2010 Annual Report and Proxy Statement
TO OUR STOCKHOLDERS:
Fiscal year 2010 was a year of significant challenges and opportunity for Microchip brought on by the global economic
conditions throughout the world. What started out as a gloomy year filled with the uncertainty of the global economic crisis
turned out to be a year of significant sequential revenue growth and profitability for Microchip. For the first time in
Microchip’s history we achieved double-digit percentage sequential revenue growth in every quarter during a fiscal year, and
in the fourth quarter of fiscal 2010 we achieved all time records for revenue, non-GAAP gross margin and non-GAAP
earnings per share. We firmly believe that the manner in which we handled the 2009 recession has positioned us
exceptionally well to gain market share in all of our strategic product lines in the future. As you are well aware, last fiscal
year (fiscal 2009) was the most difficult year in the history of Microchip due to the global financial crisis. Our decision not
to lay off any of our employees during the recession allowed us to keep our new product development activities on track,
resulting in a record number of new product introductions in fiscal 2010. Additionally, our customer support activities were
in full force, allowing our sales team to help our customers design their way out of the recession using Microchip’s
innovative products. Our actions during the recession have made Microchip stronger, and positioned us nicely for the future.
A summary of some of Microchip’s key accomplishments during fiscal year 2010 include:
We were one of the few semiconductor companies that remained profitable throughout the global financial crisis. In
fiscal 2010, our net sales were up 4.9% over fiscal 2009 and our net income was $216.0 million, which was 22.8% of
sales.
Microchip continued to generate high levels of cash from its operations which allowed us to grow our cash and
investment balance during fiscal 2010 by $90.8 million, even after paying out a record annual dividend of $249.6
million. The quarterly cash dividend payment we made in the fourth quarter of fiscal 2010 was a record 34.1 cents per
share.
We introduced approximately 150 microcontrollers, analog products and memory products. Today we have over 700
microcontroller products and over 600 analog products in our portfolio.
Based on Semiconductor Industry Association (SIA) data, we gained market share in all of our target markets -- 8-bit and
16-bit microcontrollers, and analog. We are continuing to expand our 32-bit microcontroller product offering with
outstanding market acceptance. This business is growing at a rapid pace, albeit from a small base.
Microchip’s analog products attained new highs in revenue in fiscal 2010 and ended the year with an annual revenue run
rate of over $125 million (by annualizing the fourth quarter results). Over the past two years, Microchip was the fastest
growing diversified analog company in the semiconductor industry.
Microchip shipped 160,243 development systems in fiscal 2010, a 17.4% increase over the previous fiscal year. Every
quarter in fiscal 2010 set a new record for quarterly development tools shipped. We believe development tool shipments
are an excellent leading indicator of the future success of Microchip’s products as a development tool is often the first
item a customer needs to purchase when beginning their design process with one of our microcontroller products.
During fiscal 2010, we announced our agreement to acquire Silicon Storage Technology, Inc. (“SST”) and we closed this
acquisition on April 8, 2010. Through this acquisition Microchip gained access to SST’s SuperFlash® technology and
extensive patent portfolio, which are critical building blocks for advanced microcontrollers. We expect that the SST
acquisition will enhance our ability to customize technology variants, thereby adding an advantage over competing
technologies. Since completing the acquisition, we have already made significant progress in rationalizing SST’s
business and expect that the acquisition will significantly add to Microchip’s value proposition to both its customers and
stockholders.
During fiscal 2010, we acquired ZeroG Wireless, Inc. (“ZeroG”), an innovator in low-power embedded Wi-Fi®
solutions. ZeroG is a developer of Wi-Fi-certified transceivers and FCC-certified modules which further strengthen
Microchip’s wireless offerings by enabling embedded designers to easily connect to this ubiquitous networking protocol
with any 8-, 16- or 32-bit PIC® microcontroller.
During fiscal 2010, Microchip successfully integrated and expanded the market position of R&E International, a leading
provider of analog products addressing the safety and security markets. We acquired R&E International at the end of
fiscal 2009.
Microchip won the 2010 Arizona Business Leadership Award, and was named to the Phoenix Business Journal’s “Best
Places to Work in the Valley” for the third consecutive year. During fiscal 2010, I had the distinct honor of receiving the
Executive of the Year award in the annual EE times ACE Awards, and I was included in the Phoenix Business Journal’s
annual list of Most Admired CEOs. While these awards were bestowed on me, they were possible only because of the
hard work and extraordinary results created by the global Microchip team and as such, belong to them.
Microchip’s products also gained numerous honors for product excellence in fiscal 2010. The PIC24F16KA eXtreme
Low Power PIC microcontrollers won the prestigious EDN Innovation Award in the Microcontroller category, and the
MCP651/2/5 operational amplifiers were finalists in the Analog Signal Path category. Both of these products were also
named finalists in the Design News Golden Mousetrap Awards.
As we begin fiscal year 2011, there remain plenty of challenges in the global economy. However, we believe we have
positioned Microchip to gain market share and deliver outstanding financial performance in fiscal 2011. I want to express
my sincere appreciation to our customers, stockholders and employees for your ongoing support of Microchip.
Steve Sanghi
President and CEO
Microchip Technology Incorporated
The statements contained in this stockholder letter relating to being positioned well to gain market share in all of our strategic product lines,
positioning Microchip nicely for the future, continuing to expand our 32-bit microcontroller product offering with outstanding market
acceptance, growing that business at a rapid pace, development tools being an excellent leading indicator of the future success of our
products, the SST acquisition enhancing our ability to customize technology variants thereby adding an advantage over competing
technologies, the SST acquisition significantly adding to our value proposition to customers and stockholders, the ZeroG acquisition further
strengthening our wireless offerings, challenges in the global economy and positioning Microchip to gain market share and deliver
outstanding financial performance in fiscal 2011 are forward-looking statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause our actual results to differ
materially, including, but not limited to: the strength of the economic recovery or any unexpected fluctuations or weakness in the U.S. and
global economies, changes in demand or market acceptance of our products and the products of our customers; the mix of inventory we
hold and our ability to satisfy short-term orders from our inventory; changes in utilization of our manufacturing capacity and our ability to
effectively ramp our production levels; competitive developments including pricing pressures; the level of orders that are received and can
be shipped in a quarter; the level of sell-through of our products through distribution; changes or fluctuations in customer order patterns
and seasonality; foreign currency effects on our business; the impact of any significant acquisitions that we make; costs and outcome of any
current or future tax audit or any litigation involving intellectual property, customers or other issues; difficulties associated with
successfully integrating SST’s business with our business and technologies; unexpected costs related to the integration of SST; the risk that
our customers may fail to accept the SST product offerings; disruptions in our business or the businesses of our customers or suppliers due
to natural disasters, terrorist activity, armed conflict, war, worldwide oil prices and supply, public health concerns or disruptions in the
transportation system including the recent volcanic activity in Iceland; and general economic, industry or political conditions in the United
States or internationally.
Stockholders of Microchip are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date
such statements are made. Microchip does not undertake any obligation to publicly update any forward-looking statements to reflect
events, circumstances or new information after the date of this stockholder letter, or to reflect the occurrence of unanticipated events.
©2010 Microchip Technology Incorporated. All rights reserved. The Microchip name and logo, and PIC are registered trademarks of
Microchip Technology Inc in the USA and other countries. mTouch, and nanoWatt XLP are trademarks of Microchip Technology Inc in
the USA and other countries. SuperFlash is a registered trademark of Silicon Storage Technology, Inc. All other trademarks mentioned
herein are property of their respective companies. Printed in the USA July 2010.
MICROCHIP TECHNOLOGY INCORPORATED
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
August 20, 2010
TIME:
9:00 a.m. Pacific Time
PLACE:
Microchip Technology Incorporated
At its subsidiary, Silicon Storage Technology, Inc. located at
1020 Kifer Road, Sunnyvale, California 94086
ITEMS OF
BUSINESS:
To elect five directors to serve until the next annual meeting of stockholders or until their
(1)
successors are elected and qualified.
To ratify the appointment of Ernst & Young LLP as the independent registered public accounting
(2)
firm of Microchip for the fiscal year ending March 31, 2011.
RECORD
DATE:
ANNUAL
REPORT:
PROXY:
To transact such other business as may properly come before the annual meeting or any
(3)
adjournment(s) thereof.
The Microchip Board of Directors recommends that you vote for each of the foregoing items.
Holders of Microchip common stock of record at the close of business on June 21, 2010 are
entitled to vote at the annual meeting.
Microchip's fiscal 2010 Annual Report, which is not a part of the proxy soliciting material, is
enclosed.
It is important that your shares be represented and voted at the annual meeting. You can vote your shares
by completing and returning the proxy card sent to you. Stockholders may have a choice of voting their
shares over the Internet or by telephone. If Internet or telephone voting is available to you, voting
instructions are printed on the proxy card sent to you. You can revoke your proxy at any time prior to its
exercise at the annual meeting by following the instructions in the accompanying proxy statement.
Kim van Herk
Secretary
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting
of Stockholders to be Held on August 20, 2010
The Microchip Notice of Annual Meeting, Proxy Statement and Annual Report on Form 10-K for the
fiscal year ended March 31, 2010 are available at www.microchip.com/annual_reports.
Chandler, Arizona
July 12, 2010
MICROCHIP TECHNOLOGY INCORPORATED
2355 West Chandler Boulevard
Chandler, Arizona 85224-6199
PROXY STATEMENT
You are cordially invited to attend our annual meeting on Friday, August 20, 2010, beginning at 9:00 a.m., Pacific
Time. The annual meeting will be held at the offices of our subsidiary, Silicon Storage Technology, Inc. ("SST"), located at
1020 Kifer Road, Sunnyvale, California 94086.
We are providing these proxy materials in connection with the solicitation by the Board of Directors (the "Board") of
Microchip Technology Incorporated ("Microchip") of proxies to be voted at Microchip's 2010 annual meeting of stockholders
and at any adjournment(s) thereof.
Our fiscal year begins on April 1 and ends on March 31. References in this proxy statement to fiscal 2010 refer to the
12-month period from April 1, 2009 through March 31, 2010, and references to fiscal 2009 refer to the 12-month period from
April 1, 2008 through March 31, 2009.
We anticipate first mailing this proxy statement and accompanying form of proxy on July 12, 2010 to holders of
Microchip's common stock on June 21, 2010, the Record Date for the annual meeting.
PROXIES AND VOTING PROCEDURES
YOUR VOTE IS IMPORTANT. Because many stockholders cannot attend the annual meeting in person, it is
necessary that a large number of stockholders be represented by proxy. Stockholders may have a choice of voting over the
Internet, by using a toll-free telephone number or by completing a proxy card and mailing it in the postage-paid envelope
provided. Please refer to your proxy card or the information forwarded by your bank, broker or other holder of record to see
which options are available to you. Under Delaware law, stockholders may submit proxies electronically. Please be aware that
if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be
responsible.
You can revoke your proxy at any time before it is exercised by timely delivery of a properly executed, later-dated
proxy (including an Internet or telephone vote if these options are available to you) or by voting by ballot at the annual meeting.
The method by which you vote will in no way limit your right to vote at the annual meeting if you later decide to attend
in person. If your shares are held in the name of a bank, broker or other holder of record, you must obtain a proxy, executed in
your favor, from the holder of record, to be able to vote at the annual meeting.
All shares entitled to vote and represented by properly completed proxies received prior to the annual meeting and not
revoked will be voted at the annual meeting in accordance with the instructions on such proxies. IF YOU DO NOT INDICATE
HOW YOUR SHARES SHOULD BE VOTED ON A MATTER, THE SHARES REPRESENTED BY YOUR
PROPERLY COMPLETED PROXY WILL BE VOTED AS OUR BOARD OF DIRECTORS RECOMMENDS.
If any other matters are properly presented at the annual meeting for consideration, including, among other things,
consideration of a motion to adjourn the annual meeting to another time or place, the persons named as proxies and acting
thereunder will have discretion to vote on those matters according to their best judgment to the same extent as the person
delivering the proxy would be entitled to vote. At the date this proxy statement went to press, we did not anticipate that any
other matters would be raised at the annual meeting.
1
Stockholders Entitled to Vote
Stockholders of record at the close of business on the Record Date, June 21, 2010, are entitled to notice of and to vote at the
annual meeting. Each share is entitled to one vote on each of the five director nominees and one vote on each other matter
properly brought before the annual meeting. On the Record Date, there were 185,894,984 shares of our common stock issued
and outstanding.
In accordance with Delaware law, a list of stockholders entitled to vote at the annual meeting will be available at the
annual meeting on August 20, 2010, and for 10 days prior to the annual meeting at 2355 West Chandler Boulevard, Chandler,
Arizona, between the hours of 9:00 a.m. and 4:30 p.m., Mountain Standard Time.
Required Vote
Quorum, Abstentions and Broker Non-Votes
The presence, in person or by proxy, of the holders of a majority of the shares entitled to vote at the annual meeting is
necessary to constitute a quorum at the annual meeting. Abstentions and broker "non-votes" are counted as present and entitled
to vote for purposes of determining a quorum. A broker "non-vote" occurs when a nominee holding shares for a beneficial owner
(i.e., in "street name") does not vote on a particular proposal because the nominee does not have discretionary voting power with
respect to that item and has not received instructions from the beneficial owner. Under the rules of the New York Stock
Exchange (NYSE), which apply to NYSE member brokers trading in non-NYSE stock, brokers have discretionary authority to
vote shares on certain routine matters if customer instructions are not provided. Proposal Two to be considered at the annual
meeting may be treated as a routine matter. Consequently, if you do not return a proxy card, your broker may have discretion to
vote your shares on such matter.
Election of Directors (Proposal One)
A plurality of the votes duly cast is required for the election of directors (i.e., the five nominees receiving the greatest
number of votes will be elected). Abstentions and broker "non-votes" will not affect the election of directors.
Ratification of Independent Registered Public Accounting Firm (Proposal Two)
The affirmative vote of the holders of a majority of the shares of common stock present in person or represented by
proxy and entitled to vote at the annual meeting is required for ratification of the appointment of Ernst & Young LLP as the
independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2011. An abstention will have
the same effect as voting against this proposal. Broker "non-votes" are not counted for purposes of approving the ratification of
our accounting firm, and thus will not affect the outcome of the voting on this proposal.
Electronic Access to Proxy Statement and Annual Report
This proxy statement and our fiscal 2010 Annual Report are available at www.microchip.com/annual_reports.
We will post our future proxy statements and annual reports on Form 10-K on our website as soon as reasonably
practicable after they are electronically filed with the Securities and Exchange Commission (the "SEC"). All such filings on our
website are available free of charge. The information on our website is not incorporated into this proxy statement. Our Internet
address is www.microchip.com.
2
Cost of Proxy Solicitation
Microchip will pay its costs of soliciting proxies. Proxies may be solicited on behalf of Microchip by its directors,
officers or employees in person or by telephone, facsimile or other electronic means. We may also reimburse brokerage firms
and other custodians, nominees and fiduciaries for their expenses incurred in sending proxies and proxy materials to beneficial
owners of Microchip common stock.
Meetings of the Board of Directors
THE BOARD OF DIRECTORS
Our Board of Directors met ten times in fiscal 2010. During fiscal 2010, each of Mr. Day and Mr. Meyercord attended
100% of the meetings of the Board of Directors, and Mr. Chapman, Mr. Hugo-Martinez and Mr. Sanghi attended 9 of the 10
meetings of the Board of Directors. Each director attended 100% of the meetings of the committees on which such director
served, other than Mr. Hugo-Martinez who attended 8 of the 9 Compensation Committee meetings. The Board of Directors has
a practice of meeting in executive session on a periodic basis without management or management directors (i.e., Mr. Sanghi)
present. The Board of Directors has determined that each of Mr. Chapman, Mr. Day, Mr. Hugo-Martinez and Mr. Meyercord is
an independent director as defined by applicable SEC rules and NASDAQ listing standards.
Board Leadership Structure
The Board of Directors believes that Microchip's Chief Executive Officer, Steve Sanghi, is best situated to serve as
Chairman because he is the director most familiar with Microchip's business and industry, and most capable of effectively
identifying strategic priorities and leading the discussion and execution of strategy. The Board's independent directors have
different perspectives and roles in strategic development. In particular, Microchip's independent directors bring experience,
oversight and expertise from outside the company and the industry, while the Chief Executive Officer brings company-specific
experience and expertise. The Board of Directors believes that the combined role of Chairman and Chief Executive Officer
promotes strategy development and execution, and facilitates information flow between management and the Board of
Directors, which are essential to effective governance. Microchip does not have a lead independent director.
The Board of Directors and the Board committees oversee risk management in a number of ways. The Audit
Committee oversees the management of financial and accounting related risks as an integral part of it duties. Similarly, the
Compensation Committee considers risk management when setting the compensation policies and programs for Microchip's
executive officers. The Board of Directors and the Audit Committee regularly receive reports on various risk related items
including risks related to manufacturing operations, intellectual property, taxes, products and employees. The Board and the
Audit Committee also receive periodic reports on Microchip's efforts to manage such risks through safety measures, insurance
or self-insurance.
Communications from Stockholders
Stockholders may communicate with the Board of Directors or individual members of the Board of Directors, provided
that all such communication is submitted in writing to the attention of the Secretary at Microchip Technology Incorporated,
2355 West Chandler Boulevard, Chandler, Arizona 85224-6199, who will then forward such communication to the appropriate
director or directors.
Committees of the Board of Directors
The following table lists our three Board committees, the directors who served on them and the number of committee
meetings held in fiscal 2010:
3
Membership on Board Committees in Fiscal 2010
Name
Mr. Chapman
Mr. Day
Mr. Hugo-Martinez
Mr. Meyercord
Meetings held in fiscal 2010
Audit
C
8
Compensation
C
9
Nominating and
Governance
C
1
C = Chair
= Member
Audit Committee
The responsibilities of our Audit Committee are to appoint, compensate, retain and oversee Microchip's independent
registered public accounting firm, oversee the accounting and financial reporting processes of Microchip and audits of its
financial statements, and provide the Board of Directors with the results of such monitoring. These responsibilities are further
described in the committee charter. A copy of the Audit Committee Charter, as last amended on May 13, 2007, is available at
the Corporate/Investors section under Mission Statement/Corporate Governance on www.microchip.com.
Our Board of Directors has determined that all members of the Audit Committee are independent directors as defined
by applicable SEC rules and NASDAQ listing standards. The Board of Directors has also determined that each of
Mr. Chapman, Mr. Hugo-Martinez and Mr. Meyercord meet the requirements for being an "audit committee financial expert" as
defined by applicable SEC rules.
In fiscal 2005, our Audit Committee adopted a policy with respect to (i) the receipt, retention and treatment of
complaints received by us regarding questionable accounting, internal accounting controls or auditing matters; (ii) the
confidential, anonymous submission by our employees of concerns regarding questionable accounting, internal accounting
controls or auditing matters; and (iii) the prohibition of harassment, discrimination or retaliation arising from submitting
concerns regarding questionable accounting, internal accounting controls or auditing matters or participating in an investigation
regarding questionable accounting, internal accounting controls or auditing matters. This policy, called "Legal Compliance,"
was created in accordance with applicable SEC rules and NASDAQ listing requirements. A copy of this policy is available at
the Corporate/Investors section under Mission Statement/Corporate Governance on www.microchip.com.
Compensation Committee
Our Compensation Committee has oversight responsibility for the compensation and benefit programs for our
executive officers and other employees, and for administering our equity incentive and employee stock purchase plans adopted
by our Board of Directors. The responsibilities of our Compensation Committee are further described in the committee charter
as adopted on January 29, 2007. A copy of the Compensation Committee Charter is available at the Corporate/Investors section
under Mission Statement/Corporate Governance on www.microchip.com.
The Board of Directors has determined that the members of our Compensation Committee are independent directors as
defined by applicable SEC rules and NASDAQ listing standards. For more information on our Compensation Committee,
please refer to the "Compensation Discussion and Analysis" at page 13.
Nominating and Governance Committee
Our Nominating and Governance Committee has the responsibility of ensuring that our Board is properly constituted to
be able to meet its fiduciary obligations to our stockholders. In so doing, the Nominating and Governance Committee identifies
and recommends director candidates, develops and recommends governance principles, and recommends director nominees to
serve on committees of the Board of Directors. The responsibilities of our Nominating and Governance Committee are further
described in the committee charter which is available at the Corporate/Investors section under Mission Statement/Corporate
Governance on www.microchip.com. The Board of Directors has determined that all of the members of the Nominating and
Governance Committee are independent directors as defined by applicable SEC rules and NASDAQ listing standards.
4
When considering a candidate for a director position, the Nominating and Governance Committee looks for
demonstrated character, judgment, relevant business, functional and industry experience, and a high degree of skill. The
Nominating and Governance Committee does not have a formal policy with respect to diversity; however, the Board of
Directors and the Nominating and Governance Committee believe that it is important that the members of the Board of
Directors represent diverse viewpoints. Accordingly, the Nominating and Governance Committee considers issues of diversity
in identifying and evaluating director nominees, including differences in education, professional experience, viewpoints,
technical skills and individual expertise. The Nominating and Governance Committee evaluates director nominees
recommended by a stockholder in the same manner as it would any other nominee. The Nominating and Governance
Committee will consider nominees recommended by stockholders provided such recommendations are made in accordance with
procedures described in this proxy statement under "Requirements, Including Deadlines, for Receipt of Stockholder Proposals
for the 2011 Annual Meeting of Stockholders; Discretionary Authority to Vote on Stockholder Proposals" at page 33. We do
not pay any third party to identify or assist in identifying or evaluating potential nominees for director.
Attendance at the Annual Meeting of Stockholders
All directors are encouraged, but not required, to attend our annual meeting of stockholders. All directors attended our
2009 annual meeting of stockholders.
5
REPORT OF THE AUDIT COMMITTEE (1)
Our Board of Directors has adopted a written charter setting out the purposes and responsibilities of the Audit
Committee. The Board of Directors and the Audit Committee review and assess the adequacy of the charter on an annual basis.
A copy of the Audit Committee Charter, as last amended on May 13, 2007, is available at the Corporate/Investors section under
Mission Statement/Corporate Governance on www.microchip.com.
Each of the directors who serves on the Audit Committee meets the independence and experience requirements of the
SEC rules and NASDAQ listing standards. What this means is the Microchip Board of Directors has determined that no
member of the Audit Committee has a relationship with Microchip that may interfere with such member's independence from
Microchip and its management, and that all members have the required knowledge and experience to perform their duties as
committee members.
We have received from Ernst & Young LLP the written disclosure and the letter required by Rule 3526 of the Public
Company Accounting Oversight Board (Communication with Audit Committees Concerning Independence) and have discussed
with Ernst & Young LLP their independence from Microchip. We also discussed with Ernst & Young LLP all matters required
to be discussed by the Statement on Auditing Standards No. 61, as amended (Professional Standards). We have considered
whether and determined that the provision of the non-audit services rendered to us by Ernst & Young LLP during fiscal 2010
was compatible with maintaining the independence of Ernst & Young LLP.
We have reviewed and discussed with management the audited annual financial statements included in Microchip's
Annual Report on Form 10-K for the fiscal year ended March 31, 2010 and filed with the SEC, as well as the unaudited
financial statements filed with Microchip's quarterly reports on Form 10-Q. We also met with both management and Ernst &
Young LLP to discuss those financial statements.
Based on these reviews and discussions, we recommended to the Board of Directors that Microchip's audited financial
statements be included in Microchip's Annual Report on Form 10-K for the fiscal year ended March 31, 2010 for filing with the
SEC.
By the Audit Committee of the Board of Directors:
Matthew W. Chapman (Chairman)
Albert J. Hugo-Martinez
Wade F. Meyercord
Director Compensation
Procedures Regarding Director Compensation
The Board of Directors sets non-employee director compensation. Microchip does not pay employee directors for
services provided as a member of the Board of Directors. Our program of cash and equity compensation for non-employee
directors is designed to achieve the following goals: compensation should fairly pay directors for work required for a company
of Microchip's size and scope; compensation should align directors' interests with the long-term interests of stockholders;
compensation should be competitive so as to attract and retain qualified non-employee directors; and the structure of the
compensation should be simple, transparent and easy for stockholders to understand. Non-employee director compensation is
typically reviewed once per year to assess whether any adjustment is needed to further such goals. The Board of Directors has
not used outside consultants in setting non-employee director compensation.
(1) The Report of the Audit Committee is not "soliciting" material and is not deemed "filed" with the SEC, and is not incorporated by
reference into any filings of Microchip under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after
the date of this proxy statement and irrespective of any general incorporation language contained in such filings.
6
Director Fees
During fiscal 2010, non-employee directors received an annual retainer of $28,500, paid in quarterly installments,
$3,000 for each meeting attended in person and did not receive any additional amounts for serving as a committee chair. Also,
directors did not receive any compensation for telephonic meetings of the Board of Directors or for meetings of committees of
the Board.
Equity Compensation
Under the terms of our 2004 Equity Incentive Plan prior to its amendment on May 5, 2010, each non-employee
director is automatically granted:
upon the date that the individual first is appointed or elected to the Board of Directors as a non-employee
director:
an option to purchase 6,000 shares of common stock which shall vest as to 1/48th of the shares subject to
such grant each month following the grant date so as to be 100% vested on the four-year anniversary of
the grant date,
that number of restricted stock units ("RSUs") equal to $60,000 divided by the fair market value of our
common stock which shall vest in equal 25% annual installments on each of the four anniversaries of the
first business day of the second month of our fiscal quarter in which the grant is made, and
upon the date of our annual meeting, provided that the individual has served as a non-employee director for at
least three months on that date and has been elected by the stockholders to serve as a member of the Board of
Directors at that annual meeting,
an option to purchase 3,000 shares of common stock which shall vest as to 1/12th of the shares subject to
such grant each month following the grant date so as to be 100% vested on the one-year anniversary of
the grant date, and
that number of RSUs equal to $30,000 divided by the fair market value of our common stock which shall
vest in equal 50% annual installments on each of the two anniversaries of the first business day of the
second month of our fiscal quarter in which the grant is made, and
In addition, upon the date of our 2009 annual meeting, each non-employee director who was elected by the
stockholders to serve as a member of the Board of Directors at that annual meeting, and had served as such for at least five years
on that date, received a one-time grant of that number of RSUs equal to $100,000 divided by the fair market value of our
common stock which shall vest in equal 25% annual installments on each of the four anniversaries of the first business day of
the second month of our fiscal quarter in which the grant is made.
All vesting of the above grants is contingent upon the non-employee director maintaining his or her continued status as
a non-employee director through the applicable vesting date.
In accordance with the foregoing, on August 14, 2009, each of Mr. Chapman, Mr. Day, Mr. Hugo-Martinez and Mr.
Meyercord was granted an option to acquire 3,000 shares of common stock at an exercise price of $27.03 per share, an annual
award of 1,109 RSUs and a one-time award of 3,699 RSUs.
On May 5, 2010, our Board of Directors approved our amended and restated 2004 Equity Incentive Plan which, among
other things, would change the equity compensation for our non-employee directors to provide (a) on first appointment as a
director, an initial grant of $160,000 in RSUs (based on the fair market value of our common stock on the grant date), each
subject to four-year vesting, and (b) an annual grant of $80,000 in RSUs (based on the fair market value of our common stock
on the grant date) subject to two-year vesting. Our Board of Directors no longer receives grants of options to purchase common
stock under our 2004 Equity Incentive Plan.
The following table details the total compensation for Microchip's non-employee directors for fiscal 2010.
7
DIRECTOR COMPENSATION
Name
Steve Sanghi (2)
Matthew W. Chapman
L.B. Day
Albert J. Hugo-Martinez
Wade F. Meyercord
Fees Earned
or Paid
in Cash
$
---
40,500
40,500
40,500
40,500
Stock
Awards
$
---
109,107
109,107
109,107
109,107
Option
Awards (1)
$
---
17,707
17,707
17,707
17,707
Non-Equity
Incentive Plan
Compensation
---
$
---
---
---
---
$
All Other
Compensation
---
---
---
---
---
Total
$
---
167,314
167,314
167,314
167,314
(1) The amounts shown in the column labeled Option Awards represent the aggregate grant date fair value of awards made in
fiscal 2010 computed in accordance with ASC 718 Compensation – Stock Compensation. In fiscal 2010, each non-employee
director was granted an option to purchase 3,000 shares of common stock at an exercise price of $27.03 pursuant to our 2004
Equity Incentive Plan. Each option vests in 12 equal and successive monthly installments following the grant date. For
information on the valuation assumptions made with respect to the foregoing option grants, please refer to the assumptions for
fiscal years ended March 31, 2010 stated in Note 15, "Equity Incentive Plans" to Microchip's audited financial statements for
the fiscal year ended March 31, 2010, included in Microchip's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on June 2, 2010.
(2) Mr. Sanghi, our Chairman of the Board, President and Chief Executive Officer, does not receive any additional compensation
for his services as a member of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is currently comprised of Mr. Day (Chair), Mr. Hugo-Martinez and Mr. Meyercord,
three of our independent directors. None of Mr. Day, Mr. Hugo-Martinez nor Mr. Meyercord had any related-party transaction
with Microchip during fiscal 2010 other than service as a director. In addition, none of such directors has a relationship that
would constitute a compensation committee interlock under applicable SEC rules. During fiscal 2010, no Microchip executive
officer served on the compensation committee (or equivalent) or the board of directors, of another entity whose executive
officer(s) served either on Microchip's Compensation Committee or Board of Directors.
CERTAIN TRANSACTIONS
During fiscal 2010, Microchip had no related-party transactions within the meaning of the applicable SEC rules.
Pursuant to its charter, the Audit Committee reviews issues involving potential conflicts of interest and reviews and
approves all related-party transactions as contemplated by NASDAQ and SEC rules and regulations. The Audit Committee may
consult with the Board of Directors regarding certain conflict of interest matters that do not involve a member of the Board.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) and related rules under the Securities Exchange Act of 1934 require our directors, executive officers and
stockholders holding more than 10% of our common stock to file reports of holdings and transactions in Microchip stock with
the SEC and to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such
forms received by us during fiscal 2010, and written representations from our directors and executive officers that no other
reports were required, we believe that all Section 16(a) filing requirements applicable to our directors, executive officers and
stockholders holding more than 10% of our common stock were met for fiscal 2010.
PROPOSAL ONE
ELECTION OF DIRECTORS
A board of five directors will be elected at the annual meeting. Unless proxy cards are otherwise marked, the persons
named in the proxy card will vote such proxy for the election of the nominees named below. Each of the nominees is currently
serving as a director and has agreed to continue serving if re-elected. If any of the nominees becomes unable or declines to
8
serve as a director at the time of the annual meeting, the persons named in the proxy card will vote such proxy for any nominee
designated by the current Board of Directors to fill the vacancy. We do not expect that any of the nominees will be unable or
will decline to serve as a director.
Our Board of Directors has determined that each of the following nominees for director is an independent director as
defined by applicable SEC rules and NASDAQ listing standards: Mr. Chapman, Mr. Day, Mr. Hugo-Martinez and
Mr. Meyercord.
The term of office of each person who is elected as a director at the annual meeting will continue until the 2011 annual
meeting of stockholders or until a successor has been elected and qualified.
The Board of Directors recommends that stockholders vote FOR the nominees listed below.
Information on Nominees for Director (as of June 30, 2010)
Name
Steve Sanghi
Albert J. Hugo-Martinez
L.B. Day
Matthew W. Chapman
Wade F. Meyercord
Age
54
64
65
59
69
Position(s) Held
Chairman, President and CEO
Director
Director
Director
Director
Steve Sanghi is currently, and has been since August 1990, a director and President of Microchip Technology
Incorporated. Since October 1991, he has served as CEO of Microchip and since October 1993, as Chairman of the Board of
Directors of Microchip. Since April 2010, he has served as President and CEO of our SST subsidiary. Since May 2004, he has
been a member of the Board of Directors of Xyratex Ltd., a publicly held U.K. company that specializes in storage and network
technology. In September 2004, Mr. Sanghi was appointed to the Board of Trustees of Kettering University in Flint, Michigan.
In May 2007, Mr. Sanghi was appointed to the Board of Directors of FIRST Organization, a not-for-profit public charity
founded in 1989 to develop young people's interest in science and technology.
The Board of Directors concluded that Mr. Sanghi should be nominated to serve as a director since he has served as
CEO of Microchip for almost 20 years and has provided very strong leadership to Microchip over this period. The Board of
Directors believes that Mr. Sanghi's management skills have been instrumental to the company's extraordinary growth and
profitability over the past 20 years and to the strong position Microchip has attained in its key markets.
Albert J. Hugo-Martinez has served as a director of Microchip since October 1990. Since February 2000, he has
served as CEO of Hugo-Martinez Associates, a consulting and advisory firm. In December 2003, Mr. Hugo-Martinez founded
HVVi Semiconductor, Inc., a privately held company which develops CMOS High Voltage/Frequency RF transistors, and since
that time has been a member of its Board of Directors. Since July 2004, he has also been a member of the Board of Directors of
Reaction Design, a privately held company that specializes in software engine design simulation. In his career, Mr. Hugo-
Martinez has previously served in executive positions for the following public companies: COO and Executive VP of Burr-
Brown Corp. from June 1979 to July 1987, VP GM at TRW from July 1987 to September 1988, CEO of Applied Micro
Circuits Corporation from September 1988 to October 1995 and President and CEO of GGTI Corporation from March 1996 to
April 1998. Mr. Hugo-Martinez has previously served on the public company boards of Amkor Technology, Inc. from March
2003 to May 2004, ON Semiconductor Corp. from November 1999 to February 2001 and Ramtron International Corporation
from May 2001 to October 2004.
The Board of Directors concluded that Mr. Hugo-Martinez should be nominated to serve as a director due to his
significant experience as a senior executive, board member and founder of a number of companies in the semiconductor
industry. Mr. Hugo-Martinez has gained further industry experience through his consulting practice. The Board of Directors
believes that the background of Mr. Hugo-Martinez makes him well suited to serve on the Board's nominating and governance
committee and compensation committee. The Board of Directors also recognizes his experience in financial matters and that his
background establishes him as an audit committee financial expert under applicable rules.
