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
10-K
000-21184
24.1
6/7/00
X
X
X
X
X
Exhibit
Number
10.25
*Adoption Agreement to the Microchip
Technology Incorporated Supplemental
Retirement Plan dated January 1, 1997
10.26
*Microchip Technology Incorporated Supplemental
Retirement Plan
10.27
*Amendments to Supplemental Retirement Plan
10.28
*Change of Control Severance Agreement
10.29
*Change of Control Severance Agreement
10.30
10.31
10.32
10.33
21.1
23.1
24.1
31.1
31.2
32
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
Subsidiaries of Registrant
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
48
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, 2008
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, 2008 and 2007
Consolidated Statements of Income for each of the three years in the period ended
March 31, 2008
Consolidated Statements of Cash Flows for each of the three years in the period ended
March 31, 2008
Consolidated Statements of Stockholders’ Equity for each of the three years in the
period ended March 31, 2008
Notes to Consolidated Financial Statements
Page Number
F-1
F-2
F-3
F-4
F-5
F-6
i
Ernst & Young LLP
Ernst & Young Tower
One Renaissance Square
2 North Central Avenue, Suite 2300
Phoenix, Arizona 85004
Tel: +1 602 322-3000
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, 2008 and 2007, and the related consolidated statements
of income, stockholders’ equity, and cash flows for each of the three years in the period ended
March 31, 2008. 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, 2008 and 2007, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended March 31, 2008, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 and Note 9 to the consolidated financial statements, effective April 1, 2007,
the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes and changed its method of accounting for uncertain tax positions, and
effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004) Share-Based Payment and changed its method of accounting for share-based
compensation.
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, 2008, 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 23, 2008 expressed an unqualified opinion thereon.
ey
May 23, 2008
F-1
A member firm of Ernst & Young Global Limited
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
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
ASSETS
$
March 31,
2008
2007
$
487,736
837,054
138,319
124,483
17,135
63,261
49,742
1,717,730
522,305
194,274
31,886
11,613
34,499
167,477
583,000
124,559
121,024
15,547
61,983
11,147
1,084,737
605,722
527,910
31,886
8,456
10,830
Total assets
$
2,512,307
$
2,269,541
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable
Accrued liabilities
Deferred income on shipments to distributors
Total current liabilities
$
Junior convertible debentures
Long-term income tax payable
Deferred tax liability
Other long-term liabilities
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no
shares issued or outstanding.
Common stock, $0.001 par value; 450,000,000 shares authorized;
218,789,994 shares issued and 184,338,768 shares outstanding at
March 31, 2008; 217,439,960 shares issued and outstanding at
March 31, 2007.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Common stock held in treasury: 34,451,226 shares at March 31, 2008;
and no shares at March 31, 2007.
Total stockholders’' equity
$
39,317
56,323
95,441
191,081
1,150,128
112,311
21,460
1,104
34,675
129,882
91,363
255,920
---
---
8,327
926
---
---
184
793,919
1,301,275
2,508
(1,061,663)
1,036,223
217
755,834
1,255,486
(7,169)
---
2,004,368
Total liabilities and stockholders’ equity
$
2,512,307
$
2,269,541
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 (1)
Gross profit
Operating expenses:
Research and development (1)
Selling, general and administrative (1)
Loss on sale of Fab 3
Operating income
Other income (expense):
Interest income
Interest expense
Other, net
Income before income taxes
Income tax provision
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
(1) Includes share-based compensation expense as follows:
Cost of sales
Research and development
Selling, general and administrative
Year ended March 31,
2008
2007
2006
$
$
1,035,737
410,799
624,938
1,039,671
414,915
624,756
$
927,893
377,016
550,877
120,864
175,646
26,763
323,273
113,698
163,247
---
276,945
94,926
129,587
---
224,513
301,665
347,811
326,364
54,851
(7,966)
2,435
350,985
53,237
297,748
$
58,383
(5,416)
312
401,090
44,061
357,029
$
1.44
$
1.66
$
$
$
1.40
1.205
207,220
212,048
$
$
1.62
0.965
215,498
220,848
32,753
(1,967)
2,035
359,185
116,816
242,369
1.15
1.13
0.570
210,104
215,024
$
6,191
10,695
15,960
$
3,255
9,623
14,501
---
214
364
$
$
$
$
$
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 expense related to equity incentive plans
Excess tax benefit from share-based compensation
Tax benefit from equity incentive plans
Convertible debt derivatives – revaluation and amortization
Amortization of junior convertible debenture issuance costs
Gain on sale of assets
Investments in trading securities
Unrealized impairment loss on available-for-sale investments
Loss on sale of Fab 3
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
Increase in inventories
Increase (decrease) in deferred income on shipments to distributors
Increase (decrease) in accounts payable and accrued liabilities
Change in other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of available-for-sale investments
Sales and maturities of available-for-sale investments
Investment in other assets
Proceeds from sale of Fab 3
Proceeds from sale of assets
Capital expenditures
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Payment of cash dividend
Repurchase of common stock
Proceeds from issuance of junior convertible debentures, net of issuance costs
Proceeds from sale of common stock
Excess tax benefit from share-based compensation
Proceeds from short-term borrowings
Payments on short-term borrowings
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
Year ended March 31,
2008
2007
2006
$
297,748
$
357,029
$
242,369
100,076
9,562
32,846
(21,184)
21,914
128
241
(937)
(12,133)
2,439
26,763
(13,760)
(2,902)
4,078
12,080
(9,652)
447,307
(1,857,964)
1,959,210
(5,012)
27,523
1,725
(69,827)
55,655
(251,959)
(1,138,040)
1,127,000
59,112
21,184
---
---
(182,703)
320,259
167,477
487,736
116,171
9,023
27,379
(22,788)
22,862
---
---
(364)
---
---
---
14,802
(2,663)
(8,118)
(75,978)
(7,586)
429,769
(1,327,042)
943,955
(844)
---
1,746
(60,039)
(442,224)
(207,898)
---
---
68,723
22,788
---
(268,954)
(385,341)
(397,796)
565,273
167,477
110,682
17,516
578
---
29,377
---
---
(998)
---
---
---
(26,273)
(11,296)
7,751
72,053
(4,436)
437,323
(856,748)
797,694
(2,595)
---
1,341
(76,294)
(136,602)
(120,109)
(3,320)
---
95,751
---
268,954
(45,454)
195,822
496,543
68,730
565,273
$
$
See accompanying notes to consolidated financial statements
F-4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock and
Additional Paid-in
Capital
Common Stock held
in Treasury
Accumulated
Other
Comprehensive
Deferred
Share-based
Retained
Net
Stockholders'
Shares
Amount
Shares
Amount
Income (Loss)
Compensation
Earnings
Equity
Balance at March 31, 2005
208,556
$ 532,874
818
$
(21,517)
$
(9,718)
---
$ 984,095
$
1,485,734
Components of other comprehensive income:
Net income
Net unrealized losses on available-for-
sale investments, net of $882 of tax
Total comprehensive income
Issuances from equity incentive plans
Employee stock purchase plan
Purchase of treasury stock
---
---
5,561
435
---
---
---
85,735
10,016
---
Treasury stock used for new issuances
(938)
(24,837)
Tax benefit from equity incentive plans
Unearned share-based compensation
amortization
Share-based compensation
Cash dividend
---
---
---
---
29,377
4
6,283
---
Balance at March 31, 2006
213,614
639,452
Components of other comprehensive income:
Net income
Net unrealized losses on available-for-
sale investments, net of $1,228 of tax
Total comprehensive income
Issuances from equity incentive plans
Employee stock purchase plan
Tax benefit from equity incentive plans
Reclassification due to the adoption of SFAS
123R
Unearned share-based compensation
amortization
Share-based compensation
Cash dividend
---
---
3,435
391
--
---
---
---
---
---
---
57,322
11,401
22,862
(5,705)
2
30,717
---
Balance at March 31, 2007
217,440
756,051
Components of other comprehensive income:
Net income
Net unrealized gains on available-for-sale
investments, net of $2,293 of tax
Total comprehensive income
Issuances from equity incentive plans
Employee stock purchase plan
Purchase of treasury stock
---
---
2,983
419
---
---
---
47,406
11,706
---
---
---
---
---
---
---
---
120
(938)
(3,320)
24,837
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Treasury stock used for new issuances
(2,052)
(76,377)
(2,052)
76,377
Tax benefit from equity incentive plans
Share-based compensation
Cash dividend
---
---
---
21,914
33,403
---
---
---
---
---
---
---
---
36,503
(1,138,040)
---
(4,195)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
(5,705)
242,369
242,369
---
---
---
---
---
---
---
---
(4,195)
238,174
85,735
10,016
(3,320)
---
29,377
4
578
---
(120,109)
(120,109)
(13,913)
(5,705)
1,106,355
1,726,189
---
6,744
---
---
---
---
---
---
---
---
---
---
---
---
5,705
---
---
---
357,029
357,029
---
---
---
---
---
---
---
6,744
363,773
57,322
11,401
22,862
---
2
30,717
(207,898)
(207,898)
(7,169)
---
1,255,486
2,004,368
---
9,677
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
297,748
297,748
---
---
---
---
---
---
---
9,677
307,425
47,406
11,706
(1,138,040)
---
21,914
33,403
(251,959)
(251,959)
Balance at March 31, 2008
218,790
$ 794,103
34,451
$(1,061,663)
$
2,508
---
$1,301,275
$
1,036,223
See accompanying notes to consolidated financial statements
F-5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Microchip develops, manufactures and sells specialized semiconductor products used by its customers for a
wide variety of embedded control applications. Microchip’s product portfolio comprises 8-bit, 16-bit and 32-bit
PIC® microcontrollers and 16-bit dsPIC® digital signal controllers, which feature on-board Flash (reprogrammable)
memory technology. In addition, Microchip offers a broad spectrum of high-performance linear, mixed-signal,
power management, thermal management, battery management and interface devices. Microchip also makes serial
EEPROMs.
