Microchip
Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A (RULE 14a-101) SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant Filed by a Party other than the Registrant Check the appropriate box: Preliminary proxy statement. Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2)). Definitive Proxy Statement. Definitive Additional Materials. Soliciting Material Pursuant to § 240.14a-12. Microchip Technology Incorporated (Name of Registrant as Specified In Its Charter) ____________________________________________________________________ (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (check the appropriate box): No fee required. Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (2) (3) (4) (5) Aggregate number of securities to which transaction applies: Per unit price or other underlying value of transaction computed to Exchange Act Rule 0-11 (set forth the amount on which the fee is calculated and state how it was determined): Proposed maximum aggregate value of transaction: Total fee paid: Fee paid previously with preliminary materials. Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Table of Contents (1) (2) (3) (4) Amount Previously Paid: Form, Schedule or Registration Statement No.: Filing Party: Date Filed: Table of Contents TIME: PLACE: ITEMS OF BUSINESS: RECORD DATE: ANNUAL REPORT: PROXY: MICROCHIP TECHNOLOGY INCORPORATED 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS August 22, 2017 9:00 a.m. Mountain Standard Time Microchip Technology Incorporated 2355 W. Chandler Boulevard Chandler, Arizona 85224-6199 (1) The election of each of Steve Sanghi, Matthew W. Chapman, L.B. Day, Esther L. Johnson and Wade F. Meyercord to our Board of Directors to serve for the ensuing year and until their successors are elected and qualified. (2) To approve the amendment and restatement of our 2004 Equity Incentive Plan to (i) increase the number of shares of common stock authorized for issuance thereunder by 6,000,000, (ii) re-approve the 2004 Equity Incentive Plan for purposes of Internal Revenue Code Section 162(m), and (iii) make certain other changes as set forth in the amended and restated plan. (3) To ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2018. (4) To hold an advisory (non-binding) vote regarding the compensation of our named executives. (5) To hold an advisory (non-binding) vote regarding the frequency of holding an advisory vote on the compensation of our named executives. (6) To transact such other business as may properly come before the annual meeting or any adjournment(s) thereof. The Microchip Board of Directors recommends that you vote for each of the foregoing items (1) through (4), and for a frequency period of one year on item (5). Holders of Microchip common stock of record at the close of business on June 28, 2017 are entitled to vote at the annual meeting. Microchip's fiscal 2017 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. /s/ Kim van Herk Kim van Herk Secretary Table of Contents Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be Held on August 22, 2017 The Microchip Notice of Annual Meeting, Proxy Statement and Annual Report on Form 10-K for the fiscal year ended March 31, 2017 are available at www.microchip.com/annual_reports. Chandler, Arizona July 13, 2017 Table of Contents PROXY STATEMENT THE BOARD OF DIRECTORS CERTAIN TRANSACTIONS TABLE OF CONTENTS Page SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE PROPOSAL ONE - ELECTION OF DIRECTORS PROPOSAL TWO - APPROVAL OF AMENDED AND RESTATED 2004 EQUITY INCENTIVE PLAN PROPOSAL THREE - RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PROPOSAL FOUR - APPROVAL OF EXECUTIVE COMPENSATION PROPOSAL FIVE - APPROVAL OF FREQUENCY PERIOD OF ADVISORY COMPENSATION VOTE SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS EXECUTIVE COMPENSATION - COMPENSATION DISCUSSION AND ANALYSIS COMPENSATION OF NAMED EXECUTIVE OFFICERS EQUITY COMPENSATION PLAN INFORMATION CODE OF BUSINESS CONDUCT AND ETHICS OTHER MATTERS 1 4 9 9 10 12 22 24 25 26 28 39 52 54 54 Table of Contents MICROCHIP TECHNOLOGY INCORPORATED 2355 West Chandler Boulevard Chandler, Arizona 85224-6199 PROXY STATEMENT You are cordially invited to attend our annual meeting on Tuesday, August 22, 2017, beginning at 9:00 a.m., Mountain Standard Time. The annual meeting will be held at our Chandler facility located at 2355 W. Chandler Blvd., Chandler, AZ 85224-6199. 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 2017 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 2017 refer to the 12-month period from April 1, 2016 through March 31, 2017; references to fiscal 2016 refer to the 12-month period from April 1, 2015 through March 31, 2016; and references to fiscal 2015 refer to the 12-month period from April 1, 2014 through March 31, 2015. We anticipate first mailing this proxy statement and accompanying form of proxy on July 13, 2017 to holders of record of Microchip's common stock on June 28, 2017 (the "Record Date"). 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. 1 Table of Contents 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. Stockholders Entitled to Vote Stockholders of record at the close of business on the Record Date, June 28, 2017, 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 232,723,905 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 22, 2017, 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 Three 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 nominee for director shall be elected to the board of directors if the votes cast for such nominee's election exceed the votes cast against such nominee's election. For this purpose, votes cast shall exclude abstentions, withheld votes or broker non- votes with respect to that director's election. Notwithstanding the immediately preceding sentence, in the event of a contested election of directors, directors shall be elected by the vote of a plurality of the votes cast. A contested election shall mean any election of directors in which the number of candidates for election as director exceeds the number of directors to be elected. If directors are to be elected by a plurality of the votes cast, stockholders shall not be permitted to vote against a nominee. Approval of Microchip's Amended and Restated 2004 Equity Incentive Plan (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 to (i) increase the number of shares of our common stock authorized for issuance thereunder by 6,000,000, (ii) re-approve the 2004 Equity Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and (iii) make certain other changes as set forth in the amended and restated 2004 Equity Incentive Plan. Abstentions will have the same effect as voting against this proposal. Broker "non-votes" are not counted for purposes of approving this matter, and thus will not affect the outcome of the voting on such proposal. 2 Table of Contents Ratification of Independent Registered Public Accounting Firm (Proposal Three) 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, 2018. Abstentions will have the same effect as voting against this proposal. Advisory Vote Regarding the Compensation of our Named Executives (Proposal Four) 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 to approve, on an advisory (non-binding) basis, the compensation of our named executive officers as disclosed in this proxy statement in accordance with the rules of the Securities and Exchange Commission (the "SEC"). Abstentions will have the same effect as voting against this proposal. Broker "non-votes" are not counted for purposes of approving this matter, and thus will not affect the outcome of the voting on such proposal. Advisory Vote Regarding the Frequency of Voting on the Compensation of our Named Executives (Proposal Five) A plurality of the votes duly cast is required to indicate, on an advisory (non-binding) basis, the frequency of stockholder voting on the compensation of our named executive officers (i.e., the selection receiving the greatest number of votes will be the advisory election). Abstentions and broker "non-votes" will be treated as if no vote were cast with respect to this proposal. Electronic Access to Proxy Statement and Annual Report This proxy statement and our fiscal 2017 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 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. Cost of Proxy Solicitation Microchip will pay its costs of soliciting proxies including the cost of any proxy solicitor if a proxy solicitor is engaged. 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. 3 Table of Contents THE BOARD OF DIRECTORS Meetings of the Board of Directors Our Board of Directors met six times in fiscal 2017. Each director attended at least 75% of the aggregate of (i) the total number of the meetings of the Board of Directors held during fiscal 2017 during such time as such person was a director, and (ii) the total number of meetings held by all of the committees of the Board of Directors on which he or she served during fiscal 2017 during such time as such person was a director. 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, Ms. Johnson 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 industry 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. Board Oversight of Risk Management 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 its duties. Similarly, the Compensation Committee considers risk management when setting the compensation policies and programs for Microchip's executive officers. As part of this process, our Compensation Committee concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on Microchip. 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, cyber security, IT system continuity, products and employees. The Board and the Audit Committee also receive periodic reports on Microchip's efforts to manage such risks through safety measures, system improvements, insurance or self-insurance. The Board of Directors believes that the leadership structure described above facilitates the Board's oversight of risk management because it allows the Board, working through its committees, to participate actively in the oversight of management's actions. 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 2017: 4 Table of Contents Mr. Chapman Mr. Day Ms. Johnson Mr. Meyercord Mr. Sanghi MEMBERSHIP ON BOARD COMMITTEES IN FISCAL 2017 Name Audit C Compensation Nominating and Governance C 2 C 10 Meetings held in fiscal 2017 8 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 which was amended and restated as of May 15, 2015. A copy of the Audit Committee charter is available at the About Us/Investor Relations 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 and Mr. Meyercord meet the requirements for being an "audit committee financial expert" as defined by applicable SEC rules. In fiscal 2005, our Board and 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. In fiscal 2012, our Board and our Audit Committee approved an amended policy to include matters regarding violations of federal or state securities laws, or the commission of bribery. This policy, called "Reporting Legal Non-Compliance," was created in accordance with applicable SEC rules and NASDAQ listing requirements. A copy of this policy is available at the About Us/Investor Relations 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 which was amended and restated as of May 15, 2015. The committee charter is available at the About Us/Investor Relations section under Mission Statement/Corporate Governance on www.microchip.com. The Board of Directors has determined that all members of our Compensation Committee are independent directors as defined by applicable SEC rules, NASDAQ listing standards and other requirements. For more information on our Compensation Committee, please refer to the "Compensation Discussion and Analysis" at page 28. 5 Table of Contents Nominating and Governance Committee Our Nominating and Governance Committee has the responsibility to help ensure that our Board is properly constituted to meet its fiduciary obligations to our stockholders and Microchip and that we have and follow appropriate governance standards. 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, as amended and restated as of May 19, 2014, which is available at the About Us/Investor Relations section under Mission Statement/Corporate Governance on www.microchip.com. The Board of Directors has determined that all members of the Nominating and Governance Committee are independent directors as defined by applicable SEC rules and NASDAQ listing standards. 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 believes 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, individual expertise, ethnicity and gender. 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 2018 Annual Meeting of Stockholders; Discretionary Authority to Vote on Stockholder Proposals" at page 54. 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 fiscal 2016 annual meeting of stockholders on August 15, 2016. REPORT OF THE AUDIT COMMITTEE (*) 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 is available at the About Us/Investor Relations 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. This means that 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 Public Company Accounting Oversight Board (PCAOB) standards. We have considered whether and determined that the provision of the non-audit services rendered to us by Ernst & Young LLP during fiscal 2017 was compatible with maintaining the independence of Ernst & Young LLP. 6 Table of Contents 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, 2017 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, 2017 for filing with the SEC. By the Audit Committee of the Board of Directors: Matthew W. Chapman (Chairman) Esther L. Johnson Wade F. Meyercord ________________________ (*) 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. 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. Director Fees Effective November 14, 2016, non-employee directors receive an annual retainer of $71,500, paid in quarterly installments, and $3,000 for each meeting attended in person. Directors do not receive any additional compensation for telephonic meetings of the Board of Directors, for meetings of committees of the Board, or for serving as a committee chair. Equity Compensation Under the terms of our 2004 Equity Incentive Plan, each non-employee director is automatically granted: • • upon the date that the individual is first appointed or elected to the Board of Directors as a non-employee director, that number of restricted stock units ("RSUs") equal to $160,000 (based on the fair market value of our common stock on the grant date) which shall vest in equal 25% annual installments on each of the four anniversaries of the tenth 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, that number of RSUs equal to $84,000 (based on the fair market value of our common stock on the grant date) which shall vest in equal 50% annual installments on each of the two anniversaries of the tenth day of the second month of our fiscal quarter in which the grant is made. 7 Table of Contents In addition, upon the date of our 2015 annual meeting, each individual who had served as a non-employee director for at least five years on that date and was elected by the stockholders to serve as a member of the Board of Directors at that annual meeting (i.e., Messrs. Chapman, Day and Meyercord) was granted that number of RSUs equal to $100,000 (based on the fair market value of our common stock on the grant date) which shall vest in equal 25% annual installments on each of the four anniversaries of the tenth day of the second month of our fiscal quarter in which the grant was 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 15, 2016, each of Mr. Chapman, Mr. Day, Ms. Johnson and Mr. Meyercord was granted 1,372 RSUs. The following table details the total compensation for Microchip's non-employee directors for fiscal 2017: DIRECTOR COMPENSATION Name Steve Sanghi (2) Matthew W. Chapman L.B. Day Esther L. Johnson Wade F. Meyercord Fees Earned or Paid in Cash Stock Awards(1) Option Awards Non-Equity Incentive Plan Compensation All Other Compensation Total $ — $ — $ — $ — $ — $ — 80,250 80,250 80,250 80,250 80,131 80,131 80,131 80,131 — — — — — — — — — — — — 160,381 160,381 160,381 160,381 (1) The stock award of 1,372 RSUs to each of the directors on August 15, 2016 had a fair value on the grant date of $58.40 per share and a market value on the grant date of $61.21 per share with an aggregate market value of each award of approximately $84,000. (2) Mr. Sanghi, our Chief Executive Officer and Chairman of the Board, does not receive any additional compensation for his service as a member of the Board of Directors. Compensation Committee Interlocks and Insider Participation The Compensation Committee is currently comprised of Mr. Meyercord (Chair) and Mr. Day. Each such person is an independent director. Neither Mr. Day nor Mr. Meyercord had any related-party transaction with Microchip during fiscal 2017 other than compensation for service as a director. In addition, neither of such directors has a relationship that would constitute a compensation committee interlock under applicable SEC rules. During fiscal 2017, 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. 8 Table of Contents CERTAIN TRANSACTIONS During fiscal 2017, Microchip had no related-party transactions within the meaning of 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 2017, 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 2017 except that Mr. Sanghi filed one late Form 4 in November 2016 with respect to one transaction; Mr. Moorthy filed one late Form 4 in October 2016 with respect to one transaction, and Mr. Meyercord filed one late Form 4 in August 2016 with respect to one transaction. 9 Table of Contents PROPOSAL ONE ELECTION OF DIRECTORS The Board currently consists of five directors: Steve Sanghi, Matthew W. Chapman, L.B. Day, Esther L. Johnson and Wade F. Meyercord. 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 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, Ms. Johnson and Mr. Meyercord. The term of office of each person who is elected as a director at the annual meeting will continue until the 2018 annual meeting of stockholders and until a successor has been elected and qualified. Vote Required; Board Recommendation A nominee for director in an uncontested election shall be elected to the Board of Directors if the votes cast for such nominee's election exceed the votes cast against such nominee's election (with votes cast excluding abstentions, withheld notes or broker non-votes). The Board of Directors unanimously recommends that stockholders vote FOR the nominees listed below. Information on Nominees for Director (as of June 30, 2017) Name Steve Sanghi Matthew W. Chapman L.B. Day Esther L. Johnson Wade F. Meyercord Age 61 66 72 65 76 Position(s) Held Chief Executive Officer and Chairman of the Board Director Director Director Director Steve Sanghi has served as Chief Executive Officer since October 1991, and Chairman of the Board since October 1993. He served as President from August 1990 to February 2016 and has served as a director since August 1990. From May 2004 through March 2014, when Xyratex Ltd. was acquired by Seagate Technology plc., he was a member of the Board of Directors of Xyratex Ltd., a publicly held U.K. company that specializes in storage and network technology. From May 2007 until April 2016, Mr. Sanghi served as a director of FIRST Organization, a not-for-profit public charity founded in 1989 to develop young people's interest in science and technology. From October 2013 through July 2014 when Hittite Microwave Corporation, a publicly held semiconductor company, was acquired, Mr. Sanghi was a member of the Board of Directors of Hittite Microwave Corporation. In November 2016, Mr. Sanghi joined the Board of Directors of Myomo, Inc., a commercial stage medical robotics company that offers expanded mobility for those suffering from neurological disorders and upper-limb paralysis. 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 over 25 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 Microchip's extraordinary growth and profitability over the past 25 years and to the strong position Microchip has attained in its key markets. 10 Table of Contents Matthew W. Chapman has served as a director of Microchip since May 1997. Since December 2006, he has served as Chief Executive Officer of Northwest Evaluation Association, a not-for-profit education services organization providing computer adaptive testing for millions of students throughout the United States and in 140 other countries. In his career, Mr. Chapman has served as CEO and Chairman of Concentrex Incorporated, a publicly held company specializing in supplying software solutions and service to U.S. financial institutions. Mr. Chapman also serves on the Board of Directors of the Oregon Business Association and Knowledge Alliance, and on the Board of Regents of the University of Portland. 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 Directors’ nominating and governance committee. 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 technology world. He has written on strategic planning and is involved with competitive factor assessment in the semiconductor and other technology market segments, geared to helping client organizations incorporate competitive factor assessment findings into their strategic plans. He has served as a board member or as an advisor to many public and private boards. 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 been a key strategic advisor to a number of large public corporations. The Board of Directors also recognizes Mr. Day's experience in financial matters. The Board of Directors believes that Mr. Day's background makes him well suited to serve on the Board of Directors' nominating and governance committee and compensation committee. Esther L. Johnson has served as a director of Microchip since October 2013. From April 2007 until her April 2012 retirement, Ms. Johnson served as the Vice President and General Manager of Carrier Electronics, a provider of high technology heating, air-conditioning and refrigeration solutions, and a part of United Technology Corporation, a publicly held company that provides high technology products and services to the aerospace and building systems industries. Prior to her position as Vice President and General Manager, since 1983, Ms. Johnson held a variety of other management positions with Carrier Electronics, including Director of Operations and Global Supply Chain Manager. Ms. Johnson was instrumental in Carrier being recognized by Industry Week as one of the "Top 10 Factories in North America." She has served as a board member on multiple private company boards. The Board of Directors concluded that Ms. Johnson should be nominated to serve as a director due to her significant executive level experience in the technology industry. The Board of Directors also recognizes the knowledge and experience Ms. Johnson has gained through her service on the boards of various private companies. The Board of Directors also recognizes Ms. Johnson's experience in financial matters. The Board of Directors believes that Ms. Johnson's background makes her well suited to serve on the Board of Directors' audit committee and 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 served as a member of the Board of Directors of Endwave Corporation, a publicly held company, from March 2004 until it was acquired in 2011. 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. 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 Mr. Meyercord's background makes him well suited to serve on the Board of Directors' 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. 11 Table of Contents PROPOSAL TWO APPROVAL OF AMENDED AND RESTATED 2004 EQUITY INCENTIVE PLAN Our 2004 Equity Incentive Plan (the "Plan") was initially approved by our stockholders in August 2004. The Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards (which may be granted in the form of restricted stock or restricted stock units ("Restricted Stock Units" or "RSUs")), performance shares, performance units, and deferred stock units to our employees and consultants as well as for automatic grants of RSUs to the non-employee members of our Board of Directors. Our Board of Directors is asking our stockholders to approve amending and restating the Plan to (i) increase the number of shares of common stock authorized for issuance thereunder by 6,000,000, and (ii) make certain other changes, including (x) providing that the gross shares pursuant to stock appreciation rights granted under the Plan (i.e., the shares actually issued pursuant to a stock appreciation right as well as the shares that represent payment of the exercise price and any applicable tax withholdings) will not be available for future grant or sale under the Plan; (y) adding a requirement that no award that vests on the basis of an individual’s continuous service with us will vest earlier than one year following the date of grant, except with respect to 5% of the maximum number of shares issuable under the Plan; and (z) clarifying that there will be no right for a participant to receive dividends until the shares subject to stock appreciation rights are issued and there will be no right for a participant to receive dividends until the restrictions on shares of restricted stock lapse. We are also asking our stockholders to re-approve the material terms of the Plan so that we can (i) continue to have the ability to grant equity awards that constitute "performance-based compensation" for purposes of Internal Revenue Code Section 162(m) ("Section 162(m)"), and (ii) grant certain French-qualified RSUs. Our Board of Directors believes that in order for us to remain competitive amidst the changing equity compensation landscape, we must be able to continue to use equity compensation arrangements to help us achieve our goal of attracting, retaining and motivating our personnel. We believe that, as amended and restated, the Plan will be an essential element of our competitive compensation package. Reasons for Voting for this Proposal Long-Term Equity is a Key Component of our Compensation Strategy. Our compensation strategy is to compensate our personnel in a manner that retains the highly talented employees necessary to manage and staff our business in an innovative and competitive industry. Our employees are our most valuable asset and we strive to provide them with compensation packages that are competitive, reward personal and company performance, and help meet our retention needs. We believe that equity awards, the value of which depends on our stock performance and which require continued service over time before any value can be realized, help achieve these objectives and are a key element to achieving our compensation goals. Equity awards also reinforce employees' incentives to manage our business as owners, aligning employees' interests with those of our stockholders. We believe we must continue to use equity compensation on a broad basis to help attract, retain, and motivate employees to continue to grow our business. As of March 31, 2017, there were approximately 7,240 employees (including executive officers), consultants, and non-employee directors who held outstanding equity awards granted under the Plan. 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. Requested Share Reserve Increase is Reasonable and Required to Meet our Forecasted Needs. When we most recently increased the number of shares of common stock authorized for issuance under the Plan in 2012, we believed the shares of our common stock reserved for issuance under the Plan would be sufficient to enable us to grant equity awards until 2017. This estimate was based on forecasts that took into account our anticipated rate in growth in hiring, an estimated range of our stock price over time, and our anticipated burn rates. 12 Table of Contents Our Board of Directors believes it is necessary to reserve additional shares of our common stock under the Plan to meet our anticipated equity compensation needs for the next several years. When determining the increase in the number of shares of common stock reserved for issuance under the Plan, our Board considered that we must be able to continue to use equity compensation arrangements to help us achieve our goal of attracting, retaining and motivating our personnel. Our Board also considering the following: • As of March 31, 2017, the number of shares of common stock that remained available for issuance under the Plan was 7,274,275, and we had 229,397,877 shares of common stock outstanding. As of such date, the outstanding equity awards under the Plan covered a total of 6,031,346 shares of our common stock, which consisted of (i) 5,981,292 shares subject to outstanding RSUs which were subject to vesting restrictions and (ii) 50,054 shares subject to outstanding options. • In fiscal 2017, fiscal 2016 and fiscal 2015, our usage of shares of our common stock for our stock plans as a percentage of our outstanding stock (i.e., our “burn rate”) was 0.61%, 1.09% and 0.60%, respectively. Our burn rate was calculated by dividing the number of shares subject to awards granted during the fiscal year by the weighted average number of shares outstanding during the fiscal year. Our average annual burn rate over this three-year period was 0.77%. • Our Board of Directors anticipates that the proposed share increase to the Plan will be sufficient for us to continue granting equity awards under the Plan through at least 2022 based on our average burn rate over the past three fiscal years. We are unable to predict our actual burn rate which will depend on a number of factors including the competitive dynamics for attracting, retaining and motivating our current and future employees, our future stock price, the impact of any future acquisitions we may make, any changes in tax laws, any changes in accounting rules related to share-based compensation and other factors. In particular, our Board considered that upon the closing of an acquisition (such as our acquisition of Atmel), we have typically assumed certain outstanding stock awards under the equity plans of the target company and such awards do not reduce the share reserve under Microchip's Plan. However, future equity awards to employees who join Microchip as a result of an acquisition will be made under the Plan and will reduce the share reserve under the Plan. Our Board of Directors approved the amended and restated Plan on May 16, 2017. If stockholders approve this proposal, the amended and restated Plan will become effective as of the date of stockholder approval. If stockholders do not approve this proposal, our ability to attract and retain the individuals necessary to drive our performance and increase long-term stockholder value will be limited, as the Plan will continue to be administered in its current form and the share increase will not take effect. The Plan Includes Compensation and Governance Best Practices The Plan includes provisions that are considered best practices for compensation and corporate governance purposes. These provisions protect our stockholders' interest, as follows: • • Administration. The Plan is administered by the Compensation Committee, which consists entirely of independent non-employee directors. Repricing or Exchange Programs are Not Allowed. The Plan does not permit outstanding options or stock appreciation rights to be repriced or exchanged for other awards. • Minimum Vesting Requirements. In general, awards vesting on the basis of an individual's continuous service with us will vest in full no earlier than the one-year anniversary of the grant date, although up to 5% of the shares reserved in the Plan may be granted without this minimum vesting requirement. • • Limited Transferability. Awards under the Plan generally may not be sold, assigned, transferred, pledged, or otherwise encumbered, unless otherwise approved by the administrator. No Tax Gross-ups. The Plan does not provide for any tax gross-ups. 13 Table of Contents • No Dividends on Unvested Restricted Stock. The Plan provides that a participant has no right to receive dividends on restricted stock until the restrictions on shares of restricted stock lapse. Approving the Plan Allows Us to Grant Certain Tax-Qualified Awards under Section 162(m) The approval of the Plan also is intended to give us, if we deem appropriate or desirable, the continued ability to grant awards that are intended to allow us to deduct in full for federal income tax purposes the compensation recognized by certain executive officers in connection with certain awards that may be granted to them under the Plan. Section 162(m) generally denies a corporate tax deduction for annual compensation exceeding $1 million paid to the chief executive officer and certain other executive officers (excluding the chief financial officer). However, certain types of compensation, including performance-based compensation, are generally excluded from this deductibility limit if certain requirements are met. To enable compensation in connection with stock options, stock appreciation rights, RSUs and certain full-value awards and performance awards under the Plan to qualify as “performance-based” within the meaning of Section 162(m), the Plan limits the sizes of awards that may be granted to a participant each calendar year as further described below (among other requirements). By approving the amended and restated Plan, the stockholders will be re-approving, among other things, eligibility requirements for participation in the Plan and the other material terms of the Plan and awards granted under the Plan, including limits on the numbers of shares or compensation that could be granted to a participant each calendar year, and re- approving, among things, performance measures upon which specific performance goals applicable to certain awards would be based. Notwithstanding the foregoing, we retain the ability to grant awards under the Plan that do not qualify as “performance- based” compensation within the meaning of Section 162(m). Approving the Plan Allows Us to Grant Certain French-Qualified Restricted Stock Units In August 2015, a new law was adopted in France, which is referred to as "Loi Macron." Loi Macron provides potentially favorable tax and social contribution treatment to both our French subsidiaries and the employees receiving certain French-qualified equity awards. In order to benefit from Loi Macron’s favorable tax treatment, French-qualified RSUs must be granted pursuant to an equity plan authorized by stockholders after August 7, 2015. We are not required to grant French- qualified RSUs in France and may choose, at our discretion, to grant non-qualified awards to employees of our French subsidiaries depending on the circumstances. Stockholder approval of the Plan at the Annual Meeting would allow us to meet the stockholder authorization requirement for granting French-qualified RSUs with Loi Macron terms. The approximate number of eligible employees that might receive awards under the Plan’s French subplan is 410. Grants under the Plan and the French subplan are discretionary in nature and some employees might not receive grants under the Plan and/or the French subplan. Our executive officers and directors have an interest in the approval of the Plan because they are eligible to receive equity awards under the Plan. Please see the summary of our Plan, as amended and restated, below. Vote Required and Recommendation An affirmative vote of a majority of the shares of our common stock present in person or represented by proxy and entitled to vote at our Annual Meeting is required to approve our amended and restated Plan. Abstentions will have the same effect as voting against this proposal. Broker "non-votes" are not counted for purposes of approving our amended and restated Plan and thus will not affect the outcome of the voting on such proposal. Our Board of Directors unanimously recommends a vote "FOR" Proposal Two, the approval of our amended and restated 2004 Equity Incentive Plan. 14 Table of Contents Description of the 2004 Equity Incentive Plan The essential features of the Plan, as amended and restated, are summarized below. This summary does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the amended and restated Plan, which is attached as Appendix A. Capitalized terms used herein and not defined shall have the meanings set forth in the Plan. General. The purposes of the Plan are to attract and retain the best available personnel, provide additional incentive to our employees, consultants and non-employee directors and promote the success of our business. Shares Available for Issuance. Upon approval of the amended and restated Plan and subject to adjustment for changes in our capitalization, the maximum aggregate number of shares of common stock which may be issued under the Plan is 36,300,000 shares of common stock plus any shares subject to any options under our 1993 or 1997 Nonstatutory Stock Option Plans that expired unexercised, up to a maximum of an additional 5,000,000 shares. If an award expires or becomes unexercisable without having been exercised in full, or with respect to restricted stock, RSUs, performance shares, performance units or deferred stock units, is forfeited to or repurchased by us, the unpurchased shares (or for awards other than stock options and stock appreciation rights, the forfeited or repurchased shares) which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to stock appreciation rights, the gross shares issued (i.e., shares actually issued pursuant to a stock appreciation right, as well as the shares that represent payment of the exercise price and any applicable tax withholdings pursuant to a stock appreciation right) shall cease to be available under the Plan. Shares that have actually been issued under the Plan under any award shall not be returned to the Plan and shall not become available for future distribution under the Plan; provided, however, that if shares of restricted stock, performance shares, performance units or deferred stock units are repurchased by us at their original purchase price or are forfeited to us, such shares shall become available for future grant under the Plan. Shares used to pay the exercise price or purchase price, if applicable, of an award shall become available for future grant or sale under the Plan. To the extent an award under the Plan is paid out in cash rather than stock, such cash payment shall not result in reducing the number of shares available for issuance under the Plan. Administration. The Plan may be administered by our Board of Directors or a committee or committees, which may be appointed by our Board of Directors (the "Administrator"). To the extent that the Administrator determines it to be desirable to qualify awards granted under the Plan as "performance-based compensation" under Section 162(m), the Plan will be administered by a committee of two or more "outside directors" within the meaning of Section 162(m). Subject to the provisions of the Plan, the Administrator has the authority to: (i) construe and interpret the plan and awards; (ii) prescribe, amend or rescind rules and regulations relating to the Plan; (iii) select the service providers to whom awards are to be granted (apart from the non-employee director automatic grant provisions); (iv) subject to the limits set forth in the Plan, determine the number of shares or equivalent units to be granted subject to each award; (v) determine whether and to what extent awards are to be granted; (vi) determine the terms and conditions, not inconsistent with the terms of the Plan, applicable to awards granted under the Plan; (vii) modify or amend any outstanding award subject to applicable legal restrictions and the restrictions set forth in the Plan; (viii) authorize any person to execute, on our behalf, any instrument required to effect the grant of an award; (ix) approve forms of agreement for use under the Plan; (x) allow participants to satisfy tax withholding obligations by electing to have Microchip withhold from the shares or cash to be issued upon exercise, vesting of an award (or distribution of a deferred stock unit) that number of shares or cash having a fair market value equal to the minimum amount required to be withheld; (xi) determine the fair market value of the shares of our common stock and (xii) subject to certain limitations, take any other actions deemed necessary or advisable for the administration of the Plan. All decisions, interpretations and other actions of the Administrator shall be final and binding on all holders of options or rights and on all persons deriving their rights therefrom. Plan Term. Unless previously terminated by the Board of Directors, the Plan shall terminate on May 22, 2022. Discount Award Limitations. No stock options or stock appreciation rights may be granted with an exercise price that is less than 100% of fair market value on the date of grant. 15 Table of Contents No Repricing. The Plan prohibits option or stock appreciation right repricing, including by way of an exchange for another award or for cash. Eligibility. The Plan provides that awards may be granted to our employees, consultants and non-employee directors. Minimum Vesting Requirements. Except with respect to 5% of the maximum number of shares issuable under the Plan, no award that vests on the basis of an individual's continuous service with us will vest earlier than one year following the date of grant; provided, however, that vesting of an award may be accelerated upon the death, disability, or involuntary termination of the service of the grantee, or in connection with a corporate transaction, as defined in the Plan. Code Section 162(m) Performance Goals. We have designed the Plan so that it permits us to issue awards that qualify as performance-based compensation under Section 162(m). Thus, the Administrator may make performance goals applicable to a participant with respect to an award. At the Administrator's discretion, one or more of the following performance goals may apply: (i) cash flow (including operating cash flow or free cash flow), (ii) cash position, (iii) revenue (on an absolute basis or adjusted for currency effects), (iv) revenue growth, (v) contribution margin, (vi) gross margin or gross margin as a percentage of revenue, (vii) operating margin or operating margin as a percentage of revenue, (viii) operating expenses or operating expenses as a percentage of revenue, (ix) earnings (which may include earnings before interest and taxes, earnings before taxes and net earnings), (x) earnings per share, (xi) net income, (xii) stock price, (xiii) return on equity, (xiv) total stockholder return, (xv) growth in stockholder value relative to a specified publicly reported index (such as the S&P 500 Index), (xvi) return on capital, (xvii) return on assets or net assets, (xviii) return on investment, (xix) operating profit or net operating profit, (xx) market share (which may include ranking for a specific product line or market share percentage for a given product line), (xxi) contract awards or backlog, (xxii) overhead or other expense reduction, (xxiii) credit rating, (xxiv) objective customer indicators, (xxv) new product invention or innovation, (xxvi) attainment of research and development milestones, (xxvii) improvements in productivity, (xxviii) attainment of objective operating goals, and (xxix) objective employee metrics. The performance measures listed above may apply to either Microchip as a whole or, except with respect to stockholder return metrics, a region, business unit, affiliate or business segment or specific product or products, and measured either on an absolute basis or relative to a pre-established target, to a previous period's results or to a designated comparison group, and, with respect to financial metrics, which may be determined in accordance with GAAP, in accordance with IASB Principles or which may be adjusted when established to exclude any items otherwise includable under GAAP or under IASB Principles or any other objectively determinable items including, without limitation, (a) any extraordinary non-recurring items, (b) the effect of any merger, acquisition, or other business combination or divestiture, or (c) the effect of any changes in accounting principles affecting Microchip's or a business unit's, region's, affiliate's or business segment's reported results. The performance goals may differ from participant to participant and from award to award. Terms and Conditions of Options. Each option granted under the Plan is evidenced by a written stock option agreement between the participant and Microchip and is subject to the following terms and conditions: (a) Exercise Price. The Administrator determines the exercise price of options at the time the options are granted. However, the exercise price of a stock option may not be less than 100% of the fair market value of the common stock on the date the option is granted. For purposes of the Plan, "fair market value" is generally the closing sale price for the common stock (or the closing bid if no sales were reported) on the date the option is granted. (b) Form of Consideration. The means of payment for shares issued upon exercise of an option is specified in each option agreement and generally may be made by cash, check, other shares of our common stock owned by the participant, delivery of an exercise notice together with irrevocable instructions to a broker to deliver to us the exercise price from sale proceeds, by a combination thereof, or by such other consideration and method of payment to the extent permitted by applicable laws. (c) Exercise of the Option. Each stock option agreement will specify the term of the option and the date when the option is to become exercisable. However, in no event shall an option granted under the Plan be exercised more than ten years after the date of grant. Until the shares are issued, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the underlying shares. 16 Table of Contents (d) Termination of Employment. If a participant's employment terminates for any reason (other than death or permanent disability), all options held by such participant under the Plan expire upon the earlier of (i) such period of time as is set forth in his or her option agreement or (ii) the expiration date of the option. In the absence of a specified time in the option agreement, the option will remain exercisable for three months following the participant's termination. The participant may exercise all or part of his or her option at any time before such expiration to the extent that such option was exercisable at the time of termination of employment. (e) Permanent Disability. If an employee is unable to continue employment with us as a result of permanent and total disability (as defined in the Code), all options held by such participant under the Plan shall expire upon the earlier of (i) such period of time as is set forth in his or her option agreement or (ii) the expiration date of the option. In the absence of a specified time in the option agreement, the option will remain exercisable for six months following the participant's termination. The participant may exercise all or part of his or her option at any time before such expiration to the extent that such option was exercisable at the time of termination of employment. (f) Death. If a participant dies while employed by us, 100% of his or her awards shall immediately vest, and his or her option shall expire upon the earlier of (i) such period of time as is set forth in his or her option agreement or (ii) the expiration date of the option. In the absence of a specified time in the option agreement, the option will remain exercisable for 12 months following the participant's termination. The executors or other legal representatives or the participant may exercise all or part of the participant's option at any time before such expiration with respect to all shares subject to such option. (g) Other Provisions. The stock option agreement may contain terms, provisions and conditions that are consistent with the Plan as determined by the Administrator. 162(m) Share Limit. No participant may be granted stock options and stock appreciation rights to purchase more than 1,500,000 shares of common stock in any fiscal year, except that up to 4,000,000 shares may be granted in the participant's first fiscal year of service. Terms and Conditions of Stock Appreciation Rights. The Administrator determines the exercise price of stock appreciation rights (or "SARs") at the time they are granted. However, the exercise price of a SAR may not be less than 100% of the fair market value of the common stock on the date the SAR is granted. Otherwise, the Administrator, subject to the provisions of the Plan (including the 162(m) share limit referred to above and the minimum vesting requirements), shall have complete discretion to determine the terms and conditions of SARs granted under the Plan. However, in no event shall a SAR granted under the Plan be exercised more than ten years after the date of grant. Until the shares are issued, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the underlying shares. Payment of Stock Appreciation Right Amount. Upon exercise of an SAR, the holder of the SAR shall be entitled to receive payment in an amount equal to the product of (i) the difference between the fair market value of a share on the date of exercise and the exercise price and (ii) the number of shares for which the SAR is exercised. Payment upon Exercise of Stock Appreciation Right. At the discretion of the Administrator, payment to the holder of an SAR may be in cash, shares of our common stock or a combination thereof. To the extent that an SAR is settled in cash, the shares available for issuance under the Plan shall not be diminished as a result of the settlement. Stock Appreciation Right Agreement. Each SAR grant shall be evidenced by an agreement that specifies the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the committee, in its sole discretion, shall determine. Expiration of Stock Appreciation Rights. SARs granted under the Plan expire as determined by the Administrator, but in no event later than ten years from date of grant. No SAR may be exercised by any person after its expiration. The same provisions regarding termination of service that apply to options apply to SARs. 17 Table of Contents Terms and Conditions of Restricted Stock. Subject to the terms and conditions of the Plan, restricted stock may be granted to our employees and consultants at any time and from time to time at the discretion of the Administrator. Subject to the minimum vesting requirements, the Administrator has complete discretion to determine (i) the number of shares subject to a restricted stock award granted to any participant and (ii) the conditions for grant or for vesting that must be satisfied, which typically will be based principally or solely on continued provision of services but may include a performance-based component. However, no participant shall be granted a restricted stock award covering more than 300,000 shares in any of our fiscal years, except that up to 750,000 shares may be granted in the participant's first fiscal year of service. Until the shares are issued, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the underlying shares. Restricted stock may also be granted in the form of RSUs. Each RSU granted is a bookkeeping entry representing an amount equal to the fair market value of a share of our common stock. Restricted Stock Award Agreement. Each restricted stock grant shall be evidenced by an agreement that specifies the purchase price (if any) and such other terms and conditions as the Administrator shall determine; provided, however, that if the restricted stock grant has a purchase price, the purchase price must be paid no more than ten years following the date of grant. Terms and Conditions of Performance Shares. Subject to the terms and conditions of the Plan, performance shares may be granted to our employees and consultants at any time and from time to time as determined at the discretion of the Administrator. The Administrator has complete discretion to determine (i) the number of shares of our common stock subject to a performance share award granted to any participant and (ii) the conditions that must be satisfied for grant or for vesting, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component. However, no participant shall be granted performance share award covering more than 300,000 shares in any of our fiscal years, except that up to 750,000 shares may be granted on the participant's first fiscal year of service. Performance Share Award Agreement. Each performance share grant shall be evidenced by an agreement that specifies such other terms and conditions as the Administrator, in its sole discretion, shall determine. Terms and Conditions of Performance Units. Performance units are similar to performance shares, except that they are settled in cash equivalent to the fair market value of the underlying shares of our common stock, determined as of the vesting date. The shares available for issuance under the Plan shall not be diminished as a result of the settlement of a performance unit. No participant shall be granted a performance unit award covering more than $1,500,000 in any of Microchip's fiscal years, except that a newly hired participant may receive a performance unit award covering up to $4,000,000 in the participant's first fiscal year of service. Performance Unit Award Agreement. Each performance unit grant shall be evidenced by an agreement that shall specify such terms and conditions as shall be determined at the discretion of the Administrator. Terms and Conditions of Deferred Stock Units. Deferred stock units consist of restricted stock, performance share or performance unit awards that the Administrator, in its sole discretion, permits to be paid out in installments or on a deferred basis, in accordance with rules and procedures established by the Administrator. Deferred stock units are subject to the individual annual limits that apply to each type of award. Dividend Equivalent Right Restrictions. The Plan does not permit the granting of dividend equivalent rights, including but not limited to, on options or SARs. Accordingly, in no event will dividend equivalent rights be paid out on unearned performance-based vesting awards under the Plan. Awards to Non-Employee Directors. The Plan provides for initial and annual awards to non-employee directors within prescribed parameters. Specifically, each non-employee director is entitled to receive the following automatic grants: (i) for new non-employee directors, a grant of that number of RSUs equal to $160,000 divided by the fair market value of a share on the date of grant, rounded down to the nearest whole share (the "Initial RSU Grant"), and (ii) for continuing non-employee directors who have served at least three months on the date of the annual meeting, a grant of that number of RSUs equal to $84,000 divided by the fair market value of a share on the date of grant, rounded down to the nearest whole share (the "Annual RSU Grant"), provided that such non-employee director has been elected by the stockholders to serve as a member of the Board at that annual meeting. The Initial RSU Grant vests in equal 25% annual installments on each of the four anniversaries of the 18 Table of Contents tenth business day of the second month of our fiscal quarter in which the grant is made. The Annual RSU Grant vests in equal 50% annual installments on each of the two anniversaries of the tenth day of the second month of our fiscal quarter in which the grant is made. Vesting of the Initial RSU Grant and the Annual RSU Grant is contingent upon the applicable non-employee director maintaining continued status as a non-employee director through the applicable vesting date. Non-Transferability of Awards. Unless determined otherwise by the Administrator, an award granted under the Plan may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the recipient, only by the recipient. In no event may an award granted under the Plan be exchanged for consideration. If the Administrator makes an award granted under the Plan transferable, such award shall contain such additional terms and conditions as the Administrator deems appropriate. Acceleration upon Death. In the event that a participant dies while a service provider, 100% of his or her awards shall immediately vest. Leave of Absence. In the event that a participant goes on an unpaid leave of absence, award vesting will cease until he or she returns to work, except as required by law or as determined by the Administrator. Forfeiture on Misconduct. Should (i) a participant's service be terminated for misconduct (including, but not limited to, any act of dishonesty, willful misconduct, fraud or embezzlement), or (ii) a participant makes any unauthorized use or disclosure of confidential information or trade secrets of Microchip or its parent or subsidiary, then all outstanding awards held by the participant will terminate immediately and cease to be outstanding, including both vested and unvested awards. Adjustment Upon Changes in Capitalization. In the event that our capital stock is changed by reason of any stock split, reverse stock split, stock dividend, combination or reclassification of our common stock or any other increase or decrease in the number of issued shares of common stock effected without receipt of consideration by us, appropriate proportional adjustments shall be made in the number and class of shares of stock subject to the Plan, the individual fiscal year limits applicable to restricted stock, RSUs, performance share awards, SARs and options, the number and class of shares of stock subject to any award outstanding under the Plan, and the exercise price of any such outstanding option or SAR or other award, provided that such automatic adjustments will not be made to the number of shares to be granted to our non-employee directors under the Plan. Any such adjustment shall be made by the Compensation Committee of our Board of Directors, whose determination shall be conclusive. Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of Microchip, the Administrator will notify each participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for a participant to have the right to exercise his or her option or SAR until ten days prior to such transaction as to all the shares covered by the award, including shares as to which the award would not otherwise be exercisable. The Administrator may provide that any repurchase option or forfeiture rights held by Microchip will lapse 100% and vesting will accelerate 100%, provided that the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent that it has not been exercised (with respect to options or SARs) or vested (with respect to other awards), an award will terminate immediately prior to the consummation of the proposed action. Change of Control. In the event of a change of control of Microchip, the successor corporation (or its parent or subsidiary) will assume or substitute each outstanding award. If the successor corporation refuses to assume the awards or to substitute equivalent awards, such awards shall become 100% vested. In such event, the Administrator shall notify the participant that each award subject to exercise is fully exercisable for 30 days from the date of such notice and that the award terminates upon expiration of such period. Amendment, Suspensions and Termination of the Plan. Our Board of Directors may amend, suspend or terminate the Plan at any time; provided, however, that stockholder approval is required for any amendment to the extent necessary to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 ("Rule 16b-3") or Section 422 of the Code, or any similar rule or statute. The Plan will terminate in May 2022 unless earlier terminated by the Board of Directors. 