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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014.
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number:  0-21184

 
 
  
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
86-0629024
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)

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 checkmark 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  x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 
Smaller reporting company
o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  (Check One)
Yes    o No   x
Shares Outstanding of Registrant's Common Stock
Class
 
Outstanding at January 21, 2015
Common Stock, $0.001 par value
 
201,448,608 shares
 



MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

INDEX

 
 
 
Page
 
 
 
PART I.  FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.  OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CERTIFICATIONS
 
 
 
EXHIBITS
 




MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)


Item1.
Financial Statements

ASSETS
December 31,
2014
 
March 31,
2014
Cash and cash equivalents
$
456,339

 
$
466,603

Short-term investments
666,119

 
878,182

Accounts receivable, net
242,595

 
242,405

Inventories
276,143

 
262,725

Prepaid expenses
35,111

 
31,756

Deferred tax assets
50,490

 
67,490

Assets held for sale
13,985

 

Other current assets
42,697

 
20,238

Total current assets
1,783,479

 
1,969,399

Property, plant and equipment, net
577,123

 
531,967

Long-term investments
1,107,224

 
798,712

Goodwill
565,290

 
276,097

Intangible assets, net
551,210

 
445,499

Other assets
44,591

 
45,956

Total assets
$
4,628,917

 
$
4,067,630

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
76,933

 
$
74,050

Accrued liabilities
104,389

 
96,731

Short-term borrowings
17,500

 
17,500

Deferred income on shipments to distributors
154,264

 
147,798

Total current liabilities
353,086

 
336,079

Junior convertible debentures
379,263

 
371,873

Long-term line of credit
644,375

 
300,000

Long-term borrowings, net
318,457

 
331,385

Long-term income tax payable
138,388

 
179,966

Long-term deferred tax liability
468,842

 
375,316

Other long-term liabilities
44,228

 
37,550

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued or outstanding

 

Common stock, $0.001 par value; authorized 450,000,000 shares; 218,789,994 shares issued and 201,444,488 shares outstanding at December 31, 2014; 218,789,994 shares issued and 200,002,736 shares outstanding at March 31, 2014
201

 
200

Additional paid-in capital
1,252,902

 
1,244,583

Common stock held in treasury: 17,345,506 shares at December 31, 2014; 18,787,258 shares at March 31, 2014
(534,562
)
 
(577,382
)
Accumulated other comprehensive income
15,563

 
1,051

Retained earnings
1,522,185

 
1,467,009

Microchip Technology stockholders' equity
2,256,289

 
2,135,461

Noncontrolling interests
25,989

 

Total equity
2,282,278

 
2,135,461

Total liabilities and equity
$
4,628,917

 
$
4,067,630

See accompanying notes to condensed consolidated financial statements

3


MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Net sales
$
528,710

 
$
482,372

 
$
1,603,829

 
$
1,437,833

Cost of sales (1)
226,751

 
199,652

 
687,897

 
599,676

Gross profit
301,959

 
282,720

 
915,932

 
838,157

Operating expenses:
 

 
 

 
 

 
 

Research and development  (1)
88,697

 
76,341

 
261,881

 
227,680

Selling, general and administrative  (1)
66,668

 
66,856

 
207,037

 
201,934

Amortization of acquired intangible assets
47,582

 
21,804

 
129,659

 
73,225

Special charges
1,003

 
801

 
2,082

 
2,491

 
203,950

 
165,802

 
600,659

 
505,330

 
 
 
 
 
 
 
 
Operating income
98,009

 
116,918

 
315,273

 
332,827

(Losses) gains on equity method investments
(62
)
 
150

 
(129
)
 
(211
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
4,924

 
4,241

 
14,197

 
12,176

Interest expense
(14,223
)
 
(12,545
)
 
(41,920
)
 
(36,755
)
Other (expense) income, net
(2,457
)
 
3,824

 
(3,535
)
 
6,093

Income before income taxes
86,191

 
112,588

 
283,886

 
314,130

Income tax provision
1,393

 
7,187

 
17,141

 
30,344

Net income
84,798

 
105,401

 
266,745

 
283,786

Less: Net loss attributable to noncontrolling interests
1,259

 

 
2,862

 

Net income attributable to Microchip Technology
$
86,057

 
$
105,401

 
$
269,607

 
$
283,786

Basic net income per common share attributable to Microchip Technology stockholders
$
0.43

 
$
0.53

 
$
1.34

 
$
1.43

Diluted net income per common share attributable to Microchip Technology stockholders

$
0.39

 
$
0.48

 
$
1.20

 
$
1.31

Dividends declared per common share
$
0.3565

 
$
0.3545

 
$
1.0680

 
$
1.0620

Basic common shares outstanding
201,203

 
198,759

 
200,673

 
197,845

Diluted common shares outstanding
223,487

 
219,089

 
224,433

 
215,943

(1) Includes share-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of sales
$
2,290

 
$
1,841

 
$
6,985

 
$
5,674

Research and development
7,075

 
6,141

 
20,645

 
18,762

Selling, general and administrative
5,454

 
5,737

 
15,783

 
16,939


See accompanying notes to condensed consolidated financial statements

4


MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Net income
$
84,798

 
$
105,401

 
$
266,745

 
$
283,786

Less: Net loss attributable to noncontrolling interests
1,259

 

 
2,862

 

Net income attributable to Microchip Technology
86,057

 
105,401

 
269,607

 
283,786

 
 
 
 
 
 
 
 
Components of other comprehensive income (loss):
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses), net of tax effect of $12,380, $0, $12,392 and $497, respectively
19,844

 
59

 
19,439

 
(8,011
)
Reclassification of realized transactions, net of tax effect of $0, $0, $12 and $776, respectively
(73
)
 
(113
)
 
(157
)
 
(1,503
)
Change in net foreign currency translation adjustment
1,046

 

 
(5,188
)
 

Other comprehensive income (loss), net of taxes
20,817

 
(54
)
 
14,094

 
(9,514
)
Less: Other comprehensive (income) loss attributable to noncontrolling interests
(149
)
 

 
866

 

Other comprehensive income (loss) attributable to Microchip Technology
20,668

 
(54
)
 
14,960

 
(9,514
)
 
 
 
 
 
 
 
 
Comprehensive income
105,615

 
105,347

 
280,839

 
274,272

Less: Comprehensive loss attributable to noncontrolling interests
1,110

 

 
3,728

 

