filings.toolsItem 1. Financial Statements
223K characters. Original on sec.gov · Markdown
Item 1. Financial Statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
| ASSETS | |||||||||||
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash and cash equivalents | $ | 280.0 | $ | 401.0 | |||||||
| Short-term investments | 2.0 | 2.0 | |||||||||
| Accounts receivable, net | 997.7 | 934.0 | |||||||||
| Inventories | 665.0 | 685.7 | |||||||||
| Other current assets | 200.5 | 194.5 | |||||||||
| Total current assets | 2,145.2 | 2,217.2 | |||||||||
| Property, plant and equipment, net | 854.7 | 876.1 | |||||||||
| Goodwill | 6,670.6 | 6,664.8 | |||||||||
| Intangible assets, net | 4,794.8 | 5,702.3 | |||||||||
| Long-term deferred tax assets | 1,749.2 | 1,748.5 | |||||||||
| Other assets | 264.3 | 217.2 | |||||||||
| Total assets | $ | 16,478.8 | $ | 17,426.1 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Accounts payable | $ | 292.4 | $ | 246.8 | |||||||
| Accrued liabilities | 794.3 | 781.8 | |||||||||
| Current portion of long-term debt | 1,322.9 | 608.8 | |||||||||
| Total current liabilities | 2,409.6 | 1,637.4 | |||||||||
| Long-term debt | 7,581.2 | 8,873.4 | |||||||||
| Long-term income tax payable | 689.9 | 668.4 | |||||||||
| Long-term deferred tax liability | 43.9 | 318.5 | |||||||||
| Other long-term liabilities | 417.1 | 342.9 | |||||||||
| 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; 284,479,079 shares issued and 273,528,594 shares outstanding at March 31, 2021; 258,391,231 shares issued and 245,325,643 shares outstanding at March 31, 2020 | 0.3 | 0.2 | |||||||||
| Additional paid-in capital | 2,403.3 | 2,675.1 | |||||||||
| Common stock held in treasury: 10,950,485 shares at March 31, 2021; 13,065,588 shares at March 31, 2020 | (433.8) | (500.6) | |||||||||
| Accumulated other comprehensive loss | (26.2) | (21.6) | |||||||||
| Retained earnings | 3,393.5 | 3,432.4 | |||||||||
| Total stockholders' equity | 5,337.1 | 5,585.5 | |||||||||
| Total liabilities and stockholders' equity | $ | 16,478.8 | $ | 17,426.1 |
See accompanying notes to consolidated financial statements
F-6
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
| Fiscal Year Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 5,438.4 | $ | 5,274.2 | $ | 5,349.5 | ||||||||||||||||||||||||||||||||
| Cost of sales | 2,059.6 | 2,032.1 | 2,418.2 | |||||||||||||||||||||||||||||||||||
| Gross profit | 3,378.8 | 3,242.1 | 2,931.3 | |||||||||||||||||||||||||||||||||||
| Research and development | 836.4 | 877.8 | 826.3 | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 610.3 | 676.6 | 682.9 | |||||||||||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 932.3 | 993.9 | 674.1 | |||||||||||||||||||||||||||||||||||
| Special charges and other, net | 1.7 | 46.7 | 33.7 | |||||||||||||||||||||||||||||||||||
| Operating expenses | 2,380.7 | 2,595.0 | 2,217.0 | |||||||||||||||||||||||||||||||||||
| Operating income | 998.1 | 647.1 | 714.3 | |||||||||||||||||||||||||||||||||||
| Losses on equity method investments | — | — | (0.2) | |||||||||||||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||||||||
| Interest income | 1.7 | 2.8 | 8.1 | |||||||||||||||||||||||||||||||||||
| Interest expense | (356.9) | (497.3) | (502.9) | |||||||||||||||||||||||||||||||||||
| Loss on settlement of debt | (299.6) | (5.4) | (12.6) | |||||||||||||||||||||||||||||||||||
| Other (loss) income, net | (3.8) | 3.2 | (2.2) | |||||||||||||||||||||||||||||||||||
| Income before income taxes | 339.5 | 150.4 | 204.5 | |||||||||||||||||||||||||||||||||||
| Income tax benefit | (9.9) | (420.2) | (151.4) | |||||||||||||||||||||||||||||||||||
| Net income | $ | 349.4 | $ | 570.6 | $ | 355.9 | ||||||||||||||||||||||||||||||||
| Basic net income per common share | $ | 1.35 | $ | 2.39 | $ | 1.51 | ||||||||||||||||||||||||||||||||
| Diluted net income per common share | $ | 1.29 | $ | 2.23 | $ | 1.42 | ||||||||||||||||||||||||||||||||
| Dividends declared per common share | $ | 1.494 | $ | 1.465 | $ | 1.457 | ||||||||||||||||||||||||||||||||
| Basic common shares outstanding | 259.6 | 238.9 | 236.2 | |||||||||||||||||||||||||||||||||||
| Diluted common shares outstanding | 270.6 | 256.2 | 249.9 | |||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
F-7
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Net income | $ | 349.4 | $ | 570.6 | $ | 355.9 | |||||||||||||||||||||||
| Components of other comprehensive (loss) income: | |||||||||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||||||||
| Unrealized holding losses, net of tax effect | — | — | (5.6) | ||||||||||||||||||||||||||
| Reclassification of realized transactions, net of tax effect | — | — | 5.6 | ||||||||||||||||||||||||||
| Defined benefit plans: | |||||||||||||||||||||||||||||
| Actuarial (losses) gains related to defined benefit pension plans, net of tax effect | (9.4) | 1.4 | 2.9 | ||||||||||||||||||||||||||
| Reclassification of realized transactions, net of tax effect | 1.1 | 0.8 | 1.0 | ||||||||||||||||||||||||||
| Change in net foreign currency translation adjustment | 3.7 | (1.8) | (5.3) | ||||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax effect | (4.6) | 0.4 | (1.4) | ||||||||||||||||||||||||||
| Comprehensive income | $ | 344.8 | $ | 571.0 | $ | 354.5 |
See accompanying notes to consolidated financial statements
F-8
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||||||||
| Net income | $ | 349.4 | $ | 570.6 | $ | 355.9 | |||||||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||||||||
| Depreciation and amortization | 1,153.3 | 1,215.6 | 876.4 | ||||||||||||||||||||||||||
| Deferred income taxes | (138.9) | (490.3) | (62.2) | ||||||||||||||||||||||||||
| Share-based compensation expense related to equity incentive plans | 198.3 | 170.2 | 166.4 | ||||||||||||||||||||||||||
| Loss on settlement of debt | 299.6 | 5.4 | 12.6 | ||||||||||||||||||||||||||
| Amortization of debt discount | 71.1 | 121.7 | 114.6 | ||||||||||||||||||||||||||
| Amortization of debt issuance costs | 17.1 | 17.1 | 16.5 | ||||||||||||||||||||||||||
| Losses on equity method investments | — | — | 0.2 | ||||||||||||||||||||||||||
| Gains on sale of assets | (7.1) | (2.2) | — | ||||||||||||||||||||||||||
| Losses on write-down of fixed assets | 0.9 | 2.7 | 0.8 | ||||||||||||||||||||||||||
| Impairment of intangible assets | — | 2.2 | 3.1 | ||||||||||||||||||||||||||
| Gains on equity investments | (0.2) | (2.5) | — | ||||||||||||||||||||||||||
| Impairment of available-for-sale investments | — | — | 6.0 | ||||||||||||||||||||||||||
| Amortization of premium on available-for-sale investments | — | — | (0.2) | ||||||||||||||||||||||||||
| Changes in operating assets and liabilities, excluding impact of acquisitions: | |||||||||||||||||||||||||||||
| (Increase) decrease in accounts receivable | (63.7) | (53.3) | 238.8 | ||||||||||||||||||||||||||
| Decrease in inventories | 18.4 | 28.8 | 341.6 | ||||||||||||||||||||||||||
| Increase (decrease) in accounts payable and accrued liabilities | 17.6 | 11.4 | (180.7) | ||||||||||||||||||||||||||
| Change in other assets and liabilities | (16.7) | (13.1) | (24.2) | ||||||||||||||||||||||||||
| Change in income tax payable | 17.4 | (40.5) | (190.8) | ||||||||||||||||||||||||||
| Net cash provided by operating activities | 1,916.5 | 1,543.8 | 1,674.8 | ||||||||||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||||||||
| Purchases of available-for-sale investments | — | (2.0) | (167.7) | ||||||||||||||||||||||||||
| Maturities of available-for-sale investments | — | — | 78.0 | ||||||||||||||||||||||||||
| Sales of available-for-sale investments and marketable equity securities | — | 4.7 | 1,376.6 | ||||||||||||||||||||||||||
| Acquisition of Microsemi, net of cash acquired | — | — | (7,850.6) | ||||||||||||||||||||||||||
| Investments in other assets | (89.0) | (71.5) | (18.6) | ||||||||||||||||||||||||||
| Proceeds from sale of assets | 8.3 | 3.2 | 0.2 | ||||||||||||||||||||||||||
| Capital expenditures | (92.6) | (67.6) | (228.9) | ||||||||||||||||||||||||||
| Net cash used in investing activities | (173.3) | (133.2) | (6,811.0) | ||||||||||||||||||||||||||
| Cash flows from financing activities: (1) | |||||||||||||||||||||||||||||
| Proceeds from borrowings on revolving loan under credit facility | 3,966.0 | 1,026.0 | 4,416.5 | ||||||||||||||||||||||||||
| Repayments of revolving loan under credit facility | (4,007.9) | (1,904.0) | (1,150.0) | ||||||||||||||||||||||||||
| Proceeds from issuance of senior notes | 3,577.8 | — | 1,989.5 | ||||||||||||||||||||||||||
| Proceeds from borrowings on bridge loan facility | — | 611.9 | — | ||||||||||||||||||||||||||
| Repayment of bridge loan facility | (615.0) | — | — | ||||||||||||||||||||||||||
| Proceeds from borrowings on term loan facility | — | — | 3,000.0 | ||||||||||||||||||||||||||
| Repayments of term loan facility | (1,723.5) | (188.0) | (1,088.5) | ||||||||||||||||||||||||||
| Payments on settlement of convertible debt | (2,611.4) | (615.0) | — | ||||||||||||||||||||||||||
| Repayment of debt assumed in Microsemi acquisition | — | — | (2,056.9) | ||||||||||||||||||||||||||
| Deferred financing costs | (21.2) | (8.9) | (72.7) | ||||||||||||||||||||||||||
| Purchase of capped call options | (35.8) | — | — | ||||||||||||||||||||||||||
| Payment of cash dividends | (388.3) | (350.1) | (344.4) | ||||||||||||||||||||||||||
| Proceeds from sale of common stock | 60.3 | 58.8 | 42.6 |
F-9
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Tax payments related to shares withheld for vested restricted stock units | (64.6) | (68.1) | (71.8) | ||||||||||||||||||||||||||
| Capital lease payments | (0.6) | (0.8) | (0.8) | ||||||||||||||||||||||||||
| Net cash (used in) provided by financing activities | (1,864.2) | (1,438.2) | 4,663.5 | ||||||||||||||||||||||||||
| Net decrease in cash and cash equivalents | (121.0) | (27.6) | (472.7) | ||||||||||||||||||||||||||
| Cash and cash equivalents, and restricted cash at beginning of period | 401.0 | 428.6 | 901.3 | ||||||||||||||||||||||||||
| Cash and cash equivalents, and restricted cash at end of period | $ | 280.0 | $ | 401.0 | $ | 428.6 | |||||||||||||||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||||||||||||||
| Restricted cash | $ | — | $ | 25.0 | $ | 38.4 | |||||||||||||||||||||||
| Non-cash activities: | |||||||||||||||||||||||||||||
| ROU assets obtained in exchange of lease liabilities (2) | $ | 65.6 | $ | 24.8 | |||||||||||||||||||||||||
| Cash paid for: | |||||||||||||||||||||||||||||
| Interest | $ | 265.4 | $ | 355.2 | $ | 347.9 | |||||||||||||||||||||||
| Income taxes | $ | 87.3 | $ | 101.3 | $ | 77.6 | |||||||||||||||||||||||
| Operating lease payments in operating cash flows (2) | $ | 47.4 | $ | 46.5 | |||||||||||||||||||||||||
| (1) During the fiscal year ended March 31, 2021, the Company completed the December 2020 settlement of $1,086.5 million principal amount of convertible debt in exchange for $428.9 million in cash, 8.4 million shares of common stock and $665.5 million principal amount of 2020 Senior Convertible Debt. Refer to Note 7 for further information. | |||||||||||||||||||||||||||||
| (2) During the fiscal year ended March 31, 2020, the Company adopted Accounting Standards Codification Topic 842, Leases, using the retrospective cumulative effect adjustment transition method. The disclosures are not applicable for the fiscal year ended March 31, 2019. |
See accompanying notes to consolidated financial statements
F-10
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in millions)
| Common Stock and Additional Paid-in-Capital | Common Stock Held in Treasury | Accumulated Other Comprehensive Loss | Retained Earnings | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2018 | 253.2 | $ | 2,562.7 | 18.2 | $ | (662.6) | $ | (17.6) | $ | 1,397.3 | $ | 3,279.8 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 355.9 | 355.9 | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (1.4) | — | (1.4) | ||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of ASU 2016-01, cumulative adjustment | — | — | — | — | (1.7) | 1.7 | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of ASC 606, cumulative adjustment | — | — | — | — | — | 242.0 | 242.0 | ||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of ASU 2016-16, cumulative adjustment | — | — | — | — | — | 1,558.1 | 1,558.1 | ||||||||||||||||||||||||||||||||||||||||||||||
| Non-cash consideration, exchange of employee stock awards - Microsemi acquisition | — | 53.9 | — | — | — | — | 53.9 | ||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from sales of common stock through employee equity incentive plans | 3.4 | 42.6 | — | — | — | — | 42.6 | ||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock unit and stock appreciation right withholdings | (0.8) | (71.8) | — | — | — | — | (71.8) | ||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock used for new issuances | (2.6) | (80.4) | (2.6) | 80.4 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 172.8 | — | — | — | — | 172.8 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend | — | — | — | — | — | (344.4) | (344.4) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2019 | 253.2 | 2,679.8 | 15.6 | (582.2) | (20.7) | 3,210.6 | 5,287.5 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 570.6 | 570.6 | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 0.4 | — | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of ASU 2018-02, cumulative adjustment | — | — | — | — | (1.3) | 1.3 | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from sales of common stock through employee equity incentive plans | 3.2 | 58.8 | — | — | — | — | 58.8 | ||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock unit and stock appreciation right withholdings | (0.7) | (68.1) | — | — | — | — | (68.1) | ||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock used for new issuances | (2.5) | (81.6) | (2.5) | 81.6 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued to settle convertible debt | 5.2 | 351.8 | — | — | — | — | 351.8 | ||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of convertible debt | — | (438.1) | — | — | — | — | (438.1) | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 172.7 | — | — | — | — | 172.7 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend | — | — | — | — | — | (350.1) | (350.1) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 258.4 | 2,675.3 | 13.1 | (500.6) | (21.6) | 3,432.4 | 5,585.5 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 349.4 | 349.4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (4.6) | — | (4.6) | ||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from sales of common stock through employee equity incentive plans | 2.6 | 60.3 | — | — | — | — | 60.3 | ||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock unit and stock appreciation right withholdings | (0.5) | (64.6) | — | — | — | — | (64.6) | ||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock used for new issuances | (2.1) | (66.8) | (2.1) | 66.8 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued to settle convertible debt | 26.1 | 3,171.1 | — | — | — | — | 3,171.1 | ||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of convertible debt | — | (3,622.1) | — | — | — | — | (3,622.1) | ||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of capped call options | — | (35.8) | — | — | — | — | (35.8) | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of 2020 Senior Convertible Debt | — | 87.7 | — | — | — | — | 87.7 | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 198.5 | — | — | — | — | 198.5 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividend | — | — | — | — | — | (388.3) | (388.3) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 284.5 | $ | 2,403.6 | 11.0 | $ | (433.8) | $ | (26.2) | $ | 3,393.5 | $ | 5,337.1 |
See accompanying notes to consolidated financial statements
F-11
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 smart, connected and secure embedded control solutions used by its customers for a wide variety of applications. The Company provides 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 the Company's solutions by its customers in their end products.
