Microchip Technology 10-Q 2022-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2022

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

(Address of Registrant's Principal Executive Offices)

(480) 792-7200

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

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).

Yes ☐ No ☒

The number of shares outstanding of the registrant's Common Stock, $0.001 par value, as of July 27, 2022 was 552,484,192.

MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

INDEX

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," "can," "continue," "could," "expect," "future," "intend," "plan," 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 35 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 into calendar 2023;

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

• Our expectation that we will experience period-to-period fluctuations in operating results due to general industry or economic conditions;

• 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 goal to continue to be more efficient with our selling, general and administrative expenses;

• Our expectation that our days of inventory at September 30, 2022 will be 127 to 132 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;

• The likelihood of our stock price to fluctuate in the future;

• Our ability to maintain manufacturing yields;

• The maintenance of our competitive position based on our investments in new and enhanced products;

• The success of our licensing business depending on the continued market acceptance of our technologies and on our ability to further develop such technologies and to introduce new technologies;

• The potential of the Preferred Supply Program and the long-term supply agreements to satisfy commitments to our suppliers, enable us to forecast capital equipment requirements and employee needs, ramp up manufacturing and manufacture products more efficiently;

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

• The greater functionality in new product designs afforded by our proprietary design and manufacturing processes;

• Our plans to continue to transition certain outsourced assembly and test capacity to our internal facilities;

• Our expectation of continued investment in expanding our manufacturing capacity through calendar 2022 and during the next twelve months;

• The continued development of the embedded control market based on our strong technical service presence;

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

• 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;

• The 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;

• Our belief that the capital expenditures to be incurred over the next twelve months will provide sufficient manufacturing capacity to support the growth of our production capabilities for our new products and technologies and to bring in-house more of the production requirements that are currently outsourced;

• 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 impact of the resolution of legal actions on our business, and the accuracy of our assessment of the probability of loss and range of potential loss;

• Our plans to pursue all available administrative and judicial remedies necessary to resolve the Statutory Notice of Deficiency we received;

• Our expectation regarding the treatment of our unrecognized tax benefits in calendar year 2022;

• 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;

• Our ability to 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 expectations regarding the amounts and timing of repurchases under our stock repurchase program;

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

• Our ability to collect accounts receivable;

• 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 plans to continue to undertake efforts to conform to current regulatory obligations and evolving best practices;

• Our plans to continue to comply with applicable U.S. sanctions regarding Ukraine;

• The costs we expect to incur associated with certain disclosure requirements;

• Estimates and plans regarding pension liability and payments expected to be made for benefits earned; and

• The impact on our business stemming from Russia’s invasion of Ukraine.

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 forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update the information contained in any forward-looking statement.

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Introduction

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document.

We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations with a summary of business and macroeconomic developments followed by a summary of our overall business strategy to give the reader an overview of the goals and overall direction of our business. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then discuss our Results of Operations for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, followed by an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the section titled "Liquidity and Capital Resources."

Business and Macroeconomic Environment

The COVID-19 pandemic initially resulted in a global disruption in economic activity by adversely affecting production, creating supply chain and market disruption, and adversely impacting businesses and individuals. However, in the second half of fiscal 2021, business conditions were unexpectedly strong as businesses and individuals adapted to the effects of the pandemic. In response to global supply constraints, we worked to mitigate the impact of the pandemic on our business by qualifying alternative suppliers, increasing our inventory of raw materials, ramping our internal factories and adding assembly and test capacity to increase our manufacturing capability while securing additional capacity with our subcontractors wherever possible. However, strong customer demand continued to outpace capacity in the first three months of fiscal 2023 and in fiscal 2022 as we continued to experience constraints in our internal and external factories and their related manufacturing supply chains. We expect that certain supply chain constraints will persist through calendar 2022 and into calendar 2023. In order to provide prioritized capacity to our customers, we launched our Preferred Supply Program in February 2021, which provides our customers with prioritized capacity beginning six months after the customer places an order for 12 months of continuous, non-cancellable and non-reschedulable backlog. In the first quarter of calendar 2022, we entered into certain long-term supply agreements with our customers for products that will be shipped in future periods. We also entered into certain long-term supply agreements with key suppliers.