Comprehensive income attributable to Microchip Technology
$
106,725

 
$
105,347

 
$
284,567

 
$
274,272


See accompanying notes to condensed consolidated financial statements


5

MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Nine Months Ended
 
December 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
266,745

 
$
283,786

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
205,112

 
143,704

Deferred income taxes
5,795

 
24,190

Share-based compensation expense related to equity incentive plans
43,413

 
41,375

Excess tax benefit from share-based compensation
(1,100
)
 

Convertible debt derivatives - revaluation and amortization
79

 
(449
)
Amortization of debt discount on convertible debentures
7,311

 
6,682

Amortization of debt issuance costs
1,632

 
1,416

Losses on equity method investments
129

 
211

Loss on write-down of fixed assets
285

 

Impairment of intangible assets
1,861

 
350

Amortization of premium on available-for-sale investments
7,561

 
8,067

Special income, net

 
(999
)
Gain on shares of acquired company

 
(2,438
)
Changes in operating assets and liabilities:
 
 
 
Decrease in accounts receivable
15,449

 
5,624

Decrease (increase) in inventories
28,684

 
(30,588
)
Increase in deferred income on shipments to distributors
6,466

 
4,363

Decrease in accounts payable and accrued liabilities
(39,001
)
 
(21,870
)
Change in other assets and liabilities
(7,749
)
 
9,799

Net cash provided by operating activities
542,672

 
473,223

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investments
(721,861
)
 
(950,560
)
Sales and maturities of available-for-sale investments
821,160

 
584,186

Acquisition of ISSC, net of cash acquired
(252,469
)
 

Purchase of additional controlling interest in ISSC
(22,934
)
 

Acquisition of Supertex, net of cash acquired
(375,365
)
 

Other business acquisitions, net of cash acquired

 
(11,187
)
Investments in other assets
(5,274
)
 
(7,462
)
Proceeds from sale of assets

 
16,200

Capital expenditures
(120,014
)
 
(79,536
)
Net cash used in investing activities
(676,757
)
 
(448,359
)
Cash flows from financing activities:
 

 
 

Repayments of revolving loan under previous credit facility

 
(650,000
)
Repayments of revolving loan under new credit facility
(427,900
)
 
(153,500
)
Proceeds from borrowings on revolving loan under previous credit facility

 
30,000

Proceeds from borrowings on revolving loan under new credit facility
772,275

 
453,500

Proceeds from issuance of long-term borrowings

 
350,000

Repayments of long-term borrowings
(13,125
)
 

Deferred financing costs

 
(7,515
)
Payment of cash dividends
(214,431
)
 
(210,322
)
Proceeds from sale of common stock
20,829

 
42,517

Tax payments related to shares withheld for vested restricted stock units
(14,276
)
 
(17,765
)
Contingent consideration payment

 
(14,700
)
Capital lease payments
(450
)
 
(313
)
Excess tax benefit from share-based compensation
1,100

 

Net cash provided by (used in) financing activities
124,022

 
(178,098
)
Effect of foreign exchange rate changes on cash and cash equivalents
(201
)
 

Net decrease in cash and cash equivalents
(10,264
)
 
(153,234
)
Cash and cash equivalents at beginning of period
466,603

 
528,334

Cash and cash equivalents at end of period
$
456,339

 
$
375,100

See accompanying notes to condensed consolidated financial statements

6


MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Microchip Technology Incorporated and its majority-owned subsidiaries (the Company).  The Company owns 100% of the outstanding stock in all of its subsidiaries with the exception of its recent acquisition of ISSC Technologies Corporation (ISSC) as further discussed in Note 2. The noncontrolling interests in the Company's net income from ISSC have been excluded from net income attributable to the Company in the Company's condensed consolidated statements of income. All intercompany balances and transactions have been eliminated in consolidation.
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC).  The information furnished herein reflects all adjustments which are, in the opinion of management, of a normal recurring nature and necessary for a fair statement of the results for the interim periods reported. Certain information and footnote disclosures normally included in audited consolidated financial statements have been condensed or omitted pursuant to such SEC rules and regulations.  It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2014.  The results of operations for the nine months ended December 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2015 or for any other period.

(2)
Business Acquisitions
Acquisition of ISSC
On July 17, 2014, the Company acquired an 83.5% interest in Taiwan based ISSC, a leading provider of low power Bluetooth and advanced wireless solutions for the Internet of Things (IoT) market. The total purchase price paid for the 83.5% interest was approximately $267.6 million and was financed with existing cash and investment balances. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities in the wireless and IoT areas by extending its served available market. The Company acquired the 83.5% ownership interest through a tender offer process and expects to acquire the remaining shares through a follow-on merger which is expected to close in the first quarter of fiscal 2016. As of December 31, 2014, the Company's ownership percentage in ISSC was approximately 91.1%.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer. Since the Company's acquired ownership interest in ISSC represents a controlling interest, the operating results of ISSC have been included in the Company's condensed consolidated financial statements as of the closing date of the acquisition with the noncontrolling interest deducted to arrive at net income. The fair value of the noncontrolling interest at the acquisition date was calculated based on the expected purchase price of the remaining shares available. As the Company purchases additional shares of ISSC, the noncontrolling interest will be reduced and any gain or loss on the shares purchased will be reflected in the stockholders' equity of the Company. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to ISSC's net tangible assets and intangible assets based on their estimated fair values as of July 17, 2014.  The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's semiconductor products reporting segment.  None of the goodwill related to the ISSC acquisition is deductible for tax purposes.  The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. This could result in adjustments to the carrying value of the assets acquired and liabilities assumed, the useful lives of intangible assets and the residual amount allocated to goodwill. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuations and estimates of useful lives.

7


The table below represents the preliminary allocation of the purchase price, including adjustments to the purchase price allocation from the originally reported figures at September 30, 2014, to the net assets acquired based on their estimated fair values as of July 17, 2014, as well as the associated estimated useful lives of the acquired intangible assets at that date (amounts in thousands):
Assets acquired
Previously Reported September 30, 2014
 
Adjustments
 
December 31, 2014
Cash and cash equivalents
$
15,120

 
$

 
$
15,120

Short-term investments
27,063

 

 
27,063

Accounts receivable, net
8,792

 

 
8,792

Inventories
19,160

 
(2,618
)
 
16,542

Prepaid expenses and other current assets
2,501

 

 
2,501

Property, plant and equipment, net
2,637

 

 
2,637

Goodwill
152,243

 
2,156

 
154,399

Purchased intangible assets
147,800

 

 
147,800

Other assets
1,370

 

 
1,370

Total assets acquired
376,686

 
(462
)
 
376,224

 
 
 
 
 
 