Principles of Consolidation
The Company prepares its consolidated financial statements in accordance with U.S. GAAP. The consolidated financial statements include the accounts of Microchip and its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per share amounts, are stated in millions of U.S. dollars unless otherwise noted. As further discussed in Note 2, on May 29, 2018, the Company completed its acquisition of Microsemi Corporation (Microsemi) and the Company's financial results include Microsemi's results beginning as of such acquisition date.
Revenue Recognition
The Company generates revenue primarily from sales of semiconductor products to distributors and non-distributor customers (direct customers) and, to a lesser extent, from royalties paid by licensees of intellectual property. The Company applies the following five-step approach to determine the timing and amount of revenue recognition: (i) identify the contract with the customer, (ii) identify performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the performance obligation is satisfied.
Sales to distributors are governed by a distributor agreement, a purchase order, and an order acknowledgment. Sales to distributors do not meet the definition of a contract until the distributor has sent in a purchase order, the Company has acknowledged the order, the Company has deemed the collectability of the consideration to be probable, and legally enforceable rights and obligations have been created; this generally occurs 30 days prior to the estimated ship date. As is customary in the semiconductor industry, the Company offers price concessions and stock rotation rights to many of its distributors. As these are forms of variable consideration, the Company estimates the amount of consideration to which they will be entitled using recent historical data and applying the expected value method. Usually, there is only a single performance obligation in the contract, and therefore the entire transaction price is allocated to the single performance obligation. After the transaction price has been allocated, the Company recognizes revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with distributors is recognized at the time risk and title of the inventory transfers to the distributor.
Sales to direct customers are generally governed by a purchase order and an order acknowledgment. Sales to direct customers usually do not meet the definition of a contract until shipment of the product occurs. Generally, the transaction price associated with contracts with direct customers is set at the standalone selling price and is not variable. Usually, there is only a single performance obligation in the contract, and therefore the entire transaction price is allocated to the single performance obligation. After the transaction price has been allocated, the Company recognizes revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with direct customers is recognized at the time risk and title of the inventory transfers to the customer.
Revenue generated from licensees is governed by licensing agreements. The Company's primary performance obligation related to these agreements is to provide the licensee the right to use the intellectual property. The final transaction price is determined by multiplying the usage of the license by the royalty, which is fixed in the licensing agreement. Revenue is recognized as usage of the license occurs.
F-12
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 were immaterial for the fiscal years ended March 31, 2021, 2020, and 2019.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were immaterial for the fiscal years ended March 31, 2021, 2020 and 2019.
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.
Restructuring Charges
Restructuring charges are included within special charges and other, net in the consolidated statements of income and are primarily comprised of employee separation costs, asset impairments, contract exit costs and costs of facility consolidation and closure, including the related gains or losses associated with the sale of owned facilities. Employee separation costs includes one-time termination benefits that are recognized as a liability at estimated fair value, at the time of communication to employees, unless future service is required, in which case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits are probable and reasonably estimable. Contract exit costs includes contract termination fees and ROU asset impairments recognized on the cease-use date of leased facilities. A liability for contract termination fees is recognized in the period in which the Company terminates the contract.
Foreign Currency Translation
Substantially all of 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 (loss) income, net 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 fiscal 2021, 2020 and 2019, certain foreign subsidiaries acquired as part of the Company's acquisition activities had the local currency as the functional currency. For subsidiaries acquired as part of the Company's acquisition of Microsemi, the U.S. dollar will become the functional currency for such entities once integrated into the Company's legal structure and intercompany agreements are executed.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and to the extent the Company believes that recovery is not likely, it must establish a valuation allowance. The Company provided valuation allowances for certain of its deferred tax assets where it is more likely than not that some portion, or all of such assets, will not be realized.
F-13
Various taxing authorities in the U.S. and other countries in which the Company does business scrutinize the tax structures employed by businesses. Companies of a similar size and complexity as the Company are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. During the fiscal year ended March 31, 2021, various jurisdictions finalized their audits. The close of these audits did not have an adverse impact on the financial statements. The Company is currently being audited by the tax authorities in the United States and various foreign jurisdictions. At this time, the Company does not know what the outcome of these audits will be. The Company records benefits for uncertain tax positions based on an assessment of whether it is more likely than not that the tax positions will be sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the Company recognizes the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.
The accounting model related to the valuation of uncertain tax positions requires the Company 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 the Company believes the possibility of examination by a taxing authority or discovery of the related risk matters is remote or where it has a long history of the taxing authority not performing an exam or overlooking an issue. The Company 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.
On December 22, 2017, the TCJA was enacted into law and established a new provision designed to tax low-taxed income of foreign subsidiaries known as global intangible low-taxed income (GILTI). The FASB allows taxpayers to make an accounting policy election of either (i) treating taxes due on GILTI inclusions as a current-period expense when incurred or (ii) recognizing deferred taxes for temporary basis differences that are expected to reverse as GILTI in future years. The Company has made a policy choice to include taxes due on the future GILTI inclusion in taxable income when incurred.
On March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) was enacted into law in the U.S. The ARPA, among other things, includes provisions to extend the $1.0 million limitation on deductions for compensation to executive offices to include the eight highest paid individuals rather than the top three in addition to the Chief Executive Officer and Chief Financial Officer, extends the period for which companies may claim an employee retention credit and repeals the election under which a U.S. affiliated group may allocate interest expense on a worldwide basis. The Company continues to examine the impacts the ARPA may have on its business.
Cash and Cash Equivalents
All highly liquid investments, including marketable securities with an original maturity to the Company of three months or less when acquired are considered to be cash equivalents.
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.
The Company is exposed to fluctuations in prices for energy that it consumes, particularly electricity and natural gas. The Company also enters into variable-priced contracts for some purchases of electricity and natural gas, on an index basis. The Company seeks, or may seek, to partially mitigate these exposures through fixed-price contracts. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales” exception under authoritative guidance and require no mark-to-market adjustment.
F-14
Inventories
Inventories are valued at the lower of cost or net realizable value 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 net realizable 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 30 years for buildings and building improvements and 5 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.
Leases
The Company determines if an arrangement is a lease at its inception. Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the ROU assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued expenses and other current liabilities or other long-term liabilities in the condensed consolidated balance sheets.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets also include any initial direct costs and prepayments less lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.
As the Company's leases generally do not provide an implicit rate, the Company uses its collateralized incremental borrowing rate based on the information available at the lease commencement date, including lease term, in determining the present value of lease payments. Lease expense for these leases is recognized on a straight-line basis over the lease term. The Company accounts for the lease and non-lease components as a single lease component.
Convertible Debt
Upon issuance, the Company separately accounts for the liability and equity components of its Convertible Debt by estimating the fair values of the i) liability component without a conversion feature and ii) the conversion feature. 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 the Company's consolidated statements of income.
Upon settlement of Convertible Debt instruments, the Company allocates the total consideration between the liability and equity components based on the fair value of the liability component without the conversion feature. The difference between the consideration allocated to the liability component and the net carrying value of the liability component is recognized as an extinguishment loss or gain. The remaining settlement consideration is allocated to the equity component and recognized as a
F-15
reduction of additional paid-in capital in the Company's consolidated balance sheets. In addition, if the terms of the settlement are different from the contractual terms of the original instrument, the Company recognizes an inducement loss, which is measured as the difference between the fair value of the original terms of the instrument and the fair value of the settlement terms.
Determining the fair value of the liability component without the conversion feature upon issuance and settlement involves estimating the equivalent borrowing rate for a similar non-convertible instrument. Given the values of these transactions, fair value estimates are sensitive to changes in the equivalent borrowing rate conclusions. The measurement of the equivalent borrowing rate requires that the Company make estimates of volatility and credit spreads to align observable market inputs with the instrument being valued.
Lastly, the Company includes the dilutive effect of the shares of its common stock issuable upon conversion of the outstanding 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 has adopted an accounting policy to settle the principal amount of the Convertible Debt in cash. This method results in incremental dilutive shares when the average fair value of the Company's common stock for a reporting period exceeds the conversion prices per share and adjusts as dividends are recorded in the future.
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. 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
F-16
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. 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. Other intangible assets include existing technologies, core and developed technology, in-process research and development, trademarks and trade names, distribution rights and customer-related intangibles. 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. 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 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. 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. The Company's impairment evaluation consists of a qualitative impairment assessment in which 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 performs a quantitative 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, 2021, 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 RSUs have been granted to employees and non-employee members of the Board of Directors. The Company uses 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 on a straight-line basis 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.
F-17
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. 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.
Distributor advances in the consolidated balance sheets, totaled $104.8 million and $141.0 million at March 31, 2021 and March 31, 2020, respectively. 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 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. GAAP. 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 maker (CODM) to assess the performance of the component and make decisions about the resources to be allocated to the component. The Company's President and Chief Executive Officer has been identified as the CODM. 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, timing, wired and wireless connectivity devices, and memory products. Under the leadership of the CODM, 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 CODM, 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 CODM assesses performance and allocates resources based on the Company's consolidated results.
