Microchip Technology 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2021

OR

For the transition period from __________ to __________

Commission File Number: 0-21184

MICROCHIP TECHNOLOGY INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

2355 W. Chandler Blvd., Chandler, AZ 85224-6199

(480) 792-7200

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant's

Principal Executive Offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check One)

Yes ☐ No ☒

Shares Outstanding of Registrant's Common Stock

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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

INDEX

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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

Defined Terms(1)

(1) Certain terms used within this Form 10-Q are defined in the above table.

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PART I. FINANCIAL INFORMATION

MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share amounts)

See accompanying notes to condensed consolidated financial statements

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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share amounts)

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Note Regarding Forward-looking Statements

This report, including “Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Part II - Item 1A. Risk Factors” contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance and revenue sources. We use words such as "anticipate," "believe," "plan," "expect," "future," "continue," "intend" and similar expressions to identify forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under "Risk Factors," beginning at page 38 and elsewhere in this Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement. These forward-looking statements include, without limitation, statements regarding the following:

• Our expectation that certain supply chain constraints will continue through calendar 2022 and possibly beyond;

• That if the impact of COVID-19 worsens, the pandemic could adversely impact our business in future periods;

• That local governments could require us or our suppliers to temporarily reduce production further, cease operations, or implement mandatory vaccine requirements, and we could experience constraints in fulfilling customer orders;

• The impact that local restrictions could have on our manufacturing operations, or the manufacturing operations of our subcontractors, in the future;

• That we hope to see more of our team members return to our offices in the coming months, contingent on local conditions;

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

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

• The effects that uncertain global economic conditions and fluctuations in the global credit and equity markets may have on our financial condition and results of operations;

• The effects and amount of competitive pricing pressure on our product lines and modest pricing declines in certain of our more mature proprietary product lines;

• Our ability to moderate future average selling price declines;

• The effect of product mix, capacity utilization, yields, fixed cost absorption, competition and economic conditions on gross margin;

• The amount of, and changes in, demand for our products and those of our customers;

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

• Our expectation that in the future we will acquire additional businesses that we believe will complement our existing businesses;

• Our expectation that in the future we will enter into joint development agreements or other strategic relationships with other companies;

• The level of orders that will be received and shipped within a quarter, including the impact of our product lead times;

• Our expectation that our days of inventory at December 31, 2021 will be 112 to 118 days;

• Our belief that customers recognize our products and brand name and use distributors as an effective supply channel;

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

• Our ability to increase the proprietary portion of our analog product line and the effect of such an increase;

• The impact of any supply disruption we may experience;

• Our ability to effectively utilize our facilities at appropriate capacity levels and anticipated costs;

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

• That manufacturing costs will be reduced by transition to advanced process technologies;

• Our ability to maintain manufacturing yields;

• Continuing our investments in new and enhanced products;

• The cost effectiveness of using our own assembly and test operations;

• Our expectation that foundry capacity will continue to be tight due to strong demand for wafers across the industry;

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• Our expectation that we will continue to operate our manufacturing facilities at or above normal capacity if the current supply constraints relative to demand continue;

• Our anticipated level of capital expenditures;

• Continuation and amount of quarterly cash dividends;

• The sufficiency of our existing sources of liquidity to finance anticipated capital expenditures and otherwise meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on them;

• The impact of seasonality on our business;

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

• Our expectation that we will continue to be the target of cyber-attacks, computer viruses, unauthorized access and other attempts to breach or otherwise compromise the security of our IT systems and data;

• The accuracy of our estimates used in valuing employee equity awards;

• That the resolution of legal actions will not have a material effect on our business, and the accuracy of our assessment of the probability of loss and range of potential loss;

• The accuracy of our estimated tax rate;

• Our belief that the expiration of any tax holidays will not have a material impact on our effective tax rate;

• The impact of the geographical dispersion of our earnings and losses on our effective tax rate;

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

• Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis;

• Our ability to obtain patents and intellectual property licenses and minimize the effects of litigation;

• The level of risk we are exposed to for product liability claims or indemnification claims;

• The effect of fluctuations in market interest rates on our income and/or cash flows;

• The effect of fluctuations in currency rates;

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

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

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

• Our expectation that our reliance on third party contractors may increase over time as our business grows;

• Our ability to collect accounts receivable; and

• The impact of the legislative and policy changes implemented or which may be implemented by the current administration, on our business and the trading price of our stock.

Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth in "Item 1A. Risk Factors," and elsewhere in this Form 10-Q. Although we believe that the expectations reflected in our

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As of September 30, 2021, our long-term debt totaled $8.41 billion. We have no interest rate exposure to rate changes on our fixed rate debt, which totaled $6.60 billion as of September 30, 2021. We do have interest rate exposure with respect to the $1.81 billion of our variable interest rate debt outstanding as of September 30, 2021. A 50 basis point increase in interest rates would impact our expected annual interest expense for the next 12 months by approximately $9.0 million.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act, we evaluated under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required

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disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2021, there was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 10 to our condensed consolidated financial statements for information regarding legal proceedings.

