NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Business
Microchip Technology Incorporated ("Microchip" or the "Company") develops, manufactures and sells specialized semiconductor products used by its customers for a wide variety of embedded control applications. Microchip's product portfolio comprises general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, 32-bit microprocessors, field-programmable gate array (FPGA) products, a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, discrete diodes and Metal Oxide Semiconductor Field Effect Transistors (MOSFETS), radio frequency (RF), timing, timing systems, safety, security, wired connectivity and wireless connectivity devices, as well as Serial Electrically Erasable Programmable Read Only Memory (EEPROM), Serial Flash memories, Parallel Flash memories, Serial Electrically Erasable Random Access Memory (EERAM), and Serial Static Random Access Memory (SRAM) memories. Microchip also licenses Flash-IP solutions that are incorporated in a broad range of products.
Principles of Consolidation
The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (US GAAP). The consolidated financial statements include the accounts of Microchip and its majority-owned and controlled subsidiaries. As further discussed in Note 2, on May 29, 2018, the Company completed its acquisition of Microsemi Corporation (Microsemi) and the Company's financial results include Microsemi's results beginning as of such acquisition date. All of the Company's subsidiaries are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the financial statements and tables in these notes, except per share amounts, are stated in millions of U.S. dollars unless otherwise noted.
Revenue Recognition (subsequent to the adoption of ASC 606)
The Company generates revenue primarily from sales of semiconductor products to distributors and non-distributor customers (direct customers) and, to a lesser extent, from royalties paid by licensees of intellectual property. The Company applies the following five-step approach to determine the timing and amount of revenue recognition: (1) identify the contract with the customer, (2) identify performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when the performance obligation is satisfied.
Sales to distributors are governed by a distributor agreement, a purchase order, and an order acknowledgment. Sales to distributors do not meet the definition of a contract, as defined by ASC 606, until the distributor has sent in a purchase order, the Company has acknowledged the order, the Company has deemed the collectability of the consideration to be probable, and legally enforceable rights and obligations have been created; this generally occurs 30 days prior to the estimated ship date. As is customary in the semiconductor industry, the Company offers price concessions and stock rotation rights to many of their distributors. As these are forms of variable consideration, the Company estimates the amount of consideration to which they will be entitled using recent historical data and applying the expected value method. Usually, there is only a single performance obligation in the contract, and therefore the entire transaction price is allocated to the single performance obligation. After the transaction price has been allocated, the Company recognizes revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with distributors is recognized at the time risk and title of the inventory transfers to the distributor.
Sales to direct customers are generally governed by a purchase order and an order acknowledgment. Sales to direct customers usually do not meet the definition of a contract, as defined by ASC 606, until shipment of the product occurs. Generally, the transaction price associated with contracts with direct customers is set at the standalone selling price and is not variable. Usually, there is only a single performance obligation in the contract, and therefore the entire transaction price is allocated to the single performance obligation. After the transaction price has been allocated, the Company recognizes revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with direct customers is recognized at the time risk and title of the inventory transfers to the customer.
Revenue generated from licensees is governed by licensing agreements. The Company's primary performance obligation related to these agreements is to provide the licensee the right to use the intellectual property. The final transaction price is
determined by multiplying the usage of the license by the royalty, which is fixed in the licensing agreement. Revenue is recognized as usage of the license occurs.
For a discussion of the financial statement impact related to the adoption of ASC 606, see “Recently Adopted Accounting Pronouncements.”
Revenue Recognition (prior to the adoption of ASC 606)
The Company recognized revenue when the earnings process was complete, as evidenced by an agreement with the customer, transfer of title had occurred, the pricing was fixed or determinable and collectability was reasonably assured. The Company recognized revenue from product sales to original equipment manufacturers (OEMs) upon shipment and recorded reserves for estimated customer returns.
Distributors worldwide generally had broad price protection and product return rights which prevented the sales pricing from being fixed or determinable at the time of the Company's shipment to the distributors. Therefore, revenue recognition was deferred until the pricing uncertainty was resolved, which generally occurred when the distributor sold the product to their customer. At the time of shipment to these distributors, the Company recorded a trade receivable for the selling price as there was a legally enforceable right to payment, relieved inventory for the carrying value of goods shipped since legal title had passed to the distributor, and recorded the gross margin in deferred income on shipments to distributors on its consolidated balance sheets.
In connection with its acquisition of Atmel, the Company acquired certain distributor relationships where revenue was recognized upon shipment to the distributors based on certain contractual terms or prevailing business practices that resulted in the price being fixed and determinable at such time. Following an acquisition, the Company undertook efforts to align the contract terms and business practices of the acquired entity with its own. Once these efforts were complete, the related revenue recognition was changed. With respect to such distributor relationships acquired in the Atmel acquisition, as of October 1, 2016, these business practices were conformed to those of the Company’s other distributors, which beginning in October 2016 resulted in the deferral of revenue recognition until the distributor sold the product to their customers.
Deferred income on shipments to distributors effectively represented gross margin on the sale to the distributor at the initial shipment date; however, the amount of gross margin recognized by the Company in future periods was less than the deferred margin as a result of credits granted to distributors on specifically identified products and customers to allow the distributors to earn a competitive gross margin on the sale of the Company's products to their end customers and price protection concessions related to market pricing conditions.
The Company sold the majority of the items in its product catalog to its distributors worldwide at a uniform list price. However, distributors resold the Company's products to end customers at a broad range of individually negotiated price points. The majority of the Company's distributors' resales required a reduction from the original list price paid. Often, under these circumstances, the Company remitted back to the distributor a portion of their original purchase price after the resale transaction was completed in the form of a credit against the distributors' outstanding accounts receivable balance. The credits were on a per unit basis and were not given to the distributor until they provided information regarding the sale to their end customer. The price reductions varied significantly based on the customer, product, quantity ordered, geographic location and other factors and discounts to a price less than the Company's cost have historically been rare. The effect of granting these credits established the net selling price from the Company to its distributors for the product and resulted in the net revenue recognized by the Company when the product was sold by the distributors to their end customers. Thus, a portion of the "deferred income on shipments to distributors" balance represented the amount of distributors' original purchase price that was
to be credited back to the distributors in the future. The Company did not reduce deferred income on shipments to distributors or accounts receivable by anticipated future price concessions; rather, price concessions are recorded against deferred income on shipments to distributors when incurred, which is generally at the time the distributor sold the product.
At March 31, 2018, the Company had approximately
$479.6 million
of deferred revenue and
$145.8 million
in deferred cost of sales recognized as
$333.8 million
of deferred income on shipments to distributors. The deferred income on shipments to distributors that was ultimately to be recognized in the Company's income statement was lower than the amount reflected on the balance sheet due to price credits to be granted to the distributors when the product is sold to their customers. These price credits historically have resulted in the deferred income approximating the overall gross margins that the Company recognizes in the distribution channel of its business.
The Company reduced product pricing through price protection based on market conditions, competitive considerations and other factors. Price protection was granted to distributors on the inventory they have on hand at the date the price
protection was offered. When the Company reduced the price of its products, it allowed the distributor to claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it has on hand as of the date of the price reduction. There was no immediate revenue impact from the price protection, as it was reflected as a reduction of the deferred income on shipments to distributors' balance.
Products returned by distributors and subsequently scrapped have historically been immaterial to the Company's consolidated results of operations. The Company routinely evaluated the risk of impairment of the deferred cost of sales component of the deferred income on shipments to distributors' account. Because of the historically immaterial amounts of inventory that have been scrapped, and historically rare instances where discounts given to a distributor resulted in a price less than the Company's cost, the Company believed the deferred costs have a low risk of material impairment.
Shipping charges billed to customers were included in net sales, and the related shipping costs were included in cost of sales. The Company collected and remitted certain sales-related taxes on a portion of its sales of inventory and reported such amounts under the net method in its consolidated statements of income.
For licenses or other technology arrangements without an upgrade period, non-royalty revenue from the license was recognized upon delivery of the technology if the fee was fixed or determinable and collection of the fee was reasonably assured. Royalties were recognized when reported to the Company, which generally coincided with the receipt of payment. In certain limited circumstances, the Company entered into license and other arrangements for technologies that the Company was continuing to enhance and refine or under which it was obligated to provide unspecified enhancements. Under these arrangements, non-royalty revenue is recognized over the lesser of (1) the estimated period that the Company has historically enhanced and developed refinements to the specific technology, typically one to
three years
(the "upgrade period"), and (2) the remaining portion of the upgrade period after the date of delivery of all specified technology and documentation, provided that the fee is fixed or determinable and collection of the fee is reasonably assured. Royalties received during the upgrade period were recognized as revenue based on an amortization calculation of the elapsed portion of the upgrade period compared to the entire estimated upgrade period. Royalties received after the upgrade period has elapsed were recognized when reported to the Company, which generally coincided with the receipt of payment.
Product Warranty
The Company typically warrants its products against defects in materials and workmanship and non-conformance to specifications for 12 to
24 months
. The majority of the Company's product warranty claims are settled through the return of the defective product and the shipment of replacement product. Warranty returns are included within the Company's allowance for returns, which is based on historical return rates. Actual future returns could differ from the allowance established. In addition, the Company accrues a liability for specific warranty costs expected to be settled other than through product return and replacement, if a loss is probable and can be reasonably estimated. Product warranty expenses were immaterial for the fiscal years ended March 31,
2019
,
2018
, and
2017
.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were immaterial for the fiscal years ended March 31,
2019
,
2018
and
2017
.
Research and Development
Research and development costs are expensed as incurred. Assets purchased to support the Company's ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their estimated useful lives. Renewals or extensions of these assets are expensed as incurred. Research and development expenses include expenditures for labor, share-based payments, depreciation, masks, prototype wafers, and expenses for development of process technologies, new packages, and software to support new products and design environments.
Restructuring Charges
The Company recognizes a liability measured at fair value for restructuring costs when the liability is incurred. Restructuring charges are included within special charges and other, net in the consolidated statements of income and are primarily comprised of employee separation costs, asset impairments, contract exit costs and costs of facility consolidation and closure, including the related gains or losses associated with the sale of owned facilities. Employee separation costs includes one-time termination benefits that are recognized as a liability at estimated fair value, at the time of communication to
employees, unless future service is required, in which case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits are probable and reasonably estimable. Contract exit costs includes contract termination fees and future contractual commitments for lease payments. A liability for contract exit costs is recognized in the period in which the Company terminates the contract or on the cease-use date for leased facilities.
Foreign Currency Translation
The Company's foreign subsidiaries are considered to be extensions of the U.S. company and any translation gains and losses related to these subsidiaries are included in other income (expense) in the consolidated statements of income. As the U.S. dollar is utilized as the functional currency, gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the subsidiaries' functional currency) are also included in income. For a portion of fiscal 2019 and 2017, certain foreign subsidiaries acquired as part of the Company's acquisition activities had the local currency as the functional currency. For subsidiaries acquired as part of the Company's acquisition of Microsemi, the U.S. dollar is expected to become the functional currency for such entities once integrated into the Company's legal structure and intercompany agreements are executed.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and to the extent the Company believes that recovery is not likely, it must establish a valuation allowance. The Company provided valuation allowances for certain of its deferred tax assets where it is more likely than not that some portion, or all of such assets, will not be realized.
Various taxing authorities in the U.S. and other countries in which the Company does business scrutinize the tax structures employed by businesses. Companies of a similar size and complexity as the Company are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations. During the year ended March 31, 2019, various foreign jurisdictions finalized their audits. The close of these audits did not have an adverse impact on the financial statements. The Company is currently being audited by the tax authorities in the United States and various foreign jurisdictions. At this time, the Company does not know what the outcome of these audits will be. The Company records benefits for uncertain tax positions based on an assessment of whether it is more likely than not that the tax positions will be sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the Company recognizes the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.
The accounting model as defined in Accounting Standards Codification ("ASC") 740 related to the valuation of uncertain tax positions requires the Company to presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information and that each tax position will be evaluated without consideration of the possibility of offset or aggregation with other positions. The recognition requirement for the liability exists even if the Company believes the possibility of examination by a taxing authority or discovery of the related risk matters is remote or where it has a long history of the taxing authority not performing an exam or overlooking an issue. The Company will record an adjustment to a previously recorded position if new information or facts related to the position are identified in a subsequent period. All adjustments to the positions are recorded through the income statement. Generally, adjustments will be recorded in periods subsequent to the initial recognition if the taxing authority has completed an audit of the period or if the statute of limitation expires. Due to the inherent uncertainty in the estimation process and in consideration of the criteria of the accounting model, amounts recognized in the financial statements in periods subsequent to the initial recognition may significantly differ from the estimated exposure of the position under the accounting model.
On December 22, 2017, the Act was enacted into law. The Act provides for numerous significant tax law changes and modifications including the reduction of the U.S. federal corporate income tax rate from 35.0% to 21.0%, the requirement for companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-sourced earnings. As a fiscal year-end taxpayer, certain provisions of the Act began to impact the Company in the third quarter of fiscal 2018, while other provisions have become effective for the Company in fiscal 2019.
In addition to the impacts of tax reform on fiscal 2018, the Act establishes new tax laws that are effective for fiscal 2019, including, but not limited to, (1) a new provision designed to tax low-taxed income of foreign subsidiaries (“GILTI”), which allows for the possibility of using foreign tax credits ("FTCs") and a deduction of up to 50% to offset the income tax liability (subject to some limitations); (2) limitations on the deductibility of certain executive compensation; (3) limitations on the deductibility of interest expense; and (4) limitations on the use of FTCs to reduce the U.S. income tax liability. While each of these provisions is expected to have an impact on the Company's tax expense for future periods, the increase in tax expense for GILTI is the most significant.
The FASB allows taxpayers to make an accounting policy election of either (1) treating taxes due on GILTI inclusions as a current-period expense when incurred or (2) recognizing deferred taxes for temporary basis differences that are expected to reverse as GILTI in future years. The Company is making a policy choice to include taxes due on the future GILTI inclusion in taxable income when incurred.
Cash and Cash Equivalents
All highly liquid investments, including marketable securities with an original maturity to the Company of three months or less when acquired are considered to be cash equivalents.
Available-for-Sale Investments
The Company classifies its investments in debt and marketable equity securities as available-for-sale based upon management's intent with regard to the investments and the nature of the underlying securities.
The Company's available-for-sale debt securities consist of government agency bonds, municipal bonds and corporate bonds. The Company's available-for-sale debt securities are carried at fair value with unrealized gains and losses reported in stockholders' equity unless losses are considered to be other than temporary impairments in which case the losses are recognized through the statement of income. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. Dividend and interest income are recognized when earned. The cost of available-for-sale debt securities sold is calculated using the first-in, first-out (FIFO) basis at the individual security level for sales from multiple lots.
Marketable equity securities are equity securities with a readily determinable fair value that are measured and recorded at fair value on a recurring basis with changes in fair value, whether realized or unrealized, recorded through the statement of income. Prior to fiscal 2019, these securities were classified as available-for-sale securities and measured and recorded at fair value with unrealized changes in fair value reported in stockholders' equity.
The Company includes within short-term investments its income yielding available-for-sale securities that can be readily converted to cash and includes within long-term investments those income yielding available-for-sale securities with maturities of over one year that have unrealized losses attributable to them or those that cannot be readily liquidated. As discussed in Note 5, if the Company anticipates that investments will be liquidated in anticipation of a pending merger or otherwise, any unrealized losses are recognized as other-than-temporary impairments. If the anticipated liquidity event is within 12 months, the securities are classified as short-term investments. In the normal course of business, the Company intends and has the ability to hold its long-term investments with temporary impairments until such time as these assets are no longer impaired.
Derivative Instruments
Derivative instruments are required to be recorded at fair value as either assets or liabilities in the Company's consolidated balance sheet. The Company's accounting policies for derivative instruments depends on whether the instrument has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.
The Company does not apply hedge accounting to foreign currency forward contracts. Gains and losses associated with currency rate changes on forward contracts are recorded currently in income. These gains and losses have been immaterial to the Company's financial statements.
The Company is exposed to fluctuations in prices for energy that it consumes, particularly electricity and natural gas. The Company also enters into variable-priced contracts for some purchases of electricity and natural gas, on an index basis. The Company seeks, or may seek, to partially mitigate these exposures through fixed-price contracts. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales” exception under authoritative guidance and require no mark-to-market adjustment.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for probable losses on uncollectible accounts receivable resulting from the inability of its customers to make required payments, which is included in bad debt expense. The Company determines the adequacy of this allowance by routinely analyzing the composition of accounts receivable and evaluating customer creditworthiness, credit history, facts and circumstances specific to outstanding balances and current economic conditions.
Inventories
Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. 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. In estimating reserves for obsolescence, the Company primarily evaluates estimates of demand over a 12-month period and provides reserves for inventory on hand in excess of the estimated 12-month demand. Estimates for projected 12-month demand are generally based on the average shipments of the prior three-month period, which are then annualized to adjust for any potential seasonality in the Company's business. The estimated 12-month demand is compared to the Company's most recently developed sales forecast to further reconcile the 12-month demand estimate. Management reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the extent any existing products are being replaced or discontinued.
In periods where the Company's production levels are substantially below normal operating capacity, unabsorbed overhead production costs associated with the reduced production levels of the Company's manufacturing facilities are charged directly to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. The Company's property and equipment accounting policies incorporate estimates, assumptions and judgments relative to the useful lives of its property and equipment. Depreciation is provided for assets placed in service on a straight-line basis over the estimated useful lives of the relative assets, which range from
10
to
40 years
for buildings and building improvements and
3
to
7 years
for machinery and equipment. The Company evaluates the carrying value of its property and equipment when events or changes in circumstances indicate that the carrying value of such assets may be impaired. Asset impairment evaluations are, by nature, highly subjective.