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. Revenue is recognized when the distributor sells
the product to an end-user, at which time the sales price becomes fixed or determinable. Revenue is not recognized
upon the Company’s shipment to the distributors since, due to discounts from list price as well as price protection
rights, the sales price is not substantially fixed or determinable at that time. At the time of shipment to these
distributors, the Company records a trade receivable for the selling price as there is a legally enforceable right to
payment, relieves inventory for the carrying value of goods shipped since legal title has passed to the distributor, and
records the gross margin in deferred income on shipments to distributors on the consolidated balance sheets.
Deferred income on shipments to distributors effectively represents the gross margin on the sale to the
distributor; however, the amount of gross margin recognized by the Company in future periods could be less than
the deferred margin as a result of credits granted to distributors on specifically identified products and customers to
allow the distributors to earn a competitive gross margin on the sale of the Company’s products to their end
customers and price protection concessions related to market pricing conditions.
We sell the majority of the items in our product catalog to our distributors worldwide at a uniform list price.
However, distributors resell our products to end customers at a very broad range of individually negotiated price
points. The majority of our distributors’ resales require a reduction from the original list price paid. Often, under
these circumstances, we remit back to the distributor a portion of their original purchase price after the resale
transaction is completed in the form of a credit against the distributors’ outstanding accounts receivable balance.
The credits are on a per unit basis and are not given to the distributor until they provide information regarding the
sale to their end customer. The price reductions vary significantly based on the customer, product, quantity ordered,
geographic location and other factors and discounts to a price less than the Company’s cost have historically been
rare. The effect of granting these credits establishes the net selling price from the Company to its distributors for the
product and results in the net revenue recognized by the Company when the product is sold by the distributors to
their end customers. Thus, a portion of the “Deferred income on shipments to distributors” balance represents the
amount of distributors’ original purchase price that will be credited back to the distributor in the future. The wide
range and variability of negotiated price concessions granted to distributors does not allow us to accurately estimate
the portion of the balance in the deferred income on shipments to distributors account that will be credited back to
the distributors. Therefore, the Company does not reduce deferred income on shipments to distributors or accounts
receivable by anticipated future price concessions; rather, price concessions are typically recorded against deferred
income on shipments to distributors when incurred, which is generally at the time the distributor sells the product.
F-6
At March 31, 2008, the Company had approximately $130.4 million of deferred revenue and $35.0 million in
deferred cost of sales recognized as $95.4 million of deferred income on shipments to distributors. At March 31,
2007, the Company had approximately $126.4 million of deferred revenue and $35.0 million of deferred cost of
sales recognized as $91.4 million of deferred income on shipments to distributors. The deferred income on
shipments to distributors that will ultimately be recognized in the Company’s income statement will be lower than
the amount reflected on the balance sheet due to price credits to be granted to the distributors when the product is
sold to their customers. These price credits historically have resulted in the deferred income approximating the
overall gross margins that the Company recognizes in the distribution channel of its business.
The Company reduces product pricing through price protection based on market conditions, competitive
considerations and other factors. Price protection is granted to distributors on the inventory they have on hand at the
date the price protection is offered. When the Company reduces the price of its products, it allows the distributor to
claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it has on
hand as of the date of the price reduction. There is no immediate revenue impact from the price protection, as it is
reflected as a reduction of the deferred income on shipments to distributors’ balance.
Products returned by distributors and subsequently scrapped have historically been immaterial to the
Company’s consolidated results of operations. The Company routinely evaluates the risk of impairment of the
deferred cost of sales component of the deferred income on shipments to distributors account. Because of the
historically immaterial amounts of inventory that have been scrapped, and historically rare instances where
discounts given to a distributor result in a price less than the Company’s cost, the Company believes the deferred
costs have a low risk of material impairment.
Shipping charges billed to customers are included in net sales, and the related shipping costs are included in
cost of sales.
Product Warranty
The Company generally sells products with a limited warranty related to product quality and a limited
indemnification of customers against intellectual property infringement claims related to the Company’s products.
Due to comprehensive product testing, the short time between product shipment and the detection and correction of
product failures, and a low historical rate of payments on indemnification claims, the accrual based on historical
activity and the related expense were immaterial as of and for fiscal years ended March 31, 2008, 2007 and 2006.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were immaterial for the fiscal years
ended March 31, 2008, 2007 and 2006.
Research and Development
Research and development costs are expensed as incurred. Assets purchased to support the Company’s ongoing
research and development activities are capitalized when related to products which have achieved technological
feasibility or that have alternative future uses and are amortized over their estimated useful lives. Research and
development expenses include expenditures for labor, share-based payments, depreciation, masks, prototype wafers,
and expenses for development of process technologies, new packages, and software to support new products and
design environments.
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
have been immaterial to the Company’s financial statements.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its
income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s
actual current tax exposure together with assessing temporary differences resulting from differing treatment of items
for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included
within the Company’s consolidated balance sheet. The Company must then assess the likelihood that its deferred
tax assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, it
F-7
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.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109 (FIN) 48). FIN 48
establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for
income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement
classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted
FIN 48 on April 1, 2007, and did not recognize any cumulative-effect adjustment associated with its unrecognized
tax benefits, interest, and penalties. See further discussion in Note 9.
Cash and Cash Equivalents
All highly liquid investments, including marketable securities purchased with a remaining maturity of three
months or less when acquired are considered to be cash equivalents.
Investments
The Company classifies its investments as trading securities or available-for-sale securities based upon
management’s intent with regard to the investments and the nature of the underlying securities.
The Company’s trading securities consist of strategic investments in shares of publicly traded common stock
and restricted cash representing cash collateral for put options the Company has written on one of its trading
securities. The Company’s investments in trading securities are carried at fair value with unrealized gains and losses
reported in other income, net.
The Company’s available-for-sale investments consist of government agency bonds, municipal bonds, auction
rate securities and corporate bonds. The Company’s investments are carried at fair value with unrealized gains and
losses reported in stockholders’ equity. Premiums and discounts are amortized or accreted over the life of the related
available-for-sale security. Dividend and interest income are recognized when earned. The cost of securities sold is
calculated using the specific identification method.
The Company includes within short-term investments its trading securities, as well as its income yielding
available-for-sale securities that can be readily converted to cash and includes within long-term investments those
income yielding available-for-sale securities with maturities of over one year that have unrealized losses attributable
to them. 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.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of
its customers to make required payments, which is included in bad debt expense. The Company determines the
adequacy of this allowance by regularly reviewing the composition of its accounts receivable aging and evaluating
individual customer receivables, considering such customer’s financial condition, credit history and current
economic conditions.
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out method. The Company writes
down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference
between the cost of inventory and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those projected by the Company, additional
inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and
charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts
are recoverable. In estimating reserves for obsolescence, the Company primarily evaluates estimates of demand
over a twelve-month period and provides reserves for inventory on hand in excess of the estimated twelve-month
demand.
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
F-8
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.
Junior Subordinated Convertible Debentures
The Company accounts for its junior subordinated convertible debentures and related provisions in accordance
with the provisions of Emerging Issues Task Force Issue (EITF) No. 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, EITF No. 00-27, Application of
Issue No. 98-5 to Certain Convertible Instruments, EITF No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and EITF No. 01-6, The Meaning of
‘Indexed to a Company’s Own Stock’, EITF No. 04-08, The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share (EITF 04-08) and EITF No. 90-19, Convertible Bonds with Issuer Option to Settle for Cash
upon Conversion. The Company also evaluates the instruments in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133), which requires bifurcation of embedded derivative
instruments and measurement of fair value for accounting purposes. EITF 04-08 requires the Company to include
the dilutive effect of the shares of its common stock issuable upon conversion of the outstanding convertible
debentures in its diluted income per share calculation regardless of whether the market price trigger or other
contingent conversion feature has been met. The Company applies the treasury stock method as it has the intent and
current ability to settle the principal amount of the convertible debentures in cash. This method results in
incremental dilutive shares when the average fair value of the Company’s common stock for a reporting period
exceeds the conversion price.
The Company considers the embedded features related to the contingent interest payments, over-allotment
option, and the Company’s ability to make specific types of distributions (e.g., extraordinary dividends) to qualify as
derivatives and bundles them as a compound embedded derivative under SFAS No. 133. The fair value of the
derivative at the date of issuance of the debentures is accounted for as a discount on the debentures. The over-
allotment feature which was revalued on the date of exercise is accounted for as a premium on the debentures. The
debt discount and the debt premium are being accreted to the face value of the debentures as interest expense, net,
over the maturity period of the debentures. Any change in the fair value of this embedded derivative is recognized as
an unrealized gain or loss in Other income, net.
