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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-21184
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0629024
(State of Incorporation) (I.R.S. Employer Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224
(Address of Principal Executive Offices, Including Zip Code)
(480) 792-7200
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
PREFERRED SHARE PURCHASE RIGHTS
The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. [X]
The approximate aggregate market value of the voting stock of the
registrant beneficially owned by stockholders, other than directors, officers
and affiliates of the registrant, at April 26, 2002 was $5,498,022,097.
Number of shares of Common Stock, $.001 par value, outstanding as of April
26, 2002: 201,113,363.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K
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Proxy Statement for the 2002 Annual III
Meeting of Stockholders
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PART I
ITEM 1. BUSINESS
Microchip Technology Incorporated was incorporated in Delaware in 1989. In
this Form 10-K, "we," "us," and "our" each refers to Microchip Technology
Incorporated and its subsidiaries. In January 2001, we merged with TelCom
Semiconductor, Inc., a company with a diversified portfolio of high performance
analog and mixed-signal integrated circuits. Our executive offices are located
at 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone
number is (480) 792-7200. Our website address is microchip.com. The information
on our website is NOT incorporated into this Form 10-K.
We develop and manufacture specialized semiconductor products used by our
customers for a wide variety of embedded control applications. Our product
portfolio comprises field-programmable RISC-based microcontrollers that serve 8-
and 16-bit embedded control applications, and a broad spectrum of
high-performance linear and mixed-signal, power management and thermal
management devices. We also offer complementary microperipheral products,
including interface devices, serial EEPROMS, and our patented KEELOQ(R) security
devices. We market our products to the automotive, communications, computing,
consumer and industrial control markets. Our quality systems are ISO 9001 (1994
version) and QS9000 (1998 version) certified.
THIS FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, INCLUDING STATEMENTS REGARDING OUR STRATEGY, FINANCIAL
PERFORMANCE AND REVENUE SOURCES. WE USE WORDS SUCH AS "ANTICIPATE," "BELIEVE,"
"PLAN," "EXPECT," "FUTURE," "INTEND" AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS INCLUDING THOSE SET FORTH UNDER "ITEM 1 - BUSINESS - ADDITIONAL FACTORS
THAT MAY AFFECT RESULTS OF OPERATIONS," BEGINNING BELOW AT PAGE 10, "ITEM 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," BEGINNING AT PAGE 20, AND ELSEWHERE IN THIS FORM 10-K. ALTHOUGH WE
BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE
REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR ACHIEVEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS. WE DISCLAIM ANY OBLIGATION TO UPDATE INFORMATION CONTAINED IN ANY
FORWARD-LOOKING STATEMENT.
RECENT DEVELOPMENT
On May 22, 2002, we signed a definitive agreement to acquire PowerSmart,
Inc., a privately held fabless semiconductor company that develops and sells
high-accuracy field-programmable integrated circuits and battery sensors based
on such integrated circuits. We will pay approximately $54.0 million in cash for
PowerSmart and will assume a balance sheet with approximately $4.0 million in
cash and other net assets, and assume certain employee stock options. The
transaction will be accounted for as a purchase. The transaction is expected to
close by June 7, 2002, following approval by PowerSmart's stockholders.
INDUSTRY BACKGROUND
Competitive pressures require manufacturers to expand product functionality
and provide differentiation while maintaining or reducing cost. To address these
requirements, manufacturers use integrated circuit-based embedded control
systems that provide an integrated solution for application-specific control
requirements. Embedded control systems enable our customers to:
* differentiate their products
* replace less efficient electromechanical control devices
* add product functionality, and
* significantly reduce product cost.
In addition, embedded control systems facilitate the emergence of complete
new classes of products. Embedded control solutions have been incorporated into
thousands of products and subassemblies in a wide variety of markets worldwide,
including:
* automotive air bag systems * cordless and cellular telephone accessories
* remote control devices * motor controls
* handheld tools * security systems
* appliances * educational and entertainment devices, and
* portable computers * personal digital assistant (PDA) accessories.
Embedded control systems typically incorporate a microcontroller as the
principal active, and sometimes sole, component. A microcontroller is a
self-contained computer-on-a-chip consisting of a central processing unit,
non-volatile program memory, random access memory for data storage and various
input/output capabilities. In addition to the microcontroller, a complete
embedded control system incorporates application-specific software and may
include specialized peripheral device controllers and internal or external
non-volatile memory components, such as EEPROMs, to store additional program
software.
The increasing demand for embedded control has made the market for
microcontrollers one of the largest segments of the semiconductor market.
Microcontrollers are currently available in 4-bit through 32-bit architectures.
Although 4-bit microcontrollers are relatively inexpensive, typically costing
under $1.00 each, they generally lack the minimum performance and features
required by today's design engineers for product differentiation and are
typically used only to produce basic functionality in products. While 16- and
32-bit architectures provide very high performance, they are prohibitively
expensive for most high-volume embedded control applications, typically costing
$6.00 to $10.00 each. As a result, manufacturers of competitive, high-volume
products have increasingly found 8-bit microcontrollers, that typically cost
about $1.00 to $6.00 each, to be the most cost-effective embedded control
solution. For example, a typical new automobile may include one 32-bit
microcontroller for engine control, three 16-bit microcontrollers for
transmission control, audio systems and anti-lock braking, and up to 50 8-bit
microcontrollers to provide other embedded control functions, such as door
locking, automatic windows, sun roof, adjustable seats, electric mirrors, air
bags, fuel pump, speedometer, and the security and climate control systems.
Most microcontrollers available today are ROM-based and must be programmed
by the semiconductor supplier during manufacturing, resulting in 5- to 15-week
lead times, based on current market conditions, for delivery of such
microcontrollers. In addition to delayed product introduction, these long lead
times can result in potential inventory obsolescence and temporary factory
shutdowns when changes to the firmware are required. To address time-to-market
constraints, some suppliers have made EPROM, EEPROM, or FLASH Memory-based
programmable microcontrollers available for prototyping and preproduction runs.
However, these microcontrollers have been relatively expensive, and
manufacturers have still been required to send program code to the semiconductor
factory for ROM programming as product changes are made. As a result, the long
lead times for production volume microcontrollers have not been significantly
reduced by traditional approaches.
OUR PRODUCTS
Our strategic focus is on embedded control products, including:
* microcontrollers
* high-performance linear and mixed-signal devices
* power management and thermal management devices, and
* complementary microperipheral products including interface devices,
Serial EEPROMs, low power radio frequency, or RF, devices, and our
patented KEELOQ(R) security devices.
We provide highly cost-effective embedded control products that also offer
the advantages of small size, low voltage/power operation and ease of
development, enabling timely and cost-effective product integration by our
customers.
2
MICROCONTROLLERS
We offer a broad family of microcontroller products featuring a unique,
proprietary architecture marketed under the PIC(R) brand name. We believe that
our PIC(R) product family is a price/performance leader in the worldwide
microcontroller market. We have shipped approximately 2.0 billion PIC(R)
microcontrollers to customers worldwide since their introduction in 1990. Our
PIC(R) products are designed for applications requiring field-programmability,
high performance, low power and cost effectiveness. They feature a variety of
memory technology configurations, low voltage and power, small footprint and
ease of use. Our performance results from an exclusive product architecture
which features dual data and instruction pathways, referred to as a Harvard
dual-bus architecture; a reduced instruction set, referred to as RISC; and
variable length instructions; all of which provide significant speed advantages
over the alternative single-bus, CISC architectures. Prices for our
microcontroller products currently range from approximately $0.46 to $10.00 per
unit, in volume quantities.
Our original market focus was in the low-cost segment of the 8-bit
microcontroller marketplace. With our baseline products, we built our current
market position as the leading worldwide supplier of field programmable
microcontrollers. Over the past eight years, we have introduced more than 152
new microcontrollers targeted at the baseline, mid-range, high-end and enhanced
architecture segments of the traditional 8-bit microcontroller marketplace.
Additionally, with our scalable product architecture, we have successfully
targeted both the entry level of the 16-bit microcontroller market as well as
the higher end of the 4-bit microcontroller marketplace, significantly enlarging
our addressable market.
We have used our manufacturing experience and design and process technology
to bring additional enhancements and manufacturing efficiencies to the
development and production of our PIC(R) family of microcontroller products. Our
extensive experience base has enabled us to develop our advanced, low cost user
programmability feature by incorporating non-volatile memory, such as Flash,
EEPROM and EPROM Memory, into the microcontroller in addition to masked ROM
program memory being included into the microcontroller.
DEVELOPMENT SYSTEMS
We offer a comprehensive set of low cost and easy-to-learn application
development tools. These tools enable system designers to quickly and easily
program a PIC(R) microcontroller for specific applications and are a key factor
for obtaining design wins.
Our family of development tools operates in the standard Windows(R)
environment on standard PC hardware. Entry-level systems, which include an
assembler and programmer or in-circuit debugging hardware, are priced at less
than $200. A fully configured system, which also provides in-circuit emulation
hardware, is priced at approximately $2,000. Customers moving from entry-level
designs to those requiring real-time emulation are able to preserve their
investment in learning and tools as they migrate to future PIC(R) devices since
all systems share the same integrated development environment.
Many independent companies also develop and market application development
tools and systems that support our standard microcontroller product
architecture. Currently, there are more than 120 third-party tool suppliers
worldwide whose products support our proprietary microcontroller architecture.
We believe that familiarity with and adoption of our, and third-party,
development systems by an increasing number of product designers will be an
important factor in the future selection of our embedded control products. These
development tools allow design engineers to develop thousands of
application-specific products from our standard microcontrollers. To date, we
have shipped more than 220,000 development systems.
ASSPS
Our application-specific standard products, referred to as ASSPs, are
specialized products designed to perform specific end-user applications as
opposed to our other products that are more general purpose in nature. Our ASSP
device families currently include the KEELOQ(R) family of secure data
transmission products, low power RF products, as well as other specialized
integrated circuit devices.
3
KEELOQ(R) security products are designed for low cost, secure, uni- and
bi-directional communications and verification purposes. Applications include:
* automotive remote keyless entry systems * residential security
* automotive immobilizer systems * automatic garage and gate
* product authentication openers, and
* residential/hotel door access.
Our rfPIC(TM) products combine either a PIC(R) microcontroller or a
KEELOQ(R) security device, referred to as an HCS device, with low power RF
technology targeting wireless sensor and control applications. The rfPIC(TM) or
rfHCS products are designed for battery powered devices requiring a small
footprint, low external component count and ease of use. Applications include:
* home appliance control
* command and control, such as remote thermostat and water irrigation
systems control
* wireless sensors, such as smoke detectors and water level sensors, and
* home security applications, such as garage door openers and remote
infrared detectors.
MIXED-SIGNAL ANALOG AND INTERFACE PRODUCTS
With the integration of TelCom complete, our mixed-signal analog and
interface product offering now consists of several families with over 300 power
management, linear, mixed-signal, thermal management and interface products. By
the end of fiscal 2002, our mixed-signal analog and interface products were
being shipped to more than 6,000 end customers.