Senior and Junior Subordinated Convertible Debt
The Company separately accounts for the liability and equity components of its senior and junior subordinated convertible debt in a manner that reflects its nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. This results in a bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in its consolidated statements of income. Lastly, the Company includes the dilutive effect of the shares of its common stock issuable upon conversion of the outstanding senior and junior subordinated convertible debt in its diluted income per share calculation regardless of whether the market price triggers or other contingent conversion features have been met. The Company applies the treasury stock method as it has the intent and ability to settle the principal amounts of the senior and junior subordinated convertible debentures in cash. This method results in incremental dilutive shares when the average market value of the Company's common stock for a reporting period exceeds the conversion prices per share and adjust as dividends are recorded in the future.
Upon a de-recognition event such as a settlement or conversion, the Company estimates the fair value of the liability component and compares that to the carrying amount in order to calculate the appropriate amount of gain or loss. The remaining amounts paid or issued (in the case of non cash consideration in the form of shares of common stock) are recognized as a reduction of additional paid-in-capital. The fair value of the liability component is estimated using the current comparable borrowing rate for an otherwise identical non-convertible debt instrument.
Defined Benefit Pension Plans
The Company maintains defined benefit pension plans, covering certain of its foreign employees. For financial reporting purposes, net periodic pension costs and pension obligations are determined based upon a number of actuarial assumptions, including discount rates for plan obligations, and assumed rates of compensation increases for employees participating in plans. These assumptions are based upon management's judgment and consultation with actuaries, considering all known trends and uncertainties.
Contingencies
In the ordinary course of business, the Company 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.
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, it 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, it 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, it uses the amount that is the low end of such range.
Business Combinations
All of the Company's business combinations are accounted for at fair value under the acquisition method of accounting. Under the acquisition method of accounting, (i) acquisition-related costs, except for those costs incurred to issue debt or equity securities, will be expensed in the period incurred; (ii) non-controlling interests will be valued at fair value at the acquisition date; (iii) in-process research and development will be recorded at fair value as an intangible asset at the acquisition date and amortized once the technology reaches technological feasibility; (iv) restructuring costs associated with a business combination will be expensed subsequent to the acquisition date; and (v) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will be recognized through income tax expense. The aggregate amount of consideration paid by the Company is allocated to net tangible assets and intangible assets based on their estimated fair values as of the acquisition date. The excess of the purchase price over the value of the net tangible assets and intangible assets is recorded to goodwill. The measurement of fair value of assets acquired and liabilities assumed requires significant judgment. The valuation of intangible assets, in particular, requires that the Company use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: revenue, expenses, capital spending and other costs, and discount rates based on the respective risks of the cash flows.
Goodwill and Other Intangible Assets
The Company's intangible assets include goodwill and other intangible assets. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Other intangible assets include existing technologies, core and developed technology, in-process research and development, trademarks and trade names, distribution rights and customer-related intangibles. In-process research and development is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Indefinite-lived intangible assets consist of goodwill and in-process research and development intangible assets that have not yet been placed in service. All other intangible assets are definite-lived intangible assets, including in-process research and development assets that have been placed in service, and are amortized over their respective estimated lives, ranging from
1
to
15
years.
The Company is required to perform an impairment review of indefinite-lived intangible assets, including goodwill annually, and more frequently under certain circumstances. Indefinite-lived intangible assets are subjected to this annual
impairment test during the fourth quarter of the Company's fiscal year. The Company engages primarily in the development, manufacture and sale of semiconductor products as well as technology licensing. As a result, the Company concluded there are
two
reporting units, semiconductor products and technology licensing. Under the qualitative indefinite-lived intangible asset impairment assessment standard, management evaluates whether it is more likely than not that the indefinite-lived intangible assets are impaired. If it is determined that it is more likely than not, the Company proceeds with the next step of the impairment test, which compares the fair value of the reporting unit or indefinite-lived intangible asset to its carrying value. If the Company determines through the impairment process that the indefinite-lived intangible asset has been impaired, the Company will record the impairment charge in its results of operation. Through
March 31, 2019
, the Company has not had impaired goodwill. In the event that facts and circumstances indicate definite-lived intangible assets may be impaired, the Company evaluates the recoverability and estimated useful lives of such assets. If such indicators are present, recoverability is evaluated based on whether the sum of the estimated undiscounted cash flows attributable to the asset (group) in question is less than their carrying value. If less, the Company measures the fair value of the asset (group) and recognizes an impairment loss if the carrying amount of the assets exceeds their respective fair values.
Impairment of Long-Lived Assets
The Company assesses whether indicators of impairment of long-lived assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss through a charge to operating results to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset's carrying value. The Company would depreciate the remaining value over the remaining estimated useful life of the asset.
Share-Based Compensation
The Company has equity incentive plans under which non-qualified stock options and restricted stock units (RSUs) have been granted to employees and non-employee members of the Board of Directors. The Company uses RSUs as its primary equity incentive compensation instrument for employees. The Company also has employee stock purchase plans for eligible employees. Share-based compensation cost is measured on the grant date based on the fair market value of the Company’s common stock discounted for expected future dividends and is recognized as expense on a straight-line basis over the requisite service periods.
If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate or increase any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that the Company grants additional equity awards to employees or it assumes unvested equity awards in connection with acquisitions.
During fiscal 2017, the Company elected to early adopt ASU 2016-09-
Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting (Topic 718).
See "Recently Adopted Accounting Pronouncements" for additional information on the new guidance.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investments in debt securities and trade receivables. Investments in debt securities with original maturities of greater than six months consist primarily of AAA and AA rated financial instruments and counterparties. The Company's investments are primarily in direct obligations of the U.S. government or its agencies, corporate bonds, and municipal bonds.
Concentrations of credit risk with respect to accounts receivable are generally not significant due to the diversity of the Company's customers and geographic sales areas. The Company sells its products primarily to OEMs and distributors in the Americas, Europe and Asia. The Company performs ongoing credit evaluations of its customers' financial condition and, as deemed necessary, may require collateral, primarily letters of credit.
Distributor advances in the consolidated balance sheets, totaled
$170.7 million
and
$203.9 million
at
March 31, 2019
and March 31,
2018
, respectively. On sales to distributors, the Company's payment terms generally require the distributor to settle amounts owed to the Company for an amount in excess of their ultimate cost. The Company's sales price to its distributors may be higher than the amount that the distributors will ultimately owe the Company because distributors often negotiate price
reductions after purchasing the products from the Company and such reductions are often significant. It is the Company's practice to apply these negotiated price discounts to future purchases, requiring the distributor to settle receivable balances, on a current basis, generally within
30
days, for amounts originally invoiced. This practice has an adverse impact on the working capital of the Company's distributors. As such, the Company has entered into agreements with certain distributors whereby it advances cash to the distributors to reduce the distributors' working capital requirements. These advances are reconciled at least on a quarterly basis and are estimated based on the amount of ending inventory as reported by the distributor multiplied by a negotiated percentage. Such advances have no impact on revenue recognition or the Company's consolidated statements of income. The Company processes discounts taken by distributors against its deferred income on shipments to distributors' balance and trues-up the advanced amounts generally after the end of each completed fiscal quarter. The terms of these advances are set forth in binding legal agreements and are unsecured, bear no interest on unsettled balances and are due upon demand. The agreements governing these advances can be canceled by the Company at any time.
Use of Estimates
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare its consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles. Actual results could differ from those estimates.
Business Segments
Operating segments are components of an enterprise about which separate financial information is regularly reviewed by the chief operating decision makers ("CODMs") to assess the performance of the component and make decisions about the resources to be allocated to the component. The Company's Chairman and Chief Executive Officer and the Company's President and Chief Operating Officer have been identified as the CODMs as they jointly manage the Company's worldwide consolidated enterprise. Based on the Company's structure and manner in which the Company is managed and decisions are made, the Company's business is made up of
two
operating segments, semiconductor products and technology licensing.
In the semiconductor products segment, the Company designs, develops, manufactures and markets microcontrollers, development tools and analog, interface, mixed-signal, timing, wired and wireless connectivity devices, and memory products. Under the leadership of the CODMs, the Company is structured and organized around standardized roles and responsibilities based on product groups and functional activities. The Company's product groups are responsible for product research, design and development. The Company's functional activities include sales, marketing, manufacturing, information technology, human resources, legal and finance.
The Company's product groups have similar products, production processes, types of customers and methods for distribution. In addition, the tools and technologies used in the design and manufacture of the Company's products are shared among the various product groups. The Company's product group leaders, under the direction of the CODMs, define the product roadmaps and team with sales personnel to achieve design wins and revenue and other performance targets. Product group leaders also interact with manufacturing and operational personnel who are responsible for the production, prioritization and planning of the Company's manufacturing capabilities to help ensure the efficiency of the Company's operations and fulfillment of customer requirements. This centralized structure supports a global operating strategy in which the CODMs assess performance and allocate resources based on the Company's consolidated results.
Recently Adopted Accounting Pronouncements
On April 1, 2018, the Company adopted ASU 2014-09-
Revenue from Contracts with Customers (ASC 606)
and all related amendments (“New Revenue Standard”) using the modified retrospective method. The Company has applied the new revenue standard to all contracts that were entered into after adoption and to all contracts that were open as of the initial date of adoption. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the new standard impacts the Company's net sales on an ongoing basis depending on the relative amount of revenue sold through its distributors, the change in inventory held by its distributors, and the changes in price concessions granted to its distributors. Previously, the Company deferred revenue and cost of sales on shipments to distributors until the distributor sold the product to their end customer. As required by the new revenue standard, the Company no longer defers revenue and cost of sales, but rather, estimates the effects of returns and allowances provided to distributors and records revenue at the time of sale to the distributor. Sales to non-distributor customers, under both the previous and new revenue standards, are generally recognized upon the Company’s shipment of the product. The cumulative effect of the changes made to the consolidated April 1, 2018 balance sheet for the adoption of the new revenue standard is summarized in the table of opening balance sheet adjustments below. In accordance with the new revenue standard
requirements, the disclosure of the impact of adoption on the consolidated income statement and balance sheet for the period ended March 31, 2019 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
For the year ended March 31, 2019
|
|
|
As reported
|
|
Balances without adoption of New Revenue Standard
|
|
Effect of Change Higher / (Lower)
|
|
Net sales
|
|
$
|
5,349.5
|
|
|
$
|
5,380.1
|
|
|
$
|
(30.6
|
)
|
|
Cost of sales
|
|
$
|
2,418.2
|
|
|
$
|
2,434.0
|
|
|
$
|
(15.8
|
)
|
|
Gross profit
|
|
$
|
2,931.3
|
|
|
$
|
2,946.1
|
|
|
$
|
(14.8
|
)
|
|
Income before income taxes
|
|
$
|
204.5
|
|
|
$
|
219.3
|
|
|
$
|
(14.8
|
)
|
|
Income tax (benefit) provision
|
|
$
|
(151.4
|
)
|
|
$
|
(149.0
|
)
|
|
$
|
(2.4
|
)
|
|
Net income from continuing operations
|
|
$
|
355.9
|
|
|
$
|
368.3
|
|
|
$
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
As of March 31, 2019
|
|
|
As reported
|
|
Balances without adoption of New Revenue Standard
|
|
Effect of Change Higher / (Lower)
|
|
ASSETS
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
880.6
|
|
|
$
|
556.1
|
|
|
$
|
324.5
|
|
|
Inventories
|
|
$
|
711.7
|
|
|
$
|
724.2
|
|
|
$
|
(12.5
|
)
|
|
Other current assets
|
|
$
|
191.6
|
|
|
$
|
154.7
|
|
|
$
|
36.9
|
|
|
Other assets
|
|
$
|
111.8
|
|
|
$
|
106.3
|
|
|
$
|
5.5
|
|
|
Long-term deferred tax assets
|
|
$
|
1,677.2
|
|
|
$
|
1,700.7
|
|
|
$
|
(23.5
|
)
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
787.3
|
|
|
$
|
420.3
|
|
|
$
|
367.0
|
|
|
Deferred income on shipments to distributors
|
|
$
|
—
|
|
|
$
|
288.2
|
|
|
$
|
(288.2
|
)
|
|
Long-term deferred tax liability
|
|
$
|
706.1
|
|
|
$
|
689.3
|
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Retained Earnings
|
|
$
|
3,210.6
|
|
|
$
|
2,975.3
|
|
|
$
|
235.3
|
|
The significant changes in the financial statements noted in the table above are primarily due to the transition from sell-through revenue recognition to sell-in revenue recognition as required by the New Revenue Standard, which eliminated the balance of deferred income on shipments to distributors, significantly reduced accounts receivable, and significantly increased retained earnings. Prior to the acquisition of Microsemi, Microsemi already recognized revenue on a sell-in basis, so the impact of the adoption of the New Revenue Standard was primarily driven by Microchip's historical business excluding Microsemi.
During the three months ended June 30, 2018, the Company adopted ASU 2016-01-
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. This standard requires available-for-sale equity investments to be measured at fair value with changes in fair value recognized in net income. The adoption of this standard did not have a material impact on the Company's financial statements.
During the three months ended June 30, 2018, the Company adopted 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. This standard has been applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The adoption of this standard resulted in a cumulative-effect increase in the Company's deferred tax assets of approximately
$1.58 billion
, a decrease to the Company's deferred tax
liabilities of
$1.1 million
, a decrease to other assets of
$24.1 million
, and a decrease of
$1.7 million
to other long-term liabilities.
During the three months ended June 30, 2018, the Company adopted 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. The standard has been applied using a retrospective transition method to each period presented. The adoption of this standard did not have a material impact on the Company's financial statements.
The following table summarizes the opening balance sheet adjustments related to the adoption of the New Revenue Standard, ASU 2016-01-
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, and ASU 2016-16-
Intra-Entity Transfers of Assets Other Than Inventory
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
Adjustments from
|
|
Balance as of
|
|
|
|
March 31, 2018
|
|
ASC 606
|
|
ASU 2016-01
|
|
ASU 2016-16
|
|
April 1, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
563.7
|
|
|
$
|
340.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
903.8
|
|
|
Inventories
|
|
$
|
476.2
|
|
|
$
|
(5.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
471.1
|
|
|
Other current assets
|
|
$
|
119.8
|
|
|
$
|
17.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137.0
|
|
|
Long-term deferred tax assets
|
|
$
|
100.2
|
|
|
$
|
(23.1
|
)
|
|
$
|
—
|
|
|
$
|
1,579.4
|
|
|
$
|
1,656.5
|
|
|
Other assets
|
|
$
|
71.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(24.1
|
)
|
|
$
|
47.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
229.6
|
|
|
$
|
404.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
633.8
|
|
|
Deferred income on shipments to distributors
|
|
$
|
333.8
|
|
|
$
|
(333.8
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Long-term deferred tax liability
|
|
$
|
205.8
|
|
|
$
|
16.8
|
|
|
$
|
—
|
|
|
$
|
(1.1
|
)
|
|
$
|
221.5
|
|
|
Other long-term liabilities
|
|
$
|
240.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.7
|
)
|
|
$
|
239.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(17.6
|
)
|
|
$
|
—
|
|
|
$
|
(1.7
|
)
|
|
$
|
—
|
|
|
$
|
(19.3
|
)
|
|
Retained earnings
|
|
$
|
1,397.3
|
|
|
$
|
241.9
|
|
|
$
|
1.7
|
|
|
$
|
1,558.1
|
|
|
$
|
3,199.0
|
|
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2017, the FASB issued ASU 2017-12-
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
. The update expands an entity's ability to apply hedge accounting for nonfinancial and financial risk components and allows for a simplified approach for fair value hedging of interest rate risk. The update eliminates the need to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item. Additionally, the update simplifies the hedge documentation and effectiveness assessment requirements under the previous guidance. The effective date of this standard is for fiscal years beginning after December 15, 2018 and early adoption is permitted. Adoption will be applied through a cumulative-effect adjustment for cash flow and net investment hedges existing at the date of adoption and prospectively for presentation and disclosure. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04-
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendment is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company does not expect this standard to have an impact on its 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 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 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 Company will adopt Topic 842 using the retrospective cumulative effect adjustment transition method and record a cumulative effect adjustment as of the adoption date. The Company currently plans to apply the package of practical expedients to leases that commenced before the effective date whereby the Company will elect to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company is continuing to assess the potential impacts of the new leasing standard. The Company expects the adoption of this standard will result in the inclusion of a significant component of the Company’s future minimum lease commitments, as disclosed in Note 17 on its consolidated balance sheets, as right-of-use assets and lease liabilities with no material impact to its consolidated statements of income and comprehensive income.
Note 2. Business Acquisitions
Acquisition of Microsemi
On
May 29, 2018
, the Company completed its acquisition of Microsemi Corporation, a publicly traded company headquartered in Aliso Viejo, California. The Company paid an aggregate of approximately
$8.19 billion
in cash to the stockholders of Microsemi. The total consideration transferred in the acquisition, including approximately
$53.9 million
of non-cash consideration for the exchange of certain share-based payment awards of Microsemi for stock awards of the Company, was approximately
$8.24 billion
. In addition to the consideration transferred, the Company recognized in its consolidated financial statements
$3.23 billion
in liabilities of Microsemi consisting of debt, taxes payable and deferred, restructuring, and contingent and other liabilities of which
$2.06 billion
of existing debt was paid off. The Company financed the purchase price using approximately
$8.10 billion
of borrowings consisting of
$3.10 billion
under its amended and restated revolving line of credit (the "Revolving Credit Facility"),
$3.00 billion
of term loans ("Term Loan Facility") provided under the Company's amended and restated credit agreement (the "Credit Agreement"), and
$2.00 billion
in newly issued senior secured notes. The Company incurred
$22.0 million
in acquisition costs related to the acquisition. As a result of the acquisition, Microsemi became a wholly owned subsidiary of the Company. Microsemi offers a comprehensive portfolio of semiconductor and system solutions for aerospace and defense, communications, data center and industrial markets. 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 Microsemi 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 Microsemi's net tangible assets and intangible assets based on their estimated fair values as of
May 29, 2018
. 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 Microsemi acquisition is deductible for tax purposes. The Company retained independent third-party appraisers to assist management in its valuation of the acquired assets and liabilities.