In response to the pandemic, we have taken proactive preventative measures to enable a safe environment for our employees and operation of our manufacturing sites. While our global manufacturing sites have been fully operational in recent periods, we strategically implemented plans intended to provide more assurance of business continuity in the event severe outbreaks or government requirements were to impact our operations.

Strategy

We develop, manufacture and sell smart, connected and secure embedded control solutions used by our customers for a wide variety of applications. Our strategic focus includes general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, microprocessors, analog, FPGA, and memory products. With over 30 years of technology leadership, our broad product portfolio is a Total System Solution (TSS) for our customers that can provide a large portion of the silicon requirements in their applications. TSS is a combination of hardware, software and services which help our customers increase their revenue, reduce their costs and manage their risks compared to other solutions. Our synergistic product portfolio empowers disruptive growth trends, including 5G, data centers, artificial intelligence and machine learning, Internet of Things (IoT) and edge computing, advanced driver assist systems (ADAS) and autonomous driving, and electric vehicles, in key end markets such as automotive, aerospace and defense, communications, consumer appliances, data centers and computing, and industrial.

Our manufacturing operations include wafer fabrication, wafer probe, assembly and test. The ownership of a substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry. By owning wafer fabrication facilities and our assembly and test operations, and by employing statistical techniques (statistical process control, designed experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture a portion of the wafer manufacturing and assembly and testing profit margin. We outsource a significant portion of our manufacturing requirements to third parties and the amount of our outsourced manufacturing has increased in recent years due to our acquisitions of Microsemi and other companies that outsourced all or substantial portions of their manufacturing.

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We employ proprietary design and manufacturing processes in developing our embedded control products. We believe our processes afford us both cost-effective designs in existing and derivative products and greater functionality in new product designs. While many of our competitors develop and optimize separate processes for their logic and memory product lines, we use a common process technology for both microcontroller and non-volatile memory products. This allows us to more fully leverage our process research and development costs and to deliver new products to market more rapidly. Our engineers utilize advanced computer-aided design tools and software to perform circuit design, simulation and layout, and our in-house photomask and wafer fabrication facilities enable us to rapidly verify design techniques by processing test wafers quickly and efficiently.

We are committed to continuing our investment in new and enhanced products, including development systems, and in our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our competitive position. Our current research and development activities focus on the design of new microcontrollers, digital signal controllers, memory, analog and mixed-signal products, FPGAs, timing systems, Flash-IP, development systems, software and application-specific software libraries. We are also developing new design and process technologies to achieve further cost reductions and performance improvements in our products.

We market and sell our products worldwide primarily through a network of direct sales personnel and distributors. Our direct sales force focuses on a wide variety of strategic accounts in three geographical markets: the Americas, Europe and Asia. We currently maintain sales and technical support centers in major metropolitan areas in all three geographic markets. We believe that a strong technical service presence is essential to the continued development of the embedded control market. Many of our CEMs, ESEs, and sales managers have technical degrees or backgrounds and have been previously employed in high technology environments. We believe that the technical and business knowledge of our sales force is a key competitive advantage in the sale of our products. The primary mission of our ESE team is to provide technical assistance to customers and to conduct periodic training sessions for the balance of our sales team. ESEs also frequently conduct technical seminars and workshops in major cities around the world or through online webcasts. Our licensing division has dedicated sales, technology, design, product, test and reliability personnel that support the requirements of our licensees.

See the risk factor captioned "Our operating results are impacted by seasonality and wide fluctuations of supply and demand in the industry" on page 41 for discussion of the impact of seasonality on our business.

Critical Accounting Policies and Estimates

Except for the changes discussed in "Recently Adopted Accounting Pronouncements" in Note 2 to our condensed consolidated financial statements in this Form 10-Q, there were no changes to our critical accounting policies and estimates during the first three months of the fiscal year ending March 31, 2023 compared to our "Critical Accounting Policies and Estimates" as previously described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.

Results of Operations

The following table sets forth certain operational data as a percentage of net sales for the periods covered by this report:

Net Sales

We operate in two industry segments and engage primarily in the design, development, manufacture and sale of semiconductor products as well as the licensing of our SuperFlash and other technologies. We sell our products to

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distributors and OEMs in a broad range of markets, perform ongoing credit evaluations of our customers and generally require no collateral. In certain circumstances, a customer's financial condition may require collateral, and, in such cases, the collateral would be typically provided in the form of letters of credit.

