MICROCHIP TECHNOLOGY INC - FORM 10-Q - February 8, 2017

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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, 2016.
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

 mich4ca02a01a01a07.jpg
 
  
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 31, 2017
Common Stock, $0.001 par value
 
216,432,165 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,
2016
 
March 31,
2016
Cash and cash equivalents
$
663,938

 
$
2,092,751

Short-term investments
5,705

 
353,284

Accounts receivable, net
475,093

 
290,183

Inventories
419,618

 
306,815

Prepaid expenses
51,265

 
41,992

Assets held for sale
5,757

 
—

Other current assets
55,374

 
11,688

Total current assets
1,676,750

 
3,096,713

Property, plant and equipment, net
698,704

 
609,396

Long-term investments
30,007

 
118,549

Goodwill
2,362,090

 
1,012,652

Intangible assets, net
2,233,621

 
606,349

Long-term deferred tax assets
60,797

 
14,831

Other assets
82,612

 
79,393

Total assets
$
7,144,581

 
$
5,537,883

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accounts payable
$
135,160

 
$
79,312

Accrued liabilities
222,134

 
119,265

Deferred income on shipments to distributors
294,259

 
183,432

Total current liabilities
651,553

 
382,009

Long-term line of credit
1,675,423

 
1,043,156

Senior convertible debentures
1,250,178

 
1,216,313

Junior convertible debentures
198,393

 
193,936

Long-term income tax payable
266,763

 
111,061

Long-term deferred tax liability
386,824

 
399,218

Other long-term liabilities
148,549

 
41,271

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; 237,465,809 shares issued and 216,430,010 shares outstanding at December 31, 2016; 227,416,789 shares issued and 204,081,727 shares outstanding at March 31, 2016
216

 
204

Additional paid-in capital
1,904,215

 
1,391,553

Common stock held in treasury: 21,035,799 shares at December 31, 2016; 23,335,062 shares at March 31, 2016
(751,778
)
 
(820,066
)
Accumulated other comprehensive loss
(10,828
)
 
(3,357
)
Retained earnings
1,425,073

 
1,582,585

Total stockholders' equity
2,566,898

 
2,150,919

Total liabilities and stockholders' equity
$
7,144,581

 
$
5,537,883

See accompanying notes to condensed consolidated financial statements

3

MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
834,366

 
$
540,344

 
$
2,505,141

 
$
1,615,687

Cost of sales (1)
369,107

 
247,626

 
1,280,771

 
713,002

Gross profit
465,259

 
292,718

 
1,224,370

 
902,685

 
 

 
 

 
 

 
 

Research and development  (1)
132,433

 
97,022

 
418,111

 
276,958

Selling, general and administrative  (1)
111,017

 
76,270

 
388,651

 
223,377

Amortization of acquired intangible assets
82,791

 
48,312

 
243,356

 
126,764

Special charges (income) and other, net
20,944

 
(5,018
)
 
52,522

 
3,187

 Operating expenses
347,185

 
216,586

 
1,102,640

 
630,286

 
 
 
 
 
 
 
 
Operating income
118,074

 
76,132

 
121,730

 
272,399

Losses on equity method investments
(55
)
 
(56
)
 
(167
)
 
(289
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
501

 
6,677

 
1,765

 
18,610

Interest expense
(35,143
)
 
(27,507
)
 
(104,685
)
 
(77,203
)
Other income (loss), net
121

 
(5,088
)
 
(658
)
 
10,163

Income before income taxes
83,498

 
50,158

 
17,985

 
223,680

Income tax benefit
(23,837
)
 
(11,053
)
 
(15,699
)
 
(32,890
)
Net income from continuing operations
107,335

 
61,211

 
33,684

 
256,570

Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations
(191
)
 
—

 
(7,514
)
 
—

Income tax benefit
(31
)
 
—

 
(1,561
)
 
—

Net loss from discontinued operations
(160
)
 
—

 
(5,953
)
 
—

 
 
 
 
 
 
 
 
Net income
107,175

 
61,211

 
27,731

 
256,570

Less: Net loss attributable to noncontrolling interests
—

 
—

 
—

 
207

Net income attributable to Microchip Technology
$
107,175

 
$
61,211

 
$
27,731

 
$
256,777

 
 
 
 
 
 
 
 
Basic net income per common share attributable to Microchip Technology stockholders
 
 
 
 
 
 
 
Net income from continuing operations
$
0.50

 
$
0.30

 
$
0.16

 
$
1.26

Net loss from discontinued operations
—

 
—

 
(0.03
)
 
—

Net income attributable to Microchip Technology
$
0.50

 
$
0.30

 
$
0.13

 
$
1.26

Diluted net income per common share attributable to Microchip Technology stockholders
 
 
 
 
 
 
 
Net income from continuing operations
$
0.46

 
$
0.28

 
$
0.14

 
$
1.18

Net loss from discontinued operations
—

 
—

 
(0.02
)
 
—

Net income attributable to Microchip Technology
$
0.46

 
$
0.28

 
$
0.12

 
$
1.18

Dividends declared per common share
$
0.3605

 
$
0.3585

 
$
1.0800

 
$
1.0740

Basic common shares outstanding
216,210

 
203,294

 
215,360

 
203,267

Diluted common shares outstanding
235,424

 
217,975

 
233,351

 
217,280

(1) Includes share-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of sales
$
3,468

 
$
2,270

 
$
15,465

 
$
6,325

Research and development
9,881

 
7,855

 
37,569

 
23,623

Selling, general and administrative
8,771

 
6,840

 
53,055

 
24,155

See accompanying notes to condensed consolidated financial statements

4

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

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
Net income
$
107,175

 
$
61,211

 
$
27,731

 
$
256,570

Less: Net loss attributable to noncontrolling interests
—

 
—

 
—

 
207

Net income attributable to Microchip Technology
107,175

 
61,211

 
27,731

 
256,777

 
 
 
 
 
 
 
 
Components of other comprehensive income (loss):
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding losses, net of tax effect
(254
)
 
(7,481
)
 
(1,983
)
 
(7,411
)
Reclassification of realized transactions, net of tax effect
1,433

 
(89
)
 
1,522

 
(14,054
)
Actuarial losses related to defined benefit pension plans, net of tax (provision) benefit of ($2,539), $0, $1,206, and $0, respectively
6,998

 
—

 
(1,332
)
 
—

Change in net foreign currency translation adjustment
(3,109
)
 
—

 
(5,678
)
 
—

Other comprehensive income (loss), net of taxes attributable to Microchip Technology
5,068

 
(7,570
)
 
(7,471
)
 
(21,465
)
 
 
 
 
 
 
 
 
Comprehensive income
112,243

 
53,641

 
20,260

 
235,105

Less: Comprehensive loss attributable to noncontrolling interests
—

 
—

 
—

 
207

Comprehensive income attributable to Microchip Technology
$
112,243

 
$
53,641

 
$
20,260

 
$
235,312


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,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
27,731

 
$
256,570

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
340,925

 
207,662

Deferred income taxes
(52,215
)
 
(11,116
)
Share-based compensation expense related to equity incentive plans
106,089

 
54,103

Excess tax benefit from share-based compensation
—

 
(735
)
Amortization of debt discount on convertible debentures
36,907

 
35,909

Amortization of debt issuance costs
3,182

 
2,916

Losses on equity method investments
167

 
289

Gains on sale of assets
(78
)
 
(960
)
Losses on write-down of fixed assets
1,278

 
—

Impairment of intangible assets
10,226

 
577

Realized losses (gains) on available-for-sale investment
89

 
(14,054
)
Realized gains on equity method investment
(468
)
 
