MICROCHIP TECHNOLOGY INC - Annual Report: 2020 (Form 10-K)

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•	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

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•	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

•	add security to their products

•	decrease time to market for their products

•	significantly reduce product cost

•	actuators

•	applications needing touch buttons, touch screens and graphical user interfaces

•	automotive access control

•	automotive comfort, safety, information and entertainment applications

•	avionics

•	building automation

•	communication infrastructure systems

•	consumer electronics

•	defense and military hardware

•	energy monitoring

•	handheld tools

•	industrial automation

•	large and small home appliances

•	medical devices

•	motor controls

•	portable computers and accessories

•	power supplies

•	remote control devices

•	robotics

•	routers and video surveillance systems

•	satellites

•	security systems

•	smoke and carbon monoxide detectors

•	storage and server systems

•	thermostats

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•	general purpose and specialized microcontrollers and microprocessors

•	wired and wireless connectivity products

•	development tools and related software

•	analog, interface, mixed signal, timing, timing systems and security products

•	discrete diodes and MOSFETS

•	FPGA products

•	memory products

•	technology licensing

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•	United States

◦	Chandler, Arizona (wafer probe)

◦	Tempe, Arizona (Fab 2)

◦	Gresham, Oregon (Fab 4)

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◦	Colorado Springs, Colorado (Fab 5)

◦	Garden Grove, California (manufacturing, R&D and administrative)

◦	San Jose, California (manufacturing, R&D, and administrative)

◦	Simsbury, Connecticut (manufacturing, R&D and administrative)

◦	Beverly, Massachusetts (manufacturing)

◦	Lawrence, Massachusetts (manufacturing and administrative)

◦	Lowell, Massachusetts (wafer fabrication, assembly and test, R&D, warehousing and administrative)

◦	Mt. Holly Springs, Pennsylvania (manufacturing, R&D and administrative)

•	Thailand

◦	Chacherngsao (wafer probe, assembly and test)

•	Philippines

◦	Calamba, Laguna (wafer probe and test)

•	France

◦	Nantes, Loire-Atlantique (design, engineering, test, probe, administrative and warehousing)

•	Ireland

◦	Ennis, County Clare (manufacturing)

•	Germany

◦	Neckarbischofsheim, Baden-Württemberg (manufacturing and administrative)

◦	Teltow, Brandenburg (wafer fabrication, assembly and test, wafer probe, R&D, warehousing and administrative)

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•	performance

•	analog, digital and mixed signal functionality and level of functional integration

•	field programmability

•	memory density

•	low power consumption

•	extended voltage ranges

•	reliability

•	packaging alternatives

•	completeness of development tool line

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•	ease of use

•	functionality of application development systems

•	dependable delivery, quality and availability

•	technical and innovative service and support

•	time to market

•	price

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•	general economic, industry, public health or political conditions in the U.S. or internationally, including ongoing uncertainty surrounding the COVID-19 virus and its implications;

•	disruptions in our business, our supply chain or our customers' businesses due to public health concerns (including viral outbreaks such as the COVID-19 virus), cybersecurity incidents, terrorist activity, armed conflict, war, worldwide oil prices and supply, fires, 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;

•	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;

•	the level of order cancellations or push-outs due to the impact of the COVID-19 virus or other factors;

•	trade restrictions and changes in tariffs, including those impacting business in China, as well as those focused on specific companies;

•	the mix of inventory we hold and our ability to satisfy orders from our inventory;

•	our ability to continue to realize the expected benefits of our past or future acquisitions;

•	our ability to adjust our factory capacity to respond to changes in customer demand;

•	changes in utilization of our manufacturing capacity and fluctuations in manufacturing yields;

•	our ability to secure sufficient wafer foundry, assembly and testing capacity;

•	changes or fluctuations in customer order patterns and seasonality;

•	changes in tax regulations and policies in the U.S. and other countries in which we do business including the impact of the Tax Cuts and Jobs Act of 2017 (the Act);

•	new accounting pronouncements or changes in existing accounting standards and practices;

•	levels of inventories held by our customers;

•	risk of excess and obsolete inventories;

•	competitive developments including pricing pressures;

•	unauthorized copying of our products resulting in pricing pressure and loss of sales;

•	availability of raw materials, supplies 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, including the impact of product lead times;

•	the level of sell-through of our products through distribution;

•	fluctuations in our mix of product sales;

•	announcements of other significant acquisitions by us or our competitors;

•	costs and outcomes of any current or future tax audits or any litigation, investigation or claims involving intellectual property, our Microsemi acquisition, customers or other issues;

•	fluctuations in commodity or energy prices; and

•	property damage or other losses, whether or not covered by insurance.