The following table summarizes our net sales for the periods covered by this report (dollars in millions):

The increase in net sales in the three months ended June 30, 2022 compared to June 30, 2021 was primarily due to strong business conditions that began in the second half of fiscal 2021 as businesses and individuals adapted to the effects of the COVID-19 pandemic. Business conditions continued to be strong in the three months ended June 30, 2022. Additionally, semiconductor industry conditions have resulted in increased costs throughout our supply chain, which we have been passing on to our customers in the form of price increases. These price increases also contributed to the increase in net sales during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Our price increases were implemented at various times and in various amounts throughout fiscal 2022 with respect to our very broad range of customers and products. Due to the complexity of the implementation of the price increases and the changes in product, geographic and customer mix, we are not able to quantify the impact of the price increases on our net sales. Additionally, the increase in net sales was positively impacted by strength in our microcontroller and analog product lines.

Other factors that we believe contributed to changes in our reported net sales for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and which are drivers of long-term trends in our net sales but which factors we are not able to quantify include:

• semiconductor industry conditions;

• our various new product offerings that have increased our served available market;

• customers’ increasing needs for the flexibility offered by our programmable solutions; and

• increasing semiconductor content in our customers’ products through our Total Systems Solutions.

We sell a large number of products to a large and diverse customer base and there was not any single product or customer that accounted for a material portion of the change in our net sales in the three months ended June 30, 2022 or the three months ended June 30, 2021.

Net sales by product line for the periods covered by this report were as follows (dollars in millions):

Microcontrollers

Our microcontroller product line represents the largest component of our total net sales. Microcontrollers and associated application development systems accounted for approximately 54.2% of our net sales in the three months ended June 30, 2022 compared to approximately 57.5% of our net sales in the three months ended June 30, 2021.

Net sales of our microcontroller products increased 17.8% in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due primarily to strength in demand for our microcontroller products in end markets that we serve and our price increases.

Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. However, the overall average selling prices of our microcontroller products have increased in recent periods and have remained relatively stable over time due to the proprietary nature of these products. We have in the past been able to, and expect in the future to be able to, moderate average selling price declines in our microcontroller product lines by introducing new products with more features and higher prices.

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Analog

Our analog product line includes analog, interface, mixed signal and timing products. Our analog product line accounted for approximately 29.5% of our net sales in the three months ended June 30, 2022 compared to approximately 27.5% of our net sales in the three months ended June 30, 2021.

Net sales from our analog product line increased 34.2% in the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to strength in demand for our analog products in end markets that we serve and our price increases.

We consider a majority of the products in our analog product line to be proprietary in nature, where prices are relatively stable, similar to the pricing stability experienced in our microcontroller products. The non-proprietary portion of our analog product line will experience price fluctuations, driven primarily by the current supply and demand for those products.

Other

Our other product line includes FPGA products, royalties associated with licenses for the use of our SuperFlash and other technologies, sales of our intellectual property, fees for engineering services, memory products, timing systems, manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, and certain products for aerospace applications. Revenue from these services and products accounted for approximately 16.3% of our net sales in the three months ended June 30, 2022 compared to approximately 15.0% of our net sales in the three months ended June 30, 2021.

Net sales related to these services and products increased 36.5% in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase in net sales was primarily due to strength in demand for our products in end markets that we serve and our price increases. Net sales of our other product line can fluctuate over time based on general economic and semiconductor industry conditions as well as changes in demand for our FPGA products, licenses, engineering services, memory products, and manufacturing services (wafer foundry and assembly and test subcontracting).

Distribution

Distributors accounted for approximately 47% of our net sales in the three months ended June 30, 2022 and approximately 50% of our net sales in the three months ended June 30, 2021. The decrease in the distribution percentage of our total net sales is due to lower Preferred Supply Program participation among our distributors as priority of supply under the Preferred Supply Program is more prevalent with direct customers. With the exception of Arrow Electronics, our largest distributor, which made up 11% of our net sales, no other distributor or end customer accounted for more than 10% of our net sales in the three months ended June 30, 2022. In the three months ended June 30, 2021, no distributor or end customer accounted for more than 10% of our net sales. Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base. We believe that customers recognize Microchip for its products and brand name and use distributors as an effective supply channel.