(2,225
)
Impairment of available-for-sale investment
1,433

 
3,995

Amortization of premium on available-for-sale investments
5

 
7,230

Special charges (income) and other, net
850

 
1,351

Changes in operating assets and liabilities, excluding impact of acquisitions:
 
 
 
(Increase) decrease in accounts receivable
(43,551
)
 
40,027

Decrease in inventories
220,674

 
34,773

Increase (decrease) in deferred income on shipments to distributors
110,827

 
(2,888
)
Decrease in accounts payable and accrued liabilities
(22,261
)
 
(44,434
)
Change in other assets and liabilities
(14,266
)
 
(27,099
)
Operating cash flows related to discontinued operations
9,348

 
—

Net cash provided by operating activities
736,892

 
541,891

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investments
(35,147
)
 
(1,542,864
)
Sales and maturities of available-for-sale investments
470,565

 
1,193,487

Sale of equity method investment
468

 
2,667

Acquisition of Atmel, net of cash acquired
(2,747,516
)
 
—

Acquisition of Micrel, net of cash acquired
—

 
(343,928
)
Purchase of additional controlling interest in ISSC
—

 
(18,051
)
Investments in other assets
(9,597
)
 
(5,961
)
Proceeds from sale of assets
23,069

 
14,296

Capital expenditures
(52,338
)
 
(81,423
)
Net cash used in investing activities
(2,350,496
)
 
(781,777
)
Cash flows from financing activities:
 

 
 

Repayments of revolving loan under credit facility
(1,078,500
)
 
(571,000
)
Proceeds from borrowings on revolving loan under credit facility
1,517,000

 
1,117,500

Deferred financing costs
—

 
(2,156
)
Payment of cash dividends
(232,847
)
 
(217,939
)
Repurchase of common stock
—

 
(363,829
)
Proceeds from sale of common stock
28,893

 
17,916

Tax payments related to shares withheld for vested restricted stock units
(48,161
)
 
(17,201
)
Capital lease payments
(587
)
 
(504
)
Excess tax benefit from share-based compensation
—

 
735

Net cash provided by (used in) financing activities
185,798

 
(36,478
)
Effect of foreign exchange rate changes on cash and cash equivalents
(1,007
)
 
—

Net decrease in cash and cash equivalents
(1,428,813
)
 
(276,364
)
Cash and cash equivalents at beginning of period
2,092,751

 
607,815

Cash and cash equivalents at end of period
$
663,938

 
$
331,451

See accompanying notes to condensed consolidated financial statements

6


Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Microchip Technology Incorporated and its majority-owned and controlled subsidiaries (the Company).  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 (US GAAP), 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, 2016.  The results of operations for the nine months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017 or for any other period.

As further discussed in Note 3, on April 4, 2016, the Company completed its acquisition of Atmel Corporation (Atmel) and the Company's financial results include Atmel's results beginning as of such acquisition date.

Note 2. Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

During the three months ended June 30, 2016, the Company adopted Accounting Standards Update (ASU) 2015-03-Simplifying the Presentation of Debt Issuance Costs. The new guidance was adopted on a retrospective basis and as a result, debt issuance costs historically included in other assets have been reclassified as a direct deduction from the carrying amount of the associated debt. Related prior period information included on the Company's condensed consolidated balance sheets has been retrospectively adjusted as follows (amounts in thousands).

 
As of March 31, 2016
 
As Reported
 
Adjustments
 
As Adjusted
Other assets
$
109,025

 
$
(29,632
)
 
$
79,393

Total assets
$
5,567,515

 
$
(29,632
)
 
$
5,537,883

 
 
 
 
 
 
Senior convertible debentures
$
1,234,733

 
$
(18,420
)
 
$
1,216,313

Junior convertible debentures
$
196,304

 
$
(2,368
)
 
$
193,936

Long-term line of credit
$
1,052,000

 
$
(8,844
)
 
$
1,043,156

Total liabilities and stockholder's equity
$
5,567,515

 
$
(29,632
)
 
$
5,537,883


During the three months ended June 30, 2016, the Company elected to early adopt ASU 2016-09, Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies several aspects of the accounting for share-based payment transactions. Under this standard, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. The Company has elected to recognize forfeitures as they occur and the impact of that change in accounting policy has been recorded as a $2.0 million cumulative effect adjustment as an increase to the Company's retained earnings and a decrease to additional paid-in capital as of April 1, 2016. The Company also recorded a cumulative-effect adjustment to retained earnings for the increase of $2.3 million in long-term deferred tax assets related to the forfeiture rate reduction on outstanding share-based payment awards. Additionally, ASU 2016-09 eliminates the requirement to report excess tax benefits and certain tax deficiencies related to share-based payment transactions in additional paid-in capital. In accordance with the new standard, the Company will record excess tax benefits and tax deficiencies as income tax benefit or provision on a prospective basis in its condensed consolidated statements of operations. The standard also eliminates the requirement that

7

excess tax benefits be realized before companies can recognize them. Accordingly, the Company has recorded a $47.2 million cumulative-effect adjustment to its retained earnings and long-term deferred tax assets as of April 1, 2016 for previously unrecognized excess tax benefits. ASU 2016-09 also requires excess tax benefits to be reported as operating activities in the statement of cash flows rather than as a financing activity. The Company has elected to apply the change in cash flow classification on a prospective basis and prior periods were not retrospectively adjusted.
 
Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under US GAAP.  In July 2015, the FASB issued ASU 2015-14-Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard by one year to December 15, 2017, for annual and interim reporting periods beginning after that date. In accordance with the delay, the new standard will be effective for the Company beginning no later than April 1, 2018.  Early adoption is permitted, but not before the original effective date of December 15, 2016. 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 new standard allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. In March 2016, the FASB issued ASU 2016-08 - Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10 - Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations. In May 2016, the FASB issued ASU 2016-12 - Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which addresses implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group. As described in the Company's significant accounting policies, the Company currently defers the revenue and cost of sales on shipments to distributors until the distributor sells the product to their end customer. Upon adoption of ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, the Company will no longer defer revenue until sale by the distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to distributors and record revenue at the time of sale to the distributor. The Company is currently evaluating the impact that the adoption of the standards will have on its condensed consolidated financial statements. The Company has not yet elected a transition method.

In July 2015, the FASB issued ASU 2015-11-Simplifying the Measurement of Inventory. This standard requires that entities measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. The Company does not expect this standard to have a material impact on its condensed consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01-Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02-Leases. This standard requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The standard is to be applied using the modified retrospective approach to all periods presented. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13-Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.  This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which required waiting to recognize a loss until it is probable of having been incurred. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually and can include forecasted information. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as

8

expanded disclosures. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019, and permits early adoption, but not before December 15, 2018. The standard is to be applied using a modified retrospective approach. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16-Intra-Entity Transfers of Assets Other Than Inventory. This standard addresses the recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset other than inventory.  Prior to the adoption of ASU 2016-16, a company will defer for financial reporting purposes the income tax expense resulting from an intra-entity asset transfer, including the taxes currently payable or paid. Upon adoption of ASU 2016-16, a company will recognize current and deferred income taxes that result from such transfers in the period in which they occur. ASU 2016-16 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and is applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements but expects to recognize its previously deferred tax related to intra-entity transfers upon adoption of ASU 2016-16 as of April 1, 2018 with a cumulative-effect reduction to retained earnings.