The table below represents the allocation of the purchase price to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported December 31, 2018
|
|
Adjustments
|
|
March 31, 2019
|
|
Assets acquired
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
340.0
|
|
|
$
|
—
|
|
|
$
|
340.0
|
|
|
Accounts receivable
|
216.1
|
|
|
(0.5
|
)
|
|
215.6
|
|
|
Inventories
|
571.5
|
|
|
4.7
|
|
|
576.2
|
|
|
Other current assets
|
85.2
|
|
|
—
|
|
|
85.2
|
|
|
Property, plant and equipment
|
201.9
|
|
|
(0.4
|
)
|
|
201.5
|
|
|
Goodwill
|
4,483.0
|
|
|
(118.1
|
)
|
|
4,364.9
|
|
|
Purchased intangible assets
|
5,466.9
|
|
|
167.6
|
|
|
5,634.5
|
|
|
Long-term deferred tax assets
|
6.0
|
|
|
(0.1
|
)
|
|
5.9
|
|
|
Other assets
|
57.2
|
|
|
(3.9
|
)
|
|
53.3
|
|
|
Total assets acquired
|
11,427.8
|
|
|
49.3
|
|
|
11,477.1
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
|
|
Accounts payable
|
(233.8
|
)
|
|
—
|
|
|
(233.8
|
)
|
|
Other current liabilities
|
(169.4
|
)
|
|
20.1
|
|
|
(149.3
|
)
|
|
Long-term debt
|
(2,056.9
|
)
|
|
—
|
|
|
(2,056.9
|
)
|
|
Deferred tax liabilities
|
(604.7
|
)
|
|
39.6
|
|
|
(565.1
|
)
|
|
Long-term income tax payable
|
(87.2
|
)
|
|
(90.5
|
)
|
|
(177.7
|
)
|
|
Other long-term liabilities
|
(31.3
|
)
|
|
(18.5
|
)
|
|
(49.8
|
)
|
|
Total liabilities assumed
|
(3,183.3
|
)
|
|
(49.3
|
)
|
|
(3,232.6
|
)
|
|
Purchase price allocated
|
$
|
8,244.5
|
|
|
$
|
—
|
|
|
$
|
8,244.5
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Assets
|
Weighted Average
|
|
|
|
|
Useful Life
|
|
May 29, 2018
|
|
|
(in years)
|
|
(in millions)
|
|
Core and developed technology
|
15
|
|
$
|
4,569.1
|
|
|
In-process research and development
|
—
|
|
847.1
|
|
|
Customer-related
|
12
|
|
200.2
|
|
|
Backlog
|
1
|
|
12.3
|
|
|
Other
|
4
|
|
5.8
|
|
|
Total purchased intangible assets
|
|
|
$
|
5,634.5
|
|
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 are being 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 Microsemi's contractual relationships and customer loyalty related to its distributor and end-customer relationships. The fair values of the customer-related intangibles were determined using the distributor method, a form of the income approach based on distributor margin and expected attrition and revenue growth for Microsemi's existing customers as of the acquisition date. 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 Microsemi at the acquisition date, and the fair values are being determined based on the 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 Microsemi transaction is
13 years
. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately
$856.7 million
was established as a net deferred tax liability for the future amortization of the intangible assets.
The amount of Microsemi net sales and net loss included in the Company's
consolidated statements of income
for the fiscal year ended
March 31, 2019
was approximately
$1,568.6 million
and
$570.8 million
, respectively.
The following unaudited pro-forma consolidated results of operations for the fiscal year ended
March 31, 2019
and
2018
assume the closing of the Microsemi acquisition occurred as of April 1, 2017. The pro-forma adjustments are mainly comprised of acquired inventory fair value costs and amortization of purchased intangible assets. 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, 2017 or of results that may occur in the future (in millions except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
Net sales
|
$
|
5,563.7
|
|
|
$
|
5,875.0
|
|
|
Net income (loss)
|
$
|
542.0
|
|
|
$
|
(762.3
|
)
|
|
Basic net income (loss) per common share
|
$
|
2.29
|
|
|
$
|
(3.27
|
)
|
|
Diluted net income (loss) per common share
|
$
|
2.17
|
|
|
$
|
(3.27
|
)
|
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 and 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
$653.0 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 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 table below represents the allocation of the final purchase price 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 millions).
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
|
|
Cash and cash equivalents
|
|
$
|
230.2
|
|
|
Accounts receivable
|
|
141.4
|
|
|
Inventories
|
|
335.1
|
|
|
Prepaid expenses and other current assets
|
|
28.4
|
|
|
Assets held for sale
|
|
32.0
|
|
|
Property, plant and equipment
|
|
129.9
|
|
|
Goodwill
|
|
1,286.4
|
|
|
Purchased intangible assets
|
|
1,888.4
|
|
|
Long-term deferred tax assets
|
|
46.7
|
|
|
Other assets
|
|
7.5
|
|
|
Total assets acquired
|
|
4,126.0
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
Accounts payable
|
|
(55.7
|
)
|
|
Other current liabilities
|
|
(121.0
|
)
|
|
Long-term line of credit
|
|
(192.0
|
)
|
|
Deferred tax liabilities
|
|
(27.5
|
)
|
|
Long-term income tax payable
|
|
(115.1
|
)
|
|
Other long-term liabilities
|
|
(141.7
|
)
|
|
Total liabilities assumed
|
|
(653.0
|
)
|
|
Purchase price allocated
|
|
$
|
3,473.0
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Intangible Assets
|
Weighted Average
|
|
|
|
|
Useful Life
|
|
April 4, 2016
|
|
|
(in years)
|
|
(in millions)
|
|
Core and developed technology
|
11
|
|
$
|
1,075.0
|
|
|
In-process research and development
|
—
|
|
140.7
|
|
|
Customer-related
|
6
|
|
630.6
|
|
|
Backlog
|
1
|
|
40.3
|
|
|
Other
|
5
|
|
1.8
|
|
|
Total purchased intangible assets
|
|
|
$
|
1,888.4
|
|
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 fair values were based on the estimated profit associated with those orders. Backlog related assets had a
one year
useful life and were 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 $
178.1 million
was established as a net deferred tax liability for the future amortization of the intangible assets.
Note 3. Net Sales
The following table represents the Company's net sales by product line (in millions):
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
March 31, 2019
|
|
Microcontrollers
|
$
|
2,921.9
|
|
|
Analog, interface, mixed signal and timing products
|
1,530.7
|
|
|
Field-programmable gate array products
|
303.8
|
|
|
Memory products
|
184.0
|
|
|
Technology licensing
|
132.4
|
|
|
Multi-market and other
|
276.7
|
|
|
Total net sales
|
$
|
5,349.5
|
|
All of the product lines listed above are included in the Company's Semiconductor Product segment with the exception of Technology Licensing, which belongs to the Technology Licensing segment.
The following table represents the Company's net sales by contract type (in millions).
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
March 31, 2019
|
|
Distributors
|
$
|
2,719.1
|
|
|
Direct customers
|
2,498.0
|
|
|
Licensees
|
132.4
|
|
|
Total net sales
|
$
|
5,349.5
|
|
Distributors are customers that buy products with the intention of reselling them. Distributors generally have a distributor agreement with the Company to govern the terms of the relationship. Direct customers are non-distributor customers, which generally do not have a master sales agreement with the Company. The Company's direct customers primarily consist of original equipment manufacturers (OEMs) and, to a lesser extent, contract manufacturers. Licensees are customers of the Company's Technology Licensing segment, which include purchasers of intellectual property and customers that have licensing agreements to use the Company's SuperFlash® embedded flash and Smartbits® one time programmable NVM technologies. All of the contract types listed in the table above are included in the Company's Semiconductor Product segment with the exception of Licensees, which belong to the Technology Licensing segment.
Substantially all of the Company's net sales are recognized from contracts with customers, and therefore, subject to the new revenue recognition standard.
Semiconductor Product Segment
For contracts related to the purchase of semiconductor products, the Company satisfies its performance obligation when control of the ordered product transfers to the customer. The timing of the transfer of control depends on the agreed upon shipping terms with the customer, but generally occurs upon shipment, which is when physical possession of the product has been transferred and legal title of the product transfers to the customer. Payment is generally due within 30 days of the ship date. Payment is generally collected after the Company satisfies its performance obligation, therefore contract liabilities are uncommon. Also, the Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a
contract asset. Refer to Note 8 for the opening and closing balances of the Company's receivables. As contracts with customers generally have an expected duration of one year or less, the balance of open performance obligations as of period end that will be recognized as revenue subsequent to
March 31,
2020
is immaterial.
Generally, there is only a single performance obligation in the Company's contracts with customers for semiconductor products; as such, the entire transaction price is allocated to the single performance obligation and allocation of the transaction price to individual performance obligations is not necessary. The consideration received from customers is fixed, with the exception of consideration from certain distributors. Certain of the Company's distributors are granted price concessions and return rights, which result in variable consideration. The amount of revenue recognized for sales to these certain distributors is adjusted for estimates of the price concessions and return rights that are expected to be claimed. These estimates are based on the recent history of price concessions and stock rotations.
Technology Licensing Segment
The technology licensing segment includes sales and licensing of the Company's intellectual property. For contracts related to the sale of the Company's intellectual property, the Company satisfies its performance obligation and recognizes revenue when control of the intellectual property transfers to the customer. For contracts related to the licensing of the Company's technology, the Company satisfies its performance obligation and recognizes revenue as usage of the license occurs. The transaction price is fixed by the license agreement. Payment is collected after the Company satisfies its performance obligation, and therefore no contract liabilities are recorded. The Company does not record contract assets due to the fact that the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, the Company recognizes a receivable instead of a contract asset. Refer to Note 8 for the opening and closing balances of the Company's receivables.
Note 4.
Special Charges and Other, Net
The following table summarizes activity included in the "
special charges and other, net
" caption on the Company's
consolidated statements of income
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Restructuring
|
|
|
|
|
|
|
Employee separation costs
|
$
|
65.3
|
|
|
$
|
1.2
|
|
|
$
|
39.1
|
|
|
Gain on sale of assets
|
—
|
|
|
(4.4
|
)
|
|
—
|
|
|
Impairment charges
|
3.6
|
|
|
—
|
|
|
12.6
|
|
|
Contract exit costs
|
(4.7
|
)
|
|
0.7
|
|
|
44.1
|
|
|
Other
|
(0.3
|
)
|
|
—
|
|
|
2.8
|
|
|
Legal contingencies
|
(30.2
|
)
|
|
—
|
|
|
—
|
|
|
Non-restructuring contract exit costs and other
|
—
|
|
|
20.0
|
|
|
—
|
|
|
Total
|
$
|
33.7
|
|
|
$
|
17.5
|
|
|
$
|
98.6
|
|
The Company continuously evaluates its existing operations in an attempt to identify and realize cost savings opportunities and operational efficiencies. This same approach is applied to businesses that are acquired by the Company and often the operating models of acquired companies are not as efficient as the Company's operating model which enables the Company to realize significant savings and efficiencies. As a result, following an acquisition, the Company will from time to time incur restructuring expenses; however, the Company is often not able to estimate the timing or amount of such costs in advance of the period in which they occur. The primary reason for this is that the Company regularly reviews and evaluates each position, contract and expense against the Company's strategic objectives, long-term operating targets and other operational priorities. Decisions related to restructuring activities are made on a "rolling basis" during the course of the integration of an acquisition whereby department managers, executives and other leaders work together to evaluate each of these expenses and make recommendations. As a result of this approach, at the time of an acquisition, the Company is not able to estimate the future amount of expected employee separation or exit costs that it will incur in connection with its restructuring activities.
The Company's restructuring expenses during the fiscal year ended
March 31, 2019
were related to the Company's most recent business acquisitions, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. These expenses were for employee separation costs and intangible asset impairment charges. The impairment charges in the fiscal year ended
March 31, 2019
were primarily recognized as a result of writing off intangible assets purchased from Microsemi prior to the close of the acquisition and other intangible assets that were impaired as a result of changes in the combined product roadmaps after the acquisition that affected the use and life of the assets. Additional costs will be incurred in the future as additional synergies or operational efficiencies are identified in connection with the Microsemi transaction and other previous acquisitions. The Company is not able to estimate the amount of such future expenses at this time.
During fiscal 2018, the Company incurred expenses including non-restructuring contract exit costs of
$19.5 million
for fees associated with transitioning from the public utility provider in Oregon to a lower cost direct access provider. The fee is paid monthly and will depend on the amount of actual energy consumed by the Company's wafer fabrication facility in Oregon over the next
five years
. In connection with the transition to a direct access provider, the Company signed a ten-year supply agreement to purchase monthly amounts of energy that are less than the current average usage and priced on a per mega watt hour published index rate in effect at those future dates. Also during fiscal 2018, the Company incurred
$1.2 million
of employee separation costs in connection with the acquisition of Atmel.
The Company's restructuring expenses during fiscal 2017 were related to the Company's acquisitions of Atmel and Micrel, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. These expenses were for employee separation costs, contract exit costs, other operating expenses and intangible asset impairment losses. The impairment charges in fiscal 2017 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. At March 31, 2017, these activities were substantially complete.
All of the Company's restructuring activities occurred in its semiconductor products segment. The Company incurred
$115.2 million
in costs since the start of fiscal
2016
in connection with employee separation activities, of which
$65.3 million
,
$1.2 million
and
$39.1 million
was incurred during the fiscal years ended
March 31, 2019
,
2018
and
2017
, respectively. The Company could incur future expenses as additional synergies or operational efficiencies are identified. The Company is not able to estimate future expenses, if any, to be incurred in employee separation costs. The Company has incurred
$40.8 million
in costs in connection with contract exit activities since the start of fiscal
2016
which includes
$4.7 million
of income incurred for the year ended
March 31, 2019
and
$0.7 million
and
$44.1 million
of costs incurred for the years ended March 31,
2018
and
2017
, respectively. The amounts recognized during the fiscal year ended
March 31, 2019
were primarily related to vacated lease liabilities. While the Company expects to incur further acquisition-related contract exit expenses, it is not able to estimate the amount at this time.
In the three months ended June 30, 2017, the Company completed the sale of an asset it acquired as part of its acquisition of Micrel for proceeds of
$10.0 million
and the gain of
$4.4 million
is included in the gain on sale of assets in the above table.
The following is a roll forward of accrued restructuring charges for fiscal
2019
and fiscal
2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
Non-Restructuring
|
|
|
|
|
Employee Separation Costs
|
|
Exit Costs
|
|
Exit Costs
|
|
Total
|
|
Balance at March 31, 2017
|
$
|
5.4
|
|
|
$
|
34.8
|
|
|
$
|
—
|
|
|
$
|
40.2
|
|
|
Charges
|
1.2
|
|
|
0.7
|
|
|
20.0
|
|
|
21.9
|
|
|
Payments
|
(5.9
|
)
|
|
(9.2
|
)
|
|
(0.9
|
)
|
|
(16.0
|
)
|
|
Non-cash - Other
|
(0.2
|
)
|
|
1.0
|
|
|
—
|
|
|
0.8
|
|
|
Changes in foreign exchange rates
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
Balance at March 31, 2018
|
0.8
|
|
|
27.3
|
|
|
19.1
|
|
|
47.2
|
|
|
Additions due to Microsemi acquisition
|
10.4
|
|
|
9.0
|
|
|
—
|
|
|
19.4
|
|
|
Charges
|
48.9
|
|
|
(4.7
|
)
|
|
—
|
|
|
44.2
|
|
|
Payments
|
(47.1
|
)
|
|
(13.1
|
)
|
|
(4.1
|
)
|
|
(64.3
|
)
|
|
Non-cash - Other
|
—
|
|
|
0.7
|
|
|
0.7
|
|
|
1.4
|
|
|
Changes in foreign exchange rates
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
Balance at March 31, 2019
|
$
|
12.9
|
|
|
$
|
19.2
|
|
|
$
|
15.7
|
|
|
$
|
47.8
|
|
|
Current
|
|
|
|
|
|
|
$
|
26.9
|
|
|
Non-current
|
|
|
|
|
|
|
20.9
|
|
|
Total
|
|
|
|
|
|
|
$
|
47.8
|
|
The liability for restructuring and other exit costs of
$47.8 million
is included in accrued liabilities and other long-term liabilities, on the Company's consolidated balance sheets as of
March 31, 2019
.
Note 5. 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.
At
March 31, 2019
, the company had short-term investments of
$2.3 million
consisting of marketable equity securities.