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 its results of operation. As of March 31, 2008, 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.
F-9
Share-Based Compensation
The Company has equity incentive plans under which non-qualified stock options and restricted stock units
(RSUs) have been granted to employees and under which non-qualified stock options have been granted to non-
employee members of the Board of Directors. In the second half of fiscal 2006, the Company adopted RSUs as its
primary equity incentive compensation instrument for employees. The Company also has an employee stock
purchase plan for all eligible employees.
Effective April 1, 2006, the Company adopted FASB Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock options, RSUs, and employee stock purchase rights, to
be recognized in the financial statements based on their respective grant date fair values and does not allow the
previously permitted pro forma disclosure-only method as an alternative to financial statement recognition.
SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related interpretations, and amends SFAS No. 95, Statement of Cash Flows.
SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported
as a financing cash flow, rather than as an operating cash flow as required under previous literature. This
requirement has reduced the Company’s net operating cash flows and increased net financing cash flows. In March
2005, the SEC issued SAB No. 107, Share-Based Payment (SAB 107), which provides guidance regarding the
interaction of SFAS No. 123R and certain SEC rules and regulations. The Company has applied the provisions of
SAB 107 in its adoption of SFAS No. 123R.
The Company adopted SFAS No. 123R using the modified-prospective method of recognition of compensation
expense related to share-based payments. The Company’s consolidated statements of income for the years ended
March 31, 2008 reflect the impact of adopting SFAS No. 123R. In accordance with the modified-prospective
transition method, the Company’s consolidated statements of income for prior periods have not been restated to
reflect, and do not include, the impact of SFAS No. 123R.
SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the date of
grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is
recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each
award as of the date of grant using the Black-Scholes option pricing model, which was developed for use in
estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-
Scholes model considers, among other factors, the expected life of the award and the expected volatility of the
Company’s stock price.
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions resulting from
the exercise of stock options as operating cash flows in the condensed consolidated statements of cash flows. SFAS
No. 123R requires the cash flows resulting from the tax benefits arising from tax deductions in excess of the
compensation cost recognized for the equity incentives (excess tax benefits) to be classified as financing cash flows.
The $21.2 million and $22.8 million excess tax benefit classified as a financing cash inflow in the Company’s
accompanying consolidated statements of cash flows for the years ending March 31, 2008 and 2007, respectively,
would have been classified as an operating cash inflow of the Company prior to the adoption of SFAS No. 123R.
Prior to the adoption of SFAS No. 123R, the Company accounted for share-based payment awards to employees
in accordance with APB 25 and related interpretations, and had adopted the disclosure-only alternative of
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and SFAS No. 148, Accounting for
Stock-Based Compensation — Transition and Disclosure. In accordance with APB 25, share-based compensation
expense was not recorded in connection with share-based payment awards granted with exercise prices equal to or
greater than the fair market value of the Company’s common stock on the date of grant, unless certain modifications
were subsequently made. The Company recorded deferred compensation in connection with RSUs equal to the fair
market value of the common stock on the date of grant. Recorded deferred compensation was recognized as share-
based compensation expense ratably over the applicable vesting periods. In accordance with the provisions of SFAS
No. 123R, all deferred compensation previously recorded has been eliminated with a corresponding reduction in
additional paid-in capital.
Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of
grant requires judgment. The fair value of RSUs is based on the fair market value of the Company’s common stock
on the date of grant discounted for expected future dividends. The Company uses the Black-Scholes option pricing
model to estimate the fair value of employee stock options and rights to purchase shares under stock participation
plans, consistent with the provisions of SFAS No. 123R. Option pricing models, including the Black-Scholes
model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate,
F-10
and expected risk-free rate of return. The Company uses a blend of historical and implied volatility based on
options freely traded in the open market as it believes this is more reflective of market conditions and a better
indicator of expected volatility than using purely historical volatility. The expected life of the awards is based on
historical and other economic data trended into the future. The risk-free interest rate assumption is based on
observed interest rates appropriate for the expected terms of the Company’s awards. The dividend yield assumption
is based on the Company’s history and expectation of future dividend payouts. SFAS No. 123R requires the
Company to develop an estimate of the number of share-based awards which will be forfeited due to employee
turnover. Quarterly changes in the estimated forfeiture rate would affect share-based compensation, as the effect of
adjusting the rate for all expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate
is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to
increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial
statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to
decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial
statements. If forfeiture adjustments are made, they would affect the Company’s results of operations. The effect of
forfeiture adjustments in the year ended March 31, 2008 was immaterial.
The Company evaluates the assumptions used to value its awards on a quarterly basis. If factors change and the
Company employs different assumptions, share-based compensation expense may differ significantly from what was
recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the
Company may be required to accelerate or increase any remaining unearned share-based compensation expense.
Future share-based compensation expense and unearned share-based compensation will increase to the extent that
the Company grants additional equity awards to employees or it assumes unvested equity awards in connection with
acquisitions. Had the Company adopted SFAS No. 123R in prior periods, the magnitude of the impact of that
standard on its results of operations would have approximated the impact of SFAS 123 assuming the application of
the Black-Scholes option pricing model as described in the disclosure of pro forma net income and pro forma net
income per share in Note 14 to the Company’s Consolidated Financial Statements.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of
investments in debt securities and trade receivables. Investments in debt securities with original maturities of
greater than six months consist primarily of AAA rated financial instruments and counterparties. The Company’s
investments are primarily in direct obligations of the United States government or its agencies and in municipal
bonds.
Concentrations of credit risk with respect to accounts receivable are generally not significant due to the
diversity of the Company’s customers and geographic sales areas. The Company had one distributor that accounted
for 10% or more of its net sales in the year ended March 31, 2008. The Company sells its products primarily to
OEMs and distributors in the Americas, Europe and Asia. The Company performs ongoing credit evaluations of its
customers’ financial condition and, as deemed necessary, may require collateral, primarily letters of credit. 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, 2008, 2007 and 2006. See Note 16, Geographic Information, for additional information
on the Company’s largest distributors.
Distributor advances, included in deferred income on shipments to distributors on our consolidated balance
sheets, totaled $36.4 million at March 31, 2008 and $37.4 million at March 31, 2007. On sales to distributors, our
payment terms generally require the distributor to settle amounts owed to us for an amount in excess of their
ultimate cost. The Company’s sales price to its distributors may be higher than the amount that the distributors will
ultimately owe the Company because distributors often negotiate price reductions after purchasing the product from
us and such reductions are often significant. It is the Company’s practice to apply these negotiated price discounts
to future purchases, requiring the distributor to settle receivable balances, on a current basis, generally within 30
days, for amounts originally invoiced. This practice has an adverse impact on the working capital of the Company’s
distributors. As such, the Company has entered into agreements with certain distributors whereby it advances cash
to the distributors to reduce the distributor’s working capital requirements. These advances are reconciled at least
on a quarterly basis and are estimated based on the amount of ending inventory as reported by the distributor
multiplied by a negotiated percentage. Such advances have no impact on revenue recognition or the Company’s
consolidated statements of income. The Company processes discounts taken by distributors against its deferred
income on shipments to distributors’ balance and trues-up the advanced amounts generally after the end of each
completed fiscal quarter. The terms of these advances are set forth in binding legal agreements and are unsecured,
bear no interest on unsettled balances and are due upon demand. The agreements governing these advances can be
cancelled by the Company at any time.
F-11
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
statements in conformity with U.S. Generally Accepted Accounting Principles. Actual results could differ from
those estimates.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurement (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value
in accordance with generally accepted accounting principles, and expands disclosures about fair value
measurements. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB
Statement No. 157 (FSP FAS 157-2), which delays the effective date of SFAS No. 157 for all nonfinancial assets
and liabilities except for those recognized or disclosed at least annually. Except for the delay for nonfinancial assets
and liabilities, SFAS No. 157 is effective for the Company beginning April 1, 2008. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years and will be adopted by
the Company in the first quarter of fiscal 2009. The Company is in the process of determining the effect, if any, the
adoption of SFAS No. 157 will have on the Company’s consolidated financial statements.
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). Under this Statement, the Company may elect to report financial instruments
and certain other items at fair value on a contract-by-contract basis with changes in value reported in
earnings. SFAS No. 159 is effective for years beginning after November 15, 2007 and will be adopted by the
Company in the first quarter of fiscal 2009. The Company is in the process of determining the effect, if any, the
adoption of SFAS No. 159 will have on the Company’s consolidated financial statements.
In June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities (EITF 07-3). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or rendered for future research and
development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after
December 15, 2007 and will be adopted by the Company in the first quarter of fiscal 2009. The Company does not
expect the adoption of EITF 07-3 to have a material effect on its consolidated results of operations and financial
condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R).
SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning after
December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. The Company is
currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on its consolidated results of
operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements—an amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS No. 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's
ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. The
Company is currently evaluating the potential impact, if any, the adoption of SFAS 160 will have on its consolidated
results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities—an amendment of FASB Statement No. 133 (SFAS No. 161). The standard requires additional
quantitative disclosures (provided in tabular form) and qualitative disclosures for derivative instruments. The
required disclosures include how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows; relative volume of derivative activity; the objectives and strategies
for using derivative instruments; the accounting treatment for those derivative instruments formally designated as
the hedging instrument in a hedge relationship; and the existence and nature of credit-related contingent features for
F-12
derivatives. SFAS No. 161 does not change the accounting treatment for derivative instruments. SFAS No. 161 is
effective for the Company beginning April 1, 2009. The Company does not expect the adoption of SFAS No. 161 to
have a material impact on its financial condition, results of operations or cash flows.
In May 2008, the FASB released FSP APB 14-1 Accounting For Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1) that alters the accounting
treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. FSP APB
14-1, will impact the accounting associated with the Company's $1.15 billion junior subordinated convertible
debentures. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods, and will require the Company to recognize additional (non-cash) interest expense
based on the market rate for similar debt instruments without the conversion feature. Furthermore, it would require
recognizing interest expense in prior periods pursuant to retrospective accounting treatment. This FSP is effective
for financial statements issued for fiscal years beginning after December 15, 2008, and will be adopted by the
Company on April 1, 2009. The Company is currently evaluating the impact the adoption of FSP APB 14-1 will
have on its consolidated results of operations and financial condition.
2.
SPECIAL CHARGES
Loss on Sale of Fab 3
The Company received an unsolicited offer on its Puyallup, Washington facility (Fab 3) in September 2007.
The Company assessed its available capacity in its current facilities, along with potential available capacity from
outside foundries and determined the capacity of Fab 3 would not be required in the near term. As a result of this
assessment, the Company accepted the offer on September 21, 2007, and the transaction closed on October 19,
2007. The Company received $27.5 million in cash, net of expenses associated with the sale, and recognized a loss
on sale of $26.8 million, representing the difference between the carrying value of the assets and the amounts
received.
There were no special charges in fiscal 2007 or fiscal 2006.
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 and
trading securities at March 31, 2008 (amounts in thousands):
Available-for-sale Securities
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
1,933
2,877
---
---
4,810
$
$
---
395
1,095
102
1,592
Trading Securities
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
227
---
227
$
$
---
---
---
Estimated
Fair Value
$ 399,641
466,013
56,141
79,898
$ 1,001,693
Estimated
Fair Value
12,360
17,275
29,635
$
$
Government agency bonds
Municipal bonds
Auction rate securities
Corporate bonds
Adjusted
Cost
$ 397,708
463,531
57,236
80,000
$ 998,475
Marketable securities
Restricted cash
Adjusted
Cost
12,133
17,275
29,408
$
$
F-13
At March 31, 2008, short-term investments consist of $837.0 million and long-term investments consist of
$194.3 million.
The $12.4 million in marketable securities listed above relates to strategic investments in two publicly traded
companies that the Company owned shares in at March 31, 2008 and has classified these as trading securities. In
fiscal 2008, the Company recognized an unrealized gain in earnings of $0.2 million on these trading securities. The
restricted cash of $17.3 million represents cash collateral for put options the Company has written on one of its
trading securities. The Company recorded the value received at the date the puts were written within other current
liabilities at an amount equal to the cash received at that time. The Company records the change in the fair value of
the puts in other income, net at each balance sheet date. At March 31, 2008, the fair value of the puts of $1.4 million
was recorded in other current liabilities. These put options have final maturities in June and September 2008 and if
the stock price of the investment falls below the strike price of the puts, the Company may need to make an
additional investment at the designated strike price of the puts.
At March 31, 2008, $59.7 million of the Company’s investment portfolio was invested in auction rate securities.
Historically, the carrying value of auction rate securities approximated fair value due to the frequent resetting of the
interest rates. If an auction fails for amounts the Company has invested, the investment will not be liquid. With the
recent liquidity issues experienced in the global credit and capital markets, the Company’s auction rate securities
have experienced multiple failed auctions. In September 2007 and February 2008, auctions for $24.9 million and
$34.8 million, respectively, of the original purchase value of the Company’s investments in auction rate securities
had first failed. While the Company continues to earn interest on these investments based on a pre-determined
formula with spreads tied to particular interest rate indexes, the estimated market value for a portion of these auction
rate securities no longer approximates the original purchase value.
The $24.9 million in failed auctions during September 2007 are all either AA or AAA rated by Standard &
Poors and all but $2.5 million of the securities possesses credit enhancement in the form of insurance for principal
and interest. The underlying characteristics of $22.4 million of these auction rate securities relate to servicing
statutory requirements in the life insurance industry and $2.5 million relate to a specialty finance company that has a
AAA Standard & Poors rating and the issue owned by the Company has a AA rating from Standard & Poors. The
$24.9 million in failed auctions have continued to fail through May 23, 2008. As a result, the Company will not be
able to access such funds until a future auction on these investments is successful. The fair value of the failed
auction rate securities has been estimated based on market information and estimates determined by management
and could change significantly based on market conditions. Based on the estimated values, the Company concluded
these investments were other than temporarily impaired and recognized an impairment charge on these investments
of $2.4 million during fiscal 2008. If the issuers are unable to successfully close future auctions or if their credit
ratings deteriorate, the Company may be required to further adjust the carrying value of the investments through an
impairment charge to earnings.
The $34.8 million in failed auctions during February 2008 are investments in student loan-backed municipal
bond auction rate securities. Based upon the Company’s evaluation of available information, it believes these
investments are of high credit quality, as all of the investments carry at least two AAA credit ratings and are largely
backed by the federal government (Federal Family Education Loan Program). The fair value of the failed auction
rate securities has been estimated based on market information and estimates determined by management and could
change significantly based on market conditions.
The Company continues to monitor the market for auction rate securities and consider its impact (if any) on the
fair market value of its investments. If the market conditions deteriorate further, the Company may be required to
record additional unrealized losses in other comprehensive income or impairment charges. The Company intends
and has the ability to hold these auction rate securities until the market recovers as it does not anticipate having to
sell these securities to fund the operations of its business. The Company believes that, based on its current
unrestricted cash, cash equivalents and short-term investment balances, the current lack of liquidity in the credit and
capital markets will not have a material impact on its liquidity, cash flow or ability to fund its operations.
At March 31, 2008, the Company evaluated its investment portfolio, and noted unrealized losses of $1.6 million
were due to fluctuations in interest rates and credit market conditions. 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, 2008. 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, 2009, such recovery is not
anticipated to occur in the next year and these investments have been classified as long-term investments.
F-14
The amortized cost and estimated fair value of the available-for-sale securities at March 31, 2008, 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.
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
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
99,780
841,459
---
57,236
$ 998,475
$
410
4,400
---
---
$ 4,810
$
$
---
497
---
1,095
1,592
Estimated
Fair Value
$
100,190
845,362
---
56,141
$ 1,001,693
The following is a summary of available-for-sale securities at March 31, 2007 (amounts in thousands):
Government agency bonds
Auction rate securities
Municipal bonds
Commercial paper
Adjusted
Cost
$ 743,278
330,710
20,675
25,000
$ 1,119,663
$
Gross
Unrealized
Gains
---
---
---
---
---
$
Gross
Unrealized
Losses
$
$
8,067
660
---
26
8,753
$
Estimated
Fair Value
735,211
330,050
20,675
24,974
$ 1,110,910
At March 31, 2007, short-term investments consist of $583.0 million and long-term investments consist of
$527.9 million.
During the year ended March 31, 2008 and March 31, 2007, the Company did not have any gross realized gains
or losses on sales of available-for-sale securities.
4.
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
Trade accounts receivable
Other
Less allowance for doubtful accounts
March 31,
2008
$ 140,966
505
141,741
3,152
$ 138,319
5.
INVENTORIES
Inventories consist of the following (amounts in thousands):
Raw materials
Work in process
Finished goods
March 31,
$
2008
4,205
95,973
24,305
$ 124,483
2007
$ 127,467
636
128,103
3,544
$ 124,559
2007
$
5,118
83,783
32,123
$ 121,024
F-15
6.
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
$
2008
39,764
330,519
1,100,759
78,073
1,549,115
1,026,810
$ 522,305
March 31,
$
2007
47,212
372,149
1,059,565
69,040
1,547,966
942,244
$ 605,722
Depreciation expense attributed to property, plant and equipment was $98.2 million, $114.3 million and $109.3
million for the years ending March 31, 2008, 2007 and 2006, respectively.
7.
INTANGIBLE ASSETS
Intangible assets consist of the following (amounts in thousands):
Developed technology
Distribution rights
Developed technology
Distribution rights
Gross
Amount
21,582
5,236
26,818
Gross
Amount
16,571
5,236
21,807
$
$
$
$
March 31, 2008
Accumulated
Amortization
(12,605)
(2,600)
(15,205)
$
$
March 31, 2007
Accumulated
Amortization
(11,242)
(2,109)
(13,351)
$
$
Net
Amount
8,977
2,636
11,613
$
$
Net
Amount
5,329
3,127
8,456
$
$
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 10 years.
