UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

(Mark One)

 

 

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

 

 

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  ý   No  o

 

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.

 

The Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes  ý   No  o

 

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 September 30, 2003 was $4,855,298,486.

 

Number of shares of Common Stock, $.001 par value, outstanding as of May 27, 2004:  206,798,025.

 

Documents Incorporated by Reference

 

 

 

PART I

 

This Form 10-K contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy and future financial performance.  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 11, “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning below at page 22, 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.

 

Item 1.                                   BUSINESS

 

We develop and manufacture specialized semiconductor products used by our customers for a wide variety of embedded control applications.  Our product portfolio comprises the PICmicro^® field–reprogrammable (Flash) RISC microcontrollers which 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 application-specific standard products (ASSPs).  This synergistic product portfolio targets thousands of applications and a growing demand for high-performance designs in the automotive, communications, computing, consumer and industrial control markets.  Our quality systems are ISO/TS16949 (2002 version) certified.

 

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.  Our executive offices are located at 2355 West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone number is (480) 792-7200.

 

Our Internet address is www.microchip.com.  We post the following filings on our Web site as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission:

 

•                  Our annual report on Form 10-K

•                  Our quarterly reports on Form 10-Q

•                  Our current reports on Form 8-K, and

•                  Any amendments to the above-listed reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934.

 

All SEC filings on our Web site are available free of charge.  The information on our Web site is not incorporated into this Form 10-K.

 

Industry Background

 

Competitive pressures require manufacturers of a wide variety of products to expand product functionality and provide differentiation while maintaining or reducing cost.  To address these requirements, manufacturers often use integrated circuit-based embedded control systems that enable them to:

 

•                  differentiate their products

•                  replace less efficient electromechanical control devices

•                  reduce the number of components in their system

•                  add product functionality

•                  decrease time to market for their products, and

•                  significantly reduce product cost.

 

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Embedded control systems also facilitate the emergence of complete new classes of products.  Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of markets worldwide, including:

 

•     automotive comfort, safety and entertainment applications
•     remote control devices
•     handheld tools
•     home appliances
•     portable computers
•     robotic applications
•     cordless and cellular telephone  accessories
•     motor controls
•     security systems
•     educational and entertainment devices, and
•     consumer electronics.

 

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 peripheral 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, and various analog and interface products.

 

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, they generally lack the minimum performance and features required for product differentiation and are typically used only to produce basic functionality in products.  While traditional 16 and 32-bit architectures provide very high performance, they are generally more expensive for most high-volume embedded control applications, typically costing significantly more than the cost of an 8-bit microcontroller.  As a result, manufacturers of competitive, high-volume products have found 8-bit microcontrollers to be the most cost-effective embedded control solution.

 

Most microcontrollers shipped today are ROM-based and must be programmed by the semiconductor supplier during manufacturing, resulting in 10 to 12-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 in the firmware are required. To address these issues, some suppliers offer programmable microcontrollers that can be configured by the customer in the customer’s manufacturing line, thus minimizing lead-time and inventory risks when the inevitable firmware changes occur.  While these microcontrollers were initially expensive relative to ROM-based microcontrollers, manufacturing technology has evolved over the last several years to the point where reprogrammable microcontrollers are now available for little to no premium over ROM-based microcontrollers, thus providing significant value to microcontroller customers.  As a result, reprogrammable microcontrollers are the fastest growing segment of the 8-bit microcontroller market.

 

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

•                  smart battery management devices, and

•                  complementary microperipheral products including interface devices, Serial EEPROMs, and our patented KEELOQ^® security devices.

 

We provide highly cost-effective embedded control products that also offer the advantages of small size, high performance, low voltage/power operation and ease of development, enabling timely and cost-effective embedded control product integration by our customers.

 

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Microcontrollers

 

We offer a broad family of microcontroller products featuring a unique, proprietary architecture marketed under the PIC^® brand name.  We believe that our PIC^® product family is a price/performance leader in the worldwide microcontroller market.  We have shipped over 3 billion PIC^® microcontrollers to customers worldwide since their introduction in 1990.  Our PIC^® 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.  Over the last three years, all of our new microcontroller product development has been focused on reprogrammable (Flash) based PIC microcontrollers.  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 alternative single-bus, CISC architectures.  With over 210 microcontrollers in our product portfolio, we target the entire performance range of 8-bit microcontrollers.  Additionally, our scalable product architecture allows us to successfully target 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^® 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, and to be a leader in reprogrammable (Flash) microcontroller product offerings.

 

Digital Signal Controllers

 

We recently began production shipments of our Digital Signal Controller product line.  Our family of dsPICä microcontrollers is a series of high-performance 16-bit microcontrollers, combining the many features and capabilities of our PIC^® family of 8-bit microcontrollers with the high-performance capabilities of a digital signal processor (DSP).  During the last three fiscal years, all of our Digital Signal Controller product development has been focused on reprogrammable (Flash) products.