L.B. Day has served as a director of Microchip since December 1994. Mr. Day serves as President of L.B. Day &
Company, Inc., a consulting firm whose parent company he co-founded in 1977, which provides strategic planning, strategic
marketing and organization design services to the elite of the high-technology world. He also serves on the Board of Advisors
9
of Willamette University's Atkinson Graduate School of Management. In September 2006, he became a member of the Board
of Directors of Lynguent, Inc., a privately held company and a supplier of integrated analog and mixed-signal design
development products.
The Board of Directors concluded that Mr. Day should be nominated to serve as a director due to his significant
experience in corporate management and strategic matters. In particular, through his consulting practice, Mr. Day has advised a
number of large public corporations on key projects. The Board of Directors believes that Mr. Day's background makes him
well suited to serve on the Board's of Directors nominating and governance committee and compensation committee.
Matthew W. Chapman has served as a director of Microchip since May 1997. Since December 2006, he has served as
President and CEO of Northwest Evaluation Association, a privately held education service organization providing computer
adaptive testing for millions of students throughout the United States. From January 2002 to February 2006, he served as
President and CEO of Centrisoft Corporation, a privately held company specializing in providing software for application
performance management. From August 2000 to January 2002, Mr. Chapman served as an advisor to early-stage technology
companies in connection with developing business plans and securing funding. In his career, Mr. Chapman has served as CEO
and Chairman of Concentrex Incorporated, a publicly held company specializing in supplier of software solutions and service to
U.S. financial institutions.
The Board of Directors concluded that Mr. Chapman should be nominated to serve as a director due to his significant
CEO level experience at several corporations. The Board of Directors also recognizes Mr. Chapman's experience in financial
matters and that his background establishes him as an audit committee financial expert under applicable rules and makes him
well suited to serve on the Board of Director's Nominating and Governance Committee.
Wade F. Meyercord has served as a director of Microchip since June 1999. Since October 2002, he has served as
President of Meyercord & Associates, Inc., a privately held management consulting firm specializing in executive compensation
matters and stock plan consulting for technology companies, a position he previously held part time beginning in 1987.
Mr. Meyercord has been a member of the Board of Directors of Endwave Corporation, a publicly held company, since March
2004. Mr. Meyercord served as a member of the Board of Directors of California Micro Devices Corporation, a publicly held
company, from January 1993 to October 2009 and Magma Design Automation, Inc., a publicly held company, from January
2004 to June 2005. From June 1999 to October 2002, Mr. Meyercord served as Sr. VP and CFO of Rioport.com, a privately
held Internet applications service provider for the music industry.
The Board of Directors concluded that Mr. Meyercord should be nominated to serve as a director due to his
significant experience as a senior executive and board member of a number of companies in the technology industry. Mr.
Meyercord gained further industry experience through his consulting practice. The Board of Directors believes that the
background of Mr. Meyercord makes him well suited to serve on the Board of Director's nominating and governance committee
and compensation committee. The Board of Directors also recognizes his experience in financial matters and that his
background establishes him as an audit committee financial expert under applicable rules.
10
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of our Board of Directors has appointed Ernst & Young LLP, independent registered public
accounting firm, to audit our consolidated financial statements for the fiscal year ending March 31, 2011. Ernst & Young LLP
has audited our financial statements since the fiscal year ended March 31, 2002 and has served as our independent registered
public accounting firm since June 2001. The partner in charge of our audit is rotated every five years. Other partners and non-
partner personnel are rotated on a periodic basis.
We anticipate that a representative of Ernst & Young LLP will be present at the annual meeting, will have the
opportunity to make a statement if he or she desires and will be available to respond to appropriate questions. Stockholder
ratification of the appointment of Ernst & Young LLP is not required by our Bylaws or applicable law. However, our Board of
Directors chose to submit such appointment to our stockholders for ratification. In the event of a negative vote on such
ratification, the Audit Committee will reconsider its selection.
Upon the recommendation of our Audit Committee, the Board of Directors recommends that stockholders vote
FOR ratification of such appointment.
Fees Paid to Independent Registered Public Accounting Firm
Audit Fees
This category includes fees associated with our annual audit, the reviews of our quarterly reports on Form 10-Q, and
statutory audits required internationally. This category also includes advice on audit and accounting matters that arose during,
or as a result of, the audit or the review of our interim financial statements, statutory audits and the assistance with review of any
of our SEC registration statements. This category also included fees associated with the audit of our internal control over
financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002. The aggregate fees billed or to be billed by
Ernst & Young LLP in each of the last two fiscal years for such services were $1,058,000 for fiscal 2010 and $967,000 for
fiscal 2009.
Audit-Related Fees
This category includes fees associated with employee benefit plan audits, internal control reviews, accounting
consultations and attestation services that are not required by statute or regulation. The aggregate fees billed or to be billed by
Ernst & Young LLP in each of the last two fiscal years for such services were $36,000 for fiscal 2010 and $0 for fiscal 2009.
Tax Fees
This category includes fees associated with tax return preparation, tax advice and tax planning. The aggregate fees
billed or to be billed by Ernst & Young LLP in each of the last two fiscal years for such services were $320,000 for fiscal 2010
and $258,000 for fiscal 2009.
All Other Fees
This category includes fees for support and advisory services not related to audit services or tax services. There were
no such fees in fiscal 2010 or fiscal 2009.
Our Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered
public accounting firm. These services may include audit services, audit-related services, tax services and other services. The
Audit Committee has adopted a policy for the pre-approval of services provided by our independent registered public
accounting firm. Under the policy, pre-approval is generally provided for up to one year, and any pre-approval is detailed as to
the particular service or category of services and is subject to a specific budget or limit. The Audit Committee may also pre-
approve particular services on a case-by-case basis. The Chairman of the Audit Committee has the delegated authority from the
Audit Committee to pre-approve a specified level of services, and such pre-approvals are then communicated to the full Audit
11
Committee at its next scheduled meeting. During fiscal 2010, all audit and non-audit services rendered by Ernst & Young LLP
were approved in accordance with our pre-approval policy.
Our Audit Committee has determined that the non-audit services rendered by Ernst & Young LLP during fiscal 2010
and fiscal 2009 were compatible with maintaining the independence of Ernst & Young LLP.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the beneficial ownership of our common stock as of May 21,
2010 for: (a) each director, (b) our CEO, our CFO and the three other most highly compensated executive officers named in the
Summary Compensation Table, (c) all directors and executive officers as a group, and (d) each person who is known to us to
own beneficially more than 5% of our common stock. Except as otherwise indicated in the footnotes to this table, and subject to
applicable community property laws and joint tenancies, the persons named in this table have sole voting and investment power
with respect to all shares of common stock held by such person:
Name and Address of Beneficial Owner
Capital World Investors (2)
Waddell & Reed Financial, Inc. (3)
Steve Sanghi (4)
Matthew W. Chapman (5)
L.B. Day (6)
Albert J. Hugo-Martinez (7)
Wade F. Meyercord (8)
J. Eric Bjornholt (9)
Stephen V. Drehobl (10)
Mitchell R. Little (11)
Ganesh Moorthy (12)
All directors and executive officers as a group (11 people) (13)
_________________________
* Less than 1% of the outstanding shares of common stock.
Number of Shares
Beneficially Owned (1)
20,548,000
20,186,154
5,997,051
68,897
63,250
96,500
59,250
24,647
84,601
62,293
373,120
7,557,383
Percent of
Common Stock (1)
11.1%
10.9%
3.2%
*
*
*
*
*
*
*
*
4.0%
(1) For each individual and group included in the table, the number of shares beneficially owned includes shares of common
stock issuable to the identified individual or group pursuant to stock options that are exercisable within 60 days of May 21,
2010. There are no stock purchase rights or RSUs that will vest within 60 days of May 21, 2010. In calculating the
percentage of ownership of each individual or group, share amounts that are attributable to options that are exercisable or
stock purchase rights or RSUs that will vest within 60 days of May 21, 2010 are deemed to be outstanding for the purpose
of calculating the percentage of shares of common stock owned by such individual or group but are not deemed to be
outstanding for the purpose of calculating the percentage of shares of common stock owned by any other individual or
group.
(2) Address is 333 South Hope Street, Los Angeles, CA 90071. All information is based solely on the Schedule 13G filed by
Capital World Investors dated February 10, 2010, with the exception of the percentage of common stock held which is
based on shares outstanding at May 21, 2010. Such Schedule 13G indicates that (i) Capital World Investors has sole power
to dispose of and direct the disposition of the common stock; and (ii) Capital World Investors is deemed to be the beneficial
owner of 20,548,000 shares as a result of acting as investment adviser to various investment companies registered under
Section 8 of the Investment Company Act of 1940; and (iii) The Income Fund of America, Inc., an investment company
registered under the Investment Company Act of 1940, which is advised by Capital World Investors, is the beneficial owner
of 14,128,000 of such shares.
(3) Address is 6300 Lamar Avenue, Overland Park, KS 66202. All information is based solely on the Schedule 13G filed by
Waddell & Reed Financial, Inc. dated February 12, 2010, with the exception of the percentage of common stock held which
is based on shares outstanding at May 21, 2010. Such Schedule 13G indicates that (i) Waddell & Reed Financial, Inc. is
12
(4)
(5)
the parent holding company of a group of investment management companies that hold investment power and, in some
cases, voting power over the securities reported in the referenced Schedule 13G; (ii) Waddell & Reed Investment
Management Company has sole power to vote or direct the vote and to dispose of and direct the disposition of 16,504,574
shares of the common stock; and (iii) Ivy Investment Management Company has sole power to vote or direct the vote and
to dispose of and direct the disposition of 3,681,580 shares of the common stock.
Includes 1,369,756 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010 and
4,581,741 shares held of record by Steve Sanghi and Maria T. Sanghi as trustees.
Includes 61,500 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010, 262 shares
held in Testamentary Trust of Regan Chapman and 135 shares held by Mr. Chapman's minor children.
Includes 58,250 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010.
Includes 66,500 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010 and 30,000
shares held of record by Albert J. Hugo-Martinez and S. Gay Hugo-Martinez as trustees.
Includes 50,250 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010 and 9,000
shares held of record by Wade F. Meyercord and Phyllis Meyercord as trustees.
(9)
Includes 14,580 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010.
(10) Includes 76,340 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010.
(11) Includes 55,979 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010.
(12) Includes 333,160 shares issuable upon exercise of options that are exercisable within 60 days of May 21, 2010 and 27,774
(6)
(7)
(8)
shares held of record by Ganesh Moorthy and Hema Moorthy as trustees.
(13) Includes an aggregate of 2,523,442 shares issuable upon exercise of options that are exercisable within 60 days of May 21,
2010.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Overview of the Compensation Program
The Compensation Committee of the Board of Directors, presently comprised of Mr. Day, Mr. Hugo-Martinez and Mr.
Meyercord, reviews the performance of our executive officers and makes compensation decisions regarding our executive
officers. Our policies for setting compensation for each of our named executive officers (CEO, CFO, and our three most highly
paid executive officers) are the same as those for the rest of our executive officers. Our compensation program is a
comprehensive package designed to motivate the executive officers to achieve our corporate objectives and is intended to be
competitive and allow us to attract and retain highly qualified executive officers. In general, the types of compensation and
benefits provided to our executive officers are similar to those provided to most other Microchip employees, and include salary,
cash bonuses, RSUs, and other benefits described below.
Our Executive Compensation Policy and Objectives
Our compensation policy for executive officers, including our named executive officers, and key employees is based
on a "pay-for-performance" philosophy. This "pay-for-performance" philosophy emphasizes variable compensation, primarily
by placing a large portion of pay at risk. We believe that this philosophy meets the following objectives:
rewards performance that may contribute to increased stockholder value,
attracts, retains, motivates and rewards individuals with competitive compensation opportunities,
aligns an executive officer's total compensation with our business objectives,
fosters a team environment among our management that focuses their energy on achieving our financial and
business objectives consistent with Microchip's "guiding values,"
balances short-term and long-term strategic goals, and
builds and encourages ownership of our common stock.
Decisions regarding cash and equity compensation also include subjective determinations and consideration of various
factors with the weight given to a particular factor varying from time to time and in various individual cases, such as an
executive officer's experience in the industry and the perceived value of the executive officer's position to Microchip as a whole.
13
In response to the adverse global economic conditions which impacted our business in fiscal 2009, we took a number
of actions to significantly reduce our operating expenses, including significant reductions in compensation for our executive
officers and other employees. These actions included:
a reduction in salary equal to one week without pay in the third quarter of fiscal 2009 which ended
December 31, 2008,
a 10% salary reduction for all executive officers effective December 29, 2008,
a week off without pay in the fourth quarter of fiscal 2009 which ended March 31, 2009,
no payments under our Executive Management Incentive Compensation Plan, or EMICP, or under our
Discretionary Management Incentive Compensation Plan, or DMICP, for the third and fourth quarters of
fiscal 2009,
no payments to officers or employees under our Employee Cash Bonus Program, or ECBP, for the second,
third and fourth quarters of fiscal 2009, and
no matching contributions under our 401(k) plan for the third and fourth quarters of fiscal 2009.
The above actions continued during fiscal 2010, but as global economic conditions improved these actions were
modified as follows:
the 10% salary reduction for all executive officers effective December 29, 2008, was reduced to 6.5%
effective July 13, 2009, reduced to 4% effective October 19, 2009, and full salary was reinstated
December 14, 2009,
no payments were made under our EMICP for the first quarter of fiscal 2010 and payments resumed in the
second fiscal quarter,
no payments were made to officers or employees under our ECBP for the first, second, and third quarters of
fiscal 2010 and payments resumed in the fourth fiscal quarter, and
no matching contributions were made under our 401(k) plan for the first, second, and third quarters of fiscal
2010 and matching contributions resumed in the fourth fiscal quarter.
We believe that the overall compensation levels for our executive officers, including our named executive officers, in
fiscal 2010 were consistent with our "pay-for-performance" philosophy and are commensurate with our fiscal 2010
performance.
Executive Compensation Process
On an annual basis, the Compensation Committee evaluates and establishes the compensation of the executive officers,
including the named executive officers. The Compensation Committee seeks input from Mr. Sanghi when discussing the
performance of, and compensation levels for, the executive officers other than himself. Mr. Sanghi does not participate in
deliberations relating to his own compensation.
The Compensation Committee designs our executive compensation program to be competitive with those of other
companies in the semiconductor or related industries that are similar to us in number of employees, revenue and capitalization.
The Compensation Committee determines appropriate levels of compensation for each executive officer based on their level of
responsibility within the organization, performance, and overall contribution. After such determination, the Compensation
Committee makes allocations between long-term and short-term as well as the cash and non-cash elements of compensation.
Microchip's financial and business objectives, the salaries of executive officers in similar positions with comparable companies
and individual performance are considered in making these determinations. If compensation information is reviewed for other
companies, it is obtained from published materials such as proxy statements, and information gathered from such companies
directly. We do not engage consultants to conduct such review process for us.
The executive officer compensation process begins with consideration of Microchip's overall annual budget for
employee compensation. The Compensation Committee considers the budgeted salary data and individual executive officer
salary increases are determined with the goal of keeping the average executive officer salary increase within the budgeted range
for all other employees. In setting annual salaries for executive officers, the Compensation Committee also considers relevant
industry data but does not target any overall industry percentage level or peer group average.
14
Microchip's annual budget is created as part of Microchip's annual operating plan process under which business and
financial objectives are initially developed by our executive officers, in conjunction with their respective operating units, and
then discussed with and approved by our CEO. These objectives are then reviewed by our Board of Directors and the Board of
Directors sets the overall financial and business objectives for Microchip on which incentive compensation is based.
The Compensation Committee sets the compensation of our Chairman, CEO and President, Mr. Sanghi, in the same
manner as each of our other executive officers. In particular, the Compensation Committee considers Mr. Sanghi's level of
responsibility, performance, and overall contribution to the results of the organization. The Compensation Committee also
considers the compensation of CEOs of other companies in the semiconductor or related industries that are similar to us in
number of employees, revenue and capitalization. Mr. Sanghi participates in the same cash incentive, equity incentive and
benefit programs as our other executive officers. For example, his compensation is subject to the same performance metrics
as our other executive officers under our EMICP and DMICP programs. The Compensation Committee recognizes that
Mr. Sanghi's total compensation package is significantly higher than that of our other executive officers and the Compensation
Committee believes this is appropriate in consideration of Mr. Sanghi's superior leadership of Microchip over a long period of
time. In particular, the Compensation Committee believes that Mr. Sanghi's leadership has been key to the substantial revenue
growth, strong market position and substantial increase in the market value of Microchip since taking Microchip public in 1993,
and to leading Microchip's strong performance relative to others in the industry in the adverse conditions which impacted the
semiconductor industry and the global economy in late 2008 and for much of 2009.
For fiscal 2010, the Compensation Committee reviewed and approved the total compensation package of all of our
executive officers, including the elements of compensation discussed below, and determined the amounts to be reasonable and
competitive.
Elements of Compensation
Our executive compensation program is currently comprised of four major elements:
annual base salary,
incentive cash bonuses,
equity compensation, and
compensation and employee benefits generally available to all of our employees.
The retirement benefits and other benefits offered to our executive officers are largely the same as those we provide to
a broad base of employees. While our executive officers' level of participation in our management incentive compensation
plans and equity incentive plans is typically higher than for our non-executive employees, based on the officers' level of
responsibility and industry experience, the plans in which our executive officers are eligible to participate are very similar to
those for our other employees. The Compensation Committee reviews each element of compensation separately and total
compensation as a whole, other than those benefits which are available to all employees. The Compensation Committee
determines the appropriate mix of elements to meet our compensation objectives and to help ensure that we remain competitive
with the compensation practices in our industry.
Although our executive officers are entitled to certain severance and change of control benefits (as described below),
the Compensation Committee does not consider such benefits to be elements of compensation for purposes of annual
compensation reviews because such benefits may never be paid.
Base Salaries. We review the base salaries of our executive officers each year. When setting base salaries, we review
the business and financial objectives for Microchip as a whole, as well as the objectives for each of the individual officers
relative to their respective areas of responsibility. We may also consider the salaries of executive officers in similar positions
with comparable companies in the semiconductor industry. This review encompasses the objectives for both the immediately
preceding fiscal year and the upcoming fiscal year.
As a result of our annual review of executive officer salaries in fiscal 2010, we did not make any adjustments due to the
uncertain economic conditions at the time of the review. However, in connection with the promotion of our Executive VP,
Ganesh Moorthy, to the position of Chief Operating Officer effective June 1, 2009, Mr. Moorthy's base salary was increased by
approximately 5%. Effective February 22, 2010, we also made an interim adjustment of approximately 2% in the base salary
for our VP, Security, Microcontroller and Technology Development Division, Stephen V. Drehobl, as part of an incentive
program to reward certain key employees as business conditions improved in the second half of fiscal 2010. Other than the
15
foregoing increases, due to overall economic and industry conditions, we had not increased the base salaries of our CEO and
other named executives since May 2007 other than in connection with the promotion of our VP of Finance, J. Eric Bjornholt, to
the position of Chief Financial Officer effective January 1, 2009.
Incentive Cash Bonuses. The Compensation Committee sets performance goals which, if met, result in quarterly
payments to our executive officers under the EMICP. Executive officers may also receive quarterly payments under the
DMICP. The Compensation Committee establishes performance goals which it believes are challenging, require a high level of
performance and motivate participants to drive shareholder value, but which goals are expected to be achievable in the context
of business conditions anticipated at the time the goals are set. When setting the performance goals, the Compensation
Committee places more emphasis on the overall expected financial performance of Microchip rather than on the achievement of
any one individual goal. The Compensation Committee believes that this focus on the overall payout incentivizes outstanding
performance across the corporation and drives the overall financial success of the corporation. The Compensation Committee
uses the DMICP to help achieve the overall objectives of the performance bonus program.
In fiscal 2010, the quarterly payments under the EMICP for our named executive officers were targeted at an aggregate
of approximately $283,000 for all such officers as a group. The aggregate budgeted bonus pool under the various management
incentive compensation plans is calculated by multiplying the eligible executive officer's bonus target percentage by his or her
base salary. Actual payments under the various management incentive plans are predicated on Microchip's quarterly operating
results and, with respect to the DMICP, a subjective element. Bonuses under the DMICP are subject to a maximum award of
$2,500,000 per individual on an annual basis; however, all awards to date have been substantially less than such maximum
amount.
Due to the continued economic uncertainty, no targets were set for the EMICP for the first quarter of fiscal 2010. In
the second through fourth quarters of fiscal 2010, the following business and financial areas were selected as the basis for
calculating bonuses under our management incentive compensation plans:
Total sequential revenue growth
16-bit sequential revenue growth
Analog sequential revenue growth
Gross margin percentage
(non-GAAP)
Operating expenses as a percentage of sales
(non-GAAP)
Operating income as a percentage of sales
(non-GAAP)
Earnings per share (quarterly)
DMICP
Target Quarterly Measurement
4.0%
30.0%
6.0%
Target % of Bonus
10.0%
5.0%
5.0%
59.0%
25.5%
33.0%
(1)
Discretionary
15.0%
15.0%
15.0%
15.0%
20.0%
(1) The EMICP quarterly non–GAAP earnings per share (EPS) targets for fiscal 2010 were $0.20, $0.28, and
$0.33 for the second through fourth quarters, respectively. There was no EPS target set or payments made for
the first quarter of fiscal 2010 due to the uncertain economic conditions existing at the time. The EPS targets
(as well as the other targets under the EMICP) are set each quarter by the Compensation Committee and may
be based on either GAAP or non-GAAP financial results at the discretion of the Compensation Committee.
The Compensation Committee typically uses non-GAAP information when setting the targets because it
believes such targets are more useful in understanding our operating results due to the exclusion of non-cash,
non-recurring and other special charges.
Consistent with our "pay-for-performance" philosophy, our CEO and other executive officers received bonuses under
the EMICP for the second, third and fourth quarters of fiscal 2010 based on our financial performance. Payments were made
under the DMICP for the first, third and fourth quarters of fiscal 2010. There was no EMICP bonus for the first quarter of fiscal
2010 due to the uncertain economic conditions existing at the time. For fiscal 2010, the total cash bonus payments under the
EMICP and the DMICP for our named executive officers, other than our CEO, ranged from $66,810 to $196,504. In fiscal
2010, Mr. Sanghi earned an aggregate EMICP bonus of $1,071,388, and an aggregate DMICP bonus of $289,928. The
differences in the levels of compensation under these programs for the various executive officers are based upon their relative
contribution, performance, experience, and responsibility level within the organization.
16
Equity Compensation. Equity compensation, such as RSUs, constitutes a significant portion of our incentive
compensation program because we believe that executive officers and key employees should hold a long-term equity stake in
Microchip to align their collective interests with the interests of our stockholders. In fiscal 2010, equity grants in the form of
RSUs were a significant portion of our executive officers' total compensation package.
We typically make equity compensation grants to executive officers and key employees in connection with their initial
employment, and we also typically make quarterly evergreen grants of equity to incentivize employees on a continuing basis as
their initial equity awards vest. In setting the amount of the equity compensation grants, the estimated value of the grants is
considered, as well as the intrinsic value of the outstanding equity compensation held by the executive officer, both the unvested
retention value and the vested amount. In setting these amounts and any performance goals, the Compensation Committee uses
its judgment after considering the effect of the overall RSU amounts and the percentage of RSUs granted to executive officers in
connection with the overall financial results and performance of the corporation.
The evergreen grants of RSUs for fiscal 2010 were awarded with vesting subject to meeting specified performance
goals over identified periods. In fiscal 2010, these performance goals were related to achieving certain levels of operating profit
over a specified time frame. Specifically, with respect to the awards made in April 2009, the performance goal was related to
achieving non-GAAP operating profit of $21 million or more for the three months ended June 30, 2009 in order for the awards
to vest in full. Based on the actual operating profit for such period, these awards will vest at 100%. With respect to the awards
made in July 2009, the performance goal was related to achieving non-GAAP operating profit for the three months ended
September 30, 2009 of $10 million or more; with an achievement of $40 million of non-GAAP operating profit necessary for
full vesting of the award. Based on the actual operating profit for such period, these awards will vest at 100%. With respect to
the awards made in October 2009, the performance goal was related to achieving non-GAAP operating profit for the three
months ended December 31, 2009 of $30 million or more with an achievement of $60 million of non-GAAP operating profit
necessary for full vesting of the award. Based on the actual operating profit for such period, these awards will vest at 100%.
With respect to the awards made in January 2010, the performance goal was related to achieving non-GAAP operating profit for
the three months ended March 31, 2010 of $40 million or more with an achievement of $70 million of non-GAAP operating
profit necessary for full vesting of the award. Based on the actual operating profit for such period, these awards will vest at
100%. The vesting of each of the foregoing awards is subject to the continued service of the officer on the vesting date.
In addition to the evergreen RSU grants, in January 2010, we made additional RSU grants under the 2004 Equity
Incentive Plan to recognize Microchip's strong financial performance. These grants were made with vesting subject to a
performance goal related to achieving non-GAAP operating profit for the three months ended March 31, 2010 of $40 million or
more with an achievement of $70 million of non-GAAP operating profit necessary for full vesting of the award. Based on the
actual operating profit for such period, these awards will vest at 100%.
Additionally, certain employees with over ten years of service to Microchip received additional RSU grants under the
2004 Equity Incentive Plan to help retain and reward such employees for their long-standing service to Microchip. Three
executive officers received these special ten year service grants: Steve Sanghi, Rich Simoncic and J. Eric Bjornholt. These
grants were made with vesting subject to a performance goal related to achieving non-GAAP operating profit for the three
months ended March 31, 2010 of $40 million or more with an achievement of $70 million of non-GAAP operating profit
necessary for full vesting of the award. Based on the actual operating profit for such period, these awards will vest at 100%.
Grants of RSUs may also be made in connection with promotions, other changes in responsibilities or in recognition of
other individual or Microchip developments or achievements. Grants of RSUs in fiscal 2010 typically were scheduled to vest
approximately four years from the grant date. The RSUs were awarded without a purchase price and therefore have immediate
value to recipients upon vesting. On March 31, 2010, approximately 51% of our employees worldwide held RSUs or options to
purchase our common stock. Since the middle of fiscal 2006, RSUs have been the principal equity compensation vehicle for
Microchip executive officers and key employees.
In granting equity compensation awards to executive officers, we consider numerous factors, including:
the individual's position, experience, and responsibilities,
the individual's future potential to influence our mid- and long-term growth,
the vesting schedule of the awards, and
the number and value of awards previously granted.
17
We do not separately target the equity element of our executive officer compensation programs at a specific percentage
of overall compensation. However, overall total compensation is structured to be competitive so that we can attract and retain
executive officers. In setting equity award levels, we also take into consideration the impact of the equity-based awards on the
dilution of our stockholders' ownership interests in our common stock.
The Compensation Committee grants RSUs to executive officers and current employees on a quarterly basis in an
attempt to more evenly record its stock-based compensation expense. Grants of RSUs to new employees are made once per
month by the Employee Committee at a meeting of such committee. Microchip does not have any program, plan or practice to
time grants of RSUs in coordination with the release of material non-public information. Microchip does not time, nor do we
plan to time, the release of material non-public information for the purposes of affecting the value of executive compensation.
See the table under "Grants of Plan-Based Awards for Fiscal Year Ended March 31, 2010" at page 24 for
information regarding RSUs granted during fiscal 2010 to our named executive officers.
Stock Ownership Guidelines For Key Employees And Directors. To help ensure alignment of the interests of our
management and Board of Directors with those of our stockholders, we have put in place a stock holding policy that applies to
each member of our management and Board of Directors. This policy was proposed by our Nominating and Governance
Committee and ratified by our Board of Directors at its October 24, 2003 meeting. Under this policy, effective April 1, 2004,
each of our directors, executive officers, vice presidents and internal director-level employees must maintain a specified
minimum level of ownership of our stock during their tenure in their respective office or position. During fiscal 2010, all
persons subject to this policy were in compliance with its terms.
Microchip does not permit executive officers to speculate in Microchip stock, which includes a prohibition on short
selling, buying and selling options (including writing covered calls) or hedging or any type of arrangement that has a similar
economic effect.
Other Compensation and Employee Benefits Generally Available to All Employees. We maintain compensation and
employee benefits that are generally available to all Microchip employees, including:
our employee stock purchase plan,
medical, dental, vision, employee assistance program, flexible spending, and short- and long-term disability
insurance, accidental death and dismemberment insurance,
life insurance benefits,
a 401(k) retirement savings plan,
an employee cash bonus plan, and
vacation and paid time off.
Since these programs are generally available to all employees, these forms of compensation are not independently
evaluated by the Compensation Committee in connection with the annual determination of executive officer compensation.
Employee Stock Purchase Plan. Our 2001 Employee Stock Purchase Plan is a Section 423 qualified employee stock
purchase plan that allows all U.S. employees the opportunity to purchase our common stock through payroll deduction at 85%
of the fair market value at the lower of the price as of the opening of the two-year offering period or at the end of any six-month
purchase period. A significant portion of our international employees have the ability to participate in the 1994 International
Employee Stock Purchase Plan that allows them the opportunity to purchase our common stock through payroll deduction at
85% of the fair market value at the lower of the price as of the opening or the end of any six-month offering period.
Medical, Dental, Vision, Employee Assistance Program, Flexible Spending, Alternative Health Care, Long-Term
Care, Legal Assistance, and Disability Coverage. We make medical, dental, vision, employee assistance program, flexible
spending, alternative health care, long term care, legal assistance, and disability coverage available to all of our U.S. employees
through our active benefit plans. Under these generally available plans, our named executive officers are eligible to receive
between $1,000 and $7,500 per month in long-term disability coverage depending on which plan they elect. Short-term
disability coverage is provided which allows for 100% of base salary to be paid for six months in the event of disability.
Accidental death and dismemberment insurance with a benefit of one times the executive's annual salary is provided by
Microchip. Since all of our U.S. employees participate in this plan on a non-discriminatory basis, the value of these benefits to
our named executive officers is not required to be included in the Summary Compensation Table on page 22 pursuant to SEC
rules and regulations.
18
Life Insurance. In fiscal 2010, we provided life insurance coverage to our named executive officers in the amount up
to one and a half times the executive's annual salary (up to a maximum of $500,000). The named executive officers may
purchase supplemental life insurance at their own expense.
401(k). We maintain a 401(k) plan for the benefit of all of our U.S. employees to allow our employees to save for
retirement. We contribute to our 401(k) plan each year based on our profitability during the year, subject to maximum
contributions and other rules prescribed by Federal law governing such plans. Our named executive officers are permitted to
participate in the plans to the same extent as our other U.S. employees. In light of the continued economic uncertainty which
impacted our business in the first part of fiscal 2010, no discretionary matching contributions were made for the first, second or
third quarters of fiscal 2010 and we eliminated any required matching contribution effective January 1, 2009.
Employee Cash Bonus Plan. All of our employees worldwide participate in our ECBP. This cash bonus plan can
award each eligible employee with a target of two and one-half days of pay, calculated on base salary, every quarter, if certain
operating profitability objectives are achieved. The pay-out is adjusted based on actual quarterly operating results. During
fiscal 2010, bonus awards were paid out at 40% for the second quarter, 100% for the third quarter, and 200% for the fourth
quarter of fiscal 2010. Under such program, for fiscal 2010, our named executive officers received payments ranging from
$5,694 to $8,417, and our CEO received $17,404.
Vacation and Paid Time-Off Benefits. We provide vacation and other paid holidays to all of our employees, including
our named executive officers. We believe our vacation and holidays are comparable to others in the industry.
Non-Qualified Deferred Compensation Plan. We maintain a non-qualified deferred compensation plan for certain
employees, including our named executive officers, who receive compensation in excess of the 401(k) contribution limits
imposed under the Internal Revenue Code and desire to defer more compensation than they would otherwise be permitted under
a tax-qualified retirement plan, such as our 401(k) plan. Microchip does not make contributions to this non-qualified deferred
compensation plan. This plan allows our executive officers to make pre-tax contributions to this plan which would be fully
taxed to the executive officers after the executive officer's termination of employment with Microchip.
We do not have pension plans or other retirement plans for our named executive officers or our other U.S. employees.
Employment Contracts, Termination of Employment and Change of Control Arrangements We do not have
employment contracts with our CEO, CFO or any of our executive officers, nor agreements to pay severance on involuntary
termination (other than as stated in the change of control agreements below) or upon retirement. Our CEO, CFO, and our
executive officers have entered into change of control agreements with us.
The change of control agreements were designed to help ensure the continued services of our key executive officers in
the event that a change of control of the company is effected, and to assist our key executive officers in transitioning from the
company if as a result of a change of control, they lose their positions. We believe that the benefits provided by these
agreements help to ensure that our management team will be incentivized to remain employed with Microchip during a change
of control. Capitalized terms used herein and not defined shall have the meanings set forth in the change of control agreements.
Additionally, our 2004 Equity Incentive Plan has a change of control provision which provides that any successor company
shall assume each outstanding award or provide an equivalent substitute award; however, if the successor fails to do so, vesting
of awards shall accelerate. The Compensation Committee considered prevalent market practices in determining the severance
amounts and the basis for selecting the events triggering payment in the agreements.