In fiscal 2008, the Company acquired $5.0 million of developed technology, which has a weighted average
amortization period of 8.2 years. The following is an expected amortization schedule for the intangible assets for
the fiscal years March 31, 2009 through March 31, 2013, absent any future acquisitions or impairment charges
(amounts in thousands):
Year Ending
March 31,
2009
2010
2011
2012
2013
$
Projected
Amortization Expense
2,554
2,167
1,787
1,785
1,770
The Company did not record any impairment losses in the years ended March 31, 2008, 2007 or 2006
associated with the intangible assets acquired.
F-16
8.
ACCRUED LIABILITIES
Accrued liabilities consist of the following (amounts in thousands):
Income taxes
Other accrued expenses
March 31,
$
2008
---
56,323
2007
$ 84,432
45,450
$ 56,323
$ 129,882
As a result of the adoption of FIN 48, the Company reclassified its current income tax payable to long-term
income tax payable in the first quarter of fiscal 2008 as described in Footnote 9 below.
9.
INCOME TAXES
Effective April 1, 2007, the Company adopted the provision of FIN 48, Accounting for Uncertainty in Income
Taxes–an Interpretation of FASB Statement No. 109. The adoption of FIN 48 did not impact the Company’s
statements of operations or statements of cash flows. The total amount of gross unrecognized tax benefits as of the
date of adoption was $102.8 million. The Company historically classified unrecognized tax benefits in current
income taxes payable. As a result of the adoption of FIN 48, unrecognized tax benefits were reclassified to long-
term income taxes payable.
The Company’s policy to include interest and penalties related to unrecognized tax benefits within the provision
for taxes on the consolidated statements of income did not change as a result of implementing the provisions of FIN
48. As of the date of adoption of FIN 48, the Company did not have an accrued liability for the payment of interest
and penalties relating to unrecognized tax benefits due to tax overpayments.
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant
judgment is required in evaluating its uncertain tax positions and determining its provision for income taxes.
Although the Company believes that it has adequately reserved for its uncertain tax positions, no assurance can be
given that the final tax outcome of these matters will not be different. The Company will adjust these reserves in
light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the
extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact
the provision for income taxes in the period in which such determination is made. The provision for income taxes
includes the impact of reserve provisions and changes to the reserves that are considered appropriate, as well as
related net interest.
The Company recognizes liabilities for anticipated tax audit issues in the United States and other domestic and
international tax jurisdictions based on its estimate of whether, and the extent to which, additional tax payments are
more likely than not. The Company believes it maintains appropriate reserves to offset potential income tax
liabilities that may arise upon final resolution of matters for open tax years. The United States Internal Revenue
Service (IRS) is currently auditing the Company’s fiscal years ended March 31, 2002, 2003 and 2004. The
Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns
and that its accruals for tax liabilities are appropriate for all open years based on an assessment of many factors
including past experience and interpretations of tax law applied to the facts of each matter. If such amounts
ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax benefits being
recorded in the period the reserves are no longer deemed necessary. If such assessments ultimately prove to be
greater than anticipated, a future charge to expense would be recorded in the period in which the assessment is
determined. Although timing of the resolution and/or closure on audits is highly uncertain, the Company does not
believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits from
April 1, 2007 to March 31, 2008 (in thousands):
Balance as of April 1, 2007
Decreases related to prior year tax positions
Increases related to current year tax positions
Increases related to prior year tax positions
Balance as of March 31, 2008
$
102,757
(10,964)
17,576
2,942
112,311
$
F-17
As of March 31, 2008, we had accrued approximately $3.5 million related to the potential payment of interest
on our uncertain tax positions, net of interest receivable on tax overpayments. Interest was included in our provision
for income taxes. We have not accrued any penalties related to our uncertain tax positions as we believe that it is
more likely than not that there will not be any assessments of penalties.
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
2008
Year Ended March 31,
2007
2006
$ 31,202
3,124
9,350
43,676
$ 24,334
2,437
8,267
35,038
7,336
734
1,491
9,561
$ 53,237
10,005
1,001
(1,983)
9,023
$ 44,061
$
79,082
5,837
14,381
99,300
16,165
1,618
(267)
17,516
$ 116,816
The tax benefit associated with the exercise of employee stock options reduced taxes currently payable by
$21.9 million, $22.9 million and $29.4 million for the years ended March 31, 2008, 2007 and 2006, 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):
Computed expected income tax provision
State income taxes, net of federal benefits
Domestic production activites/foreign export sales
benefit
Research and development tax credits
Foreign income taxed at lower than the federal rate
Tax benefit from IRS settlement
Release of tax reserves
Repatriation of foreign earnings
2008
$ 122,845
2,727
(257)
Year Ended March 31,
2007
$ 140,382
5,103
(658)
2006
$ 125,715
3,548
(2,600)
(2,625)
(58,489)
---
(10,964)
---
$ 53,237
(3,573)
(44,993)
(52,200)
---
---
$ 44,061
(2,095)
(38,362)
---
---
30,610
$ 116,816
Pretax income from foreign operations was $273.1 million, $255.3 million and $257.8 million for the years
ended March 31, 2008, 2007 and 2006, 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 $949.8 million at March 31, 2008. 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.
During the year ended March 31, 2008, the Company realized a U.S. tax benefit of $10.3 million as a result of
the sale of Fab 3 and realized a tax benefit of $11.0 million as the result of the release of previously established tax
reserves consisting of approximately $5.7 million related to the resolution of a foreign tax matter in the third quarter
of fiscal 2008, $4.5 million related to the release of tax reserves for certain international tax exposures in the fourth
quarter of fiscal 2008 and approximately $0.8 million related to accrued interest and other reserve matters. The tax
reserve releases are reflected as a separate line in the rate reconciliation table above. These tax benefits decreased
the Company’s effective tax rate for fiscal 2008 by approximately 4.4 percentage points to 15.2%.
F-18
During the year ended March 31, 2007, the Company completed a settlement agreement with the IRS for its
fiscal years ended March 31, 1998, 1999, 2000 and 2001. As part of this settlement the Company recognized $52.2
million as a tax benefit in March 2007 related to amounts previously accrued for the issues that were in dispute with
the IRS. This tax benefit decreased the Company’s effective tax rate for fiscal 2007 by approximately 13.0
percentage points, to 11.0%. This decrease is reflected as a separate line in the rate reconciliation table above.
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,
2008
2007
Deferred tax assets:
Deferred intercompany profit
Deferred income on shipments to distributors
Inventory valuation
Net operating loss carryforward
Share-based compensation
Tax credit carryforward
Accrued expenses and other
Gross deferred tax assets
$
8,733
23,040
1,110
2,864
18,627
---
8,888
63,262
$
8,089
22,732
1,490
3,890
9,344
6,814
9,624
61,983
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation
Junior convertible debentures
Other
Gross deferred tax liability
Net deferred tax asset
(11,277)
(9,089)
(1,095)
(21,460)
$ 41,801
(7,615)
---
(712)
(8,327)
$ 53,656
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, 2008, the Company had a net operating loss carryforward for federal income tax purposes of
approximately $7.4 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
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.
The Company’s Thailand manufacturing operations currently benefit from numerous tax holidays granted to the
Company based on its investment in property, plant and equipment in Thailand. The Company’s tax holiday periods
in Thailand expire at various times in the future beginning in May 2010. 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 $7.1 million, $6.1 million and $7.9 million
for the years ended March 31, 2008, 2007 and 2006, respectively. The benefit the tax holiday had on diluted net
income per share approximated $0.03, $0.03 and $0.04 for the years ended March 31, 2008, 2007 and 2006,
respectively.
10.
2.125% Junior Subordinated Convertible Debentures
In December 2007, the Company issued $1.15 billion principal amount of 2.125% junior subordinated
convertible debentures due December 15, 2037, to two initial purchasers in a private offering. The debentures are
subordinated in right of payment to any future senior debt of the Company and are effectively subordinated in right
F-19
of payment to the liabilities of the Company’s subsidiaries. The debentures are convertible, subject to certain
conditions, into shares of the Company’s common stock at an initial conversion rate of 29.2783 shares of common
stock per one thousand dollar principal amount of debentures, representing an initial conversion price of
approximately $34.16 per share of common stock. As of March 31, 2008, none of the conditions allowing holders
of the debentures to convert had been met. The conversion rate will be subject to adjustment for certain events as
outlined in the indenture governing the debentures, including in the event the Company pays a cash dividend on its
common stock, but will not be adjusted for accrued interest. As a result of a cash dividend of $0.32 per share paid in
February 2007, the conversion rate was adjusted to 29.5742 shares of common stock per $1,000 of principal amount
of debentures, representing a conversion price of approximately $33.81 per share of common stock. The Company
received net proceeds of $1,127.0 million after deduction of issuance costs of $23.0 million. The debt issuance costs
are recorded in long-term other assets and are being amortized to interest expense over 30 years. Interest is payable
in cash semiannually in arrears on June 15 and December 15, beginning on June 15, 2008. Interest expense related
to the debentures for fiscal 2008 totaled $8.0 million, and was included in interest expense on the consolidated
statement of income. The debentures also have a contingent interest component that will require the Company to
pay interest during any semiannual interest period if the average trading price of the debenture is greater or less than
certain thresholds beginning with the semi-annual interest period commencing on December 15, 2017 (the
maximum amount of contingent interest that will accrue is 0.50% of such average trading price per year) and upon
the occurrence of certain events, as outlined in the indenture governing the debentures.