 

Our dsPICä product family will offer a broad development tool suite of hardware and software to ease the effort of the designer, high-performance Harvard dual-bus architecture and a proliferation of integrated peripherals to monitor and control many aspects of the embedded control product.  With its field-re-programmability, program memory, low power, small footprint and ease of use, we believe that our dsPICä microcontrollers will significantly enlarge our addressable market.

 

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^® microcontroller for specific applications and are a key factor for obtaining design wins.

 

Our family of development tools operates in the standard Windows^® 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.  Fully configured systems that provide in-circuit emulation hardware are priced between $2,000 and $3,500.  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^® 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 150 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 300,000 development systems.

 

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ASSPs

 

Our application-specific standard products, referred to as ASSPs, are specialized products designed to perform specific end-user applications, compared to our other products that are more general purpose in nature.  Our ASSP device families currently include, among others, the KEELOQ^® family of secure data transmission products and smart battery management products.

 

Analog and Interface Products

 

Our analog and interface products now consist of several families with over 380 power management, linear, mixed-signal, thermal management and interface products.  At the end of fiscal 2004, our mixed-signal analog and interface products were being shipped to more than 8,900 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^® 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.

 

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

 

Our manufacturing operations include wafer fabrication and assembly and test.  The ownership of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control resulting in us being one of the lowest cost producers in the embedded control industry.  By owning our wafer fabrication facilities and much of our assembly and test operations, and by employing proprietary statistical process control techniques, we have been able to achieve and maintain 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.

 

Our manufacturing facilities are located in:

 

•                  Chandler, Arizona (probe operations)

•                  Tempe, Arizona (Fab 2)

•                  Puyallup, Washington (Fab 3) (non-operational-held for sale)

•                  Gresham, Oregon (Fab 4), and

•                  Bangkok, Thailand (assembly and test).

 

Wafer Fabrication

 

On April 7, 2003, we announced our intention to close our Chandler, Arizona (Fab 1) wafer fabrication facility and integrate certain Fab 1 personnel and processes into our Tempe, Arizona (Fab 2) wafer fabrication facility.  We completed this integration process during the three-month period ended June 30, 2003.  The closure of Fab 1 and the integration of certain Fab 1 personnel into our Fab 2 operations resulted in a reduction in force of 207 employees who were either directly involved in our manufacturing operations or provided support functions to Fab 1.

 

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The facility where Fab 1 is located is an integral part of our overall campus in Chandler, Arizona.  Within this same facility resides our wafer probe, mask making and other manufacturing related activities.  We have no specific plans for utilizing the space formerly housing the wafer fabrication operations, and intend to leave it in an idle status.

 

Fab 2 currently produces 8-inch wafers and supports manufacturing processes between 0.35 and 5.0 microns.  During fiscal 2004, Fab 2 operated at approximately 91% of its capacity compared to approximately 88% during fiscal 2003.  Operating at higher percentages of capacity has a positive impact on operating results due to the relatively high fixed costs inherent in our wafer fabrication manufacturing.

 

Fab 3 is non-operational and is currently classified as an asset held-for-sale.  See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Special Charges – Fab 3 Impairment Charge,” below at page 33, for a discussion of the status of Fab 3.

 

Fab 4 was acquired in August 2002 and began production on October 31, 2003.  Fab 4 produces 8-inch wafers using 0.5 micron manufacturing processes and is capable of supporting technologies below 0.18 microns.  We are in the early states of ramping our production activities at Fab 4.  Fab 4 has an installed equipment base that will allow us to produce an additional $600 to $800 million in annual product sales.  We believe the combined capacity of Fab 2 and Fab 4 will provide sufficient capacity to allow us to respond to increases in future demand.

 

We continue to transition products to more advanced process technologies to reduce future manufacturing costs.  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.

 

We also contract with third-party wafer foundries to fabricate less than 5% of our total production, primarily in our analog and smart battery management product families.  We have transitioned many of these products to our own wafer fabrication facilities and plan to continue to do so over time.  On a strategic basis, we will continue to use third-party foundries to shorten our product design cycle on certain key technologies and products.

 

Assembly and Test

 

We perform product assembly and testing at our facilities located near Bangkok, Thailand.  At March 31, 2004, approximately 71% of our assembly requirements were being performed in our Thailand facility.  As of March 31, 2004, our Thailand facility was testing substantially all of our wafer production.  As of April 30, 2004, we had substantially completed a 67,000 square foot expansion at our Thailand facility that, once placed in service, will increase the facility’s test capacity by approximately 80%.  The expansion area is expected to be placed in service in fiscal 2005.  We also use third-party assembly and test contractors in several Asian countries for the balance of our assembly and test requirements.

 

General Matters Impacting Our Manufacturing Operations

 

We 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.

 

Due to the high fixed costs inherent in semiconductor manufacturing, consistently high manufacturing yields have significant positive effects on our gross profit and overall operating results.  During fiscal 2004, our focus on manufacturing productivity allowed us to maintain average wafer fab line yields at our facilities 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

 

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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.

 

Our reliance on third parties for a portion of wafer fabrication and assembly and testing 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.