With respect to our CEO, CFO and VP of Worldwide Sales, if the executive officer's employment terminates for
reasons other than Cause within the Change of Control Period, the executive officer will be entitled to receive severance
benefits consisting of the following primary components:
a one-time payment of his base salary in effect immediately prior to the Change of Control or termination
date, whichever is greater, for the following periods: (1) in the case of the CEO, two years; (2) in the case of
the CFO and the VP of Worldwide Sales, one year; and
a one-time payment of his bonuses for which he was or would have been eligible in the year in which the
Change of Control occurred or for the year in which termination occurred, whichever is greater, for the
following periods: (1) in the case of the CEO, two years; (2) in the case of the CFO and the VP of Worldwide
Sales, one year; and
19
a continuation of medical and dental benefits (subject to any required employee contributions) for the
following periods: (1) in the case of the CEO, two years; (2) in the case of the CFO and VP of Worldwide
Sales, one year; provided in each case that such benefits would cease sooner if and when the executive officer
becomes covered by the plans of another employer; and
a payment to cover any excise tax that may be due under Section 4999 of the Code, if the payments provided
for in the change of control agreement constitute "parachute payments" under Section 280G of the Code and
the value of such payments is more than three times the executive officer's "base amount" as defined by
Section 280G(b)(3) of the Code.
With respect to our CEO, the CFO and the VP of Worldwide Sales, immediately prior to a Change of Control
(regardless of whether the executive officer's employment terminates), all equity compensation held by the executive officer
shall become fully vested.
With respect to our executive officers other than the CEO, the CFO and the VP of Worldwide Sales, if the executive
officer terminates his employment for Good Reason, or the executive's employment is terminated for reasons other than Cause
within the Change of Control Period, the executive officer will be entitled to receive severance benefits consisting of the
following primary components:
a one-time payment of his base salary in effect immediately prior to the Change of Control or termination
date, whichever is greater, for one year, and
a one-time payment of his bonuses for which he was or would have been eligible in the year in which the
Change of Control occurred or for the year in which termination occurred, whichever is greater, for one year,
and
a continuation of medical and dental benefits (subject to any required employee contributions) for one year
(provided in each case that such benefits would cease sooner if and when the executive officer becomes
covered by the plans of another employer), and
a payment to cover any excise tax that may be due under Section 4999 of the Code, if the payments provided
for in the change of control agreement constitute "parachute payments" under Section 280G of the Code and
the value of such payments is more that three times the executive officer's "base amount" as defined by
Section 280G(b)(3) of the Code.
With respect to our executive officers other than the CEO, the CFO and the VP of Worldwide Sales, immediately upon
termination during the Change of Control Period other than for Cause, all equity compensation held by the executive officer
shall become fully vested.
The following table sets forth the aggregate dollar value of payments, to the extent calculable, in the event of a
termination of a named executive officer on March 31, 2010, the last business day of our last completed fiscal year.
Name
Steve Sanghi (4)
Ganesh Moorthy (5)
Mitchell R. Little (5)
Stephen V. Drehobl (5)
J. Eric Bjornholt (5)
Salary
$1,069,744
258,694
254,120
195,523
175,000
Bonus
$ 2,180,631
165,166
126,669
85,729
59,231
Equity
Compensation
Due to
Accelerated Vesting (1)
$ 11,476,271
4,104,630
2,572,022
2,347,389
1,150,083
$
Tax Gross-up
on Change of
Control (2)
---
2,030,339
999,324
881,589
576,056
Continuation
of Certain
Benefits (3)
2 years
1 year
1 year
1 year
1 year
(1) Value represents the gain our named executive officers would receive, calculated as the amount of unvested RSUs multiplied
by our stock price on March 31, 2010.
(2) This payment covers any excise tax that may be payable under Section 4999 of the Code if the payments provided for under
the change of control agreement constitute "parachute payments" under section 280G of the Code and the value of the
payments is more than three times the executive officer's "base amount" as defined by Section 280G(b)(3) of the Code.
(3) Benefits continued under the change of control agreements are limited to company-paid medical, dental, vision and life
insurance coverage at the same level of coverage the executive was provided immediately prior to termination of
employment with Microchip. Amounts are not determinable at this time and are dependent on each executive officer's
individual circumstances.
20
(4) The change of control payment includes an amount equal to twice the annual salary of the executive plus a bonus equal to
two times the targeted annual amount payable to such executive under our management incentive compensation plans and
employee cash bonus plan.
(5) The change of control payment includes an amount equal to one times the annual salary of the executive plus a bonus equal
to the targeted annual amounts payable to such executive under our management incentive compensation plans and employee
cash bonus plan.
Performance-Based Compensation and Financial Restatement
To date, Microchip has not experienced a financial restatement and has not considered or implemented a policy
regarding retroactive adjustments to any cash or equity-based incentive compensation paid to its executive officers and other
employees where such payments were predicated upon the achievement of certain financial results that would subsequently be
the subject of a restatement.
Tax Deductibility
Section 162(m) of the Code disallows a corporate income tax deduction for executive compensation paid to our named
executive officers in excess of $1,000,000 per year, unless that income meets permitted exceptions. In order to enhance our
ability to obtain tax deductions for executive compensation, our stockholders approved the EMICP at our 2006 annual meeting.
This allows us to seek to have such compensation under our EMICP qualify as performance-based compensation under Section
162(m). Additionally, our 2004 Equity Incentive Plan allows for the granting of performance-based awards such as RSUs. To
the extent that we grant awards with such performance-based limitations, we would expect them to qualify as performance-based
awards for purposes of 162(m).
To maintain flexibility in compensating Microchip's executive officers in a manner designed to promote varying
corporate goals, it is not the policy of the Compensation Committee that executive compensation must be tax deductible. We
intend to review the deductibility of executive officer compensation from time to time to determine whether any additional
actions are advisable to obtain deductibility.
Conclusion
We believe that our executive team provided outstanding service to Microchip in fiscal 2010. We will work to assure
that the executive compensation programs continue to meet Microchip's strategic goals as well as the overall objectives of the
compensation program.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION (2)
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section of this
proxy statement required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the
Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included
in this proxy statement.
By the Compensation Committee of the Board of Directors:
L.B. Day (Chair)
Albert J. Hugo-Martinez
Wade F. Meyercord
(2) The Compensation Committee Report on executive compensation is not "soliciting" material and is not deemed "filed" with
the SEC, and is not incorporated by reference into any filings of Microchip under the Securities Act of 1933 or the Securities
Exchange Act of 1934 whether made before or after the date hereof and irrespective of any general incorporation language
contained in such filings.
21
SUMMARY COMPENSATION TABLE
The following table lists the annual compensation for our CEO, our CFO and our three other most highly compensated
executive officers (referred to as the "named executive officers") in the fiscal year ended March 31, 2010:
Name and
Principal Position
Year
Salary (1) Bonus (2)
Stock
Awards (3)
Non-Equity
Incentive Plan
Compensation (4)
Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings (5)
2010
$505,762
$17,404
$3,165,451
$1,361,316
$
Steve Sanghi,
President
and CEO
Ganesh Moorthy,
Executive VP and
COO
Mitchell R. Little,
VP, Worldwide Sales
and Applications
Stephen V. Drehobl,
VP, Security,
Microcontroller and
Technology
Development
Division
J. Eric Bjornholt,
VP and CFO (7)
2009
502,985
3,857
3,657,979
374,413
2008
532,675
7,714
2,924,470
751,495
2010
242,483
8,418
1,117,493
196,504
2009
231,687
1,777
1,573,946
2008
243,455
3,553
919,124
47,450
95,193
2010
240,290
8,269
666,901
148,757
2009
238,971
1,833
846,937
2008
252,625
3,665
668,448
40,919
82,119
2010
181,059
6,303
623,903
98,342
2009
179,728
1,378
789,449
26,760
2008
189,645
2,757
584,900
53,705
2010
165,476
5,694
352,711
66,810
2009
137,765
998
428,012
9,240
---
---
---
---
---
---
---
---
---
---
---
---
---
---
All Other
Compensation (6)
Total
$3,546
$5,053,479
2,496
4,231
2,051
2,623
3,827
2,769
3,123
3,123
1,289
1,967
2,941
1,028
1,383
4,541,730
4,220,585
1,566,949
1,857,483
1,265,152
1,066,986
1,131,783
1,009,980
910,897
999,282
833,948
591,719
577,398
(1) Represents the base salary earned by each executive officer in the specified fiscal year.
(2) Represents bonuses earned by each executive officer in the specified fiscal year under our ECBP.
(3) Represents the aggregate grant date fair value of awards of RSUs made in fiscal 2010 computed in accordance with ASC
718 Compensation - Stock Compensation. For information on the valuation assumptions made with respect to the grants of
RSUs in fiscal 2010, please refer to the assumptions for fiscal years ended March 31, 2010 stated in Note 15, "Equity
Incentive Plans" to Microchip's audited financial statements for the fiscal year ended March 31, 2010.
(4) Represents the aggregate amount of bonuses earned by each executive officer in the specified fiscal year under our MICP,
EMICP and DMICP. Each executive officer received the following payments under each of such plans in the specified
fiscal year:
22
Named Executive Officer
Steve Sanghi
Ganesh Moorthy
Mitchell R. Little
Stephen V. Drehobl
J. Eric Bjornholt (7)
Year
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
MICP
---
---
---
---
---
---
---
---
---
---
---
---
---
9,240
EMICP
1,071,388
374,413
697,312
155,455
47,450
88,330
117,075
40,919
76,198
77,295
26,760
49,833
52,581
---
DMICP
289,928
---
54,183
41,049
---
6,863
31,682
---
5,921
21,047
---
3,872
14,229
---
(5) The contributions under our non-qualified deferred compensation plan are invested at the discretion of the executive
officer and there are no above-market or preferential earnings on such amounts made or provided by Microchip.
(6) Consists of company-matching contributions under our 401(k) retirement savings plan and the full dollar value of
premiums paid by Microchip for life insurance for the benefit of the named executive officer in the amounts shown
below:
Named Executive Officer
Steve Sanghi
Ganesh Moorthy
Mitchell R. Little
Stephen V. Drehobl
J. Eric Bjornholt (7)
Year
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
2008
2010
2009
$
401(k)
2,469
1,599
3,696
1,194
2,012
3,306
1,173
1,515
2,590
889
1,562
2,535
808
1,208
Life Insurance
$
1,077
897
535
857
611
521
1,596
1,608
533
400
405
406
220
175
(7)
J. Eric Bjornholt was appointed as our VP and CFO effective as of January 1, 2009.
Grants of Plan-Based Awards During Fiscal 2010
The following table sets forth information with respect to our EMICP, our DMICP, and our ECBP, as well as RSUs
granted to our named executive officers under our 2004 Equity Incentive Plan, including the grant date fair value of the RSUs.
Amounts listed in the "Estimated Future Payouts Under Non-Equity Incentive Plan Awards" column are annual targets based on
the salaries of the named executive officers at the end of fiscal 2010. Actual payments for our bonus plans in fiscal 2010 are
reflected in the Summary Compensation Table above. Equity awards in the table below were granted in fiscal 2010.
23
GRANTS OF PLAN-BASED AWARDS
For Fiscal Year Ended March 31, 2010
Name
Steve Sanghi
Ganesh
Moorthy
Mitchell R.
Little
Stephen V.
Drehobl
J. Eric Bjornholt
Estimated Future Payouts Under Non-
Equity Incentive Plan Awards
Grant
Date
04/02/09
07/01/09
10/01/09
01/04/10
01/04/10
01/04/10
---
---
---
04/02/09
07/01/09
10/01/09
01/04/10
01/04/10
---
---
---
04/02/09
07/01/09
10/01/09
01/04/10
01/04/10
---
---
---
04/02/09
07/01/09
10/01/09
01/04/10
01/04/10
---
---
---
04/02/09
07/01/09
10/01/09
01/04/10
01/04/10
Threshold
($) (1)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Target
($)
---
---
---
---
---
---
855,795(4)
213,949(5)
20,572(6)
---
---
---
---
---
124,173(4)
31,043(5)
9,950(6)
---
---
---
---
---
93,516(4)
23,379(5)
9,774(6)
---
---
---
---
---
62,567(4)
15,642(5)
7,520(6)
---
---
---
---
---
Maximum
($) (1)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
24
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#) (2)
33,400
31,683
28,570
24,712
8,925
22,226
---
---
---
All Other Option
Awards: Number
of Securities
Underlying
Options
(#)
---
---
---
---
---
---
---
---
---
Exercise or
Base Price
of Option
Awards
($/Sh)
---
---
---
---
---
---
---
---
---
12,406
11,768
11,428
9,885
8,255
---
---
---
7,634
7,242
6,530
5,649
5,080
---
---
---
6,680
6,337
5,714
5,295
5,715
---
---
---
3,817
3,621
3,673
3,177
86
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Grant
Date Fair
Value of
Stock
and
Option
Awards
($) (3)
585,502
591,205
591,113
591,111
247,758
558,762
---
---
---
217,477
219,591
236,445
236,449
207,531
---
---
---
133,824
135,136
135,106
135,124
127,711
---
---
---
117,100
118,248
118,223
126,656
143,675
---
---
---
66,912
67,568
75,994
75,994
2,387
Estimated Future Payouts Under Non-
Equity Incentive Plan Awards
Name
Grant
Date
01/04/10
---
---
---
Threshold
($) (1)
---
---
---
---
Target
($)
---
42,000(4)
10,500(5)
6,731(6)
Maximum
($) (1)
---
---
---
---
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#) (2)
2,540
---
---
---
All Other Option
Awards: Number
of Securities
Underlying
Options
(#)
---
---
---
---
Exercise or
Base Price
of Option
Awards
($/Sh)
---
---
---
---
Grant
Date Fair
Value of
Stock
and
Option
Awards
($) (3)
63,856
---
---
---
(1) Individual awards under our EMICP are made quarterly and are not stated in terms of a threshold or maximum amount for an
award period. The EMICP does provide that the maximum amount payable to any participant is $2.5 million for any fiscal year.
(2) Represents RSUs granted under Microchip's 2004 Equity Incentive Plan.
(3) This column shows the full grant date fair value of RSU awards granted to the named executives in fiscal 2010. Generally, the
full grant date fair value is the amount that Microchip would expense in its financial statements over the award's vesting
schedule.
(4) This annual target represents the percentage of the executive officer's base salary reflected in dollar terms targeted under
Microchip's EMICP.
Microchip's DMICP.
(5) This annual target represents the percentage of the executive officer's base salary reflected in dollar terms targeted under
(6) Microchip's ECBP annual target is based on 2.5 days of base salary per quarter, or on an annual basis, two weeks of the
executive officer's annual base salary.
Summary Compensation Table and Grants of Awards Table Discussion
Based on the data stated in the Summary Compensation Table, the level of salary, bonus and non-equity incentive plan
compensation in proportion to total compensation ranged from approximately 29% to 40% for our named executive officers in
fiscal 2010. See the "Compensation Discussion and Analysis" section of this proxy statement for further discussion of overall
compensation and how compensation is determined.
We do not have employment contracts with our named executive officers, nor agreements to pay severance on
involuntary termination (other than as stated in the change of control agreements discussed above under the heading
"Employment Contracts, Termination of Employment and Change of Control Arrangements") or retirement.
For a discussion of the material terms of the awards listed in the Grants of Awards Table, see our discussion of the
equity awards and incentive cash bonuses in the "Compensation Discussion and Analysis" section of this proxy statement under
the headings "Incentive Cash Bonuses," "Equity Compensation," and "Employee Cash Bonus Plan."
Microchip has not repriced any stock options or made any material modifications to any equity-based awards during
the last fiscal year.
25
Name
Steve
Sanghi
Ganesh
Moorthy
OUTSTANDING EQUITY AWARDS AT FISCAL 2010 YEAR END
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
4,756(1)
26,457(1)
303,750(1)
58,541(1)
2,602(1)
135,000(1)
70,249(1)
23,400(1)
145,000(1)
10,000(1)
145,000(1)
49,939(1)
202,500(1)
47,562(1)
145,000(1)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
72,000(1)
26,000(1)
35,000(1)
7,060(1)
40,000(1)
5,000(1)
25,000(1)
3,600(1)
39,000(1)
24,000(1)
16,500(1)
40,000(1)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested (23)
($)
Number of
Shares or
Units of
Stock that
Have Not
Vested (#)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights that
Have Not
Vested (#)
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
65,000(2)
17,500(3)
32,778(4)
37,966(5)
20,029(6)
38,624(7)
26,700(8)
19,425(9)
33,400(10)
31,683(11)
28,570(12)
24,712(13)
8,925(14)
22,226(15)
---
---
---
---
---
---
---
---
---
---
---
---
17,000(2)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
1,830,400
492,800
923,028
1,069,123
564,017
1,087,652
751,872
547,008
940,544
892,193
804,531
695,890
251,328
625,884
---
---
---
---
---
---
---
---
---
---
---
---
478,720
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Option
Exercise
Price ($)
Option
Expiration
Date
15.86
24.27
24.04
18.48
18.48
18.48
26.14
27.39
27.05
27.05
26.25
27.15
27.15
21.00
25.29
---
---
---
---
---
---
---
---
---
---
---
---
---
---
23.70
24.04
18.48
26.14
27.05
27.05
26.25
27.15
27.15
27.15
27.15
25.29
---
06/01/2011
01/22/2012
10/25/2012
04/09/2013
04/09/2013
04/09/2013
10/09/2013
10/24/2013
04/01/2014
04/01/2014
07/21/2014
04/03/2012
04/03/2012
08/01/2012
04/01/2015
---
---
---
---
---
---
---
---
---
---
---
---
---
---
12/03/2011
10/25/2012
04/09/2013
10/09/2013
04/01/2014
04/01/2014
07/21/2014
04/03/2012
04/03/2012
04/03/2012
04/03/2012
04/01/2015
---
26
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
---
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
---
Name
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
---
Option
Exercise
Price ($)
---
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested (23)
($)
154,880
290,104
336,005
209,482
84,480
56,320
403,983
281,600
295,680
349,353
331,387
321,812
278,362
232,461
---
---
---
394,240
112,640
210,975
244,372
128,916
248,596
174,592
152,768
214,973
203,935
183,885
159,076
143,053
---
---
---
---
---
360,448
98,560
184,617
213,819
112,809
217,536
152,064
170,030
188,109
Number of
Shares or
Units of
Stock that
Have Not
Vested (#)
5,500(3)
10,302(4)
11,932(5)
7,439(6)
3,000(5)
2,000(16)
14,346(7)
10,000(8)
10,500(9)
12,406(10)
11,768(11)
11,428(12)
9,885(13)
8,255(15)
---
---
---
14,000(2)
4,000(3)
7,492(4)
8,678(5)
4,578(6)
8,828(7)
6,200(8)
5,425(9)
7,634(10)
7,242(11)
6,530(12)
5,649(13)
5,080(15)
---
---
---
---
---
12,800(2)
3,500(3)
6,556(4)
7,593(5)
4,006(6)
7,725(7)
5,400(8)
6,038(9)
6,680(10)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights that
Have Not
Vested (#)
---
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Option
Expiration
Date
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
29.11
27.05
25.29
08/01/2010
04/01/2014
04/01/2015
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
18.48
27.05
27.05
26.25
25.29
04/09/2013
04/01/2014
04/01/2014
07/21/2014
04/01/2015
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
27
---
---
---
---
---
---
---
---
---
---
---
---
---
Mitchell
R. Little
1(1)
27,978(1)
28,000(1)
---
Stephen V.
Drehobl
---
---
---
---
---
---
---
---
---
---
---
---
4,340(1)
28,000(1)
2,000(1)
10,000(1)
32,000(1)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Name
J. Eric
Bjornholt
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
---
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
---
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
---
---
---
---
457(1)
356(1)
1,172(1)
326(1)
3,000(1)
1,500(1)
1,000(1)
864(1)
1,782(1)
823(1)
3,300(1)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested (23)
($)
178,450
160,906
149,107
160,934
Number of
Shares or
Units of
Stock that
Have Not
Vested (#)
6,337(11)
5,714(12)
5,295(13)
5,715(15)
---
---
---
---
---
---
---
---
---
---
---
1,354(2)
425(3)
425(17)
430(4)
521(5)
311(18)
190(3)
679(6)
349(19)
213(17)
760(20)
385(21)
388(22)
237(4)
846(8)
3,500(16)
4,000(5)
4,500(7)
4,414(7)
3,817(10)
3,621(11)
3,673(12)
3,177(13)
86(14)
2,540(15)
---
---
---
---
---
---
---
---
---
---
---
38,129
11,968
11,968
12,109
14,671
8,758
5,350
19,121
9,828
5,998
21,402
10,842
10,926
6,674
23,823
98,560
112,640
126,720
124,298
107,487
101,967
103,432
89,464
2,422
71,526
Option
Exercise
Price ($)
---
---
---
---
24.27
24.04
26.14
28.31
27.05
27.05
26.25
27.15
27.15
21.00
25.29
Option
Expiration
Date
---
---
---
---
01/22/2012
10/25/2012
10/09/2013
02/02/2014
04/01/2014
04/01/2014
07/21/2014
04/03/2012
04/03/2012
08/01/2012
04/01/2015
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights that
Have Not
Vested (#)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
1 The option is fully vested.
2 The award vests quarterly over a one-year period, commencing on May 1, 2010, subject to continued service on such
dates.
3 The award vests in full on May 1, 2011, subject to continued service on such date.
28
4 The award vests in full on November 1, 2011, subject to continued service on such date.
5 The award vests in full on February 1, 2012, subject to continued service on such date.
6 The award vests in full on May 1, 2012, subject to continued service on such date.
7 The award vests in full on February 1, 2013, subject to continued service on such date.
8 The award vests in full on November 1, 2012, subject to continued service on such date.
9 The award vests quarterly over a two-year period commencing on February 1, 2010, subject to continued service on
such dates.
10 The award vests in full on May 1, 2013, subject to continued service on such date.
11 The award vests in full on August 15, 2013, subject to continued service on such date.
12 The award vests in full on November 15, 2013, subject to continued service on such date.
13 The award vest in full on February 15, 2014, subject to continued service on such date.
14 The award vests in full on February 15, 2011, subject to continued service on such date.
15 The award vests quarterly over a two-year period, commencing on February 15, 2011, subject to continued service on
such dates.
16 The award vests in full on February 1, 2011, subject to continued service on such date.
17 The award vests in full on August 1, 2011, subject to continued service on such date.
18 The award vests in full on May 1, 2010, subject to continued service on such date.
19 The award vests in full on August 1, 2010, subject to continued service on such date.
20 The award vests in full on August 1, 2012, subject to continued service on such date.
21 The award vests quarterly over a two-year period commencing on August 1, 2009, subject to continued service on such
dates.
22 The award vests in full on November 1, 2010, subject to continued service on such date.
23 Represents number of RSUs multiplied by $28.16, the closing price of our common stock on March 31, 2010.
Name
Steve Sanghi,
President and CEO
Ganesh Moorthy,
Executive Vice
President and COO
OPTION EXERCISES AND STOCK VESTED
For Fiscal Year Ended March 31, 2010
Option Awards
Stock Awards
Number of Shares
Acquired on Exercise (#)
Value Realized on
Exercise ($)
Number of Shares
Acquired on Vesting
(#)
Value Realized on
Vesting ($)
97,500
150,000
371,573
433,650
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
29
7,250
7,250
7,250
107
2,775
6,550
7,250
107
2,000
2,000
2,000
151
1,500
850
165,590
197,563
174,653
2,578
73,565
173,641
192,198
2,837
45,680
54,500
48,180
3,638
39,765
22,534
Name
Number of Shares
Acquired on Exercise (#)
Value Realized on
Exercise ($)
Number of Shares
Acquired on Vesting
(#)
Value Realized on
Vesting ($)
Option Awards
Stock Awards
Mitchell R. Little,
VP, Worldwide Sales
and Applications
---
---
---
---
10,000
67,379
Stephen V. Drehobl,
VP, Security,
Microcontroller and
Technology
Development Division
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
J. Eric Bjornholt,
VP and CFO
2,375
8,909
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
30
2,000
152
1,750
1,750
1,750
58
59
775
750
1,750
1,600
1,600
1,600
75
75
862
500
1,600
31
300
165
165
76
31
38
77
31
165
76
106
53,020
4,030
39,970
47,688
42,158
1,397
1,564
20,545
19,883
46,393
36,544
43,600
38,544
1,807
1,988
22,852
13,255
42,416
708
6,852
3,769
4,496
2,071
845
1,027
1,855
747
3,975
1,831
2,554
Name
Number of Shares
Acquired on Exercise (#)
Value Realized on
Exercise ($)
Number of Shares
Acquired on Vesting
(#)
Value Realized on
Vesting ($)
Option Awards
Stock Awards
---
---
---
---
---
---
---
---
---
---
32
165
76
3,000
77
848
4,374
2,015
79,530
2,041
Non-Qualified Deferred Compensation for Fiscal Year 2010
All of our U.S. employees in director-level and above positions, including our executive officers, are eligible to defer a
portion of their salary and cash bonuses into our Non-Qualified Deferred Compensation Plan, or the Deferred Compensation
Plan. Pursuant to the Deferred Compensation Plan, eligible employees can defer up to 50% of their base salary and/or cash
bonuses. In general, deferral elections are made prior to January of each year for amounts to be earned in the upcoming year.
Participants may invest amounts in various funds available under the Deferred Compensation Plan (in general, any of those funds
traded on a nationally recognized exchange). Plan earnings are calculated by reference to actual earnings of mutual funds or
other securities chosen by individual participants.
Except for a change in control or certain unforeseeable emergencies (as defined under the Deferred Compensation Plan),
benefits under the plan will not be distributed until a "distribution event" has occurred. The distribution event occurs
upon termination of employment.
We incur incidental expenses for administration of the Deferred Compensation Plan, and the receipt of any tax benefit we
might obtain based on payment of a participant's compensation is delayed until funds (including earnings or losses on the
amounts invested pursuant to the plan) are eventually distributed. We do not pay any additional compensation or guarantee
minimum returns to any participant in the Deferred Compensation Plan.
The following table shows the non-qualified deferred compensation activity for each named executive officer for the
fiscal year ended March 31, 2010.
NON-QUALIFIED DEFERRED COMPENSATION
Executive
Contributions
in Last FY ($)(1)
Registrant
Contributions in
Last FY ($)
Aggregate
Earnings in Last
FY ($)(1)
Aggregate
Withdrawals/
Distributions ($)
Aggregate
Balance at
Last FYE ($)(1)
Name
Steve Sanghi
Ganesh Moorthy
Mitchell R. Little
Stephen V. Drehobl
0
58,928
0
0
J. Eric Bjornholt
10,614
0
0
0
0
0
0
19,195
0
6
12,089
0
0
0
0
0
0
90,016
0
4,872
44,182
(1) The executive contribution amounts shown in the table were previously reported in the "Summary Compensation Table" as
salary and/or bonus for fiscal 2010 or prior fiscal years. The earnings amounts shown in the table were not previously
reported for fiscal 2010 or prior years under applicable SEC rules as such earnings were not under a defined benefit or
actuarial pension plan and there were no above-market or preferential earnings on such amounts made or provided by
Microchip.
31
Equity Compensation Plan Information
The table below provides information about our common stock that, as of March 31, 2010, may be issued upon the
exercise of options and rights under the following equity compensation plans (which are all of our equity compensation plans):
Microchip 1993 Stock Option Plan,
Microchip 1994 International Employee Stock Purchase Plan,
Microchip 1997 Nonstatutory Stock Option Plan,
Microchip 2001 Employee Stock Purchase Plan,
Microchip 2004 Equity Incentive Plan,
PowerSmart, Inc. 1998 Stock Incentive Plan,
TelCom Semiconductor, Inc. 1994 Stock Option Plan, and
TelCom Semiconductor, Inc. 2000 Nonstatutory Stock Option Plan.
(a) Number of securities to
be issued upon exercise of
outstanding options and
vesting of RSUs
(b) Weighted-
average exercise
price of
outstanding
options
(c) Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
8,996,372 (2)
$25.18 (3)
4,101,351
13,097,723
$23.83
$24.53
12,486,518
---
12,486,518
Plan Category
Equity Compensation Plans
Approved by Stockholders (1)
Equity Compensation Plans Not
Approved by Stockholders (4)
Total
(1) Beginning January 1, 2005, the shares authorized for issuance under our 2001 Employee Stock Purchase Plan are
subject to an annual automatic increase equal to the lesser of (i) 1,500,000 shares, (ii) one-half of one percent (0.5%) of
the then outstanding shares of our common stock, or (iii) such lesser amount as is approved by our Board of Directors.
Beginning January 1, 2007, the shares authorized for issuance under our 1994 International Employee Stock Purchase
Plan, or the IESPP, are subject to an annual automatic increase of equal to one-tenth of one percent (0.10%) of the then
outstanding shares of our common stock.
(2) Includes 4,637,948 shares issuable upon the vesting of RSUs granted under our 2004 Equity Incentive Plan. The
remaining balance consists of outstanding stock option grants under various plans.
(3) The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs,
which have no exercise price.
(4) Includes outstanding options to purchase an aggregate of 97,210 shares of our common stock assumed through our
acquisitions of TelCom Semiconductor, Inc. in January 2001, and PowerSmart, Inc. in June 2002. At March 31, 2010,
these assumed options had a weighted average exercise price of $21.00 per share. No additional options may be granted
under these plans.
Equity Compensation Plans Not Approved by Stockholders
Microchip Technology Incorporated 1997 Nonstatutory Stock Option Plan
In November 1997, our Board of Directors approved the Microchip 1997 Nonstatutory Stock Option Plan, or our 1997
Plan. Under our 1997 Plan, nonqualified stock options were granted to employees who were not officers or directors of
Microchip and to our consultants. The 1997 Plan was not submitted to our stockholders for approval because doing so was not
required under applicable rules and regulations in effect at the time the plan was initially adopted or when it was amended. As
of March 31, 2010, options to acquire 4,085,693 shares were outstanding under the 1997 Plan and no shares were available for
future grant because this plan was replaced with our 2004 Equity Incentive Plan for future grants.
The expiration date, maximum number of shares purchasable, and other provisions of options granted under the 1997
Plan, including vesting provisions, were established at the time of grant by either the Compensation Committee or the Employee
Committee appointed by the Board of Directors, provided that the exercise price of an option could not be less than the fair
market value of our common stock on the date of grant and no option could have a term of more than 10 years. If Microchip is
acquired by merger, consolidation or asset sale, each outstanding option that is not assumed by the successor corporation or
32
otherwise replaced with a comparable option will automatically accelerate and vest in full. In connection with a change of
control of Microchip by tender offer or proxy contest for board membership, our Board of Directors can accelerate the vesting
of outstanding options. Our Board of Directors or Compensation Committee may amend or terminate the 1997 Plan without
stockholder approval, but no amendment or termination of the 1997 Plan may adversely affect any award previously granted
under the 1997 Plan without the written consent of the stock option holder.
CODE OF ETHICS
On May 3, 2004, our Board of Directors adopted a code of ethics for our directors, officers (including our chief
executive officer and chief financial officer), and employees. A copy of the code of ethics is available on our website at the
Corporate/Investors section under Mission Statement/Corporate Governance on www.microchip.com.
We intend to post on our website any amendment to, or waiver from, a provision of our codes of ethics within four
business days following the date of such amendment or waiver or such other time period required by SEC rules.
Other Matters to be Presented at the Annual Meeting
OTHER MATTERS
At the date this proxy statement went to press, we did not anticipate that any other matters would be raised at the
annual meeting.
Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the 2011 Annual Meeting of Stockholders;
Discretionary Authority to Vote on Stockholder Proposals
Under SEC rules, if a stockholder wants us to include a proposal in our proxy statement and form of proxy for the 2011
annual meeting, our Secretary must receive the proposal at our principal executive offices by March 14, 2011. Stockholders
interested in submitting such a proposal are advised to contact knowledgeable counsel with regard to the detailed requirements
of applicable securities laws. The submission of a stockholder proposal does not guarantee that it will be included in our proxy
statement.
Under our Bylaws, stockholders must follow certain procedures to nominate a person for election as a director or to
introduce an item of business at our annual meeting. Under these procedures, stockholders must submit the proposed nominee
or item of business by delivering a notice addressed to our Secretary at our principal executive offices. We must receive notice
as follows:
Normally we must receive notice of a stockholder's intention to introduce a nomination or proposed item of
business for an annual meeting not less than 90 days before the first anniversary of the date on which we first
mailed our proxy statement to stockholders in connection with the previous year's annual meeting of
stockholders. Accordingly, a stockholder who intends to submit a nomination or proposal for our 2011 annual
meeting must do so no later than April 13, 2011.
However, if we hold our 2011 annual meeting on a date that is not within 30 days before or after the
anniversary date of our 2010 annual meeting, we must receive the notice no later than the close of business on
the later of the 90th day prior to our 2011 annual meeting or the 10th day following the day on which public
announcement of the date of such annual meeting is first made.
A stockholder's submission must include certain specified information concerning the proposal or nominee, as
the case may be, and information as to the stockholder's ownership of our common stock. Proposals or
nominations not meeting these requirements will not be considered at our 2011 annual meeting.
If a stockholder does not comply with the requirements of this advance notice provision, the proxies may
exercise discretionary voting authority under proxies it solicits to vote in accordance with its best judgment on
any such proposal or nomination submitted by a stockholder.
To make any submission or to obtain additional information as to the proper form and content of submissions,
stockholders should contact our Secretary in writing at 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199.
33
Householding of Annual Meeting Materials
Some brokers and other nominee record holders may be participating in the practice of "householding" proxy
statements and annual reports. This means that only one copy of our proxy statement and annual report may have been sent to
multiple stockholders in a stockholder's household. Additionally, you may have notified us that multiple stockholders share an
address and thus you requested to receive only one copy of our proxy statement and annual report. While our proxy statement
and 2010 Annual Report are available online (see "Electronic Access to Proxy Statement and Annual Report" on page 2), we
will promptly deliver a separate copy of either document to any stockholder who contacts our investor relations department at
480-792-7761 or by mail addressed to Investor Relations, Microchip Technology Incorporated, 2355 West Chandler Boulevard,
Chandler, Arizona 85224-6199, requesting such copies. If a stockholder is receiving multiple copies of our proxy statement and
annual report at the stockholder's household and would like to receive a single copy of the proxy statement and annual report for
a stockholder's household in the future, stockholders should contact their broker, or other nominee record holder to request
mailing of a single copy of the proxy statement and annual report. Stockholders receiving multiple copies of these documents
directly from us, and who would like to receive single copies in the future, should contact our investor relations department to
make such a request.