19 Table of Contents Federal Tax Information The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and us of awards granted under the Plan. Tax consequences for any particular individual may be different. Options. Options granted under the Plan are nonstatutory options that do not qualify as incentive stock options under Section 422 of the Code. A participant will not recognize any taxable income at the time the participant is granted a nonstatutory option. However, upon its exercise, the participant will recognize taxable income generally measured as the excess of the then-fair market value of the shares purchased over the exercise price of the option. Any taxable income recognized in connection with an option exercise by a participant who is also our employee will be subject to tax withholding by us. Upon resale of such shares by the participant, any difference between the sale price and the participant's exercise price, to the extent not recognized as taxable income as described above, will be treated as short-term or long-term capital gain or loss, depending on the holding period. Stock Appreciation Rights. No taxable income is reportable when an SAR is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the fair market value of any shares of our common stock received and/or the amount of cash received. Any taxable income recognized in connection with exercise of an SAR by a participant who is also our employee will be subject to tax withholding by us. Any additional gain or loss recognized upon any later disposition of the shares of our common stock would be a capital gain or loss. Restricted Stock, Performance Units and Performance Shares. A participant will not have taxable income upon grant (unless, with respect to restricted stock that is not in the form of RSUs, he or she elects to be taxed at that time). Instead, he or she will recognize ordinary income at the time of vesting/delivery equal to the fair market value (on the vesting date) of the vested shares or cash received minus any amount paid for the shares of our vested common stock. Any taxable income recognized in connection with an award of restricted stock, performance units, and performance shares by a participant who is also our employee will be subject to tax withholding by us. Deferred Stock Units. Typically, a participant will recognize employment taxes upon the vesting of a deferred stock unit and income upon its delivery. The participant may be subject to additional taxation, interest and penalties if the deferred stock unit does not comply with Section 409A of the Code. Tax Effect for Microchip. We generally will be entitled to a tax deduction in connection with an award under the Plan in an amount equal to the ordinary income realized by a participant at the time the participant recognizes such income (for example, the exercise of a non-qualified stock option). Special rules limit the deductibility of compensation paid to our covered employees. Under Section 162(m), the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However, we can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met with respect to awards. These conditions include (among others) stockholder approval of the Plan and its material terms, setting limits on the number of awards that any individual may receive and for awards other than stock options and stock appreciation rights, and establishing performance criteria that must be met before the award actually will vest or be paid. The Plan has been designed to permit the Administrator to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting us to continue to receive a federal income tax deduction in connection with such awards. Section 409A of the Code. Section 409A of the Code imposes certain requirements on non-qualified deferred compensation arrangements. These include requirements with respect to an individual's election to defer compensation and the individual's selection of the timing and form of distribution of the deferred compensation. Section 409A of the Code also generally provides that distributions must be made on or following the occurrence of certain events (e.g., the individual's separation from service, a predetermined date, or the individual's death). Section 409A of the Code imposes restrictions on an individual's ability to change his or her distribution timing or form after the compensation has been deferred. For certain individuals who are officers, Section 409A of the Code requires that such individual's distribution commence no earlier than six months after such officer's separation from service. 20 Table of Contents Awards granted under the Plan with a deferral feature will be subject to the requirements of Section 409A of the Code. If an award is subject to and fails to satisfy the requirements of Section 409A of the Code, the recipient of that award will recognize ordinary income on the amounts deferred under the award, to the extent vested, which may be prior to when the compensation is actually or constructively received. Also, if an award that is subject to Section 409A of the Code fails to comply with the provisions of Section 409A of the Code, Section 409A of the Code imposes an additional 20% federal income tax on compensation recognized as ordinary income, as well as possible interest charges and penalties. Certain states have enacted laws similar to Section 409A of the Code which impose additional taxes, interest and penalties on non-qualified deferred compensation arrangements. We will also have reporting requirements with respect to such amounts, and will have certain withholding requirements. THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF U.S. FEDERAL INCOME TAXATION UPON PARTICIPANTS AND MICROCHIP UNDER THE PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF A SERVICE PROVIDER'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH A SERVICE PROVIDER MAY RESIDE. Accounting Treatment. Under current accounting rules mandating expensing for all compensatory equity awards, including stock options and RSUs, we recognize compensation expense for all awards granted under the Plan. This will result in a direct charge to our reported earnings. Number of Awards Granted to Employees, Consultants, and Directors The amount, timing, and value of discretionary awards under the Plan, including grants to our CEO and our four other most highly compensated executive officers, is in the discretion of the Administrator and therefore not determinable in advance. The future award of RSUs to non-employee directors is subject to the election of such individuals as directors and the fair market value of the common stock on the date the RSUs are granted. No options were granted under the Plan during fiscal 2017. The following table sets forth the aggregate number of RSUs granted under the Plan during fiscal 2017 to each of our named executive officers; executive officers as a group; directors who are not executive officers as a group; and all employees who are not executive officers as a group: EQUITY GRANTS IN FISCAL 2017 Name of Individual or Identity of Group and Position Steve Sanghi CEO and Chairman of the Board Ganesh Moorthy President and COO Mitchell R. Little VP, Worldwide Sales and Applications Stephen V. Drehobl VP, MCU8 and Technology Development Division J. Eric Bjornholt VP, CFO All current executive officers as a group (6 people) All current directors who are not executive officers as a group (4 people) All other employees as a group (1) Represents the weighted average fair value per share as of the grant date. 21 Number of Shares Subject to RSUs Granted Weighted Average Fair Value (1) 84,508 $ 50,413 $ 16,278 $ 18,749 $ 11,932 $ 195,739 $ 5,488 $ 1,434,428 $ 50.05 50.51 50.07 50.07 50.08 50.18 58.40 51.61 Table of Contents PROPOSAL THREE 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, 2018. 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 as required. 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. 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 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 approximately $6,099,416 for fiscal 2017 and $3,525,475 for fiscal 2016. Our audit fees in fiscal 2017 were significantly higher than our audit fees in fiscal 2016 due to our acquisition of Atmel resulting in higher fees for audit, purchase accounting and related tax work. 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. There were no fees billed by Ernst & Young LLP for such services in each of the last two fiscal years. 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 either of the last two fiscal years for such services were approximately $842,330 for fiscal 2017 and $830,885 for fiscal 2016. 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 2017 or fiscal 2016. 22 Table of Contents 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 Committee at its next scheduled meeting. During fiscal 2017, 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 2017 and fiscal 2016 were compatible with maintaining the independence of Ernst & Young LLP. Vote Required; Board Recommendation The affirmative vote of a majority of the votes cast on the proposal at the annual meeting is required to approve the ratification of the appointment of Ernst & Young LLP as the independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2018. Abstentions will have the same effect as a vote against this proposal. Upon the recommendation of our Audit Committee, our Board of Directors unanimously recommends that stockholders vote "FOR" Proposal Three, the ratification of our independent registered public accounting firm, as described in this Proxy Statement. 23 Table of Contents PROPOSAL FOUR APPROVAL OF EXECUTIVE COMPENSATION As contemplated in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), Section 14A of the Securities Exchange Act of 1934 enables our stockholders to vote to approve, on an advisory (non- binding) basis, the compensation of our named executive officers as disclosed in this Proxy Statement in accordance with the SEC's rules (commonly referred to as a "Say-on-Pay"). As described under the heading "Executive Compensation — Compensation Discussion and Analysis," our executive compensation program is a comprehensive package designed to motivate our executive officers to achieve our corporate objectives and is intended to be competitive and allow us to attract and retain highly qualified executive officers. We believe that the various elements of our executive compensation program work together to promote our goal of ensuring that total compensation should be related to both our performance and individual performance. Stockholders are urged to read the "Compensation Discussion and Analysis" section of this Proxy Statement, beginning on page 28, which discusses how our executive compensation policies implement our compensation philosophy, and the "Compensation of Named Executive Officers" section of this Proxy Statement, which contains tabular information and narrative discussion about the compensation of our named executive officers. These sections provide additional details about our executive compensation programs, including information about the fiscal 2017 compensation of our named executive officers. The Compensation Committee and our Board of Directors believe that these policies are effective in implementing our compensation philosophy and in achieving our goals. We are asking our stockholders to indicate their support for our executive compensation as described in this Proxy Statement. This Say-on-Pay proposal gives our stockholders the opportunity to express their views on our named executive officers' compensation. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in this Proxy Statement. Accordingly, we are asking our stockholders to approve, on an advisory basis, the compensation of the named executive officers, as disclosed in this Proxy Statement pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and disclosures. The Say-on-Pay vote is advisory, and therefore not binding on us, the Compensation Committee or our Board of Directors. However, our Board of Directors and our Compensation Committee value the opinions of our stockholders and to the extent there is any significant vote against the named executive officer compensation as disclosed in this Proxy Statement, we will consider our stockholders' concerns and the Compensation Committee will evaluate whether any actions are necessary to address those concerns. Our current policy is to provide stockholders with an opportunity to approve the compensation of our named executive officers each year at our annual meeting of stockholders. Thus, it is expected that the next such vote will occur at our 2018 annual meeting. Vote Required; Board Recommendation The affirmative vote of a majority of the votes cast on the proposal at the Annual Meeting is required to approve the compensation of our named executive officers on an advisory (non-binding) basis. Abstentions will have the same effect as a vote against this proposal. Broker "non-votes" are not counted for purposes of approving the compensation of our named executive officers on an advisory (non-binding) basis and thus will not affect the outcome of the voting on such proposal. Our Board of Directors unanimously recommends voting "FOR" Proposal Four, the approval, on an advisory (non-binding) basis, of the compensation of our named executive officers, as described in this Proxy Statement. 24 Table of Contents PROPOSAL FIVE APPROVAL OF FREQUENCY PERIOD OF ADVISORY COMPENSATION VOTE In connection with Proposal Four, the Dodd-Frank Act also requires that we include in this Proxy Statement a separate advisory (non-binding) stockholder vote to advise Microchip on how frequently we should seek a Say-on-Pay vote. By voting on this Proposal Five, stockholders may indicate whether they would prefer an advisory vote on executive officer compensation once every one, two, or three years. Because an advisory vote every year allows our stockholders to provide us with timely feedback regarding our compensation policies and practices, our Board of Directors believes that Say-on-Pay votes should be conducted annually. You may cast your vote on your preferred voting frequency by choosing the option of one year, two years, three years or abstain from voting. Under SEC rules, we will be required to permit our stockholders to vote on the frequency of the Say-on-Pay vote at least once every six years. Vote Required; Recommendation of the Board of Directors The selection regarding the frequency of the stockholder vote on executive compensation receiving the highest number of "FOR" votes shall be approved on an advisory (non-binding) basis. However, because this vote is advisory and not binding on the Board of Directors or us in any way, the Board of Directors may decide that it is in the best interests of our stockholders and us to hold an advisory vote on executive compensation more or less frequently than the option approved by our stockholders. Our Board of Directors unanimously recommends that stockholders vote to hold Say-on-Pay votes every year (as opposed to every two or three years) under Proposal Five. 25 Table of Contents 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 22, 2017 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 Number of Shares Beneficially Owned (1) Percent of Common Stock (1) The Vanguard Group, Inc. (2) T. Rowe Price Associates, Inc.(3) BlackRock, Inc. (4) Steve Sanghi (5) Matthew W. Chapman (6) L.B. Day (7) Esther L. Johnson Wade F. Meyercord (8) J. Eric Bjornholt (9) Stephen V. Drehobl Mitchell R. Little Ganesh Moorthy (10) All directors and executive officers as a group (10 people) (11) 22,016,435 19,870,438 13,471,356 4,505,907 27,236 14,734 5,707 38,279 15,477 14,263 8,576 199,695 4,879,341 9.60 8.66 5.87 1.96 * * * * * * * * 2.13 * Represented less than 1% of the outstanding shares of common stock as of May 22, 2017. Our shares of common stock outstanding at May 22, 2017 were 229,398,261. (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 22, 2017. There are no stock purchase rights or RSUs that will vest within 60 days of May 22, 2017. In calculating the percentage of ownership of each individual or group, share amounts that are attributable to options that are exercisable within 60 days of May 22, 2017 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. 26 Table of Contents (2) Address is 100 Vanguard Boulevard, Malvern, PA 19355. All information is based solely on the Schedule 13G filed by The Vanguard Group, Inc. on February 10, 2017, with the exception of the percentage of common stock held which is based on shares outstanding at May 22, 2017. Such Schedule 13G/A indicates that The Vanguard Group, Inc. (i) has sole power to dispose of or direct the disposition of 21,647,402 shares of common stock and shared power to dispose of or direct the disposition of 369,033 shares of common stock; and (ii) has sole power to vote or direct the vote of 334,972 shares of common stock and shared power to vote or direct the vote of 36,574 shares of common stock. (3) Address is 100 E. Pratt Street, Baltimore, MD 21202. All information is based solely on the Schedule 13G/A filed by T. Rowe Price Associates, Inc. on February 7, 2017, with the exception of the percentage of common stock held which is based on shares outstanding at May 22, 2017. Such Schedule 13G/A indicates that T. Rowe Price Associates, Inc. (i) has sole power to dispose of or direct the disposition of 19,870,438 shares of common stock; and (ii) has sole power to vote or direct the vote of 6,632,168 shares of common stock. (4) Address is 55 East 52nd Street, New York, NY 10055. All information is based solely on the Schedule 13G/A filed by (5) BlackRock, Inc. on January 25, 2017 with the exception of the percentage of common stock held which is based on shares outstanding at May 22, 2017. Such Schedule 13G/A indicates that BlackRock, Inc. (i) has sole power to dispose of or direct the disposition of 13,471,356, shares of common stock; and (ii) has sole power to vote or direct the vote of 11,644,678 shares of common stock. Includes 1,552,971 shares held of record by The Sanghi Trust (the "Sanghi Trust") and 2,952,936 shares held of record by The Sanghi Family Limited Partnership (the "Family Limited Partnership"). Steve Sanghi and Maria T. Sanghi are the sole trustees of the Sanghi Trust. The Sanghi Trust is the sole member of the Sanghi LLC which is the sole general partner of the Family Limited Partnership. Includes 6,000 shares issuable upon exercise of options that are exercisable within 60 days of May 22, 2017. Includes 6,000 shares issuable upon exercise of options that are exercisable within 60 days of May 22, 2017. Includes 29,279 shares held of record by Wade F. Meyercord and Phyllis Meyercord as trustees, and 9,000 shares issuable upon exercise of options that are exercisable within 60 days of May 22, 2017. Includes 15,477 shares held of record by J. Eric Bjornholt and Lynn Bjornholt as trustees. (10) Includes 199,695 shares held of record by Ganesh Moorthy and Hema Moorthy as trustees. (11) Includes an aggregate of 21,000 shares issuable upon exercise of options that are exercisable within 60 days of May 22, 2017. (6) (9) (7) (8) 27 Table of Contents EXECUTIVE COMPENSATION COMPENSATION DISCUSSION AND ANALYSIS Overview of the Compensation Program The Compensation Committee of our Board of Directors, presently comprised of Mr. Day 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 (i.e., our CEO, CFO, and our three other 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 a broad base of 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. We believe that the overall compensation levels for our executive officers, including our named executive officers, in fiscal 2017 were consistent with our "pay-for-performance" philosophy and were commensurate with our fiscal 2017 performance. Executive Compensation Process The Compensation Committee evaluates and establishes the compensation of our 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 in our market. 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 28 Table of Contents salaries of executive officers in similar positions with comparable companies and individual performance are considered in making these determinations. To the extent 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 or utilize a specific peer group. The executive officer compensation process begins with consideration of Microchip's overall 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 executive officer salary increases within the budgeted range for other employees. In setting salaries for executive officers, the Compensation Committee may consider relevant industry data but does not target any overall industry percentage level or peer group average. Microchip's compensation budget is created as part of its annual and quarterly operating plan processes under which business and financial objectives are initially developed by our executive officers, in conjunction with their respective business units, and then discussed with and approved by our CEO. These objectives are then reviewed by our Board of Directors and are the overall financial and business objectives on which incentive compensation is based. The Compensation Committee sets the compensation of our Chairman and CEO, 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 in our market. 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 Executive Management Incentive Compensation Plan ("EMICP"). 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 and profitability 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 over a number of years. For fiscal 2017, 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. At our last annual meeting of stockholders held in August 2016, our stockholders approved an advisory (non-binding) proposal concerning our executive compensation program with approximately 84.4% of the votes cast in favor of the proposal. The Compensation Committee considered the results of this vote in establishing the compensation program for fiscal 2017. 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 29 Table of Contents those for many of 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 and market. 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. Since fiscal 2014, salary reviews for executive and non-executive employees have been conducted on a quarterly basis. Also, the budget for salary increases is established each quarter with any increases determined each quarter on a discretionary basis based on the performance reviews of the employees. 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 executive officers relative to their respective areas of responsibility. In particular, we consider our overall revenue growth and revenue growth in our strategic business units, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP net income per diluted share, cash generation, expected capital expenditures and other financial considerations in setting our budgets for salaries. We also consider the individual performance of our named executive officers including the officer's level of responsibility, performance, overall contribution to the results of the organization, the officer's base salary relative to the salaries of our other officers, salary relative to comparable positions in the industry and market, the officer's overall compensation including incentive cash bonuses and equity compensation and the officer's performance relative to expectations. We do not assign any specific weight to any such factor but consider such factors as a whole for each executive. This review encompasses the objectives for both the immediately preceding fiscal year and the upcoming fiscal year. In addition to our quarterly salary reviews, in August 2016, after consideration of the increased roles and responsibilities of our executive officers in light of our acquisition of Atmel and other recent acquisitions, the need to incentivize and retain such officers and the significant cost synergies that were realized as a result of the integration activities following the closing of the Atmel acquisition, the Compensation Committee approved salary increases for each of our executive officers other than Mr. Moorthy. Mr. Moorthy's base salary was not increased in August 2016 because his base salary had been increased effective April 1, 2016 in connection with his promotion to President. After consideration of all of the factors described above and including the salary increases approved in August 2016, the base salaries for our named executive officers other than our CEO were increased by an average of approximately 8.0% over the course of fiscal 2017 and our CEO's base salary was increased by 13.0%. 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 Discretionary Management Incentive Compensation Plan ("DMICP"). The Compensation Committee establishes performance goals which it believes are challenging, require a high level of performance and motivate participants to drive stockholder 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. The performance metrics under the EMICP are determined by the Compensation Committee at the beginning of each quarter so that such compensation may qualify as performance-based compensation within the meaning of Section 162(m) of the Internal Revenue Code. The metrics 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, and other charges that many investors feel may obscure our underlying operating results. Our non-GAAP results exclude, as applicable, the effect of discontinued operations, share-based compensation, expenses related to our acquisition activities (including intangible asset amortization, inventory valuation costs, severance costs, and legal and other general and administrative expenses associated with acquisitions), preclusion of revenue recognition under GAAP for inventory in the 30 Table of Contents distribution channel on the acquisition dates of our acquisitions, revenue recognition changes related to Atmel and Micrel distributors, a loss on the inducement and extinguishment of our convertible debentures, non-cash interest expense on our convertible debentures, gains on equity securities, impairments on available-for-sale investments, the related income tax implications of these items, tax adjustments in accordance with ASC 740-270 and non-recurring tax events. The earnings per share metric changes each quarter. Each of the other performance metrics is reviewed each quarter but may be the same for multiple quarters. The table below sets forth the performance metrics under the EMICP for each quarter of fiscal 2017: Target Quarterly Measurement Performance Metric Q1 FY17 % Q2 FY17 % Q3 FY17 % Q4 FY17 % Target % of Bonus Q1 FY17 Perf. % Q1 FY17 Bonus Payout % Q2 FY17 Perf. % Actual Results Q2 FY17 Bonus Payout % Q3 FY17 Perf. % Q3 FY17 Bonus Payout % Q4 FY17 Perf. % Q4 FY17 Bonus Payout % Total sequential revenue growth High performance micro-controller sequential revenue growth Analog sequential revenue growth Licensing 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) (non- GAAP) 1.50 1.50 1.50 1.50 10.00 2.41 13.03 3.54 16.80 0.84 7.80 2.44 13.13 3.00 3.00 3.00 3.00 4.00 (0.92) (1.23) 3.88 5.17 3.45 4.6 10.84 14.45 2.00 2.00 2.00 2.00 4.00 1.07 2.76 4.67 7.56 1.39 3.19 1.05 2.73 1.50 1.50 1.50 1.50 2.00 (1) 3.09 4.59 14.97 10.98 0.69 1.46 (3.23) (1.15) 57.00 53.00 54.00 56.00 15.00 59.75 25.31 57.21 23.29 57.84 29.42 59.24 27.15 28.00 30.00 27.00 26.50 15.00 27.05 19.75 26.73 21.35 25.04 24.81 23.66 29.20 28.00 22.00 26.00 28.50 15.00 32.70 26.75 30.48 31.20 32.81 32.02 35.58 32.70 $0.64 $0.73 $0.85 $0.97 15.00 (1) 75.94 31.41 93.87 24.15 104.73 38.21 115.78 34.36 EMICP Total N/A N/A N/A N/A 80.00 N/A 122.37 N/A 160.00 N/A 141.5 N/A 152.58 DMICP Total (2) (2) (2) (2) 20.00 N/A 37.63 N/A 0 N/A 33.50 N/A 47.42 (1) For Q1 of fiscal 2017, the "Target % of Bonus" was 3% for licensing sequential revenue growth and 14% for non- GAAP earnings per share. (2) Each quarter, the Target Quarterly Measurement under the DMICP is discretionary. 31 Table of Contents The total amount payable to each executive under the EMICP and the DMICP is based on a percentage of the executive's base salary at the beginning of the quarter. The participation percentage for each executive is determined at the beginning of the fiscal year based on the executive's base salary at that time and typically stays at the same level for each quarter of the fiscal year. However, the Compensation Committee may change the participation level of an executive each quarter to reflect changes in the performance or responsibilities of the executive or other factors. The dollar amount of the target bonus for each executive is based on assumed achievement of all performance metrics under the EMICP (as disclosed in the table above) and payment of 20% as a discretionary award under the DMICP (as disclosed in the table above). The aggregate budgeted bonus pool under the various management incentive compensation plans is calculated by multiplying each eligible executive officer's bonus target percentage by the executive's base salary. In fiscal 2017, the quarterly payments under the EMICP for our named executive officers were targeted at an aggregate of approximately $425,962 for all such officers as a group. In fiscal 2017, the quarterly payments under the DMICP for our named executive officers were targeted at an aggregate of approximately $106,490 for all such officers as a group. Bonuses under the EMICP are subject to a maximum award of $2,500,000 per individual per performance period (which can be a fiscal quarter, a fiscal year or a longer period not exceeding five fiscal years); however, all awards to date have been substantially less than such maximum amount. The actual awards under the EMICP are based on our actual quarterly financial performance compared to the performance metrics and the actual awards under the DMICP are determined in the discretion of our Compensation Committee and can be significantly higher or lower than the 20% target. The actual awards are calculated by multiplying the overall award percentage payout for the quarter by the applicable percentage of the executive's salary at the end of the fiscal quarter that the award relates to. Thus, if an executive's salary or participation percentage changes during the year, up or down, this would affect the executive's actual bonus payment during the fiscal year. For fiscal 2017, the specific total bonus percentages under both the EMICP and DMICP for each of our named executive officers were as follows: for Mr. Sanghi it was 200% of his salary for the associated quarter; for Mr. Moorthy it was 80% of his salary; for Mr. Little it was 46% of his salary; for Mr. Drehobl it was 45% of his salary; and for Mr. Bjornholt it was 32% of his salary. These bonus percentages did not change from the percentages used for fiscal 2016 except that Mr. Moorthy's target bonus percentage was increased from 61% of his salary effective April 1, 2016 in connection with his promotion to President of Microchip. As indicated in the above table, for the first quarter of fiscal 2017, 3.0% of the quarterly EMICP payment was based on Microchip's licensing business unit achieving total sequential revenue growth of 1.5%. Accordingly, if Microchip's licensing business unit's sequential revenue growth for the first quarter was 1.5%, then each executive would be paid the corresponding 3.0% of the EMICP target bonus amount for that quarter. If Microchip's licensing business unit's revenue growth for the first quarter was 0.75%, then each executive would be paid a corresponding 1.5% of his target bonus amount for that quarter (i.e., 1/2 of the 1.5%) and if Microchip's licensing business unit's revenue growth for the first quarter was 3.0%, then each executive would be paid a corresponding 6.0% of the target bonus amount for that quarter (i.e., 3.0/1.5 of the 3.0%). A similar methodology is applied each quarter to each of the performance metrics listed in the above table. As set forth in the above table, during fiscal 2017, consistent with our "pay-for-performance" philosophy, our CEO and other executive officers received bonuses under the EMICP for each quarter of fiscal 2017. Payments were also made under the DMICP for each quarter of fiscal 2017. Applying the award percentages to each named executive officer's participation level in the plans, for fiscal 2017, the total bonus payments under the EMICP and the DMICP for our named executive officers, other than our CEO, ranged from $133,192 to $556,000. In fiscal 2017, Mr. Sanghi earned an aggregate EMICP bonus of $1,979,664, and an aggregate DMICP bonus of $415,687. Please see footnote 4 to the Summary Compensation Table on page 40 of this Proxy Statement which sets forth the actual amount of the EMICP and DMICP awards for each named executive officer for fiscal 2017. 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. 32 Table of Contents 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. Accordingly, in fiscal 2017, 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. 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 Microchip. The evergreen grants of RSUs for fiscal 2017 were awarded with vesting subject to meeting specified performance goals related to achieving certain levels of operating expenses or income over a specified time frame. Specifically, with respect to the RSU awards made in April 2016, the performance goal was related to achieving non-GAAP operating expenses for the three months ended June 30, 2016 of less than $187 million; with an achievement of $167 million of non-GAAP operating expenses necessary for full vesting of the award. With respect to the awards made in July 2016, the performance goal was related to achieving non-GAAP operating expenses for the three months ended September 30, 2016 of less than $280 million; with an achievement of $250 million of non-GAAP operating expenses necessary for full vesting of the award. With respect to the awards made in October 2016, the performance goal was related to achieving non-GAAP operating expenses for the three months ended December 31, 2016 of less than $270 million, with an achievement of $240 million of non-GAAP operating expense necessary for full vesting of the award. With respect to the awards made in January 2017, the performance goal was related to achieving non-GAAP operating expenses for the three months ended March 31, 2017 of less than $270 million, with an achievement of $240 million of non-GAAP operating expenses necessary for full vesting of the award. With respect to each of the performance goals for the RSU grants, the goals exclude the impact of any acquisitions completed by Microchip during the performance period. Based on the actual results compared to the performance goals for each such period, all of the quarterly evergreen awards will vest at 100%; however, in addition to the performance-based vesting requirements, the vesting of each of the foregoing RSU awards is subject to the continued service of the officer on the vesting date which is approximately four years from the grant date. Grants of RSUs in fiscal 2017 typically were scheduled to vest approximately four years from the grant date. RSUs do not have a purchase price and therefore have immediate value to recipients upon vesting. On March 31, 2017, approximately 62% of our employees worldwide were eligible to receive RSUs under our 2004 Equity Incentive Plan. For more than ten years, RSUs have been the principal equity compensation vehicle for Microchip executive officers and key employees. 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. 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. 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. 33 Table of Contents The Compensation Committee grants RSUs to executive officers and current employees on a quarterly basis in an attempt to more evenly record stock-based compensation expense. Grants of RSUs to new employees (other than executives) are made once per month by the Employee Committee at a meeting of such committee. Grants of RSUs to any new executive officer would be made at the first meeting of the Compensation Committee following the election of such officer. 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, 2017" at page 41 for information regarding RSUs granted during fiscal 2017 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 in October 2003. Under this policy, 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 2017, all of our executive officers and directors were in compliance with the terms of such policy. Microchip's insider trading policy prohibits executive officers from speculating 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 plans, • • medical, dental, vision, employee assistance program, flexible spending, and disability 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 determination of executive officer compensation. Employee Stock Purchase Plans. 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 deductions 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 our 1994 International Employee Stock Purchase Plan that allows them the opportunity to purchase our common stock through payroll deductions 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, Disability Insurance and Accidental Death and Dismemberment. We make medical, dental, vision, employee assistance program, flexible spending, and disability insurance generally available to all of our 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, which is generally available to our U.S. employees, is provided by Microchip to our executives with a benefit of one times the executive's annual salary. Since all of our U.S. employees participate in these plans 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 39 pursuant to SEC rules and regulations. 34 Table of Contents Life Insurance. In fiscal 2017, 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. Our Compensation Committee approved discretionary matching contributions for the first quarter of fiscal 2017 equal to $0.70 for each dollar contributed by the employee for the first 4% of their salary contributions. For the second quarter of fiscal 2017, our Compensation Committee approved discretionary matching contributions equal to $0.70 for each dollar contributed by the employee for the first 4% of their salary contributions. For the third quarter of fiscal 2017, our Compensation Committee approved discretionary matching contributions equal to $0.75 for each dollar contributed by the employee for the first 4% of their salary contributions. For the fourth quarter of fiscal 2017, our Compensation Committee approved discretionary matching contributions equal to $0.80 for each dollar contributed by the employee for the first 4% of their salary contribution. There are no required matching contributions under the plan. Employee Cash Bonus Plan. All of our employees worldwide participate in our Employee Cash Bonus Plan ("ECBP"). The ECBP is a discretionary bonus plan designed to allow our full-time employees, not just our executive officers, to share in the success of the company. The target bonus under the ECBP is 2.5 days of base salary per quarter, or on an annual basis, two weeks of annual base salary which may be granted by the Compensation Committee if certain Microchip operating profitability objectives are achieved. Under the ECBP, the Compensation Committee can set the eligibility requirements and targets and has discretion to pay more or less than the stated target. Other eligibility terms also apply, such as an attendance requirement and a performance requirement. The pay-out under the ECBP is approved by the Compensation Committee based on our actual quarterly operating results. For the first, second, third and fourth quarters of fiscal 2017, bonus awards were paid out at 155%, 155%, 170% and 200% of target for all employees, respectively. For each quarter, an additional award was paid out to selected employees on a discretionary basis based on performance achievements by such employees during the quarter. Under the ECBP, for fiscal 2017, our named executive officers other than our CEO received total payments ranging from $15,671 to $26,154, and our CEO received $45,095. 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 described 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 Microchip 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 35 Table of Contents 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 the executive's 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 Worldwide Sales, one year; a one-time payment of the executive's bonuses for which the executive 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; 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; 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; 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 than 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. 36 Table of Contents 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, 2017, the last business day of our last completed fiscal year. Salary Bonus Equity Compensation Due to Accelerated Vesting (1) Tax Gross-up on Change of Control (2) Continuation of Certain Benefits (3) $ 1,455,729 $ 2,967,448 $ 36,976,913 $ 412,000 309,480 270,035 251,880 345,446 154,264 131,902 90,289 16,490,420 7,239,220 8,336,624 5,287,370 — — — — — 2 years 1 year 1 year 1 year 1 year Name Steve Sanghi (4) Ganesh Moorthy (5) Mitchell R. Little (5) Stephen V. Drehobl (5) J. Eric Bjornholt (5) (1) Value represents the gain that our named executive officers would receive, calculated as the amount of unvested RSUs multiplied by our stock price on March 31, 2017. (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. (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 (EMICP and DMICP) and our ECBP. (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 (EMICP and DMICP) and our ECBP. 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 re-approved our EMICP in August 2016 at our annual meeting. Obtaining stockholder approval and complying with the other requirements of Section 162(m) 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 Section 162(m). 37 Table of Contents 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 2017. 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 (*) 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 discussion, 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: Wade F. Meyercord (Chair) _________________________ L.B. Day (*) 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. 38 Table of Contents COMPENSATION OF NAMED EXECUTIVE OFFICERS 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") earned in the last three fiscal years: Name and Principal Position Year Salary (1) Bonus (2) Stock Awards (3) Non-Equity Incentive Plan Compensation (4) All Other Compensation (5) Total 2017 $ 618,982 $ 51,071 $ 4,229,482 $ 2,395,351 $ 10,465 $ 7,305,351 Steve Sanghi, CEO and Chairman of the Board Ganesh Moorthy, President and COO Mitchell R. Little, VP, Worldwide Sales and Applications Stephen V. Drehobl, VP, MCU8 and Technology Development Division J. Eric Bjornholt, VP and CFO 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 645,619 30,832 8,812,155 624,897 27,690 3,459,535 356,077 27,692 2,546,515 326,918 13,134 3,695,412 302,185 13,314 1,441,457 305,999 19,901 815,010 295,507 15,243 1,730,738 287,167 12,482 679,590 260,121 17,704 938,749 243,275 12,507 1,993,141 236,398 9,956 782,500 241,263 15,671 597,516 221,559 10,902 1,266,751 213,597 9,284 494,243 (6) (6) (6) (6) (6) 1,264,648 1,381,146 556,000 187,388 204,094 243,218 133,146 145,980 202,296 107,303 117,861 133,192 69,433 75,535 7,688 10,760,942 8,218 5,501,486 9,531 3,495,815 7,355 4,230,207 7,686 1,968,736 11,490 1,395,618 7,939 2,182,573 8,546 1,133,765 9,452 1,428,322 6,152 2,362,378 5,713 1,152,428 8,026 995,668 4,939 1,573,584 5,059 797,718 (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 the specified fiscal year 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 2017, please refer to Note 15, "Share-Based Compensation" to Microchip's audited financial statements for the fiscal year ended March 31, 2017 included in our Annual Report on Form 10-K filed with the SEC on May 30, 2017. (6) For fiscal 2016 stock awards include RSU grants under our evergreen grant program and also include RSU grants under our leadership grant program. Under the leadership grant program, Microchip conducted its succession planning process and merit-based RSU grants were made on September 1, 2015 to key employees based on the results of such process. The vesting of such RSUs was subject to a performance goal related to achieving a specified level of non-GAAP operating expenses for the three months ended December 31, 2015. This performance goal was achieved, and, as a result, the RSU grants under the leadership grant program will vest over 12 quarters with the first vesting on November 15, 2017. 39 Table of Contents (4) Represents the aggregate amount of bonuses earned by each executive officer in the specified fiscal year under our EMICP and DMICP. Each executive officer received the following payments under each of such plans in the specified fiscal year: Named Executive Officer Steve Sanghi Ganesh Moorthy Mitchell R. Little Stephen V. Drehobl J. Eric Bjornholt Year 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 EMICP DMICP $ 1,979,664 $ 937,893 1,052,992 461,160 139,024 155,279 201,671 98,754 111,296 167,321 79,699 89,838 110,227 51,488 57,588 415,687 326,755 328,154 94,840 48,364 48,815 41,547 34,392 34,684 34,975 27,604 28,023 22,965 17,945 17,947 (5) 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 401(k) Life Insurance $ 7,438 $ 4,619 5,804 7,511 5,183 5,514 7,914 4,870 5,477 7,339 4,633 4,408 7,037 4,000 4,270 3,027 3,069 2,414 2,020 2,172 2,172 3,576 3,069 3,069 2,113 1,519 1,305 989 939 789 Year 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 40 Table of Contents Grants of Plan-Based Awards During Fiscal 2017 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 2017. Actual payments for our bonus plans in fiscal 2017 are reflected in the Summary Compensation Table above. Equity awards in the table below were granted in fiscal 2017. Name Steve Sanghi GRANTS OF PLAN-BASED AWARDS For Fiscal Year Ended March 31, 2017 Estimated Future Payouts Under Non- Equity Incentive Plan Awards Grant Date 4/1/2016 4/1/2016 4/1/2016 7/2/2016 7/2/2016 7/2/2016 7/2/2016 10/2/2016 10/2/2016 10/2/2016 1/3/2017 1/3/2017 1/3/2017 — — — Threshold ($) (1) Target ($) Maximum ($) (1) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,164,584 (4) 291,146 (5) 27,995 (6) — — — — — — — — — — — — — — — — All Other Stock Awards: Number of Shares of Stock or Units (#) (2) Grant Date Fair Value of Stock and Option Awards ($) (3) 21,675 588 1,483 20,755 563 1,420 1,621 16,840 457 1,152 16,389 444 1,121 — — — 929,207 25,972 67,477 933,873 26,064 67,635 79,438 953,932 26,494 68,348 956,134 26,493 68,415 — — — 41 Table of Contents Estimated Future Payouts Under Non- Equity Incentive Plan Awards Name Grant Date Threshold ($) (1) Target ($) Maximum ($) (1) Ganesh Moorthy Mitchell R. Little 4/1/2016 4/1/2016 4/1/2016 4/1/2016 7/2/2016 7/2/2016 7/2/2016 7/2/2016 10/2/2016 10/2/2016 10/2/2016 10/2/2016 10/8/2016 1/3/2017 1/3/2017 1/3/2017 1/3/2017 — — — 4/1/2016 4/1/2016 4/1/2016 7/2/2016 7/2/2016 7/2/2016 10/2/2016 10/2/2016 10/2/2016 1/3/2017 1/3/2017 1/3/2017 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 263,680 (4) 65,920 (5) 15,846 (6) — — — — — — — — — — — — 113,889 (4) 28,472 (5) 11,903 (6) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 42 All Other Stock Awards: Number of Shares of Stock or Units (#) (2) 10,356 1,271 1,678 849 9,917 1,217 1,606 1,820 7,051 987 1,303 660 995 7,831 961 1,269 642 — — — 4,258 115 291 4,077 110 278 3,308 89 226 3,219 87 220 — — — Grant Date Fair Value of Stock and Option Awards ($) (3) 443,962 56,140 76,349 39,793 446,216 56,340 76,494 89,190 399,417 57,219 77,307 40,074 56,284 456,861 57,343 77,447 40,080 — — — 182,540 5,080 13,241 183,445 5,092 13,241 187,388 5,160 13,409 187,796 5,191 13,427 — — — Table of Contents Name Stephen V. Drehobl J. Eric Bjornholt Estimated Future Payouts Under Non- Equity Incentive Plan Awards Threshold ($) (1) Target ($) Maximum ($) (1) All Other Stock Awards: Number of Shares of Stock or Units (#) (2) Grant Date Fair Value of Stock and Option Awards ($) (3) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 97,213 (4) 24,303 (5) 10,386 (6) — — — — — — — — — — — — 64,481 (4) 16,120 (5) 9,688 (6) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 4,903 133 335 4,695 127 321 3,809 103 261 3,707 101 254 — — — 84 223 3,111 80 214 2,979 65 174 2,417 63 169 2,353 — — — 210,192 5,875 15,243 211,252 5,879 15,289 215,768 5,971 15,485 216,266 6,027 15,502 — — — 3,710 10,147 133,369 3,704 10,193 134,040 3,768 10,323 136,915 3,759 10,314 137,274 — — — Grant Date 4/1/2016 4/1/2016 4/1/2016 7/2/2016 7/2/2016 7/2/2016 10/2/2016 10/2/2016 10/2/2016 1/3/2017 1/3/2017 1/3/2017 — — — 4/1/2016 4/1/2016 4/1/2016 7/2/2016 7/2/2016 7/2/2016 10/2/2016 10/2/2016 10/2/2016 1/3/2017 1/3/2017 1/3/2017 — — — (1) Individual awards under our EMICP, DMICP and ECBP 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 performance period (which can be a fiscal quarter, a fiscal year or a longer period not exceeding five fiscal years). (2) Represents RSUs granted under Microchip's 2004 Equity Incentive Plan. (3) This column shows the full grant date fair value of RSU awards to the named executives in fiscal 2017. 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 amount targeted for estimated future payout in fiscal 2018 under Microchip's EMICP based on the executive officer's base salary at the end of fiscal 2017. (5) This annual target represents the amount targeted for estimated future payout in fiscal 2018 under Microchip's DMICP based on the executive officer's base salary at the end of fiscal 2017. (6) This annual target represents the amount targeted for future payout in fiscal 2018 under Microchip's ECBP based on the executive officer's base salary at the end of fiscal 2017. 43 Table of Contents Summary Compensation Table and Grants of Awards Table Discussion Based on the data in the Summary Compensation Table, the level of salary, bonus, non-equity incentive plan compensation, and other compensation in proportion to total compensation ranged from approximately 27.2% to 42.1% for our named executive officers in fiscal 2017. 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. 44 Table of Contents OUTSTANDING EQUITY AWARDS AT FISCAL 2017 YEAR END Name Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested $ (18) Stock Awards Steve Sanghi 1,894,154 1,863,757 119,597 1,728,223 1,576,826 1,499,210 48,473 109,416 1,399,385 41,981 104,768 50,170 1,557,127 55,483 84,995 1,598,813 82,707 50,908 1,522,081 43,383 1,576,531 41,538 10,936,778 1,742,831 33,717 1,599,182 32,758 1,599,182 1,531,304 1,242,455 1,209,180 25,673 (1) 25,261 (2) 1,621 (2) 23,424 (3) 21,372 (4) 20,320 (5) 657 (5) 1,483 (5) 18,967 (6) 569 (6) 1,420 (6) 680 (6) 21,105 (7) 752 (7) 1,152 (7) 21,670 (8) 1,121 (8) 690 (8) 20,630 (9) 588 (9) 21,368 (10) 563 (10) 148,235 (11) 23,622 (12) 457 (12) 21,675 (13) 444 (13) 21,675 (14) 20,755 (15) 16,840 (16) 16,389 (17) 45 Table of Contents OUTSTANDING EQUITY AWARDS AT FISCAL 2017 YEAR END Name Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested $ (18) Stock Awards Ganesh Moorthy 766,648 62,639 754,401 134,280 699,508 48,695 638,197 47,367 624,695 22,650 123,803 566,409 34,160 118,491 23,462 648,821 25,971 96,135 666,160 23,831 93,627 637,312 93,774 660,110 89,790 4,579,303 729,758 72,821 669,554 70,903 764,066 731,676 520,223 73,411 577,771 10,391 849 10,225 1,820 9,481 660 8,650 642 8,467 307 1,678 7,677 463 1,606 318 8,794 352 1,303 9,029 323 1,269 8,638 1,271 8,947 1,217 62,067 9,891 987 9,075 961 10,356 9,917 7,051 995 7,831 (1) (1) (2) (2) (3) (3) (4) (4) (5) (5) (5) (6) (6) (6) (6) (7) (7) (7) (8) (8) (8) (9) (9) (10) (10) (11) (12) (12) (13) (13) (14) (15) (16) (16) (17) 46 Table of Contents OUTSTANDING EQUITY AWARDS AT FISCAL 2017 YEAR END Name Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested $ (18) Stock Awards Mitchell R. Little 372,073 366,096 339,462 309,728 294,456 9,444 21,470 274,904 8,263 9,813 20,511 305,892 10,846 16,674 314,081 9,960 16,232 298,957 8,485 309,655 8,116 2,148,105 342,339 6,566 314,155 6,419 314,155 300,801 244,064 237,498 5,043 (1) 4,962 (2) 4,601 (3) 4,198 (4) 3,991 (5) 128 (5) 291 (5) 3,726 (6) 112 (6) 133 (6) 278 (6) 4,146 (7) 147 (7) 226 (7) 4,257 (8) 135 (8) 220 (8) 4,052 (9) 115 (9) 4,197 (10) 110 (10) 29,115 (11) 4,640 (12) 89 (12) 4,258 (13) 87 (13) 4,258 (14) 4,077 (15) 3,308 (16) 3,219 (17) 47 Table of Contents OUTSTANDING EQUITY AWARDS AT FISCAL 2017 YEAR END Name Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested $ (18) Stock Awards Stephen V. Drehobl 428,440 421,579 390,886 356,653 339,093 10,919 24,716 316,516 11,362 9,518 23,683 352,226 12,543 19,257 361,596 11,510 18,740 344,257 9,813 356,579 9,370 2,473,696 394,207 7,599 361,743 7,452 361,743 346,397 281,028 273,502 5,807 (1) 5,714 (2) 5,298 (3) 4,834 (4) 4,596 (5) 148 (5) 335 (5) 4,290 (6) 154 (6) 129 (6) 321 (6) 4,774 (7) 170 (7) 261 (7) 4,901 (8) 156 (8) 254 (8) 4,666 (9) 133 (9) 4,833 (10) 127 (10) 33,528 (11) 5,343 (12) 103 (12) 4,903 (13) 101 (13) 4,903 (14) 4,695 (15) 3,809 (16) 3,707 (17) 48 Table of Contents OUTSTANDING EQUITY AWARDS AT FISCAL 2017 YEAR END Name Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested $ (18) Stock Awards J. Eric Bjornholt 3,668 (1) 3,609 (2) 3,346 (3) 3,053 (4) 2,903 (5) 105 (5) 223 (5) 2,710 (6) 81 (6) 108 (6) 214 (6) 3,015 (7) 120 (7) 174 (7) 3,096 (8) 110 (8) 169 (8) 2,961 (9) 84 (9) 3,068 (10) 80 (10) 21,276 (11) 3,391 (12) 65 (12) 3,112 (13) 63 (13) 3,111 (14) 2,979 (15) 2,417 (16) 2,353 (17) 270,625 266,272 246,868 225,250 214,183 7,747 16,453 199,944 5,976 7,968 15,789 222,447 8,854 12,838 228,423 8,116 12,469 218,463 6,198 226,357 5,902 1,569,743 250,188 4,796 229,603 4,648 229,530 219,791 178,326 173,604 (1) The award vested in full on May 15, 2017. (2) The award vests in full on August 15, 2017, subject to continued service on such date. (3) The award vests in full on November 15, 2017, subject to continued service on such date. (4) The award vests in full on February 15, 2018, subject to continued service on such date. (5) The award vests in full on May 15, 2018, subject to continued service on such date. (6) The award vests in full on August 15, 2018, subject to continued service on such date. (7) The award vests in full on November 15, 2018, subject to continued service on such date. (8) The award vests in full on February 15, 2019, subject to continued service on such date. (9) The award vests in full on May 15, 2019, subject to continued service on such date. (10) The award vests in full on August 15, 2019, subject to continued service on such date. (11) The award vests quarterly over a three-year period commencing on November 15, 2017, subject to continued service on such dates. (12) The award vests in full on November 15, 2019, subject to continued service on such date. (13) The award vests in full on February 15, 2020, subject to continued service on such date. (14) The award vests in full on May 15, 2020, subject to continued service on such date. (15) The award vests in full on August 15, 2020, subject to continued service on such date. (16) The award vests in full on November 15, 2020, subject to continued service on such date. (17) The award vests in full on February 15, 2021, subject to continued service on such date. (18) Represents the number of RSUs multiplied by $73.78, the closing price of our common stock on March 31, 2017. 49 Table of Contents STOCK VESTED For Fiscal Year Ended March 31, 2017 The following table provides information, on an aggregate basis, about stock awards that vested during the fiscal year ended March 31, 2017 for each of the named executive officers. Microchip has not granted stock options, other than options assumed in acquisitions, since 2008. No named executive officer held any Microchip stock options during fiscal 2017. Name Stock Awards Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($) Steve Sanghi, CEO and Chairman of the Board 110,729 6,855,508 Ganesh Moorthy, President and COO 42,898 2,664,329 Mitchell R. Little, VP, Worldwide Sales and Applications 21,751 1,346,653 Stephen V. Drehobl, VP, MCU8 and Technology Development Division 25,046 1,550,671 J. Eric Bjornholt, VP and CFO 14,515 903,100 (1) The values realized upon vesting for RSUs are based on the closing price of the Company's common stock on the vesting dates. Non-Qualified Deferred Compensation for Fiscal Year 2017 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 (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. 50 Table of Contents The following table shows the non-qualified deferred compensation activity for each named executive officer for the fiscal year ended March 31, 2017. NON-QUALIFIED DEFERRED COMPENSATION Name Steve Sanghi $ Ganesh Moorthy Mitchell R. Little Stephen V. Drehobl J. Eric Bjornholt Executive Contributions in Last FY (1) Company Contributions in Last FY Aggregate Earnings in Last FY (1) Aggregate Withdrawals/ Distributions Aggregate Balance at Last FYE (1) — $ — 35,162 164,042 26,500 — $ — $ — $ — — — — 30,871 14,391 97,134 29,534 — — — — — 213,094 98,042 818,891 240,351 (1) The executive contribution amounts shown in the table were previously reported in the "Summary Compensation Table" as salary and/or bonus for fiscal 2017 or prior fiscal years. The earnings amounts shown in the table were not previously reported for fiscal 2017 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. 