Subsequent Events
The Company evaluated events after March 31, 2021, and through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
F-18
Recently Adopted Accounting Pronouncements
The Company adopted the following Accounting Standards Updates in fiscal 2021, none of which had a material impact on its consolidated financial statements.
| Accounting Standards Updates | Description | |||||||
| ASU 2020-04 | Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | |||||||
| ASU 2018-15 | Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | |||||||
| ASU 2018-13 | Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement | |||||||
| ASU 2017-04 | Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | |||||||
| ASU 2016-13 | Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity, which simplifies the guidance for certain convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. Additionally, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company expects the primary impacts of this new standard will be to increase the carrying value of its Convertible Debt and reduce its reported interest expense. In addition, the Company will be required to use the if-converted method for calculating diluted earnings per share. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12-Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance enhances and simplifies various aspects of the income tax accounting, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intraperiod tax allocation exception to the incremental approach, ownership changes in investments, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. The amendments are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
Note 2. Business Acquisitions
Acquisition of Microsemi
On May 29, 2018, the Company completed its acquisition of Microsemi Corporation, a publicly traded company headquartered in Aliso Viejo, California. The Company paid an aggregate of approximately $8.19 billion in cash to the stockholders of Microsemi. The total consideration transferred in the acquisition, including approximately $53.9 million of non-cash consideration for the exchange of certain share-based payment awards of Microsemi for stock awards of the Company, was approximately $8.24 billion. In addition to the consideration transferred, the Company recognized in its consolidated financial statements $3.23 billion in liabilities of Microsemi consisting of debt, taxes payable and deferred, restructuring, and contingent and other liabilities of which $2.06 billion of existing debt was paid off. The Company financed the purchase price using approximately $8.10 billion of borrowings consisting of $3.10 billion under its amended and restated Revolving Credit Facility, $3.00 billion under its Term Loan Facility provided under the Company's amended and restated Credit Agreement, and $2.00 billion in newly issued senior secured notes. The Company incurred $22.0 million in acquisition costs related to the acquisition. As a result of the acquisition, Microsemi became a wholly owned subsidiary of the Company. Microsemi offers a comprehensive portfolio of semiconductor and system solutions for aerospace and defense,
F-19
communications, data center and industrial markets. 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 Microsemi 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 Microsemi's net tangible assets and intangible assets based on their estimated fair values as of May 29, 2018. 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 Microsemi acquisition is deductible for tax purposes. The Company retained independent third-party appraisers to assist management in its valuation of the acquired assets and liabilities.
The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (in millions).
| Assets Acquired | |||||||||||||||||
| Cash and cash equivalents | $ | 340.0 | |||||||||||||||
| Accounts receivable | 215.6 | ||||||||||||||||
| Inventories | 576.2 | ||||||||||||||||
| Other current assets | 85.2 | ||||||||||||||||
| Property, plant and equipment | 201.5 | ||||||||||||||||
| Goodwill | 4,364.9 | ||||||||||||||||
| Purchased intangible assets | 5,634.5 | ||||||||||||||||
| Long-term deferred tax assets | 5.9 | ||||||||||||||||
| Other assets | 53.3 | ||||||||||||||||
| Total assets acquired | 11,477.1 | ||||||||||||||||
| Liabilities Assumed | |||||||||||||||||
| Accounts payable | (233.8) | ||||||||||||||||
| Other current liabilities | (149.3) | ||||||||||||||||
| Long-term debt | (2,056.9) | ||||||||||||||||
| Deferred tax liabilities | (565.1) | ||||||||||||||||
| Long-term income tax payable | (177.7) | ||||||||||||||||
| Other long-term liabilities | (49.8) | ||||||||||||||||
| Total liabilities assumed | (3,232.6) | ||||||||||||||||
| Purchase price allocated | $ | 8,244.5 |
| Weighted Average Useful Life (in years) | May 29, 2018 (in millions) | |||||||||||||
| Purchased Intangible Assets | ||||||||||||||
| Core and developed technology | 15 | $ | 4,569.1 | |||||||||||
| In-process research and development | — | 847.1 | ||||||||||||
| Customer-related | 12 | 200.2 | ||||||||||||
| Backlog | 1 | 12.3 | ||||||||||||
| Other | 4 | 5.8 | ||||||||||||
| Total purchased intangible assets | $ | 5,634.5 |
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.
F-20
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 Microsemi's contractual relationships and customer loyalty related to its distributor and end-customer relationships. The fair values of the customer-related intangibles were determined using the distributor method, a form of the income approach based on distributor margin and expected attrition and revenue growth for Microsemi's existing customers as of the acquisition date. 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 Microsemi at the acquisition date, and the fair values were determined 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 Microsemi transaction is 13 years. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $856.7 million was established as a net deferred tax liability for the future amortization of the intangible assets.
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 income (in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Restructuring | |||||||||||||||||||||||||||||||||||||||||
| Employee separation costs | $ | (1.3) | $ | 6.0 | $ | 65.3 | |||||||||||||||||||||||||||||||||||
| Gain on sale of assets | (5.8) | (1.5) | — | ||||||||||||||||||||||||||||||||||||||
| Impairment charges | — | 0.7 | 3.6 | ||||||||||||||||||||||||||||||||||||||
| Contract exit costs | (1.6) | 5.2 | (4.7) | ||||||||||||||||||||||||||||||||||||||
| Wafer fabrication restructuring | 15.0 | 18.0 | — | ||||||||||||||||||||||||||||||||||||||
| Other | 0.1 | 2.6 | (0.3) | ||||||||||||||||||||||||||||||||||||||
| Legal contingencies | 0.2 | 15.7 | (30.2) | ||||||||||||||||||||||||||||||||||||||
| Contingent consideration revaluation | (4.9) | — | — | ||||||||||||||||||||||||||||||||||||||
| Total | $ | 1.7 | $ | 46.7 | $ | 33.7 |
The Company continuously evaluates its existing operations in an attempt to identify and realize cost savings opportunities and operational efficiencies. This same approach is applied to businesses that are acquired by the Company and often the operating models of acquired companies are not as efficient as the Company's operating model which enables the Company to realize significant savings and efficiencies. As a result, following an acquisition, the Company will from time to time incur restructuring expenses; however, the Company is often not able to estimate the timing or amount of such costs in advance of the period in which they occur. The primary reason for this is that the Company regularly reviews and evaluates each position, contract and expense against the Company's strategic objectives, long-term operating targets and other operational priorities. Decisions related to restructuring activities are made on a "rolling basis" during the course of the integration of an acquisition whereby department managers, executives and other leaders work together to evaluate each of these expenses and make recommendations. As a result of this approach, at the time of an acquisition, the Company is not able to estimate the future amount of expected employee separation or exit costs that it will incur in connection with its restructuring activities.
F-21
During the fiscal year ended March 31, 2021, the Company incurred net costs of $15.0 million associated with restructuring certain of its wafer fabrication operations consisting of $8.0 million to re-purpose its Colorado Springs (Fab 5) facility and $7.0 million associated with restructuring other acquired operations compared to net costs of $18.0 million during the fiscal year ended March 31, 2020 to re-purpose its Fab 5 facility, primarily consisting of $8.2 million in contract exit costs, $6.6 million in other relocation costs and $2.5 million in asset impairment charges. These wafer fabrication restructuring efforts were substantially completed as of March 31, 2021. The Company's other restructuring activities during the fiscal years ended March 31, 2021, March 31, 2020 and March 31, 2019 were primarily related to the Company's most recent business acquisitions, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. The impairment charges in the fiscal year ended March 31, 2019 were primarily recognized as a result of writing off intangible assets purchased from Microsemi prior to the close of the acquisition and other intangible assets that were impaired as a result of changes in the combined product roadmaps after the acquisition that affected the use and life of the assets. Additional costs will be incurred in the future as additional synergies or operational efficiencies are identified in connection with the Microsemi transaction, other previous acquisitions, or the restructuring of wafer fabrication operations. The Company is not able to estimate the amount of other such future expenses at this time.
During the fiscal year ended March 31, 2020, the Company incurred $15.7 million of net charges related to legal settlements, for which the majority of the cash settlement occurred early in the fiscal year ended March 31, 2021.
All of the Company's restructuring activities occurred in its semiconductor products segment. The Company incurred $71.2 million in costs since the start of the fiscal year ended March 31, 2018 in connection with employee separation activities net of $1.3 million in credits during the fiscal year ended March 31, 2021 and $6.0 million and $65.3 million were incurred during the fiscal years ended March 31, 2020 and 2019, respectively. The Company could incur future expenses as additional synergies or operational efficiencies are identified. Beyond what is already accrued, the Company is not able to estimate future expenses, if any, to be incurred in employee separation costs. The Company has incurred $0.4 million in net credits in connection with contract exit activities since the start of the fiscal year ended March 31, 2018 which includes net credits of $1.6 million and $4.7 million for the fiscal years ended March 31, 2021 and March 31, 2019, respectively, compared to expense of $5.2 million for the fiscal year ended March 31, 2020.
The liability for restructuring and other exit costs of $15.9 million is included in accrued liabilities and other long-term liabilities, on the Company's consolidated balance sheets as of March 31, 2021.
Note 4. Net Sales
The following table represents the Company's net sales by product line (in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Microcontrollers | $ | 2,961.0 | $ | 2,817.9 | $ | 2,921.9 | |||||||||||||||||||||||||||||||||||
| Analog | 1,519.8 | 1,511.1 | 1,530.7 | ||||||||||||||||||||||||||||||||||||||
| Other | 957.6 | 945.2 | 896.9 | ||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 5,438.4 | $ | 5,274.2 | $ | 5,349.5 |
The product lines listed above are included entirely in the Company's semiconductor product segment with the exception of the other product line, which includes products from both the semiconductor product and technology licensing segments.
The following table represents the Company's net sales by contract type (in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Distributors | $ | 2,737.4 | $ | 2,626.9 | $ | 2,719.1 | |||||||||||||||||||||||||||||||||||
| Direct customers | 2,598.1 | 2,550.4 | 2,498.0 | ||||||||||||||||||||||||||||||||||||||
| Licensees | 102.9 | 96.9 | 132.4 | ||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 5,438.4 | $ | 5,274.2 | $ | 5,349.5 |
Distributors are customers that buy products with the intention of reselling them. Distributors generally have a distributor agreement with the Company to govern the terms of the relationship. Direct customers are non-distributor customers, which generally do not have a master sales agreement with the Company. The Company's direct customers primarily consist of OEMs and, to a lesser extent, contract manufacturers. Licensees are customers of the Company's technology licensing segment, which
F-22
include purchasers of intellectual property and customers that have licensing agreements to use the Company's SuperFlash® embedded flash and Smartbits® one time programmable NVM technologies. All of the contract types listed in the table above are included in the Company's semiconductor product segment with the exception of licenses, which is included in the technology licensing segment.
Substantially all of the Company's net sales are recognized from contracts with customers.
Semiconductor Product Segment
For contracts related to the purchase of semiconductor products, the Company satisfies its performance obligation when control of the ordered product transfers to the customer. The timing of the transfer of control depends on the agreed upon shipping terms with the customer, but generally occurs upon shipment, which is when physical possession of the product has been transferred and legal title of the product transfers to the customer. Payment is generally due within 30 days of the ship date. Payment is generally collected after the Company satisfies its performance obligation, therefore contract liabilities are uncommon. Also, the Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a contract asset. Refer to Note 10 for the opening and closing balances of the Company's receivables.
Generally, there is only a single performance obligation in the Company's contracts with customers for semiconductor products; as such, the entire transaction price is allocated to the single performance obligation and allocation of the transaction price to individual performance obligations is not necessary. The consideration received from customers is fixed, with the exception of consideration from certain distributors. Certain of the Company's distributors are granted price concessions and return rights, which result in variable consideration. The amount of revenue recognized for sales to these certain distributors is adjusted for estimates of the price concessions and return rights that are expected to be claimed. These estimates are based on the recent history of price concessions and stock rotations.
Technology Licensing Segment
The technology licensing segment includes sales and licensing of the Company's intellectual property. For contracts related to the sale of the Company's intellectual property, the Company satisfies its performance obligation and recognizes revenue when control of the intellectual property transfers to the customer. For contracts related to the licensing of the Company's technology, the Company satisfies its performance obligation and recognizes revenue as usage of the license occurs. The transaction price is fixed by the license agreement. Payment is collected after the Company satisfies its performance obligation, and therefore no contract liabilities are recorded. The Company does not record contract assets due to the fact that the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, the Company recognizes a receivable instead of a contract asset. Refer to Note 10 for the opening and closing balances of the Company's receivables.
Note 5. Geographic and Segment Information
The Company's reportable segments are 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.