We continue marketing and selling our analog and interface products into
our existing microcontroller customer base, which we refer to as our analog
"attach" strategy, as well as to new customers. In addition to our "attach"
strategy, we market and sell other products that may not fit our traditional
PIC(R) microcontroller and memory products customer base. We market these, and
all of our products, based on a "functions" approach, targeted to solve
different problems in development of our customers' products.
MEMORY PRODUCTS
Our memory products consist primarily of serial electrically erasable
programmable read only memory, referred to as EEPROMs. We sell these devices
primarily into the embedded control market, and we are one of the largest
suppliers of such devices worldwide. EEPROM products are used for non-volatile
program and data storage in systems where such data must be either modified
frequently or retained for long periods. Serial EEPROMs have a very low I/O pin
requirement, permitting production of very small devices. As a result, Serial
EEPROMs are widely used to supply non-volatile memory in space-sensitive
applications such as:
* home electronics
* portable computers
* cellular and cordless telephones
* pagers, and
* remote control devices.
We address customer requirements by offering products with extremely small
package sizes and very low operating voltages for both read and write functions.
High performance circuitry and microcode are also available to reduce power
consumption when a device is not in use, while permitting immediate operating
capability when required. Our memory products also feature long data retention
and high erase/write endurance.
MANUFACTURING
The ownership of our manufacturing resources is an important component of
our business strategy, enabling us to maintain a high level of manufacturing
control and to be one of the lowest cost producers in the embedded control
industry. By owning our wafer fabrication and the majority of our test
operations, and by employing proprietary statistical process control techniques,
we have been able to achieve high production yields. Direct control over
manufacturing resources allows us to shorten our design and production cycles.
This control also allows us to capture the wafer manufacturing and a portion of
the assembly and testing profit margin.
4
Our wafer fabrication and wafer test facilities are located in Chandler,
Arizona, which we refer to as Fab 1, and Tempe, Arizona, which we refer to as
Fab 2. In July 2000, we acquired a third wafer fabrication facility located in
Puyallup, Washington, which we refer to as Fab 3. Fab 3 is not currently
operational.
We perform product packaging and testing at our facilities located near
Bangkok, Thailand. We also use third-party assembly and test contractors in
several Asian countries.
Wafers are produced in Class 10 fabrication modules in Fab 1 and Fab 2. Fab
1 currently contains approximately 40,000 square feet of usable clean room space
and currently produces 6-inch wafers. Fab 2 currently contains approximately
50,000 square feet of usable clean room space and currently produces 8-inch
wafers. Wafer sort is performed in an 8,000 square foot, Class 10,000 clean
room, equipped with automated wafer handlers and test equipment. Fabs 1 and 2
are managed by the same management team and utilize similar production
techniques. Fab 3 contains approximately 114,000 square feet of clean room space
and, when required for production, will produce 8-inch wafers.
By March 31, 2001, we reduced cumulative capacity at Fabs 1 and 2 by
approximately 24%, compared to our capacity at December 31, 2000, in response to
business conditions that resulted in decreased product demand. During fiscal
2002, Fabs 1 and 2 operated at approximately 70% of their capacity due to the
capacity reductions implemented in the March 2001 quarter and a one-week plant
shutdown in each quarter of fiscal 2002. Operating at lower percentages of
capacity has a negative impact on operating results as certain fixed operating
costs are expensed.
Fab 3 is currently being maintained at minimal operating cost until we
expect to require its capacity for production. We currently plan to utilize Fab
3 for our future production requirements. However, as we begin to plan for the
mobilization of Fab 3, we continue to explore other, potentially more
cost-effective, alternatives that may become available to meet our future
production requirements.
Fabs 1 and 2 currently utilize various manufacturing process technologies,
but predominantly utilize our 1.0 to 0.5 micron processes. We continue to
transition products to more advanced process technologies to reduce future
manufacturing costs. We also continue to increase the percentage of our
production on 8-inch wafers. As of March 31, 2002, 8-inch wafers accounted for
approximately 80% of our production. We believe that our successful transition
to more advanced process technologies is important for us to remain competitive.
Our future operating results could be adversely affected if any such transition
is substantially delayed or inefficiently implemented.
THE FOREGOING STATEMENTS RELATED TO OUR CONTINUING EXPLORATION OF
ALTERNATIVES TO MEET OUR FUTURE PRODUCTION REQUIREMENTS AND THE TRANSITION TO
MORE ADVANCED PROCESS TECHNOLOGIES TO REDUCE FUTURE MANUFACTURING COSTS ARE
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF
THE FOLLOWING FACTORS, AMONG OTHERS: INCREASED OR DECREASED CUSTOMER DEMAND FOR
OUR PRODUCTS; THE AVAILABILITY OF EQUIPMENT AND OTHER SUPPLIES; SUPPLY
DISRUPTION; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND
OVERALL CAPACITY UTILIZATION; ABSORPTION OF FIXED COSTS, LABOR AND OTHER DIRECT
MANUFACTURING COSTS; CHANGES IN PRODUCT MIX; AND OTHER ECONOMIC CONDITIONS.
We currently employ proprietary design and manufacturing processes in
developing our microcontroller and memory products. We believe our processes
afford us both cost-effective designs in existing and derivative products and
greater functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully absorb our process
research and development costs and to deliver new products to market more
rapidly. Our engineers utilize advanced CAD tools and software to perform
circuit design, simulation and layout, and our in-house photomask and wafer
fabrication facilities enable us to rapidly verify design techniques by
processing test wafers quickly and efficiently.
At March 31, 2002, approximately 53% of our assembly requirements were
being performed in our Thailand facility. Third-party contractors located
throughout Asia perform the balance of our assembly operations. Our 200,000
square foot Thailand facility currently tests substantially all of the products
produced in Fabs 1 and 2, and also tested substantially all such products at
March 31, 2002. During fiscal 2003, we will construct an approximately 67,000
square foot expansion of test capacity at our Thailand facility that, once
completed, will increase the facility's test capacity by up to 70%. The
expansion is currently scheduled to be completed by February 2003. See "Item 2 -
Properties," below at page 15.
5
THE FOREGOING STATEMENT RELATED TO THE EXPECTED COMPLETION DATE OF THE
EXPANSION OF TEST CAPACITY AT OUR THAILAND FACILITY IS A FORWARD LOOKING
STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING
FACTORS, AMONG OTHERS: DELAYS IN CONSTRUCTION AND EQUIPMENT INSTALLATION OF THE
ADDITIONAL TEST CAPACITY; THE AVAILABILITY OF EQUIPMENT AND OTHER SUPPLIES;
SUPPLY DISRUPTION; LABOR UNREST; POLITICAL INSTABILITY AND EXPROPRIATION; AND
OTHER GENERAL ECONOMIC CONDITIONS.
We also contract with third-party wafer foundries to fabricate
approximately 40% of our analog products. We expect that by the end of fiscal
2003, approximately 20% of our analog products will be fabricated by third
parties. On a strategic basis, we will use third-party foundries to shorten our
product design cycle on certain key technologies and products.
THE FOREGOING STATEMENT RELATED TO THE AMOUNT OF ANALOG PRODUCTS BEING
FABRICATED BY THIRD PARTIES AT THE END OF FISCAL 2003 IS A FORWARD-LOOKING
STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING
FACTORS, AMONG OTHERS: INCREASED OR DECREASED CUSTOMER DEMAND FOR OUR ANALOG
PRODUCTS; DIFFICULTIES TRANSITIONING PRODUCTS FROM THIRD-PARTY FOUNDRIES TO OUR
MANUFACTURING PROCESSES AND TECHNOLOGIES; FLUCTUATIONS IN PRODUCTION YIELDS;
PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; CHANGES IN PRODUCT
MIX; COMPETITIVE PRESSURES ON PRICES; AND OTHER ECONOMIC CONDITIONS.
Our reliance on third parties involves some reduction in our level of
control over the portions of our business that we subcontract. While we review
the quality, delivery and cost performance of these third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain manufacturing yields, assembly and test yields and costs at
approximately their current levels.
Our reliance on foreign operations, maintenance of substantially all of our
finished goods in inventory in foreign locations, and significant foreign sales
exposes us to foreign political and economic risks. To date, we have not
experienced any significant interruptions in our foreign business operations. If
any significant interruption in our foreign business operations materializes,
our sales could decrease and our performance could suffer.
Due to the high fixed costs inherent in semiconductor manufacturing,
consistently high manufacturing yields can have significant positive effects on
gross profit and overall operating results. During fiscal 2002, we continued to
focus on manufacturing productivity, and maintained average wafer fab line
yields in excess of 95%. Our manufacturing yields are primarily driven by a
comprehensive implementation of statistical process control, extensive employee
training and selective upgrading of our manufacturing facilities and equipment.
Maintenance of manufacturing productivity and yields are important factors in
the achievement of our operating results. The manufacture and assembly of
integrated circuits, particularly non-volatile, erasable CMOS memory and logic
devices, such as those that we produce, are complex processes. These processes
are sensitive to a wide variety of factors, including the level of contaminants
in the manufacturing environment, impurities in the materials used and the
performance of our wafer fabrication personnel and equipment. As is typical in
the semiconductor industry, we have from time to time experienced lower than
anticipated manufacturing yields. Our operating results will suffer if we are
unable to maintain yields at approximately the current levels.
Our semiconductor manufacturing operations require raw materials and
equipment that must meet exacting standards. We generally have more than one
source for these supplies, but there are only a limited number of suppliers
capable of delivering various raw materials and equipment that meet our
standards. In addition, the raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of
semiconductors in product applications increases. We have experienced supply
shortages from time to time in the past, and on occasion our suppliers have told
us they need more time than expected to fill our orders. An interruption of any
raw materials or equipment sources could harm our business.
RESEARCH AND DEVELOPMENT
We are committed to continuing our investment in new and enhanced products,
including development systems, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. Our current research and development, or
R&D, activities focus on the design of new microcontroller, 16-bit digital
signal controller, memory and mixed-signal products, ASSPs, new development
systems, and software and application-specific software libraries. We are also
developing new design and process technology to achieve further cost reductions
and performance improvements in existing products. In fiscal 2002, our R&D
expenses were $81.7 million, compared to $78.6 million in fiscal 2001 and $52.4
million in fiscal 2000.
6
SALES AND DISTRIBUTION
We market our products worldwide primarily through a network of direct
sales personnel and electronics distributors. From time to time, we expect that
we may restructure certain portions of our sales network as we deem appropriate
given the level of our business.
Our direct sales force focuses primarily on major strategic accounts in
three geographical markets: the Americas, Europe and Asia. We currently maintain
sales and support centers in major metropolitan areas in North America, Europe
and Asia. We believe that a strong technical service presence is essential to
the continued development of the embedded control market. The majority of our
field sales engineers, referred to as FSEs, field application engineers,
referred to as FAEs, and sales management have technical degrees and have been
previously employed in an engineering environment. We believe that the technical
knowledge of our sales force is a key competitive advantage in the sale of our
products. Currently, we strive to have at least one dedicated FAE in every sales
and support center. The primary mission of our FAE team is to provide technical
assistance to strategic accounts and to conduct periodic training sessions for
FSEs and distributor sales teams. FAEs also frequently conduct technical
seminars in major cities around the world, and work closely with our
distributors to provide technical assistance and end-user support.