At
March 31, 2018
, short-term investments of
$1.30 billion
included available-for-sale debt securities of
$1.29 billion
and marketable equity securities of
$2.8 million
. The following is a summary of available-for-sale debt securities at
March 31, 2018
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale Debt Securities
|
|
|
Adjusted
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
Government agency bonds
|
$
|
723.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
723.2
|
|
|
Municipal bonds - taxable
|
14.9
|
|
|
—
|
|
|
—
|
|
|
14.9
|
|
|
Time deposits
|
11.5
|
|
|
—
|
|
|
—
|
|
|
11.5
|
|
|
Corporate bonds and debt
|
542.9
|
|
|
—
|
|
|
—
|
|
|
542.9
|
|
|
Total
|
$
|
1,292.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,292.5
|
|
The Company sold available-for-sale debt securities for proceeds of
$1.38 billion
during the year ended March 31,
2019
to help finance its acquisition of Microsemi. There were
no
sales of available-for-sale debt securities during the year ended
March 31, 2018
. The Company sold available-for-sale debt securities for proceeds of
$470.2 million
during the year ended March 31,
2017
. The Company recognized losses of
$5.6 million
on available-for-sale debt securities during the year ended
March 31, 2019
. The Company had
no
material net realized gains from sales of available-for-sale debt securities during fiscal years ended
March 31, 2018
and
March 31, 2017
. During the year ended
March 31, 2018
, the Company recognized an impairment of
$15.5 million
on available-for-sale debt securities based on its evaluation of available evidence and the Company's intent to sell these investments which were subsequently sold in the first quarter of fiscal
2019
. The Company determines the cost of available-for-sale debt securities sold on a first-in first-out (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 (loss) income, net
on the
consolidated statements of income
.
As of March 31,
2019
and
2018
, the Company had
no
available-for-sale debt securities in an unrealized loss position.
The Company did not have any available-for-sale debt securities at March 31,
2019
. The amortized cost and estimated fair value of the available-for-sale debt securities at
March 31, 2018
, by maturity are shown below (in millions). 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 debt 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
|
$
|
246.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
246.5
|
|
|
Due after one year and through five years
|
1,046.0
|
|
|
—
|
|
|
—
|
|
|
1,046.0
|
|
|
Due after five years and through ten years
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Due after ten years
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
1,292.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,292.5
|
|
Note 6. Fair Value Measurements
Accounting rules for fair value clarify that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
|
|
Level 1-
|
Observable inputs such as quoted prices in active markets;
|
|
|
|
|
Level 2-
|
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
|
|
Level 3-
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Marketable Debt Instruments
Marketable debt instruments include instruments such as corporate bonds and debt, government agency bonds, bank deposits, municipal bonds, and money market mutual funds. When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroborates non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.
Assets Measured at Fair Value on a Recurring Basis
Assets measured at fair value on a recurring basis at
March 31, 2019
are as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
8.3
|
|
|
$
|
—
|
|
|
$
|
8.3
|
|
|
Deposit accounts
|
—
|
|
|
420.3
|
|
|
420.3
|
|
|
Short-term investments:
|
|
|
|
|
|
|
Marketable equity securities
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
Total assets measured at fair value
|
$
|
10.6
|
|
|
$
|
420.3
|
|
|
$
|
430.9
|
|
Assets measured at fair value on a recurring basis at
March 31, 2018
are as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
121.0
|
|
|
$
|
—
|
|
|
$
|
121.0
|
|
|
Deposit accounts
|
—
|
|
|
641.6
|
|
|
641.6
|
|
|
Commercial Paper
|
—
|
|
|
118.7
|
|
|
118.7
|
|
|
Government agency bonds
|
—
|
|
|
20.0
|
|
|
20.0
|
|
|
Short-term investments:
|
|
|
|
|
|
|
Marketable equity securities
|
2.8
|
|
|
—
|
|
|
2.8
|
|
|
Corporate bonds and debt
|
—
|
|
|
542.9
|
|
|
542.9
|
|
|
Time deposits
|
—
|
|
|
11.5
|
|
|
11.5
|
|
|
Government agency bonds
|
—
|
|
|
723.2
|
|
|
723.2
|
|
|
Municipal bonds - taxable
|
—
|
|
|
14.9
|
|
|
14.9
|
|
|
Total assets measured at fair value
|
$
|
123.8
|
|
|
$
|
2,072.8
|
|
|
$
|
2,196.6
|
|
There were no transfers between Level 1 or Level 2 during fiscal
2019
or fiscal
2018
. There were no assets measured on a recurring basis during fiscal
2019
or fiscal
2018
using significant unobservable inputs (Level 3).
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.
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 the years ended
March 31, 2019
,
2018
and
2017
. These investments are included in other assets on the consolidated balance sheets.
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 7. 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
March 31, 2019
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
March 31, 2019
approximated the carrying value and are considered Level 2 in the fair value hierarchy described in Note 6. 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 Debt, Senior Secured Notes, and Term Loan Facility
The Company measures the fair value of its senior and junior subordinated convertible debt and senior secured notes for disclosure purposes. These fair values are based on observable market prices for this debt, which is 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 debt, senior secured notes, and term loan facility as of
March 31, 2019
and
2018
(in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
2023 Senior Secured Notes
|
$
|
985.4
|
|
|
$
|
1,020.1
|
|
|
N/A
|
|
|
N/A
|
|
|
2021 Senior Secured Notes
|
$
|
987.4
|
|
|
$
|
1,008.1
|
|
|
N/A
|
|
|
N/A
|
|
|
Term Loan Facility
|
$
|
1,892.1
|
|
|
$
|
1,911.5
|
|
|
N/A
|
|
|
N/A
|
|
|
2017 Senior Convertible Debt
|
$
|
1,493.6
|
|
|
$
|
2,285.4
|
|
|
$
|
1,437.6
|
|
|
$
|
2,459.2
|
|
|
2015 Senior Convertible Debt
|
$
|
1,360.8
|
|
|
$
|
2,810.6
|
|
|
$
|
1,309.9
|
|
|
$
|
3,079.1
|
|
|
2017 Junior Convertible Debt
|
$
|
335.9
|
|
|
$
|
740.8
|
|
|
$
|
326.7
|
|
|
$
|
876.9
|
|
(1)
The carrying amounts presented are net of debt discounts and debt issuance costs (see Note 12 Debt and Credit Facility for further information).
Note 8. Other Financial Statement Details
Accounts Receivable
Accounts receivable consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Trade accounts receivable
|
$
|
875.8
|
|
|
$
|
557.8
|
|
|
Other
|
6.8
|
|
|
8.1
|
|
|
Total accounts receivable, gross
|
882.6
|
|
|
565.9
|
|
|
Less allowance for doubtful accounts
|
2.0
|
|
|
2.2
|
|
|
Total accounts receivable, net
|
$
|
880.6
|
|
|
$
|
563.7
|
|
Inventories
The components of inventories consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Raw materials
|
$
|
74.5
|
|
|
$
|
26.0
|
|
|
Work in process
|
413.0
|
|
|
311.8
|
|
|
Finished goods
|
224.2
|
|
|
138.4
|
|
|
Total inventories
|
$
|
711.7
|
|
|
$
|
476.2
|
|
Inventories are valued at the lower of cost and net realizable value 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.
Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Land
|
$
|
83.4
|
|
|
$
|
73.4
|
|
|
Building and building improvements
|
647.6
|
|
|
508.5
|
|
|
Machinery and equipment
|
2,095.5
|
|
|
1,943.9
|
|
|
Projects in process
|
119.2
|
|
|
118.3
|
|
|
Total property, plant and equipment, gross
|
2,945.7
|
|
|
2,644.1
|
|
|
Less accumulated depreciation and amortization
|
1,949.0
|
|
|
1,876.2
|
|
|
Total property, plant and equipment, net
|
$
|
996.7
|
|
|
$
|
767.9
|
|
Depreciation expense attributed to property, plant and equipment was
$180.6 million
,
$123.7 million
and
$122.9 million
for the fiscal years ending March 31,
2019
,
2018
and
2017
, respectively.
Accrued Liabilities
Accrued liabilities consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Accrued compensation and benefits
|
$
|
133.2
|
|
|
$
|
87.6
|
|
|
Income taxes payable
|
46.9
|
|
|
27.5
|
|
|
Sales related reserves
|
366.9
|
|
|
—
|
|
|
Accrued expenses and other liabilities
|
240.3
|
|
|
114.5
|
|
|
Total accrued liabilities
|
$
|
787.3
|
|
|
$
|
229.6
|
|
Sales related reserves represent price concessions and stock rotation rights that the Company offers to many of its distributors. For the fiscal year ending March 31, 2018, these sales related reserves were recorded within accounts receivable, and therefore did not exist within accrued liabilities. The Company made this change in classification as part of its adoption of ASC 606. For additional information regarding the Company's adoption of ASC 606, refer to Note 1 of the consolidated financial statements.
Note 9. Discontinued Operations
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, which were substantially complete as of March 31, 2017. 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 consolidated financial statements as discontinued operations.
As the Company completed the sale of the mobile touch assets on November 10, 2016, there are no discontinued operations in the years ended March 31, 2019 or 2018. The results of discontinued operations for the year ended March 31, 2017 are as follows (in millions):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Net sales
|
$
|
18.3
|
|
|
Cost of sales
|
15.8
|
|
|
Operating expenses
|
10.7
|
|
|
Gain on Sale
|
0.6
|
|
|
Income tax benefit
|
(1.6
|
)
|
|
Net loss from discontinued operations
|
$
|
(6.0
|
)
|
Note 10. Intangible Assets and Goodwill
Intangible assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
Core and developed technology
|
|
$
|
7,413.0
|
|
|
$
|
(1,112.9
|
)
|
|
$
|
6,300.1
|
|
|
Customer-related
|
|
917.1
|
|
|
(544.0
|
)
|
|
373.1
|
|
|
In-process research and development
|
|
7.7
|
|
|
—
|
|
|
7.7
|
|
|
Distribution rights
|
|
0.3
|
|
|
(0.2
|
)
|
|
0.1
|
|
|
Other
|
|
7.3
|
|
|
(2.7
|
)
|
|
4.6
|
|
|
Total
|
|
$
|
8,345.4
|
|
|
$
|
(1,659.8
|
)
|
|
$
|
6,685.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Net Amount
|
|
Core and developed technology
|
|
$
|
1,952.3
|
|
|
$
|
(644.4
|
)
|
|
$
|
1,307.9
|
|
|
Customer-related
|
|
716.9
|
|
|
(375.9
|
)
|
|
341.0
|
|
|
In-process research and development
|
|
12.1
|
|
|
—
|
|
|
12.1
|
|
|
Distribution rights
|
|
0.3
|
|
|
(0.1
|
)
|
|
0.2
|
|
|
Other
|
|
1.5
|
|
|
(0.7
|
)
|
|
0.8
|
|
|
Total
|
|
$
|
2,683.1
|
|
|
$
|
(1,021.1
|
)
|
|
$
|
1,662.0
|
|
The Company amortizes intangible assets over their expected useful lives, which range between
1
and
15
years. During the year ended
March 31, 2019
, due to the acquisition of Microsemi, the Company acquired
$4.57 billion
of core and developed technology which has a weighted average amortization period of
15
years,
$200.2 million
of customer-related intangible assets which have a weighted average amortization period of
12
years,
$12.3 million
of intangible assets related to
backlog with an amortization period of
1
year,
$5.8 million
of other intangible assets which have a weighted average amortization period of
4
years, and
$847.1 million
of in-process technology. In fiscal
2019
,
$851.5 million
of in-process research and development intangible assets, primarily consisting of intangible assets acquired in the acquisition of Microsemi, reached technological feasibility and was reclassified as core and developed technology and began being amortized over the respective estimated useful lives. The following is an expected amortization schedule for the intangible assets for fiscal
2020
through fiscal
2024
, absent any future acquisitions or impairment charges (in millions):
|
|
|
|
|
|
Fiscal Year Ending
March 31,
|
Projected Amortization
Expense
|
|
2020
|
$1,005.8
|
|
2021
|
$944.1
|
|
2022
|
$873.1
|
|
2023
|
$680.0
|
|
2024
|
$608.3
|
Amortization expense attributed to intangible assets was
$695.8 million
,
$492.2 million
and
$346.3 million
for fiscal years
2019
,
2018
and
2017
, respectively. In fiscal
2019
,
$9.6 million
was charged to cost of sales and
$686.2 million
was charged to operating expenses. In fiscal 2018,
$6.1 million
was charged to cost of sales and
$486.1 million
was charged to operating expenses. In fiscal 2017,
$4.0 million
was charged to cost of sales and
$342.3 million
was charged to operating expenses. The Company recognized impairment charges of
$3.1 million
,
$0.5 million
and
$11.9 million
in fiscal
2019
,
2018
and fiscal
2017
, respectively. The impairment charges of
$3.1 million
in fiscal
2019
were recognized as a result of writing off intangible assets purchased from Microsemi prior to the close of the acquisition and as a result of the changes in the combined product roadmaps after the acquisition of Microsemi that affected the use and life of these assets. The impairment charges of
$11.9 million
in fiscal
2017
were recognized primarily as a result of the acquisition of Atmel and as a result of changes in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets.
Goodwill activity for fiscal
2019
and fiscal
2018
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor Products
Reporting Unit
|
|
Technology
Licensing
Reporting Unit
|
|
Balance at March 31, 2017 and 2018
|
$
|
2,279.8
|
|
|
$
|
19.2
|
|
|
Additions due to the acquisition of Microsemi
|
4,364.9
|
|
|
—
|
|
|
Balance at March 31, 2019
|
$
|
6,644.7
|
|
|
$
|
19.2
|
|
At
March 31, 2019
, 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
March 31, 2019
, the Company has never recorded an impairment charge against its goodwill balance.
Note 11. Income Taxes
The income tax provision consists of the following (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Pretax (loss) income:
|
|
|
|
|
|
|
U.S.
|
$
|
(593.4
|
)
|
|
$
|
(127.3
|
)
|
|
$
|
(279.3
|
)
|
|
Foreign
|
797.9
|
|
|
864.6
|
|
|
369.1
|
|
|
|
$
|
204.5
|
|
|
$
|
737.3
|
|
|
$
|
89.8
|
|
|
Current (benefit) expense:
|
|
|
|
|
|
|
U.S. Federal
|
$
|
(98.0
|
)
|
|
$
|
369.4
|
|
|
$
|
21.3
|
|
|
State
|
(5.3
|
)
|
|
0.5
|
|
|
1.0
|
|
|
Foreign
|
14.1
|
|
|
60.8
|
|
|
23.8
|
|
|
Total current (benefit) expense
|
$
|
(89.2
|
)
|
|
$
|
430.7
|
|
|
$
|
46.1
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
$
|
11.9
|
|
|
$
|
82.5
|
|
|
$
|
(114.7
|
)
|
|
State
|
0.6
|
|
|
0.1
|
|
|
(5.4
|
)
|
|
Foreign
|
(74.7
|
)
|
|
(31.4
|
)
|
|
(6.8
|
)
|
|
Total deferred (benefit) expense
|
(62.2
|
)
|
|
51.2
|
|
|
(126.9
|
)
|
|
Total Income tax (benefit) provision
|
$
|
(151.4
|
)
|
|
$
|
481.9
|
|
|
$
|
(80.8
|
)
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted into law. The Act provides for numerous significant tax law changes and modifications including the reduction of the U.S. federal corporate income tax rate from 35.0% to 21.0%, the requirement for companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-sourced earnings.
Accounting Standards Codification ("ASC") 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin ("SAB") 118, which allowed companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. The Company recorded a reasonable estimate when measurable and with the understanding that the provisional amount was subject to further adjustments under SAB 118. In addition, for significant items for which the Company could not make a reasonable estimate, no provisional amounts were recorded. As of December 31, 2018, the Company completed its review of the previously recorded provisional amounts related to the Act, recorded necessary adjustments, and the amounts are now final under SAB 118.
As of March 31, 2018, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally 21%), by recording a provisional income tax benefit of
$136.7 million
. Upon further analysis of certain aspects of the Act and refinement of its calculations during the period ended December 31, 2018, the Company did not make adjustments to the provisional amount.
The one-time transition tax is based on the Company's total post-1986 earnings and profits (E&P), the tax on which the Company previously deferred from U.S. income taxes under U.S. law. The Company recorded a provisional amount for its one-time transition tax expense for each of its foreign subsidiaries, resulting in a transition tax expense of
$644.7 million
at March 31, 2018. Upon further analyses of the Act and notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, the Company finalized its calculations of the transition tax expense during the period ended December 31, 2018. The Company increased its March 31, 2018 provisional amount by
$13.1 million
to
$657.8 million
, which is included as a component of income tax expense from continuing operations. The measurement period adjustment of
$13.1 million
decreased basic and diluted net income per common share by
$0.06
and
$0.05
, respectively, for the year ended March 31, 2019.
The Company intends to invest substantially all of its foreign subsidiary earnings, as well as its capital in its foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which the Company would incur significant, additional
costs upon repatriation of such amounts. It is not practical to estimate the additional tax that would be incurred, if any, if the permanently reinvested earnings were repatriated.
As of March 31, 2018, the Company removed its valuations allowance on certain foreign tax credits and recorded a provisional income tax benefit of
$36.4 million
. Upon further analysis of the Act, the Company did not make adjustments to the provisional amount.
The Act subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5,
Accounting for Global Intangible Low-Taxed Income
, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI in the year the tax is incurred.