The following table represents net sales and gross profit for each segment (in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Net Sales | Gross Profit | Net Sales | Gross Profit | Net Sales | Gross Profit | ||||||||||||||||||||||||||||||
| Semiconductor products | $ | 5,335.5 | $ | 3,275.9 | $ | 5,177.3 | $ | 3,145.2 | $ | 5,217.1 | $ | 2,798.9 | |||||||||||||||||||||||
| Technology licensing | 102.9 | 102.9 | 96.9 | 96.9 | 132.4 | 132.4 | |||||||||||||||||||||||||||||
| Total | $ | 5,438.4 | $ | 3,378.8 | $ | 5,274.2 | $ | 3,242.1 | $ | 5,349.5 | $ | 2,931.3 |
The Company sells its products to distributors and 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
F-23
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 and ROU assets) by geographic area are as follows (in millions):
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| United States | $ | 516.6 | $ | 515.0 | |||||||
| Thailand | 178.1 | 174.4 | |||||||||
| Various other countries | 314.3 | 306.2 | |||||||||
| Total long-lived assets | $ | 1,009.0 | $ | 995.6 |
Sales to unaffiliated customers located outside the U.S., primarily in Asia and Europe, aggregated approximately 77%, 78% and 80% of consolidated net sales for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Sales to customers in Europe represented approximately 19%, 22% and 23% of consolidated net sales for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Sales to customers in Asia represented approximately 55% of consolidated net sales for fiscal 2021 and approximately 52% of consolidated net sales for each of fiscal 2020 and 2019. Within Asia, sales into China represented approximately 22%, 21% and 22% of consolidated net sales for fiscal 2021, 2020 and 2019, respectively. Sales into Taiwan represented approximately 16%, 15% and 13% of consolidated net sales for fiscal 2021, 2020 and 2019, 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.
With the exception of Arrow Electronics, the Company's largest distributor, which accounted for 10% of net sales in fiscal 2020 and fiscal 2019, no other distributor or end customer accounted for more than 10% of net sales in fiscal 2021, fiscal 2020 or fiscal 2019.
Note 6. Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share (in millions, except per share amounts):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Net income | $ | 349.4 | $ | 570.6 | $ | 355.9 | |||||||||||||||||||||||||||||||||||
| Basic weighted average common shares outstanding | 259.6 | 238.9 | 236.2 | ||||||||||||||||||||||||||||||||||||||
| Dilutive effect of stock options and RSUs | 3.5 | 3.4 | 3.8 | ||||||||||||||||||||||||||||||||||||||
| Dilutive effect of 2015 Senior Convertible Debt | 4.7 | 13.7 | 9.9 | ||||||||||||||||||||||||||||||||||||||
| Dilutive effect of 2017 Senior Convertible Debt | 1.7 | 0.1 | — | ||||||||||||||||||||||||||||||||||||||
| Dilutive effect of 2020 Senior Convertible Debt | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Dilutive effect of 2017 Junior Convertible Debt | 1.1 | 0.1 | — | ||||||||||||||||||||||||||||||||||||||
| Diluted weighted average common shares outstanding | 270.6 | 256.2 | 249.9 | ||||||||||||||||||||||||||||||||||||||
| Basic net income per common share | $ | 1.35 | $ | 2.39 | $ | 1.51 | |||||||||||||||||||||||||||||||||||
| Diluted net income per common share | $ | 1.29 | $ | 2.23 | $ | 1.42 |
The Company computed basic net income per common share based on the weighted average number of common shares outstanding during the period. The Company computed diluted net income per common share based on 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 each of the fiscal years ended March 31, 2021, 2020 and 2019.
F-24
The Company's 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 Company intends to settle the principal amount of the Convertible Debt 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 7 for details on the Convertible Debt):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| 2015 Senior Convertible Debt | $ | 60.90 | $ | 61.80 | $ | 62.86 | |||||||||||||||||||||||||||||||||||
| 2017 Senior Convertible Debt | $ | 94.96 | $ | 96.37 | $ | 98.03 | |||||||||||||||||||||||||||||||||||
| 2020 Senior Convertible Debt | $ | 186.86 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||
| 2017 Junior Convertible Debt | $ | 93.30 | $ | 94.68 | $ | 96.31 |
Note 7. Debt
Debt obligations included in the consolidated balance sheets consisted of the following (in millions):
| Coupon Interest Rate | Effective Interest Rate | Fair Value of Liability Component at Issuance (1) | |||||||||||||||||||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
| Senior Secured Indebtedness | |||||||||||||||||||||||||||||||||||||||||
| Revolving Credit Facility | $ | 2,346.6 | $ | 2,388.5 | |||||||||||||||||||||||||||||||||||||
| Term Loan Facility | — | 1,723.5 | |||||||||||||||||||||||||||||||||||||||
| Bridge Loan Facility | — | 615.0 | |||||||||||||||||||||||||||||||||||||||
| 3.922% 2021 Notes | 3.922% | 4.5% | 1,000.0 | 1,000.0 | |||||||||||||||||||||||||||||||||||||
| 4.333% 2023 Notes | 4.333% | 4.7% | 1,000.0 | 1,000.0 | |||||||||||||||||||||||||||||||||||||
| 2.670% 2023 Notes | 2.670% | 2.8% | 1,000.0 | — | |||||||||||||||||||||||||||||||||||||
| 0.972% 2024 Notes | 0.972% | 1.1% | 1,400.0 | — | |||||||||||||||||||||||||||||||||||||
| Senior Unsecured Indebtedness | |||||||||||||||||||||||||||||||||||||||||
| 4.250% 2025 Notes | 4.250% | 4.6% | 1,200.0 | — | |||||||||||||||||||||||||||||||||||||
| Total Senior Indebtedness | 7,946.6 | 6,727.0 | |||||||||||||||||||||||||||||||||||||||
| Senior Subordinated Convertible Debt - Principal Outstanding | |||||||||||||||||||||||||||||||||||||||||
| 2015 Senior Convertible Debt | 1.625% | 5.9% | $ | 120.9 | 141.4 | 1,110.0 | |||||||||||||||||||||||||||||||||||
| 2017 Senior Convertible Debt | 1.625% | 6.0% | $ | 260.9 | 333.3 | 2,070.0 | |||||||||||||||||||||||||||||||||||
| 2020 Senior Convertible Debt | 0.125% | 5.1% | $ | 555.5 | 665.5 | — | |||||||||||||||||||||||||||||||||||
| Junior Subordinated Convertible Debt - Principal Outstanding | |||||||||||||||||||||||||||||||||||||||||
| 2017 Junior Convertible Debt | 2.250% | 7.4% | $ | 64.0 | 122.6 | 686.3 | |||||||||||||||||||||||||||||||||||
| Total Convertible Debt | 1,262.8 | 3,866.3 | |||||||||||||||||||||||||||||||||||||||
| Gross long-term debt including current maturities | 9,209.4 | 10,593.3 | |||||||||||||||||||||||||||||||||||||||
| Less: Debt discount (2) | (273.0) | (1,043.2) | |||||||||||||||||||||||||||||||||||||||
| Less: Debt issuance costs (3) | (32.3) | (67.9) | |||||||||||||||||||||||||||||||||||||||
| Net long-term debt including current maturities | 8,904.1 | 9,482.2 | |||||||||||||||||||||||||||||||||||||||
| Less: Current maturities (4) | (1,322.9) | (608.8) | |||||||||||||||||||||||||||||||||||||||
| Net long-term debt | $ | 7,581.2 | $ | 8,873.4 |
(1) As each of the convertible debt instruments may be settled in cash upon conversion, for accounting purposes, they were bifurcated into a liability component and an equity component. 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.
F-25
(2) The unamortized discount consists of the following (in millions):
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Bridge Loan Facility | $ | — | $ | (3.1) | |||||||||||||||||||
| 3.922% 2021 Notes | (0.3) | (2.1) | |||||||||||||||||||||
| 4.333% 2023 Notes | (2.4) | (3.5) | |||||||||||||||||||||
| 2.670% 2023 Notes | (2.3) | — | |||||||||||||||||||||
| 0.972% 2024 Notes | (3.8) | — | |||||||||||||||||||||
| 4.250% 2025 Notes | (12.8) | — | |||||||||||||||||||||
| 2015 Senior Convertible Debt | (20.1) | (192.9) | |||||||||||||||||||||
| 2017 Senior Convertible Debt | (71.3) | (504.2) | |||||||||||||||||||||
| 2020 Senior Convertible Debt | (101.6) | — | |||||||||||||||||||||
| 2017 Junior Convertible Debt | (58.4) | (337.4) | |||||||||||||||||||||
| Total unamortized discount | $ | (273.0) | $ | (1,043.2) |
(3) Debt issuance costs consist of the following (in millions):
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Revolving Credit Facility | $ | (10.0) | $ | (14.6) | |||||||||||||||||||
| Term Loan Facility | — | (14.6) | |||||||||||||||||||||
| Bridge Loan Facility | — | (3.1) | |||||||||||||||||||||
| 3.922% 2021 Notes | (0.7) | (4.8) | |||||||||||||||||||||
| 4.333% 2023 Notes | (5.3) | (7.7) | |||||||||||||||||||||
| 2.670% 2023 Notes | (1.3) | — | |||||||||||||||||||||
| 0.972% 2024 Notes | (2.0) | — | |||||||||||||||||||||
| 4.250% 2025 Notes | (1.7) | — | |||||||||||||||||||||
| 2015 Senior Convertible Debt | (0.7) | (7.0) | |||||||||||||||||||||
| 2017 Senior Convertible Debt | (1.8) | (13.0) | |||||||||||||||||||||
| 2020 Senior Convertible Debt | (8.3) | — | |||||||||||||||||||||
| 2017 Junior Convertible Debt | (0.5) | (3.1) | |||||||||||||||||||||
| Total debt issuance costs | $ | (32.3) | $ | (67.9) |
(4) As of March 31, 2021, current maturities consist of the liability component of the 2017 Senior Convertible Debt and the 2017 Junior Convertible Debt, and the 3.922% 2021 Notes which are due June 1, 2021. As of March 31, 2020, current maturities included the Bridge Loan Facility.
Expected maturities relating to the Company’s debt obligations as of March 31, 2021 are as follows (in millions):
| Fiscal year ending March 31, | Expected Maturities | |||||||
| 2022 | $ | 1,000.0 | ||||||
| 2023 | — | |||||||
| 2024 | 5,746.6 | |||||||
| 2025 | 806.9 | |||||||
| 2026 | 1,200.0 | |||||||
| Thereafter | 455.9 | |||||||
| Total | $ | 9,209.4 |
Ranking of Convertible Debt - The Convertible Debt are unsecured obligations which are subordinated in right of payment to the amounts outstanding under the Company's Senior Indebtedness. The 2017 Junior Convertible Debt is expressly subordinated in right of payment to any existing and future senior debt of the Company (including the Senior Indebtedness and 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 is subordinated to the Senior Indebtedness; ranks senior to the Company's indebtedness that is expressly subordinated in right of payment to it, including the 2017 Junior Convertible Debt; ranks equal in right of payment to any of the Company's unsubordinated indebtedness that does not provide that it is
F-26
senior to the Senior Subordinated Convertible Debt; ranks junior in right of payment to any of the Company's secured and unsecured unsubordinated indebtedness to the extent of the value of the assets securing such indebtedness; and is structurally subordinated 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 including the declaration of cash dividends. Except during the three-month period immediately preceding the maturity date of the applicable series of Convertible Debt, each series of Convertible Debt is convertible only upon the occurrence of (i) such time as the closing price of the Company's common stock exceeds the applicable 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 (ii) 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 of a given series for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such trading day or (iii) upon the occurrence of certain corporate events specified in the indenture of such series of Convertible Debt. In addition, for each series, with the exception of the 2020 Senior Convertible Debt, 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 incremental share factors and maximum conversion rates as adjusted for dividends paid since the applicable issuance date:
| Dividend adjusted rates as of March 31, 2021 | |||||||||||||||||||||||
| Conversion Rate | Approximate Conversion Price | Incremental Share Factor | Maximum Conversion Rate | ||||||||||||||||||||
| 2015 Senior Convertible Debt (1) | 16.5197 | $ | 60.53 | 8.2599 | 23.1276 | ||||||||||||||||||
| 2017 Senior Convertible Debt (1) | 10.5934 | $ | 94.40 | 5.2967 | 15.0957 | ||||||||||||||||||
| 2020 Senior Convertible Debt (1) | 5.3521 | $ | 186.84 | — | 7.4929 | ||||||||||||||||||
| 2017 Junior Convertible Debt (1) | 10.7826 | $ | 92.74 | 5.3914 | 15.0957 | ||||||||||||||||||
(1) As of March 31, 2021, the 2020 Senior Convertible Debt was not convertible. As of March 31, 2021, the holders of each of the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2017 Junior Convertible Debt have the right to convert their notes between April 1, 2021 and June 30, 2021 because the Company's common stock price has exceeded the applicable conversion price for such series by 130% for the specified period of time during the quarter ended March 31, 2021. As of March 31, 2021, the adjusted conversion rate for the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2017 Junior Convertible Debt would be increased to 21.5583 shares of common stock, 12.6689 shares of common stock, and 12.9527 shares of common stock, respectively, per $1,000 principal amount of notes based on the closing price of $155.22 per share of common stock to include an additional maximum incremental share rate per the terms of the applicable indenture. As of March 31, 2021, each of the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, and 2017 Junior Convertible Debt had a conversion value in excess of par of $331.9 million, $322.2 million, and $123.9 million, respectively.