Distributors focus primarily on servicing the product and technical support
requirements of our broad base of small- and medium-sized customers. We believe
that distributors provide an effective means of reaching this broad customer
base.
In fiscal 2002, we derived 62% of our net sales from sales through
distributors and 35% of our net sales from direct sales to original equipment
manufacturers, referred to as OEM, customers. Distributors accounted for 65% of
our net sales in fiscal 2001 and 63% of our net sales in fiscal 2000. One
distributor accounted for 13% of our total net sales for fiscal 2002, 14% for
fiscal 2001 and 14% for fiscal 2000. No other distributor or end customer
accounted for more than 10% of our net sales in fiscal years 2002, 2001 or 2000.
Generally, we do not have long-term agreements with our distributors and
our distributors may terminate their relationship with us with little or no
advanced notice. The loss of, or a disruption in the operations of, one or more
of our distributors could reduce our future net sales in a given quarter and
could result in an increase in inventory returns.
As is common in the semiconductor industry, we provide limited price
protection to our distributors. Under our current policy, distributors receive a
credit for the difference, at the time of a price reduction, between the price
they were originally charged for products in inventory and the reduced price
that we subsequently charge distributors. From time to time, and on a
case-by-case basis, distributors may also receive credit for specific
transactions that we approve in advance. We also grant some distributors limited
rights to return products. We do not recognize net sales and profit on sales to
distributors that have rights of return and price protection until those
distributors have sold the products to end customers.
Foreign sales, primarily in Asia and Europe, represented 69% of our total
net sales in fiscal 2002, compared to 68% in each of fiscal 2001 and fiscal
2000. International sales are predominately billed in U.S. Dollars. Although
foreign sales are subject to certain government export restrictions, we have not
experienced any material difficulties as a result of export restrictions to
date. For a detailed description of our sales by geographic region, see also
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations - Net Sales," at page 20, and Note
16 to our consolidated financial statements.
BACKLOG
As of April 26, 2002, our backlog was approximately $119.9 million,
compared to $137.9 million as of April 27, 2001. Our backlog includes all
purchase orders scheduled for delivery within the subsequent 12 months.
We primarily produce standard products that can be shipped from inventory
within a short time after we receive an order. Our business and, to a large
extent, that of the entire semiconductor industry, is characterized by
short-term orders and shipment schedules. Orders constituting our current
backlog are subject to changes in delivery schedules, or to cancellation at the
customer's option without significant penalty. Thus, while backlog is useful for
scheduling production, backlog as of any particular date may not be a reliable
measure of sales for any future period. Orders received in a quarter for
shipment in that quarter, which we refer to as turns orders, are an important
component of our quarterly operating results. See "Additional Factors That May
Affect Results of Operations," beginning below at page 10.
7
COMPETITION
The semiconductor industry is intensely competitive and has been
characterized by price erosion and rapid technological change. We compete with
major domestic and international semiconductor companies, many of which have
greater market recognition and greater financial, technical, marketing,
distribution and other resources than we with which to pursue engineering,
manufacturing, marketing and distribution of their products. Emerging companies
may also increase their participation in the market for embedded control
applications. Furthermore, capacity in the semiconductor industry is increasing
over time and such increased capacity or improved product availability could
adversely affect our competitive position.
We currently compete principally on the basis of the technical innovation
and performance of our embedded control products, including such products':
* speed * reliability
* functionality * packaging alternatives
* density * price
* power consumption * availability
We believe that other important competitive factors in the embedded control
market include:
* ease of use
* functionality of application development systems, and
* technical service and support.
We believe that we compete favorably with other companies on all of these
factors, but we may be unable to compete successfully in the future, which could
harm our business.
PATENTS, LICENSES AND TRADEMARKS
As of March 31, 2002, we owned 197 U.S. patents and 78 foreign patents,
expiring on various dates between 2003 and 2021, and had an additional 140 U.S.
patent applications and 146 foreign patent applications pending. We intend to
continue to seek patents on our inventions and manufacturing processes. The
process of seeking patent protection can be long and expensive, and patents may
not be issued from currently pending or future applications. In addition, our
existing patents and any new patents that are issued may not be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to us. We may be subject to or may initiate interference proceedings in the U.S.
Patent and Trademark Office, which can require significant financial and
management resources. In addition, the laws of certain foreign countries do not
protect our intellectual property rights to the same extent as the laws of the
United States. We believe, however, that our continued success depends primarily
on such factors as the technological skills and innovative abilities of our
personnel rather than on our patents.
We have entered into certain intellectual property licenses and
cross-licenses with other companies related to semiconductor products and
manufacturing processes. As is typical in the semiconductor industry, we and our
customers have from time to time received, and may in the future receive,
communications from third parties asserting patent or other intellectual
property rights on certain of our products or technologies. We investigate all
such notices and respond as we believe is appropriate. Based on industry
practice, we believe that in most cases we can obtain any necessary licenses or
other rights on commercially reasonable terms, but we cannot assure that
licenses would be on acceptable terms, that litigation would not ensue or that
damages for any past infringement would not be assessed. Litigation, which could
result in substantial cost to us and divert management effort, may be necessary
to enforce our patents or other intellectual property rights, or to defend us
against claimed infringement of the rights of others. The failure to obtain
necessary licenses or other rights, or litigation arising out of infringement
claims, could harm our business. See "Item 3 - Legal Proceedings," beginning
below at page 16.
8
ENVIRONMENTAL REGULATION
We must comply with many different federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing processes,
including the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Superfund Amendment
and Reauthorization Act, the Clean Air Act and the Water Pollution Control Act.
We believe that we have obtained all of the environmental permits required to
conduct our business. Although we believe that our activities conform to
presently applicable environmental regulations, our failure to comply with
present or future regulations could result in the imposition of fines,
suspension of production or a cessation of operations. Any such regulation could
require us to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations. While we have not experienced any
materially adverse effects on our operations from governmental regulations, any
failure by us to control the use of or adequately restrict the discharge of
hazardous substances could subject us to future liabilities. Environmental
problems may occur that could subject us to future costs or liabilities.
EMPLOYEES
As of April 26, 2002, we had 3,041 employees worldwide, including 1,957 in
manufacturing, 540 in R&D, 397 in sales and marketing and 147 in finance and
administration. Approximately 41% of our employees work at our Thailand
facility. No employees in the U.S. or Thailand are represented by a labor
organization. We have never had a work stoppage and believe that our employee
relations are good.
EXECUTIVE OFFICERS
The following sets forth certain information regarding our executive
officers as of April 26, 2002:
NAME AGE POSITION
---- --- --------
Steve Sanghi 46 Chairman of the Board, President and Chief Executive Officer
David S. Lambert 50 Vice President, Fab Operations
Mitchell R. Little 49 Vice President, Worldwide Sales and Applications
Gordon W. Parnell 52 Vice President, Chief Financial Officer
Richard J. Simoncic 38 Vice President, Analog and Interface Products Division
MR. SANGHI has been President since August 1990, CEO since October 1991,
and Chairman of the Board since October 1993. He has served as a director since
August 1990. Mr. Sanghi holds an M.S. degree in Electrical and Computer
Engineering from the University of Massachusetts and a B.S. degree in
Electronics and Communication from Punjab University, India.
MR. LAMBERT has served as Vice President, Fab Operations since November
1993. From 1991 to November 1993, he served as Director of Manufacturing
Engineering, and from 1988 to 1991, he served as Engineering Manager of Fab
Operations. Mr. Lambert holds a B.S. degree in Chemical Engineering from the
University of Cincinnati.
MR. LITTLE has served as Vice President, Worldwide Sales and Applications
since July 2000. From April 1998 through July 2000, he served as Vice President,
Americas Sales. From November 1995 to April 1998, he served as Vice President,
Standard Microcontroller and ASSP Division. Mr. Little holds a BSET from United
Electronics Institute.
MR. PARNELL has served as Vice President and Chief Financial Officer since
May 2000. He served as Vice President, Controller and Treasurer from April 1993
to May 2000. Mr. Parnell holds a finance/accounting qualification with the
Association of Certified Accountants from Edinburgh College, Scotland.
MR. SIMONCIC has served as Vice President, Analog and Interface Products
Division since September 1999. From January 1996 to September 1999, he served as
Vice President, Memory and Specialty Products Division Mr. Simoncic holds a B.S.
degree in Electrical Engineering Technology from DeVry Institute of Technology.
9
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS
When evaluating Microchip and its business, you should give careful
consideration to the factors listed below, in addition to the information
provided elsewhere in this Form 10-K and in other documents that we file with
the Securities and Exchange Commission.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO FACTORS THAT COULD REDUCE
OUR NET SALES AND PROFITABILITY.
Our quarterly operating results are affected by a wide variety of factors
that could reduce our net sales and profitability, many of which are beyond our
control. Some of the factors that may affect our operating results include:
* demand for our products in the distribution and OEM channels
* the level of orders that are received and can be shipped in a quarter
(turns orders)
* market acceptance of both our products and our customers' products
* customer order patterns and seasonality
* possible disruption in commercial activities or international
transport or delivery caused by terrorist activity, armed conflict or
unexpected increases in the price or supply of oil, which could result
in changes in logistics and security arrangements, and reduced
customer purchases relative to expectations
* impact of events outside of the United States, such as the business
impact of fluctuating currency rates or unrest or political
instability
* disruption in the supply of wafers or assembly and testing services
* availability of manufacturing capacity, the extent of effective use of
manufacturing capacity and fluctuations in manufacturing yields
* the availability and cost of raw materials, equipment and other
supplies, and
* economic, political and other conditions in the worldwide markets
served by us.
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful and that you should not rely upon any such
comparisons as indications of future performance. In future periods our
operating results may fall below the expectations of public market analysts and
investors, which would likely have a negative effect on the price of our common
stock.
OUR OPERATING RESULTS WILL SUFFER IF WE INEFFECTIVELY UTILIZE OUR MANUFACTURING
CAPACITY OR FAIL TO MAINTAIN MANUFACTURING YIELDS.
The manufacture and assembly of integrated circuits, particularly
non-volatile, erasable CMOS memory and logic devices such as those that we
produce, are complex processes. These processes are sensitive to a wide variety
of factors, including the level of contaminants in the manufacturing
environment, impurities in the materials used and the performance of our wafer
fabrication personnel and equipment. As is typical in the semiconductor
industry, we have from time to time experienced lower than anticipated
manufacturing yields. Our operating results will suffer if we are unable to
maintain yields at approximately the current levels.
Our operating results are also adversely affected when we operate at less
than 100% capacity as was the case throughout fiscal 2002. Lower capacity
utilization results in certain costs being charged directly to expense and lower
gross margins.
WE DEPEND ON ORDERS THAT ARE RECEIVED AND SHIPPED IN THE SAME QUARTER AND
THEREFORE HAVE LIMITED VISIBILITY OF FUTURE PRODUCT SHIPMENTS.