In November 2016, the FASB issued ASU 2016-18-Statement of Cash Flows: Restricted Cash. This standard requires that the statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard is to be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

Note 3. Business Acquisitions
Acquisition of Atmel
On April 4, 2016, the Company acquired Atmel, a publicly traded company based in San Jose, California. The Company paid an aggregate of approximately $2.98 billion in cash, issued an aggregate of 10.1 million shares of its common stock to Atmel stockholders valued at $486.1 million based on the closing price of the Company's common stock on April 4, 2016 and incurred transaction and other fees of approximately $14.9 million. The total consideration transferred in the acquisition, including approximately $7.5 million of non-cash consideration for the exchange of certain share-based payment awards of Atmel for stock awards of the Company, was approximately $3.47 billion. In addition to the consideration transferred, the Company recognized in its consolidated financial statements $708.1 million in liabilities of Atmel consisting of debt, taxes payable and deferred, pension obligations, restructuring, and contingent and other liabilities. The Company financed the cash portion of the purchase price using approximately $2.04 billion of cash held by certain of its foreign subsidiaries and approximately $0.94 billion from additional borrowings under its existing credit agreement. As a result of the acquisition, Atmel became a wholly owned subsidiary of the Company. Atmel is a worldwide leader in the design and manufacture of microcontrollers, capacitive touch solutions, advanced logic, mixed-signal, nonvolatile memory and radio frequency (RF) components. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Atmel have been included in the Company's consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Atmel's net tangible assets and intangible assets based on their estimated fair values as of April 4, 2016.  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 Atmel acquisition is deductible for tax purposes.  The Company retained independent third-party appraisers to assist management in its valuation. The purchase price allocation has not been finalized and is based on estimates and assumptions that are subject to change related to the valuation of inventory, intangible assets, taxes and other assets and liabilities. This could result in adjustments to the fair values of the assets acquired and liabilities assumed, the useful lives of intangible assets, the residual amount allocated to goodwill and deferred income taxes recognized. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuation 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 previously reported figures at September 30, 2016, to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (amounts in thousands).

Assets acquired
Previously Reported September 30, 2016
 
Adjustments
 
December 31, 2016
Cash and cash equivalents
$
230,266

 
$
—

 
$
230,266

Accounts receivable
135,427

 
5,932

 
141,359

Inventories
335,163

 


 
335,163

Prepaid expenses and other current assets
28,360

 
—

 
28,360

Assets held for sale
24,394

 
7,612

 
32,006

Property, plant and equipment
129,587

 
—

 
129,587

Goodwill
1,372,102

 
(22,650
)
 
1,349,452

Purchased intangible assets
1,877,945

 
—

 
1,877,945

Long-term deferred tax assets
49,360

 
—

 
49,360

Other assets
7,535

 
—

 
7,535

Total assets acquired
4,190,139

 
(9,106
)
 
4,181,033

 
 
 
 
 
 
Liabilities assumed
 
 
 
 
 
Accounts payable
(55,686
)
 
 
 
(55,686
)
Other current liabilities
(119,469
)
 
(2,115
)
 
(121,584
)
Long-term line of credit
(192,000
)
 
 
 
(192,000
)
Deferred tax liabilities
(74,885
)
 
(1,611
)
 
(76,496
)
Long-term income tax payable
(168,433
)
 
12,832

 
(155,601
)
Other long-term liabilities
(106,688
)
 
 
 
(106,688
)
Total liabilities assumed
(717,161
)
 
9,106

 
(708,055
)
Purchase price allocated
$
3,472,978

 
$
—

 
$
3,472,978


Purchased Intangible Assets
Weighted Average
 
 
 
Useful Life
 
April 4, 2016
 
(in years)
 
(in thousands)
Core and developed technology
11
 
$
1,076,540

In-process research and development
—
 
140,700

Customer-related
6
 
630,600

Backlog
1
 
28,300

Other
5
 
1,805

Total purchased intangible assets
 
 
$
1,877,945

Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles, acquisition-date backlog and other intangible assets. The estimated fair values of the core and developed technology and in-process research and development were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized in a manner based on the expected cash flows used in the initial determination of fair value. In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Customer-related intangible assets consist of Atmel'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 Atmel's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from Atmel's historical customer information.  Customer relationships are being amortized in a manner based on the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by Atmel at the acquisition date, and the preliminary fair values were based on the

10

estimated profit associated with those orders. Backlog related assets have a one year useful life and are being amortized on a straight-line basis over that period. The total weighted average amortization period of intangible assets acquired as a result of the Atmel transaction is 9 years. Amortization expense associated with acquired intangible assets is not deductible for tax purposes.  Thus, approximately $158.7 million was established as a net deferred tax liability for the future amortization of the intangible assets.
The amount of continuing Atmel net sales included in the Company's condensed consolidated statements of operations for the three and nine months ended December 31, 2016 was approximately $263.2 million and $756.3 million, respectively. The amount of Atmel's net loss from continuing operations included in the Company's condensed consolidated statements of operations was $34.7 million and $294.1 million for the three and nine months ended December 31, 2016, respectively.
The following unaudited pro-forma consolidated results of operations for the three and nine months ended December 31, 2016 and 2015 assume the closing of the Atmel acquisition occurred as of April 1, 2015. The pro-forma adjustments are mainly comprised of acquired inventory fair value costs, amortization of purchased intangible assets, distributor revenue recognition adjustments and share based compensation due to accelerated vesting of outstanding equity awards. 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, 2015 or of results that may occur in the future (amounts in thousands except per share data):

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
881,857

 
$
754,805

 
$
2,591,009

 
$
2,379,521

Net income (loss) from continuing operations
$
117,662

 
$
(38,953
)
 
$
199,764

 
$
(189,319
)
Basic net income (loss) per common share
$
0.54

 
$
(0.18
)
 
$
0.93

 
$
(0.89
)
Diluted net income (loss) per common share
$
0.50

 
$
(0.18
)
 
$
0.86

 
$
(0.89
)
Acquisition of Micrel
On August 3, 2015, the Company acquired Micrel, Incorporated (Micrel), a publicly traded company based in San Jose, California. The Company paid an aggregate of approximately $430.0 million in cash and issued an aggregate of 8.6 million shares of its common stock to Micrel shareholders. The number of shares issued in the transaction was subsequently repurchased by the Company in the open market during the fiscal year ended March 31, 2016. The total consideration transferred in the acquisition, including approximately $4.1 million of non cash consideration for the exchange of certain share-based payment awards of Micrel for stock awards of the Company, and approximately $13.1 million of cash consideration for the payout of vested employee stock awards, was approximately $816.2 million. The Company financed the cash portion of the purchase price using borrowings under its existing credit agreement. As a result of the acquisition, Micrel became a wholly owned subsidiary of the Company. Micrel's business is to design, develop, manufacture and market a range of high-performance analog, power and mixed-signal integrated circuits. Micrel's products address a wide range of end markets including industrial, automotive and communications. Micrel also manufactures custom analog and mixed-signal circuits and provides wafer foundry services for customers which produce electronic systems utilizing semiconductor manufacturing processes as well as micro-electrical mechanical system technologies. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Micrel 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 Micrel's net tangible assets and intangible assets based on their estimated fair values as of August 3, 2015.  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 Micrel acquisition is deductible for tax purposes.  The Company retained an independent third-party appraiser to assist management in its valuation.