On or after December 15, 2017, the Company may redeem all or part of the debentures for the principal amount
plus any accrued and unpaid interest if the closing price of the Company’s common stock has been at least 150% of
the conversion price then in effect for at least 20 trading days during any 30 consecutive trading-day period prior to
the date on which the Company provides notice of redemption. The debentures are also redeemable on or prior to
June 7, 2008 if certain U.S. federal tax rules are enacted.
Prior to September 1, 2037, holders of the debentures may convert their debentures only upon the occurrence of
certain events, as outlined in the indenture. If holders of the debentures convert their debentures in connection with
a fundamental change, as defined in the indenture, the Company will, in certain circumstances, be required to pay a
make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a fundamental
change, the holders of the debentures may require the Company to purchase all or a portion of their debentures at a
purchase price equal to 100% of the principal amount of debentures, plus accrued and unpaid interest, if any.
Upon conversion, the Company can satisfy its conversion obligation by delivering cash, shares of common
stock or any combination, at the Company’s option. The Company intends to satisfy the lesser of the principal
amount of the debentures or the conversion value in cash. If the conversion value of a debenture exceeds the
principal amount, the Company may also elect to deliver cash in lieu of common stock for the conversion value in
excess of one thousand dollars principal amount (conversion spread). There would be no adjustment to the
numerator in the net income per common share computation for the cash settled portion of the debentures as that
portion of the debt instrument will always be settled in cash. The conversion spread will be included in the
denominator for the computation of diluted net income per common share.
Under the terms of a registration rights agreement entered into in connection with the offering of the debentures,
the Company filed a shelf registration statement covering resales of the debentures and any common stock issuable
upon conversion of the debentures with the SEC. The Company must maintain the effectiveness of the shelf
registration statement until all of the debentures and all shares of common stock issuable upon conversion of the
debentures cease to be outstanding, have been sold or transferred pursuant to an effective registration statement,
have been sold pursuant to Rule 144 under the Securities Act of 1933, as amended, or the period of time specified in
Rule 144 for the holding period has passed. If the Company fails to comply with the terms of the registration rights
agreement, it will be required to pay additional interest on the debentures at a rate per annum equal to 0.25% for the
first 90 days after the date of such failure and 0.50% thereafter.
The Company concluded the embedded features related to the contingent interest payments, the Company
making specific types of distributions (e.g., extraordinary dividends), the redemption feature in the event of changes
in tax law, and penalty interest in the event of a failure to maintain an effective registration qualify as derivatives
and should be bundled as a compound embedded derivative under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). Additionally, the Company concluded the registration rights
agreement entered into at the time the Company issued the debt is a separate bifurcated derivative, however, the
value of this derivative was deemed to be immaterial, due to the low likelihood the registration would not occur.
The fair value of the compound embedded derivative at the date of issuance of the debentures was $1.3 million and
is accounted for as a discount on the debentures. The resulting value of the debentures of $1,148.7 million will be
accreted to par value over the term of the debt resulting in $1.3 million being amortized to interest expense over 30
F-20
years. Any change in fair value of this embedded derivative will be included in interest expense on the Company’s
consolidated statements of income. The fair value of the derivative as of March 31, 2008 was $1.5 million, resulting
in $0.2 million of additional interest expense in fiscal 2008. The balance of the debentures on the Company’s
consolidated balance sheet at March 31, 2008 was $1,150.1 million, including the fair value of the embedded
derivative. The Company also concluded that the debentures are not conventional convertible debt instruments and
that the embedded stock conversion option qualifies as a derivative under SFAS No. 133. In addition, in accordance
with Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Company’s Own Stock, the Company has concluded that the embedded conversion option
would be classified in stockholders’ equity if it were a freestanding instrument. Accordingly, the embedded
conversion option is not required to be accounted for separately as a derivative.
11.
CONTINGENCIES
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. On April 18, 2008, LSI
Logic and its wholly owned subsidiary Agere, filed both an action with the International Trade Commission and a
complaint in the Eastern District of Texas alleging patent infringement by the Company and 17 other semiconductor
and foundry companies. These actions seek monetary damages and injunctive relief against the allegedly infringing
products. Due to the very early stage of these proceedings, the outcome of these actions is not presently
determinable, and therefore the Company can make no assessment of its materiality. The Company intends to
vigorously defend its rights in these matters. The Company periodically receives notification from various third
parties alleging patent infringement of patents, intellectual property rights or other matters. With respect to these
and other pending legal actions to which Microchip is a party, although the outcome of these actions is not presently
determinable, in the Company’s opinion, based on consultation with legal counsel, as of March 31, 2008, the
ultimate resolution of these matters will not harm its business and will not have a material adverse effect on its
financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not
uncommon, and the Company is, and from time to time has been, subject to such litigation. No assurances can be
given with respect to the extent or outcome of any such litigation in the future.
12.
STOCKHOLDERS’ EQUITY
Stockholder Rights Plan. Effective October 11, 1999, the Company adopted an Amended and Restated
Preferred Shares Rights Agreement as amended on January 29, 2008 (the Amended Rights Agreement). The
Amended Rights Agreement amends and 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 18% 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 18% or more of the Company’s outstanding common shares.
Stock Repurchase Activity. On October 25, 2006, the Company announced that its Board of Directors had
authorized the repurchase of up to 10.0 million shares of its common stock in the open market or in privately
negotiated transactions. As of March 31, 2008, the Company had repurchased all of the shares under this
authorization for $333.3 million. On December 11, 2007, the Company announced that its Board of Directors had
authorized the repurchase of up to an additional 10.0 million shares of its common stock in the open market or in
privately negotiated transactions. As of March 31, 2008, the Company had repurchased 3.5 million shares under this
authorization for $110.7 million. There is no expiration date associated with this program.
The Company’s Board of Directors authorized the repurchase of 21.5 million shares of its common stock
concurrent with the junior subordinated convertible debenture transaction for $638.6 million and no further shares
are available to be repurchased under this authorization.
F-21
During the year ended March 31, 2008, the Company purchased 36.5 million shares of its common stock for
$1,138.0 million. During the year ended March 31, 2007, the Company did not repurchase any of its shares of
common stock. During the year ended March 31, 2006, the Company purchased 0.1 million shares of its common
stock for $3.3 million.
As of March 31, 2008, approximately 34.5 million shares remained as treasury shares with the balance of the
shares being used to fund share issuance requirements under the Company’s equity incentive plans. The timing and
amount of future repurchases will depend upon market conditions, interest rates, and corporate considerations.
13.
EMPLOYEE BENEFIT PLANS
The Company maintains a contributory profit-sharing plan for its domestic employees meeting certain
eligibility and service requirements. The plan qualifies under Section 401(k) of the Internal Revenue Code of 1986,
as amended, and allows employees to contribute up to 60% of their base salary, subject to maximum annual
limitations prescribed by the IRS. 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, 2008, 2007 and 2006, the Company contributions to the plan totaled
$1.4 million, $1.7 million and $1.5 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. 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 stock, or (iii) such lesser amount as is approved by the Company’s Board of
Directors. On January 1, 2008, 945,068 additional shares were reserved under the 2001 Purchase Plan based on the
automatic increase. On January 1, 2007, 1,080,191 additional shares were reserved under the 2001 Purchase Plan
based on the automatic increase. On January 1, 2006, 1,058,541 additional shares were reserved under the 2001
Purchase Plan based on the automatic increase. Since the inception of the 2001 Purchase Plan, 7,544,663 shares of
common stock have been reserved for issuance and 2,547,151 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, 753,645 shares
of common stock have been reserved for issuance and 322,011 shares have been issued under this purchase plan.
Effective January 1, 1997, the Company adopted a non-qualified deferred compensation arrangement. This
plan is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group
of highly compensated employees as defined in ERISA Sections 201, 301 and 401. There are no Company
matching contributions made under this plan.
The Company has management incentive compensation plans which 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, 2008, 2007 and 2006, $9.2 million, $12.4 million and
$14.1 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, 2008,
2007 and 2006, $2.3 million, $6.2 million and $9.4 million, respectively, were charged against operations for this
plan.
14.
EQUITY INCENTIVE PLANS
The Company has equity incentive plans under which incentive stock options, restricted stock units (RSUs) and
non-qualified stock options have been granted to employees and under which non-qualified stock options have been
F-22
granted to non-employee members of the Board of Directors. The Company’s 2004 Equity Incentive Plan, as
amended and restated (the 2004 Plan), is shareholder approved and permits the grant of stock options and RSUs to
employees, non-employee members of the Board of Directors and consultants. At March 31, 2008, 11.3 million
shares remained available for future grant under the 2004 Plan. Stock options and RSUs are designed to reward
employees for their long-term contributions to the Company and to provide incentive for them to remain employed
with the Company. The Company believes that such awards better align the interests of its employees with those of
its shareholders.
The Board of Directors or the plan administrator determines eligibility, vesting schedules and exercise prices for
equity incentives granted under the plans. Equity incentives granted generally have a term of 10 years. Equity
incentives granted in the case of newly hired employees generally vest and become exercisable at the rate of 25%
after one year of service and ratably on a monthly or quarterly basis over a period of 36 months thereafter.