With the exception of the 2020 Senior Convertible Debt, which may be redeemed by the Company on or after November 20, 2022, 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. Under the terms of the applicable indenture, the Company may repurchase any series of Convertible Debt in the open market through privately negotiated exchange offers. 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.
F-27
Interest expense consists of the following (in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Debt issuance cost amortization | $ | 14.7 | $ | 13.2 | $ | 12.9 | |||||||||||||||||||||||||||||||||||
| Debt discount amortization | 6.6 | 2.9 | 2.2 | ||||||||||||||||||||||||||||||||||||||
| Interest expense | 227.4 | 277.6 | 291.8 | ||||||||||||||||||||||||||||||||||||||
| Total interest expense on Senior Indebtedness | 248.7 | 293.7 | 306.9 | ||||||||||||||||||||||||||||||||||||||
| Debt issuance cost amortization | 2.4 | 3.9 | 3.6 | ||||||||||||||||||||||||||||||||||||||
| Debt discount amortization | 64.5 | 118.8 | 112.4 | ||||||||||||||||||||||||||||||||||||||
| Coupon interest expense | 37.6 | 77.2 | 77.1 | ||||||||||||||||||||||||||||||||||||||
| Total interest expense on Convertible Debt | 104.5 | 199.9 | 193.1 | ||||||||||||||||||||||||||||||||||||||
| Other interest expense | 3.7 | 3.7 | 2.9 | ||||||||||||||||||||||||||||||||||||||
| Total interest expense | $ | 356.9 | $ | 497.3 | $ | 502.9 |
The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 3.9 years, 5.9 years, 3.6 years, and 15.9 years for the 2015 Senior Convertible Debt, 2017 Senior Convertible Debt, 2020 Senior Convertible Debt, and 2017 Junior Convertible Debt, respectively.
The Company's settlement transactions consists of the following (in millions)(1):
| Principal Amount Settled | Consideration | Fair Value Settled(2) | Equity Component(2) | Net Loss on Inducements and Settlements | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash Paid | Value of Shares Issued | Debt Issued | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| February 2021*(3)* | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 Senior Convertible Debt | $ | 81.0 | $ | 81.0 | $ | 206.5 | $ | — | $ | 287.5 | $ | 79.2 | $ | 208.1 | $ | 10.7 | |||||||||||||||||||||||||||||||||||||
| 2017 Senior Convertible Debt | $ | 122.2 | $ | 122.2 | $ | 166.4 | $ | — | $ | 288.6 | $ | 115.9 | $ | 168.2 | $ | 25.5 | |||||||||||||||||||||||||||||||||||||
| 2017 Junior Convertible Debt | $ | 156.0 | $ | 156.0 | $ | 217.9 | $ | — | $ | 373.9 | $ | 129.8 | $ | 243.9 | $ | 49.4 | |||||||||||||||||||||||||||||||||||||
| December 2020*(4)* | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 Senior Convertible Debt | $ | 90.0 | $ | 48.5 | $ | 221.0 | $ | — | $ | 269.5 | $ | 79.4 | $ | 184.5 | $ | 9.4 | |||||||||||||||||||||||||||||||||||||
| 2017 Senior Convertible Debt | $ | 588.8 | $ | 155.4 | $ | 408.7 | $ | 601.5 | $ | 1,165.6 | $ | 486.7 | $ | 655.3 | $ | 57.0 | |||||||||||||||||||||||||||||||||||||
| 2017 Junior Convertible Debt | $ | 407.7 | $ | 225.0 | $ | 530.4 | $ | 64.0 | $ | 819.4 | $ | 246.3 | $ | 547.1 | $ | 62.8 | |||||||||||||||||||||||||||||||||||||
| Term Loan Facility | $ | 1,705.7 | $ | 1,705.7 | $ | — | $ | — | $ | 1,705.7 | $ | — | $ | — | $ | 12.9 | |||||||||||||||||||||||||||||||||||||
| August 2020*(5)* | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 Senior Convertible Debt | $ | 414.3 | $ | 414.3 | $ | 547.6 | $ | — | $ | 961.9 | $ | 351.7 | $ | 592.3 | $ | 25.0 | |||||||||||||||||||||||||||||||||||||
| 2017 Senior Convertible Debt | $ | 381.8 | $ | 381.8 | $ | 221.1 | $ | — | $ | 602.9 | $ | 299.0 | $ | 292.2 | $ | 20.1 | |||||||||||||||||||||||||||||||||||||
| June 2020*(6)* | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 Senior Convertible Debt | $ | 383.3 | $ | 383.3 | $ | 405.1 | $ | — | $ | 788.4 | $ | 314.4 | $ | 464.4 | $ | 7.8 | |||||||||||||||||||||||||||||||||||||
| 2017 Senior Convertible Debt | $ | 643.9 | $ | 643.9 | $ | 246.4 | $ | — | $ | 890.3 | $ | 481.0 | $ | 390.9 | $ | 13.7 | |||||||||||||||||||||||||||||||||||||
| Term Loan Facility | $ | 17.8 | $ | 17.8 | $ | — | $ | — | $ | 17.8 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||
| Bridge Loan Facility | $ | 615.0 | $ | 615.0 | $ | — | $ | — | $ | 615.0 | $ | — | $ | — | $ | 5.3 | |||||||||||||||||||||||||||||||||||||
| March 2020*(7)* | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 Senior Convertible Debt | $ | 615.0 | $ | 615.0 | $ | 351.8 | $ | — | $ | 966.8 | $ | 460.4 | $ | 461.1 | $ | 3.4 |
(1) The Company settled portions of its convertible debt in privately negotiated transactions that are accounted for as induced conversions.
(2) The total consideration for the convertible debt settlements was allocated to the liability and equity components using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt instrument prior to the settlement.
(3) The Company used borrowings under its Revolving Credit Facility to finance a portion of such settlement.
F-28
(4) The Company used proceeds from the issuance of $665.5 million principal amount of 2020 Senior Convertible Debt and used borrowings under its Revolving Credit Facility to finance a portion of such settlement. The Company also issued $1.40 billion aggregate principal amount of 0.972% 2024 Notes and used the proceeds in addition to $213.0 million in borrowings under its Revolving Credit Facility, and cash on hand to repay all amounts outstanding under its Term Loan Facility.
(5) The Company used borrowings under its Revolving Credit Facility to finance a portion of such settlement.
(6) The Company used a portion of the proceeds from the issuance of the 2.670% 2023 Notes and the 4.250% 2025 Notes to (i) finance a portion of such settlement, and (ii) repay a portion of the amount outstanding under the Company's existing Revolving Credit Facility as well as for general corporate purposes.
(7) The Company entered into a Bridge Loan Facility (which has since been repaid in full), for an aggregate principal amount of $615.0 million to finance a portion of such settlement.
In December 2020, in connection with the issuance of the 2020 Senior Convertible Debt, the Company incurred issuance costs of $10.8 million, of which $9.0 million was recorded as debt issuance costs and will be amortized using the effective interest method over the term of the debt. The remainder of $1.8 million in fees was recorded to equity. The debt discount on the 2020 Senior Convertible Debt was the difference between the par value and the fair value of the debt resulting in a debt discount of $110.0 million which will be amortized to interest expense using the effective interest method over the term of the debt. Interest on the 2020 Senior Convertible Debt is payable semi-annually in arrears on May 15 and November 15 of each year. In connection with the issuance of the 2020 Senior Convertible Debt, the Company entered into capped call option transactions with several financial institutions at a cost of $35.8 million. The capped call options cover, subject to anti-dilution adjustments, the number of shares of the Company’s common stock initially underlying the 2020 Senior Convertible Debt. Upon conversion of the 2020 Senior Convertible Debt, the Company may exercise the capped call options subject to a cap strike price of $233.58 per share which would reduce the potential dilution to the Company’s common stock or offset any cash payments the Company is required to make in excess of the principal amount of converted notes. Upon conversion of the 2020 Senior Convertible Debt, there will be no economic dilution from the notes until the average market price of the Company’s common stock exceeds the cap price of $233.58 per share as the exercise of the capped call options will offset any dilution from the 2020 Senior Convertible Debt from the conversion price up to the cap price. As these transactions meet certain accounting criteria, the capped call options are recorded as a reduction of stockholders' equity and are not accounted for as derivatives.
Senior Notes
The 0.972% 2024 Notes mature on February 15, 2024 and interest accrues at a rate of 0.972% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The 2.670% 2023 Notes mature on September 1, 2023 and interest accrues at a rate of 2.670% per annum, payable semi-annually in arrears on March 1 and September 1 of each year. The 4.250% 2025 Notes mature on September 1, 2025 and interest accrues at a rate of 4.250% per annum, payable semi-annually in arrears on March 1 and September 1 of each year. The 3.922% 2021 Notes mature on June 1, 2021 and interest accrues at a rate of 3.922% per annum, payable semi-annually in arrears on June 1 and December 1 of each year. The 4.333% 2023 Notes mature on June 1, 2023 and interest accrues at a rate of 4.333% per annum, payable semi-annually in arrears on June 1 and December 1 of each year.
The Company may, at its option, redeem some or all of the applicable series of Senior Notes in the manner set forth in the indenture governing the applicable series of Senior Notes. If the Company experiences a specified change of control triggering event set forth in the indenture governing the applicable series of Senior Notes, the Company must offer to repurchase each of the notes of such series at a price equal to 101% of the principal amount of each note of such series repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
The indenture governing each series of Senior Notes contains certain customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, create or incur certain liens, and enter into sale and leaseback transactions, sell or otherwise dispose of any assets constituting collateral securing the Senior Notes, and consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets, to another person. These covenants are subject to a number of limitations and exceptions set forth in the indenture governing the applicable series of Senior Notes.
Each series of Senior Notes is guaranteed by certain of the Company's subsidiaries that have also guaranteed the obligations under the Credit Agreement and under the Company’s existing Senior Indebtedness. In the future, each subsidiary of the Company that is a guarantor or other obligor of the Credit Agreement is required to guarantee each series of Senior Notes.
The 0.972% 2024 Notes, the 2.670% 2023 Notes, the 3.922% 2021 Notes, and the 4.333% 2023 Notes and each of the associated guarantees are secured, on a pari passu first lien basis with the Credit Agreement, by substantially all of the tangible and intangible assets (other than certain excluded assets) of the Company and the guarantors that secure obligations under the
F-29
Credit Agreement, in each case subject to certain thresholds, exceptions and permitted liens, as set forth in the respective security agreement, by and among the Company, the subsidiary guarantors party thereto and the collateral agent.
Senior Credit Facilities
In March 2020 and September 2019, the Company amended the Company's Credit Agreement to, among other things, provide the ability to factor receivables and, subject to the satisfaction of specified conditions, to permit the incurrence of secured debt. In addition, the amendments reduce the margin added to the interest rate on revolving loans under the Credit Agreement to 0.0% to 0.75% for base rate loans and 1.0% to 1.75% for the LIBOR rate loans, in each case determined based on the Company's senior leverage ratio. The amendments reduced the commitments for the Revolving Credit Facility thereunder to $3.57 billion from $3.60 billion.
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 and the subsidiary guarantors’ obligations under the guarantees, the Company and each of the subsidiary guarantors have granted a security interest in substantially all of their assets subject to certain exceptions and limitations.
In May 2018, the Company borrowed $3.00 billion aggregate principal amount of loans under the Term Loan Facility. As of March 31, 2021, the Company has repaid all amounts outstanding under its Term Loan Facility.
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 basis. As of March 31, 2021, the Company was in compliance with these financial covenants.
Note 8. Fair Value of Financial Instruments
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-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.
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, 2021 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair value measurements. 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.
The fair values of the Company's Revolving Credit Facility, Term Loan Facility and Bridge Loan Facility are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the Company's Revolving Credit Facility at March 31, 2021 approximated the carrying value excluding debt discounts and debt issuance costs and are considered Level 2 in the fair value hierarchy. The Company measures the fair value of its Convertible Debt and Senior Notes for disclosure purposes. These fair values are based on observable market prices for this debt, which is traded in less active markets and are therefore classified as a Level 2 fair value measurement.