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to income before income taxes. The sources and tax effects of the differences in the total income tax provision are as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Computed expected income tax provision
|
$
|
43.0
|
|
|
$
|
232.6
|
|
|
$
|
31.4
|
|
|
State income taxes, net of federal benefit
|
(8.7
|
)
|
|
(1.3
|
)
|
|
(4.6
|
)
|
|
Foreign income taxed at lower than the federal rate
|
(94.0
|
)
|
|
(208.8
|
)
|
|
(105.0
|
)
|
|
Impact of the Act - one-time transition tax, net of foreign tax credits
|
13.1
|
|
|
653.7
|
|
|
—
|
|
|
Impact of the Act - deferred tax effects, net of valuation allowance
|
—
|
|
|
(136.7
|
)
|
|
—
|
|
|
Global intangible low-taxed income
|
95.4
|
|
|
—
|
|
|
—
|
|
|
Business realignment
|
(90.6
|
)
|
|
—
|
|
|
—
|
|
|
Increases related to current year tax positions
|
9.0
|
|
|
32.0
|
|
|
53.7
|
|
|
Decreases related to prior year tax positions
(1)
|
(75.1
|
)
|
|
(11.3
|
)
|
|
(36.3
|
)
|
|
Share-based compensation
|
(13.3
|
)
|
|
(27.2
|
)
|
|
(25.0
|
)
|
|
Research and development tax credits
|
(27.5
|
)
|
|
(17.0
|
)
|
|
(12.8
|
)
|
|
Intercompany prepaid tax asset amortization
|
5.2
|
|
|
7.4
|
|
|
7.9
|
|
|
Foreign exchange
|
4.6
|
|
|
(20.5
|
)
|
|
(1.7
|
)
|
|
Other
|
(2.6
|
)
|
|
(0.5
|
)
|
|
9.8
|
|
|
Change in valuation allowance
|
(9.9
|
)
|
|
(20.5
|
)
|
|
1.8
|
|
|
Total income tax provision (benefit)
|
$
|
(151.4
|
)
|
|
$
|
481.9
|
|
|
$
|
(80.8
|
)
|
(1)
The release of prior year tax positions during fiscal
2019
increased the basic and diluted net income per common share by
$0.32
and
$0.30
, respectively. The release of prior year tax positions during fiscal
2018
increased the basic and diluted net income per common share by
$0.05
. The release of prior year tax positions during fiscal
2017
increased the basic and diluted net income per common share by
$0.17
and
$0.15
, respectively.
The foreign tax rate differential benefit primarily relates to the Company's operations in Thailand, Malta and Ireland. The Company's Thailand manufacturing operations are currently subject to numerous tax holidays granted to the Company based on its investment in property, plant and equipment in Thailand. The Company's tax holiday periods in Thailand expire between fiscal 2022 and 2026, 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 effective tax rate. The Company’s Microsemi operations in Malaysia are subject to a tax holiday that effectively reduces the income tax rate in that jurisdiction. Microsemi’s tax holiday in Malaysia was granted in 2009 and is effective through December 2019, subject to continued compliance with the tax holiday’s requirements. The aggregate dollar expense derived from these tax holidays approximated
$0.1 million
in fiscal
2019
. The aggregate dollar benefit derived from these tax holidays approximated
$6.2 million
and
$13.2 million
in fiscal
2018
and
2017
, respectively. The impact of the tax holidays during fiscal
2019
did not impact basic and diluted net income per common share. The impact of the tax holidays during fiscal
2018
increased the basic and diluted net income per common share by
$0.03
and
$0.02
, respectively. The impact of the tax holidays during fiscal
2017
increased the basic and diluted net income per common share by
$0.06
.
The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and deferred tax liabilities are as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
Deferred income on shipments to distributors
|
$
|
—
|
|
|
$
|
39.1
|
|
|
Inventory valuation
|
45.0
|
|
|
10.7
|
|
|
Net operating loss carryforward
|
94.3
|
|
|
101.1
|
|
|
Capital loss carryforward
|
9.6
|
|
|
10.6
|
|
|
Share-based compensation
|
42.4
|
|
|
31.4
|
|
|
Income tax credits
|
376.5
|
|
|
178.4
|
|
|
Property, plant and equipment
|
23.6
|
|
|
25.7
|
|
|
Accrued expenses and other
|
91.4
|
|
|
91.2
|
|
|
Intangible assets
|
1,608.1
|
|
|
—
|
|
|
Other
|
12.6
|
|
|
—
|
|
|
Gross deferred tax assets
|
2,303.5
|
|
|
488.2
|
|
|
Valuation allowances
|
(332.1
|
)
|
|
(204.5
|
)
|
|
Deferred tax assets, net of valuation allowances
|
1,971.4
|
|
|
283.7
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Convertible debt
|
(279.3
|
)
|
|
(304.4
|
)
|
|
Intangible assets
|
(721.0
|
)
|
|
(66.6
|
)
|
|
Other
|
—
|
|
|
(18.3
|
)
|
|
Deferred tax liabilities
|
(1,000.3
|
)
|
|
(389.3
|
)
|
|
Net deferred tax asset (liability)
|
$
|
971.1
|
|
|
$
|
(105.6
|
)
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
Non-current deferred tax assets
|
$
|
1,677.2
|
|
|
$
|
100.2
|
|
|
Non-current deferred tax liability
|
(706.1
|
)
|
|
(205.8
|
)
|
|
Net deferred tax asset (liability)
|
$
|
971.1
|
|
|
$
|
(105.6
|
)
|
In assessing whether it is more likely than not that deferred tax assets will be realized, the Company considers all available evidence, both positive and negative, including its recent cumulative earnings experience and expectations of future available taxable income of the appropriate character by taxing jurisdiction, tax attribute carryback and carryforward periods available to them for tax reporting purposes, and prudent and feasible tax planning strategies.
The Company had federal, state and foreign NOL carryforwards with an estimated tax effect of
$94.3 million
available at
March 31, 2019
. The federal, state and foreign NOL carryforwards expire at various times between
2020
and
2039
, of which portion of the NOL carryforwards do not expire. The Company had state tax credits of
$158.5 million
available at
March 31, 2019
. These state tax credits expire at various times between
2020
and
2039
. The Company had capital loss carryforwards with an estimated tax effect of $
9.6 million
available at
March 31, 2019
. These capital loss carryforwards begin to expire in fiscal 2020. The Company had foreign tax credits of
$18.5 million
available at
March 31, 2019
. These foreign tax credits begin to expire in fiscal
2022
. The Company had credits for increasing research activity in the amount of
$129.3 million
available at
March 31, 2019
. These credits begin to expire in fiscal 2020. The Company had U.S. prior year minimum tax credits in the amount of
$4.5 million
available at
March 31, 2019
. These credits do not expire. The Company had refundable tax credits in foreign jurisdictions of
$45.8 million
available at
March 31, 2019
. The Company had withholding tax credits in foreign jurisdictions of
$19.9 million
available at
March 31, 2019
. These credits expire at various times between fiscal 2022 and 2024.
The Company recognizes interest and penalties related to unrecognized tax benefits through income tax expense. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. 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 2007 and later tax years remain effectively open for examination by tax authorities. For foreign tax returns, the Company is generally no longer subject to income tax examinations for years prior to fiscal 2007.
Significant judgment is required in evaluating the Company's uncertain tax positions and determining its provision for income taxes. Although the Company believes that it has appropriately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different than expectations. The Company will adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate, the closing of a statutory audit period or changes in applicable tax law. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences would impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to the reserves that are considered appropriate, as well as related net interest.
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, the tax positions are more likely than not to be sustained based on the technical merits. 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 could 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.
The following table summarizes the activity related to the Company's gross unrecognized tax benefits from April 1,
2016
to
March 31, 2019
(amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Beginning balance
|
$
|
436.0
|
|
|
$
|
398.5
|
|
|
$
|
220.7
|
|
|
Increases related to acquisitions
|
329.7
|
|
|
—
|
|
|
193.3
|
|
|
Decreases related to settlements with tax authorities
|
(8.3
|
)
|
|
(0.1
|
)
|
|
(11.7
|
)
|
|
Decreases related to statute of limitation expirations
|
(16.2
|
)
|
|
(10.9
|
)
|
|
(7.6
|
)
|
|
Increases related to current year tax positions
|
27.8
|
|
|
30.3
|
|
|
26.3
|
|
|
Increases (decreases) related to prior year tax positions
|
(5.6
|
)
|
|
18.2
|
|
|
(22.5
|
)
|
|
Ending balance
|
$
|
763.4
|
|
|
$
|
436.0
|
|
|
$
|
398.5
|
|
As of
March 31, 2019
and
March 31, 2018
, the Company had accrued interest and penalties related to tax contingencies of
$88.1 million
and
$80.8 million
, respectively. Interest and penalties charged to operations for the years ended March 31,
2018
and
2017
related to the Company's uncertain tax positions were $
5.4 million
and $
5.8 million
, respectively. Previously accrued interest and penalties that were released during the year ended
March 31, 2019
were
$37.5 million
.
The total amount of gross unrecognized tax benefits was
$763.4 million
and
$436.0 million
as of
March 31, 2019
and
March 31, 2018
, respectively, of which
$664.4 million
and
$436.0 million
is estimated to impact the Company's effective tax rate, if recognized. The Company estimates that it is reasonably possible unrecognized tax benefits as of
March 31, 2019
could decrease by approximately
$50.0 million
in the next 12 months. Positions that may be resolved include various U.S. and non-U.S. matters.
Note 12. Debt and Credit Facility
Debt obligations included in the consolidated balance sheets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coupon Interest Rate
|
|
Effective Interest Rate
|
|
Fair Value of Liability Component at Issuance
(1)
|
|
March 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Senior Secured Indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
|
|
|
|
|
|
$
|
3,266.5
|
|
|
$
|
—
|
|
|
Term Loan Facility
|
|
|
|
|
|
|
|
1,911.5
|
|
|
N/A
|
|
|
2023 Notes, maturing June 1, 2023 ("2023 Notes")
|
|
4.333
|
%
|
|
|
|
|
|
1,000.0
|
|
|
N/A
|
|
|
2021 Notes, maturing June 1, 2021 ("2021 Notes")
|
|
3.922
|
%
|
|
|
|
|
|
1,000.0
|
|
|
N/A
|
|
|
Total Senior Secured Indebtedness
|
|
|
|
|
|
|
|
7,178.0
|
|
|
—
|
|
|
Senior Subordinated Convertible Debt - Principal Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
2017 Senior Convertible Debt, maturing February 15, 2027 ("2017 Senior Convertible Debt")
|
|
1.625%
|
|
6.0%
|
|
$1,396.3
|
|
$
|
2,070.0
|
|
|
$
|
2,070.0
|
|
|
2015 Senior Convertible Debt, maturing February 15, 2025 ("2015 Senior Convertible Debt")
|
|
1.625%
|
|
5.9%
|
|
$1,160.1
|
|
1,725.0
|
|
|
1,725.0
|
|
|
Junior Subordinated Convertible Debt - Principal Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
2017 Junior Convertible Debt, maturing February 15, 2037 ("2017 Junior Convertible Debt")
|
|
2.250%
|
|
7.4%
|
|
$321.1
|
|
686.3
|
|
|
686.3
|
|
|
Total Convertible Debt
|
|
|
|
|
|
|
|
4,481.3
|
|
|
4,481.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross long-term debt including current maturities
|
|
|
|
|
|
|
|
11,659.3
|
|
|
4,481.3
|
|
|
Less: Debt discount
(2)
|
|
|
|
|
|
|
|
(1,268.7
|
)
|
|
(1,372.9
|
)
|
|
Less: Debt issuance costs
(3)
|
|
|
|
|
|
|
|
(83.6
|
)
|
|
(40.1
|
)
|
|
Net long-term debt including current maturities
|
|
|
|
|
|
|
|
10,307.0
|
|
|
3,068.3
|
|
|
Less: Current maturities
(4)
|
|
|
|
|
|
|
|
(1,360.8
|
)
|
|
(1,309.9
|
)
|
|
Net long-term debt
|
|
|
|
|
|
|
|
$
|
8,946.2
|
|
|
$
|
1,758.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
As each of the convertible instruments may be settled in cash upon conversion, for accounting purposes, they were bifurcated into a liability component and an equity component, which are both initially recorded at fair value. The amount allocated to the equity component is the difference between the principal value of the instrument and the fair value of the liability component at issuance. The resulting debt discount is being amortized to interest expense at the respective effective interest rate over the contractual term of the debt.
(2)
The unamortized discount includes the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
2023 Notes
|
$
|
(4.4
|
)
|
|
N/A
|
|
|
2021 Notes
|
(3.8
|
)
|
|
N/A
|
|
|
2017 Senior Convertible Debt
|
(561.9
|
)
|
|
(616.3
|
)
|
|
2015 Senior Convertible Debt
|
(351.4
|
)
|
|
(400.3
|
)
|
|
2017 Junior Conv
ertible Debt
|
(347.2
|
)
|
|
(356.3
|
)
|
|
Total unamortized discount
|
$
|
(1,268.7
|
)
|
|
$
|
(1,372.9
|
)
|
(3)
Debt issuance costs include the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
Revolving Credit Facility
|
$
|
(14.7
|
)
|
|
$
|
(5.9
|
)
|
|
Term Loan Facility
|
(19.4
|
)
|
|
N/A
|
|
|
2023 Notes
|
(10.2
|
)
|
|
N/A
|
|
|
2021 Notes
|
(8.8
|
)
|
|
N/A
|
|
|
2017 Senior Conv
ertible Debt
|
(14.5
|
)
|
|
(16.1
|
)
|
|
2015 Senior Conv
ertible Debt
|
(12.8
|
)
|
|
(14.8
|
)
|
|
2017 Junior Conv
ertible Debt
|
(3.2
|
)
|
|
(3.3
|
)
|
|
Total debt issuance costs
|
$
|
(83.6
|
)
|
|
$
|
(40.1
|
)
|
(4)
Current maturities include the full balance of the
2015 Senior Convertible Debt
as of
March 31, 2019
and
2018
.
Expected maturities relating to the Company’s long-term debt as of
March 31, 2019
are as follows (in millions):
|
|
|
|
|
|
|
|
|
Fiscal year ending March 31,
|
|
Expected Maturities
|
|
2020
|
|
$
|
—
|
|
|
2021
|
|
—
|
|
|
2022
|
|
1,000.0
|
|
|
2023
|
|
—
|
|
|
2024
|
|
4,266.5
|
|
|
Thereafter
|
|
6,392.8
|
|
|
Total
|
|
$
|
11,659.3
|
|
Ranking of Convertible Debt
- The Senior Subordinated Convertible Debt and Junior Subordinated Convertible Debt (collectively, the Convertible Debt) are unsecured obligations which are subordinated in right of payment to the amounts outstanding under the Company's Credit Facility and Senior Secured Notes (as defined below). The Junior Subordinated Convertible Debt is expressly subordinated in right of payment to any existing and future senior debt of the Company (including the Credit Facility, the Senior Secured Notes, and the Senior Subordinated Convertible Debt) and is structurally subordinated in right of payment to the liabilities of the Company's subsidiaries. The Senior Subordinated Convertible Debt is subordinated to the Credit Facility and the Senior Secured Notes; ranks senior to the Company's indebtedness that is expressly subordinated in right of payment to it, including the Junior Subordinated Convertible Debt; ranks equal in right of payment to any of the Company's unsubordinated indebtedness that does not provide that it is senior to the Senior Subordinated Convertible Debt; ranks junior in right of payment to any of the Company's secured, unsubordinated indebtedness to the extent of the value of the assets securing such indebtedness; and is structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries.
Summary of Conversion Features
- Each series of Convertible Debt is convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at specified Conversion Rates (see table below), adjusted for certain events including the declaration of cash dividends. Except during the three-month period immediately preceding the maturity date of the applicable series of Convertible Debt, each series of Convertible Debt is convertible only upon the occurrence of (1) such time as the closing price of the Company's common stock exceeds the Conversion Price (see table below) by
130%
for
20
days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter or (2) during the
5
business day period after any
10
consecutive trading day period, or the measurement period, in which the trading price per
$1,000
principal amount of notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day or (3) upon the occurrence of certain corporate events specified in the indenture of such series of Convertible Debt. In addition, for each series, if at the time of conversion the applicable price of the Company's common stock exceeds the applicable Conversion Price at such time, the applicable Conversion Rate will be increased by up to an additional maximum incremental shares rate, as determined pursuant to a formula specified in the indenture for the applicable series of Convertible Debt, and as adjusted for cash dividends paid since the issuance of such series of Convertible Debt. However, in no event will the applicable Conversion Rate exceed the
applicable Maximum Conversion Rate specified in the indenture for the applicable series of Convertible Debt (see table below). The following table sets forth the applicable Conversion Rates adjusted for dividends declared since issuance of such series of Convertible Debt and the applicable Incremental Share Factors and Maximum Conversion Rates as adjusted for dividends paid since the applicable issuance date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend adjusted rates as of March 31, 2019
|
|
|
Conversion Rate, adjusted
|
|
Approximate Conversion Price, adjusted
|
|
Incremental Share Factor, adjusted
|
|
Maximum Conversion Rate, adjusted
|
|
2017 Senior Convertible Debt
|
10.2925
|
|
|
$
|
97.16
|
|
|
5.1462
|
|
|
14.6668
|
|
|
2015 Senior Convertible Debt
|
16.0504
|
|
|
$
|
62.30
|
|
|
8.0252
|
|
|
22.4705
|
|
|
2017 Junior Convertible Debt
|
10.4763
|
|
|
$
|
95.45
|
|
|
5.2382
|
|
|
14.6668
|
|
As of
March 31, 2019
, the 2017 Senior Convertible Debt and the 2017 Junior Convertible Debt were not convertible. As of
March 31, 2019
, the holders of the
2015 Senior
Convertible
Debt
have the right to convert their debentures between April 1,
2019
and June 30,
2019
because the Company's common stock price has exceeded the Conversion Price by
130%
for the specified period of time during the quarter ended
March 31, 2019
. As of
March 31, 2019
, the
2015 Senior
Convertible
Debt
had a value if converted above par of
$857.9 million
.
The Company may not redeem any series of Convertible Debt prior to the relevant maturity date and no sinking fund is provided for any series of Convertible Debt. Upon the occurrence of a fundamental change as defined in the applicable indenture of such series of Convertible Debt, holders of such series may require the Company to purchase all or a portion of their Convertible Debt for cash at a price equal to
100%
of the principal amount plus any accrued and unpaid interest.
