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

FORM 10-Q

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

For the quarterly period ended September 30, 2017.
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number:  0-21184

mchplogohorizontal4ca02.jpg
 
  
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)

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

2355 W. Chandler Blvd., Chandler, AZ  85224-6199
(480) 792-7200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's
Principal Executive Offices)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes  x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x No o

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  (Check One)
Yes    o No   x

Shares Outstanding of Registrant's Common Stock
Class
 
Outstanding at October 27, 2017
Common Stock, $0.001 par value
 
233,905,387 shares
 



MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

INDEX

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




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


Item1.
Financial Statements

ASSETS
September 30,
2017
 
March 31,
2017
Cash and cash equivalents
$
826,407

 
$
908,684

Short-term investments
488,197

 
394,088

Accounts receivable, net
545,416

 
478,373

Inventories
456,939

 
417,202

Prepaid expenses
44,404

 
41,354

Assets held for sale

 
6,459

Other current assets
82,059

 
58,880

Total current assets
2,443,422

 
2,305,040

Property, plant and equipment, net
722,780

 
683,338

Long-term investments
529,249

 
107,457

Goodwill
2,299,009

 
2,299,009

Intangible assets, net
1,905,730

 
2,148,092

Long-term deferred tax assets
81,370

 
68,870

Other assets
73,638

 
75,075

Total assets
$
8,055,198

 
$
7,686,881

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accounts payable
$
182,599

 
$
149,233

Accrued liabilities
221,244

 
212,450

Deferred income on shipments to distributors
324,363

 
292,815

Current portion of long-term debt
5,980

 
49,952

Total current liabilities
734,186

 
704,450

Long-term debt
3,011,852

 
2,900,524

Long-term income tax payable
194,342

 
184,945

Long-term deferred tax liability
328,235

 
409,045

Other long-term liabilities
240,459

 
217,206

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

 

Common stock, $0.001 par value; authorized 450,000,000 shares; 253,150,952 shares issued and 233,847,159 shares outstanding at September 30, 2017; 249,463,733 shares issued and 229,093,658 shares outstanding at March 31, 2017
234

 
229

Additional paid-in capital
2,590,085

 
2,537,344

Common stock held in treasury: 19,303,793 shares at September 30, 2017; 20,370,075 shares at March 31, 2017
(698,078
)
 
(731,884
)
Accumulated other comprehensive loss
(17,812
)
 
(14,378
)
Retained earnings
1,671,695

 
1,479,400

Total stockholders' equity
3,546,124

 
3,270,711

Total liabilities and stockholders' equity
$
8,055,198

 
$
7,686,881

See accompanying notes to condensed consolidated financial statements

3


MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net sales
$
1,012,139

 
$
871,364

 
$
1,984,280

 
$
1,670,775

Cost of sales (1)
398,045

 
460,743

 
785,747

 
911,664

Gross profit
614,094

 
410,621

 
1,198,533

 
759,111

 
 

 
 

 
 

 
 

Research and development  (1)
133,621

 
137,795

 
264,101

 
285,678

Selling, general and administrative  (1)
114,289

 
120,129

 
228,561

 
277,634

Amortization of acquired intangible assets
120,913

 
80,394

 
241,758

 
160,565

Special charges and other, net
19,872

 
9,543

 
17,116

 
31,578

 Operating expenses
388,695

 
347,861

 
751,536

 
755,455

 
 
 
 
 
 
 
 
Operating income
225,399

 
62,760

 
446,997

 
3,656

Losses on equity method investment
(56
)
 
(56
)
 
(111
)
 
(112
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
4,609

 
445

 
8,135

 
1,264

Interest expense
(49,459
)
 
(35,126
)
 
(98,949
)
 
(69,542
)
Loss on settlement of convertible debt

 

 
(13,826
)
 

Other income (loss), net
5,743

 
(2,789
)
 
10,195

 
(779
)
Income (loss) before income taxes
186,236

 
25,234

 
352,441

 
(65,513
)
Income tax (benefit) provision
(2,920
)
 
(10,340
)
 
(7,302
)
 
8,138

Net income (loss) from continuing operations
189,156

 
35,574

 
359,743

 
(73,651
)
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations

 
(1,850
)
 

 
(7,323
)
Income tax benefit

 
(195
)
 

 
(1,530
)
Net loss from discontinued operations

 
(1,655
)
 

 
(5,793
)
 
 
 
 
 
 
 
 
Net income (loss)
$
189,156

 
$
33,919

 
$
359,743

 
$
(79,444
)
 
 
 
 
 
 
 
 
Basic net income (loss) per common share
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
0.81

 
$
0.17

 
$
1.55

 
$
(0.34
)
Net loss from discontinued operations

 
(0.01
)
 

 
(0.03
)
Net income (loss)
$
0.81

 
$
0.16

 
$
1.55

 
$
(0.37
)
Diluted net income (loss) per common share
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
0.77

 
$
0.15

 
$
1.48

 
$
(0.34
)
Net loss from discontinued operations

 
(0.01
)
 

 
(0.03
)
Net income (loss)
$
0.77

 
$
0.14

 
$
1.48

 
$
(0.37
)
Dividends declared per common share
$
0.3620

 
$
0.3600

 
$
0.7235

 
$
0.7195

Basic common shares outstanding
233,299

 
215,524

 
231,364

 
214,935

Diluted common shares outstanding
244,767

 
233,960

 
243,835

 
214,935

(1) Includes share-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of sales
$
3,699

 
$
4,100

 
$
7,093

 
$
11,997

Research and development
10,587

 
10,171

 
20,876

 
27,688

Selling, general and administrative
9,324

 
10,119

 
18,049

 
44,284

See accompanying notes to condensed consolidated financial statements

4


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

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
189,156

 
$
33,919

 
$
359,743

 
$
(79,444
)
Components of other comprehensive income (loss):
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses), net of tax effect
490

 
(404
)
 
(354
)
 
(1,729
)
Reclassification of realized transactions, net of tax effect

 
7

 

 
89

Defined benefit plans:
 
 
 
 
 
 
 
Actuarial gains (losses) related to defined benefit pension plans, net of tax benefit of $2,311 $742, $1,385 and $3,745, respectively
618

 
(1,525
)
 
(3,496
)
 
(8,330
)
Reclassification of realized transactions, net of tax effect
213

 