11

The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values as of August 3, 2015, as well as the associated estimated useful lives of the acquired intangible assets at that date. The purchase price allocation was finalized as of June 30, 2016 (amounts in thousands):
Assets acquired
Final
Cash and cash equivalents
$
99,196

Accounts receivable, net
14,096

Inventories
73,468

Prepaid expenses and other current assets
10,652

Property, plant and equipment, net
38,491

Goodwill
440,978

Purchased intangible assets
273,500

Other assets
4,268

Total assets acquired
954,649

 
 
Liabilities assumed
 
Accounts payable
(11,068
)
Other current liabilities
(31,552
)
Deferred tax liabilities
(88,035
)
Long-term income tax payable
(7,637
)
Other long-term liabilities
(127
)
Total liabilities assumed
(138,419
)
Purchase price allocated
$
816,230


Purchased Intangible Assets
Weighted Average
 
 
 
Useful Life
 
August 3, 2015
 
(in years)
 
(in thousands)
Core and developed technology
10
 
$
175,800

In-process research and development
—
 
21,000

Customer-related
5
 
71,100

Backlog
1
 
5,600

Total purchased intangible assets
 
 
$
273,500

Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles and acquisition-date backlog. The estimated fair values of the core and developed technology and in-process research and development were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized commensurate with the expected cash flows used in the initial determination of fair value. In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.
Customer-related intangible assets consist of Micrel'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 Micrel's projected revenues. An analysis of expected attrition and revenue growth for existing customers was prepared from Micrel'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 Micrel 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 $99.7 million was established as a net deferred tax liability for the future amortization of the intangible assets offset by $11.4 million of net deferred tax assets.


12

Note 4. Discontinued Operations and Assets Held for Sale

Discontinued operations include the mobile touch operations that the Company acquired as part of its acquisition of Atmel. The mobile touch assets had been marketed for sale since the Company's acquisition of Atmel on April 4, 2016 based on management's decision that it was not a strategic fit for the Company's product portfolio. On November 10, 2016, the Company completed the sale of the mobile touch assets to Solomon Systech (Limited) International, a Hong Kong based semiconductor company. The transaction included the sale of certain semiconductor products, equipment, customer list, backlog, patents, and a license to certain other intellectual property and patents related to the Company's mobile touch product line. The Company also agreed to provide certain transition services to Solomon Systech. For financial statement purposes, the results of operations for this discontinued business have been segregated from those of the continuing operations and are presented in the Company's condensed consolidated financial statements as discontinued operations.

The results of discontinued operations for the three and nine months ended December 31, 2016 are as follows (amounts in thousands):

 
December 31, 2016
 
Three Months Ended
 
Nine Months Ended
Net sales
$
923

 
$
18,334

Cost of sales
478

 
15,841

Operating expenses
1,279

 
10,650

Gain on Sale
643

 
643

Income tax benefit
(31
)
 
(1,561
)
Net loss from discontinued operations
$
(160
)
 
$
(5,953
)

During the three months ended December 31, 2016, the Company began to actively market a 6-inch wafer fabrication facility it acquired as part of its acquisition of Micrel in August 2015. The Company expects to sell such assets within one year. As of December 31, 2016, these assets consisting of property, plant and equipment have been presented as held for sale in the Company's condensed consolidated financial statements.

Note 5. Special Charges (Income) and Other, Net

The following table summarizes activity included in the "special charges (income) and other, net" caption on the Company's condensed consolidated statements of operations (amounts in thousands):

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
Restructuring
 
 
 
 
 
 
 
Employee separation costs
$
6,525

 
$
1,599

 
$
35,346

 
$
9,003

Impairment charges
8,084

 
—

 
10,045

 
—

Exit costs
4,223

 
526

 
4,223

 
686

Other
2,112

 
63

 
2,908

 
704

Legal settlement costs
—

 
4,294

 
—

 
4,294

Insurance settlement
—

 
(11,500
)
 
—

 
(11,500
)
Total
$
20,944

 
$
(5,018
)
 
$
52,522

 
$
3,187



13

The Company’s restructuring activities result from its recent business combinations, including the acquisitions of Atmel and Micrel. These activities include workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. In connection with these activities the Company has incurred employee separation costs, contract exit costs, other operating expenses and intangible asset impairment losses. The impairment losses were recognized as a result of changes in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets. The following is a rollforward of accrued restructuring charges from April 1, 2016 to December 31, 2016 (amounts in thousands):

 
Employee Separation Costs
 
Exit Costs
 
Total
Balance at April 1, 2016 - Restructuring Accrual
$
58

 
$
—

 
$
58

Additions due to Atmel acquisition
6,277

 
—

 
6,277

Charges
35,346

 
4,223

 
39,569

Payments
(32,969
)
 
(1,155
)
 
(34,124
)
Non-cash - Other
(547
)
 
(850
)
 
(1,397
)
Foreign exchange gains
(861
)
 
—

 
(861
)
Balance at December 31, 2016 - Restructuring Accrual
$
7,304

 
$
2,218

 
$
9,522


The restructuring liability of $9.5 million is included in accrued liabilities on the Company's condensed consolidated balance sheets as of December 31, 2016.

Note 6. 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, 2016 (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 31, 2016
 
December 31, 2016
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Semiconductor products
$
810,532

 
$
441,425

 
$
2,437,049

 
$
1,156,278

Technology licensing
23,834

 
23,834

 
68,092

 
68,092

Total
$
834,366

 
$
465,259

 
$
2,505,141

 
$
1,224,370


The following table represents net sales and gross profit for each segment for the three and nine months ended December 31, 2015 (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 31, 2015
 
December 31, 2015
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Semiconductor products
$
517,628

 
$
270,002

 
$
1,546,533

 
$
833,531

Technology licensing
22,716

 
22,716

 
69,154

 
69,154

Total
$
540,344

 
$
292,718

 
$
1,615,687

 
$
902,685




14

Note 7. 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, 2016 (amounts in thousands):
 
Available-for-sale Securities
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Government agency bonds
$
20,000

 
$
—

 
$
(88
)
 
$
19,912

Corporate bonds and debt
15,117

 
2

 
(26
)
 
15,093

Marketable equity securities
707

 
—

 
—

 
707

Total
$
35,824

 
$
2

 
$
(114
)
 
$
35,712


The following is a summary of available-for-sale securities at March 31, 2016 (amounts in thousands):
 
Available-for-sale Securities
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Government agency bonds
$
468,290

 
$
439

 
$
(99
)
 
$
468,630

Corporate bonds and debt
1,000

 
—

 
—

 
1,000

Marketable equity securities
2,195

 
8

 
—

 
2,203

Total
$
471,485

 
$
447

 
$
(99
)
 
$
471,833


At December 31, 2016, the Company's available-for-sale securities are presented on the condensed consolidated balance sheets as short-term investments of $5.7 million and long-term investments of $30.0 million.  At March 31, 2016, the Company's available-for-sale securities are presented on the condensed consolidated balance sheets as short-term investments of $353.3 million and long-term investments of $118.5 million.

The Company sold available-for-sale investments for proceeds of $470.6 million during the nine months ended December 31, 2016. The Company sold available-for-sale investments during the first quarter of fiscal 2017 and the fourth quarter of fiscal 2016 to finance a portion of the purchase price of its Atmel acquisition which closed on April 4, 2016. The Company sold available-for-sale investments for proceeds of $55.4 million and $191.2 million during the three and nine months ended December 31, 2015, respectively. The Company had no material realized gains from the sale of available-for-sale securities during the three and nine months ended December 31, 2016. During the three months ended December 31, 2015, the Company had no material realized gains from sales of available-for-sale marketable equity and debt securities and for the nine months ended December 31, 2015, the Company had net realized gains of $14.1 million from sales of available-for-sale marketable equity and debt securities. The Company determines the cost of available-for-sale debt securities sold on a FIFO basis at the individual security level for sales from multiple lots. For sales of marketable equity securities, the Company uses an average cost basis at the individual security level. Gains and losses recognized in earnings are credited or charged to other income (expense) on the consolidated statements of operations.