Our net sales in any given quarter depend upon a combination of orders
received in that quarter for shipment in that quarter, which we refer to as
turns orders, and shipments from backlog. We emphasize our ability to respond
quickly to customer orders as part of our competitive strategy, resulting in
customers placing orders with short delivery schedules. The percentage of turns
orders in any given quarter is dependent on overall semiconductor industry
conditions and product lead times. Shorter lead times have the effect of
increasing turns orders as a percentage of our business in any given quarter and
reducing our visibility on future product shipments. As such, our percentage of
turns orders has fluctuated over the last three fiscal years between
approximately 20% and 60%. As of April 1, 2002, we required turns orders of
approximately 57% in order to achieve our revenue target for the first quarter
of fiscal 2003. Because turns orders are difficult to predict, increased levels
of turns orders make our net sales more difficult to forecast.
10
If we do not achieve a sufficient level of turns orders in a particular
quarter relative to our projections, our revenue and operating results will
suffer.
INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS AND
REDUCED MARKET SHARE.
The semiconductor industry is intensely competitive and has been
characterized by price erosion and rapid technological change. We compete with
major domestic and international semiconductor companies, many of which have
greater market recognition and substantially greater financial, technical,
marketing, distribution and other resources than we with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also increasing their participation in the market for
embedded control applications. We may be unable to compete successfully in the
future, which could harm our business.
Our ability to compete successfully depends on a number of factors both
within and outside our control, including:
* the quality, performance, reliability, features, ease of use, pricing
and diversity of our products
* the quality of our customer services and our ability to address the
needs of our customers
* our success in designing and manufacturing new products including
those implementing new technologies
* manufacturing capacity utilization and manufacturing yields
* hiring and retention of qualified engineering and management personnel
* adequate supplies of raw materials and other supplies at acceptable
prices
* the rate at which customers incorporate our products into their own
products
* product introductions by our competitors
* the number, nature and success of our competitors in a given market
* general market and economic conditions, and
* protection of our products and processes by effective utilization of
intellectual property laws.
Historically, average selling prices in the semiconductor industry decrease
over the life of any particular product. The overall average selling prices of
our microcontroller and proprietary analog and interface products have remained
relatively constant, while average selling prices of our Serial EEPROM and
non-proprietary analog and interface products have declined over time. We have
experienced, and expect to continue to experience, pricing pressure in certain
of our proprietary product lines, due primarily to competitive conditions. We
have been able to moderate average selling price declines in many of our
proprietary products by continuing to introduce new products with more features
and higher prices. We experienced significant competitive pricing pressures in
our Serial EEPROM product lines during the first half of fiscal 2002, which
moderated in the third and fourth quarters.
We may be unable to maintain average selling prices for our microcontroller
or other products as a result of increased pricing pressure in the future, which
would reduce our operating results.
WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL, AND COMPETITION
FOR QUALIFIED PERSONNEL IS INTENSE IN OUR MARKET.
Our success depends to a significant extent upon the efforts and abilities
of our senior management, engineering and other personnel. The competition for
qualified engineering and management personnel is intense. We may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the services of
one or more of our key personnel or the inability to add key personnel could
harm our business. We have no employment agreements with any member of our
senior management team.
11
OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON A TIMELY BASIS.
Our future operating results will depend to a significant extent on our
ability to develop and introduce new products on a timely basis that can compete
effectively on the basis of price and performance and which address customer
requirements. The success of new product introductions depends on various
factors, including:
* proper new product selection
* timely completion and introduction of new product designs
* development of support tools and collateral literature that make
complex new products easy for engineers to understand and use, and
* market acceptance of our customers' end products.
Because our products are complex, we have experienced delays from time to
time in completing development of new products. In addition, our new products
may not receive or maintain substantial market acceptance. We may be unable to
design, develop and introduce competitive products on a timely basis, which
could reduce our future operating results.
Our success also depends upon our ability to develop and implement new
design and process technologies. Semiconductor design and process technologies
are subject to rapid technological change and require significant R&D
expenditures. We and other companies in the industry have, from time to time,
experienced difficulties in effecting transitions to advanced process
technologies and, consequently, have suffered reduced manufacturing yields or
delays in product deliveries. Our future operating results could be adversely
affected if any transition to future process technologies is substantially
delayed or inefficiently implemented.
WE ARE DEPENDENT ON SEVERAL THIRD-PARTY CONTRACTORS IN ASIA TO PERFORM KEY
MANUFACTURING FUNCTIONS FOR US.
We depend on several third-party contractors located throughout Asia for a
portion of the assembly and testing of our products and for a portion of the
wafer fabrication of our analog products. Although we seek to reduce our
dependence on these third-party contractors, disruption or termination of any of
these sources could harm our business and operating results. Our reliance on
third parties involves some reduction in our level of control over the portions
of our business that we subcontract. Our future operating results could suffer
if any third-party contractor were to experience financial, operations or
production difficulties, or if they were unable to maintain manufacturing
yields, assembly and test yields and costs at approximately their current
levels.
WE MAY LOSE SALES IF OUR SUPPLIERS OF RAW MATERIALS AND EQUIPMENT FAIL TO MEET
OUR NEEDS.
Our semiconductor manufacturing operations require raw materials and
equipment that must meet exacting standards. We generally have more than one
source for these supplies, but there are only a limited number of suppliers
capable of delivering various raw materials and equipment that meet our
standards. In addition, the raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of
semiconductors in product applications increases. We have experienced supply
shortages from time to time in the past, and on occasion our suppliers have told
us they need more time than expected to fill our orders. An interruption of any
raw materials or equipment sources could harm our business.
OUR BUSINESS IS HIGHLY DEPENDENT ON SELLING THROUGH DISTRIBUTORS.
Sales through distributors accounted for 62% of our net sales for the
fiscal year ended March 31, 2002. Sales through one distributor accounted for
13% of our total net sales for the fiscal year ended March 31, 2002. Generally,
we do not have long-term agreements with our distributors and our distributors
may terminate their relationship with us with little or no advanced notice.
The loss of, or a disruption in the operations of, one or more of our
distributors could reduce our net sales in a given quarter and could result in
an increase in inventory returns.
OUR OPERATING RESULTS MAY BE IMPACTED BY THE WIDE FLUCTUATIONS OF SUPPLY AND
DEMAND IN THE SEMICONDUCTOR INDUSTRY.
The semiconductor industry is characterized by wide fluctuations of supply
and demand. Over the last 18 months, the industry has experienced a significant
economic downturn, characterized by diminished product demand and production
12
over-capacity. We have sought to reduce our exposure to this industry
cyclicality by selling proprietary products, that cannot be easily or quickly
replaced, to a geographically diverse base of customers across a broad range of
market segments. However, we have experienced substantial period-to-period
fluctuations in operating results and may, in the future, experience
period-to-period fluctuations in operating results due to general industry or
economic conditions.
INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT
LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS.
As is typical in the semiconductor industry, we and our customers have from
time to time received, and may in the future receive, communications from third
parties asserting patent or other intellectual property rights on certain of our
products or technologies. In the event a third party were to make a valid
intellectual property claim and a license or other agreement was not available
on commercially reasonable terms, our operating results could be harmed. We have
in the past been, are currently, and may in the future be, involved in
litigation to defend Microchip against alleged infringement of the rights of
others or to enforce our intellectual property rights. Litigation could result
in substantial cost to us and divert our resources. An unfavorable outcome in
any such suit could harm our business, financial condition or results of
operations.
Our ability to obtain patents, licenses and other intellectual property
rights covering our products and manufacturing processes is important for our
success. To that end, we have acquired certain patents and patent licenses and
intend to continue to seek patents on our inventions and manufacturing
processes. The process of seeking patent protection can be long and expensive,
and patents may not be issued from currently pending or future applications. In
addition, our existing patents and any new patents that are issued may not be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to us. We may be subject to or may initiate interference proceedings
in the U.S. Patent and Trademark Office, which can require significant financial
and management resources. In addition, the laws of certain foreign countries do
not protect our intellectual property rights to the same extent as the laws of
the United States.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
We do not typically enter into long-term contracts with our customers and
we cannot be certain as to future order levels from our customers. When we do
enter into customer contracts, the contract is generally cancelable at the
convenience of the customer. In the event of any early termination of a contract
by one of our major customers, it is unlikely that we would be able to rapidly
replace that revenue source which would harm our financial results.
BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS.
Operations at any of our primary manufacturing facilities, or at any of our
wafer fabrication or test and assembly subcontractors, may be disrupted for
reasons beyond our control, including work stoppages, power loss, incidents of
terrorism, political instability, telecommunications failure, fire, earthquake,
floods, or other natural disasters. If operations at any of our facilities or by
any of our subcontractors are interrupted, we may not be able to shift
production to other facilities on a timely basis. If this occurs, we may
experience delays in shipments of products to our customers and alternate
sources for production may be unavailable on acceptable terms. This could result
in reduced revenues and profits and the cancellation of orders or loss of
customers. In addition, business interruption insurance may not be enough to
compensate us for any losses that may occur and any losses or damages incurred
by us as a result of business interruptions could significantly harm our
business.
WE ARE HIGHLY DEPENDENT ON FOREIGN SALES AND OPERATIONS, WHICH EXPOSES US TO
FOREIGN POLITICAL AND ECONOMIC RISKS.
Sales to foreign customers account for a substantial portion of our net
sales. During the fiscal year ended March 31, 2002, approximately 69% of our net
sales were made to foreign customers. We purchase a substantial portion of our
raw materials and equipment from foreign suppliers. In addition, we own product
assembly and testing facilities located near Bangkok, Thailand. We also use
various third-party contractors located throughout Asia for a portion of our
assembly and testing and a portion of our analog product wafer fabrication
requirements.
13
Our reliance on foreign operations, maintenance of substantially all of our
finished goods in inventory at foreign locations and significant foreign sales
exposes us to foreign political and economic risks, including:
* political, social and economic instability
* trade restrictions and changes in tariffs
* import and export license requirements and restrictions
* difficulties in staffing and managing international operations
* employment regulations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables
* economic slowdown in the worldwide markets served by us, and
* potentially adverse tax consequences.
If any of these risks materialize, our sales could decrease and our
operating results could suffer.
WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION, WHICH MAY FORCE US TO
INCUR SIGNIFICANT EXPENSES.
We must comply with many different federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing process.
Although we believe that our activities conform to presently applicable
environmental regulations, our failure to comply with present or future
regulations could result in the imposition of fines, suspension of production or
a cessation of operations. Any such regulation could require us to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. Any failure by us to control the use of or adequately
restrict the discharge of hazardous substances could subject us to future
liabilities. Environmental problems may occur that could subject us to future
costs or liabilities.
In 1993, TelCom acquired the semiconductor manufacturing operations of
Teledyne, Inc. previously conducted at TelCom's Mountain View, California
facility. The semiconductor manufacturing operations conducted by Teledyne at
the facility allegedly contaminated the soil and groundwater of the facility,
and the groundwater of properties located down-gradient of the facility.
Although TelCom was indemnified by Teledyne against, among other things, any
liabilities arising from any such contamination, and although we should be able
to benefit from this indemnification as a successor to TelCom's business, we
cannot assure you that claims will not be made against us or that such
indemnification will be available or will provide meaningful protection at the
time any such claim is brought. To the extent that we are subject to a claim
that is not covered by the indemnity from Teledyne or as to which Teledyne is
unable to provide indemnification, our financial condition or operating results
could suffer.