 
416

 

Change in net foreign currency translation adjustment

 
454

 

 
(2,569
)
Other comprehensive income (loss), net of tax effect
1,321

 
(1,468
)
 
(3,434
)
 
(12,539
)
Comprehensive income (loss)
$
190,477

 
$
32,451

 
$
356,309

 
$
(91,983
)

See accompanying notes to condensed consolidated financial statements


5

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

 
Six Months Ended
 
September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
359,743

 
$
(79,444
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
304,356

 
225,957

Deferred income taxes
(46,939
)
 
(17,820
)
Share-based compensation expense related to equity incentive plans
46,018

 
83,969

Loss on settlement of convertible debt
13,826

 

Amortization of debt discount on convertible debt
52,306

 
24,413

Amortization of debt issuance costs
3,339

 
2,118

Losses on equity method investments
111

 
112

Gains on sale of assets
(5,381
)
 
(75
)
Losses on write-down of fixed assets
53

 
317

Impairment of intangible assets
215

 
1,984

Realized losses on available-for-sale investment

 
89

Realized gains on equity method investment

 
(468
)
Amortization of premium on available-for-sale investments
593

 

Changes in operating assets and liabilities, excluding impact of acquisitions:
 
 
 
Increase in accounts receivable
(67,043
)
 
(25,432
)
(Increase) decrease in inventories
(40,149
)
 
215,950

Increase in deferred income on shipments to distributors
31,548

 
39,764

Increase (decrease) in accounts payable and accrued liabilities
25,806

 
(22,017
)
Change in other assets and liabilities
16,721

 
(13,641
)
Operating cash flows related to discontinued operations

 
10,314

Net cash provided by operating activities
695,123

 
446,090

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investments
(879,437
)
 
(25
)
Maturities of available-for-sale investments
363,086

 
350

Sales of available-for-sale investments

 
470,215

Sale of equity method investment

 
468

Acquisition of Atmel, net of cash acquired

 
(2,747,516
)
Investments in other assets
(3,838
)
 
(3,232
)
Proceeds from sale of assets
10,241

 
66

Capital expenditures
(82,025
)
 
(36,646
)
Net cash used in investing activities
(591,973
)
 
(2,316,320
)
Cash flows from financing activities: (1)
 

 
 

Payments on conversion of convertible debt
(15,166
)
 

Repayments of revolving loan under credit facility
(113,000
)
 
(951,500
)
Proceeds from borrowings on revolving loan under credit facility
113,000

 
1,385,000

Deferred financing costs
(814
)
 

Payment of cash dividends
(167,448
)
 
(154,877
)
Proceeds from sale of common stock
19,568

 
25,452

Tax payments related to shares withheld for vested restricted stock units
(21,176
)
 
(35,843
)
Capital lease payments
(391
)
 
(391
)
Net cash (used in) provided by financing activities
(185,427
)
 
267,841

Effect of foreign exchange rate changes on cash and cash equivalents

 
(374
)
Net decrease in cash and cash equivalents
(82,277
)
 
(1,602,763
)
Cash and cash equivalents at beginning of period
908,684

 
2,092,751

Cash and cash equivalents at end of period
$
826,407

 
$
489,988

Schedule of significant non-cash financing activity:
(1) During the six months ended September 30, 2017, the Company issued $111.3 million principal amount of 2017 Junior Notes and 3.2 million shares of common stock in exchange for $111.3 million principal amount of 2007 Junior Notes. Refer to Note 13 Debt and Credit Facility for further discussion.

See accompanying notes to condensed consolidated financial statements

6



Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Microchip Technology Incorporated and its majority-owned and controlled subsidiaries (the Company).  All intercompany balances and transactions have been eliminated in consolidation.
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP), pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC).  The information furnished herein reflects all adjustments which are, in the opinion of management, of a normal recurring nature and necessary for a fair statement of the results for the interim periods reported. Certain information and footnote disclosures normally included in audited consolidated financial statements have been condensed or omitted pursuant to such SEC rules and regulations.  It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2017.  The results of operations for the six months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018 or for any other period.

Note 2. Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

During the three months ended June 30, 2017, the Company adopted ASU 2015-11-Simplifying the Measurement of Inventory. This standard requires that entities measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and is applied prospectively. The adoption of this standard did not have a material impact on the Company's financial statements.

In March 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-07-Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This standard improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendment will require the employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost will be presented separately in the income statement from the service cost component outside of income from operations. The amendment is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period (in the first interim period) for which financial statements have not yet been issued. During the three months ended June 30, 2017, the Company elected to early adopt ASU 2017-07 and the adoption of this standard did not have a material impact on its financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2017, the FASB issued ASU 2017-12-Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The update expands an entity's ability to apply hedge accounting for nonfinancial and financial risk components and allows for a simplified approach for fair value hedging of interest rate risk. The update eliminates the need to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item. Additionally, the update simplifies the hedge documentation and effectiveness assessment requirements under the previous guidance. The effective date will be for fiscal years beginning after December 15, 2018 and early adoption is permitted. Adoption will be applied through a cumulative-effect adjustment for cash flow and net investment hedges existing at the date of adoption and prospectively for presentation and disclosure. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

7


In January 2017, the FASB issued ASU 2017-04-Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendment is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019, and early adoption is permitted. The Company does not expect this standard to have an impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18-Statement of Cash Flows: Restricted Cash. This standard requires that the statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard is to be applied using a retrospective transition method to each period presented. The Company does not expect this standard to have a material impact on its consolidated financial statements.

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

In June 2016, the FASB issued ASU 2016-13-Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.  This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of having been incurred. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually and can include forecasted information. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019, and permits early adoption, but not before December 15, 2018. The standard is to be applied using a modified retrospective approach. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

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

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

In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under US GAAP.  In July 2015, the FASB issued ASU 2015-14-Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard by one year to December 15, 2017, for annual and interim reporting periods beginning after that date. In accordance with the delay, the new standard will be effective for the Company beginning no later than April 1, 2018.  The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in

8


an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. In March 2016, the FASB issued ASU 2016-08 - Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10 - Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations. In May 2016, the FASB issued ASU 2016-12 - Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which addresses implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group. As described in the Company's significant accounting policies, the Company currently defers the revenue and cost of sales on shipments to distributors until the distributor sells the product to their end customer. Upon adoption of ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, the Company will no longer defer revenue until sale by the distributor to the end customer, but rather, will be required to estimate the effects of returns and allowances provided to distributors and record revenue at the time of sale to the distributor. The Company is currently evaluating the impact that the adoption of the standards will have on its consolidated financial statements. The Company currently expects to adopt the standard under the modified retrospective method. The final adoption method will depend on the results of the Company's ongoing assessment of the standard, which is expected to be completed later in fiscal 2018.