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 the length of time that the individual securities have been in a continuous unrealized loss position (amounts in thousands):
 
December 31, 2016
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Government agency bonds
$
19,912

 
$
(88
)
 
$
—

 
$
—

 
$
19,912

 
$
(88
)
Corporate bonds and debt
10,095

 
(26
)
 
—

 
—

 
10,095

 
(26
)
Total
$
30,007

 
$
(114
)
 
$
—

 
$
—

 
$
30,007

 
$
(114
)

15

 
March 31, 2016
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Government agency bonds
$
148,562

 
$
(99
)
 
$
—

 
$
—

 
$
148,562

 
$
(99
)

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, 2016 and the Company's intent is to hold these investments until these assets are no longer impaired. 

The amortized cost and estimated fair value of the available-for-sale securities at December 31, 2016, by contractual maturity, excluding marketable equity securities of $0.7 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
$
—

 
$
—

 
$
—

 
$
—

Due after one year and through five years
35,117

 
2

 
(114
)
 
35,005

Due after five years and through ten years
—

 
—

 
—

 
—

Due after ten years
—

 
—

 
—

 
—

Total
$
35,117

 
$
2

 
$
(114
)
 
$
35,005



Note 8. 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

16

discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.

Assets Measured at Fair Value on a Recurring Basis
 
Assets measured at fair value on a recurring basis at December 31, 2016 are as follows (amounts in thousands):
 
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Total
Balance
Assets
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
Money market mutual funds
$
61,923

 
$
—

 
$
61,923

Deposit accounts
—

 
602,015

 
602,015

Short-term investments:
 
 
 
 
 
Marketable equity securities

707

 
—

 
707

Corporate bonds and debt
—

 
4,998

 
4,998

Long-term investments:
 
 
 
 
 
Corporate bonds and debt
—

 
10,095

 
10,095

Government agency bonds
—

 
19,912

 
19,912

Total assets measured at fair value
$
62,630

 
$
637,020

 
$
699,650


Assets measured at fair value on a recurring basis at March 31, 2016 are as follows (amounts in thousands):
 
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Total
Balance
Assets
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
Money market mutual funds
$
1,787,446

 
$
—

 
$
1,787,446

Deposit accounts
—

 
305,305

 
305,305

Short-term investments:
 
 
 
 
 
Marketable equity securities
2,203

 
—

 
2,203

Corporate bonds and debt
—

 
1,000

 
1,000

Government agency bonds
—

 
350,081

 
350,081

Long-term investments:
 
 
 
 
 
Government agency bonds
—

 
118,549

 
118,549

Total assets measured at fair value
$
1,789,649

 
$
774,935

 
$
2,564,584


There were no transfers between Level 1 and Level 2 during the three and nine-months ended December 31, 2016 or the fiscal year ended March 31, 2016. There were no assets measured at fair value on a recurring basis classified as Level 3 at December 31, 2016 or March 31, 2016.

Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis
 
The Company's non-marketable equity, cost method investments, certain acquired liabilities and non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment, are recorded at fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment.  


17

The Company's non-marketable and cost method investments are monitored on a quarterly basis for impairment charges.  The fair values of these investments have been determined as Level 3 fair value measurements because the valuations use unobservable inputs that require management's judgment due to the absence of quoted market prices. There were no impairment charges recognized on these investments during each of the three and nine-month periods ended December 31, 2016 and December 31, 2015. These investments are included in other assets on the condensed consolidated balance sheet.

The fair value measurements related to the Company's non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment are based on available market prices at the measurement date based on transactions of similar assets and third-party independent appraisals, less costs to sell where appropriate. The Company classifies these measurements as Level 2.
  
Note 9. 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, 2016 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 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 excluding debt issuance costs. 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 borrowings at December 31, 2016 approximated the carrying value and are considered Level 2 in the fair value hierarchy described in Note 8. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy. 

Fair Value of Subordinated Convertible Debentures

The Company measures the fair value of its senior and junior subordinated convertible debentures for disclosure purposes. These fair values are based on observable market prices for these debentures, which are traded in less active markets and are therefore classified as a Level 2 fair value measurement.

The following table shows the carrying amounts and fair values of the Company’s senior and junior subordinated convertible debentures as of December 31, 2016 and March 31, 2016 (amounts in thousands). As of December 31, 2016, the carrying amounts of the Company's senior and junior subordinated convertible debentures have been reduced by debt issuance costs of $17.1 million and $2.3 million, respectively. As of March 31, 2016, the carrying amounts of the Company's senior and junior subordinated convertible debentures have been reduced by debt issuance costs of $18.4 million and $2.4 million, respectively.

 
December 31, 2016
 
March 31, 2016
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
1.625% Senior Subordinated Convertible Debentures
$
1,250,178

 
$
2,254,368

 
$
1,216,313

 
$
1,762,088

2.125% Junior Subordinated Convertible Debentures
$
198,393

 
$
1,545,261

 
$
193,936

 
$
1,143,117


Note 10.
Accounts Receivable
 
Accounts receivable consists of the following (amounts in thousands):
 
December 31, 2016
 
March 31, 2016
Trade accounts receivable
$
472,871

 
$
289,013

Other
4,607

 
3,710

Total accounts receivable, gross
477,478

 
292,723

Less allowance for doubtful accounts
2,385

 
2,540

Total accounts receivable, net
$
475,093

 
$
290,183




18

Note 11.
Inventories

The components of inventories consist of the following (amounts in thousands):
 
December 31, 2016
 
March 31, 2016
Raw materials
$
14,733

 
$
12,179

Work in process
267,399

 
208,283

Finished goods
137,486

 
86,353

Total inventories
$
419,618

 
$
306,815


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.

Note 12.
Property, Plant and Equipment

Property, plant and equipment consists of the following (amounts in thousands):
 
December 31, 2016
 
March 31, 2016
Land
$
73,474

 
$
63,907

Building and building improvements
499,793

 
458,379

Machinery and equipment
1,752,480

 
1,645,617

Projects in process
112,201

 
99,370

Total property, plant and equipment, gross
2,437,948

 
2,267,273

Less accumulated depreciation and amortization
1,739,244

 
1,657,877

Total property, plant and equipment, net
$
698,704

 
$
609,396

 
Depreciation expense attributed to property, plant and equipment was $29.7 million and $90.3 million for the three and nine months ended December 31, 2016, respectively. Depreciation expense attributed to property, plant and equipment was $26.7 million and $77.6 million for the three and nine months ended December 31, 2015, respectively.

