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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.
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(1)
(2)
(3)
(4)
Amount Previously Paid:
Form, Schedule or Registration Statement No.:
Filing Party:
Date Filed:
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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
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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
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PROXY STATEMENT
THE BOARD OF DIRECTORS
CERTAIN TRANSACTIONS
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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
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4
9
9
10
12
22
24
25
26
28
39
52
54
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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.
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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.
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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.
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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:
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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•
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.
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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.
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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.
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(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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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(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)
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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
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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
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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
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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.
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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.
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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.
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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.
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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
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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
—
—
—
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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)
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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)
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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 $73.78, the closing price of our common stock on March 31, 2017.
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STOCK VESTED
For Fiscal Year Ended March 31, 2017
The following table provides information, on an aggregate basis, about stock awards that vested during the fiscal year
ended March 31, 2017 for each of the named executive officers.
Microchip has not granted stock options, other than options assumed in acquisitions, since 2008. No named executive
officer held any Microchip stock options during fiscal 2017.
Name
Stock Awards
Number of Shares
Acquired on Vesting (#)
Value Realized
on Vesting ($)
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.
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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.
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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
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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.
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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.
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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.
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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.
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(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.
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(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.
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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)
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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
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(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
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(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
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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.
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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.
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(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.
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(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.
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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
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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:
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•
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:
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the quality, performance, reliability, features, ease of use, pricing and diversity of our products;
our success in designing and manufacturing new products including those implementing new technologies;
the rate at which customers incorporate our products into their own applications 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
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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.
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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:
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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:
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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.
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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:
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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.
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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:
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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;
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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.
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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.
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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
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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:
•
•
•
•
•
•
•
•
•
•
•
•
•
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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;
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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
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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
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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.
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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
—
—
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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
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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
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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.
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