51 Table of Contents EQUITY COMPENSATION PLAN INFORMATION The table below provides information about our common stock that, as of March 31, 2017, may be issued upon the vesting of RSUs and the exercise of options and rights under the following equity compensation plans (which are all of our equity compensation plans; provided, however, that new equity awards or stock purchase rights may only be issued under the Microchip 2004 Equity Incentive Plan, the Microchip 1994 International Employee Stock Purchase Plan and the Microchip 2001 Employee Stock Purchase Plan): SMSC 2002 Inducement Stock Option Plan, SMSC 2003 Inducement Stock Option Plan, SMSC 2004 Inducement Stock Option Plan, SMSC 2005 Inducement Stock Option and Restricted Stock Plan, SMSC 2009 Long Term Incentive Plan (the "LTIP"), Supertex 2009 Equity Plan, ISSC 2011 Equity Plan, • Microchip 1994 International Employee Stock Purchase Plan (the "IESPP"), • Microchip 2001 Employee Stock Purchase Plan (the "ESPP"), • Microchip 2004 Equity Incentive Plan, • • • • • • • • Micrel 2003 Incentive Award Plan, • Micrel 2012 Equity Incentive Award Plan, • Microchip 2012 Inducement Award Plan (the "2012 Inducement Plan"), • Atmel Corporation 2005 Stock Plan, • Newport Media, Inc. 2005 Stock Incentive Plan, and • Ozmo, Inc. 2005 Equity Incentive Plan. Plan Category (a) Number of securities to be issued upon exercise of outstanding options and vesting of RSUs (b) Weighted average exercise price of outstanding options (1) (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity Compensation Plans Approved by Stockholders(2) 6,031,346 Equity Compensation Plans Not Approved by Stockholders 821,227 (3) (5) $40.58 $30.33 14,150,695 (4) — Total 6,852,573 $31.51 (6) 14,150,695 (1) The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which have no exercise price. (2) Beginning January 1, 2005, the shares authorized for issuance under our ESPP 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. Upon the approval of our Board of Directors, 1,077,150 shares of common stock were reserved under the ESPP on January 1, 2017 based on the automatic increase provision. Beginning January 1, 2007, the shares authorized for issuance under our IESPP are subject to an annual automatic increase of equal to one-tenth of one percent (0.10%) of the then outstanding shares of 52 Table of Contents our common stock. Upon the approval of our Board of Directors, 215,430 shares of common stock were reserved under the IESPP on January 1, 2017 based on the automatic increase provision. (3) As of March 31, 2017, includes 5,981,292 shares issuable upon the vesting of RSUs granted under our 2004 Equity Incentive Plan, and 50,054 shares issuable upon the exercise of outstanding options granted under our 2004 Equity Incentive Plan. (4) As of March 31, 2017, includes 7,274,275 shares remaining available for future issuance under our 2004 Equity Incentive Plan. The remaining balance represents shares available for purchase under the IESPP and the ESPP. (5) As of March 31, 2017, includes 55,731 shares subject to outstanding SARs under the 2012 Inducement Plan. Also, includes 16,034 shares subject to outstanding awards under the 2009 LTIP; 1,360 shares subject to outstanding options under the 2004 Inducement Plan; 680 shares subject to outstanding options under the 2003 Inducement Plan; and 226 shares subject to outstanding options under the 2002 Inducement Plan. Also, includes 172,348 shares subject to outstanding options under the 2009 Equity Plan that Supertex adopted prior to our acquisition of Supertex in April 2014. Also, includes 1,239 shares subject to outstanding options under the 2011 Equity Plan that ISSC adopted prior to our acquisition of ISSC in July 2014. Also, includes 2,675 shares issuable upon the vesting of RSUs granted under the Micrel 2003 Incentive Award Plan, and 36,754 shares issuable upon the exercise of outstanding options granted under the Micrel 2003 Incentive Award Plan. Also, includes 98,158 shares issuable upon the vesting of RSUs granted under the Micrel 2012 Equity Incentive Award Plan, and 98,691 shares issuable upon the exercise of outstanding options granted under the Micrel 2012 Equity Incentive Award Plan. Also, includes 337,331 shares issuable upon the vesting of RSUs granted under the Atmel Corporation 2005 Stock Plan. (6) As of March 31, 2017, there were a total of 433,117 shares subject to outstanding options, with a weighted average exercise price of $31.51 per share and a weighted average term of 5.02 years. Equity Compensation Plans Not Approved by Stockholders Microchip 2012 Inducement Award Plan In August 2012, our Board of Directors approved the 2012 Inducement Plan. Under our 2012 Inducement Plan, SARs were granted to certain employees of SMSC as an inducement for them to enter employment with Microchip. The 2012 Inducement 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 adopted. The expiration date and other provisions of awards granted under the 2012 Inducement Plan, including vesting provisions, were established at the time of grant by the Compensation Committee. No SAR may have a term of more than ten years. If Microchip is acquired by merger, consolidation or asset sale, or there is a nomination and election of 50% or more of all members of the Board within a 36-month period whose election is without recommendation of the Board, then each outstanding SAR may be terminated at the discretion of any committee appointed by the Board upon notice to the award holder. Our Board of Directors may amend or terminate the 2012 Inducement Plan without stockholder approval, but no amendment of the 2012 Inducement Plan may adversely affect any award previously granted under the 2012 Inducement Plan without the written consent of the SAR holder. 53 Table of Contents CODE OF BUSINESS CONDUCT AND ETHICS In May 2004, our Board of Directors adopted a Code of Business Conduct and Ethics for our directors, officers (including our chief executive officer and chief financial officer), and employees. A copy of the Code of Business Conduct and Ethics, as amended to date, is available on our website at the About Us/Investor Relations 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 code 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 Other Matters to be Presented at the Annual Meeting 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 2018 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 our 2018 annual meeting, our Secretary must receive the proposal at our principal executive offices by March 15, 2018. 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 2018 annual meeting must do so no later than April 14, 2018. • However, if we hold our 2018 annual meeting on a date that is not within 30 days before or after the anniversary date of our 2017 annual meeting, we must receive the notice no later than the close of business on the later of the 90th day prior to our 2018 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 2018 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. 54 Table of Contents 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 2017 Annual Report are available online (see "Electronic Access to Proxy Statement and Annual Report" on page 3), 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 13, 2017. 55 Table of Contents MICROCHIP TECHNOLOGY INCORPORATED 2004 EQUITY INCENTIVE PLAN (As Amended and Restated on May 16, 2017, subject to stockholder approval) 1. Purposes of the Plan. The purposes of this 2004 Equity Incentive Plan are: • • • to attract and retain the best available personnel, to provide additional incentive to Service Providers, and to promote the success of the Company’s business. Awards granted under the Plan may be Nonstatutory Stock Options, Restricted Stock, Stock Appreciation Rights, Performance Shares, Performance Units or Deferred Stock Units, as determined by the Administrator at the time of grant. 2. Definitions. As used herein, the following definitions shall apply: (a) accordance with Section 4 of the Plan. “Administrator” means the Board or any of its Committees as shall be administering the Plan, in (b) “Applicable Laws” means the legal requirements relating to the administration of equity compensation plans under state and federal corporate and securities laws and the Code. (c) “Award” means, individually or collectively, a grant under the Plan of Options, Restricted Stock, Stock Appreciation Rights, Performance Shares, Performance Units or Deferred Stock Units. (d) “Award Agreement” means the written agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan. (e) (f) (g) related transactions: “Awarded Stock” means the Common Stock subject to an Award. “Board” means the Board of Directors of the Company. “Change of Control” means the occurrence of any of the following events, in one or a series of (1) any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or a Company employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or (2) a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or or (3) the sale or disposition by the Company of all or substantially all of the Company’s assets; (4) a change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are Directors as of the date this Plan is approved by the Board, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors and whose election or nomination was not in connection with any transaction described in (1) or (2) above or in connection with an actual or threatened proxy contest relating to the election of directors of the Company. A-1 Table of Contents (h) “Code” means the Internal Revenue Code of 1986, as amended. (i) (j) “Committee” means a committee appointed by the Board in accordance with Section 4 of the Plan. “Common Stock” means the common stock of the Company. (k) “Company” means Microchip Technology Incorporated. (l) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services. The term Consultant shall not include Directors who are compensated by the Company only for their service as Directors. (m) “Deferred Stock Unit” means a deferred stock unit Award granted to a Participant pursuant to Section 13. (n) (o) (p) “Director” means a member of the Board. “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code. “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company. (q) (r) “Exchange Act” means the Securities Exchange Act of 1934, as amended. “Fair Market Value” means, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the National Association of Securities Dealers, Inc. Automated Quotation (“Nasdaq”) System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (2) If the Common Stock is quoted on the Nasdaq System (but not on the Nasdaq National Market thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or be determined in good faith by the Administrator. (3) In the absence of an established market for the Common Stock, the Fair Market Value shall (s) (t) (u) (v) “Fiscal Year” means a fiscal year of the Company. “Fiscal Quarter” means a fiscal quarter of the Company. “Non-Employee Director” means a member of the Board who is not an Employee. “Nonstatutory Stock Option” means an Option not intended to qualify as an incentive stock option under Section 422 of the Code and regulations promulgated thereunder. (w) “Notice of Grant” means a written or electronic notice evidencing certain terms and conditions of an individual Award. The Notice of Grant is part of the Option Agreement. (x) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. A-2 Table of Contents (y) (z) “Option” means a stock option granted pursuant to the Plan. “Option Agreement” means a written or electronic agreement between the Company and a Participant evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (aa) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424 (e) of the Code. (bb) “Participant” means the holder of an outstanding Award granted under the Plan. (cc) “Performance Goals” means the goal(s) (or combined goal(s)) determined by the Administrator (in its discretion) to be applicable to a Participant with respect to an Award. As determined by the Administrator, the performance measures for any performance period will be any one or more of the following objective performance criteria, applied to either the Company as a whole or, except with respect to stockholder return metrics, to a region, business unit, affiliate or business segment or specific product or products, and measured either on an absolute basis or relative to a pre-established target, to a previous period’s results or to a designated comparison group, and, with respect to financial metrics, which may be determined in accordance with United States Generally Accepted Accounting Principles (“GAAP”), in accordance with accounting principles established by the International Accounting Standards Board (“IASB Principles”) or which may be adjusted when established to exclude any items otherwise includable under GAAP or under IASB Principles or any other objectively determinable items including, without limitation, (a) any extraordinary non-recurring items, (b) the effect of any merger, acquisition, or other business combination or divestiture, or (c) the effect of any changes in accounting principles affecting the Company’s or a business units’, region’s, affiliate’s or business segment’s reported results: (i) cash flow (including operating cash flow or free cash flow), (ii) cash position, (iii) revenue (on an absolute basis or adjusted for currency effects), (iv) revenue growth, (v) contribution margin, (vi) gross margin or gross margin as a percentage of revenue, (vii) operating margin or operating margin as a percentage of revenue (viii) operating expenses or operating expenses as a percentage of revenue, (ix) earnings (which may include earnings before interest and taxes, earnings before taxes and net earnings), (x) earnings per share, (xi) net income, (xii) stock price, (xiii) return on equity, (xiv) total stockholder return, (xv) growth in stockholder value relative to a specified publicly reported index (such as the S&P 500 Index), (xvi) return on capital, (xvii) return on assets or net assets, (xviii) return on investment, (xix) operating profit or net operating profit, (xx) market share (which may include ranking for a specific product line or market share percentage for a given product line), (xxi) contract awards or backlog, (xxii) overhead or other expense reduction, (xxiii) credit rating, (xxiv) objective customer indicators, (xxv) new product invention or innovation, (xxvi) attainment of research and development milestones, (xxvii) improvements in productivity, (xxviii) attainment of objective operating goals, and (xxix) objective employee metrics. The Performance Goals may differ from Participant to Participant and from Award to Award. (dd) “Performance Share” means a performance share Award granted to a Participant pursuant to Section 11. Section 12. (ee) “Performance Unit” means a performance unit Award granted to a Participant pursuant to (ff) “Plan” means this 2004 Equity Incentive Plan. (gg) “Restricted Stock” means Shares granted pursuant to Section 10 of the Plan. (hh) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (ii) (jj) “Section 16(b)” means Section 16(b) of the Exchange Act, as amended. “Service Provider” means an Employee, Consultant or Non-Employee Director. (kk) “Share” means a share of the Common Stock, as adjusted in accordance with Section 19 of the Plan. (ll) “Stock Appreciation Right” or “SAR” means an Award granted pursuant to Section 9 of the Plan. (mm) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code. A-3 Table of Contents 3. Stock Subject to the Plan. Subject to the provisions of Section 19 of the Plan, the maximum aggregate number of Shares which may be issued under the Plan is 36,300,000 Shares plus any Shares subject to any outstanding options under the Company’s 1993 or 1997 Nonstatutory Stock Option Plans that expire unexercised, up to a maximum of an additional 5,000,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Award expires or becomes unexercisable without having been exercised in full, or with respect to Restricted Stock, Performance Shares, Performance Units or Deferred Stock Units, is forfeited to or repurchased by the Company, the unpurchased Shares (or for Awards other than Options and SARs, the forfeited or repurchased Shares) which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to SARs, the gross Shares issued (i.e., Shares actually issued pursuant to a Stock Appreciation Right, as well as the Shares that represent payment of the exercise price and any applicable tax withholdings) pursuant to a SAR will cease to be available under the Plan. Shares that have actually been issued under the Plan under any Award shall not be returned to the Plan and shall not become available for future distribution under the Plan; provided, however, that if Shares of Restricted Stock, Performance Shares, Performance Units or Deferred Stock Units are repurchased by the Company at their original purchase price or are forfeited to the Company, such Shares shall become available for future grant under the Plan. Shares used to pay the exercise price or purchase price, if applicable, of an Award shall become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than stock, such cash payment shall not result in reducing the number of Shares available for issuance under the Plan. 4. Administration of the Plan. (a) Procedure. with respect to different groups of Service Providers. (1) Multiple Administrative Bodies. The Plan may be administered by different Committees (2) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code. (3) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (4) Other Administration. Other than as provided above, the Plan shall be administered by (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: of the Plan; (1) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(u) automatic grants to Non-Employee Directors provided for in Section 17 of the Plan); (2) to select the Service Providers to whom Awards may be granted hereunder (other than the under the Plan; (3) to determine whether and to what extent Awards or any combination thereof, are granted each Award granted under the Plan; (4) to determine the number of shares of Common Stock or equivalent units to be covered by (5) to approve forms of agreement for use under the Plan; to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted under the Plan. Such terms and conditions include, but are not limited to, the exercise price, the time or times (6) A-4 Table of Contents when Options or SARs may be exercised or other Awards vest (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (7) (8) to construe and interpret the terms of the Plan and Awards; to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (9) to modify or amend each Award (subject to Sections 8(c), 9(b) and 21(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options and SARs longer than is otherwise provided for in the Plan; effect the grant of an Award previously granted by the Administrator; (10) to authorize any person to execute on behalf of the Company any instrument required to (11) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares or cash to be issued upon exercise or vesting of an Award (or distribution of a Deferred Stock Unit) that number of Shares or cash having a Fair Market Value equal to the minimum amount required to be withheld (but no more). The Fair Market Value of any Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares or cash withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (12) to determine the terms and restrictions applicable to Awards; and (13) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations shall be final and binding on all Participants and any other holders of Awards. 5. Eligibility. Restricted Stock, Performance Shares, Performance Units, Stock Appreciation Rights, Deferred Stock Units and Nonstatutory Stock Options may be granted to Service Providers. Non-Employee Directors shall only receive Awards pursuant to Section 17 of the Plan. 6. Limitations. (a) Nonstatutory Stock Option. Each Option shall be designated in the Notice of Grant as a Nonstatutory Stock Option. (b) No Employment Rights. Neither the Plan nor any Award shall confer upon a Participant any right with respect to continuing the Participant’s employment with the Company or its Subsidiaries, nor shall they interfere in any way with the Participant’s right or the Company’s or Subsidiary’s right, as the case may be, to terminate such employment at any time, with or without cause or notice. (c) 162(m) Limitations. The following limitations shall apply to grants of Options and Stock Appreciation Rights to Participants: No Participant shall be granted, in any Fiscal Year, Options and Stock Appreciation Rights to purchase more than 1,500,000 Shares; provided, however, that such limit shall be 4,000,000 Shares in the Participant’s first Fiscal Year of Company service. (1) in the Company’s capitalization as described in Section 19(a). (2) The foregoing limitations shall be adjusted proportionately in connection with any change A-5 Table of Contents (d) Minimum Vesting Requirements. (1) General. Except as specified in Section 6(d)(2), Awards will vest no earlier than the one (1)-year anniversary of such Award’s grant date (except if accelerated pursuant to a Change of Control or a termination of the Participant’s status as a Service Provider due to a Participant’s death, or a Participant’s Disability) (each, an “Acceleration Event”). (2) Exception. Awards may be granted to any Service Provider without regard to the minimum vesting requirements set forth in Section 6(d)(1) if the Shares subject to such Awards would not result in more than five percent (5%) of the maximum aggregate number of Shares reserved for issuance pursuant to all outstanding Awards granted under the Plan (the “5% Limit”). Any Awards that have their vesting discretionarily accelerated (except if accelerated pursuant to an Acceleration Event) are subject to the 5% Limit. For purposes of clarification, the Administrator may accelerate the vesting of any Awards pursuant to an Acceleration Event without such vesting acceleration counting toward the 5% Limit. The 5% Limit applies in the aggregate to Awards that do not satisfy the minimum vesting requirements as set forth in Section 6(d)(1) and to the discretionary vesting acceleration of Awards specified in this Section 6(d)(2). 7. Term of Plan. The Plan is effective as of October 1, 2004 (the “Effective Date”). It shall continue in effect until May 22, 2022, unless sooner terminated under Section 21 of the Plan. 8. Stock Options. (a) Term. The term of each Option shall be stated in the Notice of Grant; provided, however, that the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. (b) Option Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator and shall be no less than 100% of the Fair Market Value per share on the date of grant. (c) No Repricing. The exercise price for an Option may not be reduced. This shall include, without limitation, a repricing of the Option as well as an Option exchange program whereby the Participant agrees to cancel an existing Option in exchange for an Option, SAR, other Award or cash. (d) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period. (e) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. Subject to Applicable Laws, such consideration may consist entirely of: (1) (2) (3) cash; check; other Shares which (A) in the case of Shares acquired upon exercise of an option have been owned by the Participant for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale proceeds required to pay the exercise price; (4) (5) any combination of the foregoing methods of payment; or (6) permitted by Applicable Laws. such other consideration and method of payment for the issuance of Shares to the extent A-6 Table of Contents (f) Exercise of Option. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the optioned stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 19 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available for sale under the Option, by the number of Shares as to which the Option is exercised. (g) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s misconduct, death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Participant’s termination. If, on the date of termination, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (h) Disability. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for six (6) months following the Participant’s termination. If, on the date of termination, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (i) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participant’s death within such period of time as is specified in the Option Agreement (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Option Agreement), by the personal representative of the Participant’s estate, provided such representative has been designated prior to Participant’s death in a form acceptable to the Administrator. If no such representative has been designated by the Participant, then such Option may be exercised by the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following Participant’s death. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 9. Stock Appreciation Rights. (a) Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine the number of SARs granted to any Participant. (b) Exercise Price and Other Terms. Subject to Section 4(c) of the Plan, the Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of SARs granted under the A-7 Table of Contents Plan; provided, however, that no SAR may have a term of more than ten (10) years from the date of grant. The per share exercise price for the Shares or cash to be issued pursuant to exercise of an SAR shall be determined by the Administrator and shall be no less than 100% of the Fair Market Value per share on the date of grant. The exercise price may not be reduced. This shall include, without limitation, a repricing of the SAR as well as an SAR exchange program whereby the Participant agrees to cancel an existing SAR in exchange for an Option, SAR, other Award or cash. (c) Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying: exercise price; times (1) the difference between the Fair Market Value of a Share on the date of exercise over the (2) the number of Shares with respect to which the SAR is exercised. With respect to SARs settled in Shares, until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the SAR, notwithstanding the exercise of the SAR. (d) Payment Upon Exercise of SAR. At the discretion of the Administrator, payment for an SAR may be in cash, Shares or a combination thereof. (e) SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, shall determine. (f) Expiration of SARs. An SAR granted under the Plan shall expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. (g) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s death or Disability termination, the Participant may exercise his or her SAR within such period of time as is specified in the SAR Agreement to the extent that the SAR is vested on the date of termination (but in no event later than the expiration of the term of such SAR as set forth in the SAR Agreement). In the absence of a specified time in the SAR Agreement, the SAR shall remain exercisable for three (3) months following the Participant’s termination. If, on the date of termination, the Participant is not vested as to his or her entire SAR, the Shares covered by the unvested portion of the SAR shall revert to the Plan. If, after termination, the Participant does not exercise his or her SAR within the time specified by the Administrator, the SAR shall terminate, and the Shares covered by such SAR shall revert to the Plan. (h) Disability. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her SAR within such period of time as is specified in the SAR Agreement to the extent the SAR is vested on the date of termination (but in no event later than the expiration of the term of such SAR as set forth in the SAR Agreement). In the absence of a specified time in the SAR Agreement, the SAR shall remain exercisable for six (6) months following the Participant’s termination. If, on the date of termination, the Participant is not vested as to his or her entire SAR, the Shares covered by the unvested portion of the SAR shall revert to the Plan. If, after termination, the Participant does not exercise his or her SAR within the time specified herein, the SAR shall terminate, and the Shares covered by such SAR shall revert to the Plan. (i) Death of Participant. If a Participant dies while a Service Provider, the SAR may be exercised following the Participant’s death within such period of time as is specified in the SAR Agreement (but in no event may the SAR be exercised later than the expiration of the term of such SAR as set forth in the SAR Agreement), by the personal representative of the Participant’s estate, provided such representative has been designated prior to Participant’s death in a form acceptable to the Administrator. If no such representative has been designated by the Participant, then such SAR may be exercised by the person(s) to whom the SAR is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the SAR Agreement, the SAR shall remain exercisable for twelve (12) months following Participant’s death. If the SAR is not so exercised within the time specified herein, the SAR shall terminate, and the Shares covered by such SAR shall revert to the Plan. A-8 Table of Contents 10. Restricted Stock. (a) Grant of Restricted Stock. Subject to the terms and conditions of the Plan, Restricted Stock may be granted to Participants at any time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine (i) the number of Shares subject to a Restricted Stock award granted to any Participant (provided that during any Fiscal Year, no Participant shall be granted more than 300,000 Shares of Restricted Stock); provided, however, that such limit shall be 750,000 Shares in the Participant’s first Fiscal Year of Company service, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on continued provision of services but may include a performance-based component, upon which is conditioned the grant or vesting of Restricted Stock. (b) Restricted Stock Units. Restricted Stock may be granted in the form of Restricted Stock or units to acquire Shares. Each such unit shall be the equivalent of one Share for purposes of determining the number of Shares subject to an Award. With respect to the units to acquire Shares, until the Shares are issued, no right to vote or receive dividends or any other rights as a stockholder shall exist. (c) Other Terms. The Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of Restricted Stock granted under the Plan. Restricted Stock grants shall be subject to the terms, conditions, and restrictions determined by the Administrator at the time the stock is awarded. The Administrator may require the recipient to sign a Restricted Stock Award agreement as a condition of the award. Any certificates representing the Shares of stock awarded shall bear such legends as shall be determined by the Administrator. (d) Restricted Stock Award Agreement. Each Restricted Stock grant shall be evidenced by an agreement that shall specify the purchase price (if any) and such other terms and conditions as the Administrator, in its sole discretion, shall determine; provided, however, that if the Restricted Stock grant has a purchase price, such purchase price must be paid no more than ten (10) years following the date of grant. (e) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the Administrator on or before the latest date permissible to enable the Restricted Stock to qualify as “performance-based compensation” under Section 162(m) of the Code. In granting Restricted Stock which is intended to qualify under Section 162(m) of the Code, the Administrator shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Restricted Stock under Section 162(m) of the Code (e.g., in determining the Performance Goals). (f) Dividends and Other Distributions. Until the restrictions set forth in the Restricted Stock Award agreement have lapsed, Service Providers holding Shares of Restricted Stock will not be entitled to receive dividends and other distributions paid with respect to such Shares. However, to the extent the restrictions in the Restricted Stock Award have lapsed, Service Providers holding Shares of Restricted Stock will be entitled to receive dividends, even if there are other restrictions on the Shares of Restricted Stock (e.g., a lock up period due to a public offering or a restriction due to possession of material nonpublic information). 11. Performance Shares. (a) Grant of Performance Shares. Subject to the terms and conditions of the Plan, Performance Shares may be granted to Participants at any time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine (i) the number of Shares subject to a Performance Share award granted to any Participant (provided that during any Fiscal Year, no Participant shall be granted more than 300,000 units of Performance Shares); provided, however, that such limit shall be 750,000 Shares in the Participant’s first Fiscal Year of Company service, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component, upon which is conditioned the grant or vesting of Performance Shares. Performance Shares shall be granted in the form of units to acquire Shares. Each such unit shall be the equivalent of one Share for purposes of determining the number of Shares subject to an Award. Until the Shares are issued, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the units to acquire Shares. A-9 Table of Contents (b) Other Terms. The Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of Performance Shares granted under the Plan. Performance Share grants shall be subject to the terms, conditions, and restrictions determined by the Administrator at the time the stock is awarded, which may include such performance-based milestones as are determined appropriate by the Administrator. The Administrator may require the recipient to sign a Performance Shares agreement as a condition of the award. Any certificates representing the Shares of stock awarded shall bear such legends as shall be determined by the Administrator. (c) Performance Share Award Agreement. Each Performance Share grant shall be evidenced by an agreement that shall specify such other terms and conditions as the Administrator, in its sole discretion, shall determine. (d) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Performance Shares as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the Administrator on or before the latest date permissible to enable the Performance Shares to qualify as “performance-based compensation” under Section 162(m) of the Code. In granting Performance Shares which are intended to qualify under Section 162(m) of the Code, the Administrator shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Performance Shares under Section 162(m) of the Code (e.g., in determining the Performance Goals). 12. Performance Units. (a) Grant of Performance Units. Performance Units are similar to Performance Shares, except that they shall be settled in a cash equivalent to the Fair Market Value of the underlying Shares, determined as of the vesting date. Subject to the terms and conditions of the Plan, Performance Units may be granted to Participants at any time and from time to time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine the conditions that must be satisfied, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component, upon which is conditioned the grant or vesting of Performance Units. Performance Units shall be granted in the form of units to acquire Shares. Each such unit shall be the cash equivalent of one Share of Common Stock. No right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Performance Units or the cash payable thereunder. (b) Number of Performance Units. The Administrator will have complete discretion in determining the number of Performance Units granted to any Participant, provided that during any Fiscal Year, no Participant shall receive Performance Units having an initial value greater than $1,500,000, provided, however, that such limit shall be $4,000,000 in the Participant’s first Fiscal Year of Company service. (c) Other Terms. The Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of Performance Units granted under the Plan. Performance Unit grants shall be subject to the terms, conditions, and restrictions determined by the Administrator at the time the stock is awarded, which may include such performance-based milestones as are determined appropriate by the Administrator. The Administrator may require the recipient to sign a Performance Unit agreement as a condition of the award. Any certificates representing the Shares awarded shall bear such legends as shall be determined by the Administrator. (d) Performance Unit Award Agreement. Each Performance Unit grant shall be evidenced by an agreement that shall specify such terms and conditions as the Administrator, in its sole discretion, shall determine. (e) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Performance Units as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the Administrator on or before the latest date permissible to enable the Performance Units to qualify as “performance-based compensation” under Section 162(m) of the Code. In granting Performance Units which are intended to qualify under Section 162(m) of the Code, the Administrator shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Performance Units under Section 162(m) of the Code (e.g., in determining the Performance Goals). 13. Deferred Stock Units. (a) Description. Deferred Stock Units shall consist of a Restricted Stock, Performance Share or Performance Unit Award that the Administrator, in its sole discretion permits to be paid out in installments or on a deferred basis, in accordance with rules and procedures established by the Administrator. Deferred Stock Units shall remain subject to the claims of the Company’s general creditors until distributed to the Participant. A-10 Table of Contents (b) 162(m) Limits. Deferred Stock Units shall be subject to the annual 162(m) limits applicable to the underlying Restricted Stock, Performance Share or Performance Unit Award. 14. Death of Participant. In the event that a Participant dies while a Service Provider, then 100% of his or her Awards shall immediately vest. 15. Leaves of Absence. Unless the Administrator provides otherwise or as otherwise required by Applicable Laws, vesting of Awards granted hereunder shall cease commencing on the first day of any unpaid leave of absence and shall only recommence upon return to active service. 16. Misconduct. Should (i) the Participant’s service be terminated for misconduct (including, but not limited to, any act of dishonesty, willful misconduct, fraud or embezzlement), or (ii) the Participant makes any unauthorized use or disclosure of confidential information or trade secrets of the Company or any Parent or Subsidiary, then in any such event all outstanding Awards held by the Participant under the Plan shall terminate immediately and cease to be outstanding, including as to both vested and unvested Awards. 17. Non-Employee Director Options. (a) Initial Grants. Each Non-Employee Director who first becomes a Non-Employee Director on or after May 5, 2010 (excluding any Non-Employee Director who previously served on the Board), shall be automatically granted that number of Restricted Stock Units equal to $160,000 divided by the Fair Market Value, rounded down to the nearest whole Share (the “Initial RSU Grant”), as of the date that the individual first is appointed or elected as a Non-Employee Director. The Initial RSU Grant will vest in equal 25% annual installments on each of the four anniversaries of the tenth business day of the second month of the Company’s fiscal quarter in which the grant is made. All vesting of the Initial RSU Grant is contingent upon the Non-Employee Director maintaining continued status as a Non-Employee Director through the applicable vesting date. (b) Annual Grants. On the date of the Company’s annual stockholders’ meeting, each Non-Employee Director who has served as a Non-Employee Director for at least three months on that date shall be automatically granted that number of Restricted Stock Units equal to $84,000 divided by the Fair Market Value, rounded down to the nearest whole Share (the “Annual RSU Grant”), provided that such Non-Employee Director has been elected by the stockholders to serve as a member of the Board at that annual meeting. The Annual RSU Grant will vest in equal 50% annual installments on each of the two anniversaries of the tenth day of the second month of the Company’s fiscal quarter in which the grant is made. All vesting of the Annual RSU Grant is contingent upon the Non-Employee Director maintaining continued status as a Non-Employee Director through the applicable vesting date. (c) Additional Grant. On August 14, 2015 (the date of the Company’s 2015 annual meeting of stockholders), each Non-Employee Director who has served as a Non-Employee Director for at least five years on that date shall be automatically granted an additional grant of that number of Restricted Stock Units equal to $100,000 divided by the Fair Market Value, rounded down to the nearest whole Share, provided that such Non-Employee Director was elected by the stockholders to serve as a member of the Board at the annual meeting held August 14, 2015. The Restricted Stock Units subject to this grant will vest in equal 25% annual installments on each of the four anniversaries of the tenth day of the second month of the Company’s fiscal quarter in which the grant is made. Vesting of the additional grant is contingent upon the Non- Employee Director maintaining continued status as a Non-Employee Director through the applicable vesting date. 18. Non-Transferability of Awards. Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the recipient, only by the recipient. In no event may an Award be transferred in exchange for consideration. If the Administrator makes an Award transferable, such Award shall contain such additional terms and conditions as the Administrator deems appropriate. 19. Adjustments Upon Changes in Capitalization, Dissolution or Liquidation or Change of Control. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Award, the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award, as well as the price per share of Common Stock covered by each such outstanding Award and the 162(m) fiscal year share issuance limits under Sections 6(c), 10(a) and 11(a) shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse A-11 Table of Contents stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that any such change in capitalization shall not affect the number of shares awarded under the automatic grants to Non-Employee Directors described in Sections 17(a) and (b), and provided that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for a Participant to have the right to exercise his or her Option or SAR until ten (10) days prior to such transaction as to all of the Awarded Stock covered thereby, including Shares as to which the Award would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option or forfeiture rights applicable to any Award shall lapse 100%, and that any Award vesting shall accelerate 100%, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised (with respect to Options and SARs) or vested (with respect to other Awards), an Award will terminate immediately prior to the consummation of such proposed action. (c) Change of Control. (1) Stock Options and SARs. In the event of a Change of Control, each outstanding Option and SAR shall be assumed or an equivalent option or SAR substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or SAR, the Participant shall fully vest in and have the right to exercise the Option or SAR as to all of the Awarded Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or SAR becomes fully vested and exercisable in lieu of assumption or substitution in the event of a Change of Control, the Administrator shall notify the Participant in writing or electronically that the Option or SAR shall be fully vested and exercisable for a period of thirty (30) days from the date of such notice, and the Option or SAR shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or SAR shall be considered assumed if, following the Change of Control, the option or stock appreciation right confers the right to purchase or receive, for each Share of Awarded Stock subject to the Option or SAR immediately prior to the Change of Control, the consideration (whether stock, cash, or other securities or property) received in the Change of Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change of Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or SAR, for each Share of Awarded Stock subject to the Option or SAR, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change of Control. (2) Restricted Stock, Performance Shares, Performance Units and Deferred Stock Units. In the event of a Change of Control, each outstanding Restricted Stock, Performance Share, Performance Unit and Deferred Stock Unit award shall be assumed or an equivalent Restricted Stock, Performance Share, Performance Unit and Deferred Stock Unit award substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Restricted Stock, Performance Share, Performance Unit or Deferred Stock Unit award, the Participant shall fully vest in the Restricted Stock, Performance Share, Performance Unit or Deferred Stock Unit including as to Shares (or with respect to Performance Units, the cash equivalent thereof) which would not otherwise be vested. For the purposes of this paragraph, a Restricted Stock, Performance Share, Performance Unit and Deferred Stock Unit award shall be considered assumed if, following the Change of Control, the award confers the right to purchase or receive, for each Share (or with respect to Performance Units, the cash equivalent thereof) subject to the Award immediately prior to the Change of Control, the consideration (whether stock, cash, or other securities or property) received in the Change of Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change of Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received, for each Share and each unit/right to acquire a Share subject to the Award, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change of Control. A-12 Table of Contents 20. Date of Grant. The date of grant of an Award shall be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Participant within a reasonable time after the date of such grant. 21. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Stockholder Approval. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such stockholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. 22. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Award unless the exercise of the Award or the issuance and delivery of such Shares (or with respect to Performance Units, the cash equivalent thereof) shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise or receipt of an Award, the Company may require the person exercising or receiving such Award to represent and warrant at the time of any such exercise or receipt that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 23. Liability of Company. (a) Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. (b) Grants Exceeding Allotted Shares. If the Awarded Stock covered by an Award exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional stockholder approval, such Award shall be void with respect to such excess Awarded Stock, unless stockholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 21(b) of the Plan. 24. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. A-13 Table of Contents MICROCHIP TECHNOLOGY INCORPORATED 2017 ANNUAL MEETING OF STOCKHOLDERS Tuesday, August 22, 2017 9:00 a.m. Mountain Standard Time 2355 W. Chandler Blvd. Chandler, Arizona 85224-6199 This Proxy is solicited on behalf of the Board of Directors 2017 ANNUAL MEETING OF STOCKHOLDERS I (whether one or more of us) appoint Steve Sanghi and J. Eric Bjornholt, and each of them, each with full power of substitution, to be my Proxies. The Proxies may vote on my behalf, in accordance with my instructions, all of my shares entitled to vote at the 2017 Annual Meeting of Stockholders of Microchip Technology Incorporated and any adjournment(s) of that meeting. The meeting is scheduled for August 22, 2017, at 9:00 a.m., Mountain Standard Time, at Microchip's Chandler, Arizona facility at 2355 W. Chandler Blvd., Chandler, Arizona 85224-6199. The Proxies may vote on my behalf as if I were personally present at the meeting. This Proxy will be voted as directed or, if no contrary direction is indicated, will be voted (1) FOR the election of each of the director nominees; (2) FOR the approval of the amendment and restatement of Microchip's 2004 Equity Incentive Plan to (i) increase the number of shares of common stock authorized for issuance thereunder by 6,000,000, (ii) re-approve the 2004 Equity Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code; and (iii) make certain other changes; (3) FOR the ratification of Ernst & Young LLP as Microchip's independent registered public accounting firm for the fiscal year ending March 31, 2018; (4) FOR approval, on an advisory (non-binding) basis, of the compensation of our named executives; and (5) FOR a frequency period of ONE YEAR regarding the frequency of holding an advisory (non- binding) vote on the compensation of our named executives; and as my Proxies deem advisable on such other matters as may properly come before the meeting or any adjournment(s) thereof. The proposals described in the accompanying proxy statement have been proposed by the Board of Directors. IF VOTING BY MAIL, PLEASE COMPLETE, DATE AND SIGN ON REVERSE SIDE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. YOUR VOTE IS IMPORTANT! Thank you in advance for participating in our 2017 Annual Meeting Vote by Internet, Telephone or Mail 24 Hours a Day, 7 Days a Week Your phone or internet vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card. INTERNET/MOBILE www.proxypush.com/mchp PHONE 1-866-883-3382 MAIL Use the internet to vote your proxy until 11:59 p.m. (CT) on August 21, 2017. Use a touch-tone telephone to vote your proxy until 11:59 p.m. (CT) on August 21, 2017. Mark, sign and date your proxy card and return it in the postage-paid envelope provided. If you vote your proxy by internet or by telephone, you do NOT need to mail back your Proxy Card. Table of Contents TO VOTE BY MAIL AS THE BOARD OF DIRECTORS RECOMMENDS ON ALL ITEMS BELOW, SIMPLY SIGN, DATE, AND RETURN THIS PROXY CARD. The Board of Directors recommends you vote FOR the following: 1. Election of Directors: 01 Steve Sanghi 02 Matthew W. Chapman 03 L.B. Day 04 Esther L. Johnson 05 Wade F. Meyercord For For For For For Against Against Against Against Against Abstain Abstain Abstain Abstain Abstain The Board of Directors recommends you vote FOR proposals 2, 3 and 4, and for a frequency period of ONE YEAR on proposal 5. 2. 3. 4. 5. Proposal to approve the amendment and restatement of Microchip's 2004 Equity Incentive Plan to (i) increase the number of shares of common stock authorized for issuance thereunder by 6,000,000, (ii) re-approve the 2004 Equity Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code, and (iii) make certain other changes as set forth in the amended and restated 2004 Equity Incentive Plan. Proposal to ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2018. Proposal to approve, on an advisory (non-binding) basis, the compensation of our named executives. Proposal to approve, on an advisory (non-binding) basis, the frequency of holding an advisory vote on the compensation of our named executives. For Against Abstain For For Against Abstain Against Abstain 1 Year 2 Years 3 Years Abstain Date _________________________________ Signature(s) in Box Please sign exactly as your name(s) appears on the Proxy. If held in joint tenancy, all persons should sign. Trustees, administrators, etc., should include title and authority. Corporations must provide full name of corporation and title of authorized officer signing the Proxy. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.  20549 (Mark One) FORM 10-K x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 2017 OR o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to __________ Commission File Number:  0-21184 MICROCHIP TECHNOLOGY INCORPORATED (Exact Name of Registrant as Specified in Its Charter) Delaware 86-0629024 (State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.) 2355 W. Chandler Blvd., Chandler, AZ  85224-6199 (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 Name of Each Exchange on Which Registered Common Stock, $0.001 Par Value Per Share NASDAQ® Global Market 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. x 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. o Yes x 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 (2) has been subject to such filing requirements for the past 90 days. x Yes o No Indicate by check mark 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 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 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. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act: 1   Large accelerated filer x Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o Emerging growth company o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes x No Aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 2016 based upon the closing price of the common stock as reported by the NASDAQ Global Market on such date was approximately $13,114,059,963. Number of shares of Common Stock, $0.001 par value, outstanding as of May 19, 2017: 229,397,877 shares Document Proxy Statement for the 2017 Annual Meeting of Stockholders Part of Form 10-K III Documents Incorporated by Reference 2 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES FORM 10-K TABLE OF CONTENTS Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. Item 16. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART I PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III 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 PART IV Exhibits and Financial Statement Schedules Form 10-K Summary Signatures Power of Attorney Page 3 12 25 25 26 27 28 30 32 50 50 50 51 52 53 53 53 54 54 55 56 57 58 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 12, 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. In this Form 10-K, "we," "us," "our," and "Microchip" each refers to Microchip Technology Incorporated and its subsidiaries.   Item 1.   BUSINESS We develop, manufacture and sell specialized semiconductor products used by our customers for a wide variety of embedded control applications. Our product portfolio comprises general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, radio frequency (RF), timing, safety, security, wired connectivity and wireless connectivity devices, as well as serial Electrically Erasable Programmable Read Only Memory (EEPROM), Serial Flash memories, Parallel Flash memories and serial Static Random Access Memory (SRAM). We also license Flash-IP solutions that are incorporated in a broad range of products.  Our synergistic product portfolio targets thousands of applications worldwide and a growing demand for high-performance designs in the automotive, communications, computing, consumer and industrial control markets.  Our quality systems are ISO/ TS16949 (2009 version) certified. Microchip Technology Incorporated was incorporated in Delaware in 1989.  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 of our 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 • • • • • • make systems safer to operate • • decrease time to market for their products significantly reduce product cost 3             Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of applications and markets worldwide, including: automotive comfort, safety, information and entertainment applications • remote control devices • handheld tools • large and small home appliances • portable computers and accessories • robotics • energy monitoring • • thermostats • motor controls • • • • • • medical instruments security systems smoke and carbon monoxide detectors consumer electronics power supplies applications needing touch buttons, touch screens and graphical user interfaces 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, often with on- board non-volatile program memory for program storage, random access memory for data storage and various analog and digital input/output peripheral capabilities.  In addition to the microcontroller, a complete embedded control system incorporates application-specific software, various analog, mixed-signal, timing and connectivity products and non-volatile memory components such as EEPROMs and Flash memory. The increasing demand for embedded control has made the market for microcontrollers one of the significant segments of the semiconductor market at over $15.8 billion in calendar year 2016.  Microcontrollers are primarily available in 8-bit through 32-bit architectures.  8-bit microcontrollers remain very cost-effective for a wide range of high-volume embedded control applications and, as a result, continue to represent a significant 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. The analog and mixed-signal segment of the semiconductor market is very large at over $45 billion in calendar year 2016, and this market is fragmented into a large number of sub segments. Our Products Our strategic focus is on embedded control solutions, including: general purpose and specialized microcontrollers and 32-bit microprocessors development tools and related software analog, interface, mixed signal, timing and security products wired and wireless connectivity products • • • • • memory products • technology licensing We provide highly cost-effective embedded control solutions that also offer the advantages of small size, high performance, extreme low power usage, wide voltage range operation, mixed signal integration, and ease of development, thus enabling timely and cost-effective integration of our solutions by our customers in their end products. Microcontrollers We offer a broad family of proprietary general purpose microcontroller products marketed under multiple brand names.  We believe that our microcontroller product families provide leading function and performance characteristics in the worldwide microcontroller market.  We have shipped over 19 billion microcontrollers to customers worldwide since 1990.  We also offer specialized microcontrollers for automotive networking, computing, lighting, power supplies, motor control, human machine interface, security, wired connectivity and wireless connectivity. With over 2,800 microcontrollers in our product portfolio, we target the 8-bit, 16-bit, and 32-bit microcontroller markets. 4             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 microcontroller products.  Our extensive experience base has enabled us to develop microcontrollers with rich analog and digital peripherals, that have a small footprint, extreme low power consumption and are re-programmable, enabling us to be a leader in microcontroller product offerings. Development Tools We offer a comprehensive set of low-cost and easy-to-learn application development tools.  These tools enable system designers to quickly and easily program our microcontroller products for specific applications and, we believe, they are an important factor for facilitating design wins. Our family of development tools for our microcontroller products 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 capability.  We also offer a complete suite of compilers, software code configurators and simulators. 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 microcontroller devices in our portfolio. Many independent companies also develop and market application development tools that support our microcontroller product architectures.  Currently, there are approximately 400 third-party tool suppliers worldwide whose products support our microcontroller architectures. We believe that familiarity with and adoption of development tools from Microchip as well as our third-party development tool partners 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 approximately 2.2 million development tools. Analog, Interface, Mixed Signal and Timing Products Our analog, interface, mixed signal and timing products consist of several families with over 3,700 power management, linear, mixed-signal, high voltage, thermal management, radio frequency (RF), drivers, safety, security, timing, USB, ethernet, wireless and other interface products.   We market and sell our analog, interface, mixed signal and timing products into our microcontroller customer base, to customers who use microcontrollers from other suppliers and to customers who use other products that may not fit our traditional 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 of EEPROMs, Serial Flash memories, Parallel Flash memories, Serial SRAM memories and EERAM.  Serial EEPROMs, Serial Flash memories, Serial SRAMs and EERAM have a very low I/O pin requirement, permitting production of very small footprint devices.  We sell our memory products primarily into the embedded control market, complementing our microcontroller offerings. Technology Licensing Our technology licensing business includes license fees and royalties associated with technology licenses for the use of our SuperFlash® embedded flash and Smartbits® one time programmable NVM technologies. We also generate fees for engineering services related to these technologies.  