Note 13.     Intangible Assets and Goodwill
 
Intangible assets consist of the following (amounts in thousands):
 
 
December 31, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Core and developed technology
 
$
1,933,307

 
$
(378,750
)
 
$
1,554,557

Customer-related
 
909,141

 
(287,024
)
 
622,117

Trademarks and trade names
 
11,700

 
(9,120
)
 
2,580

Backlog
 
28,300

 
(21,225
)
 
7,075

In-process research and development
 
45,557

 
—

 
45,557

Distribution rights
 
5,580

 
(5,335
)
 
245

Other
 
1,805

 
(315
)
 
1,490

Total
 
$
2,935,390

 
$
(701,769
)
 
$
2,233,621



19

 
 
March 31, 2016
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Core and developed technology
 
$
724,883

 
$
(255,460
)
 
$
469,423

Customer-related
 
278,542

 
(200,331
)
 
78,211

Trademarks and trade names
 
11,700

 
(7,571
)
 
4,129

In-process research and development
 
54,308

 
—

 
54,308

Distribution rights
 
5,580

 
(5,302
)
 
278

Total
 
$
1,075,013

 
$
(468,664
)
 
$
606,349


The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years.  During the three months ended June 30, 2016, as a result of the Atmel transaction, the Company acquired $1,076.5 million of core and developed technology which has a weighted average amortization period of 11 years, $630.6 million of customer-related intangible assets which have a weighted average amortization period of 6 years, $28.3 million of intangible assets related to backlog with an amortization period of 1 year, $1.8 million of other intangible assets which have a weighted average amortization period of 5 years and $140.7 million of in-process research and development which will begin amortization once the technology reaches technological feasibility. During the nine months ended December 31, 2016, $149.6 million of in-process research and development reached technological feasibility and was reclassified as core and 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 2017 through fiscal 2021, absent any future acquisitions or impairment charges (amounts in thousands):

Fiscal Year Ending
March 31,
Projected Amortization
Expense
2017
$84,229
2018
490,789
2019
362,836
2020
314,211
2021
257,368
 
Amortization expense attributed to intangible assets was $85.2 million and $250.6 million for the three and nine months ended December 31, 2016, respectively. Amortization expense attributed to intangible assets was $49.4 million and $130.0 million for the three and nine months ended December 31, 2015, respectively. In the three and nine months ended December 31, 2016, approximately $0.9 million and $2.8 million was charged to cost of sales, respectively, and approximately $84.3 million and $247.8 million was charged to operating expenses, respectively.  In the three and nine months ended December 31, 2015, approximately $0.9 million and $2.6 million was charged to cost of sales, respectively, and approximately $48.5 million and $127.4 million was charged to operating expenses, respectively.  In connection with its acquisition of Atmel, the Company recognized intangible asset impairment charges of $8.2 million and $10.2 million for the three and nine months ended December 31, 2016, respectively. The impairment losses were recognized as a result of changes in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets. The Company recognized an immaterial amount of intangible asset impairment charges in the nine months ended December 31, 2015.

Goodwill activity for the nine months ended December 31, 2016 was as follows (amounts in thousands):
 
Semiconductor Products
Reporting Unit
 
Technology
Licensing
Reporting Unit
Balance at March 31, 2016
$
993,452

 
$
19,200

Additions due to the acquisition of Atmel
1,349,452

 
—

Adjustments due to the acquisition of Micrel
(14
)
 
—

Balance at December 31, 2016
$
2,342,890

 
$
19,200

 
At March 31, 2016, the Company applied a qualitative goodwill impairment test to its two reporting units, concluding it was not more likely than not that goodwill was impaired. Through December 31, 2016, the Company has never recorded an impairment charge against its goodwill balance.

20

Note 14.
Income Taxes

The provision for income taxes reflects tax on foreign earnings and federal and state tax on U.S. earnings.  The Company had a negative effective tax rate of 87.3% for the nine months ended December 31, 2016 and a negative effective tax rate of 14.7% for the nine months ended December 31, 2015.  The Company's effective tax rate for the nine months ended December 31, 2016 is lower compared to the prior year primarily due to acquisition related expenses that reduced taxable income in the U.S. and the release of reserves due to favorable outcomes of tax authority examinations and the expiration of statutes of limitations on certain tax periods. 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 as well as numerous tax holidays it receives related to its Thailand manufacturing operations based on its investment in property, plant and equipment in Thailand. The Company's tax holiday periods in Thailand expire at various times in the future, however, the Company actively seeks to obtain new tax holidays. The Company does not expect the future expiration of any of its tax holiday periods in Thailand to have a material impact on its effected tax rate. The remaining material components of foreign income taxed at a rate lower than the U.S. are earnings accrued in Ireland and earnings accrued by the Company's offshore technology company which is resident in the Cayman Islands.

The following tables summarize the activity related to the Company's gross unrecognized tax benefits for the nine months ended December 31, 2016 and the year ended March 31, 2016 (amounts in thousands):
 
 
Nine Months Ended
 
December 31, 2016
Balance at March 31, 2016
$
220,669

Increases related to acquisitions
198,034

Decreases related to settlements with tax authorities
(19,222
)
Decreases related to statute of limitation expirations
(4,105
)
Increases related to current year tax positions
19,360

Decreases related to prior year tax positions
(8,385
)
Balance at December 31, 2016
$
406,351


 
Year Ended
 
March 31, 2016
Balance at March 31, 2015
$
170,654

Increases related to acquisitions
46,245

Decreases related to settlements with tax authorities
(7,954
)
Decreases related to statute of limitation expirations
(4,591
)
Increases related to current year tax positions
16,315

Balance at March 31, 2016
$
220,669


As of December 31, 2016 and March 31, 2016, the Company had accrued approximately $18.3 million and $2.4 million, respectively, related to the potential payment of interest on the Company's uncertain tax positions with the increase being primarily composed of a $9.3 million increase related to acquisitions. As of December 31, 2016 and March 31, 2016, the Company had accrued approximately $61.3 million and $27.6 million, respectively, in penalties related to its uncertain tax positions with the increase being primarily composed of a $25.6 million increase related to acquisitions. Interest and penalties charged to operations during the nine months ended December 31, 2016 and 2015 related to the Company's uncertain tax positions were $14.7 million and $1.2 million, respectively. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
 
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 2005 and later tax years remain effectively open for examination by tax authorities.  During the three months ended December 31, 2016, the U.S. Internal Revenue Service (IRS) finalized the audit of the Company's 2011 and 2012 income tax years.  The close of the audit did not have an adverse impact on the Company's financial statements. For foreign tax returns, the Company is generally no longer subject to income tax examinations for years prior to fiscal 2007.
 

21

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 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.

Note 15.
1.625% Senior Subordinated Convertible Debentures

In February 2015, the Company issued $1,725.0 million principal amount of 1.625% senior subordinated convertible debentures due February 15, 2025. The debentures are subordinated to the Company's senior debt, including amounts borrowed under its amended credit facility, but are senior to the Company's outstanding 2.125% junior subordinated convertible debentures. The debentures are convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at an initial base conversion rate of 14.5654 shares of common stock per $1,000 principal amount of debentures, representing an initial base conversion price of approximately $68.66 per share of common stock.  As a result of cash dividends paid since the issuance of the debentures, the conversion rate has been adjusted to 15.4284 shares of common stock per $1,000 of principal amount of debentures, representing a base conversion price of approximately $64.82 per share of common stock. In addition, if at the time of conversion the applicable price of the Company's common stock exceeds the base conversion price, the conversion rate will be increased by up to an additional initial base conversion rate of 7.2827 shares of common stock per $1,000 principal amount of debentures, as determined pursuant to a specified formula. As a result of cash dividends paid since the issuance of the debentures, the maximum number of additional shares that may be issued if the stock price of the Company's common stock exceeds the base conversion price has been adjusted to 7.7142 shares of common stock per $1,000 principal amount of debentures. However, in no event will the
conversion rate exceed 20.3915 (adjusted to 21.5997 as a result of cash dividends paid since the issuance of the debentures) shares of common stock per $1,000 principal amount of debentures. The Company received net proceeds of approximately $1,694.7 million from the issuance of its senior subordinated convertible debentures after deduction of issuance costs of approximately $30.3 million. The $30.3 million in issuance costs was split between a debt component of $20.4 million and an equity component of $9.9 million.  The debt component of the debt issuance costs is recorded as a direct deduction from the carrying value of the debentures and is being amortized using the effective interest method over the term of the debentures.