Liabilities assumed
 
 
 
 
 
Accounts payable
(9,860
)
 

 
(9,860
)
Other current liabilities
(16,997
)
 
462

 
(16,535
)
Long-term income tax payable
(4,402
)
 

 
(4,402
)
Deferred tax liability
(25,126
)
 

 
(25,126
)
Other long-term liabilities
(245
)
 

 
(245
)
Total liabilities assumed
(56,630
)
 
462

 
(56,168
)
Net assets acquired including noncontrolling interest
320,056

 

 
320,056

Less: noncontrolling interest
(52,467
)
 

 
(52,467
)
Net assets acquired
$
267,589

 
$

 
$
267,589


The amount of cash paid by the Company, net of cash and short-term investments acquired from ISSC of approximately $42.2 million, was $225.4 million.
Purchased Intangible Assets
Useful Life
 
April 1, 2014
 
(in years)
 
(in thousands)
Core/developed technology
10
 
$
68,900

In-process technology
10
 
27,200

Customer-related
3
 
51,100

Backlog
1
 
600

 
 
 
$
147,800

Purchased intangible assets include core and developed technology, in-process technology, customer-related intangibles and acquisition-date backlog. The estimated fair values of the core and developed technology and in-process technology were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized commensurate with the expected cash flows used in the initial determination of fair value. In-process technology is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.

8


Customer-related intangible assets consist of ISSC's contractual relationships and customer loyalty related to its distributor and end-customer relationships, and the fair values of the customer-related intangibles were determined based on ISSC's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from ISSC's historical customer information.  Customer relationships are being amortized in a manner consistent with the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by ISSC at the acquisition date, and the preliminary fair values were based on the estimated profit associated with those orders. Backlog related assets are being recognized commensurate with recognition of the revenue for the orders on which the backlog intangible assets were determined.  Amortization expense associated with acquired intangible assets is not deductible for tax purposes.  Thus, approximately $25.1 million was established as a net deferred tax liability for the future amortization of the intangible assets.
The amount of ISSC net sales and net loss attributable to the Company included in the Company's condensed consolidated statements of income for the three months ended December 31, 2014 was approximately $8.7 million and $10.0 million, respectively. The amount of ISSC net sales and net loss attributable to the Company included in the Company's condensed consolidated statements of income for the nine months ended December 31, 2014 was approximately $25.6 million and $18.2 million, respectively. The amount of ISSC net sales in the three months ended December 31, 2014 was negatively impacted by approximately $7.1 million due to the Company changing the contractual relationships with the ISSC distribution network to a sell through revenue recognition model.
The following unaudited pro-forma consolidated results of operations for the three and nine months ended December 31, 2014 and 2013 assume the ISSC acquisition occurred as of April 1, 2013. The pro-forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2013 or of results that may occur in the future (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Net sales
$
528,710

 
$
497,585

 
$
1,626,183

 
$
1,490,776

Net income attributable to Microchip Technology
86,683

 
97,470

 
265,412

 
260,386

Net income attributable to Microchip Technology common stockholders per share - basic
$
0.43

 
$
0.49

 
$
1.32

 
$
1.32

Net income attributable to Microchip Technology common stockholders per share - diluted
$
0.39

 
$
0.44

 
$
1.18

 
$
1.21

Acquisition of Supertex
On April 1, 2014, the Company acquired Supertex Inc., a publicly traded company based in Sunnyvale, California, for $33.00 per share and the exchange of certain share-based payment awards, for a total of $391.8 million. The Company financed the transaction using borrowings under its existing credit agreement. As a result of the acquisition, Supertex became a wholly owned subsidiary of the Company. Supertex is a leader in high voltage analog and mixed signal technologies, with a strong position in the medical, lighting and industrial control markets. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities in these areas by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Supertex have been included in the Company's condensed consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Supertex's net tangible assets and intangible assets based on their estimated fair values as of April 1, 2014.  The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's semiconductor products reporting segment.  None of the goodwill related to the Supertex acquisition is deductible for tax purposes.  The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. This could result in adjustments to the carrying value of the assets acquired and liabilities assumed, the useful lives of intangible assets and the residual amount allocated to goodwill. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuations and estimates of useful lives.

9


The table below represents the preliminary allocation of the purchase price, including adjustments to the purchase price allocation from the originally reported figures at June 30, 2014, to the net assets acquired based on their estimated fair values as of April 1, 2014 (amounts in thousands):
Assets acquired
Previously Reported June 30, 2014
 
Adjustments
 
December 31, 2014
Cash and cash equivalents
$
14,790

 
$

 
$
14,790

Short-term investments
140,984

 

 
140,984

Accounts receivable, net
7,047

 

 
7,047

Inventories
27,630

 

 
27,630

Prepaid expenses
1,493

 

 
1,493

Deferred tax assets
3,997

 

 
3,997

Other current assets
16,113

 

 
16,113

Property, plant and equipment, net
15,679

 

 
15,679

Goodwill
133,713

 
3,465

 
137,178

Purchased intangible assets
89,600

 

 
89,600

Other assets
325

 

 
325

Total assets acquired
451,371

 
3,465

 
454,836

 
 
 
 
 
 
Liabilities assumed
 
 
 
 
 
Accounts payable
(8,481
)
 

 
(8,481
)
Accrued liabilities
(19,345
)
 
(25
)
 
(19,370
)
Long-term income tax payable
(3,796
)
 

 
(3,796
)
Deferred tax liability
(27,972
)
 
(3,440
)
 
(31,412
)
Total liabilities assumed
(59,594
)
 
(3,465
)
 
(63,059
)
Net assets acquired
$
391,777

 
$

 
$
391,777


The total purchase price allocated of $391.8 million includes approximately $1.6 million of non cash consideration for the exchange of certain share-based payment awards of Supertex for stock awards of the Company. The amount of cash paid by the Company, net of cash and short-term investments acquired from Supertex of approximately $155.8 million, was $234.4 million.
Purchased Intangible Assets
Useful Life
 
April 1, 2014
 
(in years)
 
(in thousands)
Core/developed technology
10
 
$
68,900

In-process technology
10
 
1,900

Customer-related
2
 
17,700

Backlog
1
 
1,100

 
 
 
$
89,600

Purchased intangible assets include core and developed technology, in-process technology, customer-related intangibles and acquisition-date backlog. The estimated fair values of the core and developed technology and in-process technology were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized commensurate with the expected cash flows used in the initial determination of fair value. In-process technology is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.