Note 3. Business Acquisitions
Acquisition of Atmel
On April 4, 2016, the Company acquired Atmel, a publicly traded company based in San Jose, California. The Company paid an aggregate of approximately $2.98 billion in cash and issued an aggregate of 10.1 million shares of its common stock to Atmel stockholders valued at $486.1 million based on the closing price of the Company's common stock on April 4, 2016 and incurred transaction and other fees of approximately $14.9 million. The total consideration transferred in the acquisition, including approximately $7.5 million of non-cash consideration for the exchange of certain share-based payment awards of Atmel for stock awards of the Company, was approximately $3.47 billion. In addition to the consideration transferred, the Company recognized in its consolidated financial statements $653.1 million in liabilities of Atmel consisting of debt, taxes payable and deferred, pension obligations, restructuring, and contingent and other liabilities. The Company financed the cash portion of the purchase price using approximately $2.04 billion of cash held by certain of its foreign subsidiaries and approximately $0.94 billion from additional borrowings under its existing credit agreement. As a result of the acquisition, Atmel became a wholly owned subsidiary of the Company. Atmel is a worldwide leader in the design and manufacture of microcontrollers, capacitive touch solutions, advanced logic, mixed-signal, nonvolatile memory and radio frequency components. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Atmel have been included in the Company's consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Atmel's net tangible assets and intangible assets based on their estimated fair values as of April 4, 2016.  The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's semiconductor products reporting segment.  None of the goodwill related to the Atmel acquisition is deductible for tax purposes.  The Company retained independent third-party appraisers to assist management in its valuation.

The table below represents the allocation of the final purchase price to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (amounts in thousands).


9


Assets acquired
 
 
Cash and cash equivalents
 
$
230,266

Accounts receivable
 
141,359

Inventories
 
335,163

Prepaid expenses and other current assets
 
28,360

Assets held for sale
 
32,006

Property, plant and equipment
 
129,884

Goodwill
 
1,286,371

Purchased intangible assets
 
1,888,392

Long-term deferred tax assets
 
46,700

Other assets
 
7,535

Total assets acquired
 
4,126,036

 
 
 
Liabilities assumed
 
 
Accounts payable
 
(55,686
)
Other current liabilities
 
(120,955
)
Long-term line of credit
 
(192,000
)
Deferred tax liabilities
 
(27,552
)
Long-term income tax payable
 
(115,177
)
Other long-term liabilities
 
(141,688
)
Total liabilities assumed
 
(653,058
)
Purchase price allocated
 
$
3,472,978


Purchased Intangible Assets
Weighted Average
 
 
 
Useful Life
 
 
 
(in years)
 
(in thousands)
Core and developed technology
11
 
$
1,074,987

In-process research and development
 
140,700

Customer-related
6
 
630,600

Backlog
1
 
40,300

Other
5
 
1,805

Total purchased intangible assets
 
 
$
1,888,392

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

10


estimated profit associated with those orders. Backlog related assets had a one year useful life and were being amortized on a straight-line basis over that period. The total weighted average amortization period of intangible assets acquired as a result of the Atmel transaction is 9 years. Amortization expense associated with acquired intangible assets is not deductible for tax purposes.  Thus, approximately $178.1 million was established as a net deferred tax liability for the future amortization of the intangible assets.

Note 4. Discontinued Operations

Discontinued operations include the mobile touch operations that the Company acquired as part of its acquisition of Atmel. The mobile touch assets had been marketed for sale since the Company's acquisition of Atmel on April 4, 2016 based on management's decision that it was not a strategic fit for the Company's product portfolio. On November 10, 2016, the Company completed the sale of the mobile touch assets to Solomon Systech (Limited) International, a Hong Kong based semiconductor company. The transaction included the sale of certain semiconductor products, equipment, customer list, backlog, patents, and a license to certain other intellectual property and patents related to the Company's mobile touch product line. The Company also agreed to provide certain transition services to Solomon Systech, which were substantially complete as of March 31, 2017. For financial statement purposes, the results of operations for this discontinued business have been segregated from those of the continuing operations and are presented in the Company's condensed consolidated financial statements as discontinued operations.

As the Company completed the sale of the mobile touch assets on November 10, 2016, there are no discontinued operations for the three and six months ended September 30, 2017. The results of discontinued operations for the three and six months ended September 30, 2016 are as follows (amounts in thousands):

 
September 30, 2016
 
Three Months Ended
 
Six Months Ended
Net sales
$
8,035

 
$
17,411

Cost of sales
6,939

 
15,363

Operating expenses
2,946

 
9,371

Income tax benefit
(195
)
 
(1,530
)
Net loss from discontinued operations
$
(1,655
)
 
$
(5,793
)

Note 5. Special Charges and Other, Net

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

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Restructuring
 
 
 
 
 
 
 
Employee separation costs
$
301

 
$
9,205

 
$
1,387

 
$
28,821

Gain on sale of assets

 

 
(4,447
)
 

Impairment charges

 

 
100

 
1,961

Contract exit costs
19,568

 
302

 
20,154

 
340

Other
3

 
36

 
(78
)
 
456

Total
$
19,872

 
$
9,543

 
$
17,116

 
$
31,578


The Company continuously evaluates its existing operations in an attempt to identify and realize cost savings opportunities and operational efficiencies. This same approach is applied to businesses that are acquired by the Company and often the operating models of acquired companies are not as efficient as the Company's operating model which enables the Company to realize significant savings and efficiencies. As a result, following an acquisition, the Company will from time to time incur restructuring expenses; however, the Company is often not able to estimate the timing or amount of such costs in advance of the period in which they occur. The primary reason for this is that the Company regularly reviews and evaluates

11


each position, contract and expense against the Company's strategic objectives, long-term operating targets and other operational priorities. Decisions related to restructuring activities are made on a "rolling basis" during the course of the integration of an acquisition whereby department managers, executives and other leaders work together to evaluate each of these expenses and make recommendations. As a result of this approach, at the time of an acquisition, the Company is not able to estimate the total amount of expected employee separation or exit costs that it will incur in connection with its restructuring activities.