We license our NVM technologies to foundries, integrated device manufacturers and design partners throughout the world for use in the manufacture of their advanced microcontroller products, gate array, RF and analog products that require embedded non-volatile memory. Multi-Market and Other Our multi-market and other business offers manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, complex programmable logic devices, and aerospace products. 5                     Manufacturing Our manufacturing operations include wafer fabrication, wafer probe, assembly and test.  The ownership of a substantial portion 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 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 a portion of the wafer manufacturing and assembly and testing profit margin. We do outsource a significant portion of our manufacturing requirements to third parties and the amount of our outsourced manufacturing has increased in recent years due to our acquisitions of companies that outsource all or substantial portions of their manufacturing. Our manufacturing facilities are located in: • • • • • • Tempe, Arizona (Fab 2) Gresham, Oregon (Fab 4) Colorado Springs, Colorado (Fab 5) Chandler, Arizona (wafer probe) Bangkok, Thailand (wafer probe, assembly and test) Calamba, Philippines (wafer probe and test) Wafer Fabrication Fab 2 currently produces 8-inch wafers and supports various manufacturing process technologies, but predominantly utilizes our 0.5 microns to 1.0 microns processes.  During fiscal 2017, we increased Fab 2's capacity to support more advanced technologies by making process improvements, upgrading existing equipment, and adding equipment. Fab 4 currently produces 8-inch wafers using predominantly 0.13 microns to 0.5 microns manufacturing processes.  During fiscal 2017, we increased Fab 4's capacity to support more advanced technologies by making process improvements, upgrading existing equipment, and adding equipment. A significant amount of additional clean room capacity in Fab 4 can be brought on line in the future to support incremental wafer fabrication capacity needs.  Fab 5 was acquired as a result of our acquisition of Atmel Corporation (Atmel) in April 2016. Fab 5 is a 6-inch wafer fabrication facility that currently utilizes processes from 0.25 microns to 1.0 microns. During fiscal 2017, we made use of the existing capacity of Fab 5 to significantly increase wafer starts. We also added capital equipment and made clean room improvements to support products transferred from our acquisition of Micrel, Incorporated (Micrel) in August 2015.  We believe the combined capacity of Fab 2, Fab 4, and Fab 5 will provide sufficient capacity to allow us to respond to increases in future demand over the next several years with modest incremental capital expenditures. As a result of our acquisition of Micrel, we acquired a 6-inch wafer fabrication facility in San Jose, California and have since transitioned products previously manufactured at this facility to our Fab 2, Fab 4 and Fab 5 facilities. During the quarter ended December 31, 2016, we decommissioned this San Jose facility and, subsequent to March 31, 2017, we completed the sale of these assets for proceeds of $10.0 million. As of March 31, 2017, these assets consisting of property, plant and equipment were presented as held for sale in our consolidated financial statements. 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 augment our internal manufacturing capabilities by outsourcing a portion of our wafer production requirements to third-party wafer foundries.  As a result of our acquisitions in recent years, we have become more reliant on outside wafer foundries for our wafer fabrication requirements.  In fiscal 2017, approximately 41% of our sales came from products that were produced at outside wafer foundries. 6           Wafer Probe, Assembly and Test We perform wafer probe, product assembly and testing at our facilities located near Bangkok, Thailand and we perform wafer probe and testing at our facility in Calamba, Philippines, which came to us through our Atmel acquisition.  We also perform a limited amount of wafer probe and testing at our Chandler, Arizona facility and our Colorado Springs, Colorado facility. During fiscal 2017, we increased our Thailand and Philippines facilities' capacity to support more technologies by making process improvements, upgrading existing equipment, and adding equipment. During fiscal 2017, approximately 36% of our assembly requirements were being performed in our Thailand facilities and approximately 60% of our test requirements were performed in our Thailand and Philippines facilities.  We use third-party assembly and test contractors in several Asian countries for the balance of our assembly and test requirements. The primary reasons for the percentage reductions in the assembly and test operations performed internally in fiscal 2017 compared to fiscal 2016 are our acquisitions of Atmel and Micrel, which outsourced most of these activities. Over time, we intend to migrate a portion of the outsourced assembly and test activities to our Thailand and Philippines facilities. General Matters Impacting Our Manufacturing Operations 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 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 complementary metal-oxide semiconductor (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 or above 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. The following table summarizes our long-lived assets (consisting of property, plant and equipment) by geography at the end of fiscal 2017, fiscal 2016 and fiscal 2015 (in thousands). United States Thailand Various other countries Total long-lived assets 2017 388,537 210,603 84,198 683,338 $ $ $ $ March 31, 2016 373,860 182,813 52,723 609,396 $ $ 2015 331,372 197,981 52,219 581,572 We have many suppliers of raw materials and subcontractors which provide our various materials and service needs. We generally seek to have multiple sources of supply for our raw materials and services, but, in some cases, we may rely on a single or limited number of suppliers. In such event, we have plans to reduce the exposure that would result from a disruption in supply. 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 development of general purpose and specialized microcontrollers, 32-bit microprocessors, wired and wireless connectivity products, analog, interface, mixed signal, timing and security products, human machine interface, security, Serial EEPROM memory, NOR FLASH memory, Embedded FLASH technologies, development systems, software and application-specific software libraries.  We are also developing design, assembly, test and process technologies to enable new products and innovative features as well as achieve further cost reductions and performance improvements in existing products. 7             In fiscal 2017, our R&D expenses were $545.3 million, compared to $372.6 million in fiscal 2016 and $349.5 million in fiscal 2015.  R&D expenses included share-based compensation expense of $46.8 million in fiscal 2017, $32.0 million in fiscal 2016 and $28.2 million in fiscal 2015. Sales and Distribution General We market and sell 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 client engagement managers (CEMs), embedded system engineers (ESEs), 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 ESE team is to provide technical assistance to customers and to conduct periodic training sessions for the balance of our sales team.  ESEs also frequently conduct technical seminars and workshops in major cities around the world. Our licensing division has dedicated sales, technology, design, product, test and reliability personnel that support the requirements of our licensees. For information regarding our revenue, results of operations, and total assets for each of our last three fiscal years, refer to our financial statements included in this Form 10-K. 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 us for our products and brand name and use distributors as an effective supply channel. In fiscal 2017, we derived 55% of our net sales through distributors and 45% of our net sales from customers serviced directly by us. In fiscal 2016, we derived 53% of our net sales through distributors and 47% of our net sales from customers serviced directly by us. In fiscal 2015, we derived 51% of our net sales through distributors and 49% of our net sales from customers serviced directly by us. No distributor or end customer accounted for more than 10% of our net sales in fiscal 2017, fiscal 2016 or fiscal 2015. 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 2017, fiscal 2016 and fiscal 2015 were as follows (dollars in thousands): Americas Europe Asia Total Sales Year Ended March 31, $ 2017 641,849 808,583 1,957,375 $ 3,407,807 % 18.8 23.7 57.5 100.0 $ 2016 417,579 474,629 1,281,126 $ 2,173,334 % 19.2 21.8 59.0 100.0 $ 2015 421,947 452,165 1,272,924 $ 2,147,036 % 19.7 21.0 59.3 100.0 Sales to foreign customers accounted for approximately 84% of our net sales in each of fiscal 2017, 2016 and 2015.  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. 8                     Sales to customers in China, including Hong Kong, accounted for approximately 32%, 30% and 28% of our net sales in fiscal 2017, 2016 and 2015, respectively.  The increases in sales to customers in China, including Hong Kong, in fiscal 2017 compared to fiscal 2016 and in fiscal 2016 compared to fiscal 2015 were due primarily to our continued focus on the Chinese market as a key component to our global growth strategy and our acquisition of Atmel, which had a slightly higher percentage of its net sales going to China, including Hong Kong. Sales to customers in Taiwan accounted for approximately 9%, 12% and 14% of our net sales in fiscal 2017, 2016 and 2015, respectively. The decreases in sales to customers in Taiwan in fiscal 2017 compared to fiscal 2016 and in fiscal 2016 compared to fiscal 2015 were due primarily to our acquisitions of Atmel and Micrel, which had lower percentages of their net sales going to Taiwan. We did not have sales into any other foreign countries that exceeded 10% of our net sales during fiscal 2017, 2016 or 2015. Our international sales are substantially all 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.  Broad fluctuations in our overall business, changes in semiconductor industry and global economic conditions, and our acquisition activity (including our acquisitions of Atmel and Micrel) can have a more significant impact on our results than seasonality. As a result, in periods when these broad fluctuations, changes in business conditions or acquisitions occur, it is difficult to assess the impact of seasonal factors on our business. Backlog As of April 30, 2017, our backlog was approximately $1,624.1 million, compared to $1,212.3 million as of April 30, 2016.  Backlog increased significantly due to our acquisition of Atmel during fiscal 2017. 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 our 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 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: performance analog, digital and mixed signal functionality and level of functional integration • • • memory density • • • • • low power consumption extended voltage ranges reliability packaging alternatives complete development tool line 9             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 and innovative service and support time to market 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 through 2036.  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 our intention is to continue to patent our technology and manufacturing processes, we believe that our continued success depends primarily on the technological skills and innovative capabilities of our personnel and our ability to rapidly commercialize new and enhanced products.  As with any operating company, the scope and strength of our intellectual property assets, including our pending and existing patents, trademarks, copyrights, and other intellectual property rights may be insufficient to provide meaningful protection or commercial advantage.  Moreover, pursuing violations of intellectual property rights on a worldwide basis is a complex challenge involving multinational patent, trademark, copyright and trade secret laws. Further, the laws of particular foreign countries often fail to protect our intellectual property rights to the same extent as the laws of the U.S. We have also entered into certain intellectual property licenses and cross-licenses with other companies and those licenses relate to semiconductor products and manufacturing processes.  As is typical in the semiconductor industry, we and our customers from time to time receive, and may continue to receive, demand letters from third parties asserting infringement of patent and other intellectual property rights.  We diligently investigate all such notices and respond as we believe appropriate.  In most cases we believe that we can obtain necessary licenses on commercially reasonable terms, however, we cannot be certain that this would be the case, or that litigation or damages for any past infringement could be avoided. Litigation, which could result in substantial costs and require significant attention from management, may be necessary to enforce our intellectual property rights, or to defend against claimed infringement of the rights of others.  The failure to obtain necessary licenses, or the necessity of engaging in defensive litigation, 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, discharge and disposal of regulated substances could result in significant 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 storage or use of, or to adequately restrict the discharge or disposal of, hazardous substances under present or future environmental regulations. Employees As of March 31, 2017, we had 12,656 employees.  We have never had a work stoppage and believe that our employee relations are good. 10                   Executive Officers of the Registrant The following sets forth certain information regarding our executive officers as of April 30, 2017: Name Steve Sanghi Ganesh Moorthy J. Eric Bjornholt Stephen V. Drehobl Mitchell R. Little Richard J. Simoncic Age 61 57 46 55 65 53 Chief Executive Officer and Chairman of the Board Position President and Chief Operating Officer Vice President, Chief Financial Officer Vice President, MCU8 and Technology Development Division Vice President, Worldwide Sales and Applications Vice President, Analog Power and Interface Division Mr. Sanghi has served as Chief Executive Officer since October 1991, and Chairman of the Board since October 1993.  He served as President from August 1990 to February 2016 and 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.  From May 2007 until April 2016, he served as a member of the Board of Directors of FIRST (For Inspiration and Recognition of Science and Technology). Mr. Sanghi joined the Board of Myomo, Inc. in November 2016. Myomo is a commercial stage medical robotics company that offers expanded mobility for those suffering from neurological disorders and upper limb paralysis. Mr. Moorthy has served as President since February 2016 and as Chief Operating Officer since June 2009. He also served as Executive Vice President from October 2006 to August 2012 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. Mr. Moorthy was elected to the Board of Directors of Rogers Corporation in July 2013. Mr. Bjornholt has served as Vice President of Finance since 2008 and as Chief Financial Officer since January 2009.  He has served in various financial management capacities since he joined Microchip in 1995.  Mr. Bjornholt holds a Master's 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 MCU8 and Technology Development 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. 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 Power and Interface Division since September 1999.  From October 1995 to September 1999, he served as Vice President in various roles.  Since 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. 11        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 are 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: • • • • • • • • • • • • • • • • • • • • • • • • general economic, industry or political conditions in the U.S. or internationally; changes in demand or market acceptance of our products and products of our customers, and market fluctuations in the industries into which such products are sold; changes in utilization of our manufacturing capacity and fluctuations in manufacturing yields; our ability to realize the expected benefits of our acquisitions including our acquisition of Atmel; our ability to ramp our factory capacity to meet customer demand; changes or fluctuations in customer order patterns and seasonality; our ability to secure sufficient wafer foundry, assembly and testing capacity; the mix of inventory we hold and our ability to satisfy orders from our inventory; levels of inventories held by our customers; risk of excess and obsolete inventories; changes in tax regulations and policies in the U.S. and other countries in which we do business; competitive developments including pricing pressures; unauthorized copying of our products resulting in pricing pressure and loss of sales; availability of raw materials and equipment; our ability to successfully transition products to more advanced process technologies to reduce manufacturing costs; 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 our mix of product sales; announcements of significant acquisitions by us or our competitors; disruptions in our business or our customers' businesses due to terrorist activity, armed conflict, war, worldwide oil prices and supply, public health concerns, natural disasters or disruptions in the transportation system; 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; fluctuations in commodity prices; and property damage or other losses, whether or not covered by insurance. 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 our future performance. In future periods, our operating results may fall below our public guidance or the expectations of public market analysts and investors, which would likely have a negative effect on the price of our common stock. Our acquisition of Atmel, uncertain global economic conditions, the ongoing economic recovery and uncertainty surrounding the strength and duration of such 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 and assembly and test 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 or above approximately the current levels. This could include delays in the recognition of revenue, loss of revenue or future orders, and customer-imposed penalties for our failure to meet contractual shipment 12 deadlines. Our operating results are also adversely affected when we operate at less than optimal capacity. Although we operated at normal capacity levels during the last three quarters of fiscal 2015, the first two quarters of fiscal 2016, the fourth quarter of fiscal 2016, and throughout fiscal 2017, there can be no assurance that such production levels will be maintained in future periods. We may not fully realize the anticipated benefits of our completed or future acquisitions or divestitures including our acquisition of Atmel. We have acquired, and expect in the future to acquire, additional businesses that we believe will complement or augment our existing businesses. On April 4, 2016, we acquired Atmel, which was our largest and most complex acquisition ever. In addition, in August 2015, we completed our acquisition of Micrel; in July 2014, we completed our acquisition of a controlling interest in ISSC; in April 2014, we completed our acquisition of Supertex, Inc.; and in August 2012, we completed our acquisition of SMSC. The integration process for our acquisitions is complex and may be 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 and it may be difficult to implement our corporate culture at acquired companies. We have been and may in the future be subject to claims from terminated employees, shareholders of acquired companies and other third parties related to the transaction. In particular, as a result of our Atmel acquisition, we became involved with third-party claims, litigation and disputes related to the Atmel business. See "Item 1. Legal Proceedings" for information regarding pending litigation. Acquisitions may also result in charges (such as acquisition- related expenses, write-offs, restructuring charges, or future impairment of goodwill), contingent liabilities, adverse tax consequences, additional share-based compensation expense and other charges that adversely affect our operating results. To fund our acquisition of Atmel, we used a significant portion of our cash balances, borrowed under our credit agreement and issued approximately 10.1 million shares of our common stock. Additionally, we may fund future acquisitions of new businesses or strategic alliances by utilizing cash, borrowings under our credit agreement, raising debt, issuing shares of our common stock, or other mechanisms. Further, if we decide to divest assets or a business, including the divestiture of our Atmel mobile touch assets or the planned divestiture of our Micrel wafer fabrication facility, 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 achievement of our strategic objectives or cause us to incur additional expenses with respect to assets or a business that we want to dispose of, or we may dispose of assets or a business at a price or on terms that are less favorable than we had anticipated. Even following a divestiture, we may be contractually obligated with respect to certain continuing obligations to customers, vendors, landlords or other third parties. We may also have continuing obligations for pre-existing liabilities related to the assets or businesses. Such obligations may have a material adverse impact on our results of operations and financial condition. 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 current or future debt. As of March 31, 2017, the principal amount of our outstanding indebtedness was $4,513.8 million. In February 2017, we issued $2,645.0 million of aggregate principal value of senior and junior convertible debt and amended our existing $2,774.0 million credit agreement to, among other things, increase certain covenant compliance ratios. The February 2017 credit agreement amendment included a new collateral agreement that secures our borrowings with all assets of our guarantor subsidiaries with the exception of real property. We used a portion of the proceeds from the issuance of the 2017 senior and junior convertible debt to settle $431.3 million in principal value of our 2007 junior convertible debt and $1,682.5 million to pay off the outstanding balance under the credit facility. At March 31, 2017, there were no outstanding borrowings under the credit facility which is comprised of two tranches expiring in February 2020 and June 2018, the maturity date of the original credit agreement. In February 2015, we issued $1,725.0 million of principal value of our 2015 senior convertible debt. As a result of such transactions, we have a substantially greater amount of debt than we had 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 our convertible debt or any other 13 future indebtedness and there can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms, if at all. Servicing our debt may require a significant amount of cash, and we may not have sufficient cash flow from our business to fund future payments. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our outstanding debentures, depends on our future performance, which is subject to economic, financial, competitive and other factors. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and to fund capital expenditures, dividend payments, share repurchases or acquisitions. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We are dependent on orders that are received and shipped in the same quarter and therefore have limited visibility to future product shipments. Our net sales in any given quarter depend upon a combination of shipments from backlog and customer orders that are both received and shipped in that same 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 it more difficult to forecast net sales. As a significant portion of our products are manufactured at foundries, foundry lead times may affect our ability to satisfy certain turns orders. 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 will likely 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. The semiconductor industry has experienced significant merger and acquisition activity and consolidation in recent years which has resulted in several of our competitors becoming much larger in terms of revenue, product offerings and scale. 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 and the success of such applications; the rate at which the markets that we serve redesign and change their own products; changes in demand in the markets that we serve and the overall rate of growth or contraction of such markets, including but not limited to the automotive, personal computing and consumer electronics markets; product introductions by our competitors; the number, nature and success of our competitors in a given market; our ability to obtain adequate foundry and assembly and test capacity and supplies of raw materials and other supplies at acceptable prices; our ability to ramp production and increase capacity, as needed, at our wafer fabrication and assembly and test facilities; 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, interface, mixed signal and timing products have 14 remained relatively constant, while average selling prices of our memory and non-proprietary analog, interface, mixed signal and timing 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 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 memory and non-proprietary analog, interface, mixed signal and timing 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. We are dependent on wafer foundries and other contractors to perform key manufacturing functions for us, and our licensees of our SuperFlash and other technologies also rely on foundries and other contractors. We rely on outside wafer foundries for a significant portion of our wafer fabrication needs. Specifically, during fiscal 2017 and fiscal 2016, approximately 41% and 39% of our net sales came from products that were produced at outside wafer foundries, respectively. We also use several contractors located primarily in Asia for a portion of the assembly and testing of our products. Specifically, during fiscal 2017, approximately 64% of our assembly requirements and 40% of our test requirements were performed by third party contractors compared to approximately 47% of our assembly requirements and 19% of our test requirements during fiscal 2016. Our reliance on third party contractors and foundries increased as a result of our acquisitions of Atmel, Micrel, SMSC, Supertex and ISSC. The disruption or termination of any of our contractors could harm our business and operating results. Our use of third parties somewhat reduces our control over the subcontracted portions of our business. Our future operating results could suffer if any contractor were to experience financial, operational 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 the countries in which such contractors are located were to experience political upheaval or infrastructure disruption. 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 on terms favorable to us, or at all. Additionally, these subcontractors could abandon fabrication processes that are important to us, or fail to adopt advanced manufacturing technologies that we desire to control costs. In any such event, we could experience an interruption in production, an increase in manufacturing and production costs or a decline in product reliability, and our business and operating results could be adversely affected. Further, our use of subcontractors increases the risks of potential misappropriation of our intellectual property. Certain of our SuperFlash and other technology licensees also rely on outside wafer foundries for wafer fabrication services. If our licensees were to experience any disruption in supply from outside wafer foundries, this would reduce the revenue we receive in our technology licensing business and would harm our operating results. Our operating results are 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.  Broad fluctuations in our overall business, changes in semiconductor industry and global economic conditions, and our acquisition activity (including our acquisitions of Atmel and Micrel) can have a more significant impact on our results than seasonality. As a result, in periods when these broad fluctuations, changes in business conditions or acquisitions occur, it is difficult to assess the impact of seasonal factors on our business. The semiconductor 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 customer base 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. 15 Our business is dependent on selling through distributors. Sales through distributors accounted for approximately 55% of our net sales in fiscal 2017 and approximately 53% of our net sales in fiscal 2016. 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. Any future adverse conditions in the U.S. or global economies or in the U.S. or 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 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. Violations of the Foreign Corrupt Practices Act, or similar laws, by our distributors or other channel partners could have a material adverse impact on our business. Our success depends on our ability to introduce new products on a timely basis. Our future operating results depend on our ability to develop and timely introduce new products that 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; procurement of licenses for intellectual property rights from third parties under commercially reasonable terms; timely filing and protection 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. Because our products are complex, we have experienced delays from time to time in completing new product development. In addition, our new products may not receive or maintain substantial market acceptance.  We may be unable to timely design, develop and introduce competitive products, 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. Our technology licensing business exposes us to various risks. Our technology licensing business is based on our SuperFlash and other technologies. The success of our licensing business depends on the continued market acceptance of these technologies and on our ability to further develop and enhance such technologies and to introduce new technologies in the future. To be successful, any such technology must be able to be repeatably implemented by licensees, provide satisfactory yield rates, address licensee and customer requirements, and perform competitively. The success of our technology licensing business depends on various other factors, including, but not limited to: • • • • • • proper identification of licensee requirements; timely development and introduction of new or enhanced technology; our ability to protect and enforce our intellectual property rights for our licensed technology; our ability to limit our liability and indemnification obligations to licensees; availability of sufficient development and support services to assist licensees in their design and manufacture of products integrating our technology; availability of foundry licensees with sufficient capacity to support original equipment manufacturer (OEM) production; and • market acceptance of our customers' end products. 16 Because our licensed technologies are complex, there may be delays from time to time in developing and enhancing such technologies. There can be no assurance that our existing or any enhanced or new technology will achieve or maintain substantial market acceptance. Our licensees may experience disruptions in production or lower than expected production levels which would adversely affect the revenue that we receive from them. Our technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from intellectual property matters. We could be exposed to substantial liability for claims or damages related to intellectual property matters or indemnification claims. Any claim, with or without merit, could result in significant legal fees and require significant attention from our management. Any of the foregoing issues may adversely impact the success of our licensing business and adversely affect our future operating results. We may lose sales if our suppliers of raw materials and equipment fail to meet our needs. Our semiconductor manufacturing operations require raw and processed 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 materials and equipment that meet our standards.  The materials and equipment necessary for our business could become more difficult to obtain as worldwide use of semiconductors in product applications increases. Additionally, consolidation in our supply chain due to mergers and acquisitions may reduce the number of suppliers or change the relationships that we have with our suppliers. This could impair sourcing flexibility or increase costs. 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. In particular, we have recently experienced longer lead times for equipment which we need for capacity expansion at certain of our manufacturing facilities. An interruption of any materials or equipment sources, or the lack of supplier support for a particular piece of equipment, could harm our business. 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, other intellectual property rights, product failures, contracts and other matters. As is typical in the semiconductor industry, we receive notifications from third parties from time to time who believe that we owe them indemnification or other obligations related to claims made against us, our direct or indirect customers or our licensees. These legal proceedings and claims, even if meritless, could result in substantial costs 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, provide a cost-effective remedy, 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 injuries, economic damage or environmental exposures related to manufacturing, a product's nonconformance to our specifications or specifications agreed upon with the customer, changes in our manufacturing processes, or unexpected customer system issues due to the integration of 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 our 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 or unpaid receivables; customer imposed fines or penalties for failure to meet contractual requirements; and a requirement to pay damages or penalties. Because the systems into which our products are integrated have a higher cost of goods than the products we sell, the expenses and damages we are asked to pay 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, certain of our contracts may not exclude such liabilities. Further, our ability to avoid such liabilities may be limited by applicable law. We do have liability insurance which covers certain 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. 17 Further, we sell to customers in industries such as automotive, aerospace, defense, safety, security, 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 the integration of our products, cause 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 have sufficient scope or strength to provide meaningful protection or 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 licensees, customers, distributors, or suppliers. We regularly review the financial performance of our licensees, customers, distributors and suppliers. However, any downturn in global economic conditions may adversely impact the financial viability of our licensees, customers, distributors or suppliers. The financial failure of a large licensee, customer or distributor, an important supplier, or a group thereof, could have an adverse impact on our operating results and could result in our 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 net sales. 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 2017, approximately 84% of our net sales were made to foreign customers, including 32% in China, including Hong Kong. During fiscal 2016, approximately 84% of our net sales were made to foreign customers, including 30% in China, including Hong Kong. A strong position in the Chinese market is a key component of our global growth strategy. The market for integrated circuit products in China is highly competitive, and both international and domestic competitors are aggressively seeking to increase their market share. Increased competition or economic weakness in the China market may make it difficult for us to achieve our desired sales volumes in China. In particular, economic conditions in China remain uncertain and we are unable to predict whether such uncertainty will continue or worsen in future periods. We purchase a substantial portion of our raw materials and equipment from foreign suppliers. In addition, we own product assembly and testing facilities near Bangkok, Thailand, which has experienced periods of political instability in the past. A large portion of our finished goods inventory is maintained in Thailand. From time to time, Thailand has also experienced periods of severe flooding. There can be no assurance that any future flooding or political instability in Thailand would not have a material adverse impact on our operations. We use various foundries and other foreign contractors for a significant portion of our assembly and testing and wafer fabrication requirements. 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; economic uncertainty in the worldwide markets served by us; trade restrictions and changes in tariffs; import and export license requirements and restrictions; changes in rules and laws related to taxes, environmental, health and safety, technical standards and consumer protection in various jurisdictions; currency fluctuations and foreign exchange regulations; difficulties in staffing and managing international operations; 18 • • • • • employment regulations; disruptions in international transport or delivery; public health conditions; difficulties in collecting receivables and longer payment cycles; and potentially adverse tax consequences. If any of these risks materialize, or are worse than we anticipate, our sales could decrease and our operating results could suffer. We do not typically have long-term contracts with our customers, but where we do, certain terms of such contracts expose us to risks and liabilities. 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 approximately 115,000 customers and our ten largest direct customers made up approximately 12% of our total revenue for fiscal 2017 and six of our top ten customers are contract manufacturers that perform manufacturing services for many customers, cancellation of customer contracts could have an adverse impact on our revenue and profits. We have entered into contracts with certain customers that differ from our standard terms of sale. Further, as a result of our acquisitions, we have inherited certain customer contracts that differ from our standard terms of sale. For several of the significant markets that we sell into, such as the automotive and personal computer markets, our current or potential customers may possess significant leverage over us in negotiating the terms and conditions of supply as a result of their market size and position. For example, under certain contracts we may commit to supply specific quantities of products on scheduled delivery dates, or agree to extend our obligations for certain liabilities such as warranties or indemnification for quality issues or claims of intellectual property infringement. If we are 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. We may be liable for the customer's costs, expenses and damages associated with their claims and we may be obligated to defend the customer against claims of intellectual property infringement and pay the associated legal fees. While we try to minimize the number of contracts which contain such provisions, manage the risks underlying such liabilities, and set caps on our liability exposure, sometimes we are not able to do so. In order to win important designs, avoid losing business to competitors, maintain existing business, or be permitted to bid on new business, we have been, and may in the future be, forced to agree to uncapped liability for such items as intellectual property infringement, product failure, or confidentiality. Such provisions expose us to risk of liability far exceeding the purchase price of the products we sell under such contracts, the lifetime revenues we receive from such products, or various forms of potential consequential damages. These significant additional risks could result in a material adverse impact on our results of operations and financial condition. 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, manufacturing 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. The loss of, or any inability to attract personnel, even if not key personnel, if experienced in sufficient numbers could harm our business. We have no employment agreements with any member of our senior management team.  Business interruptions to our operations or the operations of our key vendors, subcontractors, licensees or customers, whether due to natural disasters or other events, could harm our business. Operations at any of our facilities, at the facilities of any of our wafer fabrication or assembly and test subcontractors, or at any of our significant vendors or customers may be disrupted for reasons beyond our control. These reasons may include work stoppages, power loss, cyber attacks, incidents of terrorism or security risk, political instability, public health issues, telecommunications, transportation or other infrastructure failure, radioactive contamination, fire, earthquake, floods, volcanic eruptions or other natural disasters. We have taken steps to mitigate the impact of some of these events should they occur; however, we cannot be certain that our actions will be effective to avoid a significant impact on our business in the event of a disaster or other business interruption. 19 In particular, Thailand has experienced periods of severe flooding in recent years. While our facilities in Thailand have continued to operate normally, there can be no assurance that any future flooding in Thailand would not have a material adverse impact on our operations. 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, and we may need to spend significant amounts to repair or replace our facilities and equipment.  If we experienced business interruptions, 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. Although we maintain business interruption insurance, such 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. Additionally, operations at our customers and licensees may be disrupted for a number of reasons. In the event of customer disruptions, sales of our products may decline and our revenue, profitability and financial condition could suffer. Likewise, if our licensees are unable to manufacture and ship products incorporating our technology, or if there is a decrease in product demand due to a business disruption, our royalty revenue may decline. Fluctuations in foreign currency exchange rates could adversely impact our operating results. We use forward currency exchange contracts in an attempt 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 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. In periods when the U.S. dollar is significantly declining in relation to the British pound, Euro and Thai baht, the operational costs in our European and Thailand subsidiaries are adversely affected.  Although our business has not been materially adversely impacted by recent changes in the value of the U.S. dollar, there can be no assurance as to the future impact that the strength of the dollar will have on our business or results of operations. Interruptions in our information technology systems, or improper handling of data, 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 disruption to our systems or networks, including, but not limited to, new system implementations, computer viruses, security breaches, facility issues, natural disasters, terrorism, war, telecommunication failures or energy blackouts could have a material adverse impact on our operations, sales and operating results.  Such disruption could result in a loss of our intellectual property or the release of sensitive competitive information or supplier, customer or employee personal data. Any loss of such information could harm our competitive position, result in a loss of customer confidence, and cause us to incur significant costs to remedy the damages caused by any such disruptions or security breaches. Additionally, any failure to properly manage the collection, handling, transfer or disposal of personal data of employees and customers may result in regulatory penalties, enforcement actions, remediation obligations, litigation, fines and other sanctions. From time to time, we have experienced verifiable attacks on our data, attempts to breach our security and attempts to introduce malicious software into our IT systems; however, such attacks have not previously resulted in any material damage to us. Were future attacks successful, we may be unaware of the incident, its magnitude, or its effects until significant harm is done. In recent years, we have implemented improvements to our protective measures which are not limited to the following: firewalls, antivirus measures, patches, log monitors, routine backups with offsite retention of storage media, system audits, data partitioning and routine password modifications. There can be no assurance that such system improvements will be sufficient to prevent or limit the damage from any future cyber attacks or disruptions. Any such attack or disruption could result in additional costs related to rebuilding of our internal systems, defending litigation, responding to regulatory actions, or paying damages. Such attacks or disruptions could have a material adverse impact on our business, operations and financial results. Third-party service providers, such as wafer foundries, assembly and test contractors, distributors, credit card processors and other vendors, have access to certain portions of our and our customers' sensitive data. In the event that these service providers do not properly safeguard the data that they hold, security breaches and loss of data could result. Any such loss of data by our third-party service providers could negatively impact our business, operations and financial results, as well as our relationship with our customers. 20 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 believe that it is more cost effective for us 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, employment risks, environmental matters, political risks, and intellectual property matters. Should there be a loss or adverse judgment or other decision in an area for which we are self- insured, then our financial condition, results of operations and liquidity may be adversely affected. We are subject to stringent environmental and other regulations, which may force us to incur significant expenses. We must comply with many 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 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 buy costly equipment or to incur significant expenses to comply with such regulations. Our failure to control the use of, or adequately restrict the discharge of, hazardous substances could impact the health of our employees and others and could impact our ability to operate. Such failure 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. There is a continuing expansion in environmental laws with a focus on reducing or eliminating hazardous substances and substances of high concern in electronic products and shipping materials. 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, sell and ship our products. In addition, 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 the quantity and the recycling of packing 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 unsaleable inventory as a result of changes to regulations or customer requirements. 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 substances of high concern in our products, energy efficiency measures, and supplier practices associated with sourcing and manufacturing. These requirements may increase our own costs, as well as those passed on to us by our supply chain. Customer demands for us to implement business practices that are more stringent than existing legal requirements may reduce our revenue opportunities or cause us to incur higher costs. Some of our customers and potential customers are requiring that we implement operating practices that are more stringent than what is required by applicable laws with respect to workplace and labor requirements, the type of materials we use in our products, environmental matters or other items. To comply with such requirements, we may have to pass these same operating practices on to our suppliers. Our suppliers may refuse to implement these operating practices, or may charge us more for complying with them. The cost to implement such practices may cause us to incur higher costs and reduce our profitability, and if we choose not to implement such practices, such customers may disqualify us as a supplier, resulting in decreased revenue opportunities. Developing, administering, monitoring and auditing these customer-requested practices at our own sites and those in our supply chain will increase our costs and may require that we hire more personnel. Customer demands and regulations related to conflict-free minerals may force us to incur additional expenses. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, in August 2012, the SEC released investigation, disclosure and reporting requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries and which are necessary to the functionality or production of products.  We filed a report on Form SD with the SEC regarding such matters on May 26, 2016. Other countries are considering similar regulations. If we cannot certify that we are using conflict-free minerals, customers may demand that we change the sourcing of minerals and other materials used in the manufacture of our products, even if the costs for compliant minerals and materials significantly increases and availability is limited.  If we make changes to materials or suppliers, there will likely be costs associated with qualifying new suppliers and production capacity and quality could be negatively impacted.  Our relationships with customers and suppliers may be adversely affected if we are unable to certify that our products are "conflict-free." We have incurred, and expect in the future to incur, additional costs associated with complying with these new disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products.  We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict free in a materially different 21 manner than advocated by the Conflict Free Smelter Initiative or the Dodd-Frank Wall Street Reform and Consumer Protection Act.  If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier and we may have to write off inventory in the event that it cannot be sold. 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 Foreign Corrupt Practices Act, Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR) 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 foreign government that we have failed to comply with these or other export regulations or anti- bribery regulations can result in penalties which may include denial of export privileges, fines, civil or criminal penalties, and seizure of products. Such penalties could have a material adverse effect on our business, sales and earnings. 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 laws or regulations could have a material adverse effect on our business, financial condition and results of operations. The outcome of future examinations of our income tax returns 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 2005 and later.  We are subject to certain income tax examinations in foreign jurisdictions for fiscal 2007 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. We could be subject to changes in tax rates and potential U.S. tax legislation regarding our foreign earnings that 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 of 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. However, changes to the U.S. income tax regulations and jurisdictions in which we operate, or in the interpretation of such laws, could, significantly increase our tax provisions and ultimately reduce our cash flow from operations and otherwise have a material adverse effect on our financial condition. Other factors or events, including business combinations, changes in the valuation of our deferred tax assets and liabilities, adjustments to income taxes upon finalization of various tax returns or as a result of deficiencies asserted by taxing authorities, increases in expenses not deductible for tax purposes, changes in available tax credits, and changes in tax rates could also increase our future effective tax rate. 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 or the operating results of other technology companies; general conditions in the semiconductor industry; global economic and financial conditions; changes in our financial guidance or our failure to meet such guidance; changes in analysts' estimates of our financial performance or buy/sell recommendations; any acquisitions we pursue or complete; and actual or anticipated announcements of technical innovations or new products by us or our competitors. 22 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. Some or all of the foregoing factors could also cause the market price of our convertible debentures to decline or fluctuate substantially. Anti-takeover defenses in our charter documents and under Delaware law could discourage takeover attempts, which could also reduce the market price of our common stock. Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of Microchip. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include: • • • • • the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror; the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; the requirement that a special meeting of stockholders may be called only by the holders of 50% or more of the combined voting power of all classes of our capital stock, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquiror to amend the bylaws to facilitate an unsolicited takeover attempt; and advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders' meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror's own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. The application of Section 203 also could have the effect of delaying or preventing a change in control of us. Any of these provisions could, under certain circumstances, depress the market price of our common stock. As a result of our acquisition activity, our goodwill and intangible assets have increased significantly in recent years and we may in the future incur impairments to goodwill or intangible assets. When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. As of March 31, 2017, we had goodwill of $2,299.0 million and net intangible assets of $2,148.1 million. We review our indefinite-lived intangible assets, including goodwill, for impairment annually in the fourth fiscal quarter or whenever events or changes in circumstances indicate that the carrying amount of those assets is more likely than not impaired.  Factors that may be considered in assessing whether goodwill or intangible assets may be impaired 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 our future operating results and cash flows may vary significantly from our actual results.  No goodwill impairment charges were recorded in fiscal 2017 or fiscal 2016.  In fiscal 2017, we recognized $11.9 million of intangible asset impairment charges. If in future periods, we determine that our goodwill or intangible assets are impaired, we will be required to write down these assets which would have a negative effect on our consolidated financial statements.   23 Our foreign pension plans are unfunded, and any requirement to fund these plans in the future could negatively affect our cash position and operating capital. In connection with our acquisition of Atmel, we assumed unfunded defined benefit pension plans that cover certain of our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. The projected benefit obligation totaled $50.4 million at March 31, 2017. The plans are unfunded in compliance with local statutory regulations, and we have no immediate intention of funding these plans. Benefits are paid when amounts become due, commencing when participants retire. We expect to pay approximately $0.7 million in fiscal 2018 for benefits earned. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively affect our cash position and operating capital. From time to time we receive grants from governments, agencies and research organizations. If we are unable to comply with the terms of those grants, we may not be able to receive or recognize grant benefits or we may be required to repay grant benefits previously paid to us and recognize related charges, which would adversely affect our operating results and financial position. From time to time, we receive economic incentive grants and allowances from European governments, agencies and research organizations targeted at increasing employment at specific locations. The subsidy grant agreements typically contain economic incentive, headcount, capital and research and development expenditure and other covenants that must be met to receive and retain grant benefits, and these programs can be subjected to periodic review by the relevant governments. Noncompliance by us with the conditions of the grants could result in our forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts received to date. Conversion of our debentures will dilute the ownership interest of existing stockholders. 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 conversion of our debentures 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. 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 Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). New accounting pronouncements and varying interpretations of accounting standards and practices have occurred in the past and are expected to 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. In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09 - Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue guidance under US GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Upon adoption of ASU 2014-09, we will no longer defer revenue until sale by the distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to distributors and record revenue at the time of sale to the distributor. We are currently evaluating the impact that the adoption of the standard may have on our consolidated financial statements. We currently expect to adopt the standard under the full retrospective method. The final adoption method will depend on the results of our final assessment, which is expected to be completed later in fiscal 2018. Refer to Note 1 to our consolidated financial statements for additional information on the new guidance and its potential impact on us. 24 Climate change regulations and sustained adverse climate change pose regulatory and physical risks that could harm our results of operations or affect the way we conduct business. Climate change regulations at the federal, state or local level or in international jurisdictions could require us to limit emissions, change our manufacturing processes, obtain substitute materials which may cost more or be less available, increase our investment in control technology for greenhouse gas emissions, 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. New permits may be required for our current operations, or expansions thereof. Failure to timely receive permits could result in fines, suspension of production, or cessation of operations at one or more facilities. In addition, 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. 