10


Customer-related intangible assets consist of Supertex's contractual relationships and customer loyalty related to its distributor and end-customer relationships, and the fair values of the customer-related intangibles were determined based on Supertex's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from Supertex's historical customer information.  Customer relationships are being amortized in a manner consistent with the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by Supertex at the acquisition date, and the preliminary fair values were based on the estimated profit associated with those orders. Backlog related assets are being recognized commensurate with recognition of the revenue for the orders on which the backlog intangible assets were determined.  Amortization expense associated with acquired intangible assets is not deductible for tax purposes.  Thus, approximately $22.8 million was established as a net deferred tax liability for the future amortization of the intangible assets.
The amount of Supertex net sales included in the Company's condensed consolidated statements of income for the three months ended December 31, 2014 was approximately $18.6 million. The amount of Supertex net sales included in the Company's condensed consolidated statements of income for the nine months ended December 31, 2014 was approximately $53.0 million. The operations of Supertex were fully integrated into the Company's operations as of July 1, 2014 and as such, cost of sales and operating expenses were no longer segregated in the three or nine months ended December 31, 2014.
The following unaudited pro-forma consolidated results of operations for the three and nine months ended December 31, 2014 and 2013 assume the Supertex acquisition occurred as of April 1, 2013. The pro-forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2013 or of results that may occur in the future (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Net sales
$
528,710

 
$
499,722

 
$
1,606,298

 
$
1,486,661

Net income
87,392

 
99,741

 
291,288

 
251,976

Basic earnings per share
$
0.43

 
$
0.50

 
$
1.45

 
$
1.27

Diluted earnings per share
$
0.39

 
$
0.46

 
$
1.30

 
$
1.17


(3)
Recently Issued Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.  The amendments in this ASU provide explicit guidance on whether a performance target contained in a share-based payment award that could be achieved after the requisite service period should be treated (i) as a performance condition that affects vesting or (ii) as a nonvesting condition that affects the grant-date fair value of the award.  The amendments require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition rather than as a nonvesting condition.  Accordingly, such performance targets are not reflected in the estimation of the grant date fair value of the award.  Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.  If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining service period.  The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.  The amendments in this update are effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods.  Early adoption is permitted.  The Company does not anticipate adoption of this ASU will have a material impact on its consolidated financial statements.


11


In July 2013, FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11) to provide guidance on the presentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for the Company's first quarter of fiscal 2015 with earlier adoption permitted. ASU 2013-11 should be applied prospectively with retroactive application permitted. There was no income statement impact to the Company as a result of adopting this accounting standard.

In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under US GAAP.  The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company is evaluating its existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be materially affected by the new requirements.  The effects may include identifying performance obligations in existing arrangements, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  The new standard is effective beginning with the first quarter of the Company's 2018 fiscal year.  Early adoption is not permitted.  The standard allows for either "full retrospective" adoption, meaning the standard is applied to all of the periods presented, or "modified retrospective" adoption, meaning the standard is applied only to the most current period presented in the financial statements.  The Company is currently evaluating the transition method that will be elected.

(4)
Special Charges

The Company incurred special charges related to severance, office closing and other costs associated with its acquisition activity of $1.0 million and $2.1 million for the three and nine months ended December 31, 2014, respectively, and $0.8 million and $2.5 million for the three and nine months ended December 31, 2013, respectively.

(5)
Segment Information
 
The Company's reportable segments are semiconductor products and technology licensing.  The Company does not allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income taxes to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is beneficial in evaluating segment performance.  Additionally, the Company does not allocate assets to segments for internal reporting purposes as it does not manage its segments by such metrics.

The following table represents net sales and gross profit for each segment for the three and nine months ended December 31, 2014 (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 31, 2014
 
December 31, 2014
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Semiconductor products
$
505,763

 
$
279,012

 
$
1,537,861

 
$
849,964

Technology licensing
22,947

 
22,947

 
65,968

 
65,968

 
$
528,710

 
$
301,959

 
$
1,603,829

 
$
915,932



12


The following table represents net sales and gross profit for each segment for the three and nine months ended December 31, 2013 (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 31, 2013
 
December 31, 2013
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Semiconductor products
$
458,298

 
$
258,646

 
$
1,366,415

 
$
766,739

Technology licensing
24,074

 
24,074

 
71,418

 
71,418

 
$
482,372

 
$
282,720

 
$
1,437,833

 
$
838,157



(6)
Investments
 
The Company's investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to the Company's investment guidelines and market conditions.  The following is a summary of available-for-sale securities at December 31, 2014 (amounts in thousands):
 
Available-for-sale Securities
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Government agency bonds
$
736,615

 
$
113

 
$
(1,866
)
 
$
734,862

Municipal bonds
45,140

 
74

 
(32
)
 
45,182

Auction rate securities
9,825

 

 

 
9,825

Time deposits (1)
8,699

 

 

 
8,699

Corporate bonds and debt
938,331

 
927

 
(1,397
)
 
937,861

Marketable equity securities
3,600

 
33,314

 

 
36,914

 
$
1,742,210

 
$
34,428

 
$
(3,295
)
 
$
1,773,343

 
(1) Time deposits in various financial institutions with maturities greater than three months that will mature within one year.

The following is a summary of available-for-sale securities at March 31, 2014 (amounts in thousands):
 
Available-for-sale Securities
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Government agency bonds
$
684,451

 
$
114

 
$
(3,171
)
 
$
681,394

Municipal bonds
41,622

 
101

 
(14
)
 
41,709

Auction rate securities
9,825

 

 

 
9,825

Corporate bonds and debt
941,524

 
3,247

 
(805
)
 
943,966

 
$
1,677,422

 
$
3,462

 
$
(3,990
)
 
$
1,676,894


At December 31, 2014, the Company's available-for-sale securities are presented on the condensed consolidated balance sheets as short-term investments of $666.1 million and long-term investments of $1,107.2 million.  At March 31, 2014, the Company's available-for-sale securities are presented on the condensed consolidated balance sheets as short-term investments of $878.2 million and long-term investments of $798.7 million.

The Company's marketable equity securities consist of an investment in Hua Hong Semiconductor Limited (Hua Hong), which effected its initial public offering on the Hong Kong stock exchange on October 15, 2014. This investment was previously classified as a non-marketable cost-method investment, and had a carrying value of $3.6 million.