The Company's restructuring expenses during fiscal 2017 were related to the Company's recent business combinations, including the acquisitions of Atmel and Micrel, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. These expenses were for employee separation costs, contract exit costs, other operating expenses and intangible asset impairment losses. At March 31, 2017, these activities were substantially complete; however, the Company may continue to incur additional costs in the future as additional synergies or operational efficiencies are identified. The Company is not able to estimate the amount of such future expenses, if any, at this time.

All of the Company's restructuring activities occurred in its semiconductor products segment. The Company incurred $52.5 million in costs since the start of fiscal 2015 in connection with employee separation activities, of which $0.3 million and $1.4 million was incurred during the three and six months ended September 30, 2017, respectively, and $9.2 million and $28.8 million was incurred during the during the three and six months ended September 30, 2016, respectively. These employee separation activities are now substantially complete and any future amounts are not expected to be material. The Company has incurred $64.9 million in costs in connection with contract exit activities since the start of fiscal 2015 of which $19.6 million and $20.2 million was incurred during the three and six months ended September 30, 2017, respectively, and $0.3 million was incurred for each of the three and six months ended September 30, 2016. These acquisition-related contract exit activities are now substantially complete and any future amounts are not expected to be material.

In the three months ended September 30, 2017, the Company recognized a $19.5 million charge for fees associated with transitioning from the public utility provider in Oregon to a lower cost direct access provider. The fee will be paid monthly starting in calendar year 2018 and will depend on the amount of actual energy consumed by the Company's wafer fabrication facility in Oregon over the next five years. In connection with the transition to a direct access provider, the Company signed a ten-year supply agreement to purchase monthly amounts of energy that are less than the current average usage and priced on a per mega watt hour published index rate in effect at those future dates.

In the three months ended June 30, 2017, the Company completed the sale of an asset it acquired as part of its acquisition of Micrel for proceeds of $10.0 million and the gain of $4.4 million is included in the gain on sale of assets in the above table. As of March 31, 2017, these assets consisting of property, plant and equipment were presented as held for sale in the Company's consolidated financial statements.

The impairment losses in the six months ended September 30, 2016 were recognized as a result of changes in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets. The following is a rollforward of accrued restructuring charges from April 1, 2017 to September 30, 2017 (amounts in thousands):
 
Employee Separation Costs
 
Exit Costs
 
Total
Balance at April 1, 2017 - Restructuring Accrual
$
5,474

 
$
34,751

 
$
40,225

Charges
1,387

 
20,154

 
21,541

Payments
(4,403
)
 
(5,037
)
 
(9,440
)
Non-cash - Other
(287
)
 
300

 
13

Foreign exchange gains
258

 

 
258

Balance at September 30, 2017 - Restructuring Accrual
$
2,429

 
$
50,168

 
$
52,597

Current
 
 
 
 
$
13,605

Non-current
 
 
 
 
38,992

 
 
 
 
 
$
52,597


The restructuring liability of $52.6 million is included in accrued liabilities and other long-term liabilities on the Company's condensed consolidated balance sheet as of September 30, 2017.


12


Note 6. Segment Information
 
The Company's reportable segments are semiconductor products and technology licensing.  The Company does not allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income taxes to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is beneficial in evaluating segment performance.  Additionally, the Company does not allocate assets to segments for internal reporting purposes as it does not manage its segments by such metrics.

The following table represents net sales and gross profit for each segment for the three and six months ended September 30, 2017 (amounts in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 30, 2017
 
September 30, 2017
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Semiconductor products
$
986,361

 
$
588,316

 
$
1,933,467

 
$
1,147,720

Technology licensing
25,778

 
25,778

 
50,813

 
50,813

Total
$
1,012,139

 
$
614,094

 
$
1,984,280

 
$
1,198,533


The following table represents net sales and gross profit for each segment for the three and six months ended September 30, 2016 (amounts in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 30, 2016
 
September 30, 2016
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Semiconductor products
$
847,694

 
$
386,951

 
$
1,626,517

 
$
714,853

Technology licensing
23,670

 
23,670

 
44,258

 
44,258

Total
$
871,364

 
$
410,621

 
$
1,670,775

 
$
759,111


Note 7. Investments
 
The Company's investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to the Company's investment guidelines and market conditions.  The following is a summary of available-for-sale securities at September 30, 2017 (amounts in thousands):
 
Available-for-sale Securities
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Government agency bonds
$
612,396

 
$
12

 
$
(1,456
)
 
$
610,952

Municipal bonds - taxable
10,000

 
16

 

 
10,016

Corporate bonds and debt
393,630

 
87

 
(182
)
 
393,535

Marketable equity securities
707

 
2,236

 

 
2,943

Total
$
1,016,733

 
$
2,351

 
$
(1,638
)
 
$
1,017,446


The following is a summary of available-for-sale securities at March 31, 2017 (amounts in thousands):

13


 
Available-for-sale Securities
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Government agency bonds
$
227,089

 
$
3

 
$
(227
)
 
$
226,865

Municipal bonds - tax-exempt
55,289

 

 
(10
)
 
55,279

Municipal bonds - taxable
10,000

 
43

 

 
10,043

Corporate bonds and debt
207,888

 
53

 
(169
)
 
207,772

Marketable equity securities
707

 
879

 

 
1,586

Total
$
500,973

 
$
978

 
$
(406
)
 
$
501,545



At September 30, 2017, the Company's available-for-sale securities are presented on the condensed consolidated balance sheets as short-term investments of $488.2 million and long-term investments of $529.2 million.  At March 31, 2017, the Company's available-for-sale securities are presented on the condensed consolidated balance sheets as short-term investments of $394.1 million and long-term investments of $107.5 million.

The Company had no proceeds from sales of available-for-sale investments during the six months ended September 30, 2017. The Company sold available-for-sale investments for proceeds of $470.6 million during the six months ended September 30, 2016 to finance a portion of the purchase price of its Atmel acquisition which closed on April 4, 2016. An immaterial amount of available-for-sale investments were sold during the three months ended September 30, 2016. The Company had no material realized gains from the sale of available-for-sale securities during the three and six months ended September 30, 2017 and 2016. The Company determines the cost of available-for-sale debt securities sold on a first-in first-out (FIFO) basis at the individual security level for sales from multiple lots. For sales of marketable equity securities, the Company uses an average cost basis at the individual security level. Gains and losses recognized in earnings are credited or charged to other income (expense) on the consolidated statements of operations.