When evaluating Microchip and its business, you should give careful consideration to the factors below, as well as the information provided elsewhere in this Form 10-Q and in other filings we make with the SEC.

Risk Factor Summary

Risks Related to Our Business, Operations, and Industry

• impact of global economic conditions on our operating results, net sales and profitability;

• impact of economic conditions on the financial viability of our licensees, customers, distributors, or suppliers;

• impact of the COVID-19 pandemic, increased tariffs or other factors affecting our suppliers;

• dependency on wafer foundries and other contractors by our licensees and ourselves;

• dependence on foreign sales and operations, which exposes us to foreign political and economic risks;

• limited visibility to product shipments;

• intense competition in the markets we serve, leading to pricing pressures, reduced sales or market share;

• ineffective utilization of our manufacturing capacity or failure to maintain manufacturing yields;

• impact of seasonality and wide fluctuations of supply and demand in the industry;

• dependency on distributors;

• ability to introduce new products on a timely basis;

• business interruptions, including natural disasters, affecting our operations or that of key vendors, licensees or customers;

• technology licensing business exposes us to various risks;

• reliance on sales into governmental projects, and compliance with associated regulations;

• risks related to grants from governments, agencies and research organizations;

• future acquisitions or divestitures;

• future impairments to goodwill or intangible assets;

• our failure to maintain proper and effective internal control and remediate future control deficiencies;

• customer demands to implement business practices that are more stringent than legal requirements;

• ability to attract and retain qualified personnel; and

• the occurrence of events for which we are self-insured, or which exceed our insurance limits.

Risks Related to Cybersecurity, Privacy, Intellectual Property, and Litigation

• attacks on our IT systems and data, interruptions in our IT systems, or improper handling of data;

• risks related to compliance with privacy and data protection laws and regulations;

• risks related to legal proceedings, investigations or claims;

• risks related to contractual relationships with our customers; and

• protecting and enforcing our intellectual property rights.

Risks Related to Taxation, Laws and Regulations

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

• fines, restrictions or delay in our ability to export products, or increase costs associated with the manufacture or transfer of products;

• outcome of future examinations of our income tax returns;

• exposure to greater than anticipated income tax liabilities, changes in or the interpretation of tax rules and regulations including the TCJA, the American Rescue Plan Act of 2021 (ARPA), or unfavorable assessments from tax audits;

• impact of the legislative and policy changes implemented globally by the current or future administrations;

• impact of stringent environmental, climate change, conflict-free minerals and other regulations or customer demands; and

• requirement to fund our foreign pension plans.

Risks Related to Capitalization and Financial Markets

• impact of various factors on our future trading price of our common stock;

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• our ability to effectively manage current or future debt;

• our ability to generate sufficient cash flows or obtain access to external financing;

• impact of conversion of our convertible debt on the ownership interest of our existing stockholders; and

• fluctuations in foreign currency exchange rates.

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Risks Related to Our Business, Operations, and Industry

Our operating results are impacted by global economic conditions and may fluctuate in the future due to a number of factors that could reduce our net sales and profitability.

Our operating results are affected by a wide variety of factors that could reduce our net sales and profitability, many of which are beyond our control. Some of the factors that may affect our operating results include:

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

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

• availability of raw materials, supplies and equipment due to supply chain constraints or other factors;

• constrained availability from other electronic suppliers impacting our customers' ability to ship their products, which in turn may adversely impact our sales to those customers;

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

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

• increased costs and availability of raw materials, supplies, equipment, utilities, labor, and/or subcontracted services for wafers, assembly and test;

• changes in demand or market acceptance of our products and products of our customers, and market fluctuations in the industries into which such products are sold;

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

• trade restrictions and increase in tariffs, including those on business in China, or focused on specific companies;

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

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

• changes or fluctuations in customer order patterns and seasonality;

• changes in tax regulations in countries in which we do business;

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

• levels of inventories held by our customers;

• risk of excess and obsolete inventories;

• competitive developments including pricing pressures;

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

• our ability to successfully transition to more advanced process technologies to reduce manufacturing costs;

• the level of orders that are received and can be shipped in a quarter, including the impact of product lead times;

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

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

• fluctuations in our mix of product sales;

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

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

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

Period-to-period comparisons of our operating results are not necessarily meaningful and you should not rely upon any such comparisons as indications of our future performance. In future periods, our operating results may fall below our public guidance or the expectations of public market analysts and investors, which would likely have a negative effect on the price of our common stock. Uncertain global economic and public health conditions, such as the COVID-19 pandemic, have caused and may in the future cause our operating results to fluctuate significantly and make comparisons between periods

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• Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.