Microchip Technology 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2023

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 October 26, 2023 was 541,045,298.

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; unaudited)

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; unaudited)

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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 36 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:

• The future impact on our business in response to the COVID-19 pandemic or other public health concerns;

• Our expectation that we will experience period-to-period fluctuations in operating results, gross margins, product mix and average gross profit per unit;

• 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 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 intent to vigorously defend our legal positions;

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

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

• Our belief that familiarity with and adoption of development tools from us and from our third-party development tool partners will be an important factor in the future selection of our embedded control products;

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

• Fluctuations in our analog product line;

• The impact of any supply disruption we may experience;

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

• Our ability to maintain manufacturing yields;

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

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

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

• Our expectations regarding investments in our manufacturing capacity;

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

• Our anticipated level of capital expenditures;

• The possibility that loss of, or disruption in the operations of, one or more of our distributors could reduce our future net sales and/or increase our inventory returns;

• Our expectations regarding LTSAs and Preferred Supply Program;

• 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 12 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;

• 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;

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• The amounts and timing, and our plans and expectations relating to the Statutory Notice of Deficiency and proposed income adjustment from the Malaysian Inland Revenue Board;

• Our expectation regarding the treatment of our unrecognized tax benefits in calendar year 2023;

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

• Our expectations regarding our tax expense, cash taxes and 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 and maintain patents and intellectual property licenses and minimize the effects of litigation or other disputes or the loss of patent protection;

• 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;

• The impact of inflation on our business;

• 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 belief that our culture, values, and organizational development and training programs provide an inclusive work environment where our employees are empowered and engaged to deliver the best embedded control solutions;

• Our belief that our continued success is driven by the skills, knowledge, and innovative capabilities of our personnel, a strong technical service presence, and our ability to rapidly commercialize new and enhanced products;

• The potential impact of changes in regulations or in their enforcement, including with respect to the capital expenditures or other costs or expenses;

• The impact of any failure by use to adequately control the storage, use, discharge and disposal of regulated substances;

• 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 belie

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Interest Rate Risk

As of September 30, 2023, our current and long-term debt totaled $6.10 billion. We have no interest rate exposure to rate changes on our fixed rate debt, which totaled $5.31 billion as of September 30, 2023. We have interest rate exposure with respect to the $789.0 million of our variable interest rate debt outstanding under our Revolving Credit Facility and our 2025 Term Loan Facility, as of September 30, 2023. A 50-basis point increase in interest rates would increase our expected annual interest expense for the next 12 months by approximately $3.9 million. We intend to finance the repayment of a portion of our fixed rate debt maturing within the next 12 months using available borrowings under our Revolving Credit Facility, new fixed rate notes, term loans, Commercial Paper or other instruments at which point, changes in interest rates will have a more significant impact on our interest expense if we refinance such fixed rate debt with variable rate debt. For additional information, refer to "Note 5. Debt" for a summary of our debt obligations by maturity date.

Inflation Risk

Inflation has not had a material adverse impact on our operating results in recent periods. However, if our costs were to continue to become subject to significant inflationary pressures, we may not be able to continue to offset such higher costs through price increases which could adversely impact our operating results.

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 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, 2023, 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 of the Exchange Act 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 9. Commitments and Contingencies" 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 and performance of our licensees, customers, distributors, or suppliers;

• impact of price increases, increased tariffs, raw material availability or other factors affecting our suppliers;

• dependence 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;

• dependence on orders received and shipped in the same quarter, limited visibility to product shipments other than those shipped through our Preferred Supply Program or LTSAs;

• 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;

• inability to achieve expected returns from capacity expansions;

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

• dependence on distributors;

• ability to introduce new products on a timely basis;

• business interruptions 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, or tax arrangements with, governments, agencies and research organizations;

• ability to realize anticipated benefits from completed or 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, our products or our 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 on our reported financial results by new accounting pronouncements or changes in existing accounting standards and practices;

• the issuance of new export controls or trade sanctions, fines, restrictions or delays 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, 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;

• ESG considerations; and

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• 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;

• 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 U.S., China and Europe, increases in interest rates, high inflation or instability in the banking sector;

• the level of order cancellations or push-outs due to uncertain economic conditions or other factors;

• 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 military conflict in the Middle East and 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 as needed to respond to changes in customer demand;

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

• 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;

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

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

• 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 and the customers of our distributors;

• 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 or resale;

• 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 acquisitions, customers or other issues; and

• property damage or other losses, whether or not cover

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Securities Trading Plans of Directors and Executive Officers

During our last fiscal quarter, no director or officer, as defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” each as defined in Regulation S-K Item 408.

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*Compensation plans or arrangements in which directors or executive officers are eligible to participate.

** 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.