Subsequent equity incentive grants to existing employees generally vest and become exercisable ratably on a
monthly or quarterly basis over a period starting in 48 months and ending in 60 months after the date of grant.
Beginning in fiscal 2008, the Company converted its equity granting practices to a quarterly process instead of an
annual process. The quarterly grants generally vest 48 months from the date of grant.
Under the plans, 106,026,866 shares of common stock had been reserved for issuance since the inception of the
plans.
Share-Based Compensation Expense
The following table presents details of share-based compensation expense resulting from the application of
SFAS No. 123R (amounts in thousands):
Cost of sales
Research and development
Selling, general and administrative
Pre-tax effect of share-based compensation
Income tax benefit
Net income effect of share-based compensation
2008(1)
$
6,191(2)
10,695
15,960
32,846
6,395
26,451
$
Year Ended
March 31,
2007(1)
$ 3,255(2)
9,623
14,501
27,379
6,570
$ 20,809
2006
---
214
364
578
139
439
$
$
(1) The amounts included in the years ended March 31, 2008 and March 31, 2007 reflect the adoption of SFAS No.
123R. In accordance with the modified prospective method of transition, the Company’s consolidated statements of
income for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R.
(2) During the year ended March 31, 2008, $6.7 million was capitalized to inventory, and $6.2 million of capitalized
inventory was sold. During the year ended March 31, 2007, $6.6 million was capitalized to inventory and $3.3 million
of capitalized inventory was sold.
The amount of unearned share-based compensation currently estimated to be expensed in fiscal 2008 through
fiscal 2013 related to unvested share-based payment awards at March 31, 2008 is $62.3 million. The weighted
average period over which the unearned share-based compensation is expected to be recognized is approximately
2.45 years.
In accordance with the requirements of the disclosure-only alternative of SFAS No. 123, set forth below is a pro
forma illustration of the effect on net income and net income per share computed as if the Company had valued
share-based awards to employees using the Black-Scholes option pricing model instead of applying the guidelines
provided by APB 25 for the fiscal year ended March 31, 2006 (in thousands, except per share amounts):
F-23
Net income, as reported
Deduct: Total share-based employee compensation expense determined
under fair value methods for all awards, 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
Year Ended March 31,
2006
$ 242,369
16,240
$ 226,129
$
$
$
$
1.15
1.08
1.13
1.05
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 on April 1, 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.
Combined Incentive Plan Information
RSU share activity under the 2004 Plan is set forth below:
Nonvested shares at March 31, 2005
Granted
Canceled
Vested
Nonvested shares at March 31, 2006
Granted
Canceled
Vested
Nonvested shares at March 31, 2007
Granted
Canceled
Vested
Nonvested shares at March 31, 2008
Number of Shares
---
203,334
(3,083)
(4,727)
195,524
1,634,393
(99,380)
(43,094)
1,687,443
1,084,690
(174,755)
(132,813)
2,464,565
The total intrinsic value of RSUs which vested during the year ended March 31, 2008 was $4.7 million. The
aggregate intrinsic value of RSUs outstanding at March 31, 2008 was $80.6 million calculated based on the closing
price of the Company’s common stock of $32.73 on March 31, 2008. At March 31, 2008, the weighted average
remaining expense recognition period was 2.74 years. The weighted average fair values per share of the RSUs
F-24
awarded in the years ended March 31, 2008 and 2007, was $29.73 and $31.37, respectively, calculated based on the
fair market value of the Company’s common stock on the respective grant dates discounted for the Company’s
expected dividend yield. The weighted average fair values per share of RSUs awarded in the year ended March 31,
2006 was $31.36, calculated based on the intrinsic value on the date of grant.
Option activity under the Company’s stock incentive plans in the three years ended March 31, 2008 is set forth
below:
Outstanding at March 31, 2005
Granted
Exercised
Canceled
Outstanding at March 31, 2006
Granted
Exercised
Canceled
Outstanding at March 31, 2007
Granted
Exercised
Canceled
Outstanding at March 31, 2008
Number of
Shares
22,370,686
2,204,099
(5,561,188)
(563,237)
18,450,360
59,452
(3,393,779)
(375,487)
14,740,546
31,597
(2,850,155)
(189,603)
11,732,385
Weighted
Average Exercise
Price per Share
$
$
19.19
25.91
15.46
23.81
20.97
34.58
16.87
24.25
21.88
37.23
16.66
25.17
23.14
The total intrinsic value of options exercised during the year ended March 31, 2008, 2007, and 2006 was
$56.5 million, $61.8 million and $90.3 million, respectively. This intrinsic value represents the difference between
the fair market value of the Company’s common stock on the date of exercise and the exercise price of each equity
award.
The following table summarizes information about the stock options outstanding at March 31, 2008:
Range of
Exercise Prices
$4.72 – $15.92
Number
Outstanding
1,723,405
15.93 – 17.85
120,537
17.86 – 18.48
1,414,590
18.49 – 23.39
1,484,696
23.40 – 25.26
868,014
25.27 – 25.29
1,574,317
25.30 – 27.00
683,275
27.01 – 27.05
1,387,206
27.06 – 27.15
1,467,863
27.16 – 37.84
1,008,482
Weighted
Average
Exercise Price
$ 13.72
Weighted
Average
Remaining Life
(in years)
2.23
17.38
18.48
22.38
24.17
25.29
26.21
27.05
27.15
30.04
2.49
4.98
2.57
4.17
6.99
5.77
5.99
3.99
5.64
Number
Exercisable
1,723,405
120,537
1,413,516
1,484,696
868,014
39,681
669,432
93,115
1,467,863
839,460
Weighted
Average
Exercise Price
$ 13.72
17.38
18.48
22.38
24.17
25.29
26.21
27.05
27.15
29.70
11,730,065
$ 23.14
4.55
8,719,719
$ 22.01
The aggregate intrinsic value of options outstanding and options exercisable at March 31, 2008 was $112.9
million and $93.6 million, respectively. The aggregate intrinsic values were calculated based on the closing price of
the Company’s common stock of $32.73 per share on March 31, 2008.
F-25
At March 31, 2008 and 2007, the number of option shares exercisable was 8,719,719 and 9,958,426,
respectively, and the weighted average exercise price per share of these options was $22.01 and $20.69,
respectively.
The weighted average fair values per share of stock options granted in the years ended March 31, 2008, 2007,
and 2006 was $11.93, $11.90, and $9.89 respectively.
The weighted average fair values per share of stock options granted in connection with the Company’s stock
incentive plans in the years ended March 31, 2008, 2006, and 2005 were estimated utilizing the following
assumptions:
Expected term (in years)
Volatility
Risk-free interest rate
Dividend yield
Year ended March 31,
2007
5.42
42%
5.00%
3.01%
2008
6.50
39%
3.92%
3.31%
2006
5.21
44%
4.20%
2.14%
15.
LEASE COMMITMENTS
The Company leases office space, transportation and other equipment under operating leases, which expire at
various dates through March 31, 2013. The future minimum lease commitments under these operating leases at
March 31, 2008 are as follows (amounts in thousands):
Year Ending
March 31,
2009
2010
2011
2012
2013
Total minimum payments
Amount
$ 5,869
4,699
2,825
1,114
319
$ 14,826
Rental expense under operating leases totaled $7.6 million, $6.2 million and $6.8 million for the years ended
March 31, 2008, 2007 and 2006, respectively.
16.
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, as deemed necessary, may require collateral, primarily letters of credit. 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 products, as well as the coordination of production planning and shipping to
meet worldwide customer commitments. The Thailand assembly and test facility is reimbursed in relation to value
added with respect to assembly and test operations and other functions performed, and certain foreign sales offices
receive compensation for sales within their territory. Accordingly, for financial statement purposes, it is not
meaningful to segregate sales or operating profits for the assembly and test and foreign sales office operations.
Identifiable long-lived assets (consisting of property, plant and equipment) by geographic area are as follows
(amounts in thousands):
F-26
March 31,
2008
2007
United States
Thailand
Various other countries
$ 400,564
113,117
8,624
$ 488,687
114,560
2,475
Total long-lived assets
$ 522,305
$ 605,722
Sales to unaffiliated customers located outside the United States, primarily in Asia and Europe, aggregated
approximately 75%, 74% and 74% of consolidated net sales for the years ended March 31, 2008, 2007 and 2006,
respectively. Sales to customers in Europe represented 30%, 29% and 28% of consolidated net sales for the years
ended March 31, 2008, 2007 and 2006, respectively. Sales to customers in Asia represented 44%, 43% and 44% of
consolidated net sales for the years ended March 31, 2008, 2007 and 2006, respectively. Sales into China, including
Hong Kong, represented 20%, 18% and 17% of consolidated net sales for the years ended March 31, 2008, 2007 and
2006, respectively. Sales into Taiwan represented 10% of consolidated net sales for the years ended March 31,
2008, 2007 and 2006. 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 one distributor who represented more than 10% of its net sales during fiscal 2008 and two
distributors who represented more than 10% of its net sales during fiscal 2007 and 2006. The Company’s largest
distributor accounted for approximately 12% of its net sales in fiscal 2008. The Company’s largest distributor
accounted for approximately 11% of its net sales and its second largest distributor accounted for approximately 10%
of its net sales in fiscal 2007. 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 2006.