The following tables show all investments in an unrealized loss position for which an other-than-temporary impairment has not been recognized and the related gross unrealized losses and fair value, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position (amounts in thousands):
 
September 30, 2017
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Government agency bonds
$
596,240

 
$
(1,456
)
 
$

 
$

 
$
596,240

 
$
(1,456
)
Corporate bonds and debt
251,785

 
(182
)
 

 

 
251,785

 
(182
)
Total
$
848,025

 
$
(1,638
)
 
$

 
$

 
$
848,025

 
$
(1,638
)

 
March 31, 2017
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Government agency bonds
$
196,875

 
$
(227
)
 
$

 
$

 
$
196,875

 
$
(227
)
Municipal bonds
55,279

 
(10
)
 

 

 
55,279

 
(10
)
Corporate bonds and debt
132,820

 
(169
)
 

 

 
132,820

 
(169
)
Total
$
384,974

 
$
(406
)
 
$

 
$

 
$
384,974

 
$
(406
)

Management does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of September 30, 2017 and the Company's intent is to hold these investments until these assets are no longer impaired. 


14


The amortized cost and estimated fair value of the available-for-sale securities at September 30, 2017, by contractual maturity, excluding marketable equity securities of $2.9 million, which have no contractual maturity, are shown below (amounts in thousands). Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for current operations.
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale
 
 
 
 
 
 
 
Due in one year or less
$
397,536

 
$
2

 
$
(177
)
 
$
397,361

Due after one year and through five years
618,490

 
113

 
(1,461
)
 
617,142

Due after five years and through ten years

 

 

 

Due after ten years

 

 

 

Total
$
1,016,026

 
$
115

 
$
(1,638
)
 
$
1,014,503



Note 8. Fair Value Measurements

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

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

Marketable Debt Instruments

Marketable debt instruments include instruments such as corporate bonds and debt, government agency bonds, bank deposits, municipal bonds, and money market mutual funds. When the Company uses observable market prices for identical securities that are traded in less active markets, the Company classifies its marketable debt instruments as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. The Company corroborates non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.


15


Assets Measured at Fair Value on a Recurring Basis
 
Assets measured at fair value on a recurring basis at September 30, 2017 are as follows (amounts in thousands):
 
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Total
Balance
Assets
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
Money market mutual funds
$
179,694

 
$

 
$
179,694

Deposit accounts

 
646,713

 
646,713

Short-term investments:
 
 
 
 
 
Marketable equity securities

2,943

 

 
2,943

Corporate bonds and debt

 
293,708

 
293,708

Government agency bonds

 
181,530

 
181,530

Municipal bonds - taxable
 
 
10,016

 
10,016

Long-term investments:
 
 
 
 
 
Corporate bonds and debt

 
99,827

 
99,827

Government agency bonds

 
429,422

 
429,422

Total assets measured at fair value
$
182,637

 
$
1,661,216

 
$
1,843,853


Assets measured at fair value on a recurring basis at March 31, 2017 are as follows (amounts in thousands):
 
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Total
Balance
Assets
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
Money market mutual funds
$
343,815

 
$

 
$
343,815

Deposit accounts

 
564,869

 
564,869

Short-term investments:
 
 
 
 
 
Marketable equity securities
1,586

 

 
1,586

Corporate bonds and debt

 
165,207

 
165,207

Government agency bonds

 
161,973

 
161,973

Municipal bonds - non-taxable

 
55,279

 
55,279

Municipal bonds - taxable

 
10,043

 
10,043

Long-term investments:
 
 
 
 
 
Corporate bonds and debt

 
42,565

 
42,565

Government agency bonds

 
64,892

 
64,892

Total assets measured at fair value
$
345,401

 
$
1,064,828

 
$
1,410,229


There were no transfers between Level 1 and Level 2 during the three and six months ended September 30, 2017 or the fiscal year ended March 31, 2017. There were no assets measured at fair value on a recurring basis classified as Level 3 at September 30, 2017 or March 31, 2017.



16


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

The Company's non-marketable and cost method investments are monitored on a quarterly basis for impairment charges.  The fair values of these investments have been determined as Level 3 fair value measurements because the valuations use unobservable inputs that require management's judgment due to the absence of quoted market prices. There were no impairment charges recognized on these investments during each of the three and six-month periods ended September 30, 2017 and September 30, 2016. These investments are included in other assets on the condensed consolidated balance sheet.

The fair value measurements related to the Company's non-financial assets, such as intangible assets, assets held for sale and property, plant and equipment are based on available market prices at the measurement date based on transactions of similar assets and third-party independent appraisals, less costs to sell where appropriate. The Company classifies these measurements as Level 2.

Note 9. Fair Value of Financial Instruments
 
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months.  Management believes the carrying amount of the equity and cost-method investments materially approximated fair value at September 30, 2017 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair value measurements. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy. 

Fair Value of Subordinated Convertible Debt

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

The following table shows the carrying amounts and fair values of the Company's senior and junior subordinated convertible debt as of September 30, 2017 and March 31, 2017 (amounts in thousands). As of September 30, 2017 and March 31, 2017, the carrying amounts of the Company's senior and junior subordinated convertible debt have been reduced by debt issuance costs of $36.0 million and $38.3 million, respectively.