Interest expense includes the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Debt issuance amortization
|
$
|
12.9
|
|
|
$
|
3.1
|
|
|
$
|
2.4
|
|
|
Debt discount amortization
|
2.2
|
|
|
—
|
|
|
—
|
|
|
Interest expense
|
291.8
|
|
|
6.6
|
|
|
40.4
|
|
|
Total interest expense on Senior Secured Indebtedness
|
306.9
|
|
|
9.7
|
|
|
42.8
|
|
|
Debt issuance amortization
|
3.6
|
|
|
3.5
|
|
|
2.1
|
|
|
Debt discount amortization
|
112.4
|
|
|
106.1
|
|
|
56.1
|
|
|
Coupon interest expense
|
77.1
|
|
|
77.3
|
|
|
44.5
|
|
|
Total interest expense on Convertible Debt
|
193.1
|
|
|
186.9
|
|
|
102.7
|
|
|
Other interest expense
|
2.9
|
|
|
2.4
|
|
|
0.8
|
|
|
Total interest expense
|
$
|
502.9
|
|
|
$
|
199.0
|
|
|
$
|
146.3
|
|
The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is
7.88 years
,
5.88 years
, and
17.88 years
for the
2017 Senior Convertible Debt
,
2015 Senior Convertible Debt
and
2017 Junior Convertible Debt
, respectively.
In November 2017, the Company called for redemption
$14.6 million
in principal value of the remaining outstanding 2007 Junior Subordinated Convertible Debt (2007 Junior Convertible Debt) with an effective redemption date of December 15, 2017 for which substantially all holders submitted requests to convert. Prior to the call, conversion requests were received in both the second and third quarters of fiscal 2018. Total conversions for fiscal 2018 were for a principal amount of
$32.5 million
for which the Company settled the principal amount in cash and issued
0.5 million
shares of its common stock in respect of the conversion value in excess of the principal amount for the conversions occurring prior to the redemption notice and
$41.0
million in cash for the conversion value in excess of the principal amount for the conversion requests received after the notice of redemption. A loss on total conversions was recorded for
$2.2 million
.
In June 2017, the Company exchanged, in privately negotiated transactions,
$111.3 million
aggregate principal amount of its 2007 Junior Convertible Debt for (i)
$111.3 million
principal amount of 2017 Junior Convertible Debt with a market value of
$119.3 million
plus (ii) the issuance of
3.2 million
shares of the Company's common stock with a value of
$254.6 million
, of which
$56.3 million
was allocated to the fair value of the liability and
$321.1 million
was allocated to the reacquisition of the equity component for total consideration of
$374.0 million
. The transaction resulted in a loss on settlement of the 2007 Junior Convertible Debt of approximately
$13.8 million
, which represented the difference between the fair value of the liability component at time of repurchase and the sum of the carrying values of the debt component and any unamortized debt issuance costs. The debt discount on the new 2017 Junior Convertible Debt was the difference between the par value and the fair value of the debt resulting in a debt discount of
$55.1 million
which will be amortized to interest expense using the effective interest method over the term of the debt.
In February 2017, the Company issued the
2017 Senior Convertible Debt
and
2017 Junior Convertible Debt
for net proceeds of
$2.04 billion
and
$567.7 million
, respectively. In connection with the issuance of these instruments, the Company incurred issuance costs of
$33.7 million
, of which
$17.8 million
and
$3.4 million
was recorded as convertible debt issuance costs related to the 2017 Senior Convertible Debt and 2017 Junior Convertible Debt, respectively, and will be amortized using the effective interest method over the term of the debt. The balance of
$12.5 million
in fees was recorded to equity. Interest on both instruments is payable semi-annually on February 15 and August 15 of each year.
In February 2015, the Company issued the
2015 Senior Convertible Debt
for net proceeds of approximately
$1.69 billion
. In connection with the issuance, the Company incurred issuance costs of
$30.3 million
, of which
$20.4 million
was recorded as debt issuance costs and will be amortized using the effective interest method over the term of the debt. The balance of
$9.9 million
was recorded to equity.
The Company utilized the proceeds from the issuances of the
2017 Senior Convertible Debt
, 2017 Junior Convertible Debt, and
2015 Senior Convertible Debt
to reduce amounts borrowed under its Credit Facility and to settle a portion of the 2007 Junior Convertible Debt in privately negotiated transactions. In February 2017 and February 2015, the Company settled
$431.3 million
and
$575.0 million
, respectively, in aggregate principal of its 2007 Junior Convertible Debt. The February 2015 repurchase consisted solely of cash. In February 2017, the Company used cash of
$431.3 million
and an aggregate of
12.0 million
in shares of the Company's common stock valued at
$862.7 million
for total consideration of
$1.29 billion
to repurchase
$431.3 million
of the 2007 Junior Convertible Debt, of which
$188.0 million
was allocated to the liability component and
$1.11 billion
was allocated to the equity component. In addition, in February 2017, there was an inducement fee of
$5.0 million
which was recorded in the
consolidated statements of income
in
loss on settlement of debt
. The consideration transferred in February 2015 was
$1.13 billion
, of which
$238.3 million
was allocated to the liability component and
$896.3 million
was allocated to the equity component. In the case of both settlements of the 2007 Junior Convertible Debt, the consideration was allocated to the liability and equity components using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt prior to the retirement. The transactions resulted in a
loss on settlement of debt
of approximately
$43.9 million
and
$50.6 million
in fiscal 2017 and fiscal 2015, respectively, which represented, in each case, the difference between the fair value of the liability component at time of repurchase and the sum of the carrying values of the debt component and any unamortized debt issuance costs.
Senior Secured Notes
In May 2018, the Company issued
$1.00 billion
aggregate principal amount of
3.922%
Senior Secured Notes due 2021 (the “2021 Notes”) and
$1.00 billion
aggregate principal amount of
4.333%
Senior Secured Notes due 2023 (the “2023 Notes”, and together with the 2021 Notes, the "Senior Secured Notes") to qualified institutional buyers in a Rule 144A offering. In connection with the issuance of these instruments, the Company incurred issuance costs of
$24.4 million
and recorded a debt discount of
$10.5 million
for fees deducted from the proceeds, which will both be amortized using the effective interest method over the term of the debt. The 2021 Notes mature on June 1, 2021 and the 2023 Notes mature on June 1, 2023. Interest on the 2021 Notes accrues at a rate of
3.922%
per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2018. Interest on the 2023 Notes accrues at a rate of
4.333%
per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2018.
The Company may, at its option, redeem some or all of the 2021 Notes prior to June 1, 2021 at a price equal to the greater of (a)
100%
of the principal amount of the 2021 Notes redeemed or (b) the sum of the present value of all remaining scheduled payments of principal and interest (discounted in accordance with the indenture for the 2021 Notes) that would have been due on the redeemed 2021 Notes, in each case, plus accrued and unpaid interest to, but excluding, the redemption date. The
Company may, at its option, redeem some or all of the 2023 Notes, (i) if prior to May 1, 2023 (one month prior to the maturity date of the 2023 Notes), at a price equal to the greater of (a)
100%
of the principal amount of the 2023 Notes redeemed or (b) the sum of the present value of all remaining scheduled payments of principal and interest (discounted in accordance with the indenture for the 2023 Notes) that would have been due on the redeemed 2023 Notes, in each case, plus accrued and unpaid interest to, but excluding, the redemption date, and (ii) if on or after May 1, 2023 (one month prior to maturity of the 2023 Notes), at a redemption price equal to
100%
of the principal amount of the notes redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company experiences a specified change of control triggering event, the Company must offer to repurchase the Notes at a price equal to
101%
of the principal amount of the Notes repurchased, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The Notes are guaranteed by certain of the Company's subsidiaries (each such guarantee, a “Note Guarantee”) that have also guaranteed the obligations under the Company's Credit Facility and under the Term Loan Facility (the Term Loan Facility together with the Credit Facility, the “Senior Credit Facilities”) that was entered into in connection with the Microsemi acquisition.
The Notes and the Note Guarantees are secured, on a pari passu first lien basis with the Senior Credit Facilities, by substantially all of the tangible and intangible assets (other than certain excluded assets) of the Company and the guarantors that secure obligations under the Senior Credit Facilities, in each case subject to certain thresholds, exceptions and permitted liens, as set forth in the indenture for the Senior Secured Notes and the Security Agreement, dated May 29, 2018, by and among the Company, the subsidiary guarantors party thereto and the Collateral Agent (the "Security Agreement").
Credit Facility
In May 2018, the Company amended and restated its credit agreement to, among other things, increase the size of the Revolving Credit Facility thereunder to
$3.84 billion
from
$3.12 billion
at March 31, 2018. In connection with the amendment and restatement of the Credit Agreement, the Company incurred issuance costs of
$13.6 million
which will be amortized using the effective interest method over the term of the debt. In the year ended
March 31, 2019
, the Company terminated the commitments for the 2020 Revolving Loans which decreased the capacity of the Revolving Credit Facility to
$3.60 billion
.
The Credit Agreement provides for a revolving loan facility in an aggregate principal amount of approximately $
3.60 billion
, with a $
250.0 million
foreign currency sublimit, a $
50.0 million
letter of credit sublimit and a $
25.0 million
swingline loan sublimit. The Credit Agreement consists of approximately $
3.60 billion
of revolving loan commitments that terminate on May 18, 2023 (the "2023 Maturity Date"). The $
244.3 million
of revolving loan commitments (the "2020 Revolving Loans") that would terminate on February 4, 2020 were canceled in the fiscal year ended March 31, 2019. The Revolving Loans bear interest, at the Company’s option, at the base rate plus a spread of
0.00%
to
1.00%
or an adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a spread of
1.00%
to
2.00%
, in each case with such spread being determined based on the consolidated senior leverage ratio for the preceding four fiscal quarter period.
The Credit Agreement permits the Company to add one or more incremental term loan facilities (in addition to the loans under the Term Loan Facility) and/or increase the commitments under the Revolving Credit Facility from time to time, subject, in each case, to the receipt of additional commitments from existing and/or new lenders and pro forma compliance with a consolidated senior leverage ratio set forth in the Credit Agreement.
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 and the subsidiary guarantors’ obligations under the guarantees, the Company and each of the subsidiary guarantors has granted a security interest in substantially all its assets subject to certain exceptions and limitations.
In May 2018, the Company borrowed
$3.0 billion
aggregate principal amount of loans under the Term Loan Facility ("Term Loans"). In connection with such borrowings, the Company incurred issuance costs of
$34.7 million
which will be amortized using the effective interest method over the term of the debt. The Credit Agreement provides for quarterly amortization payments of the Term Loans on the last business day of each March, June, September and December, commencing with the last business day of the first full fiscal quarter to occur after the Microsemi acquisition effective date, equal to
0.25%
of the aggregate original principal amount of the Term Loans. In addition, the Credit Agreement requires mandatory prepayments of the Term Loans from the incurrence of debt not otherwise permitted to be incurred under the Credit Agreement, certain asset sales and certain excess cash flow. Mandatory prepayments with excess cash flow (as defined in the Credit Agreement) are required to be made beginning with the Company’s fiscal year ending March 31, 2020 in an amount equal to
50%
,
25%
or
0%
of the excess cash flow for such fiscal year, depending on the Company’s senior leverage ratio. The Company may prepay the Term Loans at any time without premium or penalty. Term Loans repaid or prepaid may not be reborrowed. During fiscal 2019, the Company voluntarily prepaid
$1.09 billion
of principal under the Term Loan Facility of which
$500.0 million
was from funds borrowed under its Revolving Credit Facility. The transactions resulted in a
loss on settlement of debt
of approximately
$11.5 million
consisting of unamortized financing fees.
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. Principal, together with all accrued and unpaid interest, is due and payable on the 2023 Maturity Date in the case of revolving loans under the Credit Agreement and May 29, 2025 in the case of the Term Loans. The Company 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 Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, incur subsidiary indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, repurchase stock, enter into restrictive agreements and enter into sale and leaseback transactions, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also required to maintain compliance with a senior leverage ratio, a total leverage ratio and an interest coverage ratio, all measured quarterly and calculated on a consolidated basis. At
March 31, 2019
, the Company was in compliance with these financial covenants.
The financial covenants include limits on the Company's consolidated total leverage ratio and senior leverage ratio. The maximum Total Leverage Ratio (capitalized terms not otherwise defined in this Form 10-K have the meaning of the defined terms in the applicable agreements), measured quarterly, cannot exceed (a)
6.75
to 1.00 for any such period ended on or after the Microsemi Acquisition Closing Date to (but excluding) the first anniversary of the Microsemi Acquisition Closing Date, (b)
6.25
to 1.00 for any such period ended on or after the first anniversary of the Microsemi Acquisition Closing Date to (but excluding) the second anniversary of the Microsemi Acquisition Closing Date to (but excluding) the second anniversary or the Microsemi Acquisition Closing Date and (c)
5.75
to 1.00 for any such period ended on or after the second anniversary of the Microsemi Acquisition Closing Date. The total leverage ratio is calculated as Consolidated Total Indebtedness, excluding the Junior Convertible Debt up to a
$700 million
maximum, to Consolidated EBIDTA for a period of four consecutive quarters. The Credit Agreement also requires that the Senior Leverage Ratio, measured quarterly, not exceed (a)
4.75
to 1.00 for any such period ended from (and including) the Microsemi Acquisition Closing Date to (but excluding) the first anniversary of the Microsemi Acquisition Closing Date, (b)
4.25
to 1.00 for any such period ended on or after the first anniversary of the Microsemi Acquisition Closing Date to (but excluding) the second anniversary of the Microsemi Acquisition Closing Date and (c)
3.75
to 1.00 for any such period ended on or after the second anniversary of the Microsemi Acquisition Closing Date. The senior leverage ratio is calculated as Consolidated Senior Indebtedness to Consolidated EBIDTA for four consecutive quarters. The Company is also required to comply with a Minimum Interest Coverage Ratio of at least
3.25
to 1.00 for any period ended on or after the Microsemi Acquisition Closing Date, measured quarterly.
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 Revolving Credit Facility 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 13. 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.
In connection with its acquisition of Microsemi, which closed on May 29, 2018, the Company became involved with the following legal matters:
Federal Shareholder Class Action Litigation
. Beginning on September 14, 2018, the Company and certain of its officers were named in
two
putative shareholder class action lawsuits filed in the United States District Court for the District of Arizona, captioned Jackson v. Microchip Technology Inc., et al., Case No. 2:18-cv-02914-JJT and Maknissian v. Microchip Technology Inc., et al., Case No. 2:18-cv-02924-JJT. On November 13, 2018, the Maknissian complaint was voluntarily dismissed. The Jackson complaint is allegedly brought on behalf of a putative class of purchasers of Microchip common stock between March 2, 2018 and August 9, 2018. The complaint asserts claims for alleged violations of the federal securities laws and generally alleges that the defendants issued materially false and misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects during the putative class period. The complaint seeks, among other things, compensatory damages and attorneys’ fees and costs on behalf of the putative class. On December 11, 2018, the Court issued an order appointing the lead plaintiff. An amended complaint was filed on February 22, 2019. Defendants filed a motion to dismiss the amended complaint on April 1, 2019.
Federal Derivative Litigation.
On December 17, 2018, a shareholder derivative lawsuit was filed against certain of the Company’s officers and directors in the United States District Court for the District of Arizona, captioned Kistenmacher v. Sanghi, et al., Case No. 16-cv-04720. The Company is named as a nominal defendant. The complaint generally alleges that defendants breached their fiduciary duties by, among other things, making or causing the Company to make false and misleading statements and omissions regarding the Microsemi acquisition, the Company’s business, operations, and prospects, and a purported failure to maintain internal controls. The complaint further alleges that certain defendants engaged in insider trading. The complaint asserts causes of action for alleged violations of Section 14(a) of the Securities Exchange Act, breach of fiduciary duties, and unjust enrichment and seeks unspecified monetary damages, corporate governance reforms, restitution, and attorneys’ fees and costs.
State Derivative Litigation.
On January 22, 2019, a shareholder derivative lawsuit was filed against certain of the Company’s officers and directors in the Superior Court of Arizona for Maricopa County, captioned Reid v. Sanghi, et al., Case No. CV2019-002389. The Company is named as a nominal defendant. The complaint generally alleges that defendants breached their fiduciary duties by, among other things, purportedly failing to conduct adequate due diligence regarding Microsemi prior to its acquisition, misrepresenting the Company’s business prospects and health, and engaging in improper practices, and further alleges that certain defendants engaged in insider trading. The complaint asserts causes of action for breach of fiduciary duty, waste, and unjust enrichment and seeks unspecified monetary damages, corporate governance reforms, equitable and/or injunctive relief, restitution, and attorneys’ fees and costs. This case was stayed on May 23, 2019 to allow the Federal Derivative Litigation to address certain overlapping issues.
Peterson, et al. v. Sanghi, et al
. On October 9, 2018,
four
former officers of Microsemi Corporation filed a lawsuit in the Superior Court of California in Orange County against us and
four
of our officers asserting claims for slander per se, libel per se, trade libel, and violations of California Business and Professions Code Section 17200 ("UCL"). On November 8, 2018, defendants removed the action to the United States District Court for the Central District of California, Case No. 18-cv-02000-JLS. Defendants moved to dismiss, and, following the Court's ruling, Plaintiffs filed an amended complaint that dropped the trade libel and UCL claims. The plaintiffs are seeking unspecified compensatory damages (ranging from an alleged
$10 million
to
$100 million
), as well as punitive damages, injunctive relief, and attorneys' fees and costs. Discovery has begun, and the Court has set a Final Pretrial Conference date of May 22, 2020.