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 and power shortages, and higher costs of water or energy to control the temperature of our facilities. Certain of our operations are located in arid or tropical regions, such as Arizona and Thailand. Some environmental experts predict that these regions may become vulnerable to storms, severe 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 interrupt business, we cannot be certain that our plans will protect us from all such disasters or events.  Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES At March 31, 2017, we owned and used the facilities described below: Location Gresham, Oregon Approximate Total Sq. Ft. 826,500 Wafer Fabrication (Fab 4); R&D Center; Administrative Offices; and Warehousing Uses Chacherngsao, Thailand 489,000 Assembly and Test; Wafer Probe; Sample Center; Warehousing; and Administrative Offices Colorado Springs, Colorado 480,000 Manufacturing, Test, Research and Development, Computer and Service Functions, Design and Engineering Calamba, Philippines 460,000 Wafer Probe, Test and Administrative Offices Tempe, Arizona Chandler, Arizona Bangalore, India 457,000 415,000 281,000 Wafer Fabrication (Fab 2); R&D Center; Administrative Offices; and Warehousing Executive and Administrative Offices; Wafer Probe; R&D Center; Sales and Marketing; and Computer and Service Functions Research and Development; Sales and Marketing Support, and Administrative Offices Chacherngsao, Thailand 215,000 Assembly and Test Rousset, France 170,000 Design, Engineering, Test and Administrative Nantes, France 77,000 Design, Engineering, Test and Probe, Administrative and Warehousing Shanghai, China 21,000 Research and Development; Marketing Support, and Administrative Offices Hsinchu, Taiwan 15,000 Design, Engineering and Administrative 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 $2.2 million. 25     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 43 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. Consequently, we could incur uninsured liability in any of those actions. We also periodically receive notifications from various third parties alleging infringement of patents or other intellectual property rights or from customers requesting reimbursement for various costs. With respect to pending legal actions to which we are a party, although the outcomes of these actions are generally not determinable, we believe that the ultimate resolution of these matters will not harm our business and will not have a material adverse effect on our financial position, cash flows or results of operations.  However, if an unfavorable ruling were to occur in any of the legal proceedings described below or in other legal proceedings or matters that were not deemed material to us as of the date hereof, then such legal proceedings or matters could have a material adverse effect on our financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon, and we are, from time to time, subject to such litigation.  As a result, no assurances can be given with respect to the extent or outcome of any such litigation in the future. As a result of our acquisition of Atmel, which closed on April 4, 2016, we became involved with the following lawsuits. In re: Continental Airbag Products Liability Litigation. On May 11, 2016, an Amended and Consolidated Class Action Complaint ("Complaint") was filed in the United States District Court for the Southern District of Florida (Miami Division) against Atmel, Continental Automotive Systems, Inc., Honda Motor Co., Ltd. and an affiliate, and Daimler AG and an affiliate. The Complaint which includes claims arising under federal law and Florida, California, New Jersey, Michigan and Louisiana state law-alleges that class members unknowingly purchased or leased vehicles containing defective airbag control units (incorporating allegedly defective application specific integrated circuits manufactured by our Atmel subsidiary between 2006 and 2010), and thereby suffered financial harm, including a loss in the value of their purchased or leased vehicles. The plaintiffs are seeking, individually and on behalf of a putative case, unspecified compensatory and exemplary damages, statutory penalties, pre- and post-judgment interest, attorneys' fees, and injunctive and other relief. Our Atmel subsidiary contested plaintiffs' claims vigorously, and on May 23, 2017 the case was ordered to be dismissed. Continental Claim ICC Arbitration. On December 29, 2016, Continental Automotive GmbH ("Continental") filed a Request for Arbitration with the ICC, naming as respondents our subsidiaries Atmel Corporation, Atmel SARL, Atmel Global Sales Ltd., and Atmel Automotive GmbH (collectively, “Atmel”).  The Request alleges that a quality issue affecting Continental airbag control units in certain recalled vehicles stems from allegedly defective Atmel application specific integrated circuits (“ASICs”).  The Continental airbag control units, ASICs and vehicle recalls are also at issue in In re: Continental Airbag Products Liability Litigation, described above.  Continental seeks to recover from Atmel all related costs and damages incurred as a result of the vehicle manufacturers’ airbag control unit-related recalls, currently alleged to be $61.6 million (but subject to increase). Our Atmel subsidiaries intend to defend this action vigorously. Southern District of New York Action by LFoundry Rousset ("LFR") and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, individually and on behalf of a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York (the "District Court") against our Atmel subsidiary, our French subsidiary, Atmel Rousset S.A.S. ("Atmel Rousset"), and LFoundry GmbH ("LF"), LFR's German parent. The case purports to relate to Atmel Rousset's June 2010 sale of its wafer manufacturing facility in Rousset, France to LF, and LFR's subsequent insolvency, and later liquidation, more than three years later. The District Court dismissed the case on August 21, 2015, and the United States Court of Appeals for the Second Circuit affirmed the dismissal on June 27, 2016. On July 25, 2016, the plaintiffs filed a notice of appeal from the District Court's June 27, 2016 denial of their motion for relief from the dismissal judgment. On May 19, 2017, the United States Court of Appeals for the Second Circuit affirmed the June 27, 2016 order dismissing the case. 26     Individual Labor Actions by former LFR Employees. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in a French labor court. Our Atmel Rousset subsidiary believes that each of these actions is entirely devoid of merit, and, further, that any assertion by any of the Claimants of a co-employment relationship with our Atmel Rousset subsidiary is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. Our Atmel Rousset subsidiary therefore intends to defend vigorously against each of these claims. Item 4. MINE SAFETY DISCLOSURES Not applicable. 27 PART II Item 5. ISSUER PURCHASES OF EQUITY SECURITIES MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND Our common stock is traded on the NASDAQ Global Market under the symbol "MCHP." 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 2017 High Low Fiscal 2016 High Low First Quarter Second Quarter Third Quarter Fourth Quarter $ $ 52.99 62.80 66.18 74.52 47.16 49.49 58.41 62.59 First Quarter Second Quarter Third Quarter Fourth Quarter $ $ 50.41 46.64 49.11 49.11 46.66 39.57 42.19 39.65 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 S&P 500 Index and the PHLX Semiconductor Index $250 $200 $150 $100 $50 $0 3/12 3/13 3/14 3/15 3/16 3/17 Microchip Technology Incorporated S&P 500 PHLX Semiconductor *$100 invested on March 31, 2012 in stock or index, including reinvestment of dividends Fiscal year ending March 31. Copyright © 2017 S&P, a division of McGraw Hill Financial. All rights reserved. 28     Microchip Technology Incorporated S&P 500 Stock Index Philadelphia Semiconductor Index March 2012 100.00 100.00 100.00 March 2013 103.11 113.96 100.34 Cumulative Total Return March 2014 138.65 138.87 129.24 March 2015 146.35 156.55 150.30 March 2016 148.88 159.34 149.32 March 2017 233.40 186.71 209.36 Data acquired by Research Data Group, Inc. (www.researchdatagroup.com) On May 19, 2017, there were approximately 560 holders of record of our common stock.  This figure does not reflect beneficial ownership of shares held in nominee names. We have been declaring and paying quarterly cash dividends on our common stock since the third quarter of fiscal 2003.  Our total cash dividends paid were $315.4 million, $291.1 million and $286.5 million in fiscal 2017, fiscal 2016 and fiscal 2015, 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 2017 and fiscal 2016 (amounts in thousands, except per share amounts): Fiscal 2017 Dividends per Common Share Aggregate Amount of Dividend Payment Fiscal 2016 Dividends per Common Share First Quarter $ 0.3595 $ 77,237 First Quarter $ 0.3575 $ Second Quarter Third Quarter Fourth Quarter 0.3600 0.3605 0.3610 77,640 Second Quarter 77,970 Third Quarter 82,582 Fourth Quarter 0.3580 0.3585 0.3590 Aggregate Amount of Dividend Payment 72,331 72,686 72,923 73,147 On May 9, 2017, we declared a quarterly cash dividend of $0.3615 per share, which will be paid on June 6, 2017 to stockholders of record on May 23, 2017 and the total amount of such dividend is expected to be approximately $83.0 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. Refer to "Item 12 - Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters," at page 53 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, 2017. Issuer Purchases of Equity Securities In May 2015, our Board of Directors authorized the repurchase of up to 20.0 million shares of our common stock in the open market or in privately negotiated transactions.  As of March 31, 2016, we had repurchased 8.6 million shares under this authorization for approximately $363.8 million.  In January 2016, our Board of Directors authorized an increase in the existing share repurchase program to 15.0 million shares of common stock from the approximately 11.4 million shares remaining under the prior authorization.  There were no repurchases of common stock during fiscal 2017.  There is no expiration date associated with this repurchase program. 29       Item 6. SELECTED FINANCIAL DATA  You should read the following selected consolidated financial data for the five-year period ended March 31, 2017 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, 2017, and the balance sheet data as of March 31, 2017 and 2016, are derived from our audited consolidated financial statements, included in Item 8 of this Form 10-K.  The statement of income data for the years ended March 31, 2014 and 2013 and balance sheet data as of March 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements not included herein (in the tables below all amounts are in thousands, except per share data). Statement of Income Data: Net sales Cost of sales Research and development Selling, general and administrative Amortization of acquired intangible assets Special charges and other, net (2) Operating income Losses on equity method investments Interest income Interest expense Loss on settlement of convertible debt (3) Other income (loss), net Income from continuing operations before income taxes Income tax (benefit) provision Net income from continuing operations Less: Net loss attributable to noncontrolling interests Net income from continuing operations attributable to Microchip Technology Basic net income per common share from continuing operations attributable to Microchip Technology stockholders Diluted net income per common share from continuing operations attributable to Microchip Technology stockholders Dividends declared per common share Basic common shares outstanding Diluted common shares outstanding 2017 (1) $ 3,407,807 1,650,611 545,293 499,811 337,667 98,608 275,817 (222) 3,079 (146,346) (43,879) 1,338 Year ended March 31, 2015 (1) $ 2,147,036 917,472 349,543 274,815 176,746 2,840 425,620 (317) 19,527 (62,034) (50,631) 13,742 2016 (1) $ 2,173,334 967,870 372,596 301,670 174,896 3,957 352,345 (345) 24,447 (104,018) — 8,864 2014 $ 1,931,217 802,474 305,043 267,278 94,534 3,024 458,864 (177) 16,485 (48,716) — 5,898 2013 $ 1,581,623 743,164 254,723 261,471 111,537 32,175 178,553 (617) 15,560 (40,915) — (404) 89,787 (80,805) 170,592 — 281,293 (42,632) 323,925 207 345,907 (19,418) 365,325 3,684 432,354 37,073 395,281 — 152,177 24,788 127,389 — $ 170,592 $ 324,132 $ 369,009 $ 395,281 $ 127,389 $ $ $ 0.79 $ 1.59 $ 1.84 $ 1.99 $ 0.65 0.73 1.441 217,196 234,806 $ $ 1.49 1.433 203,384 217,388 $ $ 1.65 1.425 200,937 223,561 $ $ 1.82 1.417 198,291 217,630 $ $ 0.62 1.406 194,595 205,776 (1) Refer to Note 2 to our consolidated financial statements for an explanation of our material business combinations during fiscal 2017, fiscal 2016, and fiscal 2015. (2) The following table presents a summary of special charges and other, net for the five-year period ended March 31, 2017: 30   Acquisition related expenses Legal settlement Adjustment to contingent consideration Totals 2017 2016 March 31, 2015 2014 2013 $ $ 98,608 — — 98,608 $ $ 11,163 (7,206) — 3,957 $ $ 2,840 — — 2,840 $ $ 1,654 — 1,370 3,024 $ $ 16,259 11,516 4,400 32,175 Discussions of the special charges and other, net for fiscal 2017, fiscal 2016 and fiscal 2015 are contained in Note 3 to our consolidated financial statements. During fiscal 2014, we incurred special charges and other, net of $3.0 million related to severance, office closing and other costs associated with our acquisition activity. During fiscal 2013, we incurred special charges and other, net of $32.2 million comprised of a $4.4 million net increase in the fair value of contingent consideration related to one of our acquisitions, $16.3 million of primarily severance-related costs in addition to office closing and other costs associated with our acquisition of SMSC and legal settlement costs of approximately $11.5 million for certain legal matters related to an entity which we acquired in April 2010 in excess of previously accrued amounts. (3) Refer to Note 11 to our consolidated financial statements for an explanation of the loss on settlement of debt of approximately $43.9 million in fiscal 2017 and approximately $50.6 million in fiscal 2015. Balance Sheet Data: Working capital Total assets Long-term obligations, less current portion Microchip Technology Stockholders' equity 2017 $ 1,600,590 7,686,881 2,900,524 3,270,711 2016 $ 2,714,704 5,537,883 2,453,405 2,150,919 March 31, 2015 $ 2,310,645 4,780,713 1,826,858 2,044,654 2014 $ 1,633,320 4,067,630 1,003,258 2,135,461 2013 $ 1,894,759 3,851,405 983,385 1,933,470 31 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," "future," "continue," "intend" and similar expressions to identify forward-looking statements.  Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under "Risk Factors," beginning at page 12 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.  These forward- looking statements include, without limitation, statements regarding the following: • • • • • • • • • • • • • • • • • • • • • • • • • • • 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, fixed cost absorption, competition and economic conditions on gross margin; The amount of, and changes in, demand for our products and those of our customers; Our expectation that in the future we will acquire additional businesses that we believe will complement our existing businesses; Our expectation that in the future we will enter into joint development agreements or other business or strategic relationships with other companies; The level of orders that will be received and shipped within a quarter; Our expectation that our days of inventory levels in the June 2017 quarter will be 97 days to 106 days. Our belief that our existing level of inventory will allow us to maintain competitive lead times and provide strong delivery performance to our customers; 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; Anticipating increased customer requirements to meet voluntary criteria related to the reduction or elimination of substances in our products; Our belief that deferred cost of sales are recorded at their approximate carrying value and 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; Our belief that our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new product designs; 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 will provide sufficient capacity to respond to increases in demand with modest incremental capital expenditures; That manufacturing costs will be reduced by transition to advanced process technologies; Our ability to maintain manufacturing yields; Continuing our investments in new and enhanced products; 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 to finance anticipated capital expenditures and otherwise meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on them; 32   • • • • • • • • • • • • • • • • • • • • • • • That our U.S. operations and capital requirements are funded primarily by cash generated from U.S. operating activities, which has been and is expected to be sufficient to meet our business needs in the U.S. for the foreseeable future; 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 have a material effect on our business, and the accuracy of our assessment of the probability of loss and range of potential loss; 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 our determinations with respect to the tax consequences of the Atmel acquisition are reasonable; Our belief that the expiration of any tax holidays will not have a material impact on our overall tax expense or effective tax rate; Our belief that the estimates used in preparing our consolidated financial statements are reasonable; Our belief that some of the recently issued accounting pronouncements listed in this document will not have a material impact on our consolidated financial statements; The accuracy of our estimates of the useful life and values of our property, assets and other liabilities; The adequacy of our patent strategy, and our belief that the impact of the expiration of any particular patent will not have a material effect on our business; Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis; 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 or indemnification claims; The effect of fluctuations in market interest rates on our income and/or cash flows; The effect of fluctuations in currency rates; That our offshore earnings are considered to be permanently reinvested offshore and that we could determine to repatriate some of our offshore earnings in future periods to fund stockholder dividends, share repurchases, acquisitions or other corporate activities; That a significant portion of our future cash generation will be in our foreign subsidiaries; Our intention to satisfy the lesser of the principal amount or the conversion value of our debentures in cash; Our intention to indefinitely reinvest undistributed earnings of certain non-US subsidiaries in those subsidiaries; Our intent to maintain a high-quality investment portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield; and Our ability to collect accounts receivable. 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 our 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 the information contained in any forward-looking statement. 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 our 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 39, we discuss our Results of Operations for fiscal 2017 compared to fiscal 2016, and for fiscal 2016 compared to fiscal 2015.  We then provide an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the sections titled "Liquidity and Capital Resources," "Contractual Obligations" and "Off-Balance Sheet Arrangements." 33     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 solutions, including general purpose and specialized microcontrollers, development tools and related software, analog, interface, mixed signal and timing products, wired and wireless connectivity products, memory products and technology licensing.  We provide highly cost-effective embedded control solutions that also offer the advantages of small size, high performance, extreme low power usage, wide voltage range operation, mixed signal integration and ease of development, thus enabling timely and cost-effective integration of our solutions by our customers in their end products.  We license our SuperFlash technology and other technologies to wafer foundries, integrated device manufacturers and design partners throughout the world for use in the manufacture of advanced microcontroller products, gate array, radio frequency (RF) and analog products that require embedded non-volatile memory. We sell our products to a broad base of domestic and international customers across a variety of industries. The principal markets that we serve include consumer, automotive, industrial, office communication, computing and aerospace.  Our business is subject to fluctuations based on economic conditions within these markets.  Our manufacturing operations include wafer fabrication, wafer probe and assembly and test.  The ownership of a substantial portion 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 wafer fabrication facilities and our assembly and test operations, and by employing statistical process control techniques, we have been able to achieve and maintain high production yields.  Direct control over manufacturing resources allows us to shorten our design and production cycles.  This control also allows us to capture a portion of the wafer manufacturing and the assembly and test profit margin. We do outsource a significant portion of our manufacturing requirements to third parties.  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 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, analog and mixed-signal products, Flash-IP systems, 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 and sell 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 client engagement manager (CEMs), embedded system engineer (ESEs), and sales management personnel 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 ESE team is to provide technical assistance to strategic accounts and to conduct periodic training sessions for CEMs and distributor sales teams.  ESEs 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. See "Our operating results are impacted by both seasonality and the wide fluctuation of supply and demand in the semiconductor industry," on page 15 for discussion of the impact of seasonality on our business. Critical Accounting Policies and Estimates 34     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, business combinations, share-based compensation, inventories, income taxes, senior and junior subordinated convertible debt and contingencies.  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 original equipment manufacturers (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 which prevent the sales pricing from being fixed or determinable at the time of shipment to our distributors. Therefore, revenue recognition is deferred until the pricing uncertainty is resolved, which generally occurs when the distributor sells the product to their customer. At the time of shipment to these distributors, we record a trade receivable for the selling price as there is a legally enforceable right to payment, relieve inventory for the carrying value of goods shipped since legal title has passed to the distributor, and record the gross margin in deferred income on shipments to distributors on our consolidated balance sheets.  In connection with our acquisitions of Atmel and Micrel, we acquired certain distributor relationships where revenue was recognized upon shipment to the distributors based on certain contractual terms or prevailing business practices that result in the price not being fixed and determinable at such time. Following an acquisition, we undertake efforts to align the contract terms and business practices of the acquired entity with our own. Once these efforts are complete, revenue recognition is changed. With respect to such distributor relationships acquired in the Atmel acquisition, as of October 1, 2016, these business practices were conformed to those of our other distributors resulting in the deferral of revenue recognition until the distributor sells the product to their customers. With respect to such distributor relationships acquired in the Micrel acquisition, in the December 2015 quarter, these distributor contracts were changed to be consistent with those of our other distributors which resulted in the deferral of revenue recognition under such contracts until the distributor sells the product to their customers. 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. 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 distributors 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 35       distributor sells the product.  At March 31, 2017, we had approximately $418.0 million of deferred revenue and $125.2 million in deferred cost of sales recognized as $292.8 million of deferred income on shipments to distributors.  At March 31, 2016, we had approximately $267.2 million of deferred revenue and $83.8 million in deferred cost of sales recognized as $183.4 million of deferred income on shipments to distributors.  The increase in deferred income on shipments to distributors in fiscal 2017 compared to fiscal 2016 resulted primarily from our acquisition of Atmel. 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 $203.9 million at March 31, 2017 and $102.9 million at March 31, 2016.  The increase in distributor advances in fiscal 2017 compared to fiscal 2016 resulted primarily from our acquisition of Atmel. 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 products 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 distributors' 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 operations.  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 canceled 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. 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. Recent Updates to Revenue Recognition In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606) and in August 2015, the FASB subsequently issued ASU 2015-14 “Deferral of the Effective Date,” which supersedes existing revenue guidance pursuant to US GAAP and will no longer permit us to defer revenue on sales to distributors until the products are sold to the end customer. Upon adoption of ASU 2014-09 and 2015-14, a portion of this deferred revenue will be required to be estimated and recognized upon sale to the distributor rather than upon the sale by the distributor to the end customer. See “Recently Issued Accounting Pronouncements Not Yet Adopted” for additional information on the new guidance. Business Combinations All of our business combinations are accounted for at fair value under the acquisition method of accounting.  Under the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in- process research and development will be recorded at fair value as an intangible asset at the acquisition date and amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will be recognized through income tax expense or directly in contributed capital.  The measurement of the fair value of assets acquired and liabilities assumed requires significant judgment.  The valuation of 36     intangible assets, in particular, requires that we use valuation techniques such as the income approach.  The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates:  revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows.  Under the acquisition method of accounting, the aggregate amount of consideration we pay for a company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date.  The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill. On an annual basis, we test goodwill for impairment and through March 31, 2017, we have never recorded an impairment charge against our goodwill balance.  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.  For the past several years, we have utilized RSUs as our primary equity incentive compensation instrument for employees.  Share-based compensation cost is measured on the grant date based on the fair market value of our common stock discounted for expected future dividends and is recognized as expense straight- line over the requisite service periods. Total share-based compensation expense recognized in fiscal 2017 was $128.2 million, of which $109.5 million was reflected in operating expenses and $18.7 million was reflected in cost of sales. Total share-based compensation included in our inventory balance was $8.2 million at March 31, 2017.  During the year ended March 31, 2017, we elected to early adopt ASU 2016-09, Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting (Topic 718).  Under this standard, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. We have elected to recognize forfeitures as they occur. Prior to the adoption of ASU 2016-09, we estimated the number of share-based awards to be forfeited due to employee turnover. The effect of forfeiture adjustments in the years ended March 31, 2016 and 2015 was immaterial. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.  Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional equity awards to employees or we assume unvested equity awards in connection with acquisitions. Inventories Inventories are valued at the lower of cost or market using the first-in, first-out method.  We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  If actual market conditions are less favorable than those we projected, additional inventory write-downs may be required.  Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable.  In estimating our inventory obsolescence, we primarily evaluate estimates of demand over a 12-month period and record impairment charges for inventory on hand in excess of the estimated 12-month demand. Estimates for projected 12-month demand are generally based on the average shipments of the prior three- month period, which are then annualized to adjust for any potential seasonality in our business. The estimated 12-month demand is compared to our most recently developed sales forecast to further reconcile the 12-month demand estimate. Management reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the extent any existing products are being replaced or discontinued.  In periods where our production levels are substantially below our normal operating capacity, the reduced production levels of our manufacturing facilities are charged directly to cost of sales. As a result of production below normal operating levels in our wafer fabrication facilities, approximately $1.9 million and $0.8 million was charged directly to cost of sales in fiscal 2016 and fiscal 2015, respectively. There was no charge to cost of sales for reduced production levels in fiscal 2017. 37         Income Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included within our consolidated balance 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 provided valuation allowances for certain of our deferred tax assets, including state net operating loss carryforwards, foreign tax credits and state tax credits, where it is more likely than not that some portion, or all of such assets, will not be realized. At March 31, 2017, the valuation allowances totaled $210.1 million. 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.    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.  During the year ended March 31, 2017, the U.S. Internal Revenue Service (IRS) finalized the audit of our 2011 and 2012 income tax years. The close of this audit did not have an adverse impact on our financial statements. Also, during the year ended March 31, 2017, the German and French tax authorities finalized the audit of our 2010 through 2013 and our 2012 through 2014 income tax years, respectively. The close of these audits did not have an adverse impact on our financial statements. We are currently being audited by the tax authorities in France. 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.   The accounting model as defined in ASC 740 related to the valuation of uncertain tax positions requires us to presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information and that each tax position will be evaluated without consideration of the possibility of offset or aggregation with other positions.  The recognition requirement for the liability exists even if we believe the possibility of examination by a taxing authority or discovery of the related risk matters is remote or where we have a long history of the taxing authority not performing an exam or overlooking an issue.  We will record an adjustment to a previously recorded position if new information or facts related to the position are identified in a subsequent period.  All adjustments to the positions are recorded through the income statement. Generally, adjustments will be recorded in periods subsequent to the initial recognition if the taxing authority has completed an audit of the period or if the statute of limitation expires.  Due to the inherent uncertainty in the estimation process and in consideration of the criteria of the accounting model, amounts recognized in the financial statements in periods subsequent to the initial recognition may significantly differ from the estimated exposure of the position under the accounting model. Senior and Junior Subordinated Convertible Debt We separately account for the liability and equity components of our senior and junior subordinated convertible debt 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.  Lastly, we include the dilutive effect of the shares of our common stock issuable upon conversion of the outstanding senior and junior subordinated convertible debt in our diluted income per share calculation regardless of whether the market price triggers or other contingent conversion features have been met.  We apply the treasury stock method as we have the intent and have adopted an accounting policy to settle the principal amount of the senior and 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 prices per share and adjusts as dividends are recorded in the future. Contingencies In the ordinary course of our business, we are exposed to various liabilities as a result of contracts, product liability, customer claims and other matters.  Additionally, we are involved in a limited number of legal actions, both as plaintiff and defendant.  Consequently, we could incur uninsured liability in any of those actions.  We also periodically receive notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting 38         reimbursement for various costs.  With respect to pending legal actions to which we are a party and other claims, although the outcomes are generally not determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of operations.  Litigation and disputes relating to the semiconductor industry are not uncommon, and we are, from time to time, subject to such litigation and disputes.  As a result, no assurances can be given with respect to the extent or outcome of any such litigation or disputes in the future. We accrue for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, we review each of our matters and, where it is probable that a liability has been or will be incurred, we accrue for all probable and reasonably estimable losses. Where we can reasonably estimate a range of losses we may incur regarding such a matter, we record an accrual for the amount within the range that constitutes our best estimate. If we can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, we use the amount that is the low end of such range. Contingencies of an acquired company that exist as of the date of the acquisition are measured at fair value if determinable, which generally is based on a probability weighted model. If fair value is not determinable, contingencies of an acquired company are recognized when they become probable and reasonably estimable. Results of Continuing 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 Amortization of acquired intangible assets Special charges and other, net Operating income Net Sales Year Ended March 31, 2016 2015 2017 100.0% 48.4 51.6 16.0 14.7 9.9 2.9 8.1% 100.0% 44.5 55.5 17.1 13.9 8.1 0.2 16.2% 100.0% 42.7 57.3 16.3 12.8 8.3 0.1 19.8% We operate in two segments and engage primarily in the design, development, manufacture and sale of semiconductor products as well as the licensing of our SuperFlash and other technologies.  We sell our products to distributors and OEMs, in a broad range of markets, 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 typically provided by letters of credit. Our net sales of $3,407.8 million in fiscal 2017 increased by $1,234.5 million, or 56.8%, compared to fiscal 2016, and our net sales of $2,173.3 million in fiscal 2016 increased by $26.3 million, or 1.2%, compared to fiscal 2015.  The increase in net sales in fiscal 2017 compared to fiscal 2016 was due primarily to our acquisition of Atmel and also by growth in our historical business driven by general economic and semiconductor industry conditions. The increase in net sales in fiscal 2016 compared to fiscal 2015 was due primarily to our acquisition of Micrel, offset in part by weaker general economic and semiconductor industry conditions. Average selling prices for our semiconductor products were flat in fiscal 2017 compared to fiscal 2016 and down approximately 3% in fiscal 2016 compared to fiscal 2015. The number of units of our semiconductor products sold was up approximately 58% in fiscal 2017 compared to fiscal 2016 and up approximately 6% in fiscal 2016 compared to fiscal 2015. 39       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: • • • • • • • • • • • our acquisition of Atmel, which closed on April 4, 2016; our acquisition of Micrel, which closed on August 3, 2015; global economic conditions in the markets we serve; semiconductor industry conditions; our acquisition of ISSC on July 17, 2014; our acquisition of Supertex on April 1, 2014; our new product offerings that have increased our served available market; customers' increasing needs for the flexibility offered by our programmable solutions; inventory holding patterns of our customers; increasing semiconductor content in our customers' products; and continued market share gains in the segments of the markets we address. Net sales by product line for fiscal 2017, 2016 and 2015 were as follows (dollars in thousands): Microcontrollers Analog, interface, mixed signal and timing products Memory products Technology licensing Multi-market and other Total net sales Microcontrollers Year Ended March 31, 2017 $ 2,147,338 % 63.0 2016 $ 1,345,499 % 61.9 2015 $ 1,393,607 888,878 184,107 91,156 96,328 $ 3,407,807 26.1 5.4 2.7 2.8 100.0 595,455 116,945 89,124 26,311 $ 2,173,334 27.4 5.4 4.1 1.2 100.0 501,048 132,258 89,593 30,530 $ 2,147,036 % 64.9 23.3 6.2 4.2 1.4 100.0 Our microcontroller product line represents the largest component of our total net sales.  Microcontrollers and associated application development systems accounted for approximately 63.0% of our net sales in fiscal 2017, approximately 61.9% of our net sales in fiscal 2016 and approximately 64.9% of our net sales in fiscal 2015. Net sales of our microcontroller products increased approximately 59.6% in fiscal 2017 compared to fiscal 2016, and decreased approximately 3.5% in fiscal 2016 compared to fiscal 2015.  The increase in net sales in fiscal 2017 compared to fiscal 2016 resulted primarily from our acquisition of Atmel and also by growth in our historical business driven by general economic and semiconductor industry conditions. The decrease in net sales in fiscal 2016 compared to fiscal 2015 resulted primarily from weaker general economic and semiconductor industry conditions in the end markets we serve including the consumer, automotive, industrial control, communications and computing markets. Historically, average selling prices in the semiconductor industry decrease over the life of any particular product.  The overall average selling prices of our microcontroller products have remained relatively constant over time due to the proprietary nature of these products.  We have experienced, and expect to continue to experience, moderate pricing pressure in certain microcontroller product lines, primarily due to competitive conditions.  We have 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. Analog, Interface, Mixed Signal and Timing Products Sales of our analog, interface, mixed signal and timing products accounted for approximately 26.1% of our net sales in fiscal 2017, approximately 27.4% of our net sales in fiscal 2016 and approximately 23.3% of our net sales in fiscal 2015. 40           Net sales of our analog, interface, mixed signal and timing products increased approximately 49.3% in fiscal 2017 compared to fiscal 2016 and increased approximately 18.8% in fiscal 2016 compared to fiscal 2015.  The increase in net sales in fiscal 2017 compared to fiscal 2016 was driven primarily by our acquisition of Atmel and also by growth in our historical business driven by general economic and semiconductor industry conditions. The increase in net sales in fiscal 2016 compared to fiscal 2015 was driven primarily by our acquisition of Micrel in the second quarter of fiscal 2016 and market share gains achieved within the analog, interface, mixed signal and timing market. Analog, interface, mixed signal and timing products can be proprietary or non-proprietary in nature.  Currently, we consider the majority of our analog, interface, mixed signal and timing 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, interface, mixed signal and timing 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, interface, mixed signal and timing 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, interface, mixed signal and timing products will increase over time.  Memory Products Sales of our memory products accounted for approximately 5.4% of our net sales in fiscal 2017, approximately 5.4% of our net sales in fiscal 2016 and approximately 6.2% of our net sales in fiscal 2015. Net sales of our memory products increased approximately 57.4% in fiscal 2017 compared to fiscal 2016, and decreased approximately 11.6% in fiscal 2016 compared to fiscal 2015.  The increase in memory product net sales in fiscal 2017 compared to fiscal 2016 was driven primarily by our acquisition of Atmel. The decrease in memory product net sales in fiscal 2016 compared to fiscal 2015 was driven primarily by adverse customer demand conditions within the Serial EEPROM and Flash memory markets. Memory 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 memory products.  We may be unable to maintain the average selling prices of our memory products as a result of increased pricing pressure in the future, which could adversely affect our operating results. Technology Licensing Technology licensing revenue includes a combination of royalties associated with licenses for the use of our SuperFlash and other technologies and fees for engineering services. Technology licensing accounted for approximately 2.7% of our net sales in fiscal 2017, approximately 4.1% of our net sales in fiscal 2016 and approximately 4.2% of our net sales in fiscal 2015. Net sales related to our technology licensing increased approximately 2.3% in fiscal 2017 compared to fiscal 2016 and decreased approximately 0.5% in fiscal 2016 compared to fiscal 2015. Revenue from technology licensing can fluctuate over time based on the production activities of our licensees as well as general economic and semiconductor industry conditions. Multi-Market and Other  Multi-market and other (MMO) consists of manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, complex programmable logic devices, and aerospace products. Revenue from these services and products accounted for approximately 2.8% of our net sales in fiscal 2017, approximately 1.2% of our net sales in fiscal 2016, and approximately 1.4% of our net sales in fiscal 2015. Net sales related to these services and products increased approximately $70.0 million in fiscal 2017 compared to fiscal 2016 and decreased approximately $4.2 million in fiscal 2016 compared to fiscal 2015. The increase in MMO net sales in fiscal 2017 compared to fiscal 2016 was driven primarily by our acquisition of Atmel. The decrease in MMO net sales in fiscal 2016 compared to fiscal 2015 was driven primarily by general economic and semiconductor industry conditions.  41               Distribution Distributors accounted for approximately 55% of our net sales in fiscal 2017, approximately 53% of our net sales in fiscal 2016 and approximately 51% of our net sales in fiscal 2015. 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. Our two largest distributors together accounted for approximately 14% of our net sales in fiscal 2017, and approximately, 12% of our net sales in each of fiscal 2016 and fiscal 2015. No single distributor accounted for more than 10% of our net sales in fiscal 2017, 2016 or 2015. 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, 2017, our distributors maintained 33 days of inventory of our products compared to 32 days at March 31, 2016 and 37 days at March 31, 2015.  Over the past five fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 27 days and 37 days.  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 when the distributor sells the product to their customer. Sales by Geography Sales by geography for fiscal 2017, 2016 and 2015 were as follows (dollars in thousands): Americas Europe Asia Total net sales Year Ended March 31, $ 2017 641,849 808,583 1,957,375 $ 3,407,807 % 18.8 23.7 57.5 100.0 $ 2016 417,579 474,629 1,281,126 $ 2,173,334 % 19.2 21.8 59.0 100.0 $ 2015 421,947 452,165 1,272,924 $ 2,147,036 % 19.7 21.0 59.3 100.0 Americas sales include sales to customers in the U.S., Canada, Central America and South America. Sales to foreign customers accounted for approximately 84% of our total net sales in each of fiscal 2017, 2016 and 2015. 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 32%, 30% and 28% of our net sales in fiscal 2017, 2016 and 2015, respectively.  The increases in sales to customers in China, including Hong Kong, in fiscal 2017 compared to fiscal 2016 and in fiscal 2016 compared to fiscal 2015 were due primarily to our continued focus on the Chinese market as a key component to our global growth strategy and our acquisition of Atmel, which had a slightly higher percentage of its net sales from China, including Hong Kong. Sales to customers in Taiwan accounted for approximately 9%, 12% and 14% of our net sales in fiscal 2017, 2016 and 2015, respectively. The decreases in sales to customers in Taiwan in fiscal 2017 compared to fiscal 2016 and in fiscal 2016 compared to fiscal 2015 were due primarily to our acquisitions of Atmel and Micrel, which had lower percentages of their net sales from Taiwan. We did not have sales into any other foreign countries that exceeded 10% of our net sales during fiscal 2017, 2016 or 2015. Gross Profit Our gross profit was $1,757.2 million in fiscal 2017, $1,205.5 million in fiscal 2016 and $1,229.6 million in fiscal 2015.  Gross profit as a percentage of sales was 51.6% in fiscal 2017, 55.5% in fiscal 2016 and 57.3% in fiscal 2015. 42               The most significant factors affecting our gross profit percentage in the periods covered by this report were: • • • charges of approximately $186.7 million in fiscal 2017, approximately $44.9 million in fiscal 2016, and approximately $24.4 million in fiscal 2015 related to the recognition of acquired inventory at fair value as a result of our acquisitions which increased the value of our acquired inventory and subsequently increased our cost of sales and reduced our gross margins when the related revenue was recognized; for each of fiscal 2017, fiscal 2016 and fiscal 2015, inventory write-downs being higher than the gross margin impact of sales of inventory that was previously written down; and fluctuations in the product mix of microcontrollers, analog, interface, mixed signal and timing products, memory products and technology licensing. Other factors that impacted our gross profit percentage in the periods covered by this report include: • • continual cost reductions in wafer fabrication and assembly and test manufacturing, such as new manufacturing technologies and more efficient manufacturing techniques; and lower depreciation as a percentage of cost of sales. We adjust our wafer fabrication and assembly and test capacity utilization as required to respond to actual and anticipated business and industry-related conditions.  When production levels are below normal capacity, we charge cost of sales for the unabsorbed capacity. In fiscal 2017, our wafer fabrication facilities and assembly and test facilities operated at normal capacity levels, which we measure as a percentage of the capacity of the installed equipment. In fiscal 2016 and fiscal 2015, our wafer fabrication facilities operated below normal capacity levels during the third quarter of fiscal 2016 and the first quarter of fiscal 2015 in response to uncertain global economic conditions and our inventory position. As a result of production being below normal operating levels in our wafer fabs, approximately $1.9 million and $0.8 million was charged to cost of sales in fiscal 2016 and fiscal 2015, respectively. We operated at slightly below normal capacity levels in our Thailand assembly and test facilities during the third quarter of fiscal 2016. As a result, we charged cost of sales approximately $1.0 million during fiscal 2016. During fiscal 2015, we operated at normal levels of capacity at our Thailand assembly and test facilities. The process technologies utilized in our wafer fabrication facilities impact our gross margins.  Our wafer fabrication facility located in Tempe, Arizona (Fab 2) currently utilizes various manufacturing process technologies, but predominantly utilizes our 0.5 microns to 1.0 microns processes.  Our wafer fabrication facility located in Gresham, Oregon (Fab 4) predominantly utilizes our 0.13 microns to 0.5 microns processes.  We continue to transition products to more advanced process technologies to reduce future manufacturing costs.  Substantially all of our production in Fab 2 and Fab 4 has been on 8-inch wafers during the periods covered by this report. We consider normal capacity at Fab 2 and Fab 4 to be 90% to 95%. As a result of our acquisition of Atmel, we acquired a 6-inch wafer fabrication facility in Colorado Springs, Colorado (Fab 5) that currently utilizes processes between 0.25 microns and 1.0 microns. We consider normal capacity at Fab 5 to be 70% to 75%. As a result of our acquisition of Micrel in August 2015, we acquired a 6-inch wafer fabrication facility in San Jose, California and have since transitioned products previously manufactured at this facility to our Fab 2, Fab 4 and Fab 5 facilities. During the quarter ended December 31, 2016, we decommissioned this San Jose facility and, subsequent to March 31, 2017, we completed the sale of these assets for proceeds of $10.0 million. As of March 31, 2017, these assets consisting of property, plant and equipment were presented as held for sale in our consolidated financial statements. Our overall inventory levels were $417.2 million at March 31, 2017, compared to $306.8 million at March 31, 2016 and $279.5 million at March 31, 2015.  The increases in inventory levels at March 31, 2017 compared to March 31, 2016 and the inventory levels at March 31, 2016 compared to March 31, 2015 were due primarily to the acquisitions of Atmel and Micrel. We maintained 103 days of inventory on our balance sheet at March 31, 2017 compared to 110 days of inventory at March 31, 2016 and 111 days at March 31, 2015.  We expect our inventory levels in the June 2017 quarter to be between 97 days and 106 days. We believe our existing level of inventory will allow us to maintain competitive lead times and provide strong delivery performance to our customers. We anticipate that our gross margins will fluctuate over time, driven primarily by capacity utilization levels, the overall product mix of microcontroller, analog, interface, mixed signal and timing products, memory products and technology licensing revenue 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. We operate assembly and test facilities in Thailand and, as a result of our acquisition of Atmel, we acquired a test facility in Calamba, Philippines. During fiscal 2017, approximately 36% of our assembly requirements were performed in our Thailand facilities, compared to approximately 53% during fiscal 2016 and approximately 57% during fiscal 2015.  The percentage of our assembly work that is performed internally fluctuates over time based on supply and demand conditions in the 43           semiconductor industry, our internal capacity capabilities and our acquisition activities.  Third-party contractors located primarily in Asia perform the balance of our assembly operations.  During fiscal 2017, approximately 60% of our test requirements were performed in our Thailand and Philippines facilities compared to approximately 81% of our test requirements performed in our Thailand facilities during fiscal 2016 and approximately 88% during fiscal 2015. The primary reasons for the percentage reductions in the assembly and test operations performed internally in fiscal 2017 compared to fiscal 2016 and in fiscal 2016 compared to fiscal 2015 are our acquisitions of Atmel and Micrel, which outsourced most of these activities. Over time, we intend to migrate a portion of the outsourced assembly and test activities to our Thailand and Philippines facilities. We believe that the assembly and test operations performed at our internal facilities provide us with significant cost savings 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 significant portion of our wafer fabrication requirements. During fiscal 2017, approximately 41% of our total net sales came from products that were produced at outside wafer foundries compared to approximately 39% during each of fiscal 2016 and fiscal 2015. 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 2017 were $545.3 million, or 16.0% of sales, compared to $372.6 million, or 17.1% of sales, for fiscal 2016 and $349.5 million, or 16.3% of sales, for fiscal 2015. 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 $172.7 million, or 46.3%, for fiscal 2017 compared to fiscal 2016 primarily due to additional compensation and other costs from our acquisition of Atmel.  R&D as a percentage of revenue decreased in fiscal 2017 compared to fiscal 2016 due to our restructuring activities and synergies realized following the acquisitions of Atmel and Micrel. R&D expenses increased $23.1 million, or 6.6%, for fiscal 2016 compared to fiscal 2015 primarily due to additional costs from our acquisition of Micrel as well as higher headcount costs.     R&D expenses fluctuate over time, primarily due to revenue and operating expense investment levels. Selling, General and Administrative Selling, general and administrative expenses for fiscal 2017 were $499.8 million, or 14.7% of sales, compared to $301.7 million, or 13.9% of sales, for fiscal 2016, and $274.8 million, or 12.8% of sales, for fiscal 2015.  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, CEMs and ESEs 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 $198.1 million, or 65.7%, for fiscal 2017 compared to fiscal 2016 due primarily to additional costs from our acquisition of Atmel. Selling, general and administrative expenses as a percentage of revenue increased in fiscal 2017 compared to fiscal 2016 due to costs associated with accelerated vesting of outstanding equity awards upon termination of certain Atmel employees. Excluding these costs, selling, general and administrative expenses as a percentage of revenue would have been 13.9% of sales, which is flat compared to fiscal 2016. Selling, general and administrative expenses increased $26.9 million, or 9.8%, for fiscal 2016 compared to fiscal 2015 due primarily to additional costs from our acquisition of Micrel. Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense investment levels. 44             Amortization of Acquired Intangible Assets Amortization of acquired intangible assets in fiscal 2017 was $337.7 million compared to $174.9 million in fiscal 2016 and $176.7 million in fiscal 2015. The primary reasons for the increase in acquired intangible asset amortization for fiscal 2017 compared to fiscal 2016 were increased amortization from our acquisitions of Atmel and Micrel partially offset by decreased amortization from our customer-related intangible assets from our acquisitions of Standard Microsystems Corporation (SMSC) and ISSC Technologies Corporation (ISSC). The primary reasons for the decrease in acquired intangible asset amortization for fiscal 2016 compared to fiscal 2015 were decreased amortization from our customer-related intangible assets from our acquisition of SMSC partially offset by increased amortization from our acquisitions of Micrel and ISSC. Special Charges and Other, Net During fiscal 2017, we incurred special charges and other, net of $98.6 million comprised primarily of restructuring charges. Our restructuring activities include workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. In connection with these activities we incurred employee separation costs, contract exit costs, other operating expenses and intangible asset impairment losses. The impairment losses were recognized as a result of changes in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets. During fiscal 2016, we incurred special charges and other, net of $4.0 million comprised of $11.2 million restructuring charges associated with our acquisition activity and legal settlement costs of approximately $4.3 million partially offset by special income and other, net of $11.5 million related to an insurance settlement for reimbursement of funds we previously paid to settle a lawsuit in the second quarter of fiscal 2013. During fiscal 2015, we incurred special charges and other, net of $2.8 million related to severance, office closing and other costs associated with our acquisition activity. Other Income (Expense) Interest income in fiscal 2017 was $3.1 million compared to $24.4 million in fiscal 2016 and $19.5 million in fiscal 2015.  The primary reason for the decrease in interest income in fiscal 2017 compared to fiscal 2016 relates to lower invested cash balances as we used cash to finance a significant portion of the purchase price of our acquisition of Atmel. The primary reason for the increase in interest income in fiscal 2016 compared to fiscal 2015 relates to higher yields on short-term cash investments and higher invested cash balances. Interest expense in fiscal 2017 was $146.3 million compared to $104.0 million in fiscal 2016 and $62.0 million in fiscal 2015. The primary reasons for the increase in interest expense in fiscal 2017 compared to fiscal 2016 relate to higher interest expense on amounts borrowed under our credit facility to partially finance our acquisition of Atmel, as well as the issuance of our 2017 senior and junior debt. In February 2017, we paid off the remaining $1,682.5 million balance on our credit facility. The primary reasons for the increase in interest expense in fiscal 2016 compared to fiscal 2015 relate to the issuance of our 2015 senior debt, partially offset by lower interest expense due to the settlement of $575.0 million in principal of our 2007 junior debt in February 2015. Loss on settlement of convertible debt in fiscal 2017 and fiscal 2015 was $43.9 million and $50.6 million, respectively. In February 2017 and 2015, we settled $431.3 million and $575.0 million, respectively, in principal of our 2007 junior debt. In the case of the 2017 settlement, the principal value of $431.3 million was settled in cash and we issued shares of our common stock in respect of the conversion value in excess of the principal amount plus a cash inducement fee of $5.0 million. In the case of the 2015 settlement, the entire purchase price was settled in cash for $1,134.6 million. Other loss, net in fiscal 2017 was $1.3 million compared to other income, net of $8.9 million in fiscal 2016 and other income, net of $13.7 million in fiscal 2015.  