OUR FAILURE TO SUCCESSFULLY INTEGRATE BUSINESSES, PRODUCTS OR TECHNOLOGIES WE
ACQUIRE COULD DISRUPT OR HARM OUR ONGOING BUSINESS.
On May 22, 2002, we announced that we had signed a definitive agreement to
acquire PowerSmart, Inc. We have from time to time acquired, and may in the
future acquire, additional complementary businesses, products and technologies.
Achieving the anticipated benefits of an acquisition depends, in part, upon
whether the integration of the acquired business, products or technology is
accomplished efficiently and effectively. In addition, successful acquisitions
in the semiconductor industry may be more difficult to accomplish than in other
industries because such acquisitions require, among other things, integration of
product offerings, manufacturing operations and coordination of sales and
marketing and R&D efforts. These difficulties can become more challenging due to
the need to coordinate geographically separated organizations, the complexities
of the technologies being integrated, and the necessities of integrating
personnel with disparate business background and combining two different
corporate cultures. The integration of operations following an acquisition also
requires the dedication of management resources may distract attention from the
day-to-day business and may disrupt key R&D, marketing or sales efforts. The
inability of our management to successfully integrate any future acquisition
could harm our business. Furthermore, products acquired in connection with
acquisitions may not gain acceptance in our markets, and we may not achieve the
anticipated or desired benefits of such transaction.
14
POWERSMART DEPENDED ON THIRD-PARTY WAFER MANUFACTURERS FOR ALL OF ITS PRODUCT
REQUIREMENTS. ANY INABILITY OR UNWILLINGNESS OF POWERSMART'S WAFER SUPPLIERS TO
MEET THESE MANUFACTURING REQUIREMENTS WOULD SIGNIFICANTLY DELAY OUR ABILITY TO
PRODUCE AND SHIP POWERSMART PRODUCTS.
While Microchip has historically manufactured virtually all of its own
wafers, PowerSmart purchased its wafers primarily from two outside foundries.
Each of these foundries also fabricates wafers for other semiconductor
companies, including some of our competitors. One of the foundries used by
PowerSmart is a direct competitor of ours. During fiscal 2003, we expect to
continue to rely on these wafer suppliers to supply a substantial portion of the
wafers that are required to support the business that we are acquiring from
PowerSmart. We may be unable to acquire wafers from these foundries if they
experience manufacturing failures, yield shortfalls or other situations when
demand exceeds capacity or for other reasons. In such case, we may not be able
to qualify additional manufacturing sources for existing PowerSmart products on
a timely manner or at all, and such arrangements, if any, may not be on
favorable terms to us.
Although current market conditions in the semiconductor industry indicate
that there is sufficient manufacturing capacity at outside foundries, a
significant increase in demand for PowerSmart products during fiscal 2003 could
result in wafers being in short supply and prevent us from having an adequate
supply to meet our customer requirements and meet requested delivery dates for
customers of our PowerSmart products.
THE FUTURE TRADING PRICE OF OUR COMMON STOCK COULD BE SUBJECT TO WIDE
FLUCTUATIONS IN RESPONSE TO A VARIETY OF FACTORS.
The market price of our common stock has fluctuated significantly in the
past and is likely to fluctuate in the future. The future trading price of our
common stock could be subject to wide fluctuations in response to a variety of
factors, many of which are beyond our control, including:
* quarterly variations in our operating results and the operating
results of other semiconductor companies
* actual or anticipated announcements of technical innovations or new
products by us or our competitors
* changes in analysts' estimates of our financial performance or
buy/sell recommendations
* general conditions in the semiconductor industry, and
* worldwide economic and financial conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many high
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may harm the market price of our common stock.
ITEM 2. PROPERTIES
Our current headquarters, an R&D center and Fab 1 are located in four
buildings totaling approximately 415,000 square feet situated on a 77-acre
parcel of land in Chandler, Arizona.
A second U.S. manufacturing site, consisting of Fab 2, office and warehouse
facilities and an R&D center, is located in three buildings totaling
approximately 379,000 square feet on a 22-acre parcel of land in Tempe, Arizona.
Our third U.S. manufacturing site, consisting of Fab 3, office and
warehouse facilities and an R&D center, is located in eight buildings totaling
approximately 700,000 square feet on a 92-acre parcel of land in Puyallup,
Washington. We acquired this property in July 2000. We are currently maintaining
Fab 3 at a minimum operating cost until we expect to require its capacity for
production. We currently plan to utilize Fab 3 for our future production
requirements. However, as we begin to plan for the mobilization of Fab 3, we
continue to explore other, potentially more cost-effective, alternatives that
may become available to meet our future production requirements.
We own the Chandler, Tempe and Puyallup facilities.
We also own a final test and assembly facility located near Bangkok,
Thailand. The Thailand final test and assembly operations are housed in a
200,000 square foot facility that is owned by our Thailand subsidiary, and are
located in the Alphatechnopolis Industrial Park in Chacherngsao, Thailand, near
Bangkok. During fiscal 2003, we will construct an expansion of approximately
67,000 square feet at our Thailand facility. The expansion is currently
scheduled to be completed by February 2003. This area will house additional test
capacity and will also be available for incremental assembly capacity. The
Thailand facility is situated on land to which we expect to acquire title in
accordance with an agreement between the
15
landowner and us. To date, progress towards obtaining the full title has been
hampered by the condition of the Thailand financial industry and general
economic conditions in Thailand. At this time it is not possible to estimate
when full title transfer will be completed.
To support our sales activities, we lease space for 32 sales and support
centers in major metropolitan areas in the United States, Europe and Asia, as
well as three design centers (one each in California, Switzerland and India).
Our aggregate monthly rental payment for our leased facilities is approximately
$242,000.
We currently believe that our existing facilities, together with the
additional test capacity presently under construction at our Thailand facility,
will be adequate to meet our requirements for the next 12 months.
As conditions in the insurance market have become more difficult over the
last fiscal year, our property insurance coverage levels have decreased and our
retained risk exposure from uninsured losses has increased. We have not made any
material change to our operations as a result of the reduced coverage.
Availability and cost of coverage have generally fluctuated over time as the
insurance industry reacts to various market forces and we will consider
purchasing additional coverage if and when the availability and pricing becomes
more favorable.
THE FOREGOING STATEMENTS RELATED TO OUR CONTINUING EXPLORATION OF
ALTERNATIVES TO MEET OUR FUTURE PRODUCTION REQUIREMENTS, THE EXPECTED COMPLETION
DATE OF CONSTRUCTION OF ADDITIONAL TEST CAPACITY AT OUR THAILAND FACILITY, THE
ACQUISITION OF TITLE TO THE LAND ON WHICH THE THAILAND FACILITY IS SITUATED, THE
ADEQUACY OF EXISTING FACILITIES FOR THE NEXT 12 MONTHS AND CHANGES IN INSURANCE
COVERAGE ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY
BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE CYCLICAL NATURE OF THE
SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; DEMAND FOR OUR
PRODUCTS; THE AVAILABILITY OF EQUIPMENT AND OTHER SUPPLIES; FLUCTUATIONS IN
PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
COMPETITIVE PRESSURES ON PRICES; POLITICAL INSTABILITY AND EXPROPRIATION; COST
AND AVAILABILITY OF INSURANCE; AND OTHER ECONOMIC CONDITIONS. SEE ALSO THE
FACTORS SET FORTH UNDER "ITEM 1 - BUSINESS - ADDITIONAL FACTORS THAT MAY AFFECT
RESULTS OF OPERATIONS," BEGINNING AT PAGE 10 OF THIS REPORT.
ITEM 3. LEGAL PROCEEDINGS
MICROCHIP TECHNOLOGY INCORPORATED V. U.S. PHILIPS CORPORATION, ET AL.
(DISTRICT OF ARIZONA, 01-CV-2090-PGR); U.S. PHILIPS CORPORATION V. ATMEL
CORPORATION, ET AL. (SOUTHERN DISTRICT OF NEW YORK, 01-CV-9178-LAP). On October
26, 2001, we filed an action in federal district court in Arizona for
declaratory relief against U.S. Philips Corporation and Philips Electronics
North America Corp. requesting that the Court declare, among other matters, that
we do not infringe Philips' U.S. Patent Nos. 4,689,740 and 5,559,502. We
initiated legal action so that a determination could be made relating to the
validity, enforceability and alleged infringement of, and our license to, the
Philips' patents. Prior to filing suit, we had engaged in good faith licensing
negotiations with Philips for several years, but the discussions had reached a
point of impasse when Philips substantially increased its royalty demands. In
response to our filing the declaratory judgment action in Arizona, Philips filed
an action against us in federal district court in New York, alleging
infringement of the `740 patent and seeking unspecified damages and injunctive
relief. Despite the litigation, it is possible that discussions between the
parties could resume for the purpose of resolving this matter by agreement,
which could include a new license on commercially reasonable terms. The
litigation is in pre-trial stages. We intend to litigate this matter vigorously.
We currently believe that the outcome of this matter will not have a material
adverse effect on our consolidated financial position or results of operations.
However, the final outcome of this matter is inherently uncertain, and should
the outcome be adverse to us, we may be required to pay damages and other
expenses and may be subjected to injunctive relief. The litigation, even if
resolved in our favor, may also result in diversion of management attention and
significant legal fees.
In the ordinary course of our business, we are involved in a limited number
of legal actions, both as plaintiff and defendant, and could incur uninsured
liability in any one or more of them. Although the outcome of these actions is
not presently determinable, we believe that the ultimate resolution of these
matters will not harm our business. Litigation relating to the semiconductor
industry is not uncommon, and we are, and from time to time have been, subject
to such litigation. No assurances can be given with respect to the extent or
outcome of any such litigation in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"MCHP." Our common stock has been quoted on the Nasdaq National Market since our
initial public offering on March 19, 1993. The following table sets forth the
quarterly high and low closing prices of the common stock as reported by the
Nasdaq National Market for the last two years, adjusted to reflect a 3-for-2
stock split effected in May 2002 and a 3-for-2 stock split effected in September
2000:
FISCAL 2002 HIGH LOW FISCAL 2001 HIGH LOW
- ----------- ---- --- ----------- ---- ---
First Quarter $22.29 $14.96 First Quarter $32.33 $22.22
Second Quarter 25.59 16.89 Second Quarter 31.94 22.04
Third Quarter 27.84 16.81 Third Quarter 24.79 13.33
Fourth Quarter 28.81 22.26 Fourth Quarter 20.71 14.54
On May 29, 2002, there were approximately 526 holders of record of our
common stock. This figure does not reflect beneficial ownership of shares held
in nominee names.
We have not paid any cash dividends since our inception. We currently
anticipate that we will retain all of our future earnings for use in the
expansion and operation of our business. Thus, we do not anticipate paying any
cash dividends on our capital stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data for the
five-year period ended March 31, 2002 in conjunction with our Consolidated
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7 of this
Form 10-K. Our consolidated income statement data for each of the years in the
three-year period ended March 31, 2002, and the balance sheet data as of March
31, 2002 and 2001, are derived from our audited consolidated financial
statements, included in Item 8 of this Form 10-K.
We effected a 3-for-2 stock split, in the form of a stock dividend, on May
8, 2002. All references in this report to the number of shares and earnings per
share have been adjusted to reflect this stock split.
THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY
17
Year Ended March 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
Income Statement Data(1):
Net sales ......................... $ 571,254 $ 715,730 $ 553,051 $ 460,723 $ 452,329
Cost of sales ..................... 284,518 335,016 269,611 240,170 230,713
Research and development .......... 81,650 78,595 52,365 46,375 43,817
Selling, general and administrative 82,615 102,620 86,750 72,502 77,079
Special charges (2) ............... -- 17,358 (2,131) 34,495 13,264
----------- ----------- ----------- ----------- -----------
Operating income .................. 122,471 182,141 146,456 67,181 87,456
Interest income (expense), net .... 4,344 12,741 1,569 (1,824) 1,505
Other income (expense), net ....... 376 2,080 770 665 (71)
Net loss in equity investment (2) . -- (2,190) -- -- --
Gain on sale of investment (2) .... -- 1,427 5,819 -- --
----------- ----------- ----------- ----------- -----------
Income before income taxes ........ 127,191 196,199 154,614 66,022 88,890
Provision for income taxes ........ 32,377 53,363 39,441 19,481 26,226
----------- ----------- ----------- ----------- -----------
Net income ........................ $ 94,814 $ 142,836 $ 115,173 $ 46,541 $ 62,664
=========== =========== =========== =========== ===========
Basic net income per share ........ $ 0.48 $ 0.74 $ 0.63 $ 0.25 $ 0.32
Diluted net income per share ...... $ 0.45 $ 0.70 $ 0.59 $ 0.24 $ 0.31
Basic common shares outstanding ... 199,184 193,632 183,471 185,250 193,011
Diluted common shares outstanding . 208,907 205,190 195,509 193,323 202,925
Year Ended March 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(in thousands)
Balance Cheet Data(1)
Working capital ................... $ 381,211 $ 176,936 $ 225,504 $ 110,888 $ 79,852
Total assets ...................... 1,275,600 1,161,349 861,352 546,396 578,427
Long-term obligations, less current
portion ......................... -- -- -- 27,678 12,230
Stockholders' equity .............. 1,075,779 942,848 662,878 384,715 403,729
(1) On January 16, 2001, we merged with TelCom and accounted for the
merger as a pooling-of-interests. Accordingly, the selected financial
data has been restated to include the operations of TelCom for all
periods presented. TelCom had a December 31 fiscal year end, thus the
selected financial data presented for March 31, 2000, 1999 and 1998
have been combined with the operations of TelCom as of and for the
years ended December 31, 1999, 1998 and 1997. We have conformed the
TelCom financial data to a March 31 year end for the March 31, 2001
fiscal year.
(2) There were no special charges during the fiscal year ended March 31,
2002. Detailed discussions of the special charges, net loss in equity
investment, and gain on sale of investment for the fiscal years ended
March 31, 2001 and 2000 are contained in Note 2 to the Consolidated
Financial Statements. Detailed explanations of the special charges for
the fiscal years ended March 31, 1999 and 1998 are provided below. The
following table presents a summary of special charges for the
four-year period ended March 31, 2001:
18
Year Ended March 31,
--------------------------------------
2001 2000 1999 1998
------- ------- ------- -------
(in thousands)
Restructuring charges ................. $ 6,049 $ 269 $20,908 $ --
TelCom merger charges ................. 10,949 -- -- --
Intellectual property settlement ...... -- (3,600) 5,105 5,000
Legal charges ......................... -- 1,200 -- --
Keeloq acquisition .................... -- -- 7,632 --
Sales restructuring ................... -- -- 850 --
Loss on foundry investment ............ -- -- -- 8,264
------- ------- ------- -------
Totals ................................ $17,358 $ 2,131 $34,495 $13,624
======= ======= ======= =======
FISCAL 1999
We implemented two restructuring actions during the quarter ended March 31,
1999. First, we eliminated our 5-inch wafer fabrication line, which resulted in
a restructuring charge of $7.6 million in the March 1999 quarter. We also
decided to restructure our test operations by closing our Taiwan facility and
migrating that test capacity to our lower-cost Thailand facility. This action
resulted in a restructuring charge of $6.1 million in the March 1999 quarter.
These two restructuring actions were undertaken to improve manufacturing
flexibility, close our least cost-effective production capacity, and thereby
reduce operating costs.
Included in the restructuring charges resulting from elimination of the
5-inch production capacity was:
* $6.8 million related to equipment that was written off
* $0.3 million related to employee severance costs, and
* $0.5 million related to other restructuring costs.
Included in the restructuring charges resulting from the closure of the
Taiwan facility was $5.6 million related to employee severance costs and $0.5
million related to other restructuring costs.
Included in the special charge recorded in the quarter ended March 31, 1999
was $1.8 million related to two legal settlements associated with intellectual
property matters, and $0.4 million related to the restructure of a portion of
our sales infrastructure.
During the quarter ended June 30, 1998, we recognized a special charge of
$3.8 million, which was comprised of a $3.3 million legal settlement with
another company involving an intellectual property dispute and a $0.5 million
charge associated with the restructuring of a portion of our sales
infrastructure. We also incurred charges of $1.7 million for the write-off of
obsolete products due to the introduction of newer products, charging this to
cost of goods sold.
In August 1998, TelCom announced plans to shut down its 5-inch wafer
fabrication facility in Mountain View, California and use third party foundries
for all of its wafer fabrication requirements. In conjunction with the shut-down
of its wafer fabrication facility, TelCom recorded fab closure charges totaling
$6.5 million, predominately associated with the write-down and write-off of
manufacturing equipment and facilities improvements. TelCom recorded one-time
charges associated with its manufacturing restructuring of $0.7 million. All
restructuring reserves relating to these charges have been fully utilized.
19
KEELOQ(R) HOPPING CODE
On November 17, 1995, we acquired the KEELOQ(R) hopping code technology and
patents developed by Nanoteq Ltd. of the Republic of South Africa, and marketing
rights related thereto. The acquisition of KEELOQ was treated as an asset
purchase for accounting purposes. The amount paid for KEELOQ, including related
costs, was $12.9 million. In December 1995, we wrote off $11.4 million, which
represented the portion of the purchase price relating to in-process R&D costs,
as well as all acquisition-related expenses. The remaining $1.5 million was
capitalized as purchased technology. The amount of the purchased technology was
determined by applying a discounted cash flow model to the expected future
revenue stream of the products acquired.
In March 1999, a second cash payment of $10.3 million was made in
accordance with the terms of the original purchase agreement, and was
capitalized as purchased technology. In addition, $1.1 million of legal costs
paid to defend the KEELOQ intellectual property was also capitalized, resulting
in a total net carrying amount of $11.9 million including the $0.5 million of
residual asset value capitalized a part of the initial payment, as of March 31,
1999. Although we were obligated to make the second payment, we were concerned
that the recoverability of the carrying amount of the technology asset might not
be recoverable due to change in the forecasted cash flows related to the KEELOQ
products. In accordance with SFAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG
LIVED ASSETS AND FOR LONG LIVED ASSETS TO BE DISPOSED OF, paragraphs 4 through
11, we prepared an undiscounted cash flow analysis at March 31, 1999, which
determined that the value of the KEELOQ technology was impaired. We measured the
impairment using a discounted cash flow analysis to determine the fair value of
the asset, which was deemed to be $4.3 million, resulting in an impairment
write-down of $7.6 million. The value of the purchased technology remaining at
March 31, 1999 of $4.3 million was amortized over 3 years, the remaining life of
the technology.
All restructuring reserves relating to the fiscal 1999 actions have been
fully utilized.
FISCAL 1998
On January 13, 1998, we finalized a settlement of patent litigation with
Lucent Technologies Inc. resulting in a $5.0 million special charge during the
quarter ended December 31, 1997. This settlement is described in more detail at
page 27, below, and in Note 2 to the Consolidated Financial Statements.
In November 1995, TelCom entered into certain agreements with IC WORKS,
Inc., a privately held company located in San Jose, California under which
TelCom purchased $3.0 million of IC WORKS preferred stock and provided $10.4
million in capital equipment. In return for this investment, TelCom received a
five-year guarantee of submicron wafer fabrication capacity at specified prices,
which was projected to start in late 1997. The shortage of wafer capacity that
was projected in late 1995 had diminished and following late 1995, substantial
foundry capacity was available worldwide while the overall demand had not
increased proportionately. Consequently, wafer pricing had decreased
dramatically, which changed the economic viability of IC WORKS investment. As a
result, in fiscal 1998, TelCom recorded a loss of $8.3 million on its IC WORKS
investment consisting of:
* $3.0 million write-down of the preferred stock
* $5.2 million loss on the sale of capital equipment, and
* $0.1 million of costs associated with prepayment penalties on the
financing of the capital equipment and legal fees.
All restructuring reserves relating to the fiscal 1998 actions have been
fully utilized.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OUR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING STATEMENTS REGARDING OUR STRATEGY, FINANCIAL
PERFORMANCE AND REVENUE SOURCES. WE USE WORDS SUCH AS "ANTICIPATE," "BELIEVE,"
"PLAN," "EXPECT," "FUTURE," "INTEND" AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS INCLUDING THOSE SET FORTH IN THIS ITEM 7, AND UNDER "ITEM 1 - BUSINESS -
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS," BEGINNING AT PAGE 10,
ABOVE, AND ELSEWHERE IN THIS FORM 10-K. ALTHOUGH WE BELIEVE THAT THE
EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE
CANNOT
20
GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. YOU
SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. WE DISCLAIM
ANY OBLIGATION TO UPDATE INFORMATION CONTAINED IN ANY FORWARD-LOOKING STATEMENT.
On January 16, 2001, we merged with TelCom and accounted for the merger as
a pooling-of-interests. Accordingly, our consolidated financial statements have
been restated to include the operations of TelCom for all periods presented.
TelCom had a December 31 fiscal year end, thus the consolidated financial
statements presented for March 31, 2000, 1999 and 1998 have been combined with
the operations of TelCom as of and for the years ended December 31, 1999, 1998
and 1997. We have conformed the TelCom financial data to a March 31 year end for
the March 31, 2001 fiscal year.
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
net sales for the years indicated:
Year Ended March 31,
----------------------------
2002 2001 2000
------ ------ ------
Net sales ............................ 100.0% 100.0% 100.0%
Cost of sales ........................ 49.8% 46.8% 48.7%
------ ------ ------
Gross profit ......................... 50.2% 53.2% 51.3%
Research and development ............. 14.3% 11.0% 9.5%
Selling, general and administrative .. 14.5% 14.4% 15.7%
Special charges ...................... -- 2.4% (0.4%)
------ ------ ------
Operating income ..................... 21.4% 25.4% 26.5%
====== ====== ======
NET SALES
We have one operating industry segment and engage primarily in the design,
development, manufacture and marketing of semiconductor products. We sell our
products to distributors and OEMs in a broad range of market segments, perform
on-going credit evaluations of our customers and generally require no
collateral.