Prior to the close of business on the business day immediately preceding November 15, 2024, the debentures will be convertible at the option of the debenture holders only upon the satisfaction of specified conditions and during certain periods. Thereafter until close of business on the second scheduled trading day immediately preceding February 15, 2025, the debentures will be convertible at the option of the debenture holders at any time regardless of these conditions. Accrued and unpaid interest will be considered fully paid upon settlement of shares.
 
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, 2016 and March 31, 2016 was $564.9 million.  The estimated fair value of the liability component of the debentures at the issuance date was $1,160.1 million resulting in a debt discount of $564.9 million.  The debt discount is being amortized to interest expense at the effective interest rate of 5.9% over the contractual term of the note. The unamortized debt discount was $457.7 million at December 31, 2016 and $490.3 million at March 31, 2016.  The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 8.13 years.  In the three and nine months ended December 31, 2016, the Company recognized $11.0 million and $32.5 million, respectively, in non-cash interest expense related to the amortization of the debt discount, compared to $10.8 million and $31.9 million in the three and nine months ended December 31, 2015, respectively.  The Company recognized $7.0 million and $21.0 million of interest expense related to the 1.625% coupon on the debentures in each of the three and nine month periods ended December 31, 2016, and 2015, respectively.



22

Note 16.
2.125% Junior Subordinated Convertible Debentures
 
The Company's remaining $575.0 million 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 (including the Company's senior subordinated convertible debentures) 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 cash, shares of the Company's common stock or a combination thereof, at the Company's election, 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, 2016, the holders of the debentures had the right to convert their debentures between January 1, 2017 and March 31, 2017 because for at least 20 trading days during the 30 consecutive trading day period ending on December 31, 2016, the Company's common stock had a last reported sale price greater than 130% of the conversion price. As of December 31, 2016, the Company has classified the junior subordinated convertible debentures as long-term on its consolidated balance sheets as the Company has the intent and ability to refinance the obligation on a long-term basis. As of December 31, 2016, a holder could realize more economic value by selling its debentures in the over the counter market 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 41.9197 shares of common stock per $1,000 of principal amount of debentures, representing a conversion price of approximately $23.86 per share of common stock. The if-converted value of the debentures exceeded the principal amount by $971.3 million at December 31, 2016. The debentures include a contingent interest mechanism that begins in December 2017. The terms of the contingent interest include a 0.25% additional interest rate if the debentures are trading at less than $400 and a 0.5% additional interest rate if the debentures are trading at greater than $1,500. Based on the current trading price of the debentures, the contingent interest rate beginning in December 2017 would be 0.5% of the average trading price.
 
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 were both initially recorded at fair value.  The carrying value of the equity component at December 31, 2016 and at March 31, 2016 was $411.2 million.  The estimated fair value of the liability component of the debentures at the issuance date was $163.8 million, resulting in a debt discount of $411.2 million.  The debt discount is being amortized to interest expense at the effective interest rate of 9.1% over the contractual term of the note. The unamortized debt discount was $373.9 million at December 31, 2016 and $378.3 million at March 31, 2016.  The remaining
period over which the unamortized debt discount will be recognized as non-cash interest expense is 20.96 years.  In the three and nine months ended December 31, 2016, the Company recognized $1.5 million and $4.4 million, respectively, in non-cash interest expense related to the amortization of the debt discount compared to $1.4 million and $4.0 million for the three and nine months ended December 31, 2015, respectively.  The Company recognized $3.1 million and $9.3 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, 2016 and 2015, respectively.

Note 17.     Credit Facility

In February 2015, the Company amended its existing $2.0 billion credit agreement by increasing the revolving credit facility to $2.555 billion and removing the term loan portion of the agreement. The new credit agreement includes two tranches. One tranche consists of bank commitments through February 2020 and another tranche consists of bank commitments through June 2018, the maturity date of the original credit agreement. The increase option permitting the Company, subject to certain requirements, to arrange with existing lenders or new lenders to provide up to an aggregate of $300 million in additional commitments, was also adjusted to $249.4 million. The credit agreement provides for a $125 million foreign currency sublimit, a $25 million letter of credit sublimit and a $25 million swingline loan sublimit. The amended credit agreement was accounted for as a modification and as such any remaining unamortized deferred costs associated with the prior credit agreement was associated with the new agreement since the borrowing capacity was increased. At December 31, 2016, $1.683 billion of revolving credit facility borrowings were outstanding under the credit agreement compared to $1.052 billion at March 31, 2016. The carrying values reflected in the Company's condensed consolidated balance sheets as of December 31, 2016 and March 31, 2016 have been reduced by debt issuance costs of $7.1 million and $8.8 million, respectively.

In December 2015, the Company secured additional revolving credit commitments of $219 million from various banks in the February 2020 tranche under the increase option of the credit agreement, bringing its revolving credit facility to $2.774 billion. The remaining increase option was $30.4 million as of December 31, 2016.


23

In December 2015, the Company amended the maximum total leverage ratio in Section 6.11 of its existing credit agreement to allow the Total Leverage Ratio (as defined in that agreement) to be temporarily increased to 5.00 to 1.00 for a period of four consecutive quarters in conjunction with a permitted acquisition occurring during the first of the four quarters.
The Total Leverage Ratio then decreases to 4.75 to 1.00 for three consecutive quarters, finally returning to the stated 4.50 to 1.00 Total Leverage Ratio of the credit agreement after a period of seven consecutive fiscal periods. The Company can elect to use this special feature, also referred to as an Adjusted Covenant Period, no more than two times during the term of the credit agreement and also can terminate an Adjusted Covenant Period earlier than the seven consecutive quarters allowed. The Company elected to use this feature in conjunction with its acquisition of Atmel during the quarter ended June 30, 2016.

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 quarters (in the case of the 2018 tranche revolving loans) or the consolidated senior leverage ratio (in the case of the 2020 tranche revolving loans). 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 $11.9 million and $35.5 million in the three and nine months ended December 31, 2016, respectively, and $6.4 million and $14.9 million for the three and nine months ended December 31, 2015, respectively. Principal, together with all accrued and unpaid interest, is due and payable on the respective tranche maturity date, which is June 27, 2018 and February 4, 2020. The weighted average interest rate on borrowings outstanding at December 31, 2016 related to the credit agreement was 2.49%. 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.

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 are 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 consolidated senior and total leverage ratios and a consolidated interest coverage ratio. At December 31, 2016, 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.

Note 18.     Pension Plans

In connection with its acquisition of Atmel, the Company assumed unfunded defined benefit pension plans that cover certain French and German employees. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Pension liabilities and charges are based upon various assumptions, updated annually, including discount rates, future salary increases, employee turnover, and mortality rates. The

24

Company’s French pension plan provides for termination benefits paid to covered French employees only at retirement, and consists of approximately one to five months of salary. The Company's German pension plan provides for defined benefit payouts for covered German employees following retirement.

The aggregate net pension expense relating to these two plans are as follows (amounts in thousands):

 
December 31, 2016
 
Three Months Ended
 
Nine Months Ended
Service costs
$
327

 
$
1,054

Interest costs
214

 
698

Amortization of actuarial loss
58

 
187

Settlements
354

 
585

Net pension period cost
$
953

 
$
2,524



The change in projected benefit obligation and the accumulated benefit obligation, were as follows (amounts in thousands):

Projected benefit obligation at April 4, 2016
$
40,313

Service cost
1,054

Interest cost
698

Settlements
585

Actuarial losses (gains)
3,112

Benefits paid
(325
)
Foreign currency exchange rate changes
(648
)
Projected benefit obligation at December 31, 2016
$
44,789

Accumulated benefit obligation at December 31, 2016
41,285


As the defined benefit plans are unfunded, the liability recognized on the Company's condensed consolidated balance sheets as of December 31, 2016 was $44.8 million of which $0.7 million is included in accrued liabilities and $44.1 million is included in other long-term liabilities.