13


The following tables show all investments in an unrealized loss position for which an other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position (amounts in thousands):
 
December 31, 2014
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Government agency bonds
$
568,466

 
$
(1,561
)
 
$
64,695

 
$
(305
)
 
$
633,161

 
$
(1,866
)
Municipal bonds
13,533

 
(32
)
 

 

 
13,533

 
(32
)
Corporate bonds and debt
460,372

 
(1,363
)
 
5,988

 
(34
)
 
466,360

 
(1,397
)
 
$
1,042,371

 
$
(2,956
)
 
$
70,683

 
$
(339
)
 
$
1,113,054

 
$
(3,295
)


 
March 31, 2014
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Government agency bonds
$
522,159

 
$
(3,172
)
 
$

 
$

 
$
522,159

 
$
(3,172
)
Municipal bonds
2,625

 
(13
)
 
1,196

 
(1
)
 
3,821

 
(14
)
Corporate bonds and debt
256,717

 
(804
)
 

 

 
256,717

 
(804
)
 
$
781,501

 
$
(3,989
)
 
$
1,196

 
$
(1
)
 
$
782,697

 
$
(3,990
)

Management does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of December 31, 2014 and the Company's intent is to hold these investments until these assets are no longer impaired, except for certain auction rate securities (ARS).  For those debt securities not scheduled to mature until after December 31, 2015, such recovery is not anticipated to occur in the next year and these investments have been classified as long-term investments.
 
The amortized cost and estimated fair value of the available-for-sale securities at December 31, 2014, by contractual maturity, excluding marketable equity securities of $36.9 million and corporate debt of $6.2 million, which have no contractual maturity, are shown below (amounts in thousands).  Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for current operations.
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale
 
 
 
 
 
 
 
Due in one year or less
$
216,444

 
$
258

 
$
(9
)
 
$
216,693

Due after one year and through five years
1,428,901

 
835

 
(3,081
)
 
1,426,655

Due after five years and through ten years
77,250

 
21

 
(205
)
 
77,066

Due after ten years
9,825

 

 

 
9,825

 
$
1,732,420

 
$
1,114

 
$
(3,295
)
 
$
1,730,239

 
The Company had no material realized gains or losses from the sale of available-for-sale marketable equity securities or debt securities during each of the three and nine-month periods ended December 31, 2014 and 2013.



14


(7)
Fair Value Measurements

Accounting rules for fair value clarify that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1-
Observable inputs such as quoted prices in active markets;
Level 2-
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3-
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Marketable Debt Instruments

Marketable debt instruments include instruments such as corporate bonds and debt, government agency bonds, bank deposits, municipal bonds, and money market mutual funds. When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroborates non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Assets measured at fair value on a recurring basis at December 31, 2014 are as follows (amounts in thousands):
 
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Balance
Assets
 
 
 
 
 
 
 
Money market mutual funds
$
51,677

 
$

 
$

 
$
51,677

Marketable equity securities
36,914

 

 

 
36,914

Corporate bonds and debt

 
931,671

 
6,190

 
937,861

Time deposits (1)

 
8,699

 

 
8,699

Government agency bonds

 
734,862

 

 
734,862

Deposit accounts

 
404,662

 

 
404,662

Municipal bonds

 
45,182

 

 
45,182

Auction rate securities

 

 
9,825

 
9,825

Total assets measured at fair value
$
88,591

 
$
2,125,076

 
$
16,015

 
$
2,229,682


(1) Time deposits in various financial institutions with maturities greater than three months that will mature within one year.


15


Assets measured at fair value on a recurring basis at March 31, 2014 are as follows (amounts in thousands):
 
Quoted Prices
in Active
Markets for Identical Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Balance
Assets
 
 
 
 
 
 
 
Money market mutual funds
$
192,159

 
$

 
$

 
$
192,159

Corporate bonds and debt

 
937,776

 
6,190

 
943,966

Government agency bonds

 
681,394

 

 
681,394

Deposit accounts

 
274,444

 

 
274,444

Municipal bonds

 
41,709

 

 
41,709

Auction rate securities

 

 
9,825

 
9,825

Total assets measured at fair value
$
192,159

 
$
1,935,323

 
$
16,015

 
$
2,143,497


There were no transfers between Level 1 and Level 2 during the three and nine-month periods ended December 31, 2014 or the year ended March 31, 2014.

At December 31, 2014 and at March 31, 2014, the Company's ARS for which recent auctions were unsuccessful are made up of securities related to the insurance industry valued at $9.8 million with a par value of $22.4 million. The Company estimated the fair value of its ARS, which are classified as Level 3 securities, based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security. The significant unobservable inputs used in the fair value measurement of the insurance sector ARS as of December 31, 2014 were estimated risk free discount rates, liquidity risk premium, and the liquidity horizon. The risk free discount rate applied to these securities was 2% to 2.5% adjusted for the liquidity risk premium which ranged from 9.1% to 29.5%. The anticipated liquidity horizon ranged from 7 to 10 years. A significant increase in the liquidity premium or discount rate, in isolation, would lead to a significantly lower fair value measurement. A significant increase in the liquidity horizon, in isolation, would lead to a significantly lower fair value measurement. Each quarter the Company investigates material changes in the fair value measurements of its ARS.
The following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the year ended March 31, 2014 (amounts in thousands):
Year ended March 31, 2014
 
Auction Rate
Securities
 
Corporate
Debt
 
Contingent
Consideration
 
Total Losses
Balance at March 31, 2013
 
$
33,791

 
$
6,190

 
$
(19,100
)
 

Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
 
Included in earnings
 
1,101

 

 
(1,370
)
 
$
(269
)
  Included in other comprehensive income
 
(332
)
 

 

 
(332
)
Purchases, sales, issuances, and settlements, net
 
(24,735
)
 

 
20,470

 

Balance at March 31, 2014
 
$
9,825

 
$
6,190

 
$

 
 

Gains and losses recognized in earnings using Level 3 inputs for ARS are credited or charged to Other Income (Expense) on the condensed consolidated statements of income. Gains and losses recognized in earnings using Level 3 inputs related to the revaluation of contingent consideration are credited or charged to Special Charges on the condensed consolidated statements of income.