Generally, we do not have long-term agreements with our distributors and we, or our distributors, may terminate our relationships with each other with little or no advance notice, with the exception of orders placed under our Preferred Supply Program or otherwise designated as non-cancellable. The loss of, or the disruption in the operations of, one or more of our distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.

At June 30, 2022, our distributors maintained 19 days of inventory of our products compared to 17 days at March 31, 2022. Over the past ten fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 17 days and 40 days. Inventory holding patterns at our distributors may have a material impact on our net sales. Our distributor inventory days are near historic lows due to the imbalance between the supply of and the demand for our products in the current supply-constrained environment.

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Sales by Geography

Sales by geography for the periods covered by this report were as follows (dollars in millions):

Americas sales include sales to customers in the U.S., Canada, Central America and South America. Sales to foreign customers accounted for approximately 78% of our total net sales in the three months ended June 30, 2022 compared to approximately 79% of our total net sales in the three months ended June 30, 2021. Substantially all of our foreign sales are U.S. dollar denominated. Sales to customers in the Americas and Europe as a percentage of total net sales increased in the three months ended June 30, 2022 compared to June 30, 2021 primarily due to strength in demand in our microcontroller and analog product lines. Our sales force in the Americas and Europe supports a significant portion of the design activity for products which are ultimately shipped to Asia.

Gross Profit

Our gross profit in the three months ended June 30, 2022 was $1.31 billion, or 66.7% of net sales, compared to $1.01 billion, or 64.2% of net sales, in the three months ended June 30, 2021. Gross margin increased in the three months ended June 30, 2022 compared to June 30, 2021 primarily as a result of higher utilization of our factories due to increased customer demand.

Our overall inventory levels were $911.8 million at June 30, 2022, compared to $854.4 million at March 31, 2022. We maintained 127 days of inventory on our balance sheet at June 30, 2022 compared to 125 days of inventory at March 31, 2022. We expect our days of inventory levels at September 30, 2022 to be 127 to 132 days.

We operate assembly and test facilities in Thailand, the Philippines, and other locations throughout the world. During the three months ended June 30, 2022, approximately 58% of our assembly requirements were performed in our internal assembly facilities, compared to approximately 59% during the three months ended June 30, 2021. During the three months ended June 30, 2022, approximately 62% of our test requirements were performed in our internal test facilities, compared to approximately 63% during the three months ended June 30, 2021. The percentage of our assembly and test operations that are performed internally fluctuates over time based on supply and demand conditions in the semiconductor industry, our internal capacity capabilities and our acquisition activities. We believe that the assembly and test operations performed at our internal facilities provide us with significant cost savings compared to third party contractor assembly and test costs, as well as increased control over these portions of the manufacturing process. We plan to continue to invest in assembly and test equipment to increase our internal capacity capabilities and transition certain outsourced assembly and test capacity to our internal facilities.

We rely on outside wafer foundries for a significant portion of our wafer fabrication requirements. Approximately 63% of our net sales came from products that were produced at outside wafer foundries in the three months ended June 30, 2022, compared to 58% in the three months ended June 30, 2021.

Research and Development

R&D expenses for the three months ended June 30, 2022 were $269.0 million, or 13.7% of net sales, compared to $238.4 million, or 15.2% of net sales, for the three months ended June 30, 2021. We are committed to investing in new and enhanced products, including development systems software, and in our design and manufacturing process technologies. We believe these investments are significant factors in maintaining our competitive position. R&D costs are expensed as incurred. Assets purchased to support our ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their expected useful lives. R&D expenses include labor, depreciation, masks, prototype wafers, and expenses for the development of process technologies, new packages, and software to support new products and design environments.

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R&D expenses increased $30.6 million, or 12.8%, for the three months ended June 30, 2022 over the same period last year. The primary reasons for the increase in R&D expenses were increases in employee compensation and higher product development costs.