Date of Proxy Statement
The date of this proxy statement is July 12, 2010.
34
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended March 31, 2010
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. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes 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
Yes No
(2) has been subject to such filing requirements for the past 90 days:
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12
Yes No
months (or for such shorter period that the registrant was required to submit and post such files).
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.
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 filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No
Aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 2009 based upon the
closing price of the common stock as reported by the NASDAQ® Global Market on such date was approximately $4,740,800,949.
Number of shares of Common Stock, $.001 par value, outstanding as of May 21, 2010: 185,542,931.
Proxy Statement for the 2010 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 Registrant's Common Equity and Related Stockholder Matters
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 and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
Page
3
10
19
19
19
20
21
22
23
39
40
40
40
43
43
43
43
44
44
45
46
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 – Management's
Discussion and Analysis of Financial Condition and Results of Operations – Note Regarding Forward-looking Statements."
Our actual results could differ materially from the results described in these forward-looking statements as a result of certain
factors including those set forth under "Item 1A – Risk Factors," beginning below at page 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, safety and security, 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
reduce the system level energy consumption
decrease time to market for their products
significantly reduce product cost
Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of
applications and markets worldwide, including:
automotive comfort, safety and entertainment applications
remote control devices
handheld tools
home appliances
portable computers
robotics
accessories
3
cordless and cellular telephones
motor controls
security systems
educational and entertainment devices
consumer electronics
power supplies
touch screens
medical products
Embedded control systems typically incorporate a microcontroller as the principal active, and sometimes sole,
component. A microcontroller is a self-contained computer-on-a-chip consisting of a central processing unit, non-volatile
program memory, random access memory for data storage and various input/output peripheral capabilities. In addition to the
microcontroller, a complete embedded control system incorporates application-specific software and may include specialized
peripheral device controllers, non-volatile memory components such as EEPROMs, 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 $10.7 billion in calendar year 2009. Microcontrollers are currently available in 4-bit
through 32-bit architectures. 4-bit microcontrollers are the smallest segment of the microcontroller market and have been in
decline for several years. 8-bit microcontrollers remain very cost-effective for a wide range of high-volume embedded
control applications and, as a result, continue to represent 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.
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, extreme low power, low voltage 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 8 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, extreme low 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 650 microcontrollers in our product portfolio, we target the 8-bit, 16-bit, and
32-bit microcontroller markets.
Digital Signal Controllers (DSC) are a subset of our 16-bit microcontroller offering. Our dsPIC DSC families integrate
the control features of high-performance 16-bit microcontrollers with the computation capabilities of Digital Signal
Processors (DSPs), along with a wide variety of peripheral functions making them suitable for a large number of embedded
control applications. Our dsPIC product family offers a broad suite of hardware and software development tools, software
application libraries, development boards and reference designs to ease and expedite the customer application development
cycle. With its field-reprogrammability, large selection of peripheral functions, small footprint and ease of use, we believe
that our dsPIC DSCs expand our addressable market.
We have used our manufacturing experience and design and process technology to bring additional enhancements and
manufacturing efficiencies to the development and production of our PIC family of microcontroller products. Our extensive
experience base has enabled us to develop our 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.
4
Development Tools
We offer a comprehensive set of low-cost and easy-to-learn application development tools. These tools enable system
designers to quickly and easily program a PIC microcontroller and dsPIC DSC for specific applications and, we believe, are a
key factor for obtaining design wins.
Our family of development tools for PIC and dsPIC devices 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 PIC and dsPIC development tools share the same integrated development environment.
Many independent companies also develop and market application development tools that support our standard
microcontroller product architecture. Currently, there are approximately 200 third-party tool suppliers worldwide whose
products support our proprietary microcontroller architecture.
We believe that familiarity with and adoption of both our and third-party development tools by an increasing number of
product designers will be an important factor in the future selection of our embedded control products. These development
tools allow design engineers to develop thousands of application-specific products from our standard microcontrollers. To
date, we have shipped more than 900,000 development tools.
Analog and Interface Products
Our analog and interface products consist of several families with approximately 600 power management, linear, mixed-
signal, thermal management, safety and security, and interface products. At the end of fiscal 2010, our mixed-signal analog
and interface products were being shipped to more than 14,000 end customers.
We continue marketing and selling our analog and interface products into our existing microcontroller customer base,
which we refer to as our analog "attach" strategy, as well as to new customers. In addition to our "attach" strategy, we market
and sell other products that may not fit our traditional PIC microcontroller and memory products customer base. We market
these, and all of our products, based on an application segment approach targeted to provide customers with application
solutions.
Memory Products
Our memory products consist primarily of serial electrically erasable programmable read-only memory, referred to as
Serial EEPROMs. We sell these devices primarily into the embedded control market, and we are one of the largest suppliers
of such devices worldwide. Serial EEPROM products are used for non-volatile program and data storage in systems where
such data must be either modified frequently or retained for long periods. Serial EEPROMs have a very low I/O pin
requirement, permitting production of very small devices. We also started selling Serial SRAM products over the last year.
These are SRAM products with a serial interface compared to the traditional parallel interface that is more common, thus
enabling a smaller footprint necessary in some embedded applications.
Manufacturing
Our manufacturing operations include wafer fabrication and assembly and test. The ownership of our manufacturing
resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control
resulting in us being one of the lowest cost producers in the embedded control industry. By owning our wafer fabrication
facilities and our assembly and test operations, and by employing statistical techniques (statistical process control, designed
experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct control
over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture
the wafer manufacturing and a portion of the assembly and testing profit margin.
Our manufacturing facilities are located in:
Tempe, Arizona (Fab 2)
Chandler, Arizona (probe operations)
Gresham, Oregon (Fab 4)
Bangkok, Thailand (assembly, probe and test)
Wafer Fabrication
Fab 2 currently produces 8-inch wafers and supports manufacturing processes from 0.35 to 5.0 microns. During fiscal
2008 and the first half of fiscal 2009, Fab 2 operated at or above normal capacity levels, which we typically consider to be
the range of 90% to 95% of the actual capacity of the installed equipment. In response to lower demand in the second half of
5
fiscal 2009, we reduced the production levels of Fab 2 below normal capacity levels. Operating at lower percentages of
capacity has a negative impact on our operating results due to the relatively high fixed costs inherent in wafer fabrication
manufacturing. We increased production levels of Fab 2 in the second and third quarters of fiscal 2010 to support increasing
demand for our products. During the latter part of the third quarter and the entire fourth quarter of fiscal 2010, we operated at
or above normal capacity levels at Fab 2.
Fab 4 currently produces 8-inch wafers using predominantly 0.22 to 0.5 micron manufacturing processes and is capable
of supporting technologies below 0.18 microns. Similar to Fab 2, Fab 4 was operating at or above normal capacity levels
during the first half of fiscal 2009. We reduced the production levels of Fab 4 in the second half of fiscal 2009 below normal
capacity levels. We increased production levels of Fab 4 in the second and third quarters of fiscal 2010 to support increasing
demand for our products. During the latter part of the third quarter and the entire fourth quarter of fiscal 2010, we operated at
or above normal capacity levels at Fab 4. 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 over the
next several years with modest incremental capital expenditures.
We continue to transition products to more advanced process technologies to reduce future manufacturing costs. We
believe that our ability to successfully transition to more advanced process technologies is important for us to remain
competitive.
We outsource a portion 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, 2010,
approximately 65% of our assembly requirements were being performed in our Thailand facility. As of March 31, 2010, 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.
During the first half of fiscal 2010, we operated at levels below the total operating capacity of our Thailand facility due
to adverse business conditions. During the second half of fiscal 2010, as business conditions improved, we operated at
normal levels of capacity at our Thailand facility, and we selectively increased our assembly and test capacity at such facility.
General Matters Impacting Our Manufacturing Operations
We employ proprietary design and manufacturing processes in developing our microcontroller, analog and memory
products. We believe our processes afford us both cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors develop and optimize separate processes for their logic,
analog and memory product lines, we use a common process technology for our microcontroller, analog, and non-volatile
memory products. This allows us to more fully absorb our process research and development costs and to deliver new
products to market more rapidly. Our engineers utilize advanced computer aided design tools and software to perform circuit
design, simulation and layout, and our in-house photomask and wafer fabrication facilities enable us to rapidly verify design
techniques by processing test wafers quickly and efficiently.
Due to the high fixed costs inherent in semiconductor manufacturing, consistently high manufacturing yields have
significant positive effects on our gross profit and overall operating results. Our continuous focus on manufacturing
productivity has allowed us to maintain excellent manufacturing yields at our facilities. Our manufacturing yields are
primarily driven by a comprehensive implementation of statistical process control, extensive employee training and our
effective use of our manufacturing facilities and equipment. Maintenance of manufacturing productivity and yields are
important factors in the achievement of our operating results. The manufacture of integrated circuits, particularly non-
volatile, erasable CMOS memory and logic devices, such as those that we produce, are complex processes. These processes
are sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in
the materials used and the performance of our manufacturing personnel and equipment. As is typical in the semiconductor
industry, we have from time to time experienced lower than anticipated manufacturing yields. Our operating results will
suffer if we are unable to maintain yields at approximately the current levels.
Historically, we have relied on our ability to respond quickly to customer orders as part of our competitive strategy,
resulting in customers placing orders with relatively short delivery schedules. In order to respond to such requirements, we
have historically maintained a significant work-in-process and finished goods inventory.
At the end of fiscal 2010, we owned identifiable long-lived assets (consisting of property, plant and equipment) in the
United States with a carrying value, net of accumulated depreciation, of $333.0 million and $160.0 million in other countries,
6
including $147.7 million in Thailand. At the end of fiscal 2009, we owned identifiable long-lived assets in the United States
with a carrying value, net of accumulated depreciation, of $368.1 million and $163.6 million in other countries, including
$152.4 million in Thailand.
Research and Development (R&D)
We are committed to continuing our investment in new and enhanced products, including development systems, and in
our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our
competitive position. Our current R&D activities focus on the design of new microcontrollers, digital signal controllers,
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 2010, our R&D expenses were $120.8 million, compared to $115.5 million in fiscal 2009 and $120.9 million in
fiscal 2008. R&D expenses included share-based compensation expense of $12.2 million in fiscal 2010, $10.9 million in
fiscal 2009 and $10.7 million in fiscal 2008.
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 2010, we derived 61% of our net sales through distributors and 39% of our net sales from customers serviced
directly by Microchip. In each of fiscal 2009 and fiscal 2008, we derived 64% of our net sales through distributors and 36%
of our net sales from customers serviced directly by Microchip. Our largest distributor accounted for approximately 12% of
our net sales in fiscal 2010, 14% of our net sales in fiscal 2009 and 12% of our net sales in fiscal 2008. No other distributor
or end customer accounted for more than 10% of our net sales in fiscal 2010, fiscal 2009 or fiscal 2008.
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 2010, fiscal 2009 and fiscal 2008 were as follows (dollars in thousands):
Americas
Europe
Asia
2010
$ 231,398
237,354
478,977
24.4%
25.1
50.5
Year Ended March 31,
2009
$ 228,922
257,407
416,968
25.3%
28.5
46.2
2008
$ 273,363
308,171
454,203
26.4%
29.8
43.8
Total Sales
$ 947,729
100.0%
$ 903,297
100.0%
$ 1,035,737
100.0%
Sales to foreign customers accounted for approximately 77% of our net sales in fiscal 2010 and approximately 75% of
our net sales in each of fiscal 2009 and fiscal 2008. Our sales to foreign customers have been predominately in Asia and
7
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 25% of our net sales in fiscal 2010,
23% of our net sales in fiscal 2009 and approximately 20% of our net sales in fiscal 2008. Sales to customers in Taiwan
accounted for approximately 10% of our net sales in each of fiscal 2010 and fiscal 2008. We did not have sales into any
other foreign countries that exceeded 10% of our net sales during fiscal 2010, fiscal 2009 or fiscal 2008.
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, global 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, 2010, our backlog was approximately $527.6 million, compared to $182.8 million as of April 30, 2009.
Our backlog includes all purchase orders scheduled for delivery within the subsequent 12 months.
We primarily produce standard products that can be shipped from inventory within a relatively short time after we
receive an order. Our business and, to a large extent, that of the entire semiconductor industry, is characterized by short-term
orders and shipment schedules. Orders constituting our current backlog are subject to changes in delivery schedules, or to
cancellation at the customer's option without significant penalty. Thus, while backlog is useful for scheduling production,
backlog as of any particular date may not be a reliable measure of sales for any future period.
Competition
The semiconductor industry is intensely competitive and has been characterized by price erosion and rapid technological
change. We compete with major domestic and international semiconductor companies, many of which have greater market
recognition and greater financial, technical, marketing, distribution and other resources than we have with which to pursue
engineering, manufacturing, marketing and distribution of their products. We also compete with a number of companies that
we believe have copied, cloned, pirated or reverse engineered our proprietary product lines in such countries as China, Korea
and Taiwan. We are continuing to take actions to vigorously and aggressively defend and protect our intellectual property on
a worldwide basis.
We currently compete principally on the basis of the technical innovation and performance of our embedded control
products, including the following product characteristics:
speed
functionality
density
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 U.S. and foreign patents, expiring on various dates between 2010 and 2028. We also have
numerous additional U.S. and foreign patent applications pending. We do not expect that the expiration of any particular
patent will have a material impact on our business. While we intend to continue to seek patents on our technology and
8
manufacturing processes, we believe that our continued success depends primarily on the technological skills and innovative
capabilities of our personnel and our ability to rapidly commercialize product developments, rather than on our patents. Our
existing and new patents, trademarks and copyrights that issue may not be of sufficient scope or strength to provide
meaningful intellectual property protection or any commercial advantage to us. In addition, pursuing violations of our
intellectual property rights on a worldwide basis is a complex business area involving patent law, trademark law, copyright
law and the laws of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of
the U.S.
We have entered into certain intellectual property licenses and cross-licenses with other companies related to
semiconductor products and manufacturing processes. As is typical in the semiconductor industry, we and our customers
have from time to time received, and may in the future receive, communications from third parties asserting patent or other
intellectual property rights on certain of our products or technologies. We investigate all such notices and respond as we
believe is appropriate. Based on industry practice, we believe that in most cases we can obtain necessary licenses or other
rights on commercially reasonable terms, but we cannot assure that all licenses would be on acceptable terms, that litigation
would not ensue or that damages for any past infringement would not be assessed. Litigation, which could result in
substantial 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 material compliance with such
regulations. Any changes in such regulations or in their enforcement could require us to acquire costly equipment or to incur
other significant expenses to comply with environmental regulations. Any failure by us to adequately control the storage, use
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 recently adopted 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, 2010, we had 5,418 employees. None of our employees are represented by a labor organization. We
have never had a work stoppage and believe that our employee relations are good.
Executive Officers of the Registrant
The following sets forth certain information regarding our executive officers as of April 30, 2010:
Name
Steve Sanghi
Ganesh Moorthy
J. Eric Bjornholt
Stephen V. Drehobl
David S. Lambert
Mitchell R. Little
Richard J. Simoncic
Age
54
50
39
48
58
58
46
Position
Chairman of the Board, President and Chief Executive Officer
Executive Vice President & Chief Operating Officer
Vice President, Chief Financial Officer
Vice President, Security, Microcontroller and Technology Division
Vice President, Fab Operations
Vice President, Worldwide Sales and Applications
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 Chief Operating Officer since June 2008, as Executive Vice President since October 2006 and
as a Vice President in various roles since he joined Microchip in 2001. Prior to this time, he served in various executive
capacities with other semiconductor companies. Mr. Moorthy holds an M.B.A. in Marketing from National University, a
B.S. degree in Electrical Engineering from the University of Washington and a B.S. degree in Physics from the University of
Mumbai, India.
9
Mr. Bjornholt has served as Vice President since 2008 and as Chief Financial Officer since January 1, 2009. He has
served in various financial management capacities since he joined Microchip in 1995. Mr. Bjornholt holds a Masters degree
in Taxation from Arizona State University and a B.S. degree in accounting from the University of Arizona.
Mr. Drehobl has served as Vice President of the Security, Microcontroller, and Technology Division since July 2001. He
has been employed by Microchip since August 1989 and has served as a Vice President in various roles since February 1997.
Mr. Drehobl holds a Bachelor of Technology degree from the University of Dayton.
Mr. Lambert has served as Vice President, Fab Operations since November 1993. From 1991 to November 1993, he
served as Director of Manufacturing Engineering, and from 1989 to 1991, he served as Engineering Manager of Fab
Operations. Mr. Lambert holds a B.S. degree in Chemical Engineering from the University of Cincinnati.
Mr. Little has served as Vice President, Worldwide Sales and Applications since July 2000. He has been employed by
Microchip since 1989 and has served as a Vice President in various roles since September 1993. Mr. Little holds a B.S.
degree in Engineering Technology from United Electronics Institute.
Mr. Simoncic has served as Vice President, Analog and Interface Products Division since September 1999. From
October 1995 to September 1999, he served as Vice President in various roles. Joining Microchip in 1990, Mr. Simoncic
held various roles in Design, Device/Yield Engineering and Quality Systems. Mr. Simoncic holds a B.S. degree in Electrical
Engineering Technology from DeVry Institute of Technology.
Item 1A. RISK FACTORS
When evaluating Microchip and its business, you should give careful consideration to the factors listed below, in
addition to the information provided elsewhere in this Form 10-K and in other documents that we file with the Securities and
Exchange Commission.
Our operating results were adversely impacted by global economic conditions and may fluctuate in the future due to a
number of factors that could reduce our net sales and profitability.
Our operating results are affected by a wide variety of factors that could reduce our net sales and profitability, many of
which are beyond our control. Some of the factors that may affect our operating results include:
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;
risk of excess and obsolete inventories;
changes in utilization of our manufacturing capacity and fluctuations in manufacturing yields;
our ability to secure sufficient wafer foundry, assembly and testing capacity;
availability of raw materials and equipment;
competitive developments including pricing pressures;
unauthorized copying of our products resulting in pricing pressure and loss of sales;
the level of orders that are received and can be shipped in a quarter;
the level of sell-through of our products through distribution;
fluctuations in the mix of products;
changes or fluctuations in customer order patterns and seasonality;
constrained availability from other electronic suppliers impacting our customers' ability to ship their
products, which in turn may adversely impact our sales to those customers;
costs and outcomes of any current or future tax audits or any litigation involving intellectual property,
customers or other issues;
changes in tax regulations and policies in the U.S. and other countries in which we do business;
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;
fluctuations in commodity prices;
property damage or other losses, whether or not covered by insurance; and
general economic, industry or political conditions in the U.S. 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
10
effect on the price of our common stock. Adverse global economic conditions and the subsequent economic recovery have
caused our operating results to fluctuate significantly and make comparability between periods less meaningful.
Our operating results will suffer if we ineffectively utilize our manufacturing capacity or fail to maintain manufacturing
yields.
The manufacture and assembly of integrated circuits, particularly non-volatile, erasable CMOS memory and logic
devices such as those that we produce, are complex processes. These processes are sensitive to a wide variety of factors,
including the level of contaminants in the manufacturing environment, impurities in the materials used, the performance of
our wafer fabrication 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. In the quarter ended March 31, 2009, we
reduced wafer starts in both Fab 2 and Fab 4, implemented rotating unpaid time off and had multiple planned shutdowns in
our Thailand facility to help control inventory levels in response to adverse economic conditions. This lower capacity
utilization resulted in certain costs being charged directly to expense and lower gross margins. In the quarter ended
December 31, 2009, we increased our production output in our factories and did not have any shutdowns in our Thailand
operation and reduced the amount of rotating unpaid time off in Fab 2 and Fab 4. In the March 2010 quarter, we returned to
a more optimal level of capacity utilization.
We are dependent on orders that are received and shipped in the same quarter and are therefore limited in our visibility of
future product shipments.
Our net sales in any given quarter depend upon a combination of shipments from backlog and orders received in that
quarter for shipment in that quarter, which we refer to as turns orders. We measure turns orders at the beginning of a quarter
based on the orders needed to meet the shipment targets that we set entering the quarter. Historically, we have relied on our
ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with
relatively short delivery schedules. Shorter lead times generally mean that turns orders as a percentage of our business are
relatively high in any particular quarter and reduce our backlog visibility on future product shipments. Turns orders correlate
to overall semiconductor industry conditions and product lead times. Because turns orders are difficult to predict, varying
levels of turns orders make our net sales more difficult to forecast. If we do not achieve a sufficient level of turns orders in a
particular quarter relative to our revenue targets, our revenue and operating results 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. 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:
the quality, performance, reliability, features, ease of use, pricing and diversity of our products;
our success in designing and manufacturing new products including those implementing new technologies;
the rate at which customers incorporate our products into their own applications;
product introductions by our competitors;
the number, nature and success of our competitors in a given market;
our ability to obtain adequate supplies of raw materials and other supplies at acceptable prices;
our ability to protect our products and processes by effective utilization of intellectual property rights;
our ability to remain price competitive against companies that have copied our proprietary product lines,
especially in countries where intellectual property rights protection is difficult to achieve and maintain;
our ability to address the needs of our customers; and
general market and economic conditions.
Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. The
overall average selling prices of our microcontroller and proprietary analog and interface products have remained relatively
constant, while average selling prices of our 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, primarily due to competitive conditions. We have been able to moderate average selling price
11
declines in many of our proprietary product lines by continuing to introduce new products with more features and higher
prices. However, there can be no assurance that we will be able to do so in the future. We have experienced in the past, and
expect to continue to experience in the future, varying degrees of competitive pricing pressures in our Serial EEPROM and
non-proprietary analog products. We may be unable to maintain average selling prices for our products as a result of
increased pricing pressure in the future, which could adversely impact our operating results.
Our business is dependent on selling through distributors.
Sales through distributors accounted for approximately 61% of our net sales in fiscal 2010 and approximately 64% of our
net sales in each of fiscal 2009 and fiscal 2008. Our largest distributor accounted for approximately 14% of our net sales in
fiscal 2009 and approximately 12% of our net sales in fiscal 2010. 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.
Adverse conditions in the U.S. and global economies and in the U.S. and global credit markets could materially impact
the operations of our distributors. Any deterioration in the financial condition of our distributors or any disruption in the
operations of our distributors could adversely impact the flow of our products to our end customers and adversely impact our
results of operation. In addition, during an industry and/or economic downturn, it is possible there will be an oversupply of
products and a decrease in sell-through of our products by our distributors which could reduce our net sales in a given period
and result in an increase in inventory returns.
Recent credit conditions have adversely impacted our holdings of auction rate securities.
At March 31, 2010, $37.2 million of the fair value of our investment portfolio was invested in auction rate securities
(ARS). Historically, the carrying value of ARS approximated fair value due to the frequent resetting of the interest rates.
With the continuing liquidity issues in the global credit and capital markets, our ARS have experienced multiple failed
auctions. As a result, we will not be able to access such funds until a future auction on these investments is successful.
$23.1 million of the fair value of our total ARS position is invested in student loan backed ARS. We believe these
investments are of high credit quality, as all of the investments carry AAA credit ratings by one or more of the major credit
rating agencies and are largely backed by the federal government (Federal Family Education Loan Program). Also, in
November 2008, we executed an ARS rights agreement (the Rights) with the broker through which we purchased these ARS
that provides (1) us with the right to put these ARS back to the broker at par anytime during the period from June 30, 2010
through July 2, 2012, and (2) the broker with the right to purchase or sell the ARS at par on our behalf anytime through July
2, 2012. We intend to dispose of these ARS through the exercise of the put option on June 30, 2010.
$14.1 million of the fair value of our total ARS position is invested in ARS whose underlying characteristics relate to
servicing statutory requirements in the life insurance industry along with a small position related to a specialty finance
company. These ARS have experienced multiple rating downgrades by the major rating agencies. The fair value of these
ARS has been estimated based on market information and estimates determined by management and could change
significantly based on market conditions. Based on the estimated values, we concluded these investments were other than
temporarily impaired and recognized an impairment charge on these investments of $3.6 million during fiscal 2009 and $4.7
million during fiscal 2010. If the issuers are unable to successfully close future auctions or if their credit ratings deteriorate
further, we may be required to further adjust the carrying value of the investments through an additional impairment charge
to earnings.
The majority of our short and long-term investments are in highly rated government agency bonds, municipal, and
corporate bonds. Other than with respect to our holdings of ARS, we have not experienced any liquidity or impairment
issues with such investments. However, the credit markets have continued to be highly volatile and there can be no assurance
that these conditions will not in the future adversely affect the liquidity or value of our investments in government agency
bonds, municipal bonds, or corporate bonds.
Our success depends on our ability to introduce new products on a timely basis.
Our future operating results will depend on our ability to develop and introduce new products on a timely basis that can
compete effectively on the basis of price and performance and which address customer requirements. The success of our new
product introductions depends on various factors, including, but not limited to:
proper new product selection;
timely completion and introduction of new product designs;
timely filing of intellectual property rights for new product designs;
availability of development and support tools and collateral literature that make complex new products easy
for engineers to understand and use; and
market acceptance of our customers' end products.
12
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 can be intense.
Our success depends upon the efforts and abilities of our senior management, engineering and other personnel. The
competition for qualified engineering and management personnel can be intense. We may be unsuccessful in retaining our
existing key personnel or in attracting and retaining additional key personnel that we require. The loss of the services of one
or more of our key personnel or the inability to add key personnel could harm our business. We have no employment
agreements with any member of our senior management team.
We are dependent on several contractors to perform key manufacturing functions for us.
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
replacement parts. An interruption of any raw materials or equipment sources, or the lack of supplier support for a particular
piece of equipment, could harm our business.
Our operating results may be impacted by both seasonality and the wide fluctuations of supply and demand in the
semiconductor industry.
The semiconductor industry is characterized by seasonality and wide fluctuations of supply and demand. Since a
significant portion of our revenue is from consumer markets and international sales, our business may be subject to
seasonally lower revenues in the third and fourth quarters of our fiscal year. However, fluctuations in our overall business in
recent periods, semiconductor industry conditions and global economic conditions have had a more significant impact on our
results than seasonality, and have made it difficult to assess the impact of seasonal factors on our business. The industry has
also experienced significant economic downturns, characterized by diminished product demand and production over-
capacity. We have sought to reduce our exposure to this industry cyclically by selling proprietary products that cannot be
easily or quickly replaced to a geographically diverse base of customers across a broad range of market segments. However,
we have experienced substantial period-to-period fluctuations in operating results and expect, in the future, to experience
period-to-period fluctuations in operating results due to general industry or economic conditions.
13
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, settle a matter, obtain necessary
licenses on commercially reasonable terms, reengineer our products or processes to avoid infringement, and/or successfully
prosecute or defend our position, we could incur uninsured liability in any of them, be required to take an appropriate charge
to operations, be enjoined from selling a material portion of our products or using certain processes, suffer a reduction or
elimination in the value of our inventories, and our business, financial condition or results of operations could be harmed.
It is also possible that from time to time we may be subject to claims related to the manufacture, performance or use of
our products. These claims may be due to injury during manufacture, 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, but not limited to:
costs related to writing off the value of inventory of nonconforming products;
recalling nonconforming products;
providing support services, product replacements, or modifications to products and the defense of such
claims;
diversion of resources from other projects;
lost revenue or a delay in the recognition of revenue due to cancellation of orders and unpaid receivables;
customer imposed fines or penalties for failure to meet contractual requirements; and
a requirement to pay damages.
Because the systems into which our products are integrated have a higher cost of goods than the products we sell, our
expenses and damages may be significantly higher than the sales and profits we received from the products involved. While
we specifically exclude consequential damages in our standard terms and conditions, our ability to avoid such liabilities may
be limited by applicable law. We do have liability insurance which covers damages arising out of product defects, but we do
not expect that insurance will cover all claims or be of a sufficient amount to fully protect against such claims. Costs or
payments we may make in connection with these customer claims may adversely affect the results of our operations.
Further, we sell to customers in industries such as automotive, aerospace, and medical, where failure of the systems in
which our products are integrated could cause damage to property or persons. We may be subject to claims if our products,
or interactions with our products, cause the system failures. We will face increased exposure to claims if there are substantial
increases in either the volume of our sales into these applications or the frequency of system failures integrating our products.
Failure to adequately protect our intellectual property could result in lost revenue or market opportunities.
Our ability to obtain patents, licenses and other intellectual property rights covering our products and manufacturing
processes is important for our success. To that end, we have acquired certain patents and patent licenses and intend to
continue to seek patents on our technology and manufacturing processes. The process of seeking patent protection can be
long and expensive, and patents may not be issued from currently pending or future applications. In addition, our existing
and new patents, trademarks and copyrights that issue may not be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. We may be subject to or may ourselves initiate interference proceedings in the
U.S. Patent and Trademark Office, Patent Offices of a foreign country or U.S. or foreign courts, which can require significant
financial and management resources. In addition, the laws of certain foreign countries do not protect our intellectual property
rights to the same extent as the laws of the U.S. Infringement of our intellectual property rights by a third party could result
in uncompensated lost market and revenue opportunities for us. Although we continue to vigorously and aggressively defend
and protect our intellectual property on a worldwide basis, there can be no assurance that we will be successful in our
endeavors.
Our operating results may be adversely impacted if economic conditions impact the financial viability of our customers,
distributors, or suppliers.
We regularly review the financial performance of our customers, distributors and suppliers. However, global economic
conditions may adversely impact the financial viability of our customers, distributors or suppliers. The financial failure of a
large customer or distributor, an important supplier, or a group thereof, could have an adverse impact on our operating results
and could result in us not being able to collect our accounts receivable balances, higher reserves for doubtful accounts, write-
offs for accounts receivable, and higher operating costs as a percentage of revenues.
14
We do not typically have long-term contracts with our customers.
We do not typically enter into long-term contracts with our customers and we cannot be certain about future order levels
from our customers. When we do enter into customer contracts, the contract is generally cancelable at the convenience of the
customer. Even though we had over 60,000 customers and our ten largest direct customers made up approximately 9% of our
total revenue for the year ended March 31, 2010, 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 specific 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 facilities, or at the facilities of any of our wafer fabrication or assembly and test 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 2010, approximately 77% of
our net sales were made to foreign customers. During fiscal 2009, approximately 75% of our net sales were made to foreign
customers. We purchase a substantial portion of our raw materials and equipment from foreign suppliers. In addition, we
own product assembly and testing facilities located near Bangkok, Thailand, which has experienced periods of political
instability in the past, and is currently experiencing some instability in Bangkok, though the current situation has not
noticeably affected the area in which our facilities are located. We also use various foreign contractors for a portion of our
assembly and testing and for a portion of our wafer fabrication requirements. Substantially all of our finished goods
inventory is maintained in Thailand.
Our reliance on foreign operations, foreign suppliers, maintenance of substantially all of our finished goods inventory at
foreign locations and significant foreign sales exposes us to foreign political and economic risks, including, but not limited
to:
political, social and economic instability;
public health conditions;
trade restrictions and changes in tariffs;
import and export license requirements and restrictions;
difficulties in staffing and managing international operations;
employment regulations;
disruptions in international transport or delivery;
difficulties in collecting receivables;
economic 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.
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 value of our non-U.S. dollar transactions can have an adverse effect on our results of
operations and financial condition. In particular, in periods when a foreign currency significantly declines in value in relation
15
to the U.S. dollar, such as the recent decline in the Euro relative to the U.S. dollar, customers transacting in that foreign
currency may find it more difficult to fulfill their previously committed contractual obligations or to undertake new
obligations to make payments or purchase products.
Interruptions in our information technology systems could adversely affect our business.
We rely on the efficient and uninterrupted operation of complex information technology systems and networks to operate
our business. Any significant system or network disruption, including but not limited to new system implementations,
computer viruses, security breaches, 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
still occur and 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 potentially significant risks and obligations. In these circumstances, we have determined that it is more
cost effective to self-insure certain risks than to pay the high premium costs. The risks and exposures that we self-insure
include, but are not limited to, certain property, product defects, political risks, and 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 substances used in our products and manufacturing
processes. Our failure to comply with applicable regulations could result in the imposition of fines, suspension of
production, cessation of operations or future liabilities. Such environmental regulations have required us in the past and
could require us in the future to acquire costly equipment or to incur other significant expenses to comply with such
regulations. Any failure by us to control the use of or adequately restrict the discharge of hazardous substances could also
restrict our ability to ship certain products to certain countries, require us to modify our operations logistics, or require us to
incur other significant costs and expenses. Over the past several years, there has been an expansion in environmental laws
focusing on reducing or eliminating hazardous substances in electronic products. The European Union and countries such as
the U.S., China, Korea and Brazil, have enacted or may enact such laws or regulations. These and other future environmental
regulations could require us to reengineer certain of our existing products and may make it more expensive for us to
manufacture and sell our products. In addition, over the last several years, the number and complexity of laws focused on the
energy efficiency of electronic products and accessories, the recycling of electronic products, and the reduction in quantity
and the recycling of packaging materials have expanded significantly. It may be difficult for us to timely comply with these
laws and we may not have sufficient quantities of compliant products to meet customers' needs, thereby adversely impacting
our sales and profitability. We may also have to write off inventory in the event that we hold inventory that is not saleable as
a result of changes to regulations. We expect these risks and trends to continue. In addition, we anticipate increased
customer requirements to meet voluntary criteria related to the reduction or elimination of hazardous substances in our
products and energy efficiency measures.
Climate change regulations and sustained adverse climate change poses both regulatory and physical risks that could
harm our results of operations or affect the way we conduct our business.
New climate change regulations could require us to limit emissions, change our manufacturing processes, obtain
substitute materials that may cost more or be less available, fund offset projects or undertake other costly activities. These
regulations could significantly increase our costs and restrict our manufacturing operations by virtue of requirements for new
equipment. It is possible that new permits will be required for our current or expanded operations. Failure to receive timely
permits could result in the imposition of fines, suspension of production, or cessation of operations. In addition, new
restrictions on carbon dioxide or other greenhouse gas emissions could result in significant costs such as higher energy costs,
and utility companies passing down carbon taxes, emission cap and trade programs and renewable portfolio standards.