17.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents approximates fair value because their maturity is less than three
months. The carrying amount of short-term and long-term investments approximates fair value as the securities are
marked to market as of each balance sheet date with any unrealized gains and losses reported in stockholders’
equity. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair
value due to the short-term maturity of the amounts. The fair value of the Company’s junior subordinated
convertible debentures was $1.246 billion at March 31, 2008 based on the trading price of the bonds.
The Company has entered into foreign currency forward contracts in the normal course of business to reduce its
exposure to fluctuations in foreign exchange rates. 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, 2008, the Company held contracts with nominal amounts
totaling $2.4 million, which were entered into to hedge the Company’s foreign currency risk. At March 31, 2007,
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, 2008, 2007 and 2006 were immaterial.
18.
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):
2008
Year Ended March 31,
2007
2006
Net income
$
297,748
$
357,029
$
242,369
Weighted average common shares outstanding
207,220
215,498
210,104
Dilutive effect of stock options
4,828
5,350
4,920
Weighted average common and common
equivalent shares outstanding
212,048
220,848
215,024
Basic net income per common share
Diluted net income per common share
$
$
1.44
1.40
$
$
1.66
1.62
$
$
1.15
1.13
F-27
Weighted average common shares exclude the effect of antidilutive options. As of March 31, 2008, the number
of options that were antidilutive were 127,219. As of March 31, 2007, the number of options that were antidilutive
were 36,103. As of March 31, 2006, there were no antidilutive options outstanding.
Diluted net income per common share does not include any incremental shares issuable upon the exchange of
the debentures (see Note 10). The debentures will have no impact on diluted net income per common share until the
average price of the Company’s common stock exceeds the conversion price because the principal amount of the
debentures will be settled in cash upon conversion. Prior to conversion, the Company will include, in the diluted net
income per common share calculation, the effect of the additional shares that may be issued when the Company’s
common stock price exceeds the conversion price, using the treasury stock method. The conversion price at
March 31, 2008 was $33.81 per common share.
19.
QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company’s selected unaudited quarterly operating results for eight quarters
ended March 31, 2008. The Company believes that all adjustments of a normal recurring nature have been made to
present fairly the related quarterly results (in thousands, except per share amounts):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Fiscal 2008
Net sales
Gross profit
Operating income
Net income
Diluted net income per common share
$ 264,072
158,545
85,019
80,293
0.36
$ 258,647 $ 252,600 $ 260,418 $ 1,035,737
624,938
301,665
297,748
1.40
153,047
79,240
80,124
0.38
158,634
81,732
76,652
0.40
154,712
55,674
60,679
0.27
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Fiscal 2007
Net sales
Gross profit
Operating income
Net income
Diluted net income per common share
$ 262,557
158,484
89,681
76,984
0.35
$ 267,934 $ 251,004 $ 258,176 $ 1,039,671
624,756
347,811
357,029
1.62
149,710
81,482
72,849
0.33
154,601
85,289
127,708
0.57
161,961
91,359
79,488
0.36
Refer to Note 2, Special Charges, for an explanation of the special charge in the quarter ended September 30,
2007 related to the Company’s loss on sale of Fab 3. Refer to Note 10, Income Taxes, for an explanation of the
$52.2 million of tax benefit from a tax settlement in the quarter ended March 31, 2007, a $5.7 million of tax benefit
from a resolution of a foreign tax matter in the quarter ended December 31, 2007 and a $4.5 million release of tax
reserves in the quarter ended March 31, 2008.
20.
SUPPLEMENTAL FINANCIAL INFORMATION
Cash paid for income taxes amounted to $25.2 million, $72.6 million and $26.4 million during the years ended
March 31, 2008, 2007 and 2006, respectively. Cash paid for interest on borrowings amounted to $5.4 million and
$1.9 million during the years ended March 31, 2007 and 2006, respectively. There was no cash paid for interest on
borrowings in the year ended March 31, 2008.
A summary of additions and deductions related to the allowance for doubtful accounts for the years ended
March 31, 2008, 2007 and 2006 follows (amounts in thousands):
F-28
Balance at
beginning
of year
Charged to
costs and
expenses
Deductions (1)
Balance at end of
year
Allowance for doubtful accounts:
2008
2007
2006
$
$ 3,544
3,662
3,817
---
---
---
$
(392)
(118)
(155)
$ 3,152
3,544
3,662
(1) Deductions represent uncollectible accounts written off, net of recoveries.
21.
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. Cash dividends paid per share amounted to $1.205,
$0.965 and $0.57 during the years ended March 31, 2008, 2007 and 2006, respectively. Total dividend payments
amounted to $252.0 million, $207.9 million and $120.1 million during the years ended March 31, 2008, 2007 and
2006, respectively.
F-29
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Board of Directors and Officers
Board of Directors
Corporate Officers
Steve Sanghi
Chairman of the Board, President and
Chief Executive Officer
Microchip Technology Incorporated
Matthew W. Chapman
President and CEO
Northwest Evaluation Association
L.B. Day
President
L.B. Day & Co., Inc.
Albert J. Hugo-Martinez
Chief Executive Officer
Hugo-Martinez and Associates
Wade F. Meyercord
President
Meyercord & Associates, Inc.
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
Executive Vice President
Gordon W. Parnell
Vice President, Chief Financial Officer
Richard J. Simoncic
Vice President, Analog and Interface Products Division
Appointed Officers
J. Eric Bjornholt
Vice President, Finance and Corporate Secretary
Bryan J. Liddiard
Vice President, Analog and Interface Marketing
Paul R. Breault
Vice President, Global Sales Support
Gary Marsh
Vice President, European Sales
Mathew B. Bunker
Vice President, Pacific Rim Manufacturing Operations
Sumit K. Mitra
Vice President, Digital Signal Controller Division
Derek P. Carlson
Vice President, Development Tools Group
Lauren A. Carr
Vice President, Human Resources
Kathryn A. Clevenger
Vice President, Fab 4 Operations
Randall L. Drwinga
Vice President, Memory Products Division
Michael A. Finley
Vice President, Fab 2 Operations
Joseph R. Krawczyk
Vice President, Far East Sales
Mitchel Obolsky
Vice President, Advanced Microcontroller Architecture
Division
Robert H. Owen
Vice President, Information Services
Kenneth N. Pye
Vice President, Worldwide Applications Engineering
Dan L. Termer
Vice President, Vertical Markets Group
William Yang
Vice President, Pacific Rim Finance
Peter L. Zimmer, Jr.
Vice President, Americas Sales
Corporate Information
Independent Registered Public Accounting Firm
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 15, 2008
at 9:00 a.m. Pacifi c Standard Time.
Common Stock
Microchip Technology’s common stock is traded on
the NASDAQ Global Select MarketSM under the symbol
“MCHP .” The following table sets forth the quarterly
high and low closing prices as reported by the NASDAQ
Global Select MarketSM for the last two fi scal years.
Fiscal 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Low
$35.47
$36.31
$27.57
$26.86
$42.06
$39.53
$36.92
$34.56
Fiscal 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Low
$31.79
$31.11
$31.40
$33.21
$38.15
$34.88
$34.83
$37.49
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 the sale of Fab 3 contributing to increased gross margins, supporting $1.6 billion in sales with the current
equipment in our fabs, expanding revenue capacity to $2.2 billion with additional capital equipment investments, Microchip continuing to deliver value to its shareholders,
strong interest in Microchip’s products, our ongoing commitment to provide outstanding technical assistance, being well-positioned for further market share gains and to
outpace the semiconductor industry, our focus on new design wins, customer support, continuous improvement, cost reduction and employee empowerment, substantial
growth potential for years to come, aggressively pushing our PIC microcontroller architecture into signifi cantly new design territories, engineers continuing to embrace the PIC
microcontroller architecture, dedication to driving revenue growth and high profi t margins, our low-cost manufacturing structure contributing high gross profi t margins, our
ability to respond quickly to competitive pricing pressures, maintaining healthy margins, opportunities for high-volume growth, continuing to leverage our customers to sell
solutions, our commitment to provide resources to our customers, offering signifi cant benefi ts to our customers, adding fi eld applications engineers, our strategy delivering
critical new design wins, continued focus on helping customers succeed, providing opportunities to grow revenue, employees remaining a compelling competitive advantage,
and constantly striving to improve all aspects of the business 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; 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 serve; the costs
and outcome of any current or future tax audit or any litigation involving intellectual property, customers or other issues; our ability to attract and retain qualifi ed personnel;
disruptions in our business or the businesses of our customers or suppliers due to natural disasters, 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; and the impact on our business and on customer order patterns due to public health concerns.
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
2008 Form 10-K follows this letter to our shareholders. Additionally, you can obtain copies of our Forms 10-K, 10-Q and 8-K 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.
©2008 Microchip Technology Incorporated. All rights reserved. The Microchip name and logo, PIC, dsPIC and MPLAB are registered trademarks of Microchip
Technology Inc. in the USA and in other countries. NASDAQ is a registered trademark of the NASDAQ Stock Market, Inc. The NASDAQ Global Select Market is a
servicemark of the NASDAQ Stock Market, Inc. All other trademarks mentioned herein are property of their respective companies. Printed in USA June 2008.
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©2008 The NASDAQ Stock Market, Inc. Reprinted with permission.
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