R&D expenses fluctuate over time, primarily due to revenue and operating expense investment levels.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended June 30, 2022 were $188.9 million, or 9.6% of net sales, compared to $174.3 million, or 11.1% of net sales, for the three months ended June 30, 2021. Our goal is to continue to be more efficient with our selling, general and administrative expenses. Selling, general and administrative expenses include salary expenses related to field sales, marketing and administrative personnel, advertising and promotional expenditures and legal expenses as well as costs related to our direct sales force, CEMs and ESEs who work remotely from sales offices worldwide to stimulate demand by assisting customers in the selection and use of our products.

Selling, general and administrative expenses increased $14.6 million, or 8.4%, for the three months ended June 30, 2022 over the same period last year. The increase in selling, general and administrative expenses was primarily due to increases in employee compensation.

Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense investment levels.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the three months ended June 30, 2022 was $167.6 million, compared to $215.6 million for the three months ended June 30, 2021. The primary reason for the decrease was due to the use of accelerated amortization methods for assets placed in service in previous fiscal years.

Special (Income) Charges and Other, Net

During the three months ended June 30, 2022, we incurred special income and other, net of $16.9 million, compared to special charges and other, net of $10.5 million for the three months ended June 30, 2021. The income was primarily related to the favorable resolution of a previously accrued legal matter and the charges incurred were primarily related to restructuring of acquired and existing wafer fabrication operations to increase operational efficiency.

Other Income (Expense)

Interest income in the three months ended June 30, 2022 was $0.1 million compared to $0.3 million in the three months ended June 30, 2021.

Interest expense in the three months ended June 30, 2022 was $50.3 million compared to $72.3 million for the three months ended June 30, 2021. The primary reasons for the decrease in interest expense in the three months ended June 30, 2022 compared to the same period last year were due to the adoption of ASU 2020-06 on April 1, 2022, which eliminated the amortization of debt discount on our Convertible Debt, and the cumulative pay down of our debt offset by higher interest rates on our outstanding variable rate debt.

During the three months ended June 30, 2022, we recognized losses of $6.2 million related to the settlement of approximately $31.0 million in principal of our 2017 Senior Convertible Debt and approximately $3.6 million in principal of our 2017 Junior Convertible Debt. During the three months ended June 30, 2021, we recognized losses of $0.3 million related to the repayment of $1.00 billion aggregate principal amount outstanding on our 3.922% 2021 Notes.

Other income, net in the three months ended June 30, 2022 was $1.7 million compared to $0.5 million for the three months ended June 30, 2021.

Provision for Income Taxes

Our provision or benefit for income taxes is attributable to U.S. federal, state, and foreign income taxes. A comparison of our tax rates for the three months ended June 30, 2022 and June 30, 2021 is not meaningful due to the amount of pre-tax income, and income tax expense recorded during the prior period.

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We are subject to taxation in many jurisdictions in which we have operations. The effective tax rates that we pay in these jurisdictions vary widely, but they are generally lower than our combined U.S. federal and state effective tax rate. Our domestic blended statutory tax rate in each of the three months ended June 30, 2022 and June 30, 2021 was approximately 22%. Our non-U.S. blended statutory tax rates in the three months ended June 30, 2022 and June 30, 2021 were lower than this amount. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, tax holidays, financing arrangements and other factors. Our effective tax rate has been and will continue to be impacted by the geographical dispersion of our earnings and losses.

Our foreign tax rate differential benefit primarily relates to our operations and assets in Thailand, Malta, and Ireland. Our Thailand manufacturing operations are currently subject to numerous tax holidays granted to us based on our investment in property, plant, and equipment in Thailand. Our tax holiday periods in Thailand expire at various times in the future; however, we actively seek to obtain new tax holidays, otherwise we will be subject to tax at the statutory tax rate of 20%. We do not expect the future expiration of any of our tax holiday periods in Thailand to have a material impact on our effective tax rate. The remaining material components of foreign income taxed at a rate lower than the U.S. are earnings accrued in Ireland at a 12.5% statutory tax rate and earnings accrued in Malta at a 5.0% tax rate.