Greenhouse gas legislation has been introduced in the U.S. and we expect worldwide regulatory activity in the future. The
cost of complying, or of failing to comply, with these and other climate change and emissions regulations could have an
adverse effect on our operating results.
Further, any sustained adverse change in climate could have a direct adverse economic impact on us such as water
shortages or higher costs for water or to control the temperature inside of our facilities. Also, certain of our operations are
located in tropical regions, such as Thailand. Some environmental experts predict that these regions may become vulnerable
16
to storms, floods and droughts due to climate change. While we maintain business recovery plans that are intended to allow
us to recover from natural disasters or other events that can be disruptive to our business, we cannot be certain that our plans
will protect us from all such disasters or events.
Regulatory authorities in jurisdictions into which we ship our products could levy fines or restrict our ability to export
products.
A significant portion of our sales are made outside of the U.S. through the exporting and re-exporting of products. In
addition to local jurisdictions' export regulations, our U.S.-manufactured products or products based on U.S. technology are
subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the Export
Administration Regulations (EAR), and trade sanctions against embargoed countries and destinations administered by the
U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC). Licenses or proper license exceptions are
required for the shipment of our products to certain countries. A determination by the U.S. or local government that we have
failed to comply with these or other export regulations can result in penalties including denial of export privileges, fines, civil
or 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. Further, a change in these laws and regulations could restrict our ability
to export to previously permitted countries, customers, distributors or other third parties. Any one or more of these sanctions
or a change in law or regulations could have a material adverse effect on our business, financial condition and results of
operations.
The outcome of currently ongoing and future examinations of our income tax returns by the IRS could have an adverse
effect on our results of operations.
We are subject to examination of our income tax returns by the IRS and other tax authorities for fiscal 2006 and later.
We are currently being audited by the IRS for fiscal 2006 through fiscal 2008. We are subject to certain income tax
examinations in foreign jurisdictions for fiscal 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.
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate in the future. The
future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors, many of
which are beyond our control, including, but not limited to:
quarterly variations in our operating results and the operating results of other technology companies;
actual or anticipated announcements of technical innovations or new products by us or our competitors;
changes in analysts' estimates of our financial performance or buy/sell recommendations;
changes in our financial guidance or our failure to meet such guidance;
any acquisitions we pursue or complete;
general conditions in the semiconductor industry; and
global economic and financial conditions.
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have
affected the market prices for many companies and that often have been unrelated to the operating performance of such
companies. These broad market fluctuations and other factors have harmed and may harm the market price of our common
stock.
We may not fully realize the anticipated benefits of our completed or future acquisitions.
We have acquired and expect in the future to acquire additional businesses that we believe will complement or augment
our existing businesses. The integration process for our acquisitions, including our recent acquisition of SST, may be
complex, costly and time consuming and include unanticipated issues, expenses and liabilities. We may not be able to
successfully or profitably integrate, operate, maintain and manage any newly acquired operations or employees. We may not
be able to maintain uniform standards, procedures and policies and we may be unable to realize the expected synergies and
cost savings from the integration. There may be increased risk due to integrating financial reporting and internal control
systems. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company, or
in growing the business at the rate we anticipate. Following an acquisition, we may not achieve the revenue or net income
levels that justify the acquisition. We may suffer loss of key employees, customers and strategic partners of acquired
companies. We may be subject to claims by terminated employees, shareholders of acquired companies and other third
parties related to the transaction. Acquisitions may also result in one-time charges (such as acquisition-related expenses,
17
write-offs, restructuring charges, or future impairment of goodwill), contingent liabilities, adverse tax consequences,
additional stock-based compensation expense and other charges that adversely affect our operating results. Additionally, we
may fund acquisitions of new businesses or strategic alliances by utilizing cash, raising debt, issuing shares of common stock,
or other mechanisms.
While the risks above are relevant to all of our acquisitions, our recent acquisition of SST is a larger and more complex
transaction than our other recent transactions and may expose us to greater risks and liabilities than we have encountered in
the past.
Further, when we decide to sell assets or a business, such as certain assets of SST, we may encounter difficulty in finding
or completing divestiture opportunities or alternative exit strategies on acceptable terms or in a timely manner. These
circumstances could delay the accomplishment of our strategic objectives or cause us to incur additional expenses with
respect to a business that we want to dispose of, or we may dispose of a business at a price or on terms that are less favorable
than we had anticipated.
In addition to acquisitions, we have in the past and expect in the future to enter into joint development agreements or
other business or strategic relationships with other companies. These transactions are subject to a number of risks similar to
those we face with our acquisitions including our ability to realize the expected benefits of any such transaction, to
successfully market and sell any products resulting from such transactions or to successfully integrate any technology
developed through such transactions.
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 principal value 2.125% junior subordinated convertible debentures in December
2007, we have a substantially greater amount of long-term debt than we have maintained in the past. Our maintenance of
substantial levels of debt could adversely affect our ability to take advantage of corporate opportunities and could adversely
affect our financial condition and results of operations. We may need or desire to refinance all or a portion of our debentures or
any other future indebtedness 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.
We may in the future incur impairments to goodwill or long-lived assets.
We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth
quarter or whenever events or changes in circumstances indicate that the carrying amount of those assets may not be
recoverable. Factors that may be considered in assessing whether goodwill or intangible assets may not be recoverable
include a decline in our stock price or market capitalization, reduced estimates of future cash flows and slower growth rates
in our industry. Our valuation methodology for assessing impairment requires management to make judgments and
assumptions based on historical experience and to rely heavily on projections of future operating performance. Because we
operate in highly competitive environments, projections of future operating results and cash flows may vary significantly
from results. No goodwill or long-lived assets impairment charges were recorded in fiscal 2010.
Conversion of our debentures will dilute the ownership interest of existing stockholders, including holders who had
previously converted their debentures.
The conversion of some or all of our outstanding debentures will dilute the ownership interest of existing stockholders to
the extent we deliver common stock upon conversion of the debentures. Upon conversion, we may satisfy our conversion
obligation by delivering cash, shares of common stock or any combination, at our option. If upon conversion we elect to deliver
cash for the lesser of the conversion value and principal amount of the debentures, we would pay the holder the cash value of the
applicable number of shares of our common stock. Upon conversion, we intend to satisfy the lesser of the principal amount or the
conversion value of the debentures in cash. If the conversion value of a debenture exceeds the principal amount of the debenture,
we may also elect to deliver cash in lieu of common stock for the conversion value in excess of the one thousand dollars principal
amount (i.e. the conversion spread). There would be no adjustment to the numerator in the net income per common share
computation for the cash settled portion of the debentures as that portion of the debt instrument will always be settled in cash. The
conversion spread will be included in the denominator for the computation of diluted net income per common share. Any sales in
the public market of any common stock issuable upon such conversion could adversely affect prevailing market prices of our
common stock. In addition, the existence of the debentures may encourage short selling by market participants because the
conversion of the debentures could be used to satisfy short positions, or anticipated conversion of the debentures into shares of our
common stock could depress the price of our common stock.
18
Our reported financial results may be adversely affected by new accounting pronouncements or changes in existing
accounting standards and practices.
We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These
accounting principles are subject to interpretation or changes by the FASB and the SEC. New accounting pronouncements
and varying interpretations of accounting standards and practices have occurred in the past and may occur in the future. New
accounting pronouncements or a change in the interpretation of existing accounting standards or practices may have a
significant effect on our reported financial results and may even affect our reporting of transactions completed before the
change is announced or effective.
Recently proposed U.S. tax legislation regarding our foreign earnings could materially and adversely impact our business
and financial results.
Currently, a majority of our revenue is generated from customers located outside the U.S., and a substantial portion of
our assets, including employees, are located outside the U.S. Present U.S. income taxes and foreign withholding taxes have
not been provided on undistributed earnings for certain of our non-U.S. subsidiaries, because such earnings are intended to be
indefinitely reinvested in the operations of those subsidiaries. In fiscal 2009, President Obama's administration announced
initiatives that would substantially reduce our ability to defer U.S. taxes including repealing the deferral of U.S. taxation of
foreign earnings, eliminating utilization of or substantially reducing our ability to claim foreign tax credits, and eliminating
various tax deductions until foreign earnings are repatriated to the U.S. If any of these proposals become law, they could
have a material negative impact on our financial position and results of operations.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
At March 31, 2010, 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
489,000
Bangalore, India
67,174
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
Research and Development; Marketing Support and
Administrative Offices
In addition to the facilities we own, we lease several research and development facilities and sales offices in North
America, Europe and Asia. Our aggregate monthly rental payment for our leased facilities is approximately $0.5 million.
We currently believe that our existing facilities are suitable and will be adequate to meet our requirements for at least the
next 12 months.
See page 33 for a discussion of the capacity utilization of our manufacturing facilities.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are involved in a limited number of legal actions, both as plaintiff and
defendant, and could incur uninsured liability in any one or more of them. We also periodically receive notification from
various third parties alleging infringement of patents, intellectual property rights or other matters. With respect to these
pending legal actions to which we are a party, although the outcome of these actions 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
19
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.
On March 16, 2010, plaintiffs – stockholders of SST purporting to act on behalf of all public stockholders of SST – filed
a Consolidated Amended Class Action Complaint (the "Amended Complaint") in Santa Clara California Superior Court (In
re Silicon Storage Technology, Inc. Shareholder Litigation, No. 1-09-CV-157437) which generally alleges that the directors
of SST breached fiduciary duties owed to SST stockholders when approving the merger transaction with Microchip. The
Amended Complaint alleges that by approving the merger with Microchip, the directors prevented the SST stockholders from
receiving full value for their shares. The Amended Complaint also names Microchip as a defendant, claiming that Microchip
aided and abetted in the purported breaches of fiduciary duties by the SST director defendants. The Amended Complaint
seeks alternative relief either to enjoin the transaction with Microchip or to rescind the deal or obtain compensatory damages,
in the event the merger was consummated while the litigation was pending. Given that the merger closed on April 8, 2010,
plaintiffs' request to enjoin the transaction has been rendered moot. Microchip believes the Amended Complaint lacks merit
and intends to defend against the claims vigorously.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ Global Market under the symbol "MCHP." Our common stock has been
quoted on such market since our initial public offering on March 19, 1993. The following table sets forth the quarterly high
and low closing prices of our common stock as reported by NASDAQ for our last two fiscal years.
Fiscal 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$23.86
$27.97
$29.44
$29.18
Low
$19.78
$21.84
$23.96
$25.81
Fiscal 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$38.13
$33.97
$28.82
$21.78
Low
$30.54
$28.04
$17.12
$16.59
Stock Price Performance Graph
The following graph and table show a comparison of the five-year cumulative total stockholder return, calculated on a
dividend reinvestment basis, for Microchip Technology Incorporated, the Standard & Poor's (S&P) 500 Stock Index, and the
Philadelphia Semiconductor Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Microchip Technology Incorporated, The NASDAQ Composite Index,
The S&P 500 Index And The Philadelphia Semiconductor Index
$160
$140
$120
$100
$80
$60
$40
$20
$0
Microchip Technology Incorporated
3/05
3/06
3/07
S&P 500
3/08
PHLX Semiconductor
3/09
3/10
*$100 invested on 3/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending March 31.
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Cumulative Total Return
March 2005 March 2006 March 2007 March 2008 March 2009 March 2010
Microchip Technology Incorporated
S&P 500 Stock Index
Philadelphia Semiconductor Index
100.00
100.00
100.00
142.09
111.73
112.31
143.06
124.95
107.99
136.41
118.60
101.41
93.18
73.43
71.20
130.69
109.97
108.74
Data acquired by Research Data Group, Inc. (www.researchdatagroup.com)
On May 26, 2010, there were approximately 373 holders of record of our common stock. This figure does not reflect
beneficial ownership of shares held in nominee names.
21
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 $249.6 million, $246.7 million and $252.0 million in fiscal 2010, fiscal 2009 and fiscal
2008, 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 2010 and fiscal 2009 (amounts in thousands, except per share amounts):
Dividends per
Common
Share
0.339
0.339
0.340
0.341
$
Aggregate
Amount of
Dividend
Payment
$ 61,991
62,083
62,520
62,963
Fiscal 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends per
Common
Share
$
0.330
0.338
0.339
0.339
Aggregate
Amount of
Dividend
Payment
$ 60,977
62,166
61,690
61,825
Fiscal 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
On May 5, 2010, we declared a quarterly cash dividend of $0.342 per share, which will be paid on June 2, 2010 to
stockholders of record on May 20, 2010 and the total amount of such dividend is expected to be approximately $63.5 million.
Our Board of Directors is free to change our dividend practices at any time and to increase or decrease the dividend paid, or
not to pay a dividend, on our common stock on the basis of our results of operations, financial condition, cash requirements
and future prospects, and other factors deemed relevant by our Board of Directors. Our current intent is to provide for
ongoing quarterly cash dividends depending upon market conditions and our results of operations.
Please refer to "Item 12 - Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters," at page 43 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, 2010.
Issuer Purchases of Equity Securities
The following table sets forth our purchases of our common stock in the fourth quarter of fiscal 2010:
Issuer Purchases of Equity Securities
Period
January 1 – January 31, 2010
February 1 – February 28, 2010
March 1 – March 31, 2010
Total
(a) Total Number
of Shares
Purchased
---
---
---
---
(b) Average
Price Paid per
Share
$
$
$
$
---
---
---
---
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
---
---
---
---
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under
the Programs (1)
2,460,002
2,460,002
2,460,002
(1) 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, 2010, 2,460,002 shares of this
authorization remained available to be purchased under this program. There is no expiration date associated with
this program.
Item 6.
SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data for the five-year period ended March 31, 2010 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, 2010, and the balance sheet data as of March 31,
2010 and 2009, 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, 2007 and 2006 and balance sheet data as of March 31, 2008,
2007 and 2006 have been derived from our audited consolidated financial statements not included herein (for information
below all amounts are in thousands, except per share data).
As further discussed in Note 1 to our consolidated financial statements, our consolidated financial statements for each
year presented here have been adjusted for the retrospective application of the Cash Conversion subsections of Accounting
Standards Codification Subtopic 470-20, "Debt with Conversion and Other Options – Cash Conversion."
22
Statement of Income Data:
Net sales
Cost of sales
Research and development
Selling, general and administrative
Special charges (1)
Operating income
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Income tax provision (benefit)
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
2010
$ 947,729
413,487
120,823
167,222
1,238
244,959
15,325
(31,150)
8,679
237,813
20,808
$ 217,005
1.18
$
1.16
$
$
1.359
183,642
187,339
Balance Sheet Data:
2009
$ 903,297
386,793
115,524
161,218
6,434
233,328
32,545
(29,440)
(4,354)
232,079
(13,508)
$ 245,587
1.34
$
1.31
$
$
1.346
183,158
186,788
Year ended March 31,
2008
$1,035,737
410,799
120,864
175,646
26,763
301,665
54,851
(9,495)
2,435
349,456
52,663
$ 296,793
1.43
$
1.40
$
$
1.205
207,220
212,048
2007
$1,039,671
414,915
113,698
163,247
---
347,811
58,383
(5,416)
312
401,090
44,061
$ 357,029
1.66
$
1.62
$
$
0.965
215,498
220,848
2006
$ 927,893
377,016
94,926
129,587
---
326,364
32,753
(1,967)
2,035
359,185
116,816
$ 242,369
1.15
$
1.13
$
$
0.570
210,104
215,024
213,785
Working capital
Total assets
Long-term obligations, less current portion
Stockholders' equity
2010
$1,407,579
2,516,313
340,672
1,533,380
2009
$1,587,144
2,405,711
334,184
1,490,311
March 31,
2008
2006
2007
$1,526,649 $ 828,817 $ 509,860
2,350,596
2,269,541
2,496,031
---
---
329,409
1,726,189
2,004,368
1,539,000
(1) There were no special charges during the fiscal years ended March 31, 2007 and 2006. Discussions of the special
charges for the fiscal years ended March 31, 2010, 2009 and 2008 are contained in Note 3 to our consolidated
financial statements. The following table presents a summary of special charges for the five-year period ended
March 31, 2010:
2010
Year ended March 31,
2008
2009
2007
2006
Patent licenses
In-process research and development expenses
Abandoned acquisition related expenses
Loss on sale of Fab 3
Totals
$ 1,238 $ 4,000 $
---
---
---
860
1,574
---
--- $
---
---
26,763
$ 1,238 $ 6,434 $ 26,763 $
--- $
---
---
---
--- $
---
---
---
---
---
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:
23
The effects that adverse global economic conditions and fluctuations in the global credit and equity
markets may have on our financial condition and results of operations;
The effects and amount of competitive pricing pressure on our product lines;
Our ability to moderate future average selling price declines;
The effect of product mix, capacity utilization, yields, and fixed cost absorption on gross margin;
The amount of changes in demand for our products and those of our customers;
The level of orders that will be received and shipped within a quarter;
The effect that distributor and customer inventory holding patterns will have on us;
Our belief that customers recognize our products and brand name and use distributors as an
effective supply channel;
Our belief that deferred cost of sales will have low risk of material impairment;
Our belief that our direct sales personnel combined with our distributors provide an effective
means of reaching our customer base;
Our ability to increase the proprietary portion of our analog and interface product lines and the
effect of such an increase;
The impact of any supply disruption we may experience;
Our ability to effectively utilize our facilities at appropriate capacity levels and anticipated costs;
That we adjust capacity utilization to respond to actual and anticipated business and industry-
related conditions;
That our existing facilities 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 expectation that our wafer fabs will operate at high levels with no under-absorption of fixed
costs;
Our ability to maintain manufacturing yields;
Continuing our investments in new and enhanced products;
Our ability to attract and retain qualified personnel;
The cost effectiveness of using our own assembly and test operations;
Our anticipated level of capital expenditures;
Continuation and amount of quarterly cash dividends;
The sufficiency of our existing sources of liquidity;
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, assets, and other
liabilities;
The adequacy of our patent strategy;
Our ability to obtain patents and intellectual property licenses and minimize the effects of
litigation;
The level of risk we are exposed to for product liability claims;
The amount of labor unrest, public health issues, 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;
24
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 certain auction rate securities (ARS) until the
market recovers, and the immaterial impact this will have on our liquidity;
Our belief that any future changes in the fair value of the ARS associated with the ARS rights
agreement will be largely offset by changes in the fair value of the related rights without any
significant net impact to our income statement;
The accuracy of our estimates used in valuing our available-for-sale securities.
Our belief that unrealized losses in our investment portfolio do not represent other-than-temporary
impairment;
The accuracy of our estimation of the cost effectivity of our insurance coverage;
Our belief that our activities are conducted in compliance with various regulations not limited to
environmental and export compliance;
Our ability and intent to settle the principal amount of the junior subordinated convertible
debentures in cash; and
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.
As further discussed in Note 1 to our consolidated financial statements, our consolidated financial statements for each
year presented here have been adjusted for the retrospective application of the Cash Conversion subsections of Accounting
Standards Codification Subtopic 470-20, "Debt with Conversion and Other Options – Cash Conversion."
Introduction
The following discussion should be read in conjunction with the consolidated financial statements and the related notes
that appear elsewhere in this document, as well as with other sections of this Annual Report on Form 10-K, including "Item 1
– Business;" "Item 6 – Selected Financial Data;" and "Item 8 – Financial Statements and Supplementary Data."
We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a
summary of 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 2010 compared to fiscal 2009, and
for fiscal 2009 compared to fiscal 2008. 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 control, computing and communications. Our
business is subject to fluctuations based on economic conditions within these markets. Beginning with the third quarter of
fiscal 2009, the downturn in the U.S. and global economies adversely impacted our key markets resulting in adverse
fluctuations in our business. However, in fiscal 2010 we saw an upturn in our key markets, resulting in improvements to our
business across all product lines.
Our manufacturing operations include wafer fabrication and assembly and test. The ownership of our manufacturing
resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control
resulting in us being one of the lowest cost producers in the embedded control industry. By owning our wafer fabrication
facilities and our assembly and test operations, and by employing statistical process control techniques, we have been able to
25
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 our products.
We market our products worldwide primarily through a network of direct sales personnel and distributors. Our
distributors focus primarily on servicing the product and technical support requirements of a broad base of diverse customers.
We believe that our direct sales personnel combined with our distributors provide an effective means of reaching this broad
and diverse customer base. Our direct sales force focuses primarily on major strategic accounts in three geographical
markets: the Americas, Europe and Asia. We currently maintain sales and support centers in major metropolitan areas in
North America, Europe and Asia. We believe that a strong technical service presence is essential to the continued
development of the embedded control market. Many of our field sales engineers (FSEs), field application engineers (FAEs),
and sales management have technical degrees and have been previously employed in an engineering environment. We
believe that the technical knowledge of our sales force is a key competitive advantage in the sale of our products. The
primary mission of our FAE team is to provide technical assistance to strategic accounts and to conduct periodic training
sessions for FSEs and distributor sales teams. FAEs also frequently conduct technical seminars for our customers in major
cities around the world, and work closely with our distributors to provide technical assistance and end-user support.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. We review the
accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue
recognition, 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. Our results may differ from these estimates due to actual outcomes being different from those on which we based
our assumptions. We review these estimates and judgments on an ongoing basis. We believe the following critical
accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial
statements. We also have other policies that we consider key accounting policies, such as our policy regarding revenue
recognition to OEMs; however, we do not believe these policies require us to make estimates or judgments that are as
difficult or subjective as our policies described below.
Revenue Recognition – Distributors
Our distributors worldwide generally have broad price protection and product return rights, so we defer revenue
recognition until the distributor sells the product to their customer. Revenue is recognized when the distributor sells the
product to an end-user, at which time the sales price becomes fixed or determinable. Revenue is not recognized upon
shipment to our distributors since, due to discounts from list price as well as price protection rights, the sales price is not
substantially fixed or determinable at that time. At the time of shipment to these distributors, we record a trade receivable for
26
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, 2010, we had approximately $148.4
million of deferred revenue and $49.5 million in deferred cost of sales recognized as $98.9 million of deferred income on
shipments to distributors. At March 31, 2009, we had approximately $118.2 million of deferred revenue and $34.3 million in
deferred cost of sales recognized as $83.9 million of deferred income on shipments to distributors. The deferred income on
shipments to distributors that will ultimately be recognized in our income statement will be lower than the amount reflected
on the balance sheet due to additional price credits to be granted to the distributors when the product is sold to their
customers. These additional price credits historically have resulted in the deferred income approximating the overall gross
margins that we recognize in the distribution channel of our business.
Distributor advances, reflected as a reduction of deferred income on shipments to distributors on our consolidated
balance sheets, totaled $57.5 million at March 31, 2010 and $37.6 million at March 31, 2009. On sales to distributors, our
payment terms generally require the distributor to settle amounts owed to us for an amount in excess of their ultimate cost.
The sales price to our distributors may be higher than the amount that the distributors will ultimately owe us because
distributors often negotiate price reductions after purchasing the product from us and such reductions are often significant. It
is our practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle receivable
balances, on a current basis, generally within 30 days, for amounts originally invoiced. This practice has an adverse impact
on the working capital of our distributors. As such, we have entered into agreements with certain distributors whereby we
advance cash to the distributors to reduce the distributor's working capital requirements. These advances are reconciled at
least on a quarterly basis and are estimated based on the amount of ending inventory as reported by the distributor multiplied
by a negotiated percentage. Such advances have no impact on our revenue recognition or our consolidated statements of
income. We process discounts taken by distributors against our deferred income on shipments to distributors' balance and
true-up the advanced amounts generally after the end of each completed fiscal quarter. The terms of these advances are set
forth in binding legal agreements and are unsecured, bear no interest on unsettled balances and are due upon demand. The
agreements governing these advances can be cancelled by us at any time.
We reduce product pricing through price protection based on market conditions, competitive considerations and other
factors. Price protection is granted to distributors on the inventory they have on hand at the date the price protection is
offered. When we reduce the price of our products, it allows the distributor to claim a credit against its outstanding accounts
receivable balances based on the new price of the inventory it has on hand as of the date of the price reduction. There is no
immediate revenue impact from the price protection, as it is reflected as a reduction of the deferred income on shipments to
distributors' balance.
27
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 recorded at their approximate carrying value.
Share-based Compensation
We measure at fair value and recognize compensation expense for all share-based payment awards, including grants of
employee stock options, restricted stock units (RSUs) and employee stock purchase rights, to be recognized in our financial
statements based on their respective grant date fair values. Total share-based compensation in fiscal 2010 was $36.8 million,
of which $29.7 million was reflected in operating expenses. Total share-based compensation included in cost of sales in
fiscal 2010 was $7.1 million. Total share-based compensation included in our inventory balance was $3.2 million at March
31, 2010.
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. 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. We
estimate the number of share-based awards that will be forfeited due to employee turnover. Quarterly changes in the
estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the rate
for all expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate is changed. If the actual
forfeiture rate is higher or lower than the estimated forfeiture rate, then an adjustment is made to increase or decrease the
estimated forfeiture rate, which will result in a decrease or increase to the expense recognized in our financial statements. If
forfeiture adjustments are made, they would affect our gross margin, research and development expenses, and selling,
general, and administrative expenses. The effect of forfeiture adjustments in fiscal 2010 was immaterial.
We evaluate the assumptions used to value our awards on a quarterly basis. If factors change and we employ different
assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there are
any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel
any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-
based compensation will increase to the extent that we grant additional equity awards to employees or we assume unvested
equity awards in connection with acquisitions.
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out method. We write down our inventory
for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions
are 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. During subsequent periods, if sales occur of previously written-
down inventory, we may realize a higher gross margin on sales of this inventory during the period the inventory is sold. In
estimating our inventory obsolescence, we primarily evaluate estimates of demand over a 12-month period and record
impairment charges for inventory on hand in excess of the estimated 12-month demand.
In periods where our production levels are substantially below our normal operating capacity, such as in the second half
of fiscal 2009 and the first half of fiscal 2010, the reduced production levels of our manufacturing facilities are charged
directly to cost of sales. Approximately $18.6 million was charged to cost of sales in fiscal 2009, and approximately
$22.3 million was charged to cost of sales in fiscal 2010, as a result of decreased production in our wafer fabs.
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.
28
Our trading securities consist of auction rate securities (ARS) that we intend to dispose of through the exercise of a put
option. (See Note 4 to our consolidated financial statements for further discussion of the ARS put option.) Our investments
in trading securities are carried at fair value with unrealized gains and losses reported in other income (expense).
Our available-for-sale investments consist of government agency bonds, municipal bonds, ARS, strategic investments in
shares of publicly traded common stock and corporate bonds. Our investments are carried at fair value with unrealized gains
and losses reported in stockholders' equity to the extent any unrelated losses are determined to be temporary. 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 include within long-term investments those income yielding available-for-
sale securities with maturities of over one year that have unrealized losses attributable to them or those that cannot be readily
liquidated. We have the ability to hold our long-term investments with temporary impairments until such time as these assets
are no longer impaired. Such recovery of unrealized losses is not expected to occur within the next year.
Due to the lack of availability of observable market quotes on certain of 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, the ongoing
strength and quality of the credit markets, and market liquidity.
The credit markets experienced significant deterioration and uncertainty beginning in the second half of fiscal 2008. If
these conditions continue, or we experience 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 flows and results of operation.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in
each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with
assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must then
assess the likelihood that our deferred tax assets will be recovered from future taxable income within the relevant jurisdiction
and to the extent we believe that recovery is not likely, we must establish a valuation allowance. We have 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, 2010, our gross deferred tax asset was $78.9 million.
Various taxing authorities in the U.S. and other countries in which we do business scrutinize the tax structures employed
by businesses. Companies of our size and complexity are regularly audited by the taxing authorities in the jurisdictions in
which they conduct significant operations. We are currently under audit by the U.S. Internal Revenue Service (IRS) for our
fiscal years ended 2006, 2007 and 2008. Fiscal years 2009 and 2010 are open for examination by tax authorities. We
recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether,
and the extent to which, additional tax payments are probable. We believe that we maintain adequate tax reserves to offset
any potential tax liabilities that may arise upon these and other pending audits in the U.S. and other countries in which we do
business. If such amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax
benefits being recorded in the period the reserves are no longer deemed necessary. If such amounts ultimately prove to be
less than an ultimate assessment, a future charge to expense would be recorded in the period in which the assessment is
determined.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance
and repairs are expensed when incurred. At March 31, 2010, the carrying value of our property and equipment totaled
$493.0 million, which represented 19.6% 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 5 to 7 years on manufacturing equipment, from 10 to 15 years on leasehold improvements and
approximately 30 years on buildings.
29
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, 2010, 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 separately account for the liability and equity components of our junior subordinated convertible debentures in a
manner that reflects our nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. This results in
a bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount
on the debt to be recognized as part of interest expense in our consolidated statements of operations. Additionally, certain
embedded features of the debentures qualify as derivatives and are bundled as a compound embedded derivative that is
measured at fair value. Lastly, we include the dilutive effect of the shares of our common stock issuable upon conversion of
the outstanding junior subordinated convertible debentures in our diluted income per share calculation regardless of whether
the market price trigger or other contingent conversion feature has been met. We apply the treasury stock method as we have
the intent and 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 $30.34 at March 31, 2010 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 reasonably estimate the amount and range of loss. Recorded reserves were immaterial at March 31, 2010.
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 operations and financial
position.
Results of Operations
The following table sets forth certain operational data as a percentage of net sales for the years indicated:
Net sales
Cost of sales
Gross profit
Research and development
Selling, general and administrative
Special charges
Operating income
2010
100.0%
43.6
56.4
12.8
17.7
0.1
25.8%
Year Ended March 31,
2009
100.0%
42.8
57.2
12.8
17.9
0.7
25.8%
2008
100.0%
39.7
60.3
11.7
16.9
2.6
29.1%
30
Net Sales
We operate in one industry segment and engage primarily in the design, development, manufacture and marketing of
semiconductor products. We sell our products to distributors and original equipment manufacturers, referred to as OEMs, in
a broad range of market segments, perform ongoing credit evaluations of our customers and generally require no collateral.
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 $947.7 million in fiscal 2010 increased by $44.4 million, or 4.9%, over fiscal 2009, and our net sales of
$903.3 million in fiscal 2009 decreased by $132.4 million, or 12.8%, over fiscal 2008. The increase in net sales in fiscal
2010 over fiscal 2009 was due primarily to improving semiconductor industry conditions and market share gains in our
strategic product lines. The decrease in net sales in fiscal 2009 over fiscal 2008 resulted primarily from adverse changes in
global economic and end market conditions across all of our product lines. Average selling prices for our products were
down approximately 7% in fiscal 2010 over fiscal 2009 and were down approximately 4% in fiscal 2009 over fiscal 2008.
The number of units of our products sold was up approximately 12% in fiscal 2010 over fiscal 2009 and down approximately
9% in fiscal 2009 over fiscal 2008. The average selling prices and the unit volumes of our sales are impacted by the mix of
our products sold and overall semiconductor market conditions. Key factors impacting the amount of net sales during the last
three fiscal years include:
global economic conditions in the markets we serve;
semiconductor industry conditions;
inventory holding patterns of our customers;
increasing semiconductor content in our customers' products;
customers' increasing needs for the flexibility offered by our programmable solutions;
our new product offerings that have increased our served available market; and
continued market share gains.
Sales by product line for the fiscal years ended March 31, 2010, 2009 and 2008 were as follows (dollars in thousands):
Microcontrollers
Memory products
Analog and interface products
2010
$ 767,723
80,158
99,848
81.0%
8.5
10.5
Year Ended March 31,
2009
$ 731,648
89,336
82,313
81.0%
9.9
9.1
2008
$ 832,921
120,280
82,536
80.4%
11.6
8.0
Total Sales
$ 947,729
100.0%
$ 903,297
100.0%
$ 1,035,737
100.0%
Microcontrollers
Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and associated
application development systems accounted for approximately 81% of our total net sales in each of fiscal 2010 and fiscal
2009, and approximately 80.4% of our total net sales in fiscal 2008.
Net sales of our microcontroller products increased approximately 4.9% in fiscal 2010 compared to fiscal 2009, and
decreased approximately 12.2% in fiscal 2009 compared to fiscal 2008. The increase in net sales in fiscal 2010 compared to
fiscal 2009 resulted primarily from improving semiconductor industry conditions, market share gains and the other factors
described above. The decrease in net sales in fiscal 2009 compared to fiscal 2008 was primarily due to adverse global
economic conditions in the markets we serve and the other factors described above. The end markets we serve include
consumer, automotive, industrial control, communications and computing markets.
Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. The
overall average selling prices of our microcontroller products have remained relatively constant over time due to the
proprietary nature of these products. We have experienced, and expect to continue to experience, moderate pricing pressure
in certain microcontroller product lines, primarily due to competitive conditions. We have 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 8.5% of our total net sales in fiscal 2010, approximately
9.9% of our total net sales in fiscal 2009 and approximately 11.6% of our total net sales in fiscal 2008.
31
Net sales of our memory products decreased approximately 10.3% in fiscal 2010 compared to fiscal 2009, and decreased
approximately 25.7% in fiscal 2009 compared to fiscal 2008. These sales decreases were driven primarily by global
economic conditions and 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 10.5% of our total net sales in fiscal 2010,
approximately 9.1% of our total net sales in fiscal 2009 and approximately 8.0% of our total net sales in fiscal 2008.
Net sales of our analog and interface products increased approximately 21.3% in fiscal 2010 compared to fiscal 2009 and
were essentially flat in fiscal 2009 compared to fiscal 2008. The increase in net sales in fiscal 2010 compared to fiscal 2009
was driven primarily by improving semiconductor industry conditions and market share gains achieved within the analog and
interface market. Net sales of our analog and interface products in fiscal 2009 compared to fiscal 2008 were driven primarily
by deteriorating global 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 61% of our net sales in fiscal 2010, and 64% of our net sales in each of fiscal 2009 and fiscal
2008.