F-30
The following table shows the carrying amounts and fair values of the Company's debt obligations (in millions):
| March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Carrying Amount (1) | Fair Value | Carrying Amount (1) | Fair Value | ||||||||||||||||||||
| Revolving Credit Facility | $ | 2,336.6 | $ | 2,346.6 | $ | 2,373.9 | $ | 2,388.5 | |||||||||||||||
| Term Loan Facility | — | — | 1,708.9 | 1,723.5 | |||||||||||||||||||
| Bridge Loan Facility | — | — | 608.8 | 615.0 | |||||||||||||||||||
| 3.922% 2021 Notes | 999.0 | 1,004.3 | 993.1 | 985.0 | |||||||||||||||||||
| 4.333% 2023 Notes | 992.3 | 1,022.4 | 988.8 | 990.0 | |||||||||||||||||||
| 2.670% 2023 Notes | 996.4 | 1,040.8 | — | — | |||||||||||||||||||
| 0.972% 2024 Notes | 1,394.2 | 1,394.0 | — | — | |||||||||||||||||||
| 4.250% 2025 Notes | 1,185.5 | 1,252.6 | — | — | |||||||||||||||||||
| 2015 Senior Convertible Debt | 120.6 | 485.4 | 910.1 | 1,601.8 | |||||||||||||||||||
| 2017 Senior Convertible Debt | 260.2 | 731.4 | 1,552.8 | 2,130.3 | |||||||||||||||||||
| 2020 Senior Convertible Debt | 555.6 | 778.3 | — | — | |||||||||||||||||||
| 2017 Junior Convertible Debt | 63.7 | 272.9 | 345.8 | 656.2 | |||||||||||||||||||
| Total | $ | 8,904.1 | $ | 10,328.7 | $ | 9,482.2 | $ | 11,090.3 | |||||||||||||||
(1) The carrying amounts presented are net of debt discounts and debt issuance costs (see Note 7 for further information).
Note 9. Intangible Assets and Goodwill
Intangible assets consist of the following (in millions):
| March 31, 2021 | ||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||
| Core and developed technology | $ | 7,371.3 | $ | (2,771.0) | $ | 4,600.3 | ||||||||||||||
| Customer-related | 835.2 | (702.6) | 132.6 | |||||||||||||||||
| In-process research and development | 7.7 | — | 7.7 | |||||||||||||||||
| Distribution rights and other | 130.2 | (76.0) | 54.2 | |||||||||||||||||
| Total | $ | 8,344.4 | $ | (3,549.6) | $ | 4,794.8 |
| March 31, 2020 | ||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||
| Core and developed technology | $ | 7,331.9 | $ | (1,924.6) | $ | 5,407.3 | ||||||||||||||
| Customer-related | 903.6 | (674.7) | 228.9 | |||||||||||||||||
| In-process research and development | 8.8 | — | 8.8 | |||||||||||||||||
| Distribution rights and other | 126.0 | (68.7) | 57.3 | |||||||||||||||||
| Total | $ | 8,370.3 | $ | (2,668.0) | $ | 5,702.3 |
The following is an expected amortization schedule for the intangible assets for fiscal 2022 through fiscal 2026, absent any future acquisitions or impairment charges (in millions):
| Fiscal Year Ending March 31, | Projected Amortization Expense | |||||||
| 2022 | $ | 912.0 | ||||||
| 2023 | $ | 707.2 | ||||||
| 2024 | $ | 627.7 | ||||||
| 2025 | $ | 508.1 | ||||||
| 2026 | $ | 445.3 |
F-31
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years. Amortization expense attributed to intangible assets are assigned to cost of sales and operating expenses as follows (in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||
| Amortization expense charged to cost of sales | $ | 9.4 | $ | 8.9 | $ | 9.6 | |||||||||||||||||||||||||||||||||||
| Amortization expense charged to operating expense | 983.3 | 1,037.8 | 686.2 | ||||||||||||||||||||||||||||||||||||||
| Total amortization expense | $ | 992.7 | $ | 1,046.7 | $ | 695.8 |
There were no impairment charges in the fiscal year ended March 31, 2021. The Company recognized impairment charges of $2.2 million and $3.1 million in the fiscal years ended March 31, 2020 and March 31, 2019, respectively.
Goodwill activity by segment was as follows (in millions):
| Semiconductor Products Reporting Unit | Technology Licensing Reporting Unit | ||||||||||
| Balance at March 31, 2019 | $ | 6,644.7 | $ | 19.2 | |||||||
| Additions | 0.9 | — | |||||||||
| Balance at March 31, 2020 | 6,645.6 | 19.2 | |||||||||
| Additions | 5.8 | — | |||||||||
| Balance at March 31, 2021 | $ | 6,651.4 | $ | 19.2 |
At March 31, 2021, 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, 2021, the Company has never recorded an impairment charge.
Note 10. Other Financial Statement Details
Accounts Receivable
Accounts receivable consists of the following (in millions):
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Trade accounts receivable | $ | 991.6 | $ | 924.1 | |||||||
| Other | 11.3 | 14.8 | |||||||||
| Total accounts receivable, gross | 1,002.9 | 938.9 | |||||||||
| Less: allowance for expected credit losses | 5.2 | 4.9 | |||||||||
| Total accounts receivable, net | $ | 997.7 | $ | 934.0 |
Inventories
The components of inventories consist of the following (in millions):
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Raw materials | $ | 115.7 | $ | 92.3 | |||||||
| Work in process | 412.8 | 441.7 | |||||||||
| Finished goods | 136.5 | 151.7 | |||||||||
| Total inventories | $ | 665.0 | $ | 685.7 |
Inventories are valued at the lower of cost and net realizable value 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.
F-32
Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Land | $ | 83.2 | $ | 83.4 | |||||||
| Building and building improvements | 659.7 | 659.5 | |||||||||
| Machinery and equipment | 2,251.1 | 2,123.1 | |||||||||
| Projects in process | 102.7 | 100.1 | |||||||||
| Total property, plant and equipment, gross | 3,096.7 | 2,966.1 | |||||||||
| Less: accumulated depreciation and amortization | 2,242.0 | 2,090.0 | |||||||||
| Total property, plant and equipment, net | $ | 854.7 | $ | 876.1 |
Depreciation expense attributed to property, plant and equipment was $160.6 million, $168.9 million and $180.6 million for the fiscal years ended March 31, 2021, 2020 and 2019, respectively.
As discussed in Note 1, the Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount of such assets may not be recoverable. For the three years ended March 31, 2021, the Company’s evaluation of its property, plant and equipment did not result in any material impairments.
Accrued Liabilities
Accrued liabilities consists of the following (in millions):
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Accrued compensation and benefits | $ | 166.7 | $ | 137.5 | |||||||
| Income taxes payable | 43.4 | 38.0 | |||||||||
| Sales related reserves | 350.7 | 353.0 | |||||||||
| Current portion of lease liabilities | 39.8 | 44.5 | |||||||||
| Accrued expenses and other liabilities | 193.7 | 208.8 | |||||||||
| Total accrued liabilities | $ | 794.3 | $ | 781.8 |
Note 11. Leases
Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the ROU assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued liabilities or other long-term liabilities in the consolidated balance sheets. There are certain immaterial finance leases recorded in the consolidated balance sheets. The Company has elected to account for the lease and non-lease components as a single lease component.
The details of the Company's total lease expense are as follows (in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||
| Operating lease expense | $ | 63.1 | $ | 70.4 | |||||||||||||||||||||||||||||||||||||
F-33
The Company's leases are included as a component of the following balance sheet lines (in millions):
| March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Other assets: | ||||||||||||||
| ROU assets | $ | 154.3 | $ | 119.5 | ||||||||||
| Total lease assets | $ | 154.3 | $ | 119.5 | ||||||||||
| Accrued liabilities: | ||||||||||||||
| Current portion of lease liabilities | $ | 39.8 | $ | 44.5 | ||||||||||
| Other long-term liabilities: | ||||||||||||||
| Non-current portion of lease liabilities | 125.4 | 94.7 | ||||||||||||
| Total lease liabilities | $ | 165.2 | $ | 139.2 |
The following table presents the maturities of lease liabilities as of March 31, 2021 (in millions):
| Fiscal year ending March 31, | Operating Leases | |||||||
| 2022 | $ | 48.2 | ||||||
| 2023 | 32.4 | |||||||
| 2024 | 24.2 | |||||||
| 2025 | 17.9 | |||||||
| 2026 | 16.4 | |||||||
| Thereafter | 61.4 | |||||||
| Total lease payments | 200.5 | |||||||
| Less: Imputed lease interests | 35.3 | |||||||
| Total lease liabilities | $ | 165.2 |
The Company's weighted-average remaining lease-term and weighted-average discount rate are as follows:
| March 31, 2021 | |||||
| Weighted average remaining lease-term | 6.88 | ||||
| Weighted average discount rate | 4.49 | % | |||
Note 12. Commitments and Contingencies
Purchase Obligations
The Company has agreements for the purchase of property, plant and equipment and other goods and services including outstanding purchase commitments with the Company's wafer foundries. Commitments for construction or purchases of property, plant and equipment totaled $143.0 million as of March 31, 2021, all of which will be due within the next year. Other purchase obligations and commitments totaled approximately $166.9 million, which includes outstanding purchase commitments with the Company's wafer foundries and other suppliers, for delivery in the fiscal year ended March 31, 2022.
F-34
Indemnification Contingencies
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 $168.1 million. There are some licensing agreements in place that do not specify indemnification limits. As of March 31, 2021, the Company had not recorded any liabilities related to these indemnification obligations and the Company believes that any amounts that it may be required to pay under these agreements in the future will not have a material adverse effect on its financial position, cash flows or results of operations.
Warranty Costs and Product Liabilities
The Company accrues for known product-related claims if a loss is probable and can be reasonably estimated. During the periods presented, there have been no material accruals or payments regarding product warranty or product liability. Historically, the Company has experienced a low rate of payments on product claims. Although the Company cannot predict the likelihood or amount of any future claims, the Company does not believe these claims will have a material adverse effect on its financial condition, results of operations or liquidity.
Legal Matters
In the ordinary course of the Company's business, it is exposed to various liabilities as a result of contracts, product liability, customer claims, governmental investigations 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, governmental investigations and disputes relating to the semiconductor industry are not uncommon, and the Company is, from time to time, subject to such litigation, governmental investigations and disputes. As a result, no assurances can be given with respect to the extent or outcome of any such litigation, governmental investigations or disputes in the future.
In connection with its acquisition of Microsemi, which closed on May 29, 2018, the Company became involved with the following legal matters:
Federal Shareholder Class Action Litigation. Beginning on September 14, 2018, the Company and certain of its officers were named in two putative shareholder class action lawsuits filed in the United States District Court for the District of Arizona, captioned Jackson v. Microchip Technology Inc., et al., Case No. 2:18-cv-02914-ROS and Maknissian v. Microchip Technology Inc., et al., Case No. 2:18-cv-02924-JJT. On November 13, 2018, the Maknissian complaint was voluntarily dismissed. On December 11, 2018, the Court issued an order appointing the lead plaintiff in the Jackson matter. An amended complaint was filed on February 22, 2019. The complaint is allegedly brought on behalf of a putative class of purchasers of Microchip common stock between March 2, 2018 and August 9, 2018. The complaint asserts claims for alleged violations of the federal securities laws and alleges that the defendants issued materially false and misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects during the putative class period. The complaint seeks, among other things, compensatory damages and attorneys’ fees and costs on behalf of the putative class. Defendants filed a motion to dismiss the amended complaint on April 1, 2019, which motion was granted in part and denied in part on March 11, 2020. Plaintiff filed a motion for class certification, which was granted by the Court. Discovery is ongoing.
F-35
Derivative Litigation. On January 22, 2019, a shareholder derivative lawsuit was filed against certain of the Company’s officers and directors in the Superior Court of Arizona for Maricopa County, captioned Reid v. Sanghi, et al., Case No. CV2019-002389. The Company is named as a nominal defendant. The complaint generally alleges that defendants breached their fiduciary duties by, among other things, purportedly failing to conduct adequate due diligence regarding Microsemi prior to its acquisition, misrepresenting the Company’s business prospects and health, and engaging in improper practices, and further alleges that certain defendants engaged in insider trading. The complaint asserts causes of action for breach of fiduciary duty, waste, and unjust enrichment and seeks unspecified monetary damages, corporate governance reforms, equitable and/or injunctive relief, restitution, and attorneys’ fees and costs. An amended complaint was filed on February 28, 2020, and a second amended complaint was filed on July 27, 2020. The Company and the individual defendants filed motions to dismiss, which are not currently scheduled to be heard by the Court. The Company’s Audit Committee has filed a motion to dismiss.
Governmental Investigations. The SEC is investigating matters relating to the Company's acquisition of Microsemi. The Company believes that the investigation relates to distribution channel issues and business practices at Microsemi and the allegations made by the plaintiffs in the Peterson v. Sanghi lawsuit which was described in the Company’s prior filings on Form 10-Q and Form 10-K and which lawsuit has been settled and dismissed. The Department of Justice, which was also investigating those matters, has informed the Company that its investigation is closed and that no further action will be taken.