In September 2021, we received a Statutory Notice of Deficiency (Notice) from the Internal Revenue Service (IRS) for fiscal 2007 through fiscal 2012. The disputed amounts largely relate to transfer pricing matters. We firmly believe that the assessments are without merit and plan to pursue all available administrative and judicial remedies necessary to resolve this matter. In December 2021, we filed a petition in the United States Tax Court challenging the Notice. We intend to vigorously defend our position and we are confident in our ability to prevail on the merits. We regularly assess the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of our tax reserves. We believe that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows and that we have adequate tax reserves for all tax matters. However, the ultimate outcome of disputes of this nature is uncertain, and if the IRS were to prevail on all of its assertions, the assessed tax, penalties, and deficiency interest could have a material adverse impact on our financial position, results of operations or cash flows.

Various taxing authorities in the U.S. and other countries in which we do business are increasing their scrutiny of the tax structures employed by businesses. Companies of our size and complexity are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. For U.S. federal, and in general for U.S. state tax returns, our fiscal 2007 and later tax returns remain effectively open for examination by the taxing authorities. We are currently being audited by the tax authorities in the U.S. and in various foreign jurisdictions. At this time, we do not know what the outcome of these audits will be. We record 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, we recognize the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.

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Liquidity and Capital Resources

We had $379.1 million in cash, cash equivalents and short-term investments at June 30, 2022, an increase of $59.7 million from the March 31, 2022 balance.

Operating Activities

Net cash provided by operating activities was $840.4 million in the three months ended June 30, 2022, primarily due to higher net income of $507.2 million, adjusted for non-cash and non-operating charges of $385.4 million and net cash outflows of $52.2 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities in the three months ended June 30, 2022 include an increase in trade accounts receivable driven primarily by higher net sales and an increase in inventories related to increased production levels and higher costs of materials and production costs in support of customer demand for our products, offset by increases in accrued and other liabilities driven by higher sales related reserves. Net cash provided by operating activities was $629.9 million in the three months ended June 30, 2021, primarily due to net income of $252.8 million, adjusted for non-cash and non-operating charges of $366.2 million and net cash inflows of $10.9 million from changes in our operating assets and liabilities.

Investing Activities

Net cash used in investing activities was $153.8 million in the three months ended June 30, 2022 compared to $112.7 million in the three months ended June 30, 2021. During the three months ended June 30, 2022 and June 30, 2021, net investing activities primarily related to capital purchases and investments in other assets.

Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions. Capital expenditures in the three months ended June 30, 2022 were $121.9 million compared to $86.3 million in the three months ended June 30, 2021. Capital expenditures were primarily for the expansion of production capacity and the addition of research and development equipment. Towards the second half of fiscal 2021, we started to invest more significantly to expand our manufacturing capacity in response to supply constraints relative to current demand levels and we expect this to continue through calendar 2022. We currently expect to invest between $500 million and $550 million in equipment and facilities during the next twelve months. We believe that the capital expenditures anticipated to be incurred over the next twelve months will provide sufficient manufacturing capacity to support the growth of our production capabilities for our new products and technologies and to bring in-house more of our production requirements that are currently outsourced. We expect to finance our capital expenditures through our existing cash balances and cash flows from operations.

Financing Activities

Net cash used in financing activities was $626.9 million in the three months ended June 30, 2022 compared to $519.5 million in the three months ended June 30, 2021. Significant transactions affecting our net financing cash flows included:

• in the first three months of fiscal 2023, $272.5 million of cash used to pay down certain principal of our debt, including our 2017 Senior Convertible Debt, our 2017 Junior Convertible Debt, and our Revolving Credit Facility, and

• in the first three months of fiscal 2022, $391.0 million of cash used to pay down certain principal of our debt, including our Revolving Credit Facility and our 3.922% 2021 Notes, partially funded by the issuance of our senior notes, and

• in the first three months of fiscal 2023 and fiscal 2022, we paid cash dividends to our stockholders of $153.0 million and $113.1 million, respectively, and

• in the first three months of fiscal 2023, we repurchased shares of our common stock for $195.2 million.

In December 2021, we amended and restated our Credit Agreement in its entirety. The amended and restated Credit Agreement provides for an unsecured revolving loan facility up to $2.75 billion that terminates on December 16, 2026. The Credit Agreement also permits us, subject to certain conditions, to add one or more incremental term loan facilities or increase the revolving loan commitments up to $750.0 million. As of June 30, 2022, the principal amount of our outstanding indebtedness was $7.60 billion. At June 30, 2022, we had $1.20 billion of outstanding borrowings under the Revolving Credit Facility compared to $1.40 billion at March 31, 2022.