 
September 30, 2017
 
March 31, 2017
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
2017 Senior Debt
$
1,410,892

 
$
2,520,225

 
$
1,384,914

 
$
2,106,225

2015 Senior Debt
$
1,285,498

 
$
3,005,813

 
$
1,261,787

 
$
2,481,708

2017 Junior Debt
$
322,487

 
$
834,665

 
$
262,298

 
$
586,609

2007 Junior Debt
$
5,980

 
$
63,999

 
$
49,952

 
$
445,142




17


Note 10.
Other Financial Statement Details

Accounts Receivable
 
Accounts receivable consists of the following (amounts in thousands):
 
September 30, 2017
 
March 31, 2017
Trade accounts receivable
$
539,569

 
$
473,238

Other
7,990

 
7,219

Total accounts receivable, gross
547,559

 
480,457

Less allowance for doubtful accounts
2,143

 
2,084

Total accounts receivable, net
$
545,416

 
$
478,373


Inventories

The components of inventories consist of the following (amounts in thousands):
 
September 30, 2017
 
March 31, 2017

Raw materials
$
19,746

 
$
14,430

Work in process
296,941

 
268,281

Finished goods
140,252

 
134,491

Total inventories
$
456,939

 
$
417,202


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

Property, Plant and Equipment

Property, plant and equipment consists of the following (amounts in thousands):
 
September 30, 2017
 
March 31, 2017
Land
$
73,446

 
$
73,447

Building and building improvements
501,974

 
499,668

Machinery and equipment
1,861,622

 
1,774,920

Projects in process
108,128

 
104,318

Total property, plant and equipment, gross
2,545,170

 
2,452,353

Less accumulated depreciation and amortization
1,822,390

 
1,769,015

Total property, plant and equipment, net
$
722,780

 
$
683,338

 
Depreciation expense attributed to property, plant and equipment was $29.9 million and $58.9 million for the three and six months ended September 30, 2017, respectively, compared to $30.0 million and $61.0 million for the three and six months ended September 30, 2016, respectively.




18


Note 11.     Intangible Assets and Goodwill
 
Intangible assets consist of the following (amounts in thousands):
 
 
September 30, 2017
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Core and developed technology
 
$
1,939,833

 
$
(532,821
)
 
$
1,407,012

Customer-related
 
716,945

 
(249,773
)
 
467,172

Trademarks and trade names
 
11,700

 
(10,668
)
 
1,032

In-process research and development
 
29,379

 

 
29,379

Distribution rights
 
5,578

 
(5,368
)
 
210

Other
 
1,449

 
(524
)
 
925

Total
 
$
2,704,884

 
$
(799,154
)
 
$
1,905,730


 
 
March 31, 2017
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Core and developed technology
 
$
1,932,329

 
$
(419,468
)
 
$
1,512,861

Customer-related
 
716,945

 
(123,616
)
 
593,329

Trademarks and trade names
 
11,700

 
(9,636
)
 
2,064

In-process research and development
 
38,511

 

 
38,511

Distribution rights
 
5,578

 
(5,346
)
 
232

Other
 
1,449

 
(354
)
 
1,095

Total
 
$
2,706,512

 
$
(558,420
)
 
$
2,148,092


The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years. During the six months ended September 30, 2017, $8.9 million of in-process research and development reached technological feasibility and was reclassified as core and developed technology and began being amortized over its estimated useful life. The following is an expected amortization schedule for the intangible assets for the remainder of fiscal 2018 through fiscal 2022, absent any future acquisitions or impairment charges (amounts in thousands):

Fiscal Year Ending
March 31,
Projected Amortization
Expense
2018
$244,942
2019
361,769
2020
313,684
2021
257,444
2022
190,439
 
Amortization expense attributed to intangible assets was $122.7 million and $245.5 million for the three and six months ended September 30, 2017, respectively. Amortization expense attributed to intangible assets was $82.8 million and $165.3 million for the three and six months ended September 30, 2016, respectively. In the three and six months ended September 30, 2017, approximately $1.9 million and $3.9 million of amortization expense, respectively, was charged to cost of sales, and approximately $120.8 million and $241.6 million, respectively, was charged to operating expenses.  In the three and six months ended September 30, 2016, approximately $1.0 million and $1.9 million of amortization expense, respectively, was charged to cost of sales, and approximately $81.8 million and $163.4 million, respectively, was charged to operating expenses.  The Company recognized an immaterial amount of intangible asset impairment charges in the three and six months ended September 30, 2017. In connection with its acquisition of Atmel, the Company recognized intangible asset impairment charges of $2.0 million for the six months ended September 30, 2016. The impairment losses were recognized as a result of changes in the combined product roadmaps after the acquisition of Atmel that affected the use and life of these assets.


19


The following shows the goodwill balance as of September 30, 2017 and March 31, 2017 by segment (amounts in thousands):
 
Semiconductor Products
Reporting Unit
 
Technology
Licensing
Reporting Unit
Goodwill
$
2,279,809

 
$
19,200

 
At March 31, 2017, the Company applied a qualitative goodwill impairment test to its two reporting units, concluding it was not more likely than not that goodwill was impaired. Through September 30, 2017, the Company has never recorded an impairment charge against its goodwill balance.

Note 12.
Income Taxes

The provision for income taxes reflects tax on foreign earnings and federal and state tax on U.S. earnings.  The Company had a negative effective tax rate of 2.1% for the six months ended September 30, 2017 and a negative effective tax rate of 12.4% for the six months ended September 30, 2016.  The Company's effective tax rate for the six months ended September 30, 2017 is higher compared to the prior year primarily due to acquisition-related expenses in the prior year. The Company's effective tax rate is lower than statutory rates in the U.S. due primarily to its mix of earnings in foreign jurisdictions with lower tax rates as well as numerous tax holidays it receives related to its Thailand manufacturing operations based on its investment in property, plant and equipment in Thailand. The Company's tax holiday periods in Thailand expire at various times in the future, however, the Company actively seeks to obtain new tax holidays. The Company does not expect the future expiration of any of its tax holiday periods in Thailand to have a material impact on its effected tax rate. The material components of foreign income taxed at a rate lower than the U.S. are earnings accrued in Thailand and Ireland, and earnings accrued by the Company's offshore technology company which is resident in the Cayman Islands.

The Company files U.S. federal, U.S. state, and foreign income tax returns.  For U.S. federal, and in general for U.S. state tax returns, the fiscal 2005 and later tax years remain effectively open for examination by tax authorities.  For foreign tax returns, the Company is generally no longer subject to income tax examinations for years prior to fiscal 2007.
 
The Company recognizes liabilities for anticipated tax audit issues in the U.S. and other domestic and international tax jurisdictions based on its estimate of whether, and the extent to which, additional tax payments are more likely than not.  The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax laws applied to the facts of each matter.
 
The Company believes it maintains appropriate reserves to offset any potential income tax liabilities that may arise upon final resolution of matters for open tax years.  If such reserve amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed necessary.  If such amounts prove to be less than an ultimate assessment, a future charge to expense would be recorded in the period in which the assessment is determined.  Although the timing of the resolution or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.