The primary reason for the change in other income (loss) during fiscal 2017 compared to fiscal 2016 relates to the lower realized gains on the sale of marketable equity and debt securities. The primary reason for the change in other income (loss) during fiscal 2016 compared to fiscal 2015 relates to lower realized gains on the sale of marketable equity and debt securities and losses resulting from derivative activity. Provision for Income Taxes Our provision for income taxes reflects tax on our foreign earnings and federal and state tax on U.S. earnings.  We had an effective tax rate benefit of 90.0% in fiscal 2017, 15.2% in fiscal 2016 and 5.6% in fiscal 2015.  Excluding certain tax events described below, our effective tax rates were lower than statutory rates in the U.S. primarily due to our mix of earnings in foreign jurisdictions with lower tax rates and the R&D tax credit.  Our effective tax rate in fiscal 2017 includes $36.3 million of benefits related to audit closures and expirations of the statute of limitations on various tax reserves and $7.9 million of expense related to intercompany prepaid tax amortization, which reduces our effective tax rate by 40.3% and increased our effective tax 45         rate by 8.8%, respectively. Our effective tax rate in fiscal 2017 includes a $12.9 million benefit received from current year generated R&D credits, which reduces our effective tax rate by 14.3%. Our effective tax rate in fiscal 2017 also includes a $25.0 million benefit for share-based compensation deductions, which reduces our effective tax rate by 27.8%. Our effective tax rate in fiscal 2016 included $12.1 million of benefits related to audit closures and expirations of the statute of limitations on various tax reserves and $15.5 million of benefits related to intercompany prepaid tax amortization, which reduced our effective rate by 4.3% and 5.5%, respectively. Our effective tax rate in fiscal 2016 also included a $2.5 million benefit received from the reinstatement of the R&D credit and a $13.5 million benefit received from current year generated R&D credits, which reduced our effective tax rate by 0.9% and 4.8%, respectively. Our effective tax rate in fiscal 2015 included $33.1 million of benefits related to audit closures and expirations of the statute of limitations on various tax reserves, which reduced our effective tax rate by 9.6%. Our effective tax rate in fiscal 2015 also included a $1.8 million benefit received from the reinstatement of the R&D credit, which reduced our effective tax rate by 0.5%. 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.  For U.S. federal, and in general for U.S. state tax returns, we are effectively subject to examination of our income tax returns by the IRS and other tax authorities for fiscal 2005 and later. 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. Any expiration of our tax holidays are expected to have a minimal impact on our overall tax expense due to other tax holidays and an increase in income in other taxing jurisdictions with lower statutory rates. Results of Discontinued Operations Discontinued operations represent the mobile touch operations that we acquired as part of our acquisition of Atmel. The mobile touch assets had been marketed for sale since our acquisition of Atmel closed on April 4, 2016 based on our management's decision that such business was not a strategic fit for our product portfolio. On November 10, 2016, we completed the sale of the mobile touch assets to Solomon Systech (Limited) International, a Hong Kong based semiconductor company. The transaction included the sale of certain semiconductor products, equipment, customer list, backlog, and a license to certain other intellectual property and patents related to Atmel's mobile touch product line. We also agreed to provide certain transition services to Solomon Systech, which were substantially complete as of March 31, 2017. For financial statement purposes, the results of operations for this discontinued business have been segregated from those of the continuing operations and are presented in our consolidated financial statements as discontinued operations. Net loss from discontinued operations for the year ended March 31, 2017 was $6.0 million and consists of a pre-tax loss from operations of $8.2 million and a pre-tax gain on sale of $0.6 million. Liquidity and Capital Resources We had $1,410.2 million in cash, cash equivalents and short-term and long-term investments at March 31, 2017, a decrease of $1,154.4 million from the March 31, 2016 balance.  The decrease in cash, cash equivalents and short-term and long-term investments over this time period is primarily attributable to $2,036.2 million of cash and $941.6 million from additional amounts borrowed under our credit facility for our acquisition of Atmel, net payments of $1,244.0 million on amounts borrowed under our credit facility, payments of $436.2 million on the settlement of a portion of our 2007 junior debt, and dividend payments of $315.4 million, partially offset primarily by proceeds from our new senior and junior debt issuances of $2,645.0 million and cash generated by operating activities. Net cash provided from operating activities was $1,059.5 million for fiscal 2017, $744.5 million for fiscal 2016 and $721.2 million for fiscal 2015.  The increase in net cash provided from operating activities in fiscal 2017 compared to fiscal 2016 was primarily due to operating cash flows resulting from our acquisitions of Atmel and Micrel and operating synergies realized from our process efficiency and restructuring efforts. The increase in net cash provided by operating activities in fiscal 2016 compared to fiscal 2015 was primarily due to higher net sales and an increase in cash from changes in our operating assets and liabilities. 46         Net cash used in investing activities was $2,838.0 million for fiscal 2017 compared to net cash provided by investing activities of $800.4 million for fiscal 2016 and net cash used in investing activities of $678.3 million in fiscal 2015.  Fiscal 2017, 2016 and 2015 investing cash flows include net cash and cash equivalents used to finance acquisitions of $2,747.5 million, $362.0 million and $659.9 million, respectively. Excluding investing cash flows used for acquisitions, net investing activities resulted in a use of cash of $90.5 million in fiscal 2017, provided net cash flow of $1,162.4 million in fiscal 2016 and resulted in a use of cash of $18.4 million in fiscal 2015 and represented primarily the net change in our investments, capital purchases and sale of assets. Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.  Capital expenditures were $75.3 million in fiscal 2017, $97.9 million in fiscal 2016 and $149.5 million in fiscal 2015.  Capital expenditures are primarily for the expansion of production capacity and the addition of research and development equipment. Capital expenditures in fiscal 2017 were relatively less than we have experienced in recent years as we delayed certain purchases until we had finalized and developed plans following the acquisition of Atmel regarding process technology platforms and other manufacturing activities. We currently intend to spend approximately $170.0 million during the next twelve months to invest in equipment and facilities. We believe that the capital expenditures anticipated to be incurred over the next twelve months will provide sufficient manufacturing capacity to support the growth of our production capabilities for our new products and technologies and to bring in-house more of the assembly and test operations that are currently outsourced. We expect to finance our capital expenditures through our existing cash balances and cash flows from operations.  Net cash provided by financing activities was $595.5 million for fiscal 2017 compared to net cash used in financing activities of $59.9 million for fiscal 2016 and net cash provided by financing activities of $98.5 million for fiscal 2015. We utilize our credit facility to fund operations, pay dividends and finance acquisitions. Fiscal 2017 cash flows were favorably impacted by the net proceeds of debt issued that year. Significant transactions affecting our net financing cash flows include: • • • • In fiscal 2017, we issued $2,645.0 million of debt, of which $2,118.7 million was used to settle debt and reduce borrowings on our credit facility. In fiscal 2016, we repurchased shares of our common stock for $363.8 million, which was primarily funded with borrowings on our credit facility. In fiscal 2015, we entered into several debt transactions with a net cash inflow of $557.5 million. This included the issuance of $1,725.0 million principal amount of senior debt. The proceeds from the debt issuance were used to repay other debt and reduce borrowings on our credit facility. In fiscal 2017, 2016 and 2015, we paid cash dividends to our stockholders of $315.4 million, $291.1 million, and $286.5 million respectively. The amount of dividends paid has increased due to an increase in the amount of dividends declared per share and in the number of shares outstanding. In February 2017, we amended our existing $2,774.0 million credit agreement to, among other things, increase certain covenant compliance ratios. The February 2017 amendment included a new collateral agreement that secures our borrowings with all assets of our guarantor subsidiaries with the exception of real property. Proceeds of loans made under the credit agreement may be used for working capital and general corporate purposes. At March 31, 2017, we had no borrowings outstanding under the credit facility compared to $1,052.0 million at March 31, 2016. See Note 11 of the notes to consolidated financial statements for more information regarding our credit agreement. Our total cash, cash equivalents, short-term investments and long-term investments held by our foreign subsidiaries was $909.2 million at March 31, 2017 and $2,559.3 million at March 31, 2016. The decrease is primarily due to cash used in our acquisition of Atmel. Under current tax laws and regulations, if accumulated earnings and profits held by our foreign subsidiaries that U.S. taxes had not previously been provided for were to be distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes. The balance of cash, cash equivalents, short-term investments and long-term investments available for our U.S. operations as of March 31, 2017 and March 31, 2016 was approximately $501.0 million and $5.3 million, respectively. The increase is primarily due to net cash flow resulting from the issuances of the new senior and junior debt net of payments on amounts borrowed under our credit facility. Our U.S. operations and capital requirements are funded primarily by cash generated from U.S. operating activities, which has been and is expected to be sufficient to meet our business needs in the U.S. for the foreseeable future. We utilize a variety of tax planning and financing strategies (including amounts borrowed under our credit agreement) with the objective of having our worldwide cash available in the locations in which it is needed. Should our U.S. cash needs exceed funds generated by U.S. operations for any reason, including acquisitions of large capital assets or acquisitions of U.S. businesses, we may require additional funds in the U.S. and would expect to borrow such additional funds under our existing credit facility, pursue 47     other U.S. borrowing alternatives, issue equity securities or utilize a combination of these sources. We consider our offshore earnings to be permanently reinvested offshore. However, we could determine to repatriate some of our offshore earnings in future periods to fund stockholder dividends, share repurchases, acquisitions or other corporate activities.  We expect that a significant portion of our future cash generation will be in our foreign subsidiaries. In February 2016, we terminated our ten-year fixed-to-floating interest rate swap agreements which were related to a portion of our fixed-rate 1.625% 2015 senior subordinated convertible debt. The interest rate swap agreements were designated as fair value hedges. We paid variable interest equal to the three-month LIBOR minus 53.6 basis points and we received a fixed interest rate of 1.625%. Upon termination, the contracts were in an asset position, resulting in cash receipts of approximately $25.7 million, which included $3.7 million of accrued interest. The cash flows from the termination of these interest rate swap agreements have been reported as operating activities in the consolidated statement of cash flows. 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, 2017, we had no foreign currency forward contracts outstanding. On April 4, 2016, we completed our acquisition of Atmel. Under the terms of the merger agreement executed on January 19, 2016, Atmel stockholders received $8.15 per share consisting of $7.00 per share in cash and $1.15 per share in shares of Microchip common stock. We financed the purchase price of our Atmel acquisition using approximately $2.04 billion of cash held by certain of our foreign subsidiaries, approximately $0.94 billion from additional amounts borrowed under our credit agreement and approximately $486.1 million through the issuance of an aggregate of 10.1 million shares of our common stock. The acquisition price represents a total equity value of approximately $3.47 billion, and a total enterprise value of approximately $3.43 billion, after excluding Atmel's cash and investments net of debt on its balance sheet of approximately $39.3 million. The acquisition was structured in a manner that enabled us to utilize a substantial portion of the cash, cash equivalents, short-term investments and long-term investments held by certain of our foreign subsidiaries in a tax efficient manner. Although we believe our determinations with respect to the tax consequences of the acquisition are reasonable, we are regularly audited by the IRS and may be audited by other taxing authorities, and there can be no assurance as to the outcome of any such audit. On August 3, 2015, we acquired Micrel for $14.00 per share and paid an aggregate of approximately $430.0 million in cash and issued an aggregate of 8.6 million shares of our common stock to Micrel shareholders. We financed the cash portion of the purchase price with amounts borrowed under our credit agreement. In May 2015, our Board of Directors authorized the repurchase of up to 20.0 million shares of our common stock in the open market or in privately negotiated transactions.  In January 2016, our Board of Directors authorized an increase in the existing share repurchase program to 15.0 million shares of common stock from the approximately 11.4 million shares remaining under the current authorization. As of March 31, 2016, we had repurchased 8.6 million shares under this authorization for approximately $363.8 million.  There were no repurchases of common stock during fiscal 2017. There is no expiration date associated with this repurchase program.  As of March 31, 2017, we held approximately 20.4 million shares as treasury shares. On October 28, 2002, we announced that our Board of Directors had approved and instituted a quarterly cash dividend on our common stock.  The initial quarterly dividend of $0.02 per share was paid on December 6, 2003 in the amount of $4.1 million.  To date, our cumulative dividend payments have totaled approximately $3.13 billion.  During fiscal 2017, we paid dividends in the amount of $1.441 per share for a total dividend payment of $315.4 million. During fiscal 2016, we paid dividends in the amount of $1.433 per share for a total dividend payment of $291.1 million.  During fiscal 2015, we paid dividends in the amount of $1.425 per share for a total dividend payment of $286.5 million. On May 9, 2017, we declared a quarterly cash dividend of $0.3615 per share, which will be paid on June 6, 2017, to stockholders of record on May 23, 2017 and the total amount of such dividend is expected to be approximately $83.0 million.  Our Board is free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend, on our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and other factors deemed relevant by our Board.  Our current intent is to provide for ongoing quarterly cash dividends depending upon market conditions, our results of operations and potential changes in tax laws. 48 We believe that our existing sources of liquidity combined with cash generated from operations and borrowings under our credit agreement will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months. However, the semiconductor industry is capital intensive.  In order to remain competitive, we must constantly evaluate the need to make significant investments in capital equipment for both production and research and development.  We may increase our borrowings under our credit agreement or seek additional equity or debt financing from time to time to maintain or expand our wafer fabrication and product assembly and test facilities, for cash dividends, for share repurchases or for acquisitions or other purposes.  The timing and amount of any such financing requirements will depend on a number of factors, including our level of dividend payments, changes in tax laws and regulations regarding the repatriation of offshore cash, 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, 2017, 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, 2017 (dollars in thousands): Operating lease obligations (1) Capital purchase obligations (2) Other purchase obligations and commitments (3) 2017 senior debt (4) 2015 senior debt (5) 2017 junior debt (6) 2007 junior debt (7) Pension obligations (8) Total contractual obligations (9) Payments Due by Period Total Less than 1 year $ 87,399 $ 45,549 107,393 2,406,376 1,945,435 833,751 207,008 26,259 45,549 105,455 33,638 28,031 12,938 3,055 1 – 3 years 36,034 $ 3 – 5 years 22,683 $ — 1,575 67,275 56,063 25,875 6,109 — 242 67,275 56,063 25,875 6,109 More than 5 years $ 2,423 — 121 2,238,188 1,805,278 769,063 191,735 $ $ $ 700 1,731 2,582 194,662 255,625 180,829 13,677 $ 5,646,588 8,664 $ 5,015,472 (1) Operating lease obligations include $33.0 million which is recorded as a liability on the balance sheet as of March 31, 2017. This obligation is due under an operating lease from the acquisition of Atmel for a building in San Jose, California. (2) 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, 2017, as we have not yet received the related goods or taken title to the property. (3) Other purchase obligations and commitments include payments due under various types of licenses and outstanding purchase commitments with our wafer foundries of approximately $98.3 million for delivery of wafers in fiscal 2018. (4) For purposes of this table we have assumed that the principal of our 2017 senior convertible debt will be paid on February 15, 2027, which is the maturity date of such debt. (5) For purposes of this table we have assumed that the principal of our 2015 senior convertible debt will be paid on February 15, 2025, which is the maturity date of such debt. (6) For purposes of this table we have assumed that the principal of our 2017 junior convertible debt will be paid on February 15, 2037, which is the maturity date of such debt. (7) For purposes of this table we have assumed that the principal of our 2007 junior convertible debt will be paid on December 15, 2037, which is the maturity date of such debt. (8) For purposes of this table pension obligations due in more than 5 years represent the expected pension payments from 2023 through 2027. It excludes pension obligations subsequent to 2027. (9) Total contractual obligations do not include contractual obligations recorded on our 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. 49   Purchase orders or contracts for the purchase of raw materials and other goods and services, with the exception of commitments to our wafer foundries, 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 the 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, 2017, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. In the ordinary course of business, we may provide standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by us or our subsidiaries. We have not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, we believe we will not be required to make any payments under these guarantee arrangements. Recently Issued Accounting Pronouncements Refer to Note 1 to our consolidated financial statements regarding recently issued accounting pronouncements. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our 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 our investment guidelines and market conditions.  Our investment portfolio, consisting of fixed income securities, money market funds, cash deposits, and marketable securities that we hold on an available-for-sale basis, was $1,410.2 million as of March 31, 2017 compared to $2,564.6 million as of March 31, 2016. We sold a significant portion of our available-for-sale investments during the first quarter of fiscal 2017 and the fourth quarter of fiscal 2016 to partially finance the purchase price of our Atmel acquisition which closed on April 4, 2016. Our available-for-sale debt 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 as of March 31, 2017.  We have aggregated our available-for-sale securities for presentation purposes since they are all very similar in nature (dollars in thousands): Financial instruments maturing during the fiscal year ended March 31, Available-for-sale securities Weighted-average yield rate 2018 $ 342,500 2019 10,024 $ 2020 $ 147,435 $ 1.05% 1.72% 1.73% 2021 2022 — $ —% Thereafter — —% — $ —% See Note 1 to our Consolidated Financial Statements for additional information on our investments. 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. 50             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 (the "Exchange Act"), 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 Exchange Act.  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 Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management.  Our disclosure controls and procedures include components of our internal control over financial reporting.  Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met. Management Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Management assessed our internal control over financial reporting as of March 31, 2017, the end of our fiscal year.  Management based its assessment on criteria established in Internal Control – Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Management's assessment included an 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. In accordance with guidance issued by the Securities and Exchange Commission, registrants are permitted to exclude material business combinations from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Our management’s evaluation of internal control over financial reporting excluded the internal control activities of Atmel, which we acquired on April 4, 2016 as discussed in Note 2, “Business Combinations” of the Notes to the Consolidated Financial Statements. We have included the financial results of Atmel in our consolidated financial statements from the date of acquisition. Total revenues excluded from our assessment of internal control over financial reporting represented approximately 22% of our consolidated total Atmel revenues for the fiscal year ended March 31, 2017. Total Atmel assets excluded from our assessment of internal control over financial reporting represented approximately 4% of our consolidated total assets as of March 31, 2017. 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. 51           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 as of March 31, 2017, which is included on page F-2. Changes in Internal Control over Financial Reporting During the three months ended March 31, 2017, 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. Item 9B. OTHER INFORMATION In June and November, 2016, each of J. Eric Bjornholt, our Chief Financial Officer, Mitch Little, our Vice President, Worldwide Sales and Applications, Steve Drehobl, our Vice President, MCU8 and Technology Development Division, and Rich Simoncic, our Vice President, Analog Power and Interface Division, entered into trading plans as contemplated by Rule 10b-5-1 under the Exchange Act and periodic sales of our common stock have occurred and 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. 52       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 2017 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 2017 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 11, above. Information with respect to compliance with Section 16(a) of the Exchange Act, is incorporated herein by reference to our proxy statement for our 2017 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 2017 annual meeting of stockholders under the caption "Code of Business Conduct and Ethics."  A copy of our Code of Business Conduct and 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 2017 annual meeting of stockholders under the caption "Requirements, Including Deadlines, for Receipt of Stockholder Proposals for the 2017 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 2017 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 2017 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 2017 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 2017 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 2017 annual meeting of stockholders. 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 2017 annual meeting of stockholders. 53                 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 2017 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 2017 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 2017 annual meeting of stockholders. 54   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 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Consolidated Balance Sheets as of March 31, 2017 and 2016 Consolidated Statements of Income for each of the three years in the period ended March 31, 2017 Consolidated Statements of Comprehensive Income for each of the three years in the period ended March 31, 2017 Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2017 Consolidated Statements of Changes in Equity for each of the three years in the period ended March 31, 2017 Notes to Consolidated Financial Statements Financial Statement Schedules The Exhibits filed with this Form 10-K or incorporated herein by reference are set forth in the Exhibit Index beginning on page 59 hereof, which Exhibit Index is incorporated herein by this reference. (2) (3) (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 F-8 F-10 None 55 Item 16. Form 10-K Summary Not applicable. 56 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. May 30, 2017 MICROCHIP TECHNOLOGY INCORPORATED (Registrant) By:  /s/ Steve Sanghi                                                                        Steve Sanghi Chief Executive Officer and Chairman of the Board 57 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned officer or director of Microchip Technology Incorporated, a Delaware corporation (the "Company"), does hereby constitute and appoint each of STEVE SANGHI and J. ERIC BJORNHOLT, with full power to each of them to act alone, as the true and lawful attorneys and agents of the undersigned, with full power of substitution and resubstitution to each of said attorneys to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto relating to this annual report on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign such person's name individually and on behalf of the Company as an officer or director (as indicated below opposite such person's signature) to the Company's annual report on Form 10-K or any amendments or supplements thereto; and each of the undersigned does hereby fully ratify and confirm all that said attorneys and agents or any of them, shall do or cause to be done by virtue hereof. This Power of Attorney revokes any and all previous powers of attorney granted by any of the undersigned which such power would have entitled said attorneys and agents, or any of them, to sign such person's name, individually or on behalf of the Company, to any Form 10-K. IN WITNESS WHEREOF, each of the undersigned has executed the foregoing power of attorney on this 30th day of May, 2017. 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/ Matthew W. Chapman Matthew W. Chapman /s/ L.B. Day L.B. Day /s/ Esther L. Johnson Esther L. Johnson /s/ Wade F. Meyercord Wade F. Meyercord /s/ J. Eric Bjornholt J. Eric Bjornholt Chief Executive Officer and Chairman of the Board May 30, 2017 May 30, 2017 May 30, 2017 May 30, 2017 May 30, 2017 May 30, 2017 Director Director Director Director Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 58 Exhibit Number 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 4.1 4.2 4.3 Exhibit Description Agreement and Plan of Merger dated as of May 22, 2014 by and among Microchip Technology (Barbados) II Incorporated and ISSC Technologies Corp. Tender Agreement dated May 22, 2014 between Microchip Technology (Barbados) II Incorporated and Directors, Certain Officers and Certain Shareholders of ISSC Technologies Corp. Guaranty Concerning Merger Agreement dated May 22, 2014 made by Microchip Technology Incorporated with respect to certain obligations of Microchip Technology (Barbados) II Incorporated Guaranty Concerning Tender Agreement dated May 22, 2014 made by Microchip Technology Incorporated with respect to certain obligations of Microchip Technology (Barbados) II Incorporated Agreement and Plan of Merger dated as of February 9, 2014 by and among Microchip Technology Incorporated, Orchid Acquisition Corporation and Supertex, Inc. Agreement and Plan of Merger dated as of May 1, 2012 by and among Microchip Technology Incorporated, Microchip Technology Management Co. and Standard Microsystems Corporation, including Form of Voting Agreement Agreement and Plan of Merger dated as of May 7, 2015, by and among, Microchip Technology Incorporated, Micrel, Incorporated, Mambo Acquisition Corp. and Mambo Acquisition LLC Agreement and Plan of Merger, dated as of January 19, 2016, by and among Microchip Technology, Atmel Corporation, and Hero Acquisition Corporation Restated Certificate of Incorporation of Registrant Amended and Restated By-Laws of Registrant, as amended through November 14, 2016 Indenture, dated as of December 7, 2007, by and between Wells Fargo Bank, National Association, as Trustee, and Microchip Technology Incorporated Indenture dated as of February 11, 2015 between Microchip Technology Incorporated and Wells Fargo Bank, N.A. Indenture dated as of February 15, 2017 between Microchip Technology Incorporated and Wells Fargo Bank, National Association Incorporated by Reference Form 10-K File Number 000-21184 Exhibit 2.1 Filing Date 5/30/2014 Filed Herewith 10-K 000-21184 2.2 5/30/2014 10-K 000-21184 2.3 5/30/2014 10-K 000-21184 2.4 5/30/2014 10-K 000-21184 2.5 5/30/2014 10-K 000-21184 2.2 5/30/2012 8-K 000-21184 2.1 5/8/2015 8-K 000-21184 2.1 1/19/2016 10-Q 000-21184 8-K 000-21184 3.1 3.1 11/12/2002 11/17/2016 8-K 000-21184 4.1 12/7/2007 8-K 000-21184 4.1 2/11/2015 8-K 000-21184 4.1 2/15/2017 59 Exhibit Number 4.4 4.5 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 Exhibit Description Indenture dated as of February 15, 2017 between Microchip Technology Incorporated and Wells Fargo Bank, National Association Registration Rights Agreement, dated as of December 7, 2007, by and between J.P. Morgan Securities Inc. and Microchip Technology Incorporated Master Increasing Lender Supplement dated as of March 19, 2015, by and among Microchip Technology Incorporated and the Increasing Lenders thereto Amendment No. 2, dated as of February 8, 2017, to Amended and Restated Credit Agreement, dated as of June 27, 2013, as amended and restated as of February 4, 2015 Amendment No. 1, dated December 4, 2015, to Amended and Restated Credit Agreement, dated as of June 27, 2013, as amended and restated as of February 4, 2015 Amendment and Restatement Agreement dated as of February 4, 2015, to the Credit Agreement, dated as of June 27, 2013, by and among Microchip Technology Incorporated, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent Pledge and Security Agreement, dated as of February 8, 2017, by and among Microchip Technology Incorporated, the other grantors party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent Form of Indemnification Agreement between Registrant and its directors and certain of its officers Microchip Technology Incorporated 2012 Inducement Award Plan *2004 Equity Incentive Plan as amended and restated August 14, 2015 *Form of Notice of Grant of Restricted Stock Units (officer) for 2004 Equity Incentive Plan Form of Notice of Grant of Restricted Stock Units (non-officer) for 2004 Equity Incentive Plan *Form of Notice of Grant for 2004 Equity Incentive Plan (including Exhibit A Stock Option Agreement) Form of Notice of Grant (Foreign) for 2004 Equity Incentive Plan (including Exhibit A Stock Option Agreement (Foreign)) *Form of Notice of Grant of Restricted Stock Units for 2004 Equity Incentive Plan (including Exhibit A Restricted Stock Units Agreement) Incorporated by Reference Form 8-K File Number 000-21184 Exhibit 4.3 Filing Date 2/15/2017 Filed Herewith 8-K 000-21184 4.2 12/7/2007 10-K 000-21184 10.1 6/8/2015 8-K 000-21184 10.1 2/8/2017 8-K 000-21184 10.1 12/7/2015 8-K 000-21184 10.1 2/4/2015 8-K 000-21184 10.2 2/8/2017 S-1 33-57960 10.1 2/5/1993 S-8 333-183074 4.8 8/3/2012 8-K 000-21184 10.1 8/18/2015 S-8 S-8 333-192273 10.2 11/12/2013 333-192273 10.3 11/12/2013 S-8 333-119939 4.5 10/25/2004 10-K 000-21184 10.4 5/23/2005 10-K 000-21184 10.6 5/31/2006 10.14 *Restricted Stock Units Agreement (Domestic) for 2004 Equity Incentive Plan 10-Q 000-21184 10.3 11/7/2007 60 Incorporated by Reference Form 10-Q File Number 000-21184 Exhibit 10.4 Filing Date 11/7/2008 Filed Herewith 8-K 000-21184 10.1 9/27/2010 10-Q 000-21184 10.1 2/6/2012 10-K 000-21184 10.17 5/30/2014 8-K 000-21184 10.1 8/18/2016 10-Q 000-21184 10.3 8/24/2006 10-K 000-21184 10.21 5/30/2013 S-8 S-8 333-101696 4.1.1 12/6/2002 333-101696 4.1.3 12/6/2002 S-8 333-101696 4.1.4 12/6/2002 10-K 000-21184 10.28 6/5/2003 10-Q 000-21184 10.1 2/9/2006 10-K 000-21184 10.28 5/24/2016 8-K 8-K 10-Q 000-21184 000-21184 000-21184 10.1 10.2 10.1 12/18/2008 12/18/2008 2/13/1998 10-K 000-21184 10.14 5/15/2001 10-Q 000-21184 10.2 2/13/1998 8-K 000-21184 10.1 6/11/2009 Exhibit Number 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 Exhibit Description Restricted Stock Units Agreement (Foreign) for 2004 Equity Incentive Plan *Form of Global RSU Agreement for 2004 Equity Incentive Plan (including Notice of Grant of Restricted Stock Units) *Microchip Technology Incorporated 2001 Employee Stock Purchase Plan as amended through March 1, 2012 Microchip Technology Incorporated International Employee Stock Purchase Plan as amended through May 19, 2014, including Purchase Agreement *Executive Management Incentive Compensation Plan as amended on May 16, 2016 *Discretionary Executive Management Incentive Compensation Plan Management Incentive Compensation Plan as amended by the Board of Directors on May 17, 2013 *Microchip Technology Incorporated Supplemental Retirement Plan *Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan dated January 1, 1997 *Amendment dated December 9, 1999 to the Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan *February 3, 2003 Amendment to the Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan *Amendments to Supplemental Retirement Plan *Amended and Restated Adoption Agreement to the Microchip Technology Incorporated Supplemental Retirement Plan dated October 8, 2008, as amended December 15, 2008 *Change of Control Severance Agreement *Change of Control Severance Agreement 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 61 Exhibit Number 21.1 23.1 24.1 31.1 31.2 32 Incorporated by Reference Exhibit Description Form File Number Exhibit Filing Date Subsidiaries of Registrant Consent of Independent Registered Public Accounting Firm Power of Attorney included on Page 58 of this Form 10-K 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. Filed Herewith X X X X X X 62 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, 2017 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CHANDLER, ARIZONA 63 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Consolidated Balance Sheets as of March 31, 2017 and 2016 Consolidated Statements of Income for each of the three years in the period ended March 31, 2017 Consolidated Statements of Comprehensive Income for each of the three years in the period ended March 31, 2017 Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2017 Consolidated Statements of Changes in Equity for each of the three years in the period ended March 31, 2017 Notes to Consolidated Financial Statements Page Number F-1 F-2 F-3 F-4 F-5 F-6 F-8 F-10 i Item1. Financial Statements MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) ASSETS March 31, 2017 $ 908,684 $ 2016 2,092,751 394,088 478,373 417,202 41,354 6,459 58,880 353,284 290,183 306,815 41,992 — 11,688 2,305,040 3,096,713 $ $ $ $ 683,338 107,457 2,299,009 2,148,092 68,870 75,075 7,686,881 149,233 212,450 292,815 49,952 704,450 2,900,524 184,945 409,045 217,206 — 229 609,396 118,549 1,012,652 606,349 14,831 79,393 5,537,883 79,312 119,265 183,432 — 382,009 2,453,405 111,061 399,218 41,271 — 204 2,537,344 1,391,553 (731,884) (14,378) 1,479,400 3,270,711 (820,066) (3,357) 1,582,585 2,150,919 $ 7,686,881 $ 5,537,883 Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses Assets held for sale Other current assets Total current assets Property, plant and equipment, net Long-term investments Goodwill Intangible assets, net Long-term deferred tax assets Other assets Total assets Accounts payable Accrued liabilities LIABILITIES AND STOCKHOLDERS' EQUITY Deferred income on shipments to distributors Current portion of long-term debt Total current liabilities Long-term debt Long-term income tax payable Long-term deferred tax liability Other long-term liabilities Stockholders' equity: Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued or outstanding Common stock, $0.001 par value; authorized 450,000,000 shares; 249,463,733 shares issued and 229,093,658 shares outstanding at March 31, 2017; 227,416,789 shares issued and 204,081,727 shares outstanding at March 31, 2016 Additional paid-in capital Common stock held in treasury: 20,370,075 shares at March 31, 2017; 23,335,062 shares at March 31, 2016 Accumulated other comprehensive loss Retained earnings Total stockholders' equity Total liabilities and stockholders' equity See accompanying notes to consolidated financial statements F-3 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) Net sales Cost of sales (1) Gross profit Research and development  (1) Selling, general and administrative  (1) Amortization of acquired intangible assets Special charges and other, net Operating expenses Operating income Losses on equity method investments Other income (expense): Interest income Interest expense Loss on settlement of convertible debt Other income, net Income before income taxes Income tax benefit Net income from continuing operations Discontinued operations: Loss from discontinued operations Income tax benefit Net loss from discontinued operations Net Income Less: Net loss attributable to noncontrolling interests Net income attributable to Microchip Technology Basic net income per common share attributable to Microchip Technology stockholders Net income from continuing operations Net loss from discontinued operations Net income attributable to Microchip Technology Diluted net income per common share attributable to Microchip Technology stockholders Net income from continuing operations Net loss from discontinued operations Net income attributable to Microchip Technology Dividends declared per common share Basic common shares outstanding Diluted common shares outstanding (1) Includes share-based compensation expense as follows: Cost of sales Research and development Selling, general and administrative $ $ $ $ $ $ $ $ $ $ Year ended March 31, 2017 3,407,807 1,650,611 1,757,196 545,293 499,811 337,667 98,608 1,481,379 275,817 (222) 3,079 (146,346) (43,879) 1,338 89,787 (80,805) 170,592 (7,514) (1,561) (5,953) $ 2016 2,173,334 967,870 1,205,464 $ 2015 2,147,036 917,472 1,229,564 372,596 301,670 174,896 3,957 853,119 352,345 (345) 24,447 (104,018) — 8,864 281,293 (42,632) 323,925 — — — 349,543 274,815 176,746 2,840 803,944 425,620 (317) 19,527 (62,034) (50,631) 13,742 345,907 (19,418) 365,325 — — — 164,639 — 164,639 $ 323,925 207 324,132 $ 365,325 3,684 369,009 0.79 $ (0.03) $ $ 0.76 0.73 $ (0.02) $ $ 0.71 1.441 $ 217,196 234,806 1.59 $ — $ $ 1.59 1.49 $ — $ $ $ 1.49 1.433 203,384 217,388 1.84 — 1.84 1.65 — 1.65 1.425 200,937 223,561 $ 18,713 46,801 62,641 $ 8,252 32,022 31,146 9,010 28,164 21,422 See accompanying notes to consolidated financial statements F-4 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Net income Less: Net loss attributable to noncontrolling interests Net income attributable to Microchip Technology Components of other comprehensive (loss) income: Available-for sale securities: Unrealized holding (losses) gains, net of tax effect Reclassification of realized transactions, net of tax effect Actuarial (losses) gains related to defined benefit pension plans, net of tax benefit (provision) of $2,172, ($18), and $76 Change in net foreign currency translation adjustment Other comprehensive (loss) income, net of taxes Less: Other comprehensive loss attributable to noncontrolling interests Other comprehensive (loss) income attributable to Microchip Technology Year Ended March 31, 2017 2016 2015 $ $ 164,639 — 164,639 $ 323,925 207 324,132 365,325 3,684 369,009 (1,558) 1,522 (5,307) (5,678) (11,021) — (11,021) (3,241) (10,948) 31 — (14,158) — (14,158) 33,759 (18,694) (127) (5,188) 9,750 866 10,616 375,075 4,550 379,625 Comprehensive income Less: Comprehensive loss attributable to noncontrolling interests Comprehensive income attributable to Microchip Technology $ 153,618 — 153,618 $ 309,767 207 309,974 $ See accompanying notes to consolidated financial statements F-5 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Share-based compensation expense related to equity incentive plans Excess tax benefit from share-based compensation Loss on settlement of convertible debt Amortization of debt discount on convertible debt Amortization of debt issuance costs Losses on equity method investments Gains on sale of assets Loss on write-down of fixed assets Impairment of intangible assets Realized losses (gain) on available-for-sale investments Realized gain on equity method investment Impairment of available-for-sale investment Amortization of premium on available-for-sale investments Changes in operating assets and liabilities, excluding impact of acquisitions: Increase in accounts receivable Decrease in inventories Increase in deferred income on shipments to distributors Decrease in accounts payable and accrued liabilities Change in other assets and liabilities Operating cash flows related to discontinued operations 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 Sale of equity method investment Acquisition of Atmel, net of cash acquired Acquisition of Micrel, net of cash acquired Acquisition of ISSC, net of cash acquired Purchase of additional controlling interest in ISSC Acquisition of Supertex, net of cash acquired Investments in other assets Proceeds from sale of assets Capital expenditures Net cash (used in) provided by investing activities Cash flows from financing activities: Payments on settlement of convertible debt Proceeds from issuance of 2017 senior debt Proceeds from issuance of 2017 junior debt Proceeds from issuance of 2015 senior debt Repayments of revolving loan under credit facility Proceeds from borrowings on revolving loan under credit facility Repayments of long-term borrowings Deferred financing costs Payment of cash dividends Repurchase of common stock Proceeds from sale of common stock Tax payments related to shares withheld for vested restricted stock units Capital lease payments F-6 Year ended March 31, 2016 2015 2017 $ 164,639 $ 323,925 $ 365,325 469,208 (126,888) 128,155 — 43,879 56,075 4,524 222 (78) 2,571 11,904 89 (468) 1,433 18 (46,831) 223,711 109,383 (16,070) 24,628 9,348 1,059,452 (500,309) 470,565 1,746 (2,747,516) — — — — (10,218) 23,069 (75,310) (2,837,973) (436,205) 2,070,000 575,000 — (2,781,000) 1,537,000 — (36,930) (315,429) — 42,210 (58,402) (783) 283,171 (60,425) 71,420 (758) — 48,022 3,968 345 (960) — 629 (13,727) (2,225) 3,995 9,044 (2,150) 48,245 16,962 (20,836) 35,838 — 744,483 (1,573,867) 2,824,231 2,667 — (343,928) — (18,051) — (7,056) 14,296 (97,895) 800,397 — — — — (1,614,452) 2,204,500 — (2,156) (291,087) (363,829) 28,718 (21,720) (676) 278,298 (32,811) 58,596 (1,216) 50,631 14,791 2,463 317 — 362 1,881 (18,469) — — 9,949 (15,893) 25,517 18,330 (33,992) (2,897) — 721,182 (959,318) 1,097,065 — — — (252,469) (32,095) (375,365) (6,663) — (149,472) (678,317) (1,134,621) — — 1,725,000 (1,697,642) 1,859,594 (350,000) (32,846) (286,478) — 34,433 (19,504) (604) Excess tax benefit from share-based compensation Net cash provided by (used in) financing activities Effect of foreign exchange rate changes on cash and cash equivalents Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Year ended March 31, 2016 2015 2017 — 595,461 (1,007) (1,184,067) 2,092,751 908,684 $ 758 (59,944) — 1,484,936 607,815 2,092,751 $ $ 1,216 98,548 (201) 141,212 466,603 607,815 See accompanying notes to consolidated financial statements F-7 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands) Common Stock and Additional Paid-in- Capital Common Stock Held in Treasury Shares Amount Shares Amount Accumulated Other Comprehensive Income Retained Earnings Net Microchip Technology Stockholders' Equity Noncontrolling Interests Total Equity 218,790 $1,244,783 18,787 $(577,382) $ 1,051 $ 1,467,009 $ 2,135,461 $ — $2,135,461 — — 52,467 52,467 369,009 369,009 (3,684) 365,325 10,616 — (866) 240 9,750 240 (246) (31,849) (32,095) — — — — — — — — — 345 2,503 34,369 (426) (19,504) — — — — — — — — — — — — — — (2,077) (61,703) (2,077) 61,703 — — — — — — 1,220 56,687 1,622 (606,926) 348,824 — — — — — — — — — — — — — — — 10,616 — (591) — — — — — — — — — — — — — — — — — — — — 34,369 (19,504) — 1,220 56,687 1,622 (606,926) 348,824 64 — — — — — — — — 34,433 (19,504) — 1,220 56,687 1,622 (606,926) 348,824 (286,478) 218,790 999,717 16,710 (515,679) 11,076 1,549,540 2,044,654 16,372 2,061,026 (286,478) (286,478) — 324,132 324,132 (207) 323,925 (14,158) (275) — — — — — — — — — — — — — — — — (14,158) — (14,158) (1,886) (16,165) (18,051) 369,054 — 369,054 4,052 (363,829) 28,718 (21,720) — (567) — — — — — — 4,052 (363,829) 28,718 (21,720) — (567) — — — — — (1,611) 8,627 369,054 — — — — — — — — — — — 4,052 — — 8,627 (363,829) 2,491 28,718 (489) (21,720) — — — — (2,002) (59,442) (2,002) 59,442 — (567) — — F-8 Balance at March 31, 2014 Acquisition of controlling interest in ISSC Net income (loss) Other comprehensive income Other Purchase of additional shares from noncontrolling interest Proceeds from sales of common stock through employee equity incentive plans Restricted stock unit and stock appreciation right withholdings Treasury stock used for new issuances Tax benefit from equity incentive plans Share-based compensation Non-cash consideration, exchange of employee stock awards - Supertex acquisition Settlement of convertible debt Convertible Debt - issuance of 2015 senior debt Cash dividend Balance at March 31, 2015 Net income (loss) Other comprehensive loss Purchase of additional shares from noncontrolling interest Issuance of common stock - Micrel acquisition Non-cash consideration, exchange of employee stock awards - Micrel Purchase of treasury stock Proceeds from sales of common stock through employee equity incentive plans Restricted stock unit and stock appreciation right withholdings Treasury stock used for new issuances Tax benefit from equity incentive plans Share-based compensation Cash dividend Balance at March 31, 2016 Net income Other comprehensive loss Issuance of common stock - Atmel acquisition Non-cash consideration, exchange of employee stock awards - Atmel acquisition Proceeds from sales of common stock through employee equity incentive plans Restricted stock unit and stock appreciation right withholdings Adoption of ASU 2016-09, cumulative adjustment Treasury stock used for new issuances Share-based compensation Shares issued to settle convertible debt Settlement of convertible debt Convertible Debt - issuance of 2017 senior and junior debt Cash dividend Balance at March 31, 2017 486,182 — 486,182 Common Stock and Additional Paid-in- Capital Common Stock Held in Treasury Shares Amount Shares Amount Accumulated Other Comprehensive Income Retained Earnings Net Microchip Technology Stockholders' Equity Noncontrolling Interests Total Equity — — 73,556 — — — — — — — — 73,556 (291,087) (291,087) — — 73,556 (291,087) 227,417 1,391,757 23,335 (820,066) (3,357) 1,582,585 2,150,919 — 2,150,919 — 164,639 164,639 — — — — 10,050 486,182 — — — — 7,470 — 3,986 42,210 (1,021) (58,402) — 1,967 — — — — — — — — — — (2,965) (88,182) (2,965) 88,182 — 127,308 11,997 862,651 — (850,709) — — 615,321 — — — — — — — — — — — (11,021) — — — — — — — — — — — — — — — — (11,021) 7,470 42,210 (58,402) 47,605 49,572 — — — — — — 127,308 862,651 (850,709) 615,321 (315,429) (315,429) — — 164,639 (11,021) — — — — — — — — — — 7,470 42,210 (58,402) 49,572 — 127,308 862,651 (850,709) 615,321 (315,429) 249,464 $2,537,573 20,370 $(731,884) $ (14,378) $ 1,479,400 $ 3,270,711 $ — $3,270,711 See accompanying notes to consolidated financial statements F-9 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies Nature of Business Microchip Technology Incorporated ("Microchip" or the "Company") develops, manufactures and sells specialized semiconductor products used by its customers for a wide variety of embedded control applications. Microchip's product portfolio comprises general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, a broad spectrum of high- performance linear, mixed-signal, power management, thermal management, radio frequency (RF), timing, safety, security, wired connectivity and wireless connectivity devices, as well as serial Electrically Erasable Programmable Read Only Memory (EEPROMs), Serial Flash memories, Parallel Flash memories and serial Static Random Access Memory (SRAM) memories. Microchip also licenses Flash-IP solutions that are incorporated in a broad range of products. Principles of Consolidation The consolidated financial statements include the accounts of Microchip and its majority-owned and controlled subsidiaries.  As further discussed in Note 2, on April 4, 2016, the Company completed its acquisition of Atmel and the Company's financial results include Atmel's results beginning as of such acquisition date. As further discussed in Note 2, the Company did not hold 100% of the outstanding common stock of ISSC Technologies Corporation (ISSC) from July 17, 2014 through June 30, 2015 and the noncontrolling interest in the Company's net income from ISSC has been excluded from net income attributable to the Company in the Company's consolidated statements of income.  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 has occurred, the pricing is fixed or determinable 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 which prevent the sales pricing from being fixed or determinable at the time of the Company's shipment to the distributors. Therefore, revenue recognition is deferred until the pricing uncertainty is resolved, which generally occurs when the distributor sells the product to their customer. 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 its consolidated balance sheets. In connection with its acquisitions of Atmel and Micrel, the Company acquired certain distributor relationships where revenue was recognized upon shipment to the distributors based on certain contractual terms or prevailing business practices that resulted in the price not being fixed and determinable at such time. Following an acquisition, the Company undertakes efforts to align the contract terms and business practices of the acquired entity with its own. Once these efforts are complete, the related revenue recognition is changed. With respect to such distributor relationships acquired in the Atmel acquisition, as of October 1, 2016, these business practices were conformed to those of the Company’s other distributors, which beginning in October 2016 resulted in the deferral of revenue recognition until the distributor sells the product to their customers. With respect to such distributor relationships acquired in the Micrel acquisition, in the December 2015 quarter, these distributor contracts were changed to be consistent with those of the Company’s other distributors which resulted in the deferral of revenue recognition under such contracts until the distributor sells the product to their customers. Deferred income on shipments to distributors effectively represents gross margin on the sale to the distributor at the initial shipment date; 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. F-10               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 distributors 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. At March 31, 2017, the Company had approximately $418.0 million of deferred revenue and $125.2 million in deferred cost of sales recognized as $292.8 million of deferred income on shipments to distributors.  At March 31, 2016, the Company had approximately $267.2 million of deferred revenue and $83.8 million in deferred cost of sales recognized as $183.4 million of deferred income on shipments to distributors.  The increase in deferred income on shipments to distributors in fiscal 2017 compared to fiscal 2016 resulted primarily from the Company's acquisition of Atmel. 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. The Company collects and remits certain sales-related taxes on sales of inventory and reports such amounts under the net method in its consolidated statements of income. For licenses or other technology arrangements without an upgrade period, non-royalty revenue from the license is recognized upon delivery of the technology if the fee is fixed or determinable and collection of the fee is reasonably assured.  Royalties are recognized when reported to the Company, which generally coincides with the receipt of payment. In certain limited circumstances, the Company enters into license and other arrangements for technologies that the Company is continuing to enhance and refine or under which it is obligated to provide unspecified enhancements. Under these arrangements, non-royalty revenue is recognized over the lesser of (1) the estimated period that the Company has historically enhanced and developed refinements to the specific technology, typically one to three years (the "upgrade period"), and (2) the remaining portion of the upgrade period after the date of delivery of all specified technology and documentation, provided that the fee is fixed or determinable and collection of the fee is reasonably assured.  Royalties received during the upgrade period are recognized as revenue based on an amortization calculation of the elapsed portion of the upgrade period compared to the entire estimated upgrade period.  Royalties received after the upgrade period has elapsed are recognized when reported to the Company, which generally coincides with the receipt of payment.   F-11          Recent Updates to Revenue Recognition In May 2014, the FASB issued Accounting Standard Update (ASU) 2014-09-Revenue from Contracts with Customers (Topic 606) and in August 2015 the FASB subsequently issued ASU 2015-14-Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which supersedes existing revenue guidance pursuant to US GAAP and will no longer permit the Company to defer revenue on sales to distributors until the products are sold to the end customer. Upon adoption of ASU 2014-09 and 2015-14, a portion of this deferred revenue will be required to be estimated and recognized upon sale to the distributor rather than upon the sale by the distributor to the end customer. See “Recently Issued Accounting Pronouncements Not Yet Adopted” for additional information on the new guidance. Product Warranty The Company typically warrants its products against defects in materials and workmanship and non-conformance to specifications for 12 to 24 months.  The majority of the Company's product warranty claims are settled through the return of the defective product and the shipment of replacement product.  Warranty returns are included within the Company's allowance for returns, which is based on historical return rates.  Actual future returns could differ from the allowance established.  In addition, the Company accrues a liability for specific warranty costs expected to be settled other than through product return and replacement, if a loss is probable and can be reasonably estimated.  Product warranty expenses during fiscal 2017, 2016, and 2015 were immaterial. Advertising Costs The Company expenses all advertising costs as incurred.  Advertising costs were immaterial for the fiscal years ended March 31, 2017, 2016 and 2015. 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.  Renewals or extensions of these assets are expensed as incurred. 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 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.  For a portion of fiscal 2017 and fiscal 2015, certain foreign subsidiaries acquired as part of the Company's acquisition activities had the local currency as the functional currency. Once these entities were integrated into the Company's legal structure and intercompany agreements were executed, the U.S. dollar became the functional currency for such entities. Income Taxes The Company provides for income taxes in accordance with principles contained in ASC Topic 740, Income Taxes. Under these principles, the Company recognizes the amount of income tax payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in its consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance if it is more likely than not that a portion will not be realized. In assessing whether it is more likely than not that deferred tax assets will be realized, the Company considers all available evidence, both positive and negative, including its recent cumulative earnings experience and expectations of future available taxable income of the F-12             appropriate character by taxing jurisdiction, tax attribute carry back and carry forward periods available to them for tax reporting purposes, and prudent and feasible tax planning strategies. The Company measures and recognizes the amount of tax benefit that should be recorded for financial statement purposes for uncertain tax positions taken or expected to be taken in a tax return. With respect to uncertain tax positions, the Company evaluates the recognized tax benefits for de-recognition, classification, interest and penalties, interim period accounting and disclosure requirements. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. 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. Available-for-Sale Investments The Company classifies its investments in debt and marketable equity securities as available-for-sale based upon management's intent with regard to the investments and the nature of the underlying securities.  The Company's available-for-sale investments consist of government agency bonds, municipal bonds, auction rate securities (ARS), corporate bonds and marketable equity securities.  The Company's investments are carried at fair value with unrealized gains and losses reported in stockholders' equity unless losses are considered to be other than temporary impairments in which case the losses are recognized through the statement of income.  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 available-for-sale debt securities sold is calculated using the first-in, first-out (FIFO) basis at the individual security level for sales from multiple lots. For sales of marketable equity securities, the Company uses an average cost basis at the individual security level. The Company sold its ARS during the fourth quarter of fiscal 2016 and the first quarter of fiscal 2017. The Company includes within short-term investments 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 or those that cannot be readily liquidated.  As discussed in Note 4, the Company intends and has the ability to hold its 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. Derivative Instruments Derivative instruments are required to be recorded at fair value as either assets or liabilities in the Company's consolidated balance sheet. The Company's accounting policies for derivative instruments depends on whether the instrument has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The Company does not apply hedge accounting to foreign currency forward contracts. 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. Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between the fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be highly effective, hedge accounting is discontinued. The Company terminated its interest rate derivative instruments in fiscal 2016. F-13                 Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts for probable losses on uncollectible accounts receivable resulting from the inability of its customers to make required payments, which is included in bad debt expense.  The Company determines the adequacy of this allowance by regularly reviewing the composition of its accounts receivable aging and evaluating individual customer receivables, considering such customer's financial condition, credit history and current economic conditions. Inventories Inventories are valued at the lower of cost or market using the first-in, first-out method.  The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required.  Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable.  In estimating reserves for obsolescence, the Company primarily evaluates estimates of demand over a 12-month period and provides reserves for inventory on hand in excess of the estimated 12-month demand. Estimates for projected 12-month demand are generally based on the average shipments of the prior three-month period, which are then annualized to adjust for any potential seasonality in the Company's business. The estimated 12-month demand is compared to the Company's most recently developed sales forecast to further reconcile the 12-month demand estimate. Management reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the extent any existing products are being replaced or discontinued. In periods where the Company's production levels are substantially below normal operating capacity, unabsorbed overhead production costs 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 10 to 40 years for buildings and building improvements and 3 to 7 years for machinery and equipment.  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. Senior and Junior Subordinated Convertible Debt The Company separately accounts for the liability and equity components of its senior and junior subordinated convertible debt 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.  Lastly, the Company includes the dilutive effect of the shares of its common stock issuable upon conversion of the outstanding senior and junior subordinated convertible debt in its diluted income per share calculation regardless of whether the market price triggers or other contingent conversion features have been met.  The Company applies the treasury stock method as it has the intent and ability to settle the principal amounts of the senior and junior subordinated convertible debentures in cash.  This method results in incremental dilutive shares when the average market value of the Company's common stock for a reporting period exceeds the conversion prices per share and adjust as dividends are recorded in the future. Upon a de-recognition event, the Company estimates the fair value of the liability component and compares that to the carrying amount in order to calculate the appropriate amount of gain or loss. The remaining amounts paid or issued (in the case of non cash consideration in the form of shares of common stock) are recognized as a reduction of additional paid-in-capital. The fair value of the liability component is estimated using the current comparable borrowing rate for an otherwise identical non-convertible debt instrument. F-14               Defined Benefit Pension Plans The Company maintains defined benefit pension plans, covering certain of its foreign employees. For financial reporting purposes, net periodic pension costs and pension obligations are determined based upon a number of actuarial assumptions, including discount rates for plan obligations, and assumed rates of compensation increases for employees participating in plans. These assumptions are based upon management's judgment and consultation with actuaries, considering all known trends and uncertainties. Contingencies In the ordinary course of business, the Company is exposed to various liabilities as a result of contracts, product liability, customer claims and other matters.  Additionally, the Company is involved in a limited number of legal actions, both as plaintiff and defendant.  Consequently, the Company could incur uninsured liability in any of those actions.  The Company also periodically receives notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting reimbursement for various costs.  With respect to pending legal actions to which the Company is a party and other claims, although the outcomes are generally not determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations.  Litigation and disputes relating to the semiconductor industry are not uncommon, and the Company is, from time to time, subject to such litigation and disputes.  As a result, no assurances can be given with respect to the extent or outcome of any such litigation or disputes in the future. The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it uses the amount that is the low end of such range. Business Combinations All of the Company's business combinations are accounted for at fair value under the acquisition method of accounting. Under the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at fair value as an intangible asset at the acquisition date and amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will be recognized through income tax expense or directly in contributed capital.  The aggregate amount of consideration paid by the Company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date. The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill. The measurement of fair value of assets acquired and liabilities assumed requires significant judgment.  The valuation of intangible assets, in particular, requires that the Company use valuation techniques such as the income approach.  The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates:  revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows.   Goodwill and Other Intangible Assets The Company's intangible assets include goodwill and other intangible assets, which include existing technologies, core and developed technology, in-process research and development, trademarks and trade names, and customer-related intangibles. In-process research and development is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Indefinite-lived intangible assets consist of goodwill and in-process research and development intangible assets that have not yet been placed in service. All other intangible assets are definite-lived intangible assets, including in-process research and development assets that have been placed in service, and are amortized over their respective estimated lives, ranging from 1 to 15 years. The Company engages primarily in the development, manufacture and sale of semiconductor products as well as technology licensing. As a result, the Company concluded there are two reporting units, semiconductor products and technology licensing. F-15       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 impairment review of indefinite-lived intangible assets, including goodwill annually, and more frequently under certain circumstances. Indefinite-lived intangible assets are subjected to this annual impairment test during the fourth quarter of the Company's fiscal year. Under the qualitative indefinite-lived intangible asset impairment assessment standard, management evaluates whether it is more likely than not that the indefinite-lived intangible assets are impaired. If it is determined that it is more likely than not, the Company proceeds with the next step of the impairment test, which compares the fair value of the reporting unit or indefinite-lived intangible asset to its carrying value. If the Company determines through the impairment process that the indefinite-lived intangible asset has been impaired, the Company will record the impairment charge in its results of operation. Through March 31, 2017, the Company has not had impaired goodwill. In the event that facts and circumstances indicate definite-lived intangible assets may be impaired, the Company evaluates the recoverability and estimated useful lives of such assets. If such indicators are present, recoverability is evaluated based on whether the sum of the estimated undiscounted cash flows attributable to the asset (group) in question is less than their carrying value. If less, the Company measures the fair value of the asset (group) and recognizes an impairment loss if the carrying amount of the assets exceeds their respective fair values. 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.  For the past several years the Company has adopted RSUs as its primary equity incentive compensation instrument for employees.  The Company also has employee stock purchase plans for eligible employees. Share-based compensation cost is measured on the grant date based on the fair market value of the Company’s common stock discounted for expected future dividends and is recognized as expense straight-line over the requisite service periods. 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. During fiscal 2017, the Company elected to early adopt ASU 2016-09-Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting (Topic 718). See "Recently Issued Accounting Pronouncements Not Yet Adopted" for additional information on the new guidance. 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 municipal bonds. Concentrations of credit risk with respect to accounts receivable are generally not significant due to the diversity of the Company's customers and geographic sales areas.  The Company 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. F-16                 Distributor advances, included in deferred income on shipments to distributors in the consolidated balance sheets, totaled $203.9 million at March 31, 2017 and $102.9 million at March 31, 2016.  The increase in distributor advances in fiscal 2017 compared to fiscal 2016 resulted primarily from the Company's acquisition of Atmel. 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 products 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 distributors' 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 canceled 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. Business Segments Operating segments are components of an enterprise about which separate financial information is regularly reviewed by the chief operating decision makers ("CODMs") to assess the performance of the component and make decisions about the resources to be allocated to the component. The Company's Chairman and Chief Executive Officer and the Company's President and Chief Operating Officer have been identified as the CODMs as they jointly manage the Company's worldwide consolidated enterprise. Based on the Company's structure and manner in which the Company is managed and decisions are made, the Company's business is made up of two operating segments, semiconductor products and technology licensing. In the semiconductor products segment, the Company designs, develops, manufactures and markets microcontrollers, development tools and analog, interface, mixed signal and timing products. Under the leadership of the CODMs, the Company is structured and organized around standardized roles and responsibilities based on product groups and functional activities. The Company's product groups are responsible for product research, design and development. The Company's functional activities include sales, marketing, manufacturing, information technology, human resources, legal and finance. The Company's product groups have similar products, production processes, types of customers and methods for distribution. In addition, the tools and technologies used in the design and manufacture of the Company's products are shared among the various product groups. The Company's product group leaders, under the direction of the CODMs, define the product roadmaps and team with sales personnel to achieve design wins and revenue and other performance targets. Product group leaders also interact with manufacturing and operational personnel who are responsible for the production, prioritization and planning of the Company's manufacturing capabilities to help ensure the efficiency of the Company's operations and fulfillment of customer requirements. This centralized structure supports a global operating strategy in which the CODMs assess performance and allocate resources based on the Company's consolidated results. Recently Adopted Accounting Pronouncements During the three months ended June 30, 2016, the Company adopted ASU 2015-03-Simplifying the Presentation of Debt Issuance Costs. The new guidance was adopted on a retrospective basis and as a result, debt issuance costs historically included in other assets have been reclassified as a direct deduction from the carrying amount of the associated debt. Related prior period information included on the Company's consolidated balance sheets has been retrospectively adjusted as follows (amounts in thousands). F-17     Other assets Total assets Long-term debt Total liabilities and stockholder's equity As of March 31, 2016 As Reported Adjustments As Adjusted $ $ $ $ 109,025 5,567,515 2,483,037 5,567,515 $ $ $ $ (29,632) $ (29,632) $ (29,632) $ (29,632) $ 79,393 5,537,883 2,453,405 5,537,883 During the three months ended June 30, 2016, the Company elected to early adopt ASU 2016-09-Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies several aspects of the accounting for share-based payment transactions. Under this standard, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. The Company has elected to recognize forfeitures as they occur and the impact of that change in accounting policy has been recorded as a $2.0 million cumulative effect adjustment as an increase to the Company's retained earnings and a decrease to additional paid-in capital as of April 1, 2016. The Company also recorded a cumulative-effect adjustment to retained earnings for the increase of $2.3 million in long-term deferred tax assets related to the forfeiture rate reduction on outstanding share-based payment awards. Additionally, ASU 2016-09 eliminates the requirement to report excess tax benefits and certain tax deficiencies related to share-based payment transactions in additional paid-in capital. In accordance with the new standard, the Company will record excess tax benefits and tax deficiencies as income tax benefit or provision on a prospective basis in its consolidated statements of operations. The standard also eliminates the requirement that excess tax benefits be realized before companies can recognize them. Accordingly, the Company has recorded a $47.2 million cumulative-effect adjustment to its retained earnings and long-term deferred tax assets as of April 1, 2016 for previously unrecognized excess tax benefits. ASU 2016-09 also requires excess tax benefits to be reported as operating activities in the statement of cash flows rather than as a financing activity. The Company has elected to apply the change in cash flow classification on a prospective basis and prior periods were not retrospectively adjusted. Recently Issued Accounting Pronouncements Not Yet Adopted In March 2017, the FASB issued ASU 2017-07-Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendment will require the employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost will be presented separately in the income statement from the service cost component outside of income from operations. The amendment is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period (in the first interim period) for which financial statements have not yet been issued. The Company is currently evaluating the impact that the adoption of ASU 2017-07 may have on its consolidated financial statements. In January 2017, the FASB issued ASU 2017-04-Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendment is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company does not expect this standard to have an impact on its consolidated financial statements. In June 2016, the FASB issued ASU 2016-13-Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.  This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which required waiting to recognize a loss until it is probable of having been incurred. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually and can include forecasted information. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019, and permits early adoption, but not before December 15, 2018. The standard is to be applied using a modified retrospective approach. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements. F-18   In October 2016, the FASB issued ASU 2016-16-Intra-Entity Transfers of Assets Other Than Inventory. This standard addresses the recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset other than inventory.  Prior to the adoption of ASU 2016-16, a company will defer for financial reporting purposes the income tax expense resulting from an intra-entity asset transfer, including the taxes currently payable or paid. Upon adoption of ASU 2016-16, a company will recognize current and deferred income taxes that result from such transfers in the period in which they occur. ASU 2016-16 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and is applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements but expects to recognize its previously deferred tax related to intra-entity transfers upon adoption of ASU 2016-16 as of April 1, 2018 with a cumulative-effect reduction to retained earnings. In November 2016, the FASB issued ASU 2016-18-Statement of Cash Flows: Restricted Cash. This standard requires that the statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard is to be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements. In February 2016, the FASB issued ASU 2016-02-Leases. This standard requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The standard is to be applied using the modified retrospective approach to all periods presented. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements. In January 2016, the FASB issued ASU 2016-01-Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements. In July 2015, the FASB issued ASU 2015-11-Simplifying the Measurement of Inventory. This standard requires that entities measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. The Company does not expect this standard to have a material impact on its consolidated financial statements. In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under US GAAP.  In August 2015, the FASB issued ASU 2015-14-Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard by one year to December 15, 2017, for annual and interim reporting periods beginning after that date. In accordance with the delay, the new standard will be effective for the Company beginning no later than April 1, 2018.  Early adoption is permitted, but not before the original effective date of December 15, 2016.  The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. In March 2016, the FASB issued ASU 2016-08-Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10-Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations. In May 2016, the FASB issued ASU 2016-12-Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which addresses implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group. As described in the Company's significant accounting policies, the Company currently defers the revenue and cost of sales on shipments to distributors until the distributor sells the product to their end customer. Upon adoption of ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, the Company will no longer defer revenue until sale by the distributor to the end customer, but F-19 rather, will be required to estimate the effects of returns and allowances provided to distributors and record revenue at the time of sale to the distributor. The Company is currently evaluating the impact that the adoption of the standards will have on its consolidated financial statements. The Company currently expects to adopt the standard under the full retrospective method. The final adoption method will depend on the results of the Company's final assessment, which is expected to be completed later in fiscal 2018. Note 2. Business Acquisitions Acquisition of Atmel On April 4, 2016, the Company acquired Atmel, a publicly traded company based in San Jose, California. The Company paid an aggregate of approximately $2.98 billion in cash, issued an aggregate of 10.1 million shares of its common stock to Atmel stockholders valued at $486.1 million based on the closing price of the Company's common stock on April 4, 2016 and incurred transaction and other fees of approximately $14.9 million. The total consideration transferred in the acquisition, including approximately $7.5 million of non-cash consideration for the exchange of certain share-based payment awards of Atmel for stock awards of the Company, was approximately $3.47 billion. In addition to the consideration transferred, the Company recognized in its consolidated financial statements $653.1 million in liabilities of Atmel consisting of debt, taxes payable and deferred, pension obligations, restructuring, and contingent and other liabilities. The Company financed the cash portion of the purchase price using approximately $2.04 billion of cash held by certain of its foreign subsidiaries and approximately $0.94 billion from additional amounts borrowed under its existing credit agreement. As a result of the acquisition, Atmel became a wholly owned subsidiary of the Company. Atmel is a worldwide leader in the design and manufacture of microcontrollers, capacitive touch solutions, advanced logic, mixed-signal, nonvolatile memory and radio frequency components. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market. The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Atmel have been included in the Company's consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Atmel's net tangible assets and intangible assets based on their estimated fair values as of April 4, 2016.  The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's semiconductor products reporting segment.  None of the goodwill related to the Atmel acquisition is deductible for tax purposes.  The Company retained independent third-party appraisers to assist management in its valuation. The table below represents the final allocation of the purchase price, including adjustments to the purchase price allocation from the previously reported figures at June 30, 2016, to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (amounts in thousands). F-20 Assets acquired Cash and cash equivalents Accounts receivable Inventories Prepaid expenses and other current assets Assets held for sale Property, plant and equipment Goodwill Purchased intangible assets Long-term deferred tax assets Other assets Total assets acquired Liabilities assumed Accounts payable Other current liabilities Long-term line of credit Deferred tax liabilities Long-term income tax payable Other long-term liabilities Total liabilities assumed Purchase price allocated Purchased Intangible Assets Core and developed technology In-process research and development Customer-related Backlog Other Total purchased intangible assets As of June 30, 2016 Adjustments March 31, 2017 $ $ 230,266 135,427 333,208 28,360 24,394 129,587 1,378,317 1,880,245 49,466 5,948 4,195,218 (55,686) (119,152) (192,000) (74,334) (174,380) (106,688) (722,240) 3,472,978 $ — $ 5,932 1,955 — 7,612 297 (91,946) 8,147 (2,766) 1,587 (69,182) — (1,803) — 46,782 59,203 (35,000) 69,182 $ — $ 230,266 141,359 335,163 28,360 32,006 129,884 1,286,371 1,888,392 46,700 7,535 4,126,036 (55,686) (120,955) (192,000) (27,552) (115,177) (141,688) (653,058) 3,472,978 Weighted Average Useful Life (in years) 11 — 6 1 5 April 4, 2016 (in thousands) 1,074,987 140,700 630,600 40,300 1,805 1,888,392 $ $ Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles, acquisition-date backlog and other intangible assets. The estimated fair values of the core and developed technology and in-process research and development were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized in a manner based on the expected cash flows used in the initial determination of fair value. In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Customer-related intangible assets consist of Atmel's contractual relationships and customer loyalty related to its distributor and end-customer relationships, and the fair values of the customer- related intangibles were determined based on Atmel's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from Atmel's historical customer information.  Customer relationships are being amortized in a manner based on the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by Atmel at the acquisition date, and the preliminary fair values were based on the estimated profit associated with those orders. Backlog related assets have a one year useful life and are being amortized on a straight-line basis over that period. The total weighted average amortization period of intangible assets acquired as a result of the Atmel transaction is 9 years. Amortization expense associated with acquired intangible assets is not deductible for tax purposes.  Thus, approximately $178.1 million was established as a net deferred tax liability for the future amortization of the intangible assets. F-21 The amount of continuing Atmel net sales included in the Company's consolidated statements of operations for the year ended March 31, 2017 was approximately $1,062.6 million. The amount of Atmel's net loss from continuing operations included in the Company's consolidated statements of operations was $314.3 million for the year ended March 31, 2017. The following unaudited pro-forma consolidated results of operations for the years ended March 31, 2017 and 2016 assume the closing of the Atmel acquisition occurred as of April 1, 2015. The pro-forma adjustments are mainly comprised of acquired inventory fair value costs, amortization of purchased intangible assets, distributor revenue recognition adjustments and share-based compensation due to accelerated vesting of outstanding equity awards. The pro-forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2015 or of results that may occur in the future (amounts in thousands except per share data): Net sales Net income (loss) from continuing operations Basic net income (loss) per common share Diluted net income (loss) per common share Acquisition of Micrel Year Ended Ended March 31, 2017 2016 $ $ $ $ 3,494 337 1.55 1.43 $ $ $ $ 3,159 (384) (1.80) (1.80) On August 3, 2015, the Company acquired Micrel, Incorporated (Micrel), a publicly traded company based in San Jose, California. The Company paid an aggregate of approximately $430.0 million in cash and issued an aggregate of 8.6 million shares of its common stock to Micrel shareholders. The number of shares issued in the transaction was subsequently repurchased by the Company in the open market during the fiscal year ended March 31, 2016. The total consideration transferred in the acquisition, including approximately $4.1 million of non cash consideration for the exchange of certain share- based payment awards of Micrel for stock awards of the Company, and approximately $13.1 million of cash consideration for the payout of vested employee stock awards, was approximately $816.2 million. The Company financed the cash portion of the purchase price using amounts borrowed under its credit agreement. As a result of the acquisition, Micrel became a wholly owned subsidiary of the Company. Micrel's business is to design, develop, manufacture and market a range of high- performance analog, power and mixed-signal integrated circuits. Micrel's products address a wide range of end markets including industrial, automotive and communications. Micrel also manufactures custom analog and mixed-signal circuits and provides wafer foundry services for customers which produce electronic systems utilizing semiconductor manufacturing processes as well as micro-electrical mechanical system technologies. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market. The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Micrel have been included in the Company's consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Micrel's net tangible assets and intangible assets based on their estimated fair values as of August 3, 2015.  The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's semiconductor products reporting segment.  None of the goodwill related to the Micrel acquisition is deductible for tax purposes.  The Company retained an independent third-party appraiser to assist management in its valuation. F-22 The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values as of August 3, 2015, as well as the associated estimated useful lives of the acquired intangible assets at that date. The purchase price allocation was finalized as of June 30, 2016 (amounts in thousands): Assets acquired Cash and cash equivalents Accounts receivable, net Inventories Prepaid expenses and other current assets Property, plant and equipment, net Goodwill Purchased intangible assets Other assets Total assets acquired Liabilities assumed Accounts payable Other current liabilities Deferred tax liabilities Long-term income tax payable Other long-term liabilities Total liabilities assumed Purchase price allocated Purchased Intangible Assets Core and developed technology In-process research and development Customer-related Backlog Total purchased intangible assets $ $ 99,196 14,096 73,468 10,652 38,491 440,978 273,500 4,268 954,649 (11,068) (31,552) (88,035) (7,637) (127) (138,419) 816,230 Weighted Average Useful Life (in years) 10 — 5 1 $ $ August 3, 2015 (in thousands) 175,800 21,000 71,100 5,600 273,500 Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles and acquisition-date backlog. The estimated fair values of the core and developed technology and in-process research and development were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized commensurate with the expected cash flows used in the initial determination of fair value. In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Customer-related intangible assets consist of Micrel's contractual relationships and customer loyalty related to its distributor and end-customer relationships, and the fair values of the customer-related intangibles were determined based on Micrel's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from Micrel's historical customer information.  Customer relationships are being amortized in a manner consistent with the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by Micrel at the acquisition date, and the preliminary fair values were based on the estimated profit associated with those orders. Backlog related assets are being recognized commensurate with recognition of the revenue for the orders on which the backlog intangible assets were determined.  Amortization expense associated with acquired intangible assets is not deductible for tax purposes.  Thus, approximately $99.7 million was established as a net deferred tax liability for the future amortization of the intangible assets offset by $11.4 million of net deferred tax assets. F-23 Acquisition of ISSC On July 17, 2014, the Company acquired an 83.5% interest in Taiwan-based ISSC, a leading provider of low power Bluetooth and advanced wireless solutions for the Internet of Things (IoT) market. The Company acquired the 83.5% ownership interest through a tender offer process. After the completion of the tender offer, the Company continued to acquire additional shares of ISSC, and as of June 30, 2015, the Company had completed the acquisition of 100% of the outstanding shares of ISSC. The noncontrolling interest in the Company's net income from ISSC for fiscal 2016 and fiscal 2015 of $0.2 million and $3.7 million, respectively, has been excluded from net income attributable to the Company in the Company's consolidated statements of income. The acquisition was accounted for under the acquisition method of accounting. The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values as of July 17, 2014 as well as the associated estimated useful lives of the acquired intangible assets at that date (amounts in thousands): Assets acquired Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Property, plant and equipment, net Goodwill Purchased intangible assets (1) Other assets Total assets acquired Liabilities assumed Accounts payable Other current liabilities Long-term income tax payable Deferred tax liability Other long-term liabilities Total liabilities assumed Net assets acquired including noncontrolling interest Less: noncontrolling interest Net assets acquired (1) Purchased Intangible Assets Core/developed technology In-process technology Customer-related Backlog Total Acquisition of Supertex $ $ $ $ 15,120 27,063 8,792 16,542 2,501 2,637 154,788 147,800 1,370 376,613 (9,860) (16,535) (4,791) (25,126) (245) (56,557) 320,056 (52,467) 267,589 July 17, 2014 (in thousands) 68,900 27,200 51,100 600 147,800 Useful Life (in years) 10 10 3 1 On April 1, 2014, the Company acquired Supertex Inc., a publicly traded company based in Sunnyvale, California. Supertex is a leader in high voltage analog and mixed signal technologies, with a strong position in the medical, lighting and industrial control markets. F-24 The acquisition was accounted for under the acquisition method of accounting. The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values as of April 1, 2014 as well as the associated estimated useful lives of the acquired intangible assets at that date (amounts in thousands): Assets acquired Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses Deferred tax assets Other current assets Property, plant and equipment, net Goodwill Purchased intangible assets (1) Other assets Total assets acquired Liabilities assumed Accounts payable Accrued liabilities Long-term income tax payable Deferred tax liability Total liabilities assumed Net assets acquired (1) Purchased Intangible Assets Core/developed technology In-process technology Customer-related Backlog Total $ $ $ $ 14,790 140,984 7,047 27,630 1,493 2,456 12,625 15,679 143,160 89,600 325 455,789 (8,481) (19,224) (3,796) (32,511) (64,012) 391,777 April 1, 2014 (in thousands) 68,900 1,900 17,700 1,100 89,600 Useful Life (in years) 10 10 2 1 Note 3. Special Charges and Other, Net The following table summarizes activity included in the "special charges and other, net" caption on the Company's consolidated statements of operations (amounts in thousands): Restructuring Employee separation costs Impairment charges Exit costs Other Legal settlement costs Insurance settlement Total For The Years Ended March 31, 2017 2016 2015 $ 39,183 $ 9,577 $ 2,333 12,579 44,040 2,806 — — $ 98,608 $ F-25 — 686 900 4,294 (11,500) 3,957 — — 507 — — $ 2,840   The Company's restructuring activities result from its recent business combinations, including the acquisitions of Atmel and Micrel. These activities include workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. In connection with these activities the Company has incurred employee separation costs, contract exit costs, other operating expenses and intangible asset impairment losses. The impairment losses were recognized as a result of changes in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets. Exit costs for fiscal 2017 were $44.0 million, of which $39.0 million was recorded in the fourth quarter. The following is a rollforward of accrued restructuring charges for fiscal 2017 and fiscal 2016 (amounts in thousands): Employee Separation Costs Exit Costs Total Balance at March 31, 2015 - Restructuring Accrual $ 483 $ Charges Payments Balance at March 31, 2016 - Restructuring Accrual Additions due to Atmel acquisition Charges Payments Non-cash - Other Changes in foreign exchange rates Balance at March 31, 2017 - Restructuring Accrual $ 9,577 (10,002) 58 6,277 39,183 (38,893) (479) (672) 5,474 — $ 686 (686) — — 44,040 (6,958) (2,331) — 483 10,263 (10,688) 58 6,277 83,223 (45,851) (2,810) (672) 40,225 $ 34,751 $ The restructuring liability of $5.5 million and $34.8 million is included in accrued liabilities and other long-term liabilities, respectively, on the Company's consolidated balance sheets as of March 31, 2017. Note 4. Investments The Company's investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to the Company's investment guidelines and market conditions.  The following is a summary of available-for-sale securities at March 31, 2017 (amounts in thousands): Government agency bonds Municipal bonds - tax exempt Municipal bonds Corporate bonds and debt Marketable equity securities Total Adjusted Cost $ 227,089 $ 55,289 10,000 207,888 707 $ 500,973 $ Available-for-sale Securities Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value 3 — 43 53 879 978 $ $ (227) $ (10) — (169) — (406) $ 226,865 55,279 10,043 207,772 1,586 501,545 The following is a summary of available-for-sale securities at March 31, 2016 (amounts in thousands): Government agency bonds Corporate bonds and debt Marketable equity securities Total Adjusted Cost $ $ 468,290 1,000 2,195 471,485 $ $ Available-for-sale Securities Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value 439 — 8 447 $ $ (99) $ — — (99) $ 468,630 1,000 2,203 471,833 F-26       At March 31, 2017, the Company's available-for-sale securities are presented on the consolidated balance sheets as short- term investments of $394.1 million and long-term investments of $107.5 million.  At March 31, 2016, the Company's available- for-sale securities are presented on the consolidated balance sheets as short-term investments of $353.3 million and long-term investments of $118.5 million. The Company sold available-for-sale investments for proceeds of $470.6 million, $1,501.5 million and $273.9 million during the years ended March 31, 2017, 2016 and 2015, respectively. The Company sold available-for-sale investments during the first quarter of fiscal 2017 and fourth quarter of fiscal 2016 to finance a portion of the purchase price of its Atmel acquisition which closed on April 4, 2016. The Company had no material net realized gains during the year ended March 31, 2017 and $13.7 million and $18.5 million from sales of available-for-sale marketable equity and debt securities during the years ended March 31, 2016 and 2015, respectively. The Company determines the cost of available-for-sale debt securities sold on a FIFO basis at the individual security level for sales from multiple lots. For sales of marketable equity securities, the Company uses an average cost basis at the individual security level. Gains and losses recognized in earnings are credited or charged to other income (expense) on the consolidated statements of income. The following tables show all investments in an unrealized loss position for which an other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position (amounts in thousands): Less than 12 Months 12 Months or Greater Total March 31, 2017 Government agency bonds Municipal bonds - tax exempt Corporate bonds and debt Total Fair Value $ 196,875 55,279 132,820 $ 384,974 $ $ (227) $ (10) (169) (406) $ — $ — — — $ Unrealized Loss Fair Value Unrealized Loss Fair Value — $ 196,875 55,279 — — 132,820 — $ 384,974 Unrealized Loss $ $ (227) (10) (169) (406) Less than 12 Months 12 Months or Greater Total March 31, 2016 Government agency bonds Fair Value $ 148,562 Unrealized Loss Fair Value Unrealized Loss $ (99) $ — $ Fair Value — $ 148,562 Unrealized Loss $ (99) Management does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of March 31, 2017 and the Company's intent is to hold these investments until these assets are no longer impaired.   The amortized cost and estimated fair value of the available-for-sale securities at March 31, 2017, by contractual maturity, excluding marketable equity securities of $1.6 million, which have no contractual maturity, are shown below (amounts in thousands). Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for current operations. Available-for-sale Due in one year or less Due after one year and through five years Due after five years and through ten years Due after ten years Total Adjusted Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ 342,673 $ 157,594 — — $ 500,267 $ F-27 15 84 — — 99 $ $ (188) $ (219) — — (407) $ 342,500 157,459 — — 499,959   The amortized cost and estimated fair value of the available-for-sale securities at March 31, 2016, by maturity, excluding marketable equity securities of $2.2 million, which have no contractual maturity, are shown below (amounts in thousands).  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 Total Note 5. Fair Value Measurements Adjusted Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ 41,078 $ 5 $ 428,212 — — 434 — — $ 469,290 $ 439 $ (5) $ (94) — — (99) $ 41,078 428,552 — — 469,630 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: Level 1- Level 2- Level 3- Observable inputs such as quoted prices in active markets; Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Marketable Debt Instruments Marketable debt instruments include instruments such as corporate bonds and debt, government agency bonds, bank deposits, municipal bonds, and money market mutual funds. When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroborates non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. F-28     Assets Measured at Fair Value on a Recurring Basis Assets measured at fair value on a recurring basis at March 31, 2017 are as follows (amounts in thousands): Assets Cash and cash equivalents: Money market mutual funds Deposit accounts Short-term investments: Marketable equity securities Corporate bonds and debt Government agency bonds Municipal bonds - tax exempt Municipal bonds Long-term investments: Corporate bonds and debt Government agency bonds Quoted Prices in Active Markets for  Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) Total Balance $ 343,815 $ — $ — 564,869 1,586 — — — — — — — 165,207 161,973 55,279 10,043 42,565 64,892 343,815 564,869 1,586 165,207 161,973 55,279 10,043 42,565 64,892 Total assets measured at fair value $ 345,401 $ 1,064,828 $ 1,410,229 Assets measured at fair value on a recurring basis at March 31, 2016 are as follows (amounts in thousands): Assets Cash and cash equivalents: Money market mutual funds Deposit accounts Short-term investments: Marketable equity securities Corporate bonds and debt Government agency bonds Long-term investments: Government agency bonds Quoted Prices in Active Markets for Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) Total Balance $ 1,787,446 $ — $ 1,787,446 — 305,305 305,305 2,203 — — — — 1,000 2,203 1,000 350,081 350,081 118,549 118,549 Total assets measured at fair value $ 1,789,649 $ 774,935 $ 2,564,584 There were no transfers between Level 1 and Level 2 during fiscal 2017 or fiscal 2016. F-29        There were no assets measured on a recurring basis during fiscal 2017 using significant unobservable inputs (Level 3). 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, 2016 (amounts in thousands): Year ended March 31, 2016 Balance at March 31, 2015 Total gains (losses) (realized): Included in earnings Purchases, sales, issuances, and settlements, net Transfers out of Level 3 Balance at March 31, 2016 Auction Rate Securities Corporate Debt Total Gains (Losses) $ 9,825 $ 6,190 $ — 2,780 (12,605) — — $ $ (3,995) — (2,195) — $ (1,215) — — (1,215) Transfers into or out of Level 3 are made if the inputs used in the financial models measuring the fair values of the assets became unobservable or observable, respectively, in the current marketplace. During the year ended March 31, 2016, the Company transferred $2.2 million of corporate debt assets out of Level 3 as the inputs used to value these assets became observable in the current marketplace and were classified as Level 1 as of March 31, 2017 and 2016. This transfer was effective on October 26, 2015. During the fourth quarter of fiscal 2016, the Company sold its ARS for proceeds of $12.6 million. At March 31, 2015, the Company's ARS for which auctions were unsuccessful were made up of securities related to the insurance industry valued at $9.8 million with a par value of $22.4 million. During the period the Company held the ARS, the Company estimated the fair value of its ARS, which were classified as Level 3 securities, 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 significant unobservable inputs used in the fair value measurement of the ARS were estimated risk free discount rates, liquidity risk premium, and the liquidity horizon. The risk free discount rate applied to these securities was 2.0% to 2.5% adjusted for the liquidity risk premium which ranged from 9.1% to 29.5%. The anticipated liquidity horizon ranged from 7 to 10 years. Gains and losses recognized in earnings are credited or charged to other income (expense) on the consolidated statements of income. Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis The Company's non-marketable equity, cost method investments, certain acquired liabilities and non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment, are recorded at fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.   The Company's non-marketable and cost method investments are monitored on a quarterly basis for impairment charges.  The fair values of these investments have been determined as Level 3 fair value measurements because the valuations use unobservable inputs that require management's judgment due to the absence of quoted market prices. There were no impairment charges recognized on these investments during the years ended March 31, 2017, 2016 and 2015 . These investments are included in other assets on the consolidated balance sheets. The fair value measurements related to the Company's non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment are based on available market prices at the measurement date based on transactions of similar assets and third-party independent appraisals, less costs to sell where appropriate. The Company classifies these measurements as Level 2. F-30   Note 6. Fair Value of Financial Instruments The carrying amount of cash equivalents approximates fair value because their maturity is less than three months. Management believes the carrying amount of the equity and cost-method investments materially approximated fair value at March 31, 2017 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair value measurements. The fair values of amounts borrowed under the Company's line of credit are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements and approximate carrying value, excluding debt issuance costs. There were no outstanding borrowings under the revolving credit facility as of March 31, 2017. Based on the borrowing rates available to the Company for bank loans with similar terms and average maturities, the fair value of the Company's line of credit borrowings at March 31, 2016 approximated the carrying value and are considered Level 2 in the fair value hierarchy described in Note 5. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy.   Fair Value of Subordinated Convertible Debt The Company measures the fair value of its senior and junior subordinated convertible debt for disclosure purposes. These fair values are based on observable market prices for these debts, which are traded in less active markets and are therefore classified as a Level 2 fair value measurement. The following table shows the carrying amounts and fair values of the Company’s senior and junior subordinated convertible debt as of March 31, 2017 and 2016 (amounts in thousands). As of March 31, 2017 and March 31, 2016, the carrying amounts of the Company's senior and junior subordinated convertible debt have been reduced by debt issuances costs in the aggregate of $38.3 million and $20.8 million, respectively. See Note 11 for more information regarding the convertible debt. March 31, 2017 2016 2017 Senior Debt 2015 Senior Debt 2017 Junior Debt 2007 Junior Debt Carrying Amount 1,384,914 1,261,787 262,298 49,952 $ $ $ $ Fair Value $ $ $ $ 2,106,225 2,481,708 586,609 445,142 $ $ $ $ Note 7. Other Financial Statement Details Accounts Receivable Accounts receivable consists of the following (amounts in thousands): Carrying Amount Fair Value — 1,762,088 — 1,143,117 — $ $ — $ $ 1,216,313 193,936 Trade accounts receivable Other  Total accounts receivable, gross Less allowance for doubtful accounts  Total accounts receivable, net March 31, 2017 2016 $ $ 473,238 $ 7,219 480,457 2,084 478,373 $ 289,013 3,710 292,723 2,540 290,183 F-31     Inventories The components of inventories consist of the following (amounts in thousands): Raw materials Work in process Finished goods Total inventories March 31, 2017 2016 $ $ 14,430 268,281 134,491 417,202 $ $ 12,179 208,283 86,353 306,815 Inventories are valued at the lower of cost or market using the first-in, first-out method. 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. 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 Total property, plant and equipment, gross Less accumulated depreciation and amortization Total property, plant and equipment, net March 31, 2017 2016 $ $ 73,447 $ 499,668 1,774,920 104,318 2,452,353 1,769,015 683,338 $ 63,907 458,379 1,645,617 99,370 2,267,273 1,657,877 609,396 Depreciation expense attributed to property, plant and equipment was $122.9 million, $103.9 million and $97.3 million for the fiscal years ending March 31, 2017, 2016 and 2015, respectively. During the quarter ended December 31, 2016, the Company began to actively market a 6-inch wafer fabrication facility it acquired as part of its acquisition of Micrel in August 2015. Subsequent to March 31, 2017, the Company completed the sale of these assets for proceeds of $10.0 million. As of March 31, 2017, these assets consisting of property, plant and equipment were presented as held for sale in the Company's consolidated financial statements. Note 8. Discontinued Operations Discontinued operations include the mobile touch operations that the Company acquired as part of its acquisition of Atmel. The mobile touch assets had been marketed for sale since the Company's acquisition of Atmel on April 4, 2016 based on management's decision that it was not a strategic fit for the Company's product portfolio. On November 10, 2016, the Company completed the sale of the mobile touch assets to Solomon Systech (Limited) International, a Hong Kong based semiconductor company. The transaction included the sale of certain semiconductor products, equipment, customer list, backlog, and a license to certain other intellectual property and patents related to the Company's mobile touch product line. The Company also agreed to provide certain transition services to Solomon Systech, which were substantially complete as of March 31, 2017. For financial statement purposes, the results of operations for this discontinued business have been segregated from those of the continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. F-32   The results of discontinued operations for the year ended March 31, 2017 are as follows (amounts in thousands): Net sales Cost of sales Operating expenses Gain on Sale Income tax benefit Net loss from discontinued operations Note 9. Intangible Assets and Goodwill Intangible assets consist of the following (amounts in thousands): Core and developed technology Customer-related Trademarks and trade names In-process research and development Distribution rights Other Total Core and developed technology Customer-related Trademarks and trade names In-process technology research and development Distribution rights Total March 31, 2017 18,334 15,841 10,650 643 (1,561) (5,953) $ $ Gross Amount $ 1,932,329 716,945 11,700 38,511 5,578 1,449 $ 2,706,512 March 31, 2017 Accumulated Amortization Net Amount (419,468) $ 1,512,861 $ 593,329 (123,616) 2,064 (9,636) 38,511 — 232 (5,346) 1,095 (354) (558,420) $ 2,148,092 $ Gross Amount $ 724,883 278,542 11,700 54,308 5,580 $ 1,075,013 March 31, 2016 Accumulated Amortization Net Amount 469,423 $ 78,211 4,129 54,308 278 606,349 (255,460) $ (200,331) (7,571) — (5,302) (468,664) $ $ The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years.  During the year ended March 31, 2017, as a result of the acquisition of Atmel, the Company acquired $1,215.7 million of core and developed technology which has a weighted average amortization period of 11 years, $630.6 million of customer-related intangible assets which have a weighted average amortization period of 6 years, $40.3 million of intangible assets related to backlog with an amortization period of 1 year and $1.8 million of other intangible assets which have a weighted average amortization period of 5 years. In fiscal 2017, $156.7 million of in-process research and development intangible assets reached technological feasibility and was reclassified as core and developed technology and began being amortized over the respective estimated useful lives. The following is an expected amortization schedule for the intangible assets for fiscal 2018 through fiscal 2022, absent any future acquisitions or impairment charges (amounts in thousands): Fiscal Year Ending March 31, 2018 2019 2020 2021 2022 Projected Amortization Expense $490,382 361,988 313,288 256,930 189,881 F-33 Amortization expense attributed to intangible assets was $346.3 million, $179.3 million and $181.0 million for fiscal years 2017, 2016 and 2015, respectively.  In fiscal 2017, $4.0 million was charged to cost of sales and $342.3 million was charged to operating expenses.  In fiscal 2016, $3.6 million was charged to cost of sales and $175.7 million was charged to operating expenses.  In fiscal 2015, $3.8 million was charged to cost of sales and $177.2 million was charged to operating expenses. During fiscal 2017, the Company recognized $11.9 million of intangible asset impairment changes, primarily as a result of the acquisition of Atmel. The impairment losses were recognized as a result of changes in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets. The Company recognized impairment charges of $0.6 million and $1.9 million in fiscal 2016 and fiscal 2015, respectively. Goodwill activity for fiscal 2017 and fiscal 2016 was as follows (amounts in thousands): Balance at March 31, 2015 Additions due to the acquisition of Micrel Adjustments due to the acquisition of ISSC Balance at March 31, 2016 Additions due to the acquisition of Atmel Adjustments due to the acquisition of Micrel Balance at March 31, 2017 Semiconductor Products Reporting Unit 552,071 $ 440,992 Technology Licensing Reporting Unit 19,200 $ — 389 993,452 1,286,371 (14) $ 2,279,809 $ — 19,200 — — 19,200 At March 31, 2017, the Company applied a qualitative goodwill impairment test to its two reporting units, concluding it was not more likely than not that goodwill was impaired. Through March 31, 2017, the Company has never recorded an impairment charge against its goodwill balance. Note 10. Income Taxes The income tax provision consists of the following (amounts in thousands): Year Ended March 31, 2016 2015 2017 Pretax Income: U.S. Foreign Current expense (benefit): U.S. Federal State Foreign Total current Deferred expense (benefit): U.S. Federal State Foreign Total deferred Total $ (279,304) $ 369,091 89,787 $ $ (75,515) $ 356,808 281,293 $ (944) 346,851 345,907 $ $ 21,287 1,004 23,792 46,083 $ $ (3,966) $ (188) 21,947 17,793 $ $ (114,743) $ (5,409) (6,736) (126,888) (80,805) $ $ (42,207) $ (1,990) (16,228) (60,425) (42,632) $ (3,185) (24) 16,602 13,393 (22,641) (1,562) (8,608) (32,811) (19,418) The tax benefit associated with the Company's equity incentive plans reduced taxes currently payable by $2.4 million, $0.8 million and $1.2 million for the years ended March 31, 2017, 2016 and 2015, respectively.  These amounts were credited to tax expense in fiscal year 2017 and to additional paid-in capital in fiscal years 2015 and 2016. F-34         The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to income before income taxes.  The sources and tax effects of the differences in the total income tax provision are as follows (amounts in thousands): Computed expected income tax provision State income taxes, net of federal benefits Research and development tax credits - current year Research and development tax credits - prior years Foreign income taxed at lower than the federal rate Increases related to current and prior year tax positions Decreases related to prior year tax positions (1) Withholding taxes Change in valuation allowance Intercompany prepaid tax asset amortization Share-based compensation Other Total Year Ended March 31, 2016 2017 $ $ $ 31,425 (4,609) (12,852) — (105,069) 53,695 (36,297) 5,643 1,814 7,931 (24,998) 2,512 (80,805) $ $ 98,453 (1,246) (13,542) (2,511) (114,497) 14,462 (12,103) 5,970 (2,482) (15,493) — 357 (42,632) $ 2015 121,067 (20) (9,703) (1,789) (106,939) 19,769 (33,100) 5,218 (14,286) (1,089) — 1,454 (19,418) (1) The release of prior year tax positions during fiscal 2017 increased each of the basic and diluted net income per common share by $0.17 and $0.15, respectively. The release of prior year tax positions during fiscal 2016 increased the basic and diluted net income per common share by $0.06. The release of prior year tax positions during fiscal 2015 increased each of the basic and diluted net income per common share by $0.16 and $0.15, respectively. The foreign tax rate differential benefit primarily relates to the Company's operations in Thailand, Cayman and Ireland. The Company's Thailand manufacturing operations are currently subject to 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, however, the Company actively seeks to obtain new tax holidays. 