Capital Returns

In November 2021, our Board of Directors authorized the repurchase of up to $4.00 billion of our common stock in the open market or in privately negotiated transactions. In the first three months of fiscal 2023, we repurchased approximately

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2.9 million shares of our common stock for $195.2 million under this authorization. We did not repurchase any shares of our common stock in the first three months of fiscal 2022. As of June 30, 2022, approximately $3.38 billion remained available for repurchases under the program. As of June 30, 2022, we held approximately 25.3 million shares as treasury shares. Our current intent is to regularly repurchase shares of our common stock over time based on our cash generation, leverage metrics, and market conditions.

In October 2002, we announced that our Board of Directors had approved and instituted a quarterly cash dividend on our common stock. To date, our cumulative dividend payments have totaled approximately $5.20 billion. A quarterly cash dividend of $0.276 per share was paid on June 3, 2022 in the aggregate amount of $153.0 million. A quarterly dividend of $0.301 per share was declared on August 2, 2022 and will be paid on September 2, 2022 to stockholders of record as of August 19, 2022. We expect the aggregate cash dividend for the September 2022 quarter to be approximately $166.5 million. Our Board is free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend on our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and other factors deemed relevant by our Board. Our current intent is to increase our quarterly cash dividends depending upon market conditions, our results of operations, and potential changes in tax laws.

We believe that our existing sources of liquidity combined with cash generated from operations and borrowings under our Revolving Credit Facility will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months. Our long-term liquidity requirements primarily arise from working capital requirements, interest and principal repayments related to our outstanding indebtedness, capital expenditures, cash dividends, share repurchases, and income tax payments. For additional information regarding our cash requirements see "Note 11. Commitments and Contingencies", "Note 7. Debt" and "Note 12. Income Taxes" of the notes to our condensed consolidated financial statements. The semiconductor industry is capital intensive and in order to remain competitive, we must constantly evaluate the need to make significant investments in capital equipment for both production and research and development and to expand our existing facilities or potentially construct new facilities. We may increase our borrowings under our Revolving Credit Facility or seek additional equity or debt financing from time to time to maintain or expand our wafer fabrication and product assembly and test facilities, for cash dividends, for share repurchases or for acquisitions or other purposes. The timing and amount of any such financing requirements will depend on a number of factors, including our level of dividend payments, changes in tax laws and regulations regarding the repatriation of offshore cash, demand for our products, changes in industry conditions, product mix, competitive factors and our ability to identify suitable acquisition candidates. We may from time to time seek to refinance certain of our outstanding notes or Convertible Debt through issuances of new notes or convertible debt, tender offers, exchange transactions or open market repurchases. Such issuances, tender offers or exchanges or purchases, if any, will depend on prevailing market conditions, our ability to negotiate acceptable terms, our liquidity position and other factors. There can be no assurance that any financing will be available on acceptable terms due to uncertainties resulting from rising interest rates, higher inflation, economic uncertainty, the COVID-19 pandemic, or other factors, and any additional equity financing would result in incremental ownership dilution to our existing stockholders.

As of June 30, 2022, our long-term debt totaled $7.60 billion. We have no interest rate exposure to rate changes on our fixed rate debt, which totaled $6.40 billion as of June 30, 2022. We have interest rate exposure with respect to the $1.20 billion of our variable interest rate debt outstanding under our Revolving Credit Facility as of June 30, 2022. A 50-basis point increase in interest rates would impact our expected annual interest expense for the next 12 months by approximately $6.0 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 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

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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 June 30, 2022, 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 11 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, suppliers, 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, 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 or import 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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• fluctuations in the amount and timing of our common stock repurchases;

• 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.

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 uncertain economic conditions in China, increases in interest rates, inflation or the 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 (including Russia's invasion of Ukraine), worldwide oil prices and supply, fires, natural disasters or disruptions in the transportation system;

• availability of raw materials including rare earth minerals, 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

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None.

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• This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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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.