Our largest distributor accounted for approximately 12% of our net sales in fiscal 2010, approximately 14% of our net
sales in fiscal 2009 and approximately 12% of our net sales in fiscal 2008. Our two largest distributors together accounted
for approximately 17% of our net sales in fiscal 2010, and approximately 19% of our net sales in each of fiscal 2009 and
fiscal 2008.
Generally, we do not have long-term agreements with our distributors and we, or our distributors, may terminate our
relationship with each other with little or no advanced notice. The loss of, or the disruption in the operations of, one or more
of our distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.
At March 31, 2010, our distributors maintained 41 days of inventory of our products compared to 38 days at March 31,
2009 and 33 days at March 31, 2008. Over the past three fiscal years, the days of inventory maintained by our distributors
have fluctuated between approximately 31 days and 42 days. Thus, inventory levels at our distributors are at the higher end
of the range we have experienced over the last three fiscal 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, 2010, 2009 and 2008 were as follows (dollars in thousands):
Americas
Europe
Asia
2010
$ 231,398
237,354
478,977
Year Ended March 31,
2009
24.4% $ 228,922
257,407
25.1
416,968
50.5
25.3%
28.5
46.2
2008
$ 273,363
308,171
454,203
26.4%
29.8
43.8
Total Sales
$ 947,729
100.0% $ 903,297
100.0%
$ 1,035,737
100.0%
32
Our sales to foreign customers have been predominately in Asia and Europe, which we attribute to the manufacturing
strength in those areas for automotive, communications, computing, consumer and industrial control products. Americas
sales include sales to customers in the U.S., Canada, Central America and South America.
Sales to foreign customers accounted for approximately 77% of our net sales in fiscal 2010 and approximately 75% of
our net sales in each of fiscal 2009 and fiscal 2008. Substantially all of our foreign sales are U.S. dollar denominated. Sales
to customers in Asia have generally increased over time due to many of our customers transitioning their manufacturing
operations to Asia and growth in demand from the emerging Asian market. Our sales force in the Americas and Europe
supports a significant portion of the design activity for products which are ultimately shipped to Asia.
Sales to customers in China, including Hong Kong, accounted for approximately 25% of our net sales in fiscal 2010,
approximately 23% of our net sales in fiscal 2009 and approximately 20% of our net sales in fiscal 2008. Sales to customers
in Taiwan accounted for approximately 10% of our net sales in each of fiscal 2010 and fiscal 2008. 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 $534.2 million in fiscal 2010, $516.5 million in fiscal 2009 and $624.9 million in fiscal 2008.
Gross profit as a percent of sales was 56.4% in fiscal 2010, 57.2% in fiscal 2009 and 60.3% in fiscal 2008.
The most significant factors affecting our gross profit percentage in the periods covered by this report were:
production levels being below the range of our normal capacity, such as in the second half of fiscal 2009
and the first half of fiscal 2010, resulting in under absorption of fixed costs; and
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:
inventory write-downs partially offset by sales of inventory that was previously written down;
lower depreciation as a percentage of cost of sales; and
fluctuations in the product mix of microcontrollers, proprietary and non-proprietary analog products and
Serial EEPROM products resulting in lower overall average selling prices for our products.
We adjust our capacity utilization as required to respond to actual and anticipated business and industry-related
conditions. We operated at or above normal capacity levels, which we typically consider to be 90% to 95% of the actual
capacity of the installed equipment, during fiscal 2008, the first half of fiscal 2009 and the fourth quarter of fiscal 2010.
However, during the third and fourth quarters of fiscal 2009, we reduced wafer starts at both Fab 2 and Fab 4 and
implemented rotating unpaid time off at both fabrication facilities. The reduction in wafer starts and rotating unpaid time off
were implemented to help control inventory levels due to adverse economic conditions in the markets we serve. Reduced
levels of production continued into the third quarter of fiscal 2010, however, we increased the production output from our
wafer fabs in the second and third quarters of fiscal 2010 to support increasing demand for our products and during the latter
part of the third quarter of fiscal 2010 and during the fourth quarter of fiscal 2010, we operated our wafer fabs at or above
normal capacity levels.
As a result of decreased production in our wafer fabs, approximately $22.3 million was charged to cost of sales in
fiscal 2010 and approximately $18.6 million was charged to cost of sales in fiscal 2009. There were no such charges in fiscal
2008. In the future, if production levels are below normal capacity, we will charge cost of sales for the unabsorbed capacity.
The process technologies utilized in our wafer fabs impact our gross margins. Fab 2 currently utilizes various
manufacturing process technologies, but predominantly utilizes our 0.5 to 1.0 micron processes. Fab 4 predominantly utilizes
our 0.22 to 0.5 micron processes. We continue to transition products to more advanced process technologies to reduce future
manufacturing costs. All of our production has been on 8-inch wafers during the periods covered by this report.
Our overall inventory levels were $116.6 million at March 31, 2010, compared to $131.5 million at March 31, 2009 and
$124.5 million at March 31, 2008. We maintained 97 days of inventory on our balance sheet at March 31, 2010 compared to
134 days of inventory at March 31, 2009 and 112 days at March 31, 2008. The reduction of our inventory levels from the
March 31, 2009 levels was a result of our efforts to manage inventory through the period of adverse global economic
conditions and was impacted by net sales in each quarter in fiscal 2010 exceeding our initial expectations when entering
those periods. Our inventory levels at March 31, 2010 were at the low end of the range we have experienced over the last
three years. Our goal is to grow our inventory balances to more optimized levels over time.
33
We anticipate that our gross margins will fluctuate over time, driven primarily by capacity utilization levels, the overall
product mix of microcontroller, analog and interface 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, and competitive and economic
conditions in the markets we serve.
At March 31, 2010, approximately 65% of our assembly requirements were performed in our Thailand facility,
compared to approximately 77% at March 31, 2009 and approximately 67% at March 31, 2008. The percentage of our
assembly work that is performed internally fluctuates over time based on supply and demand conditions in the semiconductor
industry and our internal capacity capabilities. Third-party contractors located in Asia perform the balance of our assembly
operations. 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 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 2010 were $120.8 million, or 12.8% of sales, compared to $115.5 million, or 12.8% of sales,
for fiscal 2009 and $120.9 million, or 11.7% of sales, for fiscal 2008. 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 $5.3 million, or 4.6%, for fiscal 2010 over fiscal 2009. The primary reasons for the dollar
increase in R&D costs in fiscal 2010 compared to fiscal 2009 were higher salary and bonus costs related to restoring previous
reductions in compensation programs due to improving business conditions. R&D expenses decreased $5.3 million, or 4.4%,
for fiscal 2009 over fiscal 2008. The primary reasons for the dollar decrease in R&D costs in fiscal 2009 compared to fiscal
2008 were cost-cutting actions taken in the third and fourth quarters of fiscal 2009, including salary reductions, elimination of
bonuses and reductions in travel costs.
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2010 were $167.2 million, or 17.7% of sales, compared to
$161.2 million, or 17.9% of sales, for fiscal 2009, and $175.6 million, or 16.9% of sales, for fiscal 2008. 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 $6.0 million, or 3.7%, for fiscal 2010 over fiscal 2009. The
primary reasons for the dollar increase in selling, general and administrative expenses in fiscal 2010 over fiscal 2009 were
higher salary and bonus costs related to restoring previous reductions in compensation programs due to improving business
conditions. Selling, general and administrative expenses decreased $14.4 million, or 8.2%, for fiscal 2009 over fiscal 2008.
The primary reasons for the dollar decrease in selling, general and administrative expenses in fiscal 2009 over fiscal 2008
were cost-cutting actions taken in the third and fourth quarters of fiscal 2009, including salary reductions, elimination of
bonuses and reduction in travel costs.
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense
investment levels.
34
Special Charges
Patent Licenses
During the first quarter of fiscal 2010, we agreed to the terms of a patent license with an unrelated third party and signed
an agreement on July 9, 2009. The patent license settled alleged infringement claims. The total payment made to the third-
party in July 2009 was $1.4 million, $1.2 million of which was expensed in the first quarter of fiscal 2010 and the remaining
$0.2 million was recorded as a prepaid royalty that will be amortized over the remaining life of the patent.
We entered into a patent portfolio license effective March 31, 2009 with an unrelated third-party that covers both issued
patents and patent applications and settled alleged infringement claims. The total payment made to the third-party was $8.25
million, $4.0 million of which was expensed in the fourth quarter of fiscal 2009 and the remaining $4.25 million of which
was recorded as a prepaid royalty that will be amortized over the life of the patents.
Expenses Associated with the Abandonment of the Atmel Acquisition
On October 2, 2008, we and ON Semiconductor Corporation announced that we had sent a proposal to the Board of
Directors of Atmel Corporation to acquire Atmel for $5.00 per share in cash or a total of approximately $2.3 billion. On
October 29, 2008, Atmel announced that its Board of Directors had determined that the unsolicited proposal was inadequate.
On February 10, 2009, we announced our termination of our consideration of a potential transaction with Atmel in light of
the economic uncertainty and the lack of visibility with respect to Atmel's business not allowing us to put a value on Atmel.
In the fourth quarter of fiscal 2009, we expensed $1.6 million of various costs associated with the terminated proposal.
In-Process Research and Development
During the third quarter of fiscal 2009, we completed our acquisition of Hampshire Company, a leader in the large
format touch screen controller market. As a result of the acquisition, we incurred a $0.5 million in-process research and
development charge in the third quarter of fiscal 2009.
During the fourth quarter of fiscal 2009, we completed the acquisition of HI-TECH Software, a provider of software
development tools and compilers. As a result of the acquisition, we incurred a $0.2 million in-process research and
development charge in the fourth quarter of fiscal 2009.
During the fourth quarter of fiscal 2009, we completed our acquisition of R&E International, a leader in developing
innovative integrated circuits for smoke and carbon monoxide detectors and other life-safety systems. As a result of the
acquisition, we incurred a $0.2 million in-process research and development charge in the fourth quarter of fiscal 2009.
Loss on Sale of Fab 3
We received an unsolicited offer on our Fab 3 facility in September 2007. We assessed our available capacity in our
current facilities, along with our capacity available from outside foundries and determined the capacity of Fab 3 would not be
required in the near term. As a result of this assessment, we accepted the offer on September 21, 2007 and the transaction
closed on October 19, 2007. We received $27.5 million in cash net of expenses associated with the sale and recognized an
impairment charge in fiscal 2008 of $26.8 million on the sale of Fab 3, representing the difference between the carrying value
of the assets at September 30, 2007 and the amounts realized subsequent to September 30, 2007.
Other Income (Expense)
Interest income in fiscal 2010 decreased to $15.3 million from $32.5 million in fiscal 2009. Interest income in fiscal
2009 decreased to $32.5 million from $54.9 million in fiscal 2008. The primary reason for the reductions in interest income
in fiscal 2010 over fiscal 2009 and for fiscal 2009 over fiscal 2008 was lower interest rates on our invested cash balances in
those periods. Interest expense related to our 2.125% junior subordinated convertible debentures in fiscal 2010 was
$31.2 million, compared to $29.4 million in fiscal 2009 and $9.5 million in fiscal 2008. Other income, net in fiscal 2010 was
$8.7 million compared to other expense, net of $4.4 million in fiscal 2009 and other income, net in fiscal 2008 of
$2.4 million. The increase in other income, net in fiscal 2010 compared to fiscal 2009 and fiscal 2008 primarily relates to
$7.5 million of gains on trading securities during fiscal 2010 compared to $7.3 million of losses on trading securities during
fiscal 2009. These gains and losses were a result of market fluctuations in our trading securities and the put options as
described in Note 4 to our consolidated financial statements.
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 8.8% in fiscal 2010, our effective tax benefit was 5.8% in fiscal 2009 and our effective tax rate was
15.1% in fiscal 2008. Our effective tax rate is lower than statutory rates in the U.S. due primarily to lower tax rates at our
foreign locations, R&D tax credits and export sales incentives. Our effective tax rate in fiscal 2010 reflects a $8.5 million
U.S. tax benefit related to our settlement with the IRS for our fiscal 2002 through fiscal 2004 tax audits. This benefit reduced
35
our effective tax rate by 3.6 percentage points to an effective tax rate of 8.8%. Our effective tax rate in fiscal 2009 reflects a
$16.9 million U.S. tax benefit related to our settlement with the IRS for our fiscal 2005 tax audit and a $33.0 million tax
reserve release associated with a favorable clarification of tax regulations which had an ongoing benefit on our effective tax
rate. Combined, these tax benefits reduced our effective tax rate by 21.5 percentage points to an effective tax benefit of
5.8%. Our effective tax rate in fiscal 2008 reflects a $10.3 million U.S. tax benefit associated with the sale of Fab 3, a
$5.7 million tax benefit related to the release of tax reserves associated with a foreign tax matter, a $4.5 million tax benefit
related to the release of tax reserves for certain international tax exposures 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% to an effective tax rate of 15.1%.
Various taxing authorities in the U.S. and other countries in which we do business are increasing their scrutiny of the tax
structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing authorities in
the jurisdictions in which they conduct significant operations. We are currently under audit by the IRS for our fiscal years
ended 2006, 2007 and 2008. We are currently open for examination by the tax authorities for our fiscal years ended 2009 and
2010. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional tax payments are probable. We believe that we maintain adequate tax reserves to
offset any potential tax liabilities that may arise upon these and other pending audits in the U.S. and other countries in which
we do business. If such amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in
tax benefits being recorded in the period the reserves are no longer deemed necessary. If such amounts ultimately prove to be
less than any final assessment, a future charge to expense would be recorded in the period in which the assessment is
determined.
Our Thailand manufacturing operations currently benefit from numerous tax holidays that have been granted to us by the
Thailand government based on our investments in property, plant and equipment in Thailand. Our tax holiday periods in
Thailand expire at various times in the future and any expiration of our tax holidays in Thailand are expected to have a
minimal impact on our overall tax expense due to other tax holidays and increases in income in other taxing jurisdictions with
lower statutory rates.
Liquidity and Capital Resources
We had $1,531.5 million in cash, cash equivalents and short-term and long-term investments at March 31, 2010, an
increase of $90.8 million from the March 31, 2009 balance. The increase in cash, cash equivalents and short-term and long-
term investments over this time period is primarily attributable to cash generated by operating activities being offset by
dividends during the fiscal year ended March 31, 2010.
Net cash provided from operating activities was $452.0 million for fiscal 2010, $308.7 million for fiscal 2009 and
$447.3 million for fiscal 2008. The increase in cash flow from operations in fiscal 2010 compared to fiscal 2009 was
primarily due to net sales of trading securities in fiscal 2010 of $87.0 million, compared to net purchases of trading securities
of $73.5 million in fiscal 2009. The lower net income in fiscal 2010, was also offset by changes in working capital. The
decrease in cash flow from operations in fiscal 2009 compared to fiscal 2008 was primarily due to lower net income in fiscal
2009, an increase in the purchases of trading securities and changes in accrued liabilities and other assets and liabilities.
Net cash used in investing activities was $195.3 million for fiscal 2010, and $19.8 million for fiscal 2009. Net cash
provided by investing activities was $55.7 million in fiscal 2008. The increase in net cash used in investing activities in
fiscal 2010 compared to fiscal 2009 was primarily due to changes in our net purchases, sales and maturities of short-term and
long-term investments offset by lower capital expenditures in fiscal 2010. Also included in net cash used in investing
activities in fiscal 2010 was a $58.4 million investment in the common stock of Silicon Storage Technology, Inc. at $3.05 per
share. The decrease in cash provided by investing activities in fiscal 2009 over fiscal 2008 was primarily due to an increase
in capital expenditures and investments in other assets, as well as $27.5 million received from the sale of Fab 3 in fiscal 2008.
Net cash used in financing activities was $195.3 million for fiscal 2010, $330.2 million for fiscal 2009 and
$182.7 million for fiscal 2008. Proceeds from the exercise of stock options and employee purchases under our employee
stock purchase plans were $36.5 million for fiscal 2010, $33.6 million for fiscal 2009 and $59.1 million for fiscal 2008. We
paid cash dividends to our shareholders of $249.6 million in fiscal 2010, $246.7 million in fiscal 2009, and $252.0 million in
fiscal 2008. Excess tax benefits from share-based payment arrangements were $2.1 million in fiscal 2010, $6.8 million in
fiscal 2009, and $21.2 million in fiscal 2008. During the year 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 $123.9 million in fiscal 2009 and $1,138.0 million in fiscal 2008. No amounts were
expended in fiscal 2010 for the repurchase of our common stock.
Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.
Capital expenditures were $47.6 million in fiscal 2010, $102.4 million in fiscal 2009 and $69.8 million in fiscal 2008.
Capital expenditures are primarily for the expansion of production capacity and the addition of research and development
36
equipment. We currently intend to spend approximately $90 million during the next twelve months to invest in equipment
and facilities to maintain, and increase capacity, as required, to meet our currently anticipated needs.
We expect to finance our capital expenditures through our existing cash balances and cash flows from operations. We
believe that the capital expenditures anticipated to be incurred over the next twelve months will provide sufficient
manufacturing capacity to meet our currently anticipated needs.
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, 2010, we had no foreign
currency-forward contracts outstanding.
On December 11, 2007, we announced that our Board of Directors had authorized the repurchase of up to an additional
10,000,000 shares of our common stock in the open market or in privately negotiated transactions. As of March 31, 2010,
2,460,002 shares related to this authorization remained available for purchase.
Our Board of Directors authorized the repurchase of 21,500,000 shares of our common stock concurrent with our junior
subordinated convertible debentures transaction described in Note 11 to our consolidated financial statements and no further
shares are available to be repurchased under this authorization.
As of March 31, 2010, approximately 33.5 million shares of our common stock remained as treasury shares with the
balance of the repurchased shares being used to fund share issuance requirements under our equity incentive plans. The
timing and amount of future repurchases will depend upon market conditions, interest rates, and corporate considerations.
On October 28, 2002, we announced that our Board of Directors had approved and instituted a quarterly cash dividend
on our common stock. During fiscal 2008, we paid dividends in the amount of $1.205 per share for a total dividend payment
of $252.0 million. During fiscal 2009, we paid dividends in the amount of $1.346 per share for a total dividend payment of
$246.7 million. During fiscal 2010, we paid dividends in the amount of $1.359 per share for a total dividend payment of
$249.6 million. On May 5, 2010, we declared a quarterly cash dividend of $0.342 per share, which will be paid on June 2,
2010, to stockholders of record on May 20, 2010 and the total amount of such dividend is expected to be approximately
$63.5 million. Our Board of Directors is free to change our dividend practices at any time and to increase or decrease the
dividend paid, or not to pay a dividend, on our common stock on the basis of our results of operations, financial condition,
cash requirements and future prospects, and other factors deemed relevant by our Board of Directors. Our current intent is to
provide for ongoing quarterly cash dividends depending upon market conditions and our results of operations.
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 acquisitions or other
purposes. The timing and amount of any such financing requirements will depend on a number of factors, including demand
for our products, changes in industry conditions, product mix, competitive factors and our ability to identify suitable
acquisition candidates. There can be no assurance that such financing will be available on acceptable terms, and any
additional equity financing would result in incremental ownership dilution to our existing stockholders.
Contractual Obligations
The following table summarizes our significant contractual obligations at March 31, 2010, 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, 2010 (dollars in thousands):
Operating lease obligations
Capital purchase obligations (1)
Other purchase obligations and
commitments (2)
2.125% junior convertible debentures –
principal and interest (3)
Payments Due by Period
$
Total
11,858
31,090
Less than
1 year
$
4,549
31,090
1 – 3 years
5,164
$
---
3 – 5 years
2,145
$
---
3,139
1,950
1,189
---
More than
5 years
$
---
---
---
1,827,122
24,438
48,875
48,875
1,704,934
Total contractual obligations (4)
$ 1,873,209
$ 62,027
$ 55,228
$ 51,020
$ 1,704,934
37
(1) Capital purchase obligations represent commitments for construction or purchases of property, plant and equipment.
These obligations were not recorded as liabilities on our balance sheet as of March 31, 2010, 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 that the principal of our convertible debentures will be paid on
December 31, 2037.
(4) Total contractual obligations do not include contractual obligations recorded on the balance sheet as current
liabilities, or certain purchase obligations as discussed below. The contractual obligations also do not include
amounts related to uncertain tax positions because reasonable estimates cannot be made.
Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table
above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as
purchase orders may represent authorizations to purchase rather than binding agreements. For the purpose of this table,
contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding
on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current
manufacturing needs and are fulfilled by our vendors with short time horizons. We do not have significant agreements for
the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected
requirements for three months. We also enter into contracts for outsourced services; however, the obligations under these
contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant
penalty.
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, 2010, 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 July 2009, the Financial Accounting Standards Board (FASB) released the final version of its new "Accounting
Standards Codification" (Codification) as the single authoritative source for GAAP. While not intended to change GAAP,
the Codification significantly changed the way in which the accounting literature is organized, combining all authoritative
standards into a comprehensive, topically organized database. All existing accounting standard documents were superseded
and all other accounting literature not included in the Codification is considered nonauthoritative, other than guidance issued
by the SEC. The Codification was effective for interim and annual periods ending on or after September 15, 2009. We
adopted the Codification in our interim financial statements for the second quarter of fiscal 2010, which had no impact on our
financial position, results of operations or cash flows.
In April 2009, the FASB issued guidance for estimating fair value when the volume or level of activity in a market for an
asset or liability has decreased significantly. This guidance also provides information on identifying circumstances that
indicate a transaction is not orderly (i.e., a forced liquidation or distressed sale). This guidance was effective for us beginning
in fiscal 2010 and did not have a material impact on our financial position, results of operations or cash flows.
In April 2009, the FASB issued guidance that applies to investments in debt securities for which other-than-temporary
impairments may be recorded. If an entity's management asserts that it does not have the intent to sell a debt security and it is
more likely than not that it will not be required to sell the security before recovery of its cost basis, then an entity may
separate other-than-temporary impairments into two components: (i) the amount related to credit losses (recorded in
earnings) and (ii) all other amounts (recorded in other comprehensive income). This guidance was effective for us beginning
in fiscal 2010 and did not have a material impact on our financial position, results of operations or cash flows.
In April 2009, the FASB issued guidance that requires disclosures about fair value of financial instruments in interim
financial statements. This guidance was effective for us beginning in fiscal 2010, and because it applies only to financial
statement disclosures, it had no impact on our financial position, results of operations or cash flows.
In June 2008, the FASB issued guidance clarifying that unvested share-based payment awards with a right to receive
nonforfeitable dividends are participating securities and providing information on how to allocate earnings to participating
securities to allow computation of basic and diluted earnings per share using the two-class method. This guidance was
effective for us beginning in fiscal 2010 and requires retrospective application for periods prior to the effective date. The
adoption of this guidance did not have a material impact on our computation of earnings per share.
38
In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset. This guidance was effective for us
beginning in fiscal 2010 and did not have a material impact on our financial position, results of operations or cash flows.
In December 2007, the FASB issued a revision to previously issued accounting literature which changes the accounting
for business combinations including: (i) the measurement of acquirer shares issued in consideration for a business
combination, (ii) the recognition of contingent consideration, (iii) the accounting for preacquisition gain and loss
contingencies, (iv) the recognition of capitalized IPR&D, (v) the accounting for acquisition-related restructuring costs,
(vi) the treatment of acquisition-related transaction costs, and (vii) the recognition of changes in the acquirer's income tax
valuation allowance. We began applying this guidance prospectively to all business combinations beginning in fiscal 2010.
The impact of adoption on our financial position, results of operations or cash flows is dependent upon the nature and terms
of business combinations that we consummate.
New Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued new revenue recognition guidance for arrangements that include both software and
non-software related deliverables. This guidance requires entities to allocate the overall consideration to each deliverable by
using a best estimate of the selling price of individual deliverables in the arrangement in the absence of VSOE or other third
party evidence of the selling price. Additionally, the guidance modifies the manner in which the transaction consideration is
allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement
consideration. The new guidance is effective for us in the first quarter of fiscal 2012 interim financial statements, with earlier
adoption permitted. We are currently evaluating the impact of adopting this new guidance on our consolidated financial
statements.
In June 2009, the FASB issued new guidance on accounting for transfers of financial assets, which amended previous
GAAP literature. The amendment includes: (i) elimination of the qualifying special-purpose entity concept, (ii) a new unit of
account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting,
(iii) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (iv) a change to the
amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are
received by the transferor, and (v) extensive new disclosures. This guidance is effective for us beginning in fiscal 2011 and
is not expected to have a material effect on our financial position, results of operations or cash flows.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2010 and March 31, 2009, our investment portfolio, consisting of fixed income securities and money
market funds that we hold on an available-for-sale basis, totaled $1,506.6 million and $1,318.83 million respectively, and our
trading securities totaled $24.9 million and $122.5 million, respectively. Our available-for-sale 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 maturing during the fiscal year ended March 31,
2011
$ 309,744
2012
$ 220,084
2013
$ 470,529
2.13%
1.66%
1.89%
$
2014
---
---
$
2015
---
---
Thereafter
$ 14,151
2.26%
At March 31, 2010, $49.8 million of original purchase value of our investment portfolio was invested in ARS.
Historically, the carrying value of auction rate securities (ARS) approximated fair value due to the frequent resetting of the
interest rates. If an auction fails for amounts we have invested, our investment will not be liquid. With the continuing
liquidity issues experienced in the global credit and capital markets, our ARS have experienced multiple failed auctions. 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 ARS had failed. While we continue to earn interest on these investments based on a pre-determined
formula with spreads tied to particular interest rate indices, the estimated market value for a portion of these ARS no longer
approximates the original purchase value.
The $24.9 million in failed auctions noted above have continued to fail through the filing date of this Annual Report on
Form 10-K. The fair value at March 31, 2010 of the failed ARS of $14.2 million has been estimated based on market
information and estimates determined by management and could change significantly based on future market conditions. We
evaluated the impairments in the value of these ARS, determining our intent to sell these securities prior to the recovery of its
amortized cost basis resulted in the securities being other-than-temporarily impaired and recognized an impairment charge on
39
these investments of $3.6 million during fiscal 2009 and $4.7 million in fiscal 2010. If the issuers are unable to successfully
close future auctions or if their credit ratings deteriorate further, we may be required to further adjust the carrying value of the
investments through an additional impairment charge to earnings.
The $34.8 million of ARS that failed during February 2008 are investments in student loan-backed ARS (SLARS).
Approximately $2.9 million and $7.0 million of these SLARS were redeemed at par by the issuers during the fiscal years
2009 and 2010, respectively, reducing our overall position in these SLARS to $24.9 million which represents the initial cost
basis for these investments. Based upon our evaluation of available information, we believe these investments are of high
credit quality, as all of the investments carry AAA credit ratings by one or more of the major credit rating agencies and are
largely backed by the federal government (Federal Family Education Loan Program).
The fair value of the failed SLARS has been estimated based on market information and estimates determined by
management and could change significantly based on future market conditions. However, if the issuers are not able to
successfully close future auctions or over time are not able to obtain more favorable financing options for their debt issuance
needs, including refinancing these obligations into lower rate securities, the market value of these investments could be
negatively impacted.
In November 2008, we executed an SLARS rights agreement (the Rights) with the broker through which we purchased
the $24.9 million in ARS that provides (1) us with the right to put these SLARS back to the broker at par anytime during the
period from June 30, 2010 through July 2, 2012, and (2) the broker with the right to purchase or sell the ARS at par on our
behalf anytime through July 2, 2012. We accounted for the acceptance of the Rights as the receipt of a put option for no
consideration and recognized a gain with a corresponding recognition as a long-term investment. We expect any future
change in the fair value of the SLARS to be largely offset by changes in the fair value of the related Rights without any
significant net impact to our income statement. We will continue to measure the SLARS and the Rights at fair value
(utilizing Level 3 inputs) until the earlier of maturity or exercise. We intend and have the ability to hold the $24.9 million of
ARS until the market recovers or until June 30, 2010 when we have the right to sell the SLARS at par to the broker 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 investment balances, the current lack of liquidity in the credit and capital
markets will not have a material impact on our liquidity, cash flow or ability to fund our operations.
Our investment in marketable equity securities at March 31, 2010 consisted of shares of common stock of Silicon
Storage Technology, Inc., the value of which is determined by the closing price of such shares on the market on which the
shares are traded as of the balance sheet date. The market value of this investment was approximately $58.4 million at March
31, 2010 and was equal to our purchase price of $3.05 per share. On April 8, 2010, we acquired Silicon Storage Technology,
Inc. in a merger transaction for $3.05 per share for a total of $295.4 million in consideration in addition to the shares we
purchased for $58.4 million. The $58.4 million of market value of these securities will be included in the determination of
our total purchase price of $353.8 million.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements listed in the index appearing under Item 15(a)(1) hereof are filed as part of this
Form 10-K. See also Index to Financial Statements, below.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, as required by paragraph (b) of Rule 13a-15 or
Rule 15d-15 under the Securities Exchange Act of 1934, as amended, 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
40
financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is
expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can
provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to
provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that could have a material effect on our financial
statements.
Management assessed our internal control over financial reporting as of March 31, 2010, the end of our fiscal year.
Management based its assessment on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of
such elements as the design and operating effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed
by our finance organization.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as
of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We
reviewed the results of management's assessment with the Audit Committee of our Board of Directors.
Ernst & Young LLP, an independent registered public accounting firm, who audited our consolidated financial
statements included in this Form 10-K has issued an attestation report on our internal control over financial reporting, which
is included in Part II, Item 9A.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2010, 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.
41
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,
2010, 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
(U.S.). 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, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(U.S.), the March 31, 2010 consolidated financial statements of Microchip Technology Incorporated and our report
dated June 1, 2010 expressed an unqualified opinion thereon.
ey
June 1, 2010
A member firm of Ernst & Young Global Limited Ernst & Young LLP Ernst & Young Tower One Renaissance Square Suite 2300 2 North Central Avenue Phoenix, AZ 85004 Tel: +1 602 322 3000 Fax: +1 602 322 3023 www.ey.com
Item 9B. OTHER INFORMATION
In fiscal 2010, 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
2010 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 2010 annual meeting of
stockholders under the caption "The Board of Directors – Committees of the Board of Directors – Audit Committee."
Information on our executive officers is provided in Item 1, Part I of this Form 10-K under the caption "Executive
Officers of the Registrant" at page 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 2010 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 2010 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 2010 annual meeting of stockholders under
the caption "Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the 2010 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 2010 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 2010 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 2010 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 2010 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 2010 annual meeting of stockholders.
43
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 2010 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 2010 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 2010 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 2010 annual meeting of stockholders.
[Remainder of page intentionally left blank.]
44
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, 2010 and 2009
Consolidated Statements of Income for each of the three years in the
period ended March 31, 2010
Consolidated Statements of Cash Flows for each of the three years in the
period ended March 31, 2010
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended March 31, 2010
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 47 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
45
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: June 1, 2010
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/ J. Eric Bjornholt
J. Eric Bjornholt
Director, President and
Chief Executive Officer
Director
Director
Director
Director
Vice President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
June 1, 2010
June 1, 2010
June 1, 2010
June 1, 2010
June 1, 2010
June 1, 2010
46
Exhibit
Number
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
EXHIBITS
Incorporated by Reference
2.1
2.2
2.3
2.4
3.1
3.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Purchase and Sale Agreement, dated as of July 18,
2002 between Registrant and Fujitsu
Microelectronics, Inc.
Agreement and Plan of Merger dated as of February
2, 2010 by and among Microchip Technology
Incorporated, Sun Acquisition Corporation and
Silicon Storage Technology, Inc.
Amendment No. 1 to Agreement and Plan of Merger
by and among Microchip Technology Incorporated,
Sun Acquisition Corporation and Silicon Storage
Technology, Inc.
Amendment No. 2 to Agreement and Plan of Merger
by and among Microchip Technology Incorporated,
Sun Acquisition Corporation and Silicon Storage
Technology, Inc.
Restated Certificate of Incorporation of Registrant
Amended and Restated By-Laws of Registrant, as
amended through January 29, 2007
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 5, 2010
*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)
8-K
000-21184
2.1
7/18/02
10-Q
000-21184
2.1
2/9/10
8-K
000-21184
2.1
2/23/09
8-K
000-21184
2.1
3/8/10
10-Q
10-Q
000-21184
000-21184
3.1
3.1
11/12/02
2/6/07
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
8-K
000-21184
10.1
8/19/09
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
10.8
*1993 Stock Option Plan, as Amended through
August 16, 2002
10-Q
000-21184
10.1
11/12/02
47
EXHIBITS (cont'd.)
Exhibit
Number Exhibit Description
10.9
10.10
10.11
10.12
*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
*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
Incorporated by Reference
Form
File Number Exhibit
Filing
Date
Filed
Herewith
S-8
333-872
10.6
1/23/96
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
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
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
*Management Incentive Compensation Plan
amended by Board of Directors August 14, 2008
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
48
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-Q
000-21184
10.1
11/7/08
S-8
333-53876
4.1
1/18/01
S-8
333-53876
4.4
1/18/01
S-8
333-96791
4.1
7/19/02
10-K
000-21184
10.28
6/5/03
S-8
333-101696
4.1.2
12/6/02
EXHIBITS (cont'd.)