Our net sales of $571.3 million in fiscal 2002 decreased by $144.5 million,
or 20.2%, over fiscal 2001, and net sales of $715.7 million in fiscal 2001
increased by $162.7 million, or 29.4%, over fiscal 2000. The decrease in net
sales in fiscal 2002 compared to fiscal 2001 resulted primarily from slowing
demand from end markets, and to a lesser extent from inventory corrections at
our customers, overall semiconductor industry conditions and Serial EEPROM
pricing declines. We believe that we have continued to grow our percentage of
market share in the embedded control market over the last three fiscal years.
Our sales increases prior to fiscal 2002 can be attributed to several
factors including:
* new product introductions
* strong demand for new and existing products which address our
customers' requirements, and
* focused technical resources that assist our customers in successfully
bringing their products to market.
Our microcontroller product line represents the largest component of our
total net sales. Microcontrollers and associated application development systems
accounted for approximately 78% of our total net sales in fiscal 2002,
approximately 65% of our total net sales in fiscal 2001 and approximately 72% of
our total net sales in fiscal 2000. Net sales of our microcontroller products
decreased approximately 4% in fiscal 2002, compared to fiscal 2001. The decrease
in net sales of our microcontroller products was significantly lower than the
decrease in our other product lines due to our continuing design win performance
and the overall positioning of our proprietary product offerings. Net sales of
our microcontroller products increased approximately 18% in fiscal 2001,
compared to fiscal 2000, driven by increased end market demand, our continued
design win performance and increases in our overall market share. Historically,
average selling prices in the semiconductor industry decrease over the life of
any particular product. The overall average selling prices of our
microcontroller products have remained relatively constant over time due to the
proprietary nature of these products. We have experienced, and expect to
continue to experience, moderate pricing pressure in certain microcontroller
product lines, due primarily to competitive conditions. We have been able to
moderate average selling price declines in our microcontroller product lines by
introducing new products with more features and higher prices.
21
Sales of our Serial EEPROM products accounted for approximately 14% of our
total net sales in fiscal 2002, approximately 25% of our total net sales in
fiscal 2001 and approximately 18% of our total net sales in fiscal 1999. Net
sales of our Serial EEPROM products decreased approximately 54% in fiscal 2002,
compared to fiscal 2001, driven by over supply in the market and significant
pricing pressures. Net sales of our Serial EEPROM products increased
approximately 81% in fiscal 2001, compared to fiscal 2000 driven primarily by
customers' real and perceived supply and demand conditions within the market.
Serial EEPROM product pricing responds to changes in supply and demand factors
over time, being more commodity than proprietary in nature. During the periods
covered by this report, we have experienced various Serial EEPROM product
pricing trends due to market conditions. In fiscal 2000, Serial EEPROM product
pricing trends showed modest declines, while in fiscal 2001, pricing actually
increased due to supply constraints. However, we experienced significant
competitive pricing pressures in our Serial EEPROM product lines during the
first half of fiscal 2002 returning to modest pricing declines in the second
half of fiscal 2002. We anticipate Serial EEPROM pricing to be flat to up 3% in
the first quarter of fiscal 2003.
Sales of mixed-signal analog and interface products accounted for
approximately 7% of our total net sales in fiscal 2002, approximately 10% of our
total net sales in fiscal 2001 and approximately 11% of our total net sales in
fiscal 2000. Net sales of our analog and interface products decreased
approximately 39% in fiscal 2002, compared to fiscal 2001. The decrease in net
sales of our analog and interface products can be attributed to decreased
demand, primarily in the telecommunications market. Net sales of our analog and
interface products increased approximately 17% in fiscal 2001, compared to
fiscal 2000 driven by customers' real and perceived supply and demand conditions
within the market. Analog and interface products can be proprietary or
non-proprietary in nature. Currently, we consider approximately 40% of our
analog and interface product mix to be proprietary in nature, where prices are
relatively stable, similar to the pricing stability of our microcontroller
products. The non-proprietary portion of our analog and interface business will
experience price fluctuations, driven primarily by the current supply and demand
for those products, similar to the pricing pressures experienced in our Serial
EEPROM product lines. During fiscal 2002, our analog and interface products
experienced price reductions of approximately 25%. The price decreases
experienced in fiscal 2002 can be attributed to the supply and demand
environment as well as the integration of the TelCom products into our pricing
structure. We anticipate the proprietary portion of our analog and interface
products to increase over time.
We may be unable to maintain average selling prices for our microcontroller
or other products as a result of increased pricing pressure in the future, which
would adversely affect our operating results.
Sales by product line for the fiscal years ended March 31, 2002, 2001 and
2000 were as follows (in thousands):
Year Ended March 31,
-----------------------------------------------------------
2002 % 2001 % 2000 %
-------- ----- -------- ----- -------- -----
Microcontrollers ............ $446,753 78.2 $467,661 65.3 $395,510 71.5
Serial EEPROM products ...... 81,982 14.4 178,912 25.0 98,658 17.8
Analog and interface products 42,519 7.4 69,157 9.7 58,883 10.7
-------- ----- -------- ----- -------- -----
Total Sales ................. $571,254 100.0% $715,730 100.0% $553,051 100.0%
======== ===== ======== ===== ======== =====
Our net sales in any given quarter depend upon a combination of orders
received in that quarter for shipment in that quarter, which we refer to as
turns orders, and shipments from backlog. We measure turns orders at the
beginning of a quarter based on the orders needed to meet the revenue target
that we set entering the quarter. We emphasize our ability to respond quickly to
customer orders as part of our competitive strategy, resulting in customers
placing orders with short delivery schedules. Turns orders directly correlate
with product lead times, which are currently between two and four weeks
generally, essentially unchanged from lead times a year ago. Shorter lead times
have the effect of increasing turns orders as a percentage of our business in
any given quarter and reducing our visibility on future product shipments. With
current lead times between two and four weeks, customers do not place orders
beyond their immediate requirements and therefore, we do not currently have the
order visibility we experienced throughout fiscal 2001. The percentage of turns
orders in any given quarter is dependent on overall semiconductor industry
conditions and product lead times. As such, our percentage of turns orders has
fluctuated over the last three fiscal years between approximately 20% and 60%.
At April 1, 2002, we required turns orders of approximately 57% in order to
achieve our revenue target for the first quarter of fiscal 2003. At January 1,
2002, we required turns orders of approximately 61% to achieve our revenue
target for the fourth quarter of fiscal 2002.
22
Turns orders are difficult to predict, and we may not experience the
combination of turns orders and shipments from backlog in any particular quarter
that would be sufficient to achieve anticipated net sales. If we do not achieve
a sufficient level of turns orders in a particular quarter relative to our
projections, our revenue and operating results will suffer.
THE FOREGOING STATEMENTS REGARDING AVERAGE SELLING PRICES, PRICING
PRESSURES IN CERTAIN MICROCONTROLLER PRODUCT LINES, PRICING FLUCTUATIONS IN OUR
NON-PROPRIETARY ANALOG AND INTERFACE PRODUCTS LINES, THE INCREASE IN THE PORTION
OF OUR ANALOG AND INTERFACE PRODUCT LINE THAT IS PROPRIETARY, PRICING INCREASES
FOR SERIAL EEPROM PRODUCTS IN THE FIRST QUARTER OF FISCAL 2003 AND THE LEVEL OF
TURNS ORDERS REQUIRED TO MEET OUR REVENUE TARGET FOR THE FIRST QUARTER OF FISCAL
2003, ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY
BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE LEVEL OF ORDERS THAT ARE
RECEIVED AND CAN BE SHIPPED IN A QUARTER; DEMAND FOR OUR PRODUCTS AND THE
PRODUCTS OF OUR CUSTOMERS; OUR INVENTORY MIX AND TIMING OF CUSTOMER ORDERS;
CUSTOMERS' INVENTORY LEVELS, ORDER PATTERNS AND SEASONALITY; THE LEVEL AT WHICH
OUR DESIGN WINS BECOME ACTUAL ORDERS AND SALES; COMPETITION AND COMPETITIVE
PRESSURES ON PRICING AND PRODUCT AVAILABILITY; POSSIBLE DISRUPTION IN COMMERCIAL
ACTIVITIES OCCASIONED BY TERRORIST ACTIVITY AND ARMED CONFLICT, WHICH COULD
RESULT IN CHANGES IN LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED CUSTOMER
PURCHASES RELATIVE TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED STATES,
SUCH AS THE BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL
INSTABILITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE
MARKETS ADDRESSED BY OUR PRODUCTS; MARKET ACCEPTANCE OF OUR NEW PRODUCTS AND
THOSE OF OUR CUSTOMERS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION
EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; CHANGES IN PRODUCT MIX;
ABSORPTION OF FIXED COSTS, LABOR AND OTHER FIXED MANUFACTURING COSTS;
COMPETITIVE FACTORS, SUCH AS COMPETING ARCHITECTURES AND MANUFACTURING
TECHNOLOGIES AND ACCEPTANCE OF NEW PRODUCTS IN THE MARKETS WE GENERALLY SERVE;
AND GENERAL INDUSTRY, ECONOMIC AND POLITICAL CONDITIONS.
Distributors accounted for 62% of our net sales in fiscal 2002, 65% of our
net sales in fiscal 2001 and 63% of our net sales in fiscal 2000. Our largest
distributor accounted for approximately 13% of our net sales in fiscal 2002, 14%
of our net sales in fiscal 2001 and 14% of our net sales in fiscal 2000.
Generally, we do not have long-term agreements with our distributors and our
distributors may terminate their relationships with us with little or no
advanced notice. The loss of, or the disruption in the operations of, one or
more of our distributors could reduce our future net sales in a given quarter
and could result in an increase in product returns. At March 31, 2002,
distributors were maintaining an average of 2.4 months of inventory of our
products. Over the past three fiscal years, the months of inventory maintained
by our distributors have fluctuated between approximately 2.4 and 3.7 months. We
believe that distributor inventory levels are at or near replenishment levels
and that the dollar value and average months' of distributor inventory will
increase in future periods as our business returns to a pattern of growth.
THE FOREGOING STATEMENTS REGARDING DISTRIBUTORS' INVENTORY LEVELS BEING AT
OR NEAR REPLENISHMENT LEVELS, THE DOLLAR VALUE AND AVERAGE MONTHS' OF
DISTRIBUTOR INVENTORY INCREASING IN FUTURE PERIODS AND OUR BUSINESS RETURNING TO
A PATTERN OF GROWTH ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: INVENTORY LEVELS AT
OUR DISTRIBUTORS AND AT THE CUSTOMERS OF OUR DISTRIBUTORS; DEMAND FOR OUR
PRODUCTS AND THE PRODUCTS OF OUR CUSTOMERS; THE LEVEL AT WHICH OUR DESIGN WINS
BECOME ACTUAL ORDERS AND SALES; OUR INVENTORY MIX AND TIMING OF CUSTOMER ORDERS;
ORDER PATTERNS AND SEASONALITY; COMPETITION AND COMPETITIVE PRESSURES ON PRICING
AND PRODUCT AVAILABILITY; POSSIBLE DISRUPTION IN COMMERCIAL ACTIVITIES
OCCASIONED BY TERRORIST ACTIVITY AND ARMED CONFLICT, WHICH COULD RESULT IN
CHANGES IN LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED CUSTOMER PURCHASES
RELATIVE TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED STATES, SUCH AS
THE BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL
INSTABILITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE
MARKETS ADDRESSED BY OUR PRODUCTS; MARKET ACCEPTANCE OF OUR NEW PRODUCTS AND
THOSE OF OUR CUSTOMERS; COMPETITIVE FACTORS, SUCH AS COMPETING ARCHITECTURES AND
MANUFACTURING TECHNOLOGIES AND ACCEPTANCE OF NEW PRODUCTS IN THE MARKETS WE
GENERALLY SERVE; AND GENERAL INDUSTRY, ECONOMIC AND POLITICAL CONDITIONS.