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•	global economic and financial uncertainty due to the COVID-19 virus or other factors;

•	quarterly variations in our operating results or the operating results of other technology companies;

•	changes in our financial guidance or our failure to meet such guidance;

•	changes in analysts' estimates of our financial performance or buy/sell recommendations;

•	general conditions in the semiconductor industry;

•	our ability to realize the expected benefits of our completed or future acquisitions; and

•	actual or anticipated announcements of technical innovations or new products by us or our competitors.

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•	the relative impact of the COVID-19 virus on us relative to our competitors;

•	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;

•	our ability to obtain adequate foundry and assembly and test capacity and supplies of raw materials and other supplies at acceptable prices;

•	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;

•	our ability to ramp production and increase capacity, as needed, at our wafer fabrication and assembly and test facilities;

•	product introductions by our competitors;

•	the number, nature and success of our competitors in a given market;

•	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

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•	general market and economic conditions.

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•	effective 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.

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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 OEM production; and

•	market acceptance of our customers' end products.

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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.

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•	political, social and economic instability due to the COVID-19 virus or other factors;

•	trade restrictions and changes in tariffs;

•	potentially adverse tax consequences;

•	economic uncertainty in the worldwide markets served by us;

•	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;

•	employment regulations;

•	disruptions due to cybersecurity incidents;

•	disruptions in international transport or delivery;

•	public health conditions (including viral outbreaks such as the COVID-19 virus); and

•	difficulties in collecting receivables and longer payment cycles.

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•	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.

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(1)	Refer to Note 2 to our consolidated financial statements for a discussion of our acquisition of Microsemi during fiscal 2019. During fiscal 2017, we completed our acquisition of Atmel.

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•	The impact of disruptions to our manufacturing and the distribution of our products, including disruptions due to the COVID-19 virus and related government responses;

•	That we have seen increased impacts since then which we expect to adversely impact our business in the fiscal quarter ended June 30, 2020;

•	That local governments could require us to temporarily reduce production further or cease operations at any of our facilities and we could experience constraints in fulfilling customer orders;

•	Our belief that our actions to combat the spread of the COVID-19 virus will help preserve the health of our team members, customers, suppliers, visitors to our facilities, people with whom we conduct business and our communities, and allow us to safely continue operations;

•	Our inability to predict how the COVID-19 virus outbreak, and actions taken by others in response to it, will affect our business;

•	The effects that uncertain 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 and modest pricing declines in certain of our more mature proprietary 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;

•	The impact of trade restrictions and changes in tariffs, including those impacting China;

•	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, including the impact of our product lead times;

•	Our expectation that our June 2020 days of inventory levels will be down 6 days to up 8 days compared to the March 2020 levels. 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 our direct sales personnel combined with our distributors provide an effective means of reaching our customer base;

•	The accuracy of our estimates of the useful life and values of our property, assets and other liabilities;

•	Our ability to increase the proprietary portion of our analog, interface, mixed signal and timing 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;

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•	That we adjust capacity utilization to respond to actual and anticipated business and industry-related conditions;

•	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 plans for operation of our fabrication facilities, including our plan to close our facility in Santa Clara, California;

•	The cost savings from re-purposing Fab 5 for the manufacture of discrete and specialty products in addition to a lower volume of a diversified set of standard products and transferring the manufacture of certain higher volume products to other facilities;

•	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;

•	The impact of seasonality on our business;

•	Our belief that our IT system compromise has not had a material adverse effect on our business or resulted in any material damage to us;

•	Our expectation that we will continue to be the target of attacks on our data, attempts to breach our security and attempts to introduce malicious software into our IT systems;

•	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 the expiration of any tax holidays will not have a material impact on our financial statements or effective tax rate;

•	The impact of our intra-group asset transfers, and the geographical dispersion of our earnings and losses on our effective tax rate;

•	Our belief that the estimates used in preparing our consolidated financial statements are reasonable;

•	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 we could increase our borrowings or seek additional equity or debt financing to maintain or expand our facilities, or to fund cash dividends, share repurchases, acquisitions or other corporate activities, and that the timing and amount of such financing requirements will depend on a number of factors;

•	Our intention to satisfy the lesser of the principal amount or the conversion value of our debentures in cash;

•	Our intention to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts.