20


Note 13.
Debt and Credit Facility

Debt obligations included in the condensed consolidated balance sheets consisted of the following (in millions):
 
 
Coupon Interest Rate
 
Effective Interest Rate
 
Fair Value of Liability Component at Issuance (1)
 
 
 
 
 
 
 
September 30, 2017
 
March 31, 2017
Senior Indebtedness
 
 
 
 
 
 
 
 
 
 
Credit Facility
 
 
 
 
 
 
 
$

 
$

Senior Subordinated Convertible Debt - Principal Outstanding
 
 
 
 
 
 
2017 Senior Debt, maturing February 15, 2027 (2017 Senior Debt)
 
1.625%
 
6.0%
 
$1,396.3
 
$
2,070.0

 
$
2,070.0

2015 Senior Debt, maturing February 15, 2025 (2015 Senior Debt)
 
1.625%
 
5.9%
 
1,160.1
 
1,725.0

 
1,725.0

Junior Subordinated Convertible Debt - Principal Outstanding
 
 
 
 
 
 
2017 Junior Debt, maturing February 15, 2037 (2017 Junior Debt)
 
2.250%
 
7.4%
 
321.1
 
686.3

 
575.0

2007 Junior Debt, maturing December 15, 2037 (2007 Junior Debt)
 
2.125%
 
9.1%
 
6.1
 
17.3

 
143.8

Total Convertible Debt
 
 
 
 
 
 
 
4,498.6

 
4,513.8

 
 
 
 
 
 
 
 
 
 
 
Gross long-term debt including current maturities
 
 
 
 
 
 
 
4,498.6

 
4,513.8

Less: Debt discount (2)
 
 
 
 
 
 
 
(1,437.7
)
 
(1,516.5
)
Less: Debt issuance costs (3)
 
 
 
 
 
 
 
(43.0
)
 
(46.8
)
Net long-term debt including current maturities
 
 
 
 
 
 
 
3,017.9

 
2,950.5

Less: Current maturities (4)
 
 
 
 
 
 
 
(6.0
)
 
(50.0
)
Net long-term debt
 
 
 
 
 
 
 
$
3,011.9

 
$
2,900.5

 
 
 
 
 
 
 
 
 
 
 

(1) As each of the convertible instruments may be settled in cash upon conversion, for accounting purposes, they were bifurcated into a liability component and an equity component, which are both initially recorded at fair value.  The amount allocated to the equity component is the difference between the principal value of the instrument and the fair value of the liability component at issuance.  The resulting debt discount is being amortized to interest expense at the respective effective interest rate over the contractual term of the debt.

(2) The unamortized discount includes the following (in millions):  
 
September 30,
 
March 31,
 
2017
 
2017
2017 Senior Debt
$
(642.2
)
 
$
(667.5
)
2015 Senior Debt
(423.8
)
 
(446.6
)
2017 Junior Debt
(360.5
)
 
(309.3
)
2007 Junior Debt
(11.2
)
 
(93.1
)
Total unamortized discount
$
(1,437.7
)
 
$
(1,516.5
)


21


(3) Debt issuance costs include the following (in millions):
 
September 30,
 
March 31,
 
2017
 
2017
Senior Credit Facility
$
(7.0
)
 
$
(8.5
)
2017 Senior Debt
(16.9
)
 
(17.6
)
2015 Senior Debt
(15.7
)
 
(16.6
)
2017 Junior Debt
(3.3
)
 
(3.4
)
2007 Junior Debt
(0.1
)
 
(0.7
)
Total debt issuance costs
$
(43.0
)
 
$
(46.8
)

(4) Current maturities include the full balance of the 2007 Junior Debt.

Ranking of Indebtedness - The Senior Subordinated Convertible Debt and Junior Subordinated Convertible Debt (collectively, the Convertible Debt) are unsecured obligations which are subordinated in right of payment to the amounts outstanding under the Company's Credit Facility. The Junior Subordinated Convertible Debt is expressly subordinated in right of payment to any existing and future senior debt of the Company (including the Credit Facility and the Senior Subordinated Convertible Debt) and is structurally subordinated in right of payment to the liabilities of the Company's subsidiaries.  The Senior Subordinated Convertible Debt is subordinated to the Credit Facility; ranks senior to the Company's indebtedness that is expressly subordinated in right of payment, including the Junior Subordinated Convertible Debt; ranks equal in right of payment to any of the Company's unsubordinated indebtedness that does not provide that it is senior to the Senior Subordinated Convertible Debt; ranks junior in right of payment to any of the Company's secured, unsubordinated indebtedness to the extent of the value of the assets securing such indebtedness; and ranks junior to all indebtedness and other liabilities of the Company's subsidiaries.

Summary of Conversion Features - Each series of Convertible Debt is convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at specified Conversion Rates (see table below), adjusted for certain events including the declaration of cash dividends. Up until the three-months immediately preceding the maturity date of the applicable series of Convertible Debt, each series of Convertible Debt is convertible only upon the occurrence of (1) the closing price of the Company's common stock exceeds the Conversion Price (see table below) by 130% for 20 days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter or (2) during the 5 business day period after any 10 consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day or (3) upon the occurrence of certain corporate events specified in the indenture of such series of Convertible Debt. In addition, for each series other than the 2007 Junior Debt, if at the time of conversion the applicable price of the Company's common stock exceeds the applicable Conversion Price at such time, the applicable Conversion Rate will be increased by up to an additional maximum incremental shares rate, as determined pursuant to a formula specified in the indenture for the applicable series of Convertible Debt, and as adjusted for cash dividends paid since the issuance of such series of Convertible Debt. However, in no event will the applicable Conversion Rate exceed the applicable Maximum Conversion Rate specified in the indenture for the applicable series of Convertible Debt (see table below). The following table sets forth the applicable Conversion Rates adjusted for dividends declared since issuance of such series of Convertible Debt and the applicable Maximum Incremental Share Rate (with the exception of the 2007 Junior Debt) and applicable Conversion Rates as adjusted for dividends paid since the applicable issuance date:
 