Actuarial assumptions used to determine benefit obligations for the plans were as follows at December 31, 2016:

Assumed discount rate
1.49% - 1.77%
Assumed compensation rate of increase
2.40% - 3.00%

The discount rate is based on the quarterly average yield for Euros treasuries with a duration of 30 years, plus a supplement for corporate bonds (Euros, AA rating).


25

Future estimated expected benefit payments for the remainder of fiscal 2017 through 2026 are as follows (amounts in thousands):

Fiscal Year Ending March 31,
Expected Benefit Payments
2017
$
192

2018
806

2019
929

2020
1,047

2021
1,355

2022 through 2026
9,262

Total
$
13,591


The Company's pension liability represents the present value of estimated future benefits to be paid.

Actuarial losses (gains) for the three and nine months ended December 31, 2016 is comprised of an $8.9 million gain and a $3.1 million loss, respectively, primarily due to movements in the discount rates used to calculate the present value of pension obligations. Net actuarial losses (gains), which is included in accumulated other comprehensive loss in the Company's condensed consolidated balance sheets as of December 31, 2016, will be recognized as a component of net periodic cost over the average remaining service period.
 
The Company's net periodic pension cost for fiscal 2017 is expected to be approximately $3.2 million. Cash funding for benefits paid was $0.1 million and $0.3 million for the three and nine months ended December 31, 2016, respectively. The Company expects total contributions to these plans to be approximately $0.5 million in fiscal 2017.

Note 19.
Contingencies

In the ordinary course of the Company's business, it is exposed to various liabilities as a result of contracts, product liability, customer claims and other matters.  Additionally, the Company is involved in a limited number of legal actions, both as plaintiff and defendant.  Consequently, the Company could incur uninsured liability in any of those actions.  The Company also periodically receives notifications from various third parties alleging infringement of patents or other intellectual property rights, or from customers requesting reimbursement for various costs.  With respect to pending legal actions to which the Company is a party and other claims, although the outcomes are generally not determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations.  Litigation and disputes relating to the semiconductor industry are not uncommon, and the Company is, from time to time, subject to such litigation and disputes.  As a result, no assurances can be given with respect to the extent or outcome of any such litigation or disputes in the future.

As a result of its acquisition of Atmel, which closed April 4, 2016, the Company became involved with the following lawsuits:
In re: Continental Airbag Products Liability Litigation. On May 11, 2016, an Amended and Consolidated Class Action Complaint ("Complaint") was filed in the United States District Court for the Southern District of Florida (Miami Division) against Atmel, Continental Automotive Systems, Inc., Honda Motor Co., Ltd. and an affiliate, and Daimler AG and an affiliate. The Complaint which includes claims arising under federal law and Florida, California, New Jersey, Michigan and Louisiana state law alleges that class members unknowingly purchased or leased vehicles containing defective airbag control units (incorporating allegedly defective application specific integrated circuits manufactured by the Company's Atmel subsidiary between 2006 and 2010), and thereby suffered financial harm, including a loss in the value of their purchased or leased vehicles. The plaintiffs are seeking, individually and on behalf of a putative class, unspecified compensatory and exemplary damages, statutory penalties, pre- and post-judgment interest, attorneys' fees, and injunctive and other relief. The Company's Atmel subsidiary intends to contest plaintiffs' claims vigorously.
Continental Claim ICC Arbitration. On December 29, 2016, Continental Automotive GmbH ("Continental") filed a Request for Arbitration with the ICC, naming as respondents the Company's subsidiaries Atmel Corporation, Atmel SARL, Atmel Global Sales Ltd., and Atmel Automotive GmbH (collectively, “Atmel”).  The Request alleges that a quality issue affecting Continental airbag control units in certain recalled vehicles stems from allegedly defective Atmel application specific integrated circuits (“ASICs”).  The Continental airbag control units, ASICs and vehicle recalls are also at issue in In re:

26

Continental Airbag Products Liability Litigation, described above.  Continental seeks to recover from Atmel all related costs and damages incurred as a result of the vehicle manufacturers’ airbag control unit-related recalls, currently alleged to be $61.6 million (but subject to increase). The Company's Atmel subsidiaries intend to defend this action vigorously.
Southern District of New York Action by LFoundry Rousset ("LFR") and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, individually and on behalf of a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York (the "District Court") against the Company's Atmel subsidiary, French subsidiary, Atmel Rousset S.A.S. ("Atmel Rousset"), and LFoundry GmbH ("LF"), LFR's German parent. The case purports to relate to Atmel Rousset's June 2010 sale of its wafer manufacturing facility in Rousset, France to LF, and LFR's subsequent insolvency, and later liquidation, more than three years later. The District Court dismissed the case on August 21, 2015, and the United States Court of Appeals for the Second Circuit affirmed the dismissal on June 27, 2016. On July 25, 2016, the plaintiffs filed a notice of appeal from the District Court's June 27, 2016 denial of their motion for relief from the dismissal judgment.
Individual Labor Actions by former LFR Employees. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in a French labor court. The Company's Atmel Rousset subsidiary believes that each of these actions is entirely devoid of merit, and, further, that any assertion by any of the Claimants of a co-employment relationship with the Atmel Rousset subsidiary is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. The Company's Atmel Rousset subsidiary therefore intends to defend vigorously against each of these claims.
The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, the Company accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, the Company records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, the Company uses the amount that is the low end of such range. As of December 31, 2016, the Company's estimate of the aggregate potential liability that is possible but not probable is approximately $100 million in excess of amounts accrued.
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 $149 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, 2016.

Note 20.
Derivative Instruments
 
Foreign Currency Exchange Rate Risk

The Company has international operations and is thus subject to foreign currency rate fluctuations.  Approximately 99% of the Company's sales are U.S. dollar denominated.  However, a significant amount of the Company's expenses and liabilities are denominated in foreign currencies and 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.   Foreign exchange rate fluctuations after the effects of hedging activity resulted in net gains of $1.3 million and net losses of $0.8 million during the three and nine month periods ended December 31, 2016, respectively, compared to net losses of $0.5 million and $1.7 million during the three and nine month periods ended December 31, 2015, respectively.  As of December 31, 2016 and March 31, 2016, the Company had no foreign currency forward contracts outstanding. The Company recognized net realized losses on foreign currency forward contracts of $3.1 million in each of the three and nine months ended December 31, 2016. 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, 2015. Gains and losses from changes in the fair value of these foreign currency forward contracts and foreign currency exchange rate fluctuations are credited or charged to other income (expense) on the condensed consolidated statements of operations. The Company does not apply hedge accounting to its foreign currency derivative instruments.



27

Note 21.
Comprehensive Income (Loss)

The following table presents the changes in the components of accumulated other comprehensive income (loss) (AOCI), net of tax, for the nine months ended December 31, 2016 (amounts in thousands):
 
Unrealized
holding gains (losses)
available-for-sale securities
 
Defined benefit pension plans
 
Foreign
Currency
 
Total
Accumulated other comprehensive income (loss) at March 31, 2016
$
348

 
$
44

 
$
(3,749
)
 
$
(3,357
)
Other comprehensive loss before reclassifications
(1,983
)
 
(1,332
)
 
(5,678
)
 
(8,993
)
Amounts reclassified from accumulated other comprehensive loss
1,522

 
—

 
—

 
1,522