As a result of its acquisition of Atmel, which closed April 4, 2016, the Company became involved with the following legal matters:
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"). 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
$208 million
. 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. On May 19, 2017, the United States Court of Appeals for the Second Circuit affirmed the June 27, 2016 order dismissing the case.
Individual Labor Actions by former LFR Employees
. In June 2010, Atmel Rousset sold its wafer manufacturing business in Rousset, France to LFoundry GmbH ("LF"), the German parent of LFoundry Rousset ("LFR"). LFR then leased the Atmel Rousset facility to conduct the manufacture of wafers. More than three years later, LFR
became insolvent and later liquidated. 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. Additionally, complaints have been filed in a regional court in France on behalf of the same group of employees against Microchip Technology Rousset, Atmel Switzerland Sarl, Atmel Corporation and Microchip Technology Incorporated alleging that the sale of the Atmel Rousset production unit to LF was fraudulent and should be voided. Furthermore, new claims have been filed in a regional court in France on behalf of a subset of this same group of employees against Microchip Technology Incorporated and Atmel Corporation. These claims are specious and the defendant entities therefore intend to defend vigorously against 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 March 31, 2019, 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
$164 million
. There are some licensing agreements in place that do not specify indemnification limits. As of March 31, 2019, the Company had not recorded any liabilities related to these indemnification obligations and the Company believes that any amounts that it may be required to pay under these agreements in the future will not have a material adverse effect on its financial position, cash flows or results of operations.
The Company has learned of an ongoing compromise of its computer networks by what is believed to be sophisticated hackers. The Company has engaged experienced legal counsel and a leading forensic investigatory firm with experience in such matters. The Company has taken steps to identify malicious activity on its network including a compromise of its network and, as of the date of this filing, the Company is implementing a containment plan. The Company is continuing to evaluate the effectiveness of the containment plan and the amount and content of the information that was compromised and to implement additional remedial actions. At this time, the Company does not believe that this IT system compromise has had a material adverse effect on its business or resulted in any material damage to it. However, the Company is still evaluating the amount and type of data that was compromised and there can be no assurance as to what the impact of this IT system compromise will be. The Company has considered whether there may be litigation, investigations or claims related to such matter but it is too early to know if or whether litigation, investigations or claims may be asserted or what the nature of such proceedings or alleged damages may be.
Note 14.
Stock Repurchase Activity
In January 2016, the Company's Board of Directors authorized an increase to the existing share repurchase program to
15.0 million
shares of common stock. There were
no
repurchases of common stock during fiscal
2019
,
2018
and
2017
. There is no expiration date associated with this repurchase program. As of
March 31, 2019
, approximately
15.6 million
shares remained as treasury shares with the balance of the shares being used to fund share issuance requirements under the Company's equity incentive plans.
Note 15.
Employee Benefit Plans
Defined Benefit Plans
The Company has defined benefit pension plans that cover certain French and German employees. Most of these defined pension plans, which were acquired in the Atmel and Microsemi acquisitions, are unfunded. 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 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 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Service costs
|
$
|
1.5
|
|
|
$
|
2.2
|
|
|
$
|
1.4
|
|
|
Interest costs
|
1.1
|
|
|
1.0
|
|
|
1.0
|
|
|
Amortization of actuarial loss
|
0.4
|
|
|
0.8
|
|
|
—
|
|
|
Settlements
|
—
|
|
|
—
|
|
|
0.5
|
|
|
Net pension period cost
|
$
|
3.0
|
|
|
$
|
4.0
|
|
|
$
|
2.9
|
|
Interest costs and amortization of actuarial losses are recorded in the
other (loss) income, net
line item in the statements of income.
The change in projected benefit obligation and the accumulated benefit obligation, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
Projected benefit obligation at the beginning of the year
|
$
|
61.0
|
|
|
$
|
50.4
|
|
|
Additions due to acquisition of Microsemi
|
9.8
|
|
|
—
|
|
|
Service cost
|
1.5
|
|
|
2.2
|
|
|
Interest cost
|
1.1
|
|
|
1.0
|
|
|
Actuarial losses
|
6.0
|
|
|
0.7
|
|
|
Benefits paid
|
(0.9
|
)
|
|
(0.8
|
)
|
|
Foreign currency exchange rate changes
|
(5.8
|
)
|
|
7.5
|
|
|
Projected benefit obligation at the end of the year
|
$
|
72.7
|
|
|
$
|
61.0
|
|
|
Accumulated benefit obligation at the end of the year
|
$
|
66.7
|
|
|
$
|
55.5
|
|
|
Weighted average assumptions
|
|
|
|
|
Discount rate
|
1.41
|
%
|
|
1.73
|
%
|
|
Rate of compensation increase
|
2.79
|
%
|
|
2.91
|
%
|
The Company's pension liability represents the present value of estimated future benefits to be paid. 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). Net actuarial losses, which are included in accumulated other comprehensive loss in the Company's consolidated balance sheets, will be recognized as a component of net periodic cost over the average remaining service period.
As the defined benefit plans are unfunded, the liability recognized on the Company's consolidated balance sheet as of
March 31, 2019
was
$72.7 million
of which
$1.3 million
is included in accrued liabilities and
$71.4 million
is included in other long-term liabilities. The liability recognized on the Company's consolidated balance sheet as of
March 31, 2018
was
$61.0 million
of which
$0.9 million
is included in accrued liabilities and
$60.1 million
is included in other long-term liabilities.
Future estimated expected benefit payments for fiscal year
2020
through 2029 are as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Year Ending March 31,
|
Expected Benefit Payments
|
|
2020
|
$
|
1.3
|
|
|
2021
|
1.5
|
|
|
2022
|
1.9
|
|
|
2023
|
1.8
|
|
|
2024
|
2.3
|
|
|
2025 through 2029
|
11.9
|
|
|
Total
|
$
|
20.7
|
|
The Company's net periodic pension cost for fiscal 2020 is expected to be approximately
$3.3 million
.
In connection with the acquisition of SMSC in August 2012, the Company assumed an unfunded Supplemental Executive Retirement Plan ("SERP"), which provides former SMSC senior management with retirement, disability and death benefits. An amendment to the SERP was executed on November 3, 2009, freezing the benefit level for existing participants as of February 28, 2010 and closing the SERP to new participants. As of
March 31, 2019
, the projected benefit obligation is $
3.7 million
. Annual benefit payments and contributions under this plan are expected to be approximately $
0.4 million
in fiscal
2020
and approximately $
4.1 million
cumulatively in fiscal 2021 through fiscal 2029.
Defined Contribution Plans
The Company maintains a contributory profit-sharing plan for its domestic employees meeting certain eligibility and service requirements. The plan qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended, and allows employees to contribute up to
60%
of their base salary, subject to maximum annual limitations prescribed by the IRS. The Company has a discretionary matching contribution program. All matches are provided on a quarterly basis and require the participant to be an active employee at the end of the applicable quarter. During fiscal
2019
,
2018
and
2017
, the Company's matching contributions to the plan totaled $
8.6 million
, $
8.8 million
and $
8.2 million
, respectively.
The Company's 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) became effective on
March 1, 2002
. Under the 2001 Purchase Plan, eligible employees of the Company may purchase shares of common stock at semi-annual intervals through periodic payroll deductions. The purchase price in general will be
85%
of the lower of the fair market value of the common stock on the first day of the participant's entry date into the offering period or of the fair market value on the semi-annual purchase date. Depending upon a participant's entry date into the 2001 Purchase Plan, purchase periods under the 2001 Purchase Plan consist of overlapping periods of either
24
,
18
,
12
or
6
months in duration. In
May 2003
and
August 2003
, the Company's Board and stockholders, respectively, each approved an annual automatic increase in the number of shares reserved under the 2001 Purchase Plan. The automatic increase took effect on
January 1, 2005
, and on each January 1 thereafter during the term of the plan, and is equal to the lesser of (i)
1,500,000
, (ii) one half of one percent (
0.5%
) of the then outstanding shares of the Company's common stock, or (iii) such lesser amount as is approved by Board of Directors. On January 1, 2019, under the automatic increase provision, an additional
1,184,815
shares of Common Stock were reserved for sale under the 2001 Purchase Plan in future offering periods. Upon the approval of the Board of Directors, there were
no
shares added under the 2001 Purchase Plan on January 1, 2018 based on the automatic increase provision. On January 1, 2017, an additional
1,077,150
shares were reserved under the 2001 Purchase Plan based on the automatic increase. Since the inception of the 2001 Purchase Plan,
14,557,319
shares of common stock have been reserved for issuance and
8,293,815
shares have been issued under this purchase plan.
During fiscal 1995, a purchase plan was adopted for employees in non-U.S. locations. Such plan provided for the purchase price per share to be
100%
of the lower of the fair market value of the common stock at the beginning or end of the semi-annual purchase plan period. Effective May 1, 2006, the Company's Board of Directors approved a purchase price per share equal to
85%
of the lower of the fair market value of the common stock at the beginning or end of the semi-annual purchase plan period. On May 1, 2006, the Company's Board of Directors approved an annual automatic increase in the number of shares reserved under the plan. The automatic increase took effect on January 1, 2007, and on each January 1 thereafter during the term of the plan, and is equal to one tenth of one percent (
0.1%
) of the then outstanding shares of the Company's common stock. On January 1, 2019, under the automatic increase provision, an additional
236,963
shares of Common Stock were reserved for sale under the International Purchase Plan in future offering periods. Upon the approval of the Board of Directors, there were
no
shares added under the plan on January 1, 2018 based on the automatic increase provision. On January 1, 2017, an additional
215,430
shares were reserved under the plan based on the automatic increase. Since the inception of this purchase plan,
2,156,176
shares of common stock have been reserved for issuance and
1,524,674
shares have been issued under this purchase plan.
Effective
January 1, 1997
, the Company adopted a non-qualified deferred compensation arrangement. This plan is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of highly compensated employees as defined in ERISA Sections 201, 301 and 401. There are no Company matching contributions made under this plan.
The Company has management incentive compensation plans which provide for bonus payments, based on a percentage of base salary, from an incentive pool created from operating profits of the Company, at the discretion of the Board of Directors. During fiscal
2019
,
2018
and
2017
, $
18.7 million
, $
48.1 million
and $
41.5 million
were charged against operations for these plans, respectively.
The Company also has a plan that, at the discretion of the Board of Directors, provides a cash bonus to all employees of the Company based on the operating profits of the Company. During fiscal
2019
,
2018
and
2017
, $
16.4 million
, $
36.3 million
and $
28.2 million
, respectively, were charged against operations for this plan.
Note 16. Share-Based Compensation
Share-Based Compensation Expense
The following table presents the details of the Company's share-based compensation expense (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Cost of sales
(1)
|
$
|
14.9
|
|
|
$
|
13.8
|
|
|
$
|
18.7
|
|
|
Research and development
|
72.0
|
|
|
42.5
|
|
|
46.8
|
|
|
Selling, general and administrative
|
62.3
|
|
|
36.9
|
|
|
62.6
|
|
|
Special (income) charges and other, net
|
17.2
|
|
|
—
|
|
|
—
|
|
|
Pre-tax effect of share-based compensation
|
166.4
|
|
|
93.2
|
|
|
128.1
|
|
|
Income tax benefit
|
35.5
|
|
|
28.3
|
|
|
44.2
|
|
|
Net income effect of share-based compensation
|
$
|
130.9
|
|
|
$
|
64.9
|
|
|
$
|
83.9
|
|
(1)
During the year ended
March 31, 2019
, $
17.2 million
of share-based compensation expense was capitalized to inventory, and $
14.9 million
of previously capitalized share-based compensation expense in inventory was sold. During the year ended
March 31, 2018
, $
11.9 million
of share-based compensation expense was capitalized to inventory and $
13.8 million
of previously capitalized share-based compensation expense in inventory that was sold. During the year ended
March 31, 2017
, $
11.3 million
of share-based compensation expense was capitalized to inventory. The amount of share-based compensation included in cost of sales during fiscal 2017 included $
14.5 million
of previously capitalized share-based compensation expense in inventory was sold and
$4.2 million
of share-based compensation expense related to the Company's acquisition of Atmel that was not previously capitalized into inventory.
The amount of unearned share-based compensation currently estimated to be expensed in the remainder of fiscal
2020
through fiscal
2024
related to unvested share-based payment awards at
March 31, 2019
is $
253.4 million
. The weighted average period over which the unearned share-based compensation is expected to be recognized is approximately
1.88 years
.
Microsemi Acquisition-related Equity Awards
In connection with its acquisition of Microsemi on May 29, 2018, the Company assumed certain restricted stock units (RSUs), stock appreciation rights (SARs), and stock options granted by Microsemi. The assumed awards were measured at the acquisition date based on the estimated fair value, which was a total of
$175.4 million
. A portion of that fair value,
$53.9 million
, which represented the pre-acquisition vested service provided by employees to Microsemi, was included in the total consideration transferred as part of the acquisition. As of the acquisition date, the remaining portion of the fair value of those awards was
$121.5 million
, representing post-acquisition share-based compensation expense that will be recognized as these employees provide service over the remaining vesting periods. During the year ended
March 31, 2019
, the Company recognized
$65.2 million
of share-based compensation expense in connection with the acquisition of Microsemi, of which
$3.5
million was capitalized into inventory and
$17.2 million
was due to the accelerated vesting of outstanding equity awards upon termination of certain Microsemi employees.
Atmel Acquisition-related Equity Awards
In connection with its acquisition of Atmel on April 4, 2016, the Company assumed certain RSUs granted by Atmel. The assumed awards were measured at the acquisition date based on the estimated fair value, which was a total of
$95.9 million
. A portion of that fair value,
$7.5 million
, which represented the pre-acquisition vested service provided by employees to Atmel, was included in the total consideration transferred as part of the acquisition. As of the acquisition date, the remaining portion of the fair value of those awards was
$88.4 million
, representing post-acquisition share-based compensation expense that will be recognized as these employees provide service over the remaining vesting periods.
Combined Incentive Plan Information
RSU share activity under the 2004 Plan is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Nonvested shares at March 31, 2016
|
6,307,742
|
|
|
$
|
36.76
|
|
|
Granted
|
1,635,655
|
|
|
51.46
|
|
|
Assumed upon acquisition
|
2,059,524
|
|
|
46.57
|
|
|
Forfeited
|
(722,212
|
)
|
|
43.58
|
|
|
Vested
|
(2,861,253
|
)
|
|
38.60
|
|
|
Nonvested shares at March 31, 2017
|
6,419,456
|
|
|
42.06
|
|
|
Granted
|
1,267,536
|
|
|
77.26
|
|
|
Forfeited
|
(279,051
|
)
|
|
49.65
|
|
|
Vested
|
(1,735,501
|
)
|
|
38.00
|
|
|
Nonvested shares at March 31, 2018
|
5,672,440
|
|
|
50.79
|
|
|
Granted
|
1,951,408
|
|
|
77.83
|
|
|
Assumed upon acquisition
|
1,805,680
|
|
|
91.70
|
|
|
Forfeited
|
(408,242
|
)
|
|
73.36
|
|
|
Vested
|
(2,729,324
|
)
|
|
61.51
|
|
|
Nonvested shares at March 31, 2019
|
6,291,962
|
|
|
$
|
64.81
|
|
The total intrinsic value of RSUs which vested during the years ended March 31,
2019
,
2018
and
2017
was $
229.3 million
, $
146.0 million
and $
166.1 million
, respectively. The aggregate intrinsic value of RSUs outstanding at
March 31, 2019
was $
522.0 million
, calculated based on the closing price of the Company's common stock of
$82.96
per share on March 29, 2019. At
March 31, 2019
, the weighted average remaining expense recognition period was
1.91
years.
Stock option and stock appreciation right (SAR) activity under the Company's stock incentive plans in the three years ended
March 31, 2019
is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average Exercise Price per Share
|
|
Outstanding at March 31, 2016
|
913,508
|
|
|
$
|
33.00
|
|
|
Exercised
|
(437,906
|
)
|
|
34.34
|
|
|
Forfeited or expired
|
(42,485
|
)
|
|
34.26
|
|
|
Outstanding at March 31, 2017
|
433,117
|
|
|
31.51
|
|
|
Exercised
|
(131,666
|
)
|
|
31.75
|
|
|
Forfeited or expired
|
(17,111
|
)
|
|
34.73
|
|
|
Outstanding at March 31, 2018
|
284,340
|
|
|
31.21
|
|
|
Assumed upon acquisition
|
141,751
|
|
|
25.86
|
|
|
Exercised
|
(140,118
|
)
|
|
27.67
|
|
|
Forfeited or expired
|
(4,091
|
)
|
|
39.62
|
|
|
Outstanding at March 31, 2019
|
281,882
|
|
|
$
|
30.16
|
|
The total intrinsic value of options and SARs exercised during the years ended March 31,
2019
,
2018
and
2017
was $
8.3 million
, $
7.4 million
and $
9.6 million
, respectively. This intrinsic value represents the difference between the fair market value of the Company's common stock on the date of exercise and the exercise price of each equity award.
The aggregate intrinsic value of options and SARs outstanding at
March 31, 2019
was $
14.9 million
. The aggregate intrinsic value of options and SARS exercisable at
March 31, 2019
was $
14.8 million
. The aggregate intrinsic values were calculated based on the closing price of the Company's common stock of
$82.96
per share on March 29, 2019.
As of
March 31, 2019
and
March 31, 2018
, the number of option and SAR shares exercisable was
278,591
and
224,022
, respectively, and the weighted average exercise price per share was $
30.03
and $
29.96
, respectively.
There were
no
stock options granted in the years ended March 31,
2019
,
2018
and
2017
.
Note 17.