16


Assets measured at fair value on a recurring basis are presented/classified on the condensed consolidated balance sheets at December 31, 2014 as follows (amounts in thousands):
 
Quoted Prices
 in Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Balance
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
51,677

 
$
404,662

 
$

 
$
456,339

Short-term investments
36,914

 
629,205

 

 
666,119

Long-term investments

 
1,091,209

 
16,015

 
1,107,224

Total assets measured at fair value
$
88,591

 
$
2,125,076

 
$
16,015

 
$
2,229,682


Assets measured at fair value on a recurring basis are presented/classified in the condensed consolidated balance sheets at March 31, 2014 as follows (amounts in thousands):
 
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
 (Level 3)
 
Total
Balance
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
192,159

 
$
274,444

 
$

 
$
466,603

Short-term investments

 
878,182

 

 
878,182

Long-term investments

 
782,697

 
16,015

 
798,712

Total assets measured at fair value
$
192,159

 
$
1,935,323

 
$
16,015

 
$
2,143,497


Financial Assets Not Recorded at Fair Value on a Recurring Basis
 
The Company's non-marketable equity and cost-method investments are not recorded at fair value on a recurring basis.  These investments are monitored on a quarterly basis for impairment charges.  The investments will only be recorded at fair value when an impairment charge is recognized.  There were no impairment charges recognized on these investments during the three and nine-month periods ended December 31, 2014 and December 31, 2013.

(8)
Fair Value of Financial Instruments
 
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months.  Management believes the carrying amount of the equity and cost-method investments materially approximated fair value at December 31, 2014 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair value measurements. The fair values of the Company's line of credit and short-term and long-term borrowings are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements and approximate carrying value. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the Company's line of credit and long-term borrowings at December 31, 2014 approximated book value and are considered Level 2 in the fair value hierarchy described in Note 7. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts.  The fair value of the Company's junior subordinated convertible debentures was $2.051 billion at December 31, 2014 and $2.138 billion at March 31, 2014 based on observable market prices for these debentures, which are traded in less active markets and are therefore classified as Level 2 securities. See Note 16 for more information regarding the Company's junior subordinated convertible debentures.



17


(9)
Accounts Receivable
 
Accounts receivable consists of the following (amounts in thousands):
 
December 31, 2014
 
March 31, 2014
Trade accounts receivable
$
242,437

 
$
243,383

Other
3,069

 
1,940

 
245,506

 
245,323

Less allowance for doubtful accounts
2,911

 
2,918

 
$
242,595

 
$
242,405



(10)
Inventories

The components of inventories consist of the following (amounts in thousands):
 
December 31, 2014
 
March 31, 2014
Raw materials
$
14,301

 
$
9,734

Work in process
190,573

 
179,692

Finished goods
71,269

 
73,299

 
$
276,143

 
$
262,725


Inventories are valued at the lower of cost or market using the first-in, first-out method. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable.

(11)
Assets Held for Sale

During the three months ended December 31, 2014, the Company began to actively market property it acquired as part of the Supertex acquisition.   The Company expects to sell the property within one year.  As of December 31, 2014, the Company classified the assets as held for sale on its condensed consolidated balance sheet at its fair value of approximately $14.3 million, net of the estimated cost to sell of approximately $0.3 million.

(12)
Property, Plant and Equipment

Property, plant and equipment consists of the following (amounts in thousands):
 
December 31, 2014
 
March 31, 2014
Land
$
55,624

 
$
55,624

Building and building improvements
430,695

 
411,149

Machinery and equipment
1,549,999

 
1,465,255

Projects in process
75,800

 
68,991

 
2,112,118

 
2,001,019

Less accumulated depreciation and amortization
1,534,995

 
1,469,052

 
$
577,123

 
$
531,967

 
Depreciation expense attributed to property, plant and equipment was $24.7 million and $72.3 million for the three and nine months ended December 31, 2014, respectively, and $22.2 million and $66.7 million for the three and nine months ended December 31, 2013, respectively.



18


(13)
Noncontrolling Interests

The following table presents the changes in the components of noncontrolling interests for the nine months ended December 31, 2014 (amounts in thousands):

 
Noncontrolling Interests
Balance at March 31, 2014
$

Additions due to acquisition of controlling interest in ISSC
52,467

Net loss attributable to noncontrolling interests
(2,862
)
Other comprehensive loss attributable to noncontrolling interests
(866
)
Purchase of additional interests
(23,054
)
Other
304

Balance at December 31, 2014
$
25,989


The following table presents the effect of changes in the Company's ownership interest in ISSC on the Company's stockholders' equity for the nine months ended December 31, 2014 (amounts in thousands):

 
Nine Months Ended
 
December 31, 2014
Net income attributable to Microchip Technology stockholders
$
269,607

   Increase in paid-in capital for purchase of additional interests
568

   Increase in paid-in capital for converted stock options
1,094

Transfers from noncontrolling interest
1,662

Change from net income attributable to Microchip Technology stockholders and transfers from noncontrolling interest
$
271,269


(14)    Intangible Assets and Goodwill
 
Intangible assets consist of the following (amounts in thousands):
 
 
December 31, 2014
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Developed technology
 
$
563,272

 
$
(185,391
)
 
$
377,881

Customer-related
 
263,969

 
(170,719
)
 
93,250

Trademarks and trade names
 
15,730

 
(8,926
)
 
6,804

Backlog
 
26,302

 
(25,818
)
 
484

In-process technology
 
72,442

 

 
72,442

Distribution rights
 
5,585

 
(5,236
)
 
349

Covenants not to compete
 
400

 
(400
)
 

 
 
$
947,700

 
$
(396,490
)
 
$
551,210



19


 
 
March 31, 2014
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Developed technology
 
$
402,669

 
$
(117,222
)
 
$
285,447

Customer-related
 
195,800

 
(109,170
)
 
86,630

Trademarks and trade names
 
15,730

 
(7,118
)
 
8,612

Backlog
 
24,610

 
(24,610
)
 

In-process technology
 
64,396

 

 
64,396

Distribution rights
 
5,585

 
(5,171
)
 
414

Covenants not to compete
 
400

 
(400
)
 

 
 
$
709,190

 
$
(263,691
)
 
$
445,499


The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years.  During the nine months ended December 31, 2014, $20.7 million of in-process technology reached technological feasibility and was reclassified as developed technology and began being amortized over its estimated useful life. The following is an expected amortization schedule for the intangible assets for the remainder of fiscal 2015 through fiscal 2019, absent any future acquisitions or impairment charges (amounts in thousands):

Year ending
March 31,
Projected Amortization
Expense
2015
$48,377
2016
146,898
2017
91,833
2018
69,488
2019
62,732
 
Amortization expense attributed to intangible assets was $48.6 million and $132.8 million for the three and nine months ended December 31, 2014, respectively. Amortization expense attributed to intangible assets was $23.0 million and $77.0 million for the three and nine months ended December 31, 2013, respectively.  In the three and nine months ended December 31, 2014, approximately $0.9 million and $2.9 million was charged to cost of sales, respectively, and approximately $47.7 million and $129.9 million was charged to operating expenses, respectively.  In the three and nine months ended December 31, 2013, approximately $1.2 million and $3.7 million was charged to cost of sales, respectively, and approximately $21.8 million and $73.3 million was charged to operating expenses, respectively.  The Company recognized impairment charges of $1.3 million and $1.9 million in the three and nine months ended December 31, 2014, respectively. The Company recognized impairment charges of $0.4 million in the nine months ended December 31, 2013. The Company did not recognize any impairment charges in the three months ended December 31, 2013.