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 $25.3 million, $6.0 million and $12.4 million in fiscal 2017, 2016 and 2015, respectively. No U.S. income taxes have been provided on the unremitted foreign earnings of approximately $4.3 billion as of March 31, 2017, with the exception of the pre-acquisition earnings of Supertex and SMSC, since the Company has the ability and intent to permanently reinvest these amounts. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable. During the year ended March 31, 2017, the Company settled open tax positions related to the examination of fiscal years 2012 and 2011 by the U.S. Internal Revenue Service (IRS), fiscal years 2013, 2012, 2011 and 2010 by the German tax authorities, and fiscal years 2014, 2013 and 2012 by the French tax authorities.  In addition, the Company benefited from the expiration of the statute of limitations and other releases related to previously accrued tax reserves.  The total tax benefit associated with these items resulted in a reduction of income tax provision of approximately $36.3 million and a decrease in the effective tax rate of 40.4% in fiscal 2017. F-35 The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and deferred tax liabilities are as follows (amounts in thousands): Deferred tax assets: Deferred income on shipments to distributors Inventory valuation Net operating loss carryforward Capital loss carryforward Share-based compensation Income tax credits Property, plant and equipment Accrued expenses and other Gross deferred tax assets Valuation allowances Deferred tax assets, net of valuation allowances Deferred tax liabilities: Convertible debt Intangible assets Other Deferred tax liabilities Net deferred tax liability Reported as: Non-current deferred tax assets Non-current deferred tax liability Net deferred tax liability March 31, 2017 2016 $ 55,674 14,608 91,606 12,927 42,547 243,049 59,700 110,347 630,458 (210,120) 420,338 (606,674) (147,543) (6,296) (760,513) (340,175) $ 34,830 12,082 63,209 5,707 31,410 100,294 16,262 37,292 301,086 (161,834) 139,252 (496,626) (20,597) (6,416) (523,639) (384,387) $ 68,870 (409,045) (340,175) $ 14,831 (399,218) (384,387) $ $ $ $ In assessing whether it is more likely than not that deferred tax assets will be realized, the Company considers all available evidence, both positive and negative, including its recent cumulative earnings experience and expectations of future available taxable income of the appropriate character by taxing jurisdiction, tax attribute carryback and carryforward periods available to them for tax reporting purposes, and prudent and feasible tax planning strategies. The Company had federal, state and foreign NOL carryforwards with an estimated tax effect of $266.6 million available at March 31, 2017.  The federal and state NOL carryforwards expire at various times between 2017 and 2036.  The Company believes that it is more likely than not that the benefit from certain foreign and state NOL carryforwards will not be realized.  In recognition of this risk, at March 31, 2017, the Company has provided a valuation allowance of $72.6 million.  The Company also has state tax credits with an estimated tax effect of $103.1 million available at March 31, 2017.  These state tax credits expire at various times between 2017 and 2036.  The Company believes that it is more likely than not that the full benefit from these state tax credits will not be realized, and therefore has provided a valuation allowance of $71.0 million.  The Company has capital loss carryforwards with an estimated tax effect of $12.9 million available at March 31, 2017. These capital loss carryforwards begin to expire in 2020. The Company believes that it is more likely than not that the full benefit from these capital losses will not be realized, and therefore has provided a valuation allowance of $12.9 million. The Company had U.S foreign tax credits with an estimated tax effect of $47.7 million that expire at various times between 2017 and 2026.  The Company believes it is more likely than not that the benefit from these credits will not be fully realized and has provided a valuation allowance of $27.6 million.  At March 31, 2017, the Company had credits for increasing research activity in the amount of $128.5 million that expire at various times between 2017 and 2036. At March 31, 2017, the Company had $5.8 million of alternative minimum tax credits that do not expire. The Company had refundable foreign tax credits of $41.3 million available at March 31, 2017. In addition, the Company had $19.9 million of withholding tax credits that expire at various times between 2022 and 2024 in foreign jurisdictions. The Company believes it is more likely than not that the benefit from these credits will not be fully realized and has provided a valuation allowance of $19.9 million. F-36   During the year ended March 31, 2016, the H.R. 2029 "Protecting Americans from Tax Hikes Act of 2015" was signed into law which extended certain business tax provisions through December 31, 2019, including IRC section 954(c)(6) dealing with the application of Subpart F to certain inter-company payments among controlled foreign corporations. The expiration of section 954(c)(6) and the other expired provisions could have a material impact on the Company's consolidated results of operations subsequent to the year ended March 31, 2020. The Company recognizes interest and penalties related to unrecognized tax benefits through income tax expense. 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 fiscal 2005 and later tax years remain effectively 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 2007. Significant judgment is required in evaluating the Company's uncertain tax positions and determining its provision for income taxes.  Although the Company believes that it has appropriately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different than expectations.  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 could 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 that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.   The Company believes it maintains appropriate reserves to offset any potential income tax liabilities that may arise upon final resolution of matters for open tax years. If such reserve amounts ultimately prove to be unnecessary, the resulting reversal of such reserves could result in tax benefits being recorded in the period the reserves are no longer deemed necessary.  If such amounts prove to be less than an ultimate assessment, a future charge to expense would be recorded in the period in which the assessment is determined.  Although the timing of the resolution or closure of audits is highly uncertain, the Company does not believe that it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months. The following table summarizes the activity related to the Company's gross unrecognized tax benefits from April 1, 2014 to March 31, 2017 (amounts in thousands): Beginning balance Increases related to acquisitions Decreases related to settlements with tax authorities Decreases related to statute of limitation expirations Increases related to current year tax positions Decreases/Increases related to prior year tax positions Ending balance $ $ $ $ Year Ended March 31, 2016 170,654 46,245 (7,954) (4,591) 16,315 — 220,669 2017 220,669 193,297 (11,729) (7,556) 26,332 (22,536) 398,477 $ $ 2015 149,878 8,381 (20,197) (9,031) 23,179 18,444 170,654 As of March 31, 2017, the Company had accrued approximately $9.4 million related to the potential payment of interest on the Company's uncertain tax positions.  As of March 31, 2016, the Company had accrued approximately $2.4 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 accrued for approximately $66.1 million and $27.6 million in penalties related to its uncertain tax positions related primarily to its international locations as of March 31, 2017 and March 31, 2016, respectively.  Interest and penalties charged or (credited) to operations during the years ended March 31, 2017, 2016 and 2015 related to the Company's uncertain tax positions were $5.8 million, $1.7 million and $(1.8) million, respectively. The increase related to prior year tax positions for March 31, 2015 related primarily to a balance sheet reclassification from a valuation allowance to a reserve in the amount of $15.7 million. F-37         Note 11. Debt and Credit Facility Debt obligations included in the consolidated balance sheets consisted of the following (in millions): Senior Indebtedness Credit Facility Senior Subordinated Convertible Debt Coupon Interest Rate Effective Interest Rate Fair Value of Liability Component at Issuance (1) March 31, 2017 2016 $ — $ 1,052.0 2017 Senior Debt, maturing February 15, 2027 1.625% 6.0% $1,396.3 $ 2,070.0 $ — 2015 Senior Debt, maturing February 15, 2025 1.625% 5.9% 1,160.1 1,725.0 1,725.0 Junior Subordinated Convertible Debt 2017 Junior Debt, maturing February 15, 2037 2.250% 7.5% 2007 Junior Debt, maturing December 15, 2037 2.125% 9.1% Total Convertible Debt 264.8 41.0 575.0 — 143.8 575.0 4,513.8 2,300.0 Gross long-term debt including current maturities Less: Debt discount (2) Less: Debt issuance costs (3) Net long-term debt including current maturities Less: Current maturities (4) Net long-term debt 4,513.8 3,352.0 (1,516.5) (869.0) (46.8) (29.6) 2,950.5 2,453.4 (50.0) — $ 2,900.5 $ 2,453.4 (1) As each of the convertible instruments may be settled in cash upon conversion, for accounting purposes, they were bifurcated into a liability component and an equity component, which are both initially recorded at fair value.  The amount allocated to the equity component is the difference between the principal value of the instrument and the fair value of the liability component at issuance.  The resulting debt discount is being amortized to interest expense at the respective effective interest rate over the contractual term of the debt. (2) The unamortized discount includes the following (in millions): 2017 Senior Debt 2015 Senior Debt 2017 Junior Debt 2007 Junior Debt Total unamortized discount March 31, 2017 2016 $ $ (667.5) $ (446.6) (309.3) (93.1) (1,516.5) $ — (490.3) — (378.7) (869.0) F-38 (3) Debt issuance costs include the following (in millions): Senior Credit Facility 2017 Senior Debt 2015 Senior Debt 2017 Junior Debt 2007 Junior Debt Total debt issuance costs March 31, 2017 2016 (8.5) $ (17.6) (16.6) (3.4) (0.7) (46.8) $ (8.8) — (18.4) — (2.4) (29.6) $ $ (4) Current maturities include the full balance of the 2007 junior debt. Ranking of Indebtedness - The Senior Subordinated Convertible Debt and Junior Subordinated Convertible Debt (collectively, the Convertible Debt) are unsecured obligations which are subordinated in right of payment to the amounts outstanding under the Company's Credit Facility. The Junior Subordinated Convertible Debt is expressly subordinated in right of payment to any existing and future senior debt of the Company (including the Senior Subordinated Convertible Debt) and is structurally subordinated in right of payment to the liabilities of the Company's subsidiaries.  The Senior Subordinated Convertible Debt will rank senior to the Company's indebtedness that is expressly subordinated in right of payment, including the Junior Subordinated Convertible Debt and equal in right of payment to any of the Company's unsubordinated indebtedness that does not provide that it is senior to the Senior Subordinated Convertible Debt and junior in right of payment to any of the Company's secured, unsubordinated indebtedness to the extent of the value of the assets securing such indebtedness and junior to all indebtedness and other liabilities of the Company's subsidiaries. Summary of Conversion Features - Each series of Convertible Debt is convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at specified Conversion Rates (see table below), adjusted for certain events such as dividends declared. Up until the three-months immediately preceding the maturity date of the applicable series of Convertible Debt, each series of Convertible Debt is convertible only upon the occurrence of (1) the closing price of the Company's common stock exceeds the Conversion Price (see table below) by 130% for 20 days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter or (2) during the 5 business day period after any 10 consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day or (3) upon the occurrence of certain corporate events specified in the indenture of such series of Convertible Debt. In addition, if at the time of conversion the applicable price of the Company's common stock exceeds the applicable Conversion Price at such time, the applicable Conversion Rate will be increased by up to an additional maximum incremental shares rate, as determined pursuant to a formula specified in the indenture for the applicable series of Convertible Debt, and as adjusted for cash dividends paid since the issuance of such series of Convertible Debt. However, in no event will the applicable Conversion Rate exceed the applicable Maximum Conversion Rate specified in the indenture for the applicable series of Convertible Debt (see table below). The following table sets forth the applicable Conversion Rates adjusted for dividends declared since issuance of such series of Convertible Debt and the applicable Maximum Incremental Share Rate (with the exception of the 2007 Junior Debt) and applicable Conversion Rates as adjusted for dividends paid since the applicable issuance date: 2017 Senior Debt 2015 Senior Debt 2017 Junior Debt 2007 Junior Debt Dividend adjusted rates as of March 31, 2017 Conversion Rate, adjusted Conversion Price, adjusted Maximum Incremental Rate, adjusted Maximum Conversion Rate, adjusted 9.9435 15.5063 10.1211 42.1312 $ $ $ $ 100.57 64.49 98.80 23.74 4.9718 7.7531 5.0606 NA 14.1695 21.7087 14.1695 48.4509 F-39 As of March 31, 2017, the holders of the 2007 Junior Debt had the right to convert their debentures between April 1, 2017 and June 30, 2017 because the Company's common stock has exceeded the Conversion Price by 130% for the specified period of time during the quarter ended March 31, 2017. In addition, the Company has the option and intent to call the 2007 Junior Debt on or after December 15, 2017. Therefore, the 2007 Junior Debt is classified as short-term on the consolidated balance sheet as of March 31, 2017. If the Company does not call the 2007 Junior Debt in December 2017, additional interest will be due on the notes based on the trading value of the notes of 0.25% if the debentures are trading at less than $400 and a 0.5% additional interest rate if the debentures are trading at greater than $1,500. Based on the current trading price of the debentures, the contingent interest rate beginning in December 2017 would be 0.5% of the average trading price. The if-converted value of the debentures exceeded the principal amount by $303.1 million at March 31, 2017. As of March 31, 2017, the 2015 Senior Debt is not convertible but had a value if converted above par of $248.5 million. The Company may not redeem any series of Convertible Debt prior to the relevant maturity date and no sinking fund is provided for any series of Convertible Debt. Upon the occurrence of a fundamental change as defined in the applicable indenture of such series of Convertible Debt, holders of such series may require the Company to purchase all or a portion of their Convertible Debt for cash at a price equal to 100% of the principal amount plus any accrued and unpaid interest. Interest expense includes the following (in millions): Debt issuance amortization Amortization of debt discount - non cash interest expense Coupon interest expense Total Year Ended March 31, 2017 2016 2015 $ $ 2.1 $ 1.8 $ 56.1 44.5 48.0 40.2 102.7 $ 90.0 $ 0.4 14.8 26.6 41.8 The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 9.88 years, 7.88 years, 19.88 years, 20.71 years for the 2017 Senior Debt and 2015 Senior Debt and the 2017 Junior Debt and 2007 Junior Debt, respectively.   Issuances and Settlements - In February 2017, the Company issued the 2017 Senior Debt and 2017 Junior Debt for net proceeds of $2,043.6 million and $567.7 million, respectively. In connection with the issuance of these instruments, the Company incurred issuance costs of $33.7 million, of which $17.8 million and $3.4 million was recorded as debt issuance costs related to the 2017 Senior Debt and 2017 Junior Debt, respectively, and will be amortized using the effective interest method over the term of the debt. The balance of $12.5 million in fees was recorded to equity.  Interest on both instruments is payable semi-annually on February 15 and August 15 of each year. In February 2015, the Company issued the 2015 Senior Debt for net proceeds of approximately $1,694.7 million. In connection with the issuance, the Company incurred issuance costs of $30.3 million, of which $20.4 million was recorded as debt issuance costs and will be amortized using the effective interest method over the term of the debt. The balance of $9.9 million was recorded to equity. The Company utilized the proceeds from the issuances of the 2017 debt and 2015 debt to reduce amounts borrowed under its Credit Facility and to settle a portion of the 2007 Junior Debt. In February 2017 and February 2015, the Company settled $431.3 million and $575.0 million, respectively, in aggregate principal of its 2007 Junior Debt. In the case of the 2015 settlement, cash only was used to settle the value. The consideration transferred in February 2017 included cash of $431.3 million and an aggregate of 12.0 million shares of the Company's stock valued at $862.7 million for total consideration of $1,293.9 million, of which $188.0 million was allocated to the liability component and $1,105.9 million was allocated to the equity component. In addition, there was an inducement fee of $5.0 million which was recorded in the consolidated statement of income in loss on settlement of convertible debt. The consideration transferred in February 2015 was $1,134.6 million, of which $238.3 million was allocated to the liability component and $896.3 million was allocated to the equity component. In the case of both settlements, the consideration was allocated to the liability and equity components using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt prior to the retirement. The transactions resulted in a loss on settlement of convertible debt of approximately $43.9 million and $50.6 million in fiscal 2017 and fiscal 2015, respectively, which represented, in each case, the difference between the fair value of the liability component at time of repurchase and the sum of the carrying values of the debt component and any unamortized debt issuance costs. F-40 Credit Facility The Company maintains a $2.774 billion capacity credit facility which is made up of two tranches, one available until February 4, 2020 and another available through June 27, 2018, the maturity date of the original credit agreement. The credit facility was amended in February 2017 and February 2015. The financial covenants include, among others, limits on the Company's consolidated senior ratio and total leverage ratio. The maximum Total Leverage Ratio (capitalized terms not otherwise defined in this Form 10-K have the meaning of the defined terms in the applicable agreements) cannot exceed 5.00 to 1.00 and is calculated as the Consolidated Total Indebtedness, excluding the Junior Debt up to a $700 million maximum, to Consolidated EBIDTA for a period of four quarters. The Total Leverage Ratio may be temporarily increased to 5.50 to 1.00 for a period of four consecutive quarters in conjunction with a Permitted Acquisition occurring during the first four quarters following the acquisition. The Total Leverage Ratio then decreases to 5.25 to 1.00 for three consecutive quarters, finally returning to the stated 5.00 to 1.00 Total Leverage Ratio after a period of seven consecutive fiscal periods. The Company can elect to use this special feature, also referred to as an Adjusted Covenant Period, not more than one time from and after February 8, 2017, the effective date of the February 2017 amendment (discussed below), and may elect to terminate an Adjusted Covenant Period prior to the end of the Adjusted Covenant Period. The Credit Facility also requires the Senior Leverage Ratio not exceed 3.50 to 1.00, which is calculated as Consolidated Senior Indebtedness, to Consolidated EBIDTA for four consecutive quarters. The Company is also required to comply with an Interest Coverage Ratio of less than 3.50 to 1.00, measured quarterly. The credit agreement has a $125 million foreign currency sublimit, a $25 million letter of credit sublimit and a $25 million swingline loan sublimit. The Company has the option to obtain additional tranche commitments or additional indebtedness as long as the Senior Leverage Ratio is equal to or less than 2.50 to 1.00. In February 2017, the Company used a portion of the proceeds of $1,682.5 million from the issuance of the 2017 Senior Debt and 2017 Junior Debt to pay off the balance on its line of credit in full. In connection with the February 2017 amendment to the Credit Agreement, the Company incurred $2.1 million of issuance fees which will be amortized over the term of the facility and for which the balance is recorded net of any outstanding Credit Facility balance. At March 31, 2017, there were no outstanding borrowings under the revolving credit facility compared to $1,052.0 million at March 31, 2016. The Company's obligations under the credit agreement are guaranteed by certain of its subsidiaries meeting materiality thresholds set forth in the credit agreement. To secure the Company's obligations under the credit agreement, the Company and its domestic subsidiaries are required to pledge the equity securities of certain of their respective material subsidiaries, subject to certain exceptions and limitations. In addition, in connection with the February 2017 amendment, the Company and the guarantor subsidiaries granted a security interest in substantially all of their personal property to secure the obligations under the credit agreement. The loans under the credit agreement bear interest, at the Company's option, at the base rate plus a spread of 0.25% to 1.25% or an adjusted LIBOR rate (based on one, two, three, or six-month interest periods) plus a spread of 1.25% to 2.25%, in each case with such spread being determined based on the consolidated leverage ratio for the preceding four fiscal quarters (in the case of the 2018 tranche revolving loans) or the consolidated senior leverage ratio (in the case of the 2020 tranche revolving loans). The base rate means the highest of JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 1-month interest period plus a margin equal to 1.00%. Swingline loans accrue interest at a per annum rate based on the base rate plus the applicable margin for base rate loans. Base rate loans may only be made in U.S. Dollars. The Company is also obligated to pay other customary administration fees and letter of credit fees for a credit facility of this size and type. Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three-month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Interest expense related to the credit agreement was approximately $42.9 million in fiscal 2017, approximately $18.9 million in fiscal 2016 and approximately $19.9 million in fiscal 2015. Principal, together with all accrued and unpaid interest, is due and payable on the respective tranche maturity date, which is June 27, 2018 and February 4, 2020. The Company pays a quarterly commitment fee on the available but unused portion of its line of credit which is calculated on the average daily available balance during the period. The Company may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions and reimbursement of certain costs in the case of prepayments of LIBOR loans. F-41 The credit agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, incur subsidiary indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, repurchase stock, enter into restrictive agreements and enter into sale and leaseback transactions, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also required to maintain compliance with a senior leverage ratio, a total leverage ratio and an interest coverage ratio, all measured quarterly and calculated on a consolidated bases. At March 31, 2017, the Company was in compliance with these covenants. The credit agreement includes customary events of default that include, among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the credit agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the credit agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. Note 12. Contingencies In the ordinary course of the Company's business, it is exposed to various liabilities as a result of contracts, product liability, customer claims and other matters.  Additionally, the Company is involved in a limited number of legal actions, both as plaintiff and defendant.  Consequently, the Company could incur uninsured liability in any of those actions.  The Company also periodically receives notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting reimbursement for various costs.  With respect to pending legal actions to which the Company is a party and other claims, although the outcomes are generally not determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations.  Litigation and disputes relating to the semiconductor industry are not uncommon, and the Company is, from time to time, subject to such litigation and disputes.  As a result, no assurances can be given with respect to the extent or outcome of any such litigation or disputes in the future. As a result of its acquisition of Atmel, which closed April 4, 2016, the Company became involved with the following lawsuits: In re: Continental Airbag Products Liability Litigation. On May 11, 2016, an Amended and Consolidated Class Action Complaint ("Complaint") was filed in the United States District Court for the Southern District of Florida (Miami Division) against Atmel, Continental Automotive Systems, Inc., Honda Motor Co., Ltd. and an affiliate, and Daimler AG and an affiliate. The Complaint which includes claims arising under federal law and Florida, California, New Jersey, Michigan and Louisiana state law alleges that class members unknowingly purchased or leased vehicles containing defective airbag control units (incorporating allegedly defective application specific integrated circuits manufactured by the Company's Atmel subsidiary between 2006 and 2010), and thereby suffered financial harm, including a loss in the value of their purchased or leased vehicles. The plaintiffs are seeking, individually and on behalf of a putative class, unspecified compensatory and exemplary damages, statutory penalties, pre- and post-judgment interest, attorneys' fees, and injunctive and other relief. The Company's Atmel subsidiary contested plaintiffs' claims vigorously, and on May 23, 2017 the case was ordered to be dismissed. Continental Claim ICC Arbitration. On December 29, 2016, Continental Automotive GmbH ("Continental") filed a Request for Arbitration with the ICC, naming as respondents the Company's subsidiaries Atmel Corporation, Atmel SARL, Atmel Global Sales Ltd., and Atmel Automotive GmbH (collectively, “Atmel”).  The Request alleges that a quality issue affecting Continental airbag control units in certain recalled vehicles stems from allegedly defective Atmel application specific integrated circuits (“ASICs”).  The Continental airbag control units, ASICs and vehicle recalls are also at issue in In re: Continental Airbag Products Liability Litigation, described above.  Continental seeks to recover from Atmel all related costs and damages incurred as a result of the vehicle manufacturers’ airbag control unit-related recalls, currently alleged to be $61.6 million (but subject to increase). The Company's Atmel subsidiaries intend to defend this action vigorously. Southern District of New York Action by LFoundry Rousset ("LFR") and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, individually and on behalf of a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York (the "District Court") against the Company's Atmel subsidiary, French subsidiary, Atmel Rousset S.A.S. ("Atmel Rousset"), and LFoundry GmbH ("LF"), LFR's German parent. The case purports to relate to Atmel Rousset's June 2010 sale of its wafer manufacturing facility in Rousset, France to LF, and LFR's subsequent insolvency, and later liquidation, more than three years later. The District Court dismissed the case on August 21, 2015, and the United States Court of Appeals for the Second Circuit affirmed the dismissal on June 27, 2016. On July 25, 2016, the plaintiffs F-42 filed a notice of appeal from the District Court's June 27, 2016 denial of their motion for relief from the dismissal judgment. On May 19, 2017, the United States Court of Appeals for the Second Circuit affirmed the June 27, 2016 order dismissing the case. Individual Labor Actions by former LFR Employees. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in a French labor court. The Company's Atmel Rousset subsidiary believes that each of these actions is entirely devoid of merit, and, further, that any assertion by any of the Claimants of a co-employment relationship with the Atmel Rousset subsidiary is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. The Company's Atmel Rousset subsidiary therefore intends to defend vigorously against each of these claims. The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, the Company accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, the Company records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, the Company uses the amount that is the low end of such range. As of March 31, 2017, the Company's estimate of the aggregate potential liability that is possible but not probable is approximately $100 million in excess of amounts accrued. The Company's technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or trade secret infringement by the Company's proprietary technology.  The terms of these indemnification provisions approximate the terms of the outgoing technology license agreements, which are typically perpetual unless terminated by either party for breach. The possible amount of future payments the Company could be required to make based on agreements that specify indemnification limits, if such indemnifications were required on all of these agreements, is approximately $151.5 million. There are some licensing agreements in place that do not specify indemnification limits.  The Company had not recorded any liabilities related to these indemnification obligations as of March 31, 2017. Note 13. Stock Repurchase Activity In December 2007, the Company announced that its Board of Directors had authorized the repurchase of up to 10.0 million shares of its common stock in the open market or in privately negotiated transactions.  As of March 31, 2015, the Company had repurchased 7.5 million shares under this authorization for $234.7 million.  In May 2015, the Company's Board of Directors authorized an increase to the existing share repurchase program to 20.0 million shares of common stock from the approximately 2.5 million shares remaining under the prior authorization. During fiscal 2016, the Company repurchased 8.6 million shares under this authorization for $363.8 million. In January 2016, the Company's Board of Directors authorized an increase to the existing share repurchase program to 15.0 million shares of common stock from the approximately 11.4 million shares remaining under the prior authorization. There were no repurchases of common stock during fiscal 2017 and fiscal 2015.  There is no expiration date associated with this repurchase program. As of March 31, 2017, approximately 20.4 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. Note 14. Employee Benefit Plans Defined Benefit Plans In connection with its acquisition of Atmel, the Company assumed unfunded defined benefit pension plans that cover certain French and German employees. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Pension liabilities and charges are based upon various assumptions, updated annually, including discount rates, future salary increases, employee turnover, and mortality rates. The Company’s French pension plan provides for termination benefits paid to covered French employees only at retirement, and consists of approximately one to five months of salary. The Company's German pension plan provides for defined benefit payouts for covered German employees following retirement. F-43 The aggregate net pension expense relating to these two plans is as follows (amounts in thousands): Year Ended March 31, 2017 Service costs Interest costs Settlements Net pension period cost $ $ The change in projected benefit obligation and the accumulated benefit obligation, were as follows (amounts in thousands): Projected benefit obligation at April 4, 2016 Service cost Interest cost Settlements Actuarial losses Benefits paid Foreign currency exchange rate changes Projected benefit obligation at March 31, 2017 Accumulated benefit obligation at March 31, 2017 $ $ 1,430 962 511 2,903 40,313 1,430 962 511 7,969 (440) (322) 50,423 45,610 As the defined benefit plans are unfunded, the liability recognized on the Company's consolidated balance sheets as of March 31, 2017 was $50.4 million of which $0.7 million is included in accrued liabilities and $49.7 million is included in other long-term liabilities. Weighted average actuarial assumptions used to determine benefit obligations for the plans were as follows at March 31, 2017: Weighted average assumed discount rate Weighted average assumed compensation rate of increase 1.82% 2.90% The discount rate is based on the quarterly average yield for Euros treasuries with a duration of 30 years, plus a supplement for corporate bonds (Euros, AA rating). Future estimated expected benefit payments for the remainder of fiscal 2018 through 2027 are as follows (amounts in thousands): Fiscal Year Ending March 31, Expected Benefit Payments 2018 2019 2020 2021 2022 2023 through 2027 Total F-44 $ $ 700 714 1,017 1,033 1,549 8,664 13,677 The Company's pension liability represents the present value of estimated future benefits to be paid. Net actuarial losses for the year ended March 31, 2017 are primarily due to movements in the discount rates used to calculate the present value of pension obligations. Net actuarial losses, which are included in accumulated other comprehensive loss in the Company's consolidated balance sheets as of March 31, 2017, will be recognized as a component of net periodic cost over the average remaining service period. The Company's net periodic pension cost for fiscal 2018 is expected to be approximately $2.6 million. In connection with the acquisition of SMSC in August 2012, the Company assumed an unfunded Supplemental Executive Retirement Plan ("SERP"), which provides former SMSC senior management with retirement, disability and death benefits. An amendment to the SERP was executed on November 3, 2009, freezing the benefit level for existing participants as of February 28, 2010 and closing the SERP to new participants. As of March 31, 2017, the projected benefit obligation is $4.7 million. Annual benefit payments and contributions under this plan are expected to be approximately $0.5 million in fiscal 2018 and approximately $3.7 million cumulatively in fiscal 2019 through fiscal 2027. Defined Contribution Plans The Company maintains a contributory profit-sharing plan for its domestic employees meeting certain eligibility and service requirements.  The plan qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended, and allows employees to contribute up to 60% of their base salary, subject to maximum annual limitations prescribed by the IRS.  The Company has a discretionary matching contribution program. All matches are provided on a quarterly basis and require the participant to be an active employee at the end of the applicable quarter.  During fiscal 2017, 2016 and 2015, the Company's matching contributions to the plan totaled $8.2 million, $4.4 million and $3.9 million, respectively. The Company's 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) became effective on March 1, 2002.  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 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, (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 Board of Directors.  On January 1, 2017 and 2016, an additional 1,077,150 shares and 1,017,492 shares, respectively, were reserved under the 2001 Purchase Plan based on the automatic increase.  Upon the approval of the Board of Directors, there were no shares added under the 2001 Purchase Plan on January 1, 2015 based on the automatic increase provision. Since the inception of the 2001 Purchase Plan, 13,372,504 shares of common stock have been reserved for issuance and 7,230,790 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 of Directors approved a purchase price per share equal to 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.  On May 1, 2006, the Company's Board of Directors approved an annual automatic increase in the number of shares reserved under the plan.  The automatic increase took effect on January 1, 2007, and on each January 1 thereafter during the term of the plan, and is equal to one tenth of one percent (0.1%) of the then outstanding shares of the Company's common stock.  On January 1, 2017 and 2016, an additional 215,430 shares and 203,498 shares, respectively, were reserved under the plan based on the automatic increase. Upon the approval of the Board of Directors, there were no shares added under the plan on January 1, 2015 based on the automatic increase provision. Since the inception of this purchase plan, 1,919,213 shares of common stock have been reserved for issuance and 1,184,507 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-45       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 fiscal 2017, 2016 and 2015, $41.5 million, $19.1 million and $24.2 million were charged against operations for these plans, 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 fiscal 2017, 2016 and 2015, $28.2 million, $14.2 million and $15.9 million, respectively, were charged against operations for this plan. Note 15. Share-Based Compensation Share-Based Compensation Expense The following table presents the details of the Company's 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 Year Ended March 31, 2017 2016 2015 $ $ 18,713 (1) $ 46,801 62,641 128,155 44,214 (2) 83,941 $ 8,252 (1) $ 32,022 9,010 (1) 28,164 31,146 71,420 23,012 48,408 $ 21,422 58,596 10,640 47,956 (1) During the year ended March 31, 2017, $11.3 million of share-based compensation expense was capitalized to inventory. The amount of share-based compensation included in cost of sales during fiscal 2017 included $14.5 million of previously capitalized share-based compensation expense in inventory that was sold and $4.2 million of share-based compensation expense related to the Company's acquisition of Atmel that was not previously capitalized to inventory. During the year ended March 31, 2016, $7.9 million of share-based compensation expense was capitalized to inventory, and $8.3 million of previously capitalized share-based compensation expense in inventory was sold. During the year ended March 31, 2015, $6.8 million of share-based compensation expense was capitalized to inventory, and $9.0 million of previously capitalized share-based compensation expense in inventory was sold. (2) Amounts exclude excess tax benefits related to share-based compensation of $25.0 million for the year ended March 31, 2017. The Company elected to early adopt ASU 2016-09 effective April 1, 2016. Prior to the adoption of ASU 2016-09, the Company recognized excess tax benefits related to share-based compensation in additional paid-in capital. Refer to Note 1 for additional information on the adoption of this standard. The amount of unearned share-based compensation currently estimated to be expensed in the remainder of fiscal 2018 through fiscal 2022 related to unvested share-based payment awards at March 31, 2017 is $166.8 million.  The weighted average period over which the unearned share-based compensation is expected to be recognized is approximately 2.15 years. Atmel Acquisition-related Equity Awards In connection with the acquisition of Atmel, the Company assumed certain RSUs granted by Atmel. The assumed awards were measured at the acquisition date based on the estimated fair value, which was a total of $95.9 million. A portion of that fair value, $7.5 million, which represented the pre-acquisition vested service provided by employees to Atmel, was included in the total consideration transferred as part of the acquisition. As of the acquisition date, the remaining portion of the fair value of those awards was $88.4 million, representing post-acquisition share-based compensation expense that will be recognized as these employees provide service over the remaining vesting periods. During the year ended March 31, 2017, the Company recognized $58.6 million of share-based compensation expense in connection with the acquisition of Atmel, of which $39.6 million was due to the accelerated vesting of outstanding equity awards upon termination of certain Atmel employees. F-46           Combined Incentive Plan Information RSU share activity under the 2004 Plan is set forth below: Nonvested shares at March 31, 2014 Granted Forfeited Vested Nonvested shares at March 31, 2015 Granted Assumed upon acquisition Forfeited Vested Nonvested shares at March 31, 2016 Granted Assumed upon acquisition Forfeited Vested Nonvested shares at March 31, 2017 Number of Shares 5,530,034 $ 1,446,968 (266,415) (1,441,671) 5,268,916 2,479,729 525,442 (360,072) (1,606,273) 6,307,742 1,635,655 2,059,524 (722,212) (2,861,253) 6,419,456 $ Weighted Average Grant Date Fair Value 30.13 42.02 32.45 26.96 34.15 38.91 40.58 38.20 32.47 36.76 51.46 46.57 43.58 38.60 42.06 The total intrinsic value of RSUs which vested during the years ended March 31, 2017, 2016 and 2015 was $166.1 million, $72.1 million and $67.6 million, respectively.  The aggregate intrinsic value of RSUs outstanding at March 31, 2017 was $473.6 million, calculated based on the closing price of the Company's common stock of $73.78 per share on March 31, 2017.  At March 31, 2017, the weighted average remaining expense recognition period was 2.19 years. Stock option and stock appreciation right (SAR) activity under the Company's stock incentive plans in the three years ended March 31, 2017 is set forth below: Outstanding at March 31, 2014 Granted Assumed upon acquisition Exercised Canceled Outstanding at March 31, 2015 Granted Assumed upon acquisition Exercised Canceled Outstanding at March 31, 2016 Exercised Canceled Outstanding at March 31, 2017 Number of Shares 573,611 $ 27,654 666,586 (477,618) (105,934) 684,299 244 604,900 (221,987) (153,948) 913,508 (437,906) (42,485) 433,117 $ Weighted Average Exercise Price per Share 24.75 46.66 29.33 26.42 28.17 28.41 41.09 35.03 25.30 31.52 33.00 34.34 34.26 31.51 The total intrinsic value of options and SARs exercised during the years ended March 31, 2017, 2016 and 2015 was $9.6 million, $4.7 million and $9.6 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-47 The aggregate intrinsic value of options and SARs outstanding at March 31, 2017 was $18.3 million.  The aggregate intrinsic value of options and SARS exercisable at March 31, 2017 was $11.7 million. The aggregate intrinsic values were calculated based on the closing price of the Company's common stock of $73.78 per share on March 31, 2017. As of March 31, 2017 and 2016, the number of option and SAR shares exercisable was 264,061 and 553,844, respectively, and the weighted average exercise price per share was $29.59 and $32.33, respectively. The weighted average fair values per share of stock options granted in the years ended March 31, 2016 and 2015 was $8.85 and $9.00, respectively. The fair values per share of stock options granted in the years ended March 31, 2016 and 2015 were estimated utilizing the following assumptions: Expected term (in years) Volatility Risk-free interest rate Dividend yield Year Ended March 31, 2016 2015 6.5 29.50% 1.54% 3.00% 6.5 26.65% 1.59% 3.00% There were no stock options granted in the year ended March 31, 2017. Note 16. Commitments The Company leases office space, a manufacturing facility, and transportation and other equipment under operating leases which expire at various dates through March 31, 2022.   The future minimum lease commitments under these operating leases at March 31, 2017 were as follows (amounts in thousands): Year Ending March 31, 2018 2019 2020 2021 2022 Thereafter Total minimum payments Amount 26,259 21,114 14,920 11,645 11,038 2,423 87,399 $ $ The terms of the leases do not contain significant restriction provisions and usually contain standard rent escalation clauses as well as options for renewal. Rental expense under operating leases totaled $35.4 million, $23.3 million and $23.8 million for fiscal 2017, 2016 and 2015, respectively. Commitments for construction or purchase of property, plant and equipment totaled $45.5 million as of March 31, 2017, all of which will be due within the next year. Other purchase obligations and commitments totaled approximately $107.4 million as of March 31, 2017. Other purchase obligations and commitments include payments due under various types of licenses and approximately $98.3 million of outstanding purchase commitments with the Company's wafer foundries for delivery in fiscal 2018. Note 17. Geographic and Segment Information The Company's reporting segments include semiconductor products and technology licensing.  The Company does not allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income taxes to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is beneficial in evaluating segment performance.  Additionally, the Company does not allocate assets to segments for internal reporting purposes as it does not manage its segments by such metrics. F-48         The following table represents revenues and gross profit for each segment (amounts in thousands): Years ended March 31, 2017 2016 2015 Semiconductor products Technology licensing Total Net Sales $ 3,316,651 91,156 $ 3,407,807 Gross Profit $ 1,666,040 91,156 $ 1,757,196 Net Sales $ 2,084,210 89,124 $ 2,173,334 Gross Profit $ 1,116,340 89,124 $ 1,205,464 Net Sales $ 2,057,443 89,593 $ 2,147,036 Gross Profit $ 1,139,971 89,593 $ 1,229,564 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 Company's 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 net of accumulated amortization) by geographic area are as follows (amounts in thousands): United States Thailand Various other countries Total long-lived assets March 31, 2017 2016 $ $ 388,537 210,603 84,198 683,338 $ $ 373,860 182,813 52,723 609,396 Sales to unaffiliated customers located outside the U.S., primarily in Asia and Europe, aggregated approximately 84% of consolidated net sales for each of fiscal 2017, 2016 and 2015.  Sales to customers in Europe represented approximately 24% of consolidated net sales for fiscal 2017, approximately 22% of consolidated net sales for fiscal 2016, and approximately 21% of consolidated net sales for fiscal 2015.  Sales to customers in Asia represented approximately 58% of consolidated net sales for 2017, and approximately 59% of consolidated net sales in each of fiscal 2016 and 2015.  Within Asia, sales into China, including Hong Kong, represented approximately 32%, 30% and 28% of consolidated net sales for fiscal 2017, 2016 and 2015, respectively. Sales into Taiwan represented approximately 9%, 12% and 14% of consolidated net sales for fiscal 2017, 2016 and 2015, respectively. Sales into any other individual foreign country did not exceed 10% of the Company's net sales for any of the three years presented. No single end customer or distributor accounted for 10% or more of the Company's net sales during fiscal 2017, 2016 or 2015. Note 18. Derivative Instruments Freestanding Derivative Forward Contracts The Company has international operations and is thus subject to foreign currency rate fluctuations.  Approximately 99% of the Company's sales are U.S. Dollar denominated. However, a significant amount of the Company's expenses and liabilities are denominated in foreign currencies and subject to foreign currency rate fluctuations.  To help 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.  Net gains due to foreign exchange rate fluctuations after the effects of hedging activity were $1.0 million and $0.7 million in fiscal 2017 and fiscal 2016, respectively, compared to net losses of $7.7 million in fiscal 2015. As of March 31, 2017 and 2016, the Company had no foreign currency forward contracts outstanding. The Company recognized an immaterial amount of net realized gains and losses on foreign currency forward contracts in the years ended March 31, 2017, 2016 and 2015. Gains and losses from changes in the fair value of these foreign currency forward contracts and foreign currency exchange rate fluctuations are credited or charged to other income (expense). The Company does not apply hedge accounting to its foreign currency derivative instruments. F-49   Fair Value Hedges For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between the fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. In March 2015, the Company entered into ten-year fixed-to-floating interest rate swap agreements designated as fair value hedges of the changes in fair value of a portion of the Company's fixed-rate 1.625% 2015 Senior Debt due to changes in the LIBOR swap rate, the designated benchmark interest rate. The Company pays variable interest equal to the three-month LIBOR minus 53.6 basis points and it receives a fixed interest rate of 1.625%. The notional amount of these contracts outstanding at March 31, 2015 was $431.3 million, representing 25% of the principal amount of the 2015 Senior Debt. In February 2016, the Company terminated its interest rate swap agreements. Upon termination, the contracts were in an asset position, resulting in cash receipts of approximately $25.7 million, which included $3.7 million of accrued interest. The gain from terminating the interest rate swap agreements increased the outstanding balance of the 2015 Senior Debt and is being amortized as a reduction of interest expense over the remaining life of the debt. The cash flows from the termination of these interest rate swap agreements have been reported as operating activities in the consolidated statements of cash flows. The following table summarizes the location and amount of the gain or loss on the hedged item attributable to the changes in the LIBOR swap rate and the offsetting gain or loss on the related interest rate swap agreements for the years ended March 31, 2016 and 2015. The difference represents hedge ineffectiveness (amounts in thousands): Year ended March 31, 2016 2015 Income Statement Classification Gain (Loss) on 2015 Senior Debt Gain (Loss) on Interest Rate Swap Gain (Loss) on 2015 Senior Debt Gain (Loss) on Interest Rate Swap Other income (expense) $ (18,060) $ 16,345 $ (8,302) $ 8,928 Note 19. Net Income Per Common Share From Continuing Operations Attributable to Microchip Technology Stockholders The following table sets forth the computation of basic and diluted net income per common share from continuing operations attributable to Microchip stockholders (in thousands, except per share amounts): Net income from continuing operations attributable to Microchip Weighted average common shares outstanding Dilutive effect of stock options and RSUs Dilutive effect of 2007 Junior Debt Dilutive effect of 2015 Senior Debt Dilutive effect of 2017 Senior Debt Dilutive effect of 2017 Junior Debt Weighted average common and potential common shares outstanding Basic net income per common share from continuing operations attributable to Microchip stockholders Diluted net income per common share from continuing operations attributable to Microchip stockholders $ $ $ Year Ended March 31, $ 2017 170,592 217,196 4,357 12,715 538 — — 234,806 $ 2016 324,132 203,384 3,350 10,654 — — — 217,388 2015 369,009 200,937 3,642 18,982 — — — 223,561 0.79 0.73 $ $ 1.59 1.49 $ $ 1.84 1.65 The Company computed basic net income per common share from continuing operations attributable to its stockholders using net income from continuing operations available to common stockholders and the weighted average number of common shares outstanding during the period. The Company computed diluted net income per common share from continuing F-50   operations attributable to its stockholders using net income from continuing operations available to common stockholders and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of outstanding RSUs. Weighted average common shares exclude the effect of option shares which are not dilutive.  There were no anti-dilutive option shares for the year ended March 31, 2017. For the year ended March 31, 2016, the number of option shares that were antidilutive was 298,015. Diluted net income per common share from continuing operations attributable to stockholders for fiscal 2017, 2016, and 2015 includes 12,714,831, 10,654,070 and 18,982,440 shares, respectively, issuable upon the exchange of the Company's 2007 Junior Debt.  In February 2017, the Company issued an aggregate of 11,997,924 shares in the settlement of $431.3 million principal amount of the 2007 Junior Debt.  The shares that were issued are included in the weighted average dilutive common shares outstanding through the date of the issuance and were reflected in the weighted average common shares outstanding thereafter. Diluted net income per common share from continuing operations attributable to stockholders for fiscal 2017 includes 538,044 shares issuable upon the exchange of the Company's 2015 Senior Debt. There were no shares issuable upon the exchange of the Company's senior and junior debt issued in fiscal 2017 nor were any shares issuable upon the exchange of the Company's 2015 Senior Debt for fiscal 2016 and fiscal 2015. The convertible debt has no impact on diluted net income per common share unless 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 following is the weighted average conversion price per share used in calculating the dilutive effect (See Note 11 for details on the convertible debt): 2007 Junior Debt 2015 Senior Debt 2017 Senior Debt 2017 Junior Debt 2017 March 31, 2016 2015 $ $ $ $ 24.01 65.21 100.58 98.81 $ $ $ $ 24.73 $ 67.19 $ — $ — $ 25.48 68.25 — — F-51 Note 20. Quarterly Results (Unaudited) The following table presents the Company's selected unaudited quarterly operating results for the eight quarters ended March 31, 2017.  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 2017 Net sales Gross profit Operating income Net income Diluted net income per common share attributable to Microchip stockholders Fiscal 2016 Net sales Gross profit Operating income Net income Less: Net loss attributable to noncontrolling interests Net income attributable to Microchip Technology Diluted net income per common share attributable to Microchip stockholders $ $ First Quarter Second Quarter Third Quarter Fourth Quarter $ $ 799,411 348,490 (59,104) (113,363) 871,364 410,621 62,760 33,919 $ 834,366 465,259 118,074 107,175 902,666 532,826 154,087 136,908 Total $ 3,407,807 1,757,196 275,817 164,639 (0.53) 0.14 0.46 0.57 0.71 First Quarter Second Quarter Third Quarter Fourth Quarter $ $ 533,952 309,017 121,319 130,460 207 130,667 $ 541,391 300,950 74,948 64,899 — 64,899 540,344 292,718 76,132 61,211 — 61,211 557,647 302,779 79,946 67,355 — 67,355 Total $ 2,173,334 1,205,464 352,345 323,925 207 324,132 0.60 0.30 0.28 0.31 1.49 Refer to Note 3, Special Charges and Other, Net, for an explanation of the special charges included in operating income in fiscal 2017 and fiscal 2016. Refer to Note 11, Debt and Credit Facility, for an explanation of the loss on settlement of convertible debt of approximately $43.9 million included in net income (loss) during the fourth quarter of fiscal 2017. Refer to Note 4, Investments, for an explanation of the net realized gain from sales of available-for-sale marketable equity securities included in net income during the first quarter of fiscal 2016. No material net realized gains or losses occurred in fiscal 2017. Note 21. Supplemental Financial Information Cash paid for income taxes amounted to $48.4 million, $25.4 million and $25.5 million during fiscal 2017, 2016 and 2015, respectively.  Cash paid for interest on borrowings amounted to $82.5 million in fiscal 2017, $52.9 million in fiscal 2016 and $40.2 million in fiscal 2015. A summary of additions and deductions related to the valuation allowance for deferred tax asset accounts for the years ended March 31, 2017, 2016 and 2015 follows (amounts in thousands): Balance at Beginning of Year Additions Charged to Costs and Expenses Additions Charged to Other Accounts Deductions Balance at End of Year Valuation allowance for deferred tax assets: Fiscal Year 2017 Fiscal Year 2016 Fiscal Year 2015 $ 161,834 $ 15,220 $ 37,578 $ 116,482 93,811 5,535 — 47,834 36,957 (4,512) $ (8,017) (14,286) 210,120 161,834 116,482 F-52       A summary of additions and deductions related to the allowance for doubtful accounts for the years ended March 31, 2017, 2016 and 2015 follows (amounts in thousands): Balance at Beginning of Year Additions Charged to Costs and Expenses Deductions (1) Balance at End of Year Allowance for doubtful accounts: Fiscal Year 2017 Fiscal Year 2016 Fiscal Year 2015 $ $ 2,540 2,621 2,918 $ 184 59 104 (640) $ (140) (401) 2,084 2,540 2,621 (1) Deductions represent uncollectible accounts written off, net of recoveries. Accumulated Other Comprehensive Income The following tables present the changes in the components of accumulated other comprehensive income (AOCI) for the years ended March 31, 2017 and March 31, 2016: Year ended March 31, 2017 Balance at March 31, 2016 Unrealized Holding Gains (Losses) Available-for- sale Securities 348 $ Minimum Pension Liability Foreign Currency Total $ 44 $ (3,749) $ Other comprehensive loss before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net other comprehensive loss (1,558) 1,522 (36) (5,307) — (5,307) (5,678) — (5,678) Balance at March 31, 2017 $ 312 $ (5,263) $ (9,427) $ (3,357) (12,543) 1,522 (11,021) (14,378) Year ended March 31, 2016 Balance at March 31, 2015 Other comprehensive (loss) income before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net other comprehensive income (loss) Purchase of shares from noncontrolling interest Balance at March 31, 2016 $ Unrealized Holding Gains (Losses) Available-for- sale Securities 14,537 $ Minimum Pension Liability Foreign Currency Total $ 13 $ (3,474) $ 11,076 (3,241) (10,948) (14,189) — 348 $ 31 — 31 — 44 — — — (275) $ (3,749) $ (3,210) (10,948) (14,158) (275) (3,357) The table below details where reclassifications of realized transactions out of AOCI are recorded on the consolidated statements of income. Description of AOCI Component Unrealized (losses) gains on available-for-sale securities Taxes Reclassification of realized transactions, net of taxes $ $ Year ended March 31, 2017 2016 2015 Related Statement of Income Line (1,522) $ 10,948 $ 18,706 Other income, net — — (12) Provision for income taxes (1,522) $ 10,948 $ 18,694 Net Income F-53   Note 22. Dividends On October 28, 2002, the Company announced that its Board of Directors had approved and instituted a quarterly cash dividend on its common stock. The Company has continued to pay quarterly dividends and has increased the amount of such dividends on a regular basis. Cash dividends paid per share were $1.441, $1.433 and $1.425 during fiscal 2017, 2016 and 2015, respectively. Total dividend payments amounted to $315.4 million, $291.1 million and $286.5 million during fiscal 2017, 2016 and 2015, respectively. F-54 

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