 

The foregoing statements related to the equipment base at Fab 4 allowing us to produce an additional $600 to $800 million in annual product sales, the combined capacity of Fab 2 and Fab 4 providing sufficient capacity to allow us to respond to future increases in demand 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: changes in utilization of our current manufacturing capacity; unanticipated costs in continuing to ramp production at Fab 4; our ability to increase production at Fab 2; the ability to attract and retain qualified personnel in the Portland, Oregon area; changes in demand for products and the products of our customers; changes in demand for our analog and battery management products; supply disruption; absorption of fixed costs, labor and other direct manufacturing costs; fluctuations in production yields; production efficiencies and overall capacity utilization; changes in product mix; competitive pressures on prices; labor unrest; political instability and expropriation; and other general economic conditions.

 

Research and Development (R&D)

 

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 R&D activities focus on the design of new 8-bit microcontrollers, 16-bit digital signal controllers, memory and mixed-signal products, ASSPs, new development systems, and software and application-specific software libraries.  We are also developing new design and process technologies to achieve further cost reductions and performance improvements in existing products.

 

In fiscal 2004, our R&D expenses were $85.4 million, compared to $88.0 million in fiscal 2003 and $81.7 million in fiscal 2002.

 

Sales and Distribution

 

General

 

We market our products worldwide primarily through a network of direct sales personnel and distributors.

 

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 (FSEs), field application engineers (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.  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.

 

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Distribution

 

Our distributors focus primarily on servicing the product and technical support requirements of a broad base of diverse customers.  We believe that distributors provide an effective means of reaching this broad and diverse customer base.

 

In fiscal 2004, we derived 64% of our net sales from sales through distributors and 36% of our net sales from direct sales to original equipment manufacturers, referred to as OEM customers.  Distributors accounted for 60% of our net sales in fiscal 2003 and 62% of our net sales in fiscal 2002.  Our two largest distributors combined accounted for approximately 25% of our net sales for fiscal 2004 and 21% of our net sales in fiscal 2003.  In fiscal 2004, our two largest distributors accounted for 13% and 12%, respectively, of our net sales.  In fiscal 2003 and 2002, one distributor accounted for 12% and 13%, respectively, of our net sales.  No other distributor or end customer accounted for more than 10% of our net sales in fiscal 2004, 2003 or 2002.

 

We do not have long-term agreements with our distributors and we, or our distributors, may terminate our relationships with each other 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 inventory returns.

 

Distributors generally have broad-based rights to return product to us.  As revenue on distributor shipments is not recognized until the distributors sell our product on to their end customers, distributor returns have no impact on our revenue.

 

We also grant certain credits to our third-party distributors and also offer these distributors price protection.  The credits are granted to the distributors on specifically identified pieces of the distributors’ business to allow them to earn a competitive gross margin on the sale of our products to their end customers.  The credits are on a per unit basis and are not given to the distributor until they provide information regarding the sale to their end customer.  The effect of granting these credits establishes the net selling price from us to our distributors for the products and results in the net revenue recognized by us when the product is sold by the distributors to their end customers.

 

We reduce product pricing through price protection based on market conditions, competitive considerations and other factors.  Price protection is granted to third-party distributors on the inventory that they have on hand at the date the price protection is offered.  When we reduce the selling price of our products, it allows the distributors to claim a credit against its outstanding accounts receivables balances based on the new price of the inventory it has on hand as of the date of the price reduction.  There is no revenue recognition impact from the price protections.

 

We do not offer material incentive programs to our third-party distributors.

 

Sales by Geography

 

Sales by geography for fiscal 2004, 2003 and 2002 were as follows (dollars in thousands):

 

		Year Ended March 31,
		2004			%		2003			%		2002			%
Americas		$	219,641		31.4		$	219,504		33.7		$	192,924		33.8
Europe		194,187			27.8		177,727			27.3		179,355			31.4
Asia		285,432			40.8		254,231			39.0		198,975			34.8
Total Sales		$	699,260		100.0	%	$	651,462		100.0	%	$	571,254		100.0	%

 

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 71% of our net sales in fiscal 2004 and fiscal 2003, and approximately 69% of our net sales in fiscal 2002.

 

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Sales to customers in China, including Hong Kong, accounted for approximately 14% of our net sales in fiscal 2004 and approximately 13% of our net sales in fiscal 2003.  We did not have sales into any other foreign countries that exceeded 10% of our net sales during the periods covered by this report.

 

Our international sales are predominately U.S. Dollar denominated.  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.

 

Our foreign operations are subject to a number of risks as described under the heading, “We are highly dependent on foreign sales and operations, which exposes us to foreign political and economic risks,” on page 15.

 

Backlog

 

As of April 23, 2004, our backlog was approximately $209.9 million, compared to $106.6 million as of April 25, 2003.  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.   During the last two quarters of fiscal 2004, our product lead times extended and resulted in customers providing us with additional backlog leading to improved visibility.

 

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 have 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 generally 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 the following product characteristics:

 

•                  speed
•                  functionality
•                  density
•                  power consumption
•                  reliability
•                  packaging alternatives
•                  price, and
•                  availability.