Goodwill activity for the nine months ended December 31, 2014 was as follows (amounts in thousands):
 
Semiconductor Products
Reporting Unit
 
Technology
Licensing
Reporting Unit
Balance at March 31, 2014
$
256,897

 
$
19,200

Additions due to the acquisition of Supertex
137,178

 

Additions due to acquisition of controlling interest in ISSC
154,399

 

Adjustments due to other acquisitions
625

 

Foreign currency translation adjustments
(3,009
)
 

Balance at December 31, 2014
$
546,090

 
$
19,200

 
At December 31, 2014, $546.1 million of goodwill was recorded in the Company's semiconductor products reporting unit and $19.2 million was recorded in the Company's technology licensing reporting unit. At March 31, 2014, the Company applied a qualitative goodwill impairment screen to its two reporting units, concluding it was not more likely than not that goodwill was impaired. Through December 31, 2014, the Company had never recorded an impairment charge against its goodwill balance.

20


(15)
Income Taxes
 
The provision for income taxes reflects tax on foreign earnings and federal and state tax on U.S. earnings.  The Company had an effective tax rate of 6.0% for the nine-month period ended December 31, 2014 and 9.7% for the nine-month period ended December 31, 2013.  The Company's effective tax rate for nine-month period ended December 31, 2014 is lower compared to the prior year primarily due to closure of statute of limitations, certain audit settlements with taxing authorities and a change in judgment regarding certain state valuation allowances. During the three-month period ended December 31, 2014, approximately $1.9 million of prior year tax positions were released which increased each of the basic and diluted net income per common share for the three-month period ended December 31, 2014 by approximately $0.01. During the nine-month period ended December 31, 2014, approximately $9.3 million of prior year tax positions were released which increased each of the basic and diluted net income per common share for the nine-month period ended December 31, 2014 by approximately $0.04. The Company's effective tax rate is lower than statutory rates in the U.S. due primarily to its mix of earnings in foreign jurisdictions with lower tax rates.

At December 31, 2014, the Company had $222.0 million of unrecognized tax benefits.  Unrecognized tax benefits increased by $42.0 million compared to March 31, 2014 primarily as a result of unrecognized tax benefits from the Company's acquisitions of Supertex and ISSC, the ongoing accrual for uncertain tax positions and the accrual of deficiency interest on these positions. The majority of the increase in the uncertain tax position does not result in a change in the Company's effective tax rate. The Company evaluated the impact of the adoption of ASU 2013-11 on its condensed consolidated financial statements and determined that $83.6 million of unrecognized tax benefits can be presented as a reduction to deferred tax assets for net operating loss carryforward and other tax credit carryforwards. There was no income statement impact as a result of adopting this accounting standard.
 
The Company files U.S. federal, U.S. state, and foreign income tax returns.  For U.S. federal, and in general for U.S. state tax returns, the fiscal 2011 and later tax years remain open for examination by tax authorities.  The U.S. Internal Revenue Service (IRS) is currently auditing Microchip's and Standard Microsystems Corporation's (SMSC) 2011 and 2012 tax years.  For foreign tax returns, the Company is generally no longer subject to income tax examinations for years prior to fiscal 2006.
 
The Company recognizes liabilities for anticipated tax audit issues in the U.S. and other domestic and international tax jurisdictions based on its estimate of whether, and the extent to which, additional tax payments are more likely than not.  The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax laws applied to the facts of each matter.
 
The Company believes it maintains appropriate reserves to offset any potential income tax liabilities that may arise upon final resolution of matters for open tax years.  If such reserve amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed necessary.  If such amounts prove to be less than an ultimate assessment, a future charge to expense would be recorded in the period in which the assessment is determined.  Although the timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.

(16)
2.125% Junior Subordinated Convertible Debentures
 
The Company's $1.15 billion principal amount of 2.125% junior subordinated convertible debentures due December 15, 2037, are subordinated in right of payment to any future senior debt of the Company and are effectively subordinated in right of payment to the liabilities of the Company's subsidiaries.  The debentures are convertible, subject to certain conditions, into shares of the Company's common stock at an initial conversion rate of 29.2783 shares of common stock per $1,000 principal amount of debentures, representing an initial conversion price of approximately $34.16 per share of common stock.  As of December 31, 2014, the holders of the debentures have the right to convert their debentures between January 1, 2015 and March 31, 2015 because for at least 20 trading days during the 30 consecutive trading day period ending on December 31, 2014, the Company's common stock had a last reported sale price greater than 130% of the conversion price. As of December 31, 2014, a holder could realize more economic value by selling its debentures in the over the counter market

21


than from converting its debentures. As a result of cash dividends paid since the issuance of the debentures, the conversion rate has been adjusted to 39.5749 shares of common stock per $1,000 of principal amount of debentures, representing a conversion price of approximately $25.27 per share of common stock. The debentures include a contingent interest mechanism that begins in December 2017. The terms of the contingent interest include a 0.25% interest rate if the debentures are trading at less than $40 and 0.5% if the debentures are trading at greater than $150. Based on the current trading price of the debentures, the contingent interest rate in calendar year 2017 would be 0.5%.
 
As the debentures can be settled in cash upon conversion, for accounting purposes, the debentures were bifurcated into a liability component and an equity component, which are both initially recorded at fair value.  The carrying value of the equity component at December 31, 2014 and at March 31, 2014 was $822.4 million.  The estimated fair value of the liability component of the debentures at the issuance date was $327.6 million, resulting in a debt discount of $822.4 million.  The unamortized debt discount was $769.9 million at December 31, 2014 and $777.2 million at March 31, 2014.  The carrying value of the debentures was $379.3 million at December 31, 2014 and $371.9 million at March 31, 2014.  The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 23 years.  In the three and nine months ended December 31, 2014, the Company recognized $2.5 million and $7.3 million, respectively, in non-cash interest expense related to the amortization of the debt discount.  In the three and nine months ended December 31, 2013, the Company recognized $2.3 million and $6.7 million, respectively, in non-cash interest expense related to the amortization of the debt discount.  The Company recognized $6.1 million and $18.3 million of interest expense related to the 2.125% coupon on the debentures in each of the three and nine-month periods ended December 31, 2014 and December 31, 2013, respectively.