Sales by geography for the fiscal years ended March 31, 2002, 2001 and 2000
were as follows (in thousands):
Year Ended March 31,
--------------------------------------------------------
2002 % 2001 % 2000 %
-------- ----- -------- ----- -------- -----
Americas $192,924 33.8 $236,295 33.0 $191,550 34.6
Europe 179,355 31.4 219,302 30.6 170,072 30.8
Asia 198,975 34.8 260,133 36.4 191,429 34.6
-------- ----- -------- ----- -------- -----
Total Sales $571,254 100.0% $715,730 100.0% $553,051 100.0%
======== ===== ======== ===== ======== =====
23
Our sales to foreign customers have been predominately in Asia and Europe,
which we attribute to the manufacturing strength in those areas for automotive,
communications, computing, consumer and industrial control products. Americas
sales include sales to customers in the United States, Canada, Central America
and South America. Sales to foreign customers accounted for approximately 69% of
our net sales in fiscal 2002 and approximately 68% of our net sales in each of
fiscal 2001 and fiscal 2000. The majority of our foreign sales are U.S. Dollar
denominated.
We enter into hedging transactions from time to time in an attempt to
minimize our exposure to currency rate fluctuations. Although none of the
countries in which we conduct significant foreign operations have had a highly
inflationary economy in the last five years, there is no assurance that
inflation rates or fluctuations in foreign currency rates in countries where we
conduct operations will not adversely affect our operating results in the
future. At March 31, 2002, we had no significant foreign currency contracts
outstanding.
GROSS PROFIT
Our gross profit was $286.7 million in fiscal 2002, $380.7 million in
fiscal 2001 and $283.4 million in fiscal 2000. Gross profit as a percent of
sales was 50.2% in fiscal 2002, 53.2% in fiscal 2001 and 51.3% in fiscal 2000.
The most significant factors affecting gross profit percentage in the
periods covered by this report were:
* reduced levels of manufacturing capacity utilization in fiscal 2002
compared to the previous two fiscal years
* continued cost reductions in wafer fabrication and assembly and test
manufacturing in all periods covered by this report
* maintenance of average selling prices for our microcontroller products
where moderate pricing pressures were significantly offset by new
product introductions with more features and higher selling prices in
all periods covered by this report
* significant competitive pricing pressures in Serial EEPROM products in
the first half of fiscal 2002 returning to a pattern of more moderate
prices declines in the second half of fiscal 2002, as discussed at
page 22
* pricing increases in Serial EEPROM products during fiscal 2001
* modest pricing declines in Serial EEPROM products during fiscal 2000
* fluctuations in the product mix of microcontroller and
analog products and related Serial EEPROM products as illustrated in
the chart in Net Sales on page 22, and
* cost reductions associated with one-week plant shutdowns in each of
the first three quarters of fiscal 2002.
By March 31, 2001, we reduced cumulative wafer capacity at Fab 1 and Fab 2
by approximately 24%, compared to our December 31, 2000 levels, in response to
business conditions that resulted in decreased product demand. During fiscal
2002, Fab 1 and Fab 2 operated at approximately 70% of their capacity due to the
capacity reductions implemented in the March 2001 quarter and a one-week plant
shutdown in each quarter of fiscal 2002. Beginning with the March 2001 quarter,
our overall gross margins have been negatively impacted by these actions due to
the relatively high fixed costs inherent in our wafer fabrication manufacturing,
which continue even at lower capacity levels. We expect capacity utilization in
the first quarter of fiscal 2003 to be approximately 80%. We are taking the
necessary actions to increase our capacity utilization by increasing variable
spending such as direct labor and raw materials costs, and selectively placing
orders for longer lead time manufacturing equipment needed to achieve our
projected manufacturing outputs.
Overall inventory levels have declined from $95.7 million as of March 31,
2001 to $88.6 million as of March 31, 2002, confirming that capacity was reduced
to a level aligned with market demand. We maintained 110 days of inventory on
our balance sheet as of March 31, 2002, compared to 114 days as of March 31,
2001. The highest number of days of inventory that we had experienced for the
period covered by this report was 127 days as of September 30, 2001.
Fab 3 is currently being maintained at minimal operating cost until we
expect to require its capacity for production. We currently plan to utilize Fab
3 for our future production requirements. However, as we begin to plan for the
mobilization of Fab 3, we continue to explore other, potentially more
cost-effective, alternatives that may become available to meet our future
production requirements. When required for production, Fab 3 will produce 8-inch
wafers. Upon commencement of operations at Fab 3, our operating margins could
suffer as production is brought on-line and depreciation on the buildings and
related equipment commences.
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Fabs 1 and 2 currently utilize various manufacturing process technologies,
but predominantly utilize our 1.0 to 0.5-micron processes. We continue to
transition products to more advanced process technologies to reduce future
manufacturing costs. In fiscal 2002, approximately 80% of our production was on
8-inch wafers. In fiscal 2001, products produced on 8-inch wafers increased from
approximately 55% at the beginning of fiscal 2001 to approximately 80% at the
end of fiscal 2001. We anticipate that gross margins will fluctuate over time,
driven primarily by the product mix of microcontroller products and related
memory products, manufacturing yields, fixed cost absorption, wafer fab loading
levels and competitive and economic conditions.
THE FOREGOING STATEMENTS RELATING TO OUR EXPECTED CAPACITY UTILIZATION IN
THE FIRST QUARTER OF FISCAL 2003, CONFIRMATION THAT OUR CAPACITY REDUCTION
ACTIONS HAVE ALIGNED CAPACITY WITH MARKET DEMAND, OUR CONTINUING EXPLORATION OF
ALTERNATIVES TO MEET OUR FUTURE PRODUCTION REQUIREMENTS, THE TRANSITION TO
HIGHER YIELDING MANUFACTURING PROCESSES TO REDUCE FUTURE OPERATING COSTS AND THE
FLUCTUATION OF GROSS MARGINS OVER TIME ARE FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS:
DEMAND FOR OUR PRODUCTS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION
EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; ABSORPTION OF FIXED COSTS, LABOR
AND OTHER DIRECT MANUFACTURING COSTS; COMPETITION AND COMPETITIVE PRESSURE ON
PRICING; POSSIBLE DISRUPTION IN COMMERCIAL ACTIVITIES OCCASIONED BY TERRORIST
ACTIVITY AND ARMED CONFLICT, WHICH COULD RESULT IN CHANGES IN LOGISTICS AND
SECURITY ARRANGEMENTS, AND REDUCED END-USER PURCHASES RELATIVE TO EXPECTATIONS;
IMPACT OF EVENTS OUTSIDE THE UNITED STATES, SUCH AS THE BUSINESS IMPACT OF
FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL INSTABILITY; OUR ABILITY TO
INCREASE MANUFACTURING CAPACITY AS NEEDED; COST AND AVAILABILITY OF RAW
MATERIALS; CHANGES IN PRODUCT MIX; AND OTHER INDUSTRY AND ECONOMIC CONDITIONS.
At March 31, 2002, approximately 53% of our assembly requirements were
being performed in our Thailand facility, compared to approximately 45% as of
March 31, 2001. Third-party contractors located throughout Asia perform the
balance of our assembly operations. Substantially all of our test requirements
were being performed in our Thailand facility as of March 31, 2002, compared to
approximately 95% as of March 31, 2001. We believe that the assembly and test
operations performed at our Thailand facility provide us with significant cost
savings when compared to third-party contractor assembly and test costs, as well
as increased control of these portions of the manufacturing process.
Our reliance on third parties involves some reduction in our level of
control over the portions of our business that we subcontract. While we review
the quality, delivery and cost performance of our third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain manufacturing yields, assembly and test yields and costs at
approximately their current levels.
Our reliance on foreign operations, maintenance of substantially all of our
finished goods in inventory at foreign locations, and significant foreign sales
exposes us to foreign political and economic risks, including:
* political, social and economic instability
* trade restrictions and changes in tariffs
* import and export license requirements and restrictions
* difficulties in staffing and managing international operations
* employment regulations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables
* economic slowdown in the worldwide markets served by us, and
* potentially adverse tax consequences.
To date, we have not experienced any significant interruptions in our
foreign business operations. If any of these risks materialize, our sales could
decrease and our operating results could suffer.
RESEARCH AND DEVELOPMENT (R&D)
R&D expenses for fiscal 2002 were $81.7 million, or 14.3% of sales,
compared to $78.6 million, or 11.0% of sales fiscal 2001 and $52.4 million, or
9.5% of sales for fiscal 2000. We are committed to continuing our investment in
new and enhanced products, including development systems, and in our design and
manufacturing process technologies. We believe these investments are significant
factors in maintaining our competitive position. We expense all R&D costs as
incurred. R&D expenses include expenditures for labor, masks, prototype wafers,
and expenses for the development of process technologies, new packages, and
software to support new products and design environments.
25
R&D expenses increased $3.1 million, or 3.9% for fiscal 2002 over fiscal
2001. R&D expenses increased $26.2 million, or 50.1% for fiscal 2001 over fiscal
2000. The primary reason for the dollar increase in R&D costs in fiscal 2002
over fiscal 2001 and fiscal 2000 was increased labor and professional service
costs associated with expanding our technical resources. R&D expenses would have
increased more in fiscal 2002 if we had not implemented unpaid one-week plant
shutdowns in each of the first two quarters of fiscal 2002.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for fiscal 2002 were $82.6
million, or 14.5% of sales, compared to $102.6 million, or 14.4% of sales for
fiscal 2001 and $86.8 million, or 15.7% of sales for fiscal 2000. Selling,
general and administrative expenses include salary expenses related to field
sales, marketing and administrative personnel, advertising and promotional
expenditures and legal expenses. Selling, general and administrative expenses
also include costs related to our direct sales force and field applications
engineers who work in sales and support centers worldwide to stimulate demand by
assisting customers in the use and proper selection of our products.
Selling, general and administrative expenses decreased $20.0 million, or
19.5%, for fiscal 2002 over fiscal 2001. The primary reason for the dollar
decrease in selling, general and administrative costs in fiscal 2002 over fiscal
2001 relate to reductions in wages, bonuses and recruitment costs and unpaid
one-week plant shutdowns in each of the first two quarters of fiscal 2002.
Selling, general and administrative expenses increased $15.9 million, or 18.3%,
for fiscal 2001 over fiscal 2000. The primary reason for the dollar increase in
selling, general and administrative costs in fiscal 2001 over fiscal 2000 was
the labor and recruitment costs associated with expanding our employment base to
support the growth of our business.
Selling, general and administrative expenses fluctuate over time, primarily
due to revenue and operating expense levels.
SPECIAL CHARGES
There were no special charges in fiscal 2002.
The following table presents a summary of special charges for the fiscal