As a result of its acquisition of Atmel, which closed April 4, 2016, the Company became involved with the following legal matters:
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"). Continental seeks to recover from Atmel all current and future costs and damages incurred as a result of the vehicle manufacturers’ airbag control unit-related recalls, with current costs and damages alleged to be about $115 million to date. 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 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 June 2010, Atmel Rousset sold its wafer manufacturing business in Rousset, France to LFoundry GmbH ("LF"), the German parent of LFoundry Rousset ("LFR"). LFR then leased the Atmel Rousset facility to conduct the manufacture of wafers. More than three years later, LFR became insolvent and later liquidated. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR filed individual labor actions against Atmel Rousset in a French labor court, and in 2019 a French labor court dismissed all of the employees’ claims against Atmel Rousset. Plaintiffs have filed appeals requesting reconsideration of the earlier dismissals. Furthermore, these same claims have been filed by this same group of employees in a regional court in France against Microchip Technology Incorporated and Atmel Corporation. The Company, and the other defendant entities, believe 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 any of these entities is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. The defendant entities therefore intend to defend vigorously against each of these claims. Additionally, complaints have been filed in a regional court in France on behalf of the same group of employees against Microchip Technology Rousset, Atmel Switzerland Sarl, Atmel Corporation and Microchip Technology Incorporated alleging that the sale of the Atmel Rousset production unit to LF was fraudulent and should be voided. These claims are specious and the defendant entities therefore intend to defend vigorously against 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
F-36
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, 2021, the Company's estimate of the aggregate potential liability that is possible but not probable is approximately $100 million in excess of amounts accrued.
Note 13. Income Taxes
The income tax provision consists of the following (amounts in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Pretax (loss) income: | |||||||||||||||||
| U.S. | $ | (301.7) | $ | (485.2) | $ | (593.4) | |||||||||||
| Foreign | 641.2 | 635.6 | 797.9 | ||||||||||||||
| $ | 339.5 | $ | 150.4 | $ | 204.5 | ||||||||||||
| Current expense (benefit): | |||||||||||||||||
| U.S. Federal | $ | 54.8 | $ | 21.1 | $ | (98.0) | |||||||||||
| State | 2.0 | 1.0 | (5.3) | ||||||||||||||
| Foreign | 72.2 | 48.0 | 14.1 | ||||||||||||||
| Total current expense (benefit) | $ | 129.0 | $ | 70.1 | $ | (89.2) | |||||||||||
| Deferred expense (benefit): | |||||||||||||||||
| U.S. Federal | $ | (215.4) | $ | (127.8) | $ | 11.9 | |||||||||||
| State | (22.9) | (13.2) | 0.6 | ||||||||||||||
| Foreign | 99.4 | (349.3) | (74.7) | ||||||||||||||
| Total deferred benefit | (138.9) | (490.3) | (62.2) | ||||||||||||||
| Total income tax benefit | $ | (9.9) | $ | (420.2) | $ | (151.4) |
The Company intends to invest substantially all of its foreign subsidiary earnings, as well as its capital in its foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which the Company would incur significant, additional costs upon repatriation of such amounts. It is not practical to estimate the additional tax that would be incurred, if any, if the permanently reinvested earnings were repatriated.
F-37
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 millions):
| Fiscal Year Ended March 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Computed expected income tax provision | $ | 71.3 | $ | 31.5 | $ | 43.0 | |||||||||||
| State income taxes, net of federal benefit | (3.8) | (5.4) | (8.7) | ||||||||||||||
| Foreign income taxed at lower than the federal rate | (45.7) | (78.8) | (94.0) | ||||||||||||||
| Impact of the TCJA - one-time transition tax, net of foreign tax credits | — | — | 13.1 | ||||||||||||||
| GILTI and foreign-derived intangible income, net of credits | 101.8 | 54.7 | 95.4 | ||||||||||||||
| Business realignment of intellectual property rights | (63.8) | (334.8) | (90.6) | ||||||||||||||
| Net increases related to current year tax positions | 49.8 | 20.1 | 9.0 | ||||||||||||||
| Net decreases related to prior year tax positions (1) | (4.4) | (28.5) | (75.1) | ||||||||||||||
| Share-based compensation | (12.3) | (11.1) | (13.3) | ||||||||||||||
| Research and development tax credits | (48.4) | (40.8) | (27.5) | ||||||||||||||
| Intercompany prepaid tax asset amortization | — | — | 5.2 | ||||||||||||||
| Foreign exchange | (6.5) | (0.9) | 4.6 | ||||||||||||||
| Convertible debt settlement | (48.1) | — | — | ||||||||||||||
| Subpart-F income | 6.4 | 4.1 | 10.7 | ||||||||||||||
| Other | 7.1 | (1.7) | (13.3) | ||||||||||||||
| Change in valuation allowance | (13.3) | (28.6) | (9.9) | ||||||||||||||
| Total income tax benefit | $ | (9.9) | $ | (420.2) | $ | (151.4) |
(1) The release of prior year tax positions during fiscal 2021 increased each of the basic and diluted net income per common share by $0.02. The release of prior year tax positions during fiscal 2020 increased the basic and diluted net income per common share by $0.12 and $0.11, respectively. The release of prior year tax positions during fiscal 2019 increased the basic and diluted net income per common share by $0.32 and $0.30, respectively.
The foreign tax rate differential benefit primarily relates to the Company's operations in Thailand, Malta 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 between fiscal 2022 and 2027, 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 benefit derived from these tax holidays approximated $11.1 million and $11.4 million in fiscal 2021 and fiscal 2020 , respectively. The impact of the tax holidays during fiscal 2021 increased each of the basic and diluted net income per common share by $0.04. The impact of the tax holidays during fiscal 2020 increased the basic and diluted net income per common share by $0.05 and $0.04, respectively.
The Company's effective tax rate for fiscal 2021 includes a $63.8 million tax benefit related to intra-group transfers of certain intellectual property rights, which reduced its effective tax rate by 18.8%. The tax benefit for the intra-group asset transfers primarily consisted of $155.5 million recorded as a deferred tax asset which represents the book and tax basis difference on the transferred assets measured based on the new applicable statutory tax rate, as well as, the reversal of the pre-existing deferred tax asset of $90.3 million, which represents the book and tax basis difference on the transferred assets measured based on applicable statutory tax rate prior to the transfer. The Company expects to be able to realize the future tax benefit of the deferred tax assets resulting from the intra-group asset transfers. It is not uncommon for taxing authorities of different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied with respect to the valuation of intellectual property rights. The taxing authorities of jurisdictions in which the Company operates may challenge its methodologies for valuing the intellectual property rights transferred, which could increase the Company's future effective income tax rate and harm future results of operations.
F-38
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 millions):
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Deferred tax assets: | |||||||||||
| Inventory valuation | $ | 46.0 | $ | 48.5 | |||||||
| Net operating loss carryforward | 68.0 | 74.8 | |||||||||
| Capital loss carryforward | 6.3 | 9.4 | |||||||||
| Share-based compensation | 46.5 | 39.8 | |||||||||
| Income tax credits | 331.1 | 351.1 | |||||||||
| Property, plant and equipment | 32.7 | 31.7 | |||||||||
| Accrued expenses | 83.6 | 80.4 | |||||||||
| Intangible assets | 1,581.5 | 1,694.8 | |||||||||
| Lease liabilities | 37.1 | 20.2 | |||||||||
| Other | 17.4 | 14.0 | |||||||||
| Gross deferred tax assets | 2,250.2 | 2,364.7 | |||||||||
| Valuation allowances | (290.3) | (303.5) | |||||||||
| Deferred tax assets, net of valuation allowances | 1,959.9 | 2,061.2 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Convertible debt | (53.9) | (228.7) | |||||||||
| Intangible assets | (158.1) | (365.1) | |||||||||
| ROU assets | (34.5) | (24.3) | |||||||||
| Other | (8.1) | (13.1) | |||||||||
| Deferred tax liabilities | (254.6) | (631.2) | |||||||||
| Net deferred tax asset | $ | 1,705.3 | $ | 1,430.0 | |||||||
| Reported as: | |||||||||||
| Non-current deferred tax assets | $ | 1,749.2 | $ | 1,748.5 | |||||||
| Non-current deferred tax liability | (43.9) | (318.5) | |||||||||
| Net deferred tax asset | $ | 1,705.3 | $ | 1,430.0 |
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 for tax reporting purposes, and prudent and feasible tax planning strategies.
A summary of additions and deductions related to the valuation allowance for deferred tax asset accounts for the years ended March 31, 2021, 2020 and 2019 follows (amounts in millions):
| Balance at Beginning of Year | Additions Charged to Costs and Expenses | Additions Charged to Other Accounts | Deductions | Balance at End of Year | |||||||||||||||||||||||||
| Fiscal 2021 | $ | 303.5 | $ | 8.1 | $ | — | $ | (21.3) | $ | 290.3 | |||||||||||||||||||
| Fiscal 2020 | $ | 332.1 | $ | 26.0 | $ | — | $ | (54.6) | $ | 303.5 | |||||||||||||||||||
| Fiscal 2019 | $ | 204.5 | $ | 16.2 | $ | 175.8 | $ | (64.4) | $ | 332.1 |
The Company had federal, state and foreign NOL carryforwards with an estimated tax effect of $68.0 million available at March 31, 2021. The federal, state and foreign NOL carryforwards expire at various times between fiscal 2022 and fiscal 2041, of which a portion of the NOL carryforwards do not expire. The Company had state tax credits of $163.0 million available at March 31, 2021. These state tax credits expire at various times between fiscal 2022 and fiscal 2041. The Company had capital loss carryforwards with an estimated tax effect of $6.3 million available at March 31, 2021. These capital loss carryforwards begin to expire in fiscal 2022. The Company had foreign tax credits of $1.9 million available at March 31, 2021. These foreign tax credits begin to expire in fiscal 2022. The Company had credits for increasing research activity in the amount of $85.0 million available at March 31, 2021. These credits begin to expire in fiscal 2022. The Company had U.S. prior year minimum tax credits in the amount of $4.7 million available at March 31, 2021. The Company had refundable tax credits in foreign
F-39
jurisdictions of $56.6 million available at March 31, 2021. The Company had withholding tax credits in foreign jurisdictions of $19.9 million available at March 31, 2021. These credits expire at various times between fiscal 2022 and fiscal 2024.
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 2007 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 would 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, the tax positions are more likely than not to be sustained based on the technical merits. 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 laws 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.
The following table summarizes the activity related to the Company's gross unrecognized tax benefits from April 1, 2018 to March 31, 2021 (amounts in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Beginning balance | $ | 757.3 | $ | 763.4 | $ | 436.0 | |||||||||||
| Increases related to acquisitions | — | — | 329.7 | ||||||||||||||
| Decreases related to settlements with tax authorities | (6.0) | (1.2) | (8.3) | ||||||||||||||
| Decreases related to statute of limitation expirations | (10.9) | (30.9) | (16.2) | ||||||||||||||
| Increases related to current year tax positions | 35.4 | 30.2 | 27.8 | ||||||||||||||
| Increases (decreases) related to prior year tax positions | 50.5 | (4.2) | (5.6) | ||||||||||||||
| Ending balance | $ | 826.3 | $ | 757.3 | $ | 763.4 |
As of March 31, 2021 and March 31, 2020, the Company had accrued interest and penalties related to tax contingencies of $83.9 million and $74.6 million, respectively. Interest and penalties charged to operations during the fiscal year ended March 31, 2021 were $9.3 million. Previously accrued interest and penalties that were released during the fiscal years ended March 31, 2020 and March 31, 2019 were $13.5 million and $37.5 million, respectively.
The Company is currently under income tax examination in various tax jurisdictions in which it operates. The years under examination range from fiscal 2007 through fiscal 2019. In some jurisdictions, the Company has received tax assessments in excess of established reserves. The Company is contesting these tax assessments, and will continue to do so, including pursuing all available remedies such as appeals and litigation, if necessary. During fiscal 2021, additional assessments were received for these issues and the Company’s position remains unchanged.
The total amount of gross unrecognized tax benefits was $826.3 million and $757.3 million as of March 31, 2021 and March 31, 2020, respectively, of which $720.5 million and $654.0 million is estimated to impact the Company's effective
F-40
tax rate, if recognized. The Company estimates that it is reasonably possible unrecognized tax benefits as of March 31, 2021 could decrease by approximately $10.0 million in the next 12 months. Positions that may be resolved include various U.S. and non-U.S. matters.
In April 2020, the Company became aware of a withholding tax regulation that could be interpreted to apply to certain of its previous intra-group transactions. The Company evaluated whether the interpretation of this regulation could apply to its facts and circumstances, and, upon conclusion of its analysis, the Company established an immaterial reserve related to this matter during the fiscal year ended March 31, 2021.