(17)
Credit Facility

On June 27, 2013, the Company entered into a $2.0 billion credit agreement among the Company, the lenders from time to time that are parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (the Credit Agreement). The Credit Agreement provides for a $350 million term loan and a $1.65 billion revolving credit facility, with a $125 million foreign currency sublimit, a $35 million letter of credit sublimit and a $25 million swingline loan sublimit, terminating on June 27, 2018 (the Maturity Date). The Credit Agreement also contains an increase option permitting the Company, subject to certain requirements, to arrange with existing lenders and/or new lenders for them to provide up to an aggregate of $300 million in additional commitments, which may be for revolving loans or term loans. Proceeds of loans made under the Credit Agreement may be used for working capital and general corporate purposes. The Credit Agreement replaced another credit agreement the Company had in place since August 2011. At December 31, 2014, $981.3 million of borrowings were outstanding under the Credit Agreement consisting of $644.4 million of a revolving line of credit and $336.9 million of a term loan, net of $1.0 million of debt discount resulting from amounts paid to the lenders.

The loans under the Credit Agreement bear interest, at the Company's option, at the base rate plus a spread of 0.25% to 1.25% or an adjusted LIBOR rate (based on one, two, three, or six-month interest periods) plus a spread of 1.25% to 2.25%, in each case with such spread being determined based on the consolidated leverage ratio for the preceding four fiscal quarter period. The base rate means the highest of JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 1-month interest period plus a margin equal to 1.00%. Swingline loans accrue interest at a per annum rate based on the base rate plus the applicable margin for base rate loans. Base rate loans may only be made in U.S. dollars. The Company is also obligated to pay other customary administration fees and letter of credit fees for a credit facility of this size and type.

Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three-month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Interest expense related to the Credit Agreement was approximately $5.3 million and $15.4 million in the three and nine months ended December 31, 2014, respectively, and approximately $4.1 million and $11.5 million in the three and nine months ended December 31, 2013, respectively. Principal, together with all accrued and unpaid interest, is due and payable on the Maturity Date. The weighted average interest rate on short-term borrowings outstanding at December 31, 2014 related to the Credit Agreement was 1.67%. The Company also pays a quarterly commitment fee on the available but unused portion of its line of credit which is calculated on the average daily available balance during the period. The Company may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions and reimbursement of certain costs in the case of prepayments of LIBOR loans.


22


The Company's obligations under the Credit Agreement are guaranteed by certain of its subsidiaries meeting materiality thresholds set forth in the Credit Agreement. To secure the Company's obligations under the Credit Agreement, the Company and its domestic subsidiaries will be required to pledge the equity securities of certain of their respective material subsidiaries, subject to certain exceptions and limitations.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, incur subsidiary indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, repurchase stock, enter into restrictive agreements and enter into sale and leaseback transactions, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. At December 31, 2014, the Company was in compliance with these covenants.

The Credit Agreement includes customary events of default that include, among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts.

(18)
Contingencies

In the ordinary course of the Company's business, it is involved in a limited number of legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them.  The Company also periodically receives notifications from various third parties alleging infringement of patents, intellectual property rights or other matters.  With respect to pending legal actions to which the Company is a party, although the outcomes of these actions are not generally determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations.  Litigation relating to the semiconductor industry is not uncommon, and the Company is, and from time to time has been, subject to such litigation.  No assurances can be given with respect to the extent or outcome of any such litigation in the future.
 
The Company's technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or trade secret infringement by the Company's proprietary technology.  The terms of these indemnification provisions approximate the terms of the outgoing technology license agreements, which are typically perpetual unless terminated by either party for breach.  The possible amount of future payments the Company could be required to make based on agreements that specify indemnification limits, if such indemnifications were required on all of these agreements, is approximately $138 million. There are some licensing agreements in place that do not specify indemnification limits.  The Company had not recorded any liabilities related to these indemnification obligations as of December 31, 2014.

(19)
Derivative Instruments
 
The Company has international operations and is thus subject to foreign currency rate fluctuations.  To help manage the risk of changes in foreign currency rates, the Company periodically enters into derivative contracts comprised of foreign currency forward contracts to hedge its asset and liability foreign currency exposure and a portion of its foreign currency operating expenses.  Approximately 99% of the Company's sales are U.S. dollar denominated.  To date, the exposure related to foreign exchange rate volatility has not been material to the Company's operating results.  As of December 31, 2014 and March 31, 2014, the Company had no foreign currency forward contracts outstanding. The Company recognized an immaterial amount of net realized gains and losses on foreign currency forward contracts in each of the three and nine months ended December 31, 2014 and 2013. Gains and losses from changes in the fair value of these foreign currency forward contracts are credited or charged to Other Income (Expense). The Company does not apply hedge accounting to its foreign currency derivative instruments.
 


23


(20)
Comprehensive Income

The following table presents the changes in the components of accumulated other comprehensive income (AOCI) for the nine months ended December 31, 2014 (amounts in thousands):
 
Unrealized
holding gains (losses)
available-for-sale securities
 
Minimum
pension
liability
 
Foreign
Currency
 
Total
Balance at March 31, 2014
$
(528
)
 
$
140

 
$
1,439

 
$
1,051

Other comprehensive income (loss) before reclassifications
19,439

 

 
(4,322
)
 
15,117

Amounts reclassified from accumulated other comprehensive income (loss)
(157
)
 

 

 
(157
)
Net other comprehensive income (loss)
19,282

 

 
(4,322
)
 
14,960

Purchase of shares from noncontrolling interest

 

 
(448
)
 
(448
)
Balance at December 31, 2014
$
18,754

 
$
140

 
$
(3,331
)
 
$
15,563


The table below details where reclassifications of realized transactions out of AOCI are recorded on the condensed consolidated statements of income (amounts in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
December 31,
 
December 31,
 
 
Description of AOCI Component
 
2014
 
2013
 
2014
 
2013
 
Related Statement
 of Income Line
Unrealized gains on available-for-sale securities
 
$
73

 
$
113

 
$
169

 
$
2,279

 
Other income
Taxes
 

 

 
(12
)
 
(776
)
 
Provision for income taxes
Reclassification of realized transactions, net of taxes
 
$
73

 
$
113

 
$
157

 
$
1,503

 
Net income

(21)
Share-Based Compensation
 
The following table presents the details of the Company's share-based compensation expense (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31,
 
 
2014
 
2013