Exhibit
Number
10.24
Exhibit Description
Form
File Number
Exhibit
Filing
Date
Filed
Herewith
Incorporated by Reference
*Amendment Dated December 9, 1999 to the
Adoption Agreement to the Microchip Technology
Incorporated Supplemental Retirement Plan
S-8
333-101696
4.1.4
12/6/02
10.25
*Adoption Agreement to the Microchip
Technology Incorporated Supplemental
Retirement Plan dated January 1, 1997
S-8
333-101696
4.1.3
12/6/02
10.26
*Microchip Technology Incorporated Supplemental
Retirement Plan
S-8
333-101696
4.1.1
12/6/02
10.27
*Amendments to Supplemental Retirement Plan
10-Q
000-21184
8-K
8-K
000-21184
000-21184
10-Q
000-21184
10.1
10.1
10.2
10.1
2/9/06
12/18/08
12/18/08
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
10.1
6/11/09
10-K
000-21184
24.1
5/29/09
X
X
X
X
X
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
Amended Strategic Investment Program Contract
dated as of June 8, 2009 between, Multnomah
County, Oregon, City of Gresham, Oregon and
Microchip Technology Incorporated
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
49
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, 2010
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, 2010 and 2009
Consolidated Statements of Income for each of the three years in the period ended
March 31, 2010
Consolidated Statements of Cash Flows for each of the three years in the period ended
March 31, 2010
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended March 31, 2010
Notes to Consolidated Financial Statements
Page Number
F-1
F-2
F-3
F-4
F-5
F-6
i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Microchip Technology Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheets of Microchip Technology Incorporated and
subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity,
and cash flows for each of the three years in the period ended March 31, 2010. 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
(U.S.). 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, 2010 and 2009,
and the consolidated results of their operations and their cash flows for each of the three years in the period ended
March 31, 2010, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 and Note 10 to the consolidated financial statements, effective April 1, 2007, the
Company changed its method of accounting for uncertain tax positions. Additionally, as discussed in Note 1 to the
consolidated financial statements, the Company retrospectively changed its method of accounting for its convertible
debentures.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(U.S.), the effectiveness of Microchip Technology Incorporated’s internal control over financial reporting as of
March 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated June 1, 2010 expressed an
unqualified opinion thereon.
ey
June 1, 2010
A member firm of Ernst & Young Global Limited Ernst & Young LLP Ernst & Young Tower One Renaissance Square Suite 2300 2 North Central Avenue Phoenix, AZ 85004 Tel: +1 602 322 3000 Fax: +1 602 322 3023 www.ey.com
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,
$
2010
492,130
722,193
137,806
116,579
13,068
77,810
51,383
1,610,969
493,039
317,215
40,338
35,527
19,225
As adjusted
2009
(See Note 1)
446,329
943,616
88,525
131,510
11,447
69,626
51,736
1,742,789
531,687
50,826
36,165
25,718
18,526
Total assets
$
2,516,313
$
2,405,711
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 185,329,144 shares outstanding at March
31, 2010; 218,789,994 shares issued and 182,769,124 shares outstanding
at March 31, 2009.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Common stock held in treasury: 33,460,850 shares at March 31, 2010;and
36,020,870 shares at March 31, 2009.
Total stockholders' equity
$
44,238
60,211
98,941
203,390
340,672
57,140
376,713
5,018
29,228
42,486
83,931
155,645
334,184
70,051
351,686
3,834
---
---
185
1,276,822
1,266,699
3,032
(1,013,358)
1,533,380
183
1,281,936
1,299,250
4,312
(1,095,370)
1,490,311
2,405,711
Total liabilities and stockholders' equity
$
2,516,313
$
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)
Special charges
Year ended March 31,
As adjusted
2009
2010
$
$
947,729
413,487
534,242
(See Note 1)
903,297
386,793
516,504
$
120,823
167,222
1,238
289,283
115,524
161,218
6,434
283,176
As adjusted
2008
(See Note 1)
1,035,737
410,799
624,938
120,864
175,646
26,763
323,273
Operating income
244,959
233,328
301,665
Other income (expense):
Interest income
Interest expense
Other, net
Income before income taxes
Income tax provision (benefit)
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
15,325
(31,150)
8,679
237,813
20,808
217,005
$
32,545
(29,440)
(4,354)
232,079
(13,508)
245,587
$
1.18
$
1.16
$
1.34
$
1.31
$
1.359
$
1.346
$
183,642
187,339
183,158
186,788
54,851
(9,495)
2,435
349,456
52,663
296,793
1.43
1.40
1.205
207,220
212,048
$
7,054
12,194
17,530
$
5,845
10,866
15,770
6,191
10,695
15,960
$
$
$
$
$
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
Tax benefit from equity incentive plans
Excess tax benefit from share-based compensation
Convertible debt derivatives – revaluation and amortization
Amortization of junior convertible debenture issuance costs
Gain on sale of assets
Special charges
Sales/(purchases) of trading securities
(Gain) loss on trading securities
Unrealized impairment loss on available-for-sale investments
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
Decrease (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 Silicon Storage Technology, Inc.
Investment in other assets
Proceeds from sale of Fab 3
Proceeds from sale of assets
Capital expenditures
Net cash (used in) provided by 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
Net cash used in 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,
As
adjusted
2009
(See Note 1)
245,587
$
$
2010
$
217,005
90,057
18,621
36,778
3,709
(2,094)
230
215
(100)
1,238
86,970
(7,425)
4,750
(49,078)
15,239
15,010
29,583
(8,661)
452,047
(1,576,044)
1,502,127
(58,402)
(15,439)
---
100
(47,604)
(195,262)
(249,556)
---
---
36,478
2,094
(210,984)
45,801
446,329
492,130
96,046
20,527
32,481
7,584
(6,798)
(944)
215
(100)
860
(73,510)
6,332
3,560
50,832
(4,110)
(11,510)
(25,097)
(33,302)
308,653
(2,479,175)
2,583,152
---
(21,600)
---
166
(102,370)
(19,827)
(246,657)
(123,929)
---
33,555
6,798
(330,233)
(41,407)
487,736
446,329
$
$
As
adjusted
2008
(See Note 1)
296,793
100,076
8,987
32,846
21,914
(21,184)
128
68
(937)
26,763
(12,133)
---
2,439
(13,760)
(2,902)
4,078
12,080
(7,949)
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
See accompanying notes to consolidated financial statements
F-4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Balance at March 31, 2007
217,440
$ 756,051
---
$
---
$
(7,169)
$ 1,255,486
$
2,004,368
Common Stock and
Additional Paid-in
Capital
Common Stock
Held
in Treasury
Shares
Amount
Shares
Amount
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Net
Stockholders'
Equity
Balance at March 31, 2008 (As adjusted, see Note 1)
218,790
1,297,835
34,451
(1,061,663)
2,508
1,300,320
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
---
Treasury stock used for new issuances
(2,052)
(76,377)
---
---
---
---
---
---
---
---
36,503
(2,052)
(1,138,040)
76,377
Tax benefit from equity incentive plans
Share-based compensation
Equity component related to the issuance of the
Convertible Debentures (See Note 1)
Cash dividend
---
---
---
---
21,914
33,403
503,732
---
---
---
---
---
---
---
---
---
Components of other comprehensive income:
Net income
Net unrealized gains on available-for-sale
investments, net of $1,669 of tax
Total comprehensive income
Issuances from equity incentive plans
Employee stock purchase plan
Purchase of treasury stock
---
---
1,917
545
---
---
---
22,767
10,788
---
---
---
---
---
---
---
---
---
4,032
(123,929)
Treasury stock used for new issuances
(2,462)
(90,222)
(2,462)
90,222
Tax benefit from equity incentive plans
Share-based compensation
Cash dividend
---
---
---
7,584
33,367
---
---
---
---
---
---
---
Components of other comprehensive income:
Net income
Net unrealized losses on available-for-sale
investments, net of $1,778 of tax
Total comprehensive income
Issuances from equity incentive plans
Employee stock purchase plan
---
---
---
---
1,955
605
27,108
9,370
---
---
---
---
---
---
---
---
Treasury stock used for new issuances
(2,560)
(82,012)
(2,560)
82,012
Tax benefit from equity incentive plans
Share-based compensation
Cash dividend
Balance at March 31, 2010
---
---
---
3,709
36,713
---
---
---
---
---
---
---
---
296,793
296,793
9,677
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
(251,959)
1,804
---
---
---
---
---
---
---
---
---
---
---
---
---
---
(246,657)
9,677
306,470
47,406
11,706
(1,138,040)
---
21,914
33,403
503,732
(251,959)
1,539,000
1,804
247,391
22,767
10,788
(123,929)
---
7,584
33,367
(246,657)
1,490,311
---
245,587
245,587
---
217,005
217,005
(1,280)
---
---
---
---
---
---
---
---
---
---
---
---
(1,280)
215,725
27,108
9,370
---
3,709
36,713
(249,556)
(249,556)
Balance at March 31, 2009 (As adjusted, see Note 1)
218,790
1,282,119
36,021
(1,095,370)
4,312
1,299,250
218,790
$ 1,277,007
33,461
$ (1,013,358)
$
3,032
$ 1,266,699
$ 1,533,380
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, safety and security 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 or determinable pricing and collectability is reasonably assured. The
Company recognizes revenue from product sales to original equipment manufacturers (OEMs) upon shipment and
records reserves for estimated customer returns. Distributors worldwide generally have broad price protection and
product return rights, so the Company defers revenue recognition until the distributor sells the product to their
customer. Revenue is recognized when the distributor sells the product to their end customer, at which time the
sales price becomes fixed or determinable. Revenue is not recognized upon the Company's shipment to the
distributors since, due to discounts from list price as well as price protection rights, the sales price is not
substantially fixed or determinable at that time. At the time of shipment to these distributors, the Company records
a trade receivable for the selling price as there is a legally enforceable right to payment, relieves inventory for the
carrying value of goods shipped since legal title has passed to the distributor, and records the gross margin in
deferred income on shipments to distributors on the consolidated balance sheets.
Deferred income on shipments to distributors effectively represents the gross margin on the sale to the
distributor; however, the amount of gross margin recognized by the Company in future periods will be less than the
deferred margin as a result of credits granted to distributors on specifically identified products and customers to
allow the distributors to earn a competitive gross margin on the sale of the Company's products to their end
customers and price protection concessions related to market pricing conditions.
The Company sells the majority of the items in its product catalog to its distributors worldwide at a uniform list
price. However, distributors resell the Company's products to end customers at a very broad range of individually
negotiated price points. The majority of the Company's distributors' resales require a reduction from the original list
price paid. Often, under these circumstances, the Company remits back to the distributor a portion of their original
purchase price after the resale transaction is completed in the form of a credit against the distributors' outstanding
accounts receivable balance. The credits are on a per unit basis and are not given to the distributor until they
provide information regarding the sale to their end customer. The price reductions vary significantly based on the
customer, product, quantity ordered, geographic location and other factors and discounts to a price less than the
Company's cost have historically been rare. The effect of granting these credits establishes the net selling price from
the Company to its distributors for the product and results in the net revenue recognized by the Company when the
product is sold by the distributors to their end customers. Thus, a portion of the "deferred income on shipments to
distributors" balance represents the amount of distributors' original purchase price that will be credited back to the
distributor in the future. The wide range and variability of negotiated price concessions granted to distributors does
not allow the Company to accurately estimate the portion of the balance in the deferred income on shipments to
distributors account that will be credited back to the distributors. Therefore, the Company does not reduce deferred
income on shipments to distributors or accounts receivable by anticipated future price concessions; rather, price
concessions are recorded against deferred income on shipments to distributors when incurred, which is generally at
the time the distributor sells the product.
F-6
At March 31, 2010, the Company had approximately $148.4 million of deferred revenue and $49.5 million in
deferred cost of sales recognized as $98.9 million of deferred income on shipments to distributors. At March 31,
2009, the Company had approximately $118.2 million of deferred revenue and $34.3 million of deferred cost of
sales recognized as $83.9 million of deferred income on shipments to distributors. The deferred income on
shipments to distributors that will ultimately be recognized in the Company's income statement will be lower than
the amount reflected on the balance sheet due to price credits to be granted to the distributors when the product is
sold to their customers. These price credits historically have resulted in the deferred income approximating the
overall gross margins that the Company recognizes in the distribution channel of its business.
The Company reduces product pricing through price protection based on market conditions, competitive
considerations and other factors. Price protection is granted to distributors on the inventory they have on hand at the
date the price protection is offered. When the Company reduces the price of its products, it allows the distributor to
claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it has on
hand as of the date of the price reduction. There is no immediate revenue impact from the price protection, as it is
reflected as a reduction of the deferred income on shipments to distributors' balance.
Products returned by distributors and subsequently scrapped have historically been immaterial to the Company's
consolidated results of operations. The Company routinely evaluates the risk of impairment of the deferred cost of
sales component of the deferred income on shipments to distributors account. Because of the historically immaterial
amounts of inventory that have been scrapped, and historically rare instances where discounts given to a distributor
result in a price less than the Company's cost, the Company believes the deferred costs have a low risk of material
impairment.
Shipping charges billed to customers are included in net sales, and the related shipping costs are included in
cost of sales.
Product Warranty
The Company generally sells its products with a limited warranty related to product quality and a limited
indemnification of customers against intellectual property infringement claims related to the Company's products.
Due to comprehensive product testing, the short time between product shipment and the detection and correction of
product failures, and a low historical rate of payments on indemnification claims, the accrual based on historical
activity and the related expense were immaterial as of and for the fiscal years ended March 31, 2010, 2009 and
2008.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were immaterial for the fiscal years
ended March 31, 2010, 2009 and 2008.
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 (expense) in the consolidated statements
of income. As the U.S. dollar is utilized as the functional currency, gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other than the subsidiaries' functional currency) are also
included in income. Gains and losses associated with currency rate changes on forward contracts are recorded
currently in income. These gains and losses have been immaterial to the Company's financial statements.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its
income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company's
actual current tax exposure together with assessing temporary differences resulting from differing treatment of items
F-7
for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included
within the Company's consolidated balance sheet. The Company must then assess the likelihood that its deferred tax
assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, it must
establish a valuation allowance. The Company has not provided for a valuation allowance because management
currently believes that it is "more likely than not" that its deferred tax assets will be recovered from future taxable
income.
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 which was codified into
ASC 740-10. This guidance establishes a single model to address accounting for uncertain tax positions and
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. ASC 740-10 also provides guidance on de-recognition,
measurement classification, interest and penalties, accounting in interim periods, disclosure and transition. The
Company adopted this guidance on April 1, 2007, and did not recognize any cumulative-effect adjustment
associated with its unrecognized tax benefits, interest, and penalties.
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 Auction Rate Securities (ARS) that the Company intends to dispose
of through the exercise of a put option. See further discussion in Note 4. The Company's investments in trading
securities are carried at fair value with unrealized gains and losses reported in other, net in the consolidated
statements of income.
The Company's available-for-sale investments consist of government agency bonds, municipal bonds, ARS,
strategic investments in shares of publicly traded common stock 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 both the intent and 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.
Due to the lack of availability of observable market quotes on certain of the Company's investment portfolio of
ARS, it utilizes valuation models including those that are based on expected cash flow streams and collateral values,
including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall
capital market liquidity. The valuation of the Company's ARS investment portfolio is subject to uncertainties that
are difficult to predict. Factors that may impact the Company's ARS valuation include changes to credit ratings of
the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets,
underlying collateral value, discount rates, counterparty risk, the ongoing strength and quality of the credit market,
and market liquidity.
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.
F-8
Inventories
Inventories are valued at the lower of cost or market using the first-in, first-out method. The Company writes
down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference
between the cost of inventory and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those projected by the Company, additional
inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and
charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts
are recoverable. In estimating reserves for obsolescence, the Company primarily evaluates estimates of demand
over a twelve-month period and provides reserves for inventory on hand in excess of the estimated twelve-month
demand.
In periods where the Company's production levels are substantially below normal operating capacity, such as in
the second half of fiscal 2009 and the first half of fiscal 2010, unabsorbed overhead production associated with the
reduced production levels of the Company's manufacturing facilities are charged directly to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while
maintenance and repairs are expensed when incurred. The Company's property and equipment accounting policies
incorporate estimates, assumptions and judgments relative to the useful lives of its property and equipment.
Depreciation is provided for assets placed in service on a straight-line basis over the estimated useful lives of the
relative assets, which range from 3 to 30 years. The Company evaluates the carrying value of its property and
equipment when events or changes in circumstances indicate that the carrying value of such assets may be impaired.
Asset impairment evaluations are, by nature, highly subjective.
Junior Subordinated Convertible Debentures
The Company separately accounts for the liability and equity components of its junior subordinated convertible
debentures in a manner that reflects its nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. This results in a bifurcation of a component of the debt, classification of that component in equity and
the accretion of the resulting discount on the debt to be recognized as part of interest expense in its consolidated
statements of income. Additionally, certain embedded features of the debentures qualify as derivatives and are
bundled as a compound embedded derivative that is measured at fair value. Lastly, the Company includes the
dilutive effect of the shares of its common stock issuable upon conversion of the outstanding junior subordinated
convertible debentures in its diluted income per share calculation regardless of whether the market price trigger or
other contingent conversion feature has been met. The Company applies the treasury stock method as it has the
intent and current ability to settle the principal amount of the junior subordinated convertible debentures in cash.
This method results in incremental dilutive shares when the average market value of its common stock for a
reporting period exceeds the conversion price per share which was $30.34 at March 31, 2010 and adjusts as
dividends are recorded in the future.
Litigation
The Company's estimated range of liability related to pending litigation is based on claims for which
management believes a loss is probable and it can estimate the amount or range of loss. Because of the uncertainties
related to both the outcome and range of the any potential losses 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. Through March 31, 2010, the Company has not had impaired
goodwill.
F-9
Impairment of Long-Lived Assets
The Company assesses whether indicators of impairment of long-lived assets are present. If such indicators are
present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the
assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the
excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted
future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the
Company recognizes an impairment loss through a charge to operating results to the extent the present value of
anticipated net cash flows attributable to the asset are less than the asset's carrying value. The Company would
depreciate the remaining value over the remaining estimated useful life of the asset.
Share-Based Compensation
The Company has equity incentive plans under which non-qualified stock options and restricted stock units
(RSUs) have been granted to employees and non-employee members of the Board of Directors. In the second half
of fiscal 2006, the Company adopted RSUs as its primary equity incentive compensation instrument for employees.
The Company also has an employee stock purchase plan for all eligible employees.
The Company estimates the fair value of share-based payment awards on the date of grant using an option
pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense
ratably over the requisite service periods. The Company has estimated the fair value of each award as of the date of
grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded
options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among
other factors, the expected life of the award and the expected volatility of the Company's stock price.
Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of
grant requires judgment. The fair value of RSUs is based on the fair market value of the Company's common stock
on the date of grant discounted for expected future dividends. The Company uses the Black-Scholes option pricing
model to estimate the fair value of employee stock options and rights to purchase shares under stock participation
plans. Option pricing models, including the Black-Scholes model, also require the use of input assumptions,
including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The
Company uses a blend of historical and implied volatility based on options freely traded in the open market as it
believes this is more reflective of market conditions and a better indicator of expected volatility than using purely
historical volatility. The expected life of the awards is based on historical and other economic data trended into the
future. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms
of the Company's awards. The dividend yield assumption is based on the Company's history and expectation of
future dividend payouts. The Company estimates the number of share-based awards which will be forfeited due to
employee turnover. Quarterly changes in the estimated forfeiture rate would affect share-based compensation, as the
effect of adjusting the rate for all expense amortization after April 1, 2006 is recognized in the period the forfeiture
estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is
made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the
financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is
made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the
financial statements. If forfeiture adjustments are made, they would affect the Company's results of operations. The
effect of forfeiture adjustments in the years ended March 31, 2010, 2009 and 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.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of
investments in debt securities and trade receivables. Investments in debt securities with original maturities of
greater than six months consist primarily of AAA and AA rated financial instruments and counterparties. The
Company's investments are primarily in direct obligations of the U.S. government or its agencies, corporate bonds
and in municipal bonds.
F-10
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, 2010. 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, 2010, 2009 and 2008. See Note 17, Geographic and Other Information, for additional
information on the Company's largest distributors.
Distributor advances, included in deferred income on shipments to distributors in the consolidated balance
sheets, totaled $57.5 million at March 31, 2010 and $37.6 million at March 31, 2009. On sales to distributors, the
Company's payment terms generally require the distributor to settle amounts owed to the Company for an amount in
excess of their ultimate cost. The Company's sales price to its distributors may be higher than the amount that the
distributors will ultimately owe the Company because distributors often negotiate price reductions after purchasing
the product from the Company and such reductions are often significant. It is the Company's practice to apply these
negotiated price discounts to future purchases, requiring the 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.
Use of Estimates
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities to prepare its consolidated financial
statements in conformity with U.S. Generally Accepted Accounting Principles. Actual results could differ from
those estimates.
Adopted and Recently Issued Accounting Pronouncements
Accounting Standards Codification. Effective July 1, 2009, the Financial Accounting Standards Board's
(FASB) Accounting Standards Codification (ASC) became the single official source of authoritative,
nongovernmental generally accepted accounting principles (GAAP) in the United States. The historical GAAP
hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by
the Securities and Exchange Commission. The codification was effective for interim and annual reporting periods
ending after September 15, 2009, except for certain nonpublic nongovernmental entities. The Company's
accounting policies were not affected by the conversion to ASC. However, references to specific accounting
standards in the footnotes to the Company's consolidated financial statements have been changed to refer to the
appropriate section of ASC.
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion. On April 1, 2009,
the Company adopted the Cash Conversion Subsections of ASC Subtopic 470-20, Debt with Conversion and Other
Options – Cash Conversion (the Cash Conversion Subsections), which clarify the accounting for convertible debt
instruments that may be settled in cash (including partial cash settlement) upon conversion. The Cash Conversion
Subsections require issuers to account separately for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer's nonconvertible debt (unsecured debt) borrowing rate when interest
cost is recognized. The Cash Conversion Subsections require bifurcation of a component of the debt, classification
of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest
expense in the Company's consolidated statements of income.
The Cash Conversion Subsections require retrospective application to the terms of instruments as they existed
for all periods presented. The adoption of the Cash Conversion Subsections affects the accounting for the
Company's 2.125% junior subordinated convertible debentures issued in December 2007 and due in December
2037. The retrospective application of this guidance affects the Company's fiscal years 2008 and 2009.
F-11
The following table sets forth the effect of the retrospective application of the Cash Conversion Subsections on
certain previously reported line items (in thousands, except per share data):
Condensed Consolidated Statements of Income:
Year Ended
March 31, 2009
Year Ended
March 31, 2008
As Reported
(24,269)
237,250
(11,570)
248,820
1.36
$
$
$
$
$
As Adjusted
(29,440)
$
232,079
$
(13,508)
$
245,587
$
1.34
$
As Reported
(7,966)
$
350,985
$
53,237
$
297,748
$
1.44
$
As Adjusted
(9,495)
$
349,456
$
52,663
$
296,793
$
1.43
$
$
1.33
$
1.31
$
1.40
$
1.40
Interest expense
Income before income taxes
Income tax (benefit) provision
Net income
Basic net income per common
share
Diluted net income per common
share
Condensed Consolidated Balance Sheet:
Other assets
Total assets
Junior convertible debentures
Deferred tax liability
Additional paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
March 31, 2009
As Reported
As Adjusted
$
34,254
$ 2,421,439
$ 1,149,184
51,959
$
$
778,204
$ 1,303,437
990,766
$
$ 2,421,439
$
18,526
$ 2,405,711
$ 334,184
$ 351,686
$ 1,281,936
$ 1,299,250
$ 1,490,311
$ 2,405,711
In addition, the adjustment resulted in changes to our consolidated statements of cash flows and Notes 10, 11,
20 and 21.
Other-Than-Temporary Impairments. In April 2009, the FASB issued guidance changing existing guidance for
determining whether an impairment of debt securities is other than temporary. This guidance requires other than
temporary impairments to be separated into the amount representing the decrease in cash flows expected to be
collected from a security (referred to as credit losses) which is recognized in earnings and the amount related to
other factors which is recognized in other comprehensive income. This noncredit loss component of the impairment
may only be classified in other comprehensive income if the holder of the security concludes that it does not intend
to sell and it will not more likely than not be required to sell the security before it recovers its value. If these
conditions are not met, the noncredit loss must also be recognized in earnings. When adopting this guidance, an
entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to reclassify
the noncredit component of a previously recognized other than temporary impairment from retained earnings to
accumulated other comprehensive income. The Company adopted this guidance on April 1, 2009. The Company
does not meet the conditions necessary to recognize the noncredit loss component of its auction rate securities in
other comprehensive income. Accordingly, the Company did not reclassify any previously recognized other-than-
temporary impairment losses from retained earnings to accumulated other comprehensive income and the adoption
of this guidance had no impact on the Company's consolidated financial statements. Refer to Note 4 for further
discussion of the Company's investments in marketable securities.
Fair-value when volume or level of activity has decreased significantly. In April 2009, the FASB issued
guidance for estimating fair value when the volume or level of activity in a market for an asset or liability has
decreased significantly. This guidance also provides information on identifying circumstances that indicate a
F-12
transaction is not orderly (i.e., a forced liquidation or distressed sale). This guidance was effective for the Company
beginning in fiscal 2010 and did not have a material impact on its financial position, results of operations or cash
flows.
Disclosures of fair value of financial instruments. In April 2009, the FASB issued guidance that requires
disclosures about fair value of financial instruments in interim financial statements. This guidance was effective for
the Company beginning in fiscal 2010, and because it applies only to financial statement disclosures, it had no
impact on its financial position, results of operations or cash flows.
Business combinations. In December 2007, the FASB issued a revision to previously issued accounting
literature which changes the accounting for business combinations including: (i) the measurement of acquirer shares
issued in consideration for a business combination, (ii) the recognition of contingent consideration, (iii) the
accounting for preacquisition gain and loss contingencies, (iv) the recognition of capitalized in-process research and
development (IPR&D), (v) the accounting for acquisition-related restructuring costs, (vi) the treatment of
acquisition-related transaction costs, and (vii) the recognition of changes in the acquirer's income tax valuation
allowance. The Company began applying this guidance prospectively to all business combinations beginning in
fiscal 2010. The impact of adoption on its financial position, results of operations or cash flows is dependent upon
the nature and terms of business combinations that the Company consummates.
2.
BUSINESS ACQUISITIONS
During the year ended March 31, 2010, the Company completed one business acquisition which was accounted
for under the purchase method of accounting. Total consideration paid for this business was approximately $9.3
million. The combined purchase price of the acquisition resulted in purchased intangible assets of approximately
$7.0 million, of which $2.9 million relates to in-process technology, and goodwill of approximately $4.2 million.
The purchased intangible assets (other than goodwill and the in-process technology intangible asset) are being
amortized over an average period of seven years. In addition, the acquisition resulted in contingent consideration
with an estimated fair value at the date of purchase of $1.3 million.
During the year ended March 31, 2009, the Company completed three business acquisitions which were
accounted for under the purchase method of accounting. Total consideration paid for these business acquisitions
was approximately $19.9 million. The combined purchase price of the acquisitions resulted in purchased intangible
assets of approximately $15.1 million and goodwill of approximately $4.3 million. The purchased intangible assets
(other than goodwill) are being amortized over an average period of seven years. One of the acquisitions has an
earn-out payment associated with it based on the operating performance of the acquired business for the twelve-
month period ending September 30, 2010. The initial purchase price of this acquisition was less than the fair value
of the acquired net assets, and as a result, the Company recorded negative goodwill totaling $2.2 million, which is
recorded in other long-term liabilities in the consolidated balance sheet.
3.
SPECIAL CHARGES
Patent Licenses
During the three months ended June 30, 2009, the Company agreed to the terms of a patent license with an
unrelated third-party and signed an agreement on July 9, 2009. The patent license settled alleged infringement
claims. The total payment made to the third-party in July 2009 was $1.4 million, $1.2 million of which was
expensed in the first quarter of fiscal 2010 and the remaining $0.2 million was recorded as a prepaid royalty that will
be amortized over the remaining life of the patent, which expires in June 2010.
The Company entered into a patent portfolio license effective March 31, 2009 with an unrelated third-party that
covers both issued patents and patent applications and settled alleged infringement claims. The total payment made
to the third-party was $8.25 million, $4.0 million of which was expensed in the fourth quarter of fiscal 2009 and the
remaining $4.25 million was recorded as a prepaid royalty that will be amortized over the estimated 20-year
remaining life of the patents.
Expenses Associated with the Abandonment of the Atmel Acquisition
On October 2, 2008, the Company and ON Semiconductor Corporation announced that they had sent a proposal
to the Board of Directors of Atmel Corporation to acquire Atmel for $5.00 per share in cash or a total of
approximately $2.3 billion. On October 29, 2008, Atmel announced that its Board of Directors had determined that
the unsolicited proposal was inadequate. On December 15, 2008, the Company delivered a written notification to
F-13
Atmel regarding a proposed alternate slate of directors to be elected at Atmel's 2009 annual meeting. On
February 10, 2009, the Company announced its termination of its consideration of a potential transaction with Atmel
in light of the economic uncertainty and the lack of visibility with respect to Atmel's business not allowing the
Company to put a value on Atmel. In the fourth quarter of fiscal 2009, the Company expensed $1.6 million of
various costs associated with the terminated proposal.
In-Process Research and Development
During the third quarter of fiscal 2009, the Company completed its acquisition of Hampshire Company, a leader
in the large format touch screen controller market. As a result of the acquisition, the Company incurred a $0.5
million in-process research and development charge in the third quarter of fiscal 2009.
During the fourth quarter of fiscal 2009, the Company completed the acquisition of HI-TECH Software, a
provider of software development tools and compilers. As a result of the acquisition, the Company incurred a $0.2
million in-process research and development charge in the fourth quarter of fiscal 2009.
During the fourth quarter of fiscal 2009, the Company completed its acquisition of R&E International, a leader
in developing innovative integrated circuits for smoke and carbon monoxide detectors and other life-safety systems.
As a result of the acquisition, the Company incurred a $0.2 million in-process research and development charge in
the fourth quarter of fiscal 2009.
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.
4.
INVESTMENTS
The Company's investments are intended to establish a high-quality portfolio that preserves principal, meets
liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to the
Company's investment guidelines and market conditions. The following is a summary of available-for-sale and
trading securities at March 31, 2010 (amounts in thousands):
Government agency bonds
Municipal bonds
Auction rate securities (ARS)
Marketable equity securities
Corporate bonds
ARS
Put option on ARS
Available-for-sale Securities
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
215
1,290
---
---
2,983
4,488
$
$
622
---
---
---
235
857
Adjusted
Cost
$ 389,801
156,415
14,151
58,402
392,108
$ 1,010,877
$
Estimated
Fair Value
389,394
157,705
14,151
58,402
394,856
$ 1,014,508
Trading Securities
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
---
---
---
$
$
---
---
---
Estimated
Fair Value
23,086
1,814
24,900
$
$
Adjusted
Cost
23,086
1,814
24,900
$
$
At March 31, 2010, the Company's available-for-sale and trading securities are presented in the consolidated
balance sheets as short-term investments of $722.2 million and long-term investments of $317.2 million.
F-14
The $58.4 million in marketable securities listed above relates to a strategic investment in Silicon Storage
Technology, Inc. at $3.05 per share. On April 8, 2010, the Company completed the acquisition of Silicon Storage
Technology, Inc. for $3.05 per share in a merger transaction. The Company has classified the shares owned in
Silicon Storage Technology, Inc. as available-for-sale securities.
Historically, the Company has made certain strategic investments in publicly traded companies which it
classified as trading securities. During the years ended March 31, 2010, 2009 and 2008, the Company recognized a
gain in earnings of $7.5 million, a loss in earnings of $2.0 million and a gain in earnings of $0.5 million,
respectively, on its trading securities. During the years ended March 31, 2010, 2009 and 2008, the Company had
realized gains of $1.1 million, $4.7 million and $0.2 million, respectively, on trading securities that it sold.
At March 31, 2010, $37.2 million of the Company's investment portfolio was invested in ARS. With the
continuing liquidity issues in the global credit and capital markets, the Company's ARS have experienced multiple
failed auctions. 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 ARS 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
indices, the estimated market value for these ARS no longer approximates the original purchase value.
The $24.9 million in failed auctions noted above have continued to fail through the filing date of this Annual
Report on Form 10-K. The fair value of the failed ARS of $14.2 million has been estimated based on market
information and estimates determined by management and could change significantly based on future market
conditions. The Company evaluated the impairments in the value of these ARS, determining its intent to sell these
securities prior to the recovery of its amortized cost basis resulted in the securities being other-than-temporarily
impaired and recognized impairment charges on these investments of $3.6 million during fiscal 2009 and $4.7
million in fiscal 2010, respectively.
The $34.8 million of ARS that failed during February 2008 are investments in student loan-backed ARS
(SLARS). Approximately $2.9 million and $7.0 million of these SLARS were redeemed at par by the issuers during
the fiscal years 2009 and 2010, respectively, reducing the Company's overall cost basis position in these SLARS to
$24.9 million. Based upon the Company's evaluation of available information, it believes these investments are of
high credit quality, as all of the investments carry AAA credit ratings by one or more of the major credit rating
agencies and are largely backed by the federal government (Federal Family Education Loan Program). The fair
value of the failed SLARS has been estimated based on market information and estimates determined by
management and could change significantly based on future market conditions.
In November 2008, the Company executed an ARS rights agreement (the Rights) with the broker through which
the Company purchased the $24.9 million in SLARS that provides (1) the Company with the right to put these
SLARS back to the broker at par anytime during the period from June 30, 2010 through July 2, 2012, and (2) the
broker with the right to purchase or sell the SLARS at par on the Company's behalf anytime through July 2, 2012.
The Company accounted for the acceptance of the Rights as the receipt of a put option for no consideration and
recognized a gain with a corresponding recognition as a long-term investment. The Company expects any future
changes in the fair value of the SLARS to be largely offset by changes in the fair value of the related Rights without
any significant net impact to the Company's income statement. The Company will continue to measure the SLARS
and the Rights at fair value (utilizing Level 3 inputs) until the earlier of maturity or exercise. The Company intends
and has the ability to hold the $24.9 million of SLARS until the market recovers or until June 30, 2010 when it has
the right to sell the SLARS at par to the broker 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, 2010, the Company evaluated its investment portfolio, and noted unrealized losses of $0.9 million
due to fluctuations in interest rates and credit market conditions. Management does not believe any of the
unrealized losses represent other-than-temporary impairment based on its evaluation of available evidence as of
March 31, 2010. 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, 2010, such recovery is not
anticipated to occur in the next year and these investments have been classified as long-term investments in the
Company's consolidated balance sheets. The amortized cost and estimated fair value of the available-for-sale
securities at March 31, 2010, 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.