•	Changes to the taxation of undistributed foreign earnings could change our future intentions regarding reinvestment of such earnings;

•	Our belief that the effect the new tax laws will have on low-taxed income of foreign subsidiaries will have the most significant, adverse impact; and

•	Our ability to collect accounts receivable.

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We require social distancing, and have established distancing protocols at our facilities. We currently prohibit visitors, have suspended business travel, have suspended attendance at conferences and other gatherings, and require team members to work from home to the extent possible. Where work from home is not possible, all on-site team members are requested to take their temperatures before arriving to work, stay home if they do not feel

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•	In partnership with our suppliers, we have evaluated our supply chain to identify gaps or weak points. In order to ensure continuity, in some cases, we have qualified alternative suppliers and increased our inventory of raw materials.

•	We have added assembly and test capacity to provide redundant manufacturing capability through our network of subcontractors.

•	We have implemented measures to help prepare for an economic downturn, such as implementing employee salary cuts, limiting hiring, reducing business travel costs, reducing discretionary spending, and limiting capital expenditures.

•	We are working with government authorities in the areas where we have a significant footprint. We continue to update ourselves on government requirements, relevant regulations, industry standards, and best practices to help safeguard our team members across the globe.

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•	global economic conditions in the markets we serve;

•	semiconductor industry conditions;

•	trade restrictions and adverse changes in tariffs;

•	our acquisition of Microsemi, which closed on May 29, 2018;

•	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, including distributors; and

•	increasing semiconductor content in our customers' products.

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•	charges of approximately $365.7 million in fiscal 2019 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 fiscal 2020 and 2019, inventory write-downs being higher than the gross margin impact of sales of inventory that was previously written down;

•	unabsorbed capacity charges due to operating at below normal capacity in fiscal 2020 and fiscal 2019; and

•	fluctuations in the product mix of our net sales.

•	continual cost reductions in wafer fabrication and assembly and test manufacturing, such as new manufacturing technologies and more efficient manufacturing techniques; and

•	economic market conditions.

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•	In fiscal 2020, gross proceeds of $615.0 million from term loans made under the Bridge Loan Facility used to settle $615.0 million in principal of our 2015 Senior Convertible debt, and $878.0 million and $188.0 million of cash used to pay down borrowings under our Revolving Credit Facility and our Term Loan Facility, respectively,

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In fiscal 2019, proceeds of $3.0 billion from term loans made under the Term Loan Facility, net proceeds of $3.27 billion from borrowings under our Revolving Credit Facility, net proceeds of $1.99 billion from the issuance of our Senior Secured Notes, $2.06 billion of cash used to repay Microsemi's existing debt, and $1.09 billion of cash used to pay down the principal of our Term Loan Facility, and

•	In fiscal 2020 and fiscal 2019, we paid cash dividends to our stockholders of $350.1 million and $344.4 million, respectively.

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(1)	Capital purchase obligations represent commitments for construction or purchases of property, plant and equipment.  These obligations were not recorded as liabilities on our balance sheet as of March 31, 2020, as we have not yet received the related goods or taken title to the property.

(2)	Other purchase obligations and commitments include payments due under various types of licenses and outstanding purchase commitments with our wafer foundries.

(3)	For purposes of this table, we have assumed that the principal of our 2023 revolving loans outstanding at March 31, 2020 will be paid on May 18, 2023, which is the maturity date of such borrowings.

(4)	The Term Loan Facility matures on May 29, 2025.

(5)	The Bridge Loan Facility matures on March 26, 2021.

(6)	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.

(7)	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.

(8)	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.

(9)	For purposes of this table, pension obligations due in more than 5 years represent the expected pension payments from 2026 through 2030. It excludes pension obligations subsequent to 2030.

(10)

During fiscal 2018, we recognized a provisionary one-time transition tax on accumulated unrepatriated foreign earnings, estimated at $644.7 million, as a result of the Act. As of December 31, 2018, with the conclusion of the measurement period in accordance with SAB 118, we increased this amount by $13.1 million to $657.8 million, of which we expect cash payments of approximately $290.3 million after offsets by the utilization of various tax attribute carryforwards in the U.S. This tax is payable over a period of eight years, with 8% of the transition tax payable each year for fiscal 2019 through fiscal 2023, and 15%, 20%, and 25%, respectively, payable during fiscal 2024, 2025, and 2026.

(11)	The contractual obligations do not include amounts related to uncertain tax positions because reasonable estimates cannot be made.

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•	general purpose and specialized microcontrollers and microprocessors

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Level 1-	Observable inputs such as quoted prices in active markets;

Level 2-	Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3-	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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