In July 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. In the July 2015 ruling, the Tax Court concluded that the sharing of the cost of employee stock compensation in a company’s cost-sharing arrangement was invalid under the U.S. Administrative Procedures Act. In June 2019, a panel of the Ninth Circuit of the U.S. Court of Appeals reversed this decision. In July 2019, Altera petitioned the U.S. Court of Appeals for the Ninth Circuit to hold an en banc rehearing of the case. In November 2019, the en banc rehearing petition was denied, and Altera has asked the Supreme Court for a judicial review. In June 2020, the U.S. Supreme Court declined to issue a writ of certiorari in Altera v Commissioner, leaving intact the decision reached by the Ninth Circuit of the U.S. Court of Appeals. Based on the Ninth Circuit Opinion, the Company recorded a cumulative income tax expense of $23.3 million in fiscal 2021.
Note 14. Employee Benefit Plans
Defined Benefit Plans
The Company has defined benefit pension plans that cover certain French and German employees. Most of these defined pension plans, which were acquired in the Atmel and Microsemi acquisitions, are unfunded. 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.
The change in projected benefit obligation and the accumulated benefit obligation, were as follows (in millions):
| Fiscal Year Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Projected benefit obligation at the beginning of the year | $ | 70.0 | $ | 72.7 | |||||||
| Service cost | 1.6 | 1.7 | |||||||||
| Interest cost | 1.0 | 0.9 | |||||||||
| Actuarial losses (gains) | 8.2 | (2.6) | |||||||||
| Benefits paid | (1.5) | (1.5) | |||||||||
| Foreign currency exchange rate changes | 3.7 | (1.2) | |||||||||
| Projected benefit obligation at the end of the year | $ | 83.0 | $ | 70.0 | |||||||
| Accumulated benefit obligation at the end of the year | $ | 76.3 | $ | 65.1 | |||||||
| Weighted average assumptions: | |||||||||||
| Discount rate | 0.93 | % | 1.48 | % | |||||||
| Rate of compensation increase | 3.01 | % | 2.77 | % |
The Company's pension liability represents the present value of estimated future benefits to be paid. 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). Net actuarial losses (gains), which are included in accumulated other comprehensive loss in the Company's consolidated balance sheets, will be recognized as a component of net periodic cost over the average remaining service period.
F-41
Future estimated expected benefit payments for fiscal year 2022 through 2031 are as follows (in millions):
| Fiscal Year Ending March 31, | Expected Benefit Payments | |||||||
| 2022 | $ | 1.6 | ||||||
| 2023 | 1.7 | |||||||
| 2024 | 2.2 | |||||||
| 2025 | 2.4 | |||||||
| 2026 | 2.6 | |||||||
| 2027 through 2031 | 14.6 | |||||||
| Total | $ | 25.1 |
The Company's net periodic pension cost for fiscal 2022 is expected to be approximately $3.6 million.
Note 15. Share-Based Compensation
Share-Based Compensation Expense
The following table presents the details of the Company's share-based compensation expense (in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cost of sales (1) | $ | 26.6 | $ | 20.9 | $ | 14.9 | |||||||||||
| Research and development | 96.8 | 82.9 | 72.0 | ||||||||||||||
| Selling, general and administrative | 74.9 | 66.4 | 62.3 | ||||||||||||||
| Special charges and other, net | — | — | 17.2 | ||||||||||||||
| Pre-tax effect of share-based compensation | 198.3 | 170.2 | 166.4 | ||||||||||||||
| Income tax benefit | 42.3 | 36.9 | 35.5 | ||||||||||||||
| Net income effect of share-based compensation | $ | 156.0 | $ | 133.3 | $ | 130.9 |
(1) During the fiscal year ended March 31, 2021, $16.7 million of share-based compensation expense was capitalized to inventory and $26.6 million of previously capitalized share-based compensation expense in inventory was sold. During the fiscal year ended March 31, 2020, $19.8 million of share-based compensation expense was capitalized to inventory and $20.9 million of previously capitalized share-based compensation expense in inventory was sold. During the fiscal year ended March 31, 2019, $17.2 million of share-based compensation expense was capitalized to inventory and $14.9 million of previously capitalized share-based compensation expense in inventory was sold.
Microsemi Acquisition-related Equity Awards
In connection with its acquisition of Microsemi on May 29, 2018, the Company assumed certain RSUs, SARs, and stock options granted by Microsemi. The assumed awards were measured at the acquisition date based on the estimated fair value, which was a total of $175.4 million. A portion of that fair value, $53.9 million, which represented the pre-acquisition vested service provided by employees to Microsemi, 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 $121.5 million, representing post-acquisition share-based compensation expense that will be recognized as these employees provide service over the remaining vesting periods.
Combined Incentive Plan Information
The Company has granted RSUs and stock options to employees and non-employee members of the Board of Directors under the Company’s 2004 Equity Incentive Plan (the 2004 plan). The Company uses RSUs as its primary equity incentive compensation instrument for employees. Under the 2004 plan, 32,194,859 shares of common stock have been authorized for issuance and 6,554,463 shares of common stock remain available for future grants as of March 31, 2021.
F-42
Restricted Stock Units
RSU share activity under the 2004 Plan is set forth below:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Nonvested shares at March 31, 2018 | 5,672,440 | $ | 50.79 | ||||||||
| Granted | 1,951,408 | $ | 77.83 | ||||||||
| Assumed upon acquisition | 1,805,680 | $ | 91.70 | ||||||||
| Forfeited | (408,242) | $ | 73.36 | ||||||||
| Vested | (2,729,324) | $ | 61.51 | ||||||||
| Nonvested shares at March 31, 2019 | 6,291,962 | $ | 64.81 | ||||||||
| Granted | 2,182,044 | $ | 88.17 | ||||||||
| Forfeited | (340,659) | $ | 75.50 | ||||||||
| Vested | (2,391,294) | $ | 57.47 | ||||||||
| Nonvested shares at March 31, 2020 | 5,742,053 | $ | 76.11 | ||||||||
| Granted | 2,339,247 | $ | 101.37 | ||||||||
| Forfeited | (257,055) | $ | 83.37 | ||||||||
| Vested | (1,882,336) | $ | 64.13 | ||||||||
| Nonvested shares at March 31, 2021 | 5,941,909 | $ | 89.54 |
The total intrinsic value of RSUs which vested during the fiscal years ended March 31, 2021, 2020 and 2019 was $218.5 million, $223.9 million and $229.3 million, respectively. The aggregate intrinsic value of RSUs outstanding at March 31, 2021 was $922.3 million, calculated based on the closing price of the Company's common stock of $155.22 per share on March 31, 2021. The amount of unearned share-based compensation currently estimated to be expensed in the remainder of fiscal 2022 through fiscal 2026 related to unvested share-based payment awards at March 31, 2021 is $300.1 million. The weighted average period over which the unearned share-based compensation is expected to be recognized is approximately 1.84 years.
Stock Options and Stock Appreciation Rights
Stock option and SARs activity under the Company's stock incentive plans in the three years ended March 31, 2021 is set forth below:
| Number of Shares | Weighted Average Exercise Price per Share | ||||||||||
| Outstanding at March 31, 2018 | 284,340 | $ | 31.21 | ||||||||
| Assumed upon acquisition | 141,751 | $ | 25.86 | ||||||||
| Exercised | (140,118) | $ | 27.67 | ||||||||
| Forfeited or expired | (4,091) | $ | 39.62 | ||||||||
| Outstanding at March 31, 2019 | 281,882 | $ | 30.16 | ||||||||
| Exercised | (130,419) | $ | 28.71 | ||||||||
| Forfeited or expired | (2,453) | $ | 20.02 | ||||||||
| Outstanding at March 31, 2020 | 149,010 | $ | 31.59 | ||||||||
| Exercised | (77,884) | $ | 31.48 | ||||||||
| Forfeited or expired | (629) | $ | 19.47 | ||||||||
| Outstanding at March 31, 2021 | 70,497 | $ | 31.81 |
The total intrinsic value of options and SARs exercised during the fiscal years ended March 31, 2021, 2020 and 2019 was $6.5 million, $8.4 million and $8.3 million, respectively. This intrinsic value represents the difference between the fair market value of the Company's common stock on the date of exercise and the exercise price of each equity award.
The aggregate intrinsic value of options and SARs outstanding and exercisable at March 31, 2021 was $10.9 million. The aggregate intrinsic values were calculated based on the closing price of the Company's common stock of $155.22 per share on March 31, 2021. As of March 31, 2021, the weighted average remaining contractual term for options and SARs outstanding and exercisable was 2.06 years.
F-43
As of March 31, 2021 and March 31, 2020, the number of option and SAR shares exercisable was 70,497 and 149,010, respectively, and the weighted average exercise price per share was $31.81 and $31.59, respectively.
There were no stock options granted in the fiscal years ended March 31, 2021, 2020 and 2019.
Employee Stock Purchase Plan
The Company’s 2001 Employee Stock Purchase Plan and the 1994 International Employee Stock Purchase Plan (collectively referred to as the employee stock purchase plans) allows eligible employees to purchase shares of the Company's common stock at 85% of the value of its common stock on specific dates. Since the inception of the employee stock purchase plans, 17,222,291 shares of common stock have been authorized for issuance and 5,929,687 shares remain available for future purchases as of March 31, 2021.
Employees purchased 712,220 shares of common stock in the fiscal year ended March 31, 2021 for a purchase price of $57.7 million under the employee stock purchase plans compared to 787,284 shares of common stock for a purchase price of $55.6 million in the fiscal year ended March 31, 2020 and 549,796 shares of common stock for a purchase price of $39.6 million in the fiscal year ended March 31, 2019. As of March 31, 2021, unrecognized share-based compensation costs related to the employee stock plans totaled $6.3 million, which will be recognized over a period of approximately five months.
Note 16. Stock Repurchase Activity
As of March 31, 2021, 15.0 million shares of common stock remained available for repurchase under the existing share repurchase program. There is no expiration date associated with the repurchase program. There were no repurchases of common stock during the fiscal years ended March 31, 2021, 2020 and 2019. Shares repurchased are recorded as treasury shares and used to fund share issuance requirements under the Company's equity incentive plans. As of March 31, 2021, the Company had approximately 11.0 million treasury shares.
Note 17. Accumulated Other Comprehensive Loss
The following table presents the changes in the components of accumulated other comprehensive loss, net of tax, (AOCI) (in millions):
| Unrealized Holding Gains (Losses) Available-for-sale Securities | Minimum Pension Liability | Foreign Currency | Total | ||||||||||||||||||||
| Balance at March 31, 2020 | $ | — | $ | (5.1) | $ | (16.5) | $ | (21.6) | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | — | (9.4) | 3.7 | (5.7) | |||||||||||||||||||
| Reclassification of realized transactions | — | 1.1 | — | 1.1 | |||||||||||||||||||
| Net other comprehensive (loss) income | — | (8.3) | 3.7 | (4.6) | |||||||||||||||||||
| Balance at March 31, 2021 | $ | — | $ | (13.4) | $ | (12.8) | $ | (26.2) | |||||||||||||||
| Balance at March 31, 2019 | $ | 0.2 | $ | (6.2) | $ | (14.7) | $ | (20.7) | |||||||||||||||
| Impact of change in accounting principle | (0.2) | (1.1) | — | (1.3) | |||||||||||||||||||
| Opening Balance as of April 1, 2019 | — | (7.3) | (14.7) | (22.0) | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | — | 1.4 | (1.8) | (0.4) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | 0.8 | — | 0.8 | |||||||||||||||||||
| Net other comprehensive (loss) income | — | 2.2 | (1.8) | 0.4 | |||||||||||||||||||
| Balance at March 31, 2020 | $ | — | $ | (5.1) | $ | (16.5) | $ | (21.6) |
F-44
The table below details where reclassifications of realized transactions out of accumulated other comprehensive loss are recorded on the consolidated statements of income (in millions):
| Fiscal Year Ended March 31, | Related Statement of Income Line | ||||||||||||||||||||||||||||||||||||||||||||||
| Description of AOCI Component | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized losses on available-for-sale securities | $ | — | $ | — | $ | (5.6) | Other (loss) income, net | ||||||||||||||||||||||||||||||||||||||||
| Amortization of actuarial loss | (1.1) | (0.8) | (1.0) | Other (loss) income, net | |||||||||||||||||||||||||||||||||||||||||||
| Reclassification of realized transactions, net of taxes | $ | (1.1) | $ | (0.8) | $ | (6.6) | Net income |
Note 18. 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 $1.494, $1.465 and $1.457 during fiscal 2021, 2020 and 2019, respectively. Total dividend payments amounted to $388.3 million, $350.1 million and $344.4 million during fiscal 2021, 2020 and 2019, respectively.
F-45
Previous: Item 8. , Item 15(a)(1) and (2), (b) and (c)