F-15
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
Available-for-sale Securities
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Adjusted
Cost
Estimated
Fair Value
$
308,020
688,706
---
14,151
$ 1,010,877
$
$
1,743
2,745
---
---
4,488
$
$
19
838
---
---
857
$ 309,744
690,613
---
14,151
$ 1,014,508
The following is a summary of available-for-sale securities at March 31, 2009 (amounts in thousands):
Government agency bonds
ARS
Municipal bonds
Corporate bonds
Adjusted
Cost
469,815
18,901
356,520
20,000
865,236
$
$
Available-for-sale Securities
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
960
---
6,159
---
7,119
$
$
---
---
---
430
430
Estimated
Fair Value
470,775
18,901
362,679
19,570
871,925
$
$
At March 31, 2009, short-term investments consisted of $943.6 million and long-term investments consisted of
$50.8 million.
During the years ended March 31, 2010 and March 31, 2009, the Company had net realized gains on sales of
available-for-sale securities of $1.2 million and $0.5 million, respectively.
5.
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
Trade accounts receivable
Other
Less allowance for doubtful accounts
6.
INVENTORIES
Inventories consist of the following (amounts in thousands):
Raw materials
Work in process
Finished goods
March 31,
2010
$ 140,340
575
140,915
3,109
$ 137,806
2009
91,325
376
91,701
3,176
88,525
$
$
March 31,
2010
$
4,912
100,607
11,060
$ 116,579
2009
$
3,693
114,676
13,141
$ 131,510
7.
FAIR VALUE MEASUREMENTS
Accounting rules for fair value clarify that fair value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such,
fair value is a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. As a basis for considering such assumptions, the Company utilizes a three-
tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
F-16
Level 1 – Observable inputs such as quoted prices in active markets;
Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to
develop its own assumptions.
Assets measured at fair value on a recurring basis at March 31, 2010 are as follows (amounts in thousands):
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
$ 206,376
---
---
---
---
---
---
58,402
$ 264,778
Significant
Other
Observable
Inputs
(Level 2)
$
---
285,754
389,394
157,705
---
---
394,856
---
$ 1,227,709
Significant
Unobservable
Inputs
(Level 3)
$
$
---
---
---
---
37,237
1,814
---
---
39,051
Total
Balance
$
206,376
285,754
389,394
157,705
37,237
1,814
394,856
58,402
$ 1,531,538
Assets
Money market fund deposits
Deposit accounts
Government agency bonds
Municipal bonds
ARS
Put option on ARS
Corporate bonds
Marketable equity securities
Total assets measured at fair value
For Level 3 valuations, the Company estimated the fair value of these ARS based on the following: (i) the
underlying structure of each security; (ii) the present value of future principal and interest payments discounted at
rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction
failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each
security. The Company estimated the value of the put option on the ARS by evaluating the estimated cash flows
before and after the receipt of the put option, discounted at rates reflecting the likelihood of default and lack of
liquidity, or in the case of the payment of the par value to be paid by the broker at exercise of the put option, the
counterparty credit risk. The estimated fair values that are categorized as Level 3 as well as the put options on
publicly traded public stock could change significantly based on future market conditions. Refer to Note 4 for
further discussion of the Company's investments in ARS.
The following table presents a reconciliation for all assets measured at fair value on a recurring basis, excluding
accrued interest components, using significant unobservable inputs (Level 3) for the year ended March 31, 2010 as
follows (amounts in thousands):
$
Year Ended
March 31, 2010
50,826
(7,025)
(4,750)
39,051
$
Balance at March 31, 2009
Securities redeemed at par
Impairment losses included in other, net
Balance at March 31, 2010
F-17
Assets measured at fair value on a recurring basis are presented/classified in the consolidated balance sheets at
March 31, 2010 as follows (amounts in thousands):
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Balance
Assets
Cash and cash equivalents
Short-term investments
Long-term investments
Total assets measured at fair value
$
$
206,376
58,402
---
264,778
$
$
285,754
638,891
303,064
1,227,709
$
$
---
24,900
14,151
39,051
$
$
492,130
722,193
317,215
1,531,538
8.
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
2010
39,671
349,964
1,190,548
84,254
1,664,437
1,171,398
493,039
$
$
March 31,
2009
39,671
334,717
1,148,588
114,478
1,637,454
1,105,767
531,687
$
$
Depreciation expense attributed to property, plant and equipment was $86.4 million, $93.3 million and
$98.2 million for the years ending March 31, 2010, 2009 and 2008, respectively.
9.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of the following (amounts in thousands):
Developed technology
In-process technology
Distribution rights
Developed technology
Distribution rights
Gross
Amount
49,009
2,900
5,236
57,145
Gross
Amount
38,419
5,236
43,655
$
$
$
$
$
March 31, 2010
Accumulated
Amortization
(17,979)
---
(3,639)
(21,618)
$
March 31, 2009
Accumulated
Amortization
(14,805)
(3,132)
(17,937)
$
$
Net
Amount
31,030
2,900
1,597
35,527
Net
Amount
23,614
2,104
25,718
$
$
$
$
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 20 years.
In fiscal 2010, the Company acquired $10.6 million of developed technology, which has a weighted average
amortization period of 7.9 years and $2.9 million of in-process technology which will begin amortization once the
F-18
technology reaches technological feasibility. The following is an expected amortization schedule for the intangible
assets for the fiscal years March 31, 2011 through March 31, 2015, absent any future acquisitions or impairment
charges (amounts in thousands):
Year Ending
March 31,
2011
2012
2013
2014
2015
Projected
Amortization Expense
$
4,455
5,573
5,633
4,968
4,931
Amortization expense attributed to intangible assets was $3.7 million, $2.7 million and $1.9 million for the
years ending March 31, 2010, 2009 and 2008, respectively. The Company did not record any impairment losses in
the years ended March 31, 2010, 2009 and 2008 associated with the intangible assets acquired.
Goodwill activity for the years ended March 31, 2010 and March 31, 2009 was as follows (amounts in
thousands):
Goodwill, net
March 31, 2008
Additions due to business combinations
March 31, 2009
Additions due to business combination
March 31, 2010
$
$
$
31, 886
4,279
36,165
4,173
40,338
During fiscal 2009, the Company completed three acquisitions, which resulted in goodwill of approximately
$4.3 million. During fiscal 2010, the Company completed one acquisition, which resulted in goodwill of
approximately $4.2 million.
The Company has a single reporting unit, to which all of the goodwill at March 31, 2010 is assigned.
After completing the annual impairment analyses during the fourth quarter of fiscal 2010, fiscal 2009 and fiscal
2008, the Company concluded that goodwill was not impaired in any year. At March 31, 2010, the Company has
not recorded any impairment charges against its goodwill balance of approximately $40.3 million.
10.
INCOME TAXES
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. The Company files
U.S. federal, U.S. state, and foreign income tax returns. For U.S. federal, and in general for U.S. state tax returns,
the 2006 through fiscal 2010 tax years remain open for examination by tax authorities. For foreign tax returns, the
Company is generally no longer subject to income tax examinations for years prior to fiscal 2002.
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, the refinement of an
estimate, the closing of a statutory audit period or changes in applicable tax law. To the extent that the final tax
outcome of these matters is different than the amounts recorded, such differences will impact the provision for
income taxes in the period in which such determination is made. The provision for income taxes includes the impact
of reserve provisions and changes to the reserves that are considered appropriate, as well as related net interest.
The Company recognizes liabilities for anticipated tax audit issues in the U.S. and other domestic and
international tax jurisdictions based on its estimate of whether, and the extent to which, additional tax payments are
more likely than not. The Company believes it maintains appropriate reserves to offset potential income tax
liabilities that may arise upon final resolution of matters for open tax years. The U.S. Internal Revenue Service
(IRS) is currently auditing the Company's fiscal years 2006, 2007 and 2008. Fiscal 2009 and fiscal 2010 are
currently open for examination by the IRS. The Company believes that it has appropriate support for the income tax
positions taken and to be taken on its tax returns and that its accruals for tax liabilities are appropriate for all open
years based on an assessment of many factors including past experience and interpretations of tax law applied to the
facts of each matter. If such 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
F-19
assessments ultimately prove to be greater than anticipated, a future charge to expense would be recorded in the
period in which the assessment is determined. Timing of the resolution and/or closure on audits is highly uncertain;
however, the Company believes that it is reasonably possible that the unrecognized tax benefits could significantly
change within the next 12 months as the result of a tax examination closure. This settlement could have a significant
impact on the unrecognized tax benefit; however the Company is not currently able to quantify the amount of such
change.
The following table summarizes the activity related to the Company's gross unrecognized tax benefits from
April 1, 2009 to March 31, 2010 (amounts in thousands):
Balance as of April 1, 2009
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, 2010
$
70,051
(25,492)
11,332
1,249
57,140
$
As of March 31, 2010, the Company had accrued approximately $4.7 million related to the potential payment of
interest on the Company's uncertain tax positions. Interest was included in the provision for income taxes. The
Company has not accrued any penalties related to its uncertain tax positions as the Company believes that it is more
likely than not that there will not be any assessments of penalties.
The income tax (benefit) provision consists of the following (amounts in thousands):
Current (benefit) expense:
Federal
State
Foreign
Total current
Deferred expense (benefit):
Federal
State
Foreign
Total deferred
Year Ended March 31,
2009
2008
2010
$ (4,358)
(436)
6,981
2,187
$ (38,836)
(3,888)
8,689
(34,035)
$ 31,202
3,124
9,350
43,676
16,663
1,668
290
18,621
$ 20,808
19,476
1,950
(899)
20,527
$ (13,508)
6,814
682
1,491
8,987
$ 52,663
The tax benefit associated with the Company's equity incentive plans reduced taxes currently payable by
$3.7 million, $7.6 million and $21.9 million for the years ended March 31, 2010, 2009 and 2008, respectively.
These amounts were credited to additional paid-in capital in each of the three fiscal years.
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to
income before income taxes. The sources and tax effects of the differences in the total income tax (benefit)
provision are as follows (amounts in thousands):
Computed expected income tax provision
State income taxes, net of federal benefits
Domestic production activities/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
2010
$ 83,235
915
---
(1,500)
(53,390)
(8,452)
---
$ 20,808
Year Ended March 31,
2009
$ 81,228
1,295
---
(2,732)
(43,452)
(16,880)
(32,967)
$ (13,508)
2008
$ 122,310
2,674
(257)
(2,625)
(58,475)
---
(10,964)
$ 52,663
F-20
Pretax income from foreign operations was $201.2 million, $195.1 million and $273.1 million for the years
ended March 31, 2010, 2009 and 2008, respectively. Unremitted foreign earnings that are considered to be
permanently invested outside the U.S., and on which no deferred taxes have been provided, amounted to
approximately $1,277.9 million at March 31, 2010. The Company has the ability and intent to indefinitely reinvest
the foreign earnings. Should the Company elect in the future to repatriate a portion of the foreign earnings so
invested, the Company would incur income tax expense on such repatriation, net of any available deductions and
foreign tax credits. This would result in additional income tax expense beyond the computed effective tax rate in
such periods.
During the year ended March 31, 2010, the Company settled an IRS examination of fiscal years 2002, 2003 and
2004 which resulted in a one-time tax benefit of $8.5 million. This tax benefit decreased the Company's effective
tax rate by approximately 3.6 percentage points to 8.8%.
In October 2008, the U.S. Congress passed the Emergency Economic Stabilization Act of 2008 which included
a provision to extend the research and development tax credit retroactively from January 1, 2008. As a result, the
Company recognized a one-time tax benefit of $1.5 million in the quarter ending December 31, 2008. Likewise, the
ongoing benefit from this credit was reflected in the Company's effective tax rate through December 31, 2009 when
the research and development tax credit expired.
During the year ended March 31, 2009, the Company settled an IRS examination of fiscal 2005 which resulted
in a one-time tax benefit of $16.9 million. Also, during fiscal 2009, the IRS issued revised Treasury Regulations
that provided a clarification of the tax treatment of certain items that the Company had previously established a tax
accrual for, and as a result, the Company recognized a $33.0 million tax benefit. The tax reserve releases are
reflected as separate line items in the rate reconciliation table above. These tax benefits decreased the Company's
effective tax rate by approximately 21.5 percentage points to an effective tax benefit of 5.8% for fiscal year 2009.
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 15.1%.
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):
Deferred tax assets:
Deferred intercompany profit
Deferred income on shipments to distributors
Inventory valuation
Net operating loss carryforward
Share-based compensation
Accrued expenses and other
Gross deferred tax assets
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation
Junior convertible debentures
Other
Gross deferred tax liability
Net deferred tax liability
March 31,
$
$
2010
7,711
24,531
842
2,966
30,316
11,444
77,810
2009
10,048
20,596
2,548
3,079
23,938
9,417
69,626
(3,861)
(372,252)
(600)
(376,713)
$ (298,903)
(7,997)
(341,259)
(2,430)
(351,686)
$ (282,060)
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.
F-21
At March 31, 2010, 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 $17.3 million, $6.4 million and $7.1 million
for the years ended March 31, 2010, 2009 and 2008, respectively. The benefit the tax holiday had on diluted net
income per share approximated $0.09 in the year ended March 31, 2010 and $0.03 for each of the years ended
March 31, 2009 and 2008.
11.
2.125% JUNIOR SUBORDINATED CONVERTIBLE DEBENTURES
The Company's $1.15 billion principal amount of 2.125% junior subordinated convertible debentures due
December 15, 2037, are subordinated in right of payment to any future senior debt of the Company and are
effectively subordinated in right of payment to the liabilities of the Company's subsidiaries. The debentures are
convertible, subject to certain conditions, into shares of the Company's common stock at an initial conversion rate of
29.2783 shares of common stock per $1,000 principal amount of debentures, representing an initial conversion price
of approximately $34.16 per share of common stock. As of March 31, 2010, none of the conditions allowing
holders of the debentures to convert had been met. As a result of cash dividends paid since the issuance of the
debentures, the conversion rate has been adjusted to 32.9544 shares of common stock per $1,000 of principal
amount of debentures, representing a conversion price of approximately $30.34 per share of common stock.
As the debentures can be settled in cash upon conversion, for accounting purposes, the debentures were
bifurcated into a liability component and an equity component, which are initially recorded at fair value. The
carrying value of the equity component at March 31, 2010 and at March 31, 2009 was $822.4 million. The
estimated fair value of the liability component of the debentures at the issuance date was $327.6 million, resulting in
a debt discount of $822.4 million. The unamortized debt discount was $808.7 million at March 31, 2010 and $815.0
million at March 31, 2009. The carrying value of the debentures was $340.7 million at March 31, 2010 and $334.2
million at March 31, 2009. The remaining period over which the unamortized debt discount will be recognized as
non-cash interest expense is 27.75 years. In the year ended March 31, 2010, the Company recognized $6.3 million
in non-cash interest expense related to the amortization of the debt discount. In the year ended March 31, 2009, the
Company recognized $5.2 million in non-cash interest expense related to the amortization of the debt discount. In
the year ended March 31, 2008, the Company recognized $1.5 million in non-cash interest expense related to the
amortization of the debt discount. The Company recognized $24.4 million of interest expense related to the 2.125%
coupon on the debentures in each of fiscal 2010 and fiscal 2009, and $7.1 million of interest expense related to the
2.125% coupon on the debentures in fiscal 2008.
The debentures also include certain embedded features related to the contingent interest payments, the
Company making specific types of distributions (e.g., extraordinary dividends), the redemption feature in the event
of changes in tax law, and penalty interest in the event of a failure to maintain an effective registration statement.
These features qualify as derivatives and are bundled as a compound embedded derivative that is measured at fair
value. The fair value of the derivative as of March 31, 2010 was $0.7 million, compared to the value at March 31,
2009 of $0.5 million, resulting in an increase of interest expense in fiscal 2010 of $0.2 million. The balance of the
debentures on the Company's condensed consolidated balance sheet at March 31, 2010 of $340.7 million includes
the fair value of the embedded derivative.
12.
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. 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, 2010, it is not probable that the ultimate resolution of these matters will harm its business
and will have a material adverse effect on its financial position, cash flows or results of operations.
F-22
13.
STOCKHOLDERS' EQUITY
Stock Repurchase Activity. 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, 2010, the Company had repurchased 7.5 million shares under this
authorization for $234.7 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.
During the year ended March 31, 2010, the Company did not purchase any of its shares of common stock.
During the year ended March 31, 2009, the Company purchased 4.0 million shares of its common stock for
$123.9 million. During the year ended March 31, 2008, the Company purchased 36.5 million shares of its common
stock for $1,138.0 million.
As of March 31, 2010, approximately 33.5 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.
14.
EMPLOYEE BENEFIT PLANS
The Company maintains a contributory profit-sharing plan for its domestic employees meeting certain
eligibility and service requirements. The plan qualifies under Section 401(k) of the Internal Revenue Code of 1986,
as amended, and allows employees to contribute up to 60% of their base salary, subject to maximum annual
limitations prescribed by the IRS. Through December 31, 2008, the Company made matching contributions of up to
25% of the first 4% of the participant's eligible compensation and could award up to an additional 25% under the
discretionary match. The Company eliminated the mandatory matching contribution as of January 1, 2009. All
matches are provided on a quarterly basis and require the participant to be an active employee at the end of each
quarter. For the fiscal years ended March 31, 2009 and 2008, the Company contributions to the plan totaled
$1.4 million and $1.4 million, respectively. Due to expense reduction actions taken in response to adverse economic
conditions, the Company did not contribute to the plan for the fiscal year ended March 31, 2010.
The Company's 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) became effective on March 1,
2002. The Board of Directors approved the 2001 Purchase Plan in May 2001 and the stockholders approved it in
August 2001. Under the 2001 Purchase Plan, eligible employees of the Company may purchase shares of common
stock at semi-annual intervals through periodic payroll deductions. The purchase price in general will be 85% of the
lower of the fair market value of the common stock on the first day of the participant's entry date into the offering
period or 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, 2010, 921,171 additional shares were reserved under the 2001 Purchase Plan based on the
automatic increase. On January 1, 2009, 910,229 additional shares were reserved under the 2001 Purchase Plan
based on the automatic increase. On January 1, 2008, 945,068 additional shares were reserved under the 2001
Purchase Plan based on the automatic increase. Since the inception of the 2001 Purchase Plan, 9,376,063 shares of
common stock have been reserved for issuance and 3,559,157 shares have been issued under this purchase plan.
During fiscal 1995, a purchase plan was adopted for employees in non-U.S. locations. Such plan provided for
the purchase price per share to be 100% of the lower of the fair market value of the common stock at the beginning
or end of the semi-annual purchase plan period. Effective May 1, 2006, the Company's Board approved a purchase
price per share equal to 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, 1,119,925
shares of common stock have been reserved for issuance and 460,146 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.
F-23
The Company has management incentive compensation plans which provide for bonus payments, based on a
percentage of base salary, from an incentive pool created from operating profits of the Company, at the discretion of
the Board of Directors. During the years ended March 31, 2010, 2009 and 2008, $16.5 million, $3.0 million and
$9.2 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, 2010,
2009 and 2008, $4.3 million, $2.9 million and $2.3 million, respectively, were charged against operations for this
plan.
15.
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 and RSUs
have been 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, 2010,
8.2 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, 106,177,680 shares of common stock have been reserved for issuance since the inception of
the plans.
Share-Based Compensation Expense
The following table presents details of share-based compensation expense (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
2010
$ 7,054 (1)
12,194
17,530
36,778
(4,563)
$ 32,215
Year Ended March 31,
2009
$ 5,845(1)
10,866
15,770
32,481
(5,277)
$ 27,204
2008
$ 6,191(1)
10,695
15,960
32,846
(6,395)
$ 26,451
(1) During the year ended March 31, 2010, $7.0 million was capitalized to inventory, and $7.1 million of capitalized
inventory was sold. During the year ended March 31, 2009, $6.7 million was capitalized to inventory and $5.8 million
of capitalized inventory was sold. During the year ended March 31, 2008, $6.7 million was capitalized to inventory
and $6.2 million of capitalized inventory was sold.
The amount of unearned share-based compensation currently estimated to be expensed in fiscal 2011 through
fiscal 2014 related to unvested share-based payment awards at March 31, 2010 is $56.0 million. The weighted
average period over which the unearned share-based compensation is expected to be recognized is approximately
2.27 years.
F-24
Combined Incentive Plan Information
RSU share activity under the 2004 Plan is set forth below:
Nonvested shares at March 31, 2007
Granted
Forfeited/expired
Vested
Nonvested shares at March 31, 2008
Granted
Forfeited/expired
Vested
Nonvested shares at March 31, 2009
Granted
Forfeited/expired
Vested
Nonvested shares at March 31, 2010
Number of Shares
1,687,443
1,084,690
(174,755)
(132,813)
2,464,565
1,876,738
(293,573)
(445,958)
3,601,772
1,846,241
(120,198)
(689,867)
4,637,948
The total intrinsic value of RSUs which vested during the year ended March 31, 2010 was $17.5 million. The
aggregate intrinsic value of RSUs outstanding at March 31, 2010 was $130.6 million calculated based on the closing
price of the Company's common stock of $28.16 on March 31, 2010.
The weighted average fair values per share of the RSUs awarded are calculated based on the fair market value
of the Company's common stock on the respective grant dates discounted for the Company's expected dividend
yield. The weighted average fair values per share of RSUs awarded in the years ended March 31, 2010, 2009 and
2008 was $20.75, $22.11 and $29.73, respectively. At March 31, 2010, the weighted average remaining expense
recognition period was 2.32 years.
Option activity under the Company's stock incentive plans in the three years ended March 31, 2010 is set forth
below:
Outstanding at March 31, 2007
Granted
Exercised
Canceled
Outstanding at March 31, 2008
Granted
Exercised
Canceled
Outstanding at March 31, 2009
Granted
Exercised
Canceled
Outstanding at March 31, 2010
Number of
Shares
14,740,546
31,597
(2,850,155)
(189,603)
11,732,385
24,000
(1,573,183)
(101,669)
10,081,533
12,000
(1,492,866)
(140,888)
8,459,779
Weighted
Average Exercise
Price per Share
$
21.88
37.23
16.66
25.17
23.14
33.90
16.33
26.27
24.20
27.03
22.03
27.79
24.52
$
The total intrinsic value of options exercised during the years ended March 31, 2010, 2009 and 2008 was
$7.6 million, $22.3 million and $56.5 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.
F-25
The following table summarizes information about the stock options outstanding at March 31, 2010:
Range of
Exercise Prices
$ 10.04- $17.85
17.86 - 18.48
18.49 - 24.04
24.05 - 25.26
25.27 - 25.29
25.30 - 27.03
27.04 - 27.05
27.06 - 27.15
27.16 - 37.46
37.47 - 37.84
Number
Outstanding
715,370
1,054,311
891,916
222,053
1,441,614
653,827
1,269,900
1,373,834
812,954
24,000
Weighted
Average
Exercise Price
$ 16.10
18.48
22.86
24.51
25.29
26.22
27.05
27.15
30.11
37.84
8,459,779
$ 24.52
Weighted
Average
Remaining Life
(in years)
0.98
3.01
2.33
1.73
4.98
3.88
3.98
2.01
3.94
7.38
3.22
Number
Exercisable
715,370
1,054,311
891,916
222,053
1,439,954
648,827
1,269,900
1,373,833
793,281
24,000
Weighted
Average
Exercise Price
16.10
$
18.48
22.86
24.51
25.29
26.21
27.05
27.15
29.95
37.84
8,433,445
$
24.49
The aggregate intrinsic value of options outstanding and options exercisable at March 31, 2010 was $32.6
million and $32.6 million, respectively. The aggregate intrinsic values were calculated based on the closing price of
the Company's common stock of $28.16 per share on March 31, 2010.
At March 31, 2010 and 2009, the number of option shares exercisable was 8,433,445 and 8,578,595,
respectively, and the weighted average exercise price per share of these options was $24.49 and $23.93,
respectively.
The weighted average fair values per share of stock options granted in the years ended March 31, 2010, 2009,
and 2008 was $5.90, $10.39 and $11.93, 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, 2010, 2009 and 2008 were estimated utilizing the following
assumptions:
Expected term (in years)
Volatility
Risk-free interest rate
Dividend yield
2010
6.50
36%
2.57%
5.00%
Year Ended March 31,
2009
6.50
43%
3.14%
4.00%
2008
6.50
39%
3.92%
3.31%
16.
LEASE COMMITMENTS
The Company leases office space, transportation and other equipment under operating leases which expire at
various dates through March 31, 2015. The future minimum lease commitments under these operating leases at
March 31, 2010 were as follows (amounts in thousands):
Year Ending
March 31,
2011
2012
2013
2014
2015
Total minimum payments
Amount
$
$
4,549
3,315
1,849
1,102
1,043
11,858
Rental expense under operating leases totaled $8.2 million, $7.9 million and $7.6 million for the years ended
March 31, 2010, 2009 and 2008, respectively.
F-26
17.
GEOGRAPHIC AND OTHER 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 U.S. consist of product assembly and final test facilities in Thailand, and sales and support centers and
design centers in certain foreign countries. Domestic operations are responsible for the design, development and
wafer fabrication of products, as well as the coordination of production planning and shipping to meet worldwide
customer commitments. The Thailand assembly and test facility is reimbursed in relation to value added with
respect to assembly and test operations and other functions performed, and certain foreign sales offices receive
compensation for sales within their territory. Accordingly, for financial statement purposes, it is not meaningful to
segregate sales or operating profits for the assembly and test and foreign sales office operations. Identifiable long-
lived assets (consisting of property, plant and equipment) by geographic area are as follows (amounts in thousands):
United States
Thailand
Various other countries
Total long-lived assets
March 31,
2010
332,920
147,732
12,387
493,039
$
$
2009
368,149
152,359
11,179
531,687
$
$
Sales to unaffiliated customers located outside the U.S., primarily in Asia and Europe, aggregated
approximately 77%, 75% and 75% of consolidated net sales for the years ended March 31, 2010, 2009 and 2008,
respectively. Sales to customers in Europe represented 25%, 29% and 30% of consolidated net sales for the years
ended March 31, 2010, 2009 and 2008, respectively. Sales to customers in Asia represented 51%, 46% and 44% of
consolidated net sales for each of the years ended March 31, 2010, 2009 and 2008, respectively. Sales into China,
including Hong Kong, represented 25%, 23% and 20% of consolidated net sales for the years ended March 31,
2010, 2009 and 2008, respectively. Sales into Taiwan represented 10% of consolidated net sales for each of the
years ended March 31, 2010 and 2008. 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 each of fiscal 2010,
fiscal 2009 and fiscal 2008. The Company's largest distributor accounted for approximately 12% of its net sales in
fiscal 2010, approximately 14% of its net sales in fiscal 2009, and approximately 12% of its net sales in fiscal 2008.
18.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents approximates fair value because their maturity is less than three
months. The carrying amount of short-term and long-term investments approximates fair value as the securities are
marked to market as of each balance sheet date with any unrealized gains and losses reported in stockholders' equity.
The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to
the short-term maturity of the amounts. The fair value of the Company's junior subordinated convertible debentures
was $1.146 billion at March 31, 2010, and $832.3 million at March 31, 2009 based on the trading price of the bonds.
19.
DERIVATIVE INSTRUMENTS
The Company has international operations and is thus subject to foreign currency rate fluctuations. To manage
the risk of changes in foreign currency rates, the Company periodically enters into derivative contracts comprised of
foreign currency forward contracts to hedge its asset and liability foreign currency exposure and a portion of its
foreign currency operating expenses. Approximately 99% of the Company's sales are U.S. Dollar denominated. To
date, the exposure related to foreign exchange rate volatility has not been material to the Company's operating
results. As of March 31, 2010 and 2009, the Company had no foreign currency derivatives outstanding. The
Company recognized an immaterial amount of net realized losses on foreign currency derivatives in the three
months ended March 31, 2010.
F-27
20.
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):
Net income
Weighted average common shares outstanding
Dilutive effect of stock options and RSUs
Dilutive effect of convertible debt
Weighted average common and common
equivalent shares outstanding
Basic net income per common share
Diluted net income per common share
$
$
$
2010
217,005
183,642
3,697
---
187,339
1.18
1.16
Year Ended March 31,
2009
2008
$
$
$
245,587
183,158
3,336
294
186,788
1.34
1.31
$
$
$
296,793
207,220
4,828
---
212,048
1.43
1.40
Weighted average common shares exclude the effect of antidilutive options. For the year ended March 31,
2010, the number of option shares that were antidilutive were 4,109,841. For the year ended March 31, 2009, the
number of option shares that were antidilutive were 3,685,806. For the year ended March 31, 2008, the number of
option shares that were antidilutive were 127,219.
Diluted net income per common share for the year ended March 31, 2010 does not include any incremental
shares issuable upon the exchange of the debentures (see Note 11). 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 weighted average conversion price per share used in calculating the dilutive effect of the convertible
debt for the year ended March 31, 2010 was $31.16.
21.
QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company's selected unaudited quarterly operating results for the eight quarters
ended March 31, 2010. The Company believes that all adjustments of a normal recurring nature have been made to
present fairly the related quarterly results (in thousands, except per share amounts):
Fiscal 2010
Net sales
Gross profit
Operating income
Net income
Diluted net income per common share
Fiscal 2009 (as adjusted)
Net sales
Gross profit
Operating income
Net income
Diluted net income per common share
First
Quarter
$ 192,949
96,435
31,178
27,368
0.15
First
Quarter
$ 268,172
163,597
86,632
75,547
0.40
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
$ 226,661 $ 250,099 $ 278,020 $ 947,729
534,242
244,959
217,005
1.16
123,340
52,726
44,485
0.24
168,471
88,487
75,749
0.40
145,996
72,568
69,403
0.37
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
$ 269,706 $ 192,166 $ 173,253 $ 903,297
516,504
233,328
245,587
1.31
164,153
87,181
75,720
0.40
83,967
19,041
21,964
0.12
104,787
40,474
72,356
0.39
Refer to Note 3, Special Charges, for an explanation of the special charge in the first quarter of fiscal 2010
related to the Company's patent license. Refer to Note 3, Special Charges, for an explanation of the special charges
in the fourth quarter of fiscal 2009 related to the Company's patent license and in-process research and development
expenses, as well as expenses associated with the abandonment of the Atmel acquisition. Refer to Note 10, Income
Taxes, for an explanation of the benefit related to an IRS settlement in the third quarter of fiscal 2010, the benefit
related to an IRS settlement and change in tax regulations in the third quarter of fiscal 2009 and a tax benefit from
the reinstatement of the R&D tax credit in the third quarter of fiscal 2009.
F-28
22.
SUPPLEMENTAL FINANCIAL INFORMATION
Cash paid for income taxes amounted to $9.8 million, $8.8 million and $25.2 million during the years ended
March 31, 2010, 2009 and 2008, respectively. Cash paid for interest on borrowings amounted to $24.4 million and
$25.0 million during the years ended March 31, 2010 and 2009, 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, 2010, 2009 and 2008 follows (amounts in thousands):
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Deductions (1)
Balance at
End of Year
Allowance for doubtful accounts:
2010
2009
2008
$
3,176
3,152
3,544
$
90
132
---
$
(157)
(108)
(392)
$
3,109
3,176
3,152
(1) Deductions represent uncollectible accounts written off, net of recoveries.
23.
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 $1.359,
$1.346 and $1.205 during the years ended March 31, 2010, 2009 and 2008, respectively. Total dividend payments
amounted to $249.6 million, $246.7 million and $252.0 million during the years ended March 31, 2010, 2009 and
2008, respectively.
24.
TRANSACTION WITH SILICON STORAGE TECHNOLOGY, INC. (SST)
On February 2, 2010, the Company entered into an Agreement and Plan of Merger to acquire SST. Subsequent
to signing the initial Agreement and Plan of Merger, additional offers to acquire SST were made by third parties,
and the Company entered into a First Amendment to the Agreement and Plan of Merger on February 22, 2010, and a
Second Amendment to the Agreement and Plan of Merger on March 2, 2010 (the Second Amendment). As part of
the Second Amendment, the Company acquired 19.9% of the outstanding shares of SST through the purchase of
newly issued shares of common stock at a price of $3.05 per share, the then fair value of the shares. Additionally, as
part of the Second Amendment, the Company agreed that in the event its offer to acquire SST at $3.05 per share was
superseded by a superior offer by another party, the Company's profit on the shares, and the termination fee under
the agreement would not exceed a threshold (the Profit Cap) established in the Second Amendment. Any profits
exceeding this threshold would be paid by the Company to SST in cash, or by remitting shares equal in value to the
excess profits. Finally, the Second Amendment gave the Company the right, but not the obligation, to require SST
to repurchase the shares acquired (the 19.9% ownership shares), at a price of $3.05 per share in the event the
acquisition was not completed (the Put Right).
The Company accounted for the Profit Cap and Put Right as a compound embedded derivative, and valued this
derivative taking into account the likelihood the derivative would become operable, since both the Profit Cap and
the Put Right are contingent upon the acquisition of SST not occurring. The Company concluded that the fair value
of the derivative at the acquisition date and at March 31, 2010 were immaterial. The Company has accounted for
the investment in shares of SST as an available-for-sale security, and as the value of the shares at March 31, 2010
was the same as that at the acquisition date, no unrealized gains or losses were recognized. On April 8, 2010, the
Company acquired the remaining outstanding shares of SST for $3.05 per share in a merger transaction as discussed
below.
F-29
25.
SUBSEQUENT EVENTS
On April 8, 2010, the Company closed its acquisition of SST in a merger transaction for $3.05 per share, or
$353.8 million, including the $58.4 million of SST shares acquired on March 8, 2010. This business acquisition will
be accounted for under the purchase method of accounting. The Company is in the process of completing the
purchase price allocation.
On May 24, 2010, the Company consummated the sale of certain non-core assets from its SST acquisition. The
sale included inventory, equipment, intellectual property and certain other assets and liabilities associated with
various product lines.
F-30