Commitments
The Company leases office space and transportation and other equipment under operating leases which expire at various dates through September 2032. The future minimum lease commitments under these operating leases at
March 31, 2019
were as follows (in millions):
|
|
|
|
|
|
|
|
|
Year Ending March 31,
|
|
Amount
|
|
2020
|
|
$
|
49.0
|
|
|
2021
|
|
38.2
|
|
|
2022
|
|
30.2
|
|
|
2023
|
|
18.0
|
|
|
2024
|
|
9.1
|
|
|
Thereafter
|
|
22.6
|
|
|
Total minimum payments
|
|
$
|
167.1
|
|
The terms of the leases do not contain significant restriction provisions and usually contain standard rent escalation clauses as well as options for renewal. Rental expense under operating leases totaled $
50.9 million
, $
30.0 million
and $
35.4 million
for fiscal
2019
,
2018
and
2017
, respectively.
Commitments for construction or purchase of property, plant and equipment totaled
$18.8 million
as of
March 31, 2019
, all of which will be due within the next year. Other purchase obligations and commitments totaled approximately
$194.9 million
, which includes outstanding purchase commitments with the Company's wafer foundries and other suppliers, for delivery in fiscal
2020
.
Note 18. Geographic and 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 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Net Sales
|
|
Gross Profit
|
|
Net Sales
|
|
Gross Profit
|
|
Net Sales
|
|
Gross Profit
|
|
Semiconductor products
|
$
|
5,217.1
|
|
|
$
|
2,798.9
|
|
|
$
|
3,876.0
|
|
|
$
|
2,315.9
|
|
|
$
|
3,316.6
|
|
|
$
|
1,666.0
|
|
|
Technology licensing
|
132.4
|
|
|
132.4
|
|
|
104.8
|
|
|
104.8
|
|
|
91.2
|
|
|
91.2
|
|
|
Total
|
$
|
5,349.5
|
|
|
$
|
2,931.3
|
|
|
$
|
3,980.8
|
|
|
$
|
2,420.7
|
|
|
$
|
3,407.8
|
|
|
$
|
1,757.2
|
|
The Company sells its products to distributors and original equipment manufacturers (OEMs) in a broad range of market segments, performs on-going credit evaluations of its customers and, as deemed necessary, may require collateral, primarily letters of credit. The Company's operations outside the U.S. consist of product assembly and final test facilities in Thailand, and sales and support centers and design centers in certain foreign countries. Domestic operations are responsible for the design, development and wafer fabrication of products, as well as the coordination of production planning and shipping to meet worldwide customer commitments. The Company's Thailand assembly and test facility is reimbursed in relation to value added with respect to assembly and test operations and other functions performed, and certain foreign sales offices receive compensation for sales within their territory. Accordingly, for financial statement purposes, it is not meaningful to segregate sales or operating profits for the assembly and test and foreign sales office operations. Identifiable long-lived assets (consisting of property, plant and equipment net of accumulated amortization) by geographic area are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
|
United States
|
$
|
521.1
|
|
|
$
|
393.3
|
|
|
Thailand
|
209.3
|
|
|
215.5
|
|
|
Various other countries
|
266.3
|
|
|
159.1
|
|
|
Total long-lived assets
|
$
|
996.7
|
|
|
$
|
767.9
|
|
Sales to unaffiliated customers located outside the U.S., primarily in Asia and Europe, aggregated approximately
80%
of consolidated net sales for fiscal
2019
and approximately
85%
and
84%
of net sales during fiscal
2018
and fiscal
2017
, respectively. Sales to customers in Europe represented approximately
23%
of consolidated net sales for fiscal
2019
and approximately
24%
of consolidated net sales for each of fiscal
2018
and fiscal
2017
. Sales to customers in Asia represented approximately
52%
of consolidated net sales for fiscal
2019
and approximately
58%
of consolidated net sales for each of fiscal
2018
and
2017
. Within Asia, sales into China represented approximately
22%
,
30%
and
32%
of consolidated net sales for fiscal
2019
,
2018
and
2017
, respectively. Sales into Taiwan represented approximately
13%
,
11%
and
9%
of consolidated net sales for fiscal
2019
,
2018
and
2017
, respectively. Sales into any other individual foreign country did not exceed 10% of the Company's net sales for any of the three years presented.
With the exception of Arrow Electronics, the Company's largest distributor, which made up 10% of net sales, no other distributor or end customer accounted for more than 10% of net sales in fiscal
2019
. In fiscal
2018
and fiscal
2017
, no distributor or end customer accounted for more than 10% of net sales.
Note 19. Derivative Instruments
Freestanding Derivative Forward Contracts
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
$1.7 million
,
$9.3 million
and
$1.0 million
in fiscal
2019
,
2018
and
2017
, respectively. As of
March 31, 2019
and
2018
, the Company had
no
foreign currency forward contracts outstanding. The Company recognized an immaterial amount of net losses and gains on foreign currency forward contracts in the year ended
March 31, 2019
, compared to net gains of
$4.2 million
and net losses of
$2.3 million
in the years ended March 31,
2018
and
2017
, respectively. 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 (loss) income, net
. The Company does not apply hedge accounting to its foreign currency derivative instruments.
Commodity Price Risk
The Company is exposed to fluctuations in prices for energy that it consumes, particularly electricity and natural gas. The Company also enters into variable-priced contracts for some purchases of electricity and natural gas, on an index basis. The Company seeks, or may seek, to partially mitigate these exposures through fixed-price contracts. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales" exception under authoritative guidance and require no mark-to-market adjustment.
Note 20. Net Income Per Common Share From Continuing Operations
The following table sets forth the computation of basic and diluted net income per common share from continuing operations (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net income from continuing operations
|
$
|
355.9
|
|
|
$
|
255.4
|
|
|
$
|
170.6
|
|
|
Basic weighted average common shares outstanding
|
236.2
|
|
|
232.9
|
|
|
217.2
|
|
|
Dilutive effect of stock options and RSUs
|
3.8
|
|
|
4.4
|
|
|
4.4
|
|
|
Dilutive effect of 2007 Junior Convertible Debt
|
—
|
|
|
1.3
|
|
|
12.7
|
|
|
Dilutive effect of 2015 Senior Convertible Debt
|
9.9
|
|
|
10.3
|
|
|
0.5
|
|
|
Dilutive effect of 2017 Senior Convertible Debt
|
—
|
|
|
—
|
|
|
—
|
|
|
Dilutive effect of 2017 Junior Convertible Debt
|
—
|
|
|
—
|
|
|
—
|
|
|
Diluted weighted average common shares outstanding
|
249.9
|
|
|
248.9
|
|
|
234.8
|
|
|
Basic net income per common share from continuing operations
|
$
|
1.51
|
|
|
$
|
1.10
|
|
|
$
|
0.79
|
|
|
Diluted net income per common share from continuing operations
|
$
|
1.42
|
|
|
$
|
1.03
|
|
|
$
|
0.73
|
|
The Company computed basic net income per common share from continuing operations based on the weighted average number of common shares outstanding during the period. The Company computed diluted net income per common share from continuing operations based on the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options and the assumed vesting of outstanding RSUs. Weighted average common shares exclude the effect of option shares which are not dilutive. There were no anti-dilutive option shares for the years ended
March 31, 2019
,
2018
, and
2017
.
Diluted weighted average common shares outstanding for fiscal 2018 and 2017 includes
1.3 million
and
12.7 million
shares, respectively, issuable upon the exchange of the Company's 2007 Junior Convertible Debt. The Company's 2007 Junior Convertible Debt was fully settled as of December 31, 2017 (see Note 12 for details on the settlement of debt), with the Company issuing an aggregate of
3.7 million
shares of its common stock in the settlement of
$143.8 million
principal amount
in fiscal 2018 and an aggregate of
12.0 million
shares of its common stock in the settlement of
$431.3 million
principal amount in fiscal 2017. The shares that were issued were included in the weighted average dilutive common shares outstanding through the date of the issuance and were reflected in the weighted average common shares outstanding thereafter. Diluted weighted average common shares outstanding for fiscal
2019
,
2018
, and
2017
includes
9.9 million
shares,
10.3 million
shares, and
0.5 million
shares, respectively, issuable upon the exchange of the Company's 2015 Senior Convertible Debt. There were no shares issuable upon the exchange of the Company's 2017 Junior Convertible Debt or the Company's 2017 Senior Convertible Debt. The convertible debt has no impact on diluted net income per common share unless the average price of the Company's common stock exceeds the conversion price because the principal amount of the debentures will be settled in cash upon conversion. Prior to conversion, the Company will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued when the Company's common stock price exceeds the conversion price using the treasury stock method. The following is the weighted average conversion price per share used in calculating the dilutive effect (See Note 12 for details on the convertible debt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
2007 Junior Convertible Debt
(1)
|
N/A
|
|
|
$
|
23.59
|
|
|
$
|
24.01
|
|
|
2015 Senior Convertible Debt
|
$
|
62.86
|
|
|
$
|
63.94
|
|
|
$
|
65.21
|
|
|
2017 Senior Convertible Debt
|
$
|
98.03
|
|
|
$
|
99.71
|
|
|
$
|
100.58
|
|
|
2017 Junior Convertible Debt
|
$
|
96.31
|
|
|
$
|
97.96
|
|
|
$
|
98.81
|
|
(1)
No longer outstanding as of December 31, 2017.
Note 21. Quarterly Results (Unaudited)
The following table presents the Company's selected unaudited quarterly operating results for the eight quarters ended
March 31, 2019
. The Company believes that all adjustments of a normal recurring nature have been made to present fairly the related quarterly results (in millions, except per share amounts). Amounts may not add to the total due to rounding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
Net sales
|
|
$
|
1,212.5
|
|
|
$
|
1,432.5
|
|
|
$
|
1,374.7
|
|
|
$
|
1,329.8
|
|
|
$
|
5,349.5
|
|
|
Gross profit
|
|
$
|
642.0
|
|
|
$
|
689.3
|
|
|
$
|
779.6
|
|
|
$
|
820.5
|
|
|
$
|
2,931.3
|
|
|
Operating income
|
|
$
|
132.3
|
|
|
$
|
102.7
|
|
|
$
|
194.7
|
|
|
$
|
284.6
|
|
|
$
|
714.3
|
|
|
Net income from continuing operations
|
|
$
|
35.7
|
|
|
$
|
96.3
|
|
|
$
|
49.2
|
|
|
$
|
174.7
|
|
|
$
|
355.9
|
|
|
Diluted net income per common share
|
|
$
|
0.14
|
|
|
$
|
0.38
|
|
|
$
|
0.20
|
|
|
$
|
0.70
|
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
Net sales
|
|
$
|
972.1
|
|
|
$
|
1,012.1
|
|
|
$
|
994.2
|
|
|
$
|
1,002.3
|
|
|
$
|
3,980.8
|
|
|
Gross profit
|
|
$
|
584.4
|
|
|
$
|
614.1
|
|
|
$
|
607.1
|
|
|
$
|
615.1
|
|
|
$
|
2,420.7
|
|
|
Operating income
|
|
$
|
221.6
|
|
|
$
|
225.4
|
|
|
$
|
245.2
|
|
|
$
|
244.1
|
|
|
$
|
936.3
|
|
|
Net income from continuing operations
|
|
$
|
170.6
|
|
|
$
|
189.2
|
|
|
$
|
(251.1
|
)
|
|
$
|
146.7
|
|
|
$
|
255.4
|
|
|
Diluted net income per common share
|
|
$
|
0.70
|
|
|
$
|
0.77
|
|
|
$
|
(1.07
|
)
|
|
$
|
0.58
|
|
|
$
|
1.03
|
|
Refer to Note 11, Income Taxes, for an explanation of the one-time transition tax recognized in the third quarter of fiscal 2018. Refer to Note 4,
Special Charges and Other, Net
, for an explanation of the special charges included in
operating income
in fiscal
2019
and fiscal
2018
. Refer to Note 12, Debt and Credit Facility, for an explanation of the
loss on settlement of debt
included in
other (loss) income, net
of
$4.1 million
during the second quarter,
$0.2 million
during the third quarter, and
$8.3 million
during the fourth quarter of fiscal
2019
and
$13.8 million
and
$2.1 million
for the first quarter and third quarter of fiscal
2018
, respectively. Refer to Note 5, Investments, for an explanation of the impairment recognized on available-for-sale securities in the fourth quarter of fiscal 2018.
Note 22.
Supplemental Financial Information
Cash paid for income taxes amounted to
$77.6 million
,
$25.9 million
and
$48.4 million
during fiscal
2019
,
2018
and
2017
, respectively. Cash paid for interest on borrowings amounted to
$347.9 million
,
$85.3 million
and
$82.5 million
during fiscal
2019
,
2018
and
2017
, respectively.
A summary of additions and deductions related to the valuation allowance for deferred tax asset accounts for the years ended March 31,
2019
,
2018
and
2017
follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
of Year
|
|
Additions Charged to Costs and Expenses
|
|
Additions Charged to Other Accounts
|
|
Deductions
|
|
Balance at End of Year
|
|
Valuation allowance for deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
$
|
204.5
|
|
|
$
|
16.2
|
|
|
$
|
175.8
|
|
|
$
|
(64.4
|
)
|
|
$
|
332.1
|
|
|
Fiscal 2018
|
$
|
210.1
|
|
|
$
|
36.2
|
|
|
$
|
—
|
|
|
$
|
(41.8
|
)
|
|
$
|
204.5
|
|
|
Fiscal 2017
|
$
|
161.8
|
|
|
$
|
15.2
|
|
|
$
|
37.6
|
|
|
$
|
(4.5
|
)
|
|
$
|
210.1
|
|
A summary of additions and deductions related to the allowance for doubtful accounts for the years ended
March 31, 2019
,
2018
and
2017
follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
of Year
|
|
Additions Charged to Costs and
Expenses
|
|
Deductions
(1)
|
|
Balance at End of Year
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
$
|
2.2
|
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
2.0
|
|
|
Fiscal 2018
|
$
|
2.1
|
|
|
$
|
0.2
|
|
|
$
|
(0.1
|
)
|
|
$
|
2.2
|
|
|
Fiscal 2017
|
$
|
2.5
|
|
|
$
|
0.2
|
|
|
$
|
(0.6
|
)
|
|
$
|
2.1
|
|
(1)
Deductions represent uncollectible accounts written off, net of recoveries.
Accumulated Other Comprehensive Income
The following tables present the changes in the components of accumulated other comprehensive income (AOCI) for the years ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Holding Gains (Losses) Available-for-sale Securities
|
|
Minimum Pension Liability
|
|
Foreign Currency
|
|
Total
|
|
Balance at March 31, 2018
|
$
|
1.9
|
|
|
$
|
(10.1
|
)
|
|
$
|
(9.4
|
)
|
|
$
|
(17.6
|
)
|
|
Impact of change in accounting principle
|
(1.7
|
)
|
|
—
|
|
|
—
|
|
|
(1.7
|
)
|
|
Opening Balance as of April 1, 2018
|
0.2
|
|
|
(10.1
|
)
|
|
(9.4
|
)
|
|
(19.3
|
)
|
|
Other comprehensive loss before reclassifications
|
(5.6
|
)
|
|
2.9
|
|
|
(5.3
|
)
|
|
(8.0
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
5.6
|
|
|
1.0
|
|
|
—
|
|
|
6.6
|
|
|
Net other comprehensive income (loss)
|
—
|
|
|
3.9
|
|
|
(5.3
|
)
|
|
(1.4
|
)
|
|
Balance at March 31, 2019
|
$
|
0.2
|
|
|
$
|
(6.2
|
)
|
|
$
|
(14.7
|
)
|
|
$
|
(20.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Holding Gains (Losses) Available-for-sale Securities
|
|
Minimum Pension Liability
|
|
Foreign Currency
|
|
Total
|
|
Balance at March 31, 2017
|
$
|
0.3
|
|
|
$
|
(5.3
|
)
|
|
$
|
(9.4
|
)
|
|
$
|
(14.4
|
)
|
|
Other comprehensive loss before reclassifications
|
(13.6
|
)
|
|
(5.6
|
)
|
|
—
|
|
|
(19.2
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
15.2
|
|
|
0.8
|
|
|
—
|
|
|
16.0
|
|
|
Net other comprehensive loss
|
1.6
|
|
|
(4.8
|
)
|
|
—
|
|
|
(3.2
|
)
|
|
Balance at March 31, 2018
|
$
|
1.9
|
|
|
$
|
(10.1
|
)
|
|
$
|
(9.4
|
)
|
|
$
|
(17.6
|
)
|
The table below details where reclassifications of realized transactions out of AOCI are recorded on the consolidated statements of income (amounts in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31,
|
|
|
|
Description of AOCI Component
|
2019
|
|
2018
|
|
2017
|
|
Related Statement of Income Line
|
|
Unrealized losses on available-for-sale securities
|
$
|
(5.6
|
)
|
|
$
|
(15.2
|
)
|
|
$
|
(1.5
|
)
|
|
Other income, net
|
|
Amortization of actuarial loss
|
(1.0
|
)
|
|
(0.8
|
)
|
|
—
|
|
|
Other income, net
|
|
Reclassification of realized transactions, net of taxes
|
$
|
(6.6
|
)
|
|
$
|
(16.0
|
)
|
|
$
|
(1.5
|
)
|
|
Net Income
|
Note 23. Dividends
On October 28, 2002, the Company announced that its Board of Directors had approved and instituted a quarterly cash dividend on its common stock. The Company has continued to pay quarterly dividends and has increased the amount of such dividends on a regular basis. Cash dividends paid per share were $
1.457
, $
1.449
and $
1.441
during fiscal
2019
,
2018
and
2017
, respectively. Total dividend payments amounted to
$344.4 million
, $
337.5 million
and $
315.4 million
during fiscal
2019
,
2018
and
2017
, respectively.