Dividend adjusted rates as of September 30, 2017
 
Conversion Rate, adjusted
 
Approximate Conversion Price, adjusted
 
Maximum Incremental Rate, adjusted
 
Maximum Conversion Rate, adjusted
2017 Senior Debt
10.0322

 
$
99.68

 
5.0161

 
14.2959

2015 Senior Debt
15.6445

 
$
63.92

 
7.8223

 
21.9023

2017 Junior Debt
10.2114

 
$
97.93

 
5.1057

 
14.2959

2007 Junior Debt
42.5069

 
$
23.53

 
NA

 
48.8829


22


As of September 30, 2017, the holders of the 2007 Junior Debt had the right to convert their debentures between October 1, 2017 and December 31, 2017 because the Company's common stock has exceeded the Conversion Price by 130% for the specified period of time during the quarter ended September 30, 2017. In June 2017, the Company received notification from certain holders of the 2007 Junior Debt of their intent to convert $15.2 million in principal value according to the terms of the debt and the Company settled the principal amount in cash and issued 0.5 million shares of its common stock in respect of the conversion value in excess of the principal amount in the second quarter of fiscal 2018. Since June 2017, additional holders have notified the Company of their intent to convert according to the terms of the debt. In addition, the Company has announced its intention to call the remaining outstanding 2007 Junior Debt on or after December 15, 2017. Therefore, the 2007 Junior Debt is classified as a current liability on the consolidated balance sheet as of September 30, 2017 and March 31, 2017. If the Company does not call the 2007 Junior Debt in December 2017, additional interest will be due on the notes based on the trading value of the notes of 0.25% if the debentures are trading at less than $400 and a 0.5% additional interest rate if the debentures are trading at greater than $1,500. Based on the current trading price of the debentures, the contingent interest rate beginning in December 2017 would be 0.5% of the average trading price. The if-converted value of the debentures exceeded the principal amount by $48.6 million at September 30, 2017.

As of September 30, 2017, the 2015 Senior Debt is convertible and had a value if converted above par of $697.9 million.

The Company may not redeem any series of Convertible Debt prior to the relevant maturity date and no sinking fund is provided for any series of Convertible Debt. Upon the occurrence of a fundamental change as defined in the applicable indenture of such series of Convertible Debt, holders of such series may require the Company to purchase all or a portion of their Convertible Debt for cash at a price equal to 100% of the principal amount plus any accrued and unpaid interest.

Interest expense includes the following (in millions):
 
Three Months Ended
September 30,
 
Six Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Debt issuance amortization
$
0.9

 
$
0.4

 
$
1.8

 
$
0.8

Amortization of debt discount - non cash interest expense
26.3

 
12.3

 
52.3

 
24.4

Coupon interest expense
19.4

 
10.1

 
38.8

 
20.2

Total
$
46.6

 
$
22.8

 
$
92.9

 
$
45.4


The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 9.38 years, 7.38 years19.38 years and 20.21 years for the 2017 Senior Debt, 2015 Senior Debt, 2017 Junior Debt and 2007 Junior Debt, respectively.  

Issuances and Settlements - In June 2017, the Company exchanged in privately negotiated transactions $111.3 million aggregate principal amount of its 2007 Junior Debt for (i) $111.3 million principal amount of 2017 Junior Debt with a market value of $119.3 million plus (ii) the issuance of 3.2 million shares of the Company's common stock with a value of $254.6 million, of which $56.3 million was allocated to the fair value of the liability and $321.1 million was allocated to the reacquisition of the equity component for total consideration of $374.0 million. The transaction resulted in a loss on settlement of the 2007 Junior Debt of approximately $13.8 million, which represented the difference between the fair value of the liability component at time of repurchase and the sum of the carrying values of the debt component and any unamortized debt issuance costs. The debt discount on the new 2017 Junior Debt was the difference between the par value and the fair value of the debt resulting in a debt discount of $55.1 million which will be amortized to interest expense using the effective interest method over the term of the debt.

In February 2017, the Company issued the 2017 Senior Debt and 2017 Junior Debt for net proceeds of $2,043.6 million and $567.7 million, respectively. In connection with the issuance of these instruments, the Company incurred issuance costs of $33.7 million, of which $17.8 million and $3.4 million was recorded as debt issuance costs related to the 2017 Senior Debt and 2017 Junior Debt, respectively, and will be amortized using the effective interest method over the term of the debt. The balance of $12.5 million in fees was recorded to equity.  Interest on both instruments is payable semi-annually on February 15 and August 15 of each year.


23


In February 2015, the Company issued the 2015 Senior Debt for net proceeds of approximately $1,694.7 million. In connection with the issuance, the Company incurred issuance costs of $30.3 million, of which $20.4 million was recorded as debt issuance costs and will be amortized using the effective interest method over the term of the debt. The balance of $9.9 million was recorded to equity.

The Company utilized the proceeds from the issuances of the 2017 debt and 2015 debt to reduce amounts borrowed under its Credit Facility and to settle a portion of the 2007 Junior Debt in privately negotiated transactions. In February 2017 and February 2015, the Company settled $431.3 million and $575.0 million, respectively, in aggregate principal of its 2007 Junior Debt. The 2015 repurchase consisted solely of cash. In February 2017, the Company used cash of $431.3 million and an aggregate of 12.0 million in shares of the Company's common stock valued at $862.7 million for total consideration of $1,293.9 million to settle $431.3 million of the 2007 Junior Debt, of which $188.0 million was allocated to the liability component and $1,105.9 million was allocated to the equity component. In addition, in February 2017, there was an inducement fee of $5.0 million which was recorded in the consolidated statement of operations in loss on settlement of convertible debt. The consideration transferred in February 2015 was $1,134.6 million, of which $238.3 million was allocated to the liability component and $896.3 million was allocated to the equity component. In the case of both settlements of the 2007 Junior Debt, the consideration was allocated to the liability and equity components using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt prior to the retirement. The transactions resulted in a loss on settlement of convertible debt of approximately $43.9 million and $50.6 million in fiscal 2017 and fiscal 2015, respectively, which represented, in each case, the difference between the fair value of the liability component at time of repurchase and the sum of the carrying values of the debt component and any unamortized debt issuance costs.

Credit Facility

The Company maintains a credit facility which is available until February 4, 2020 (the "Credit Agreement"). At the beginning of the second quarter of fiscal 2018, the credit facility had a borrowing capacity of $2.774 billion comprised of two tranches; one tranche terminating in 2018 (the "2018 Tranche") and one tranche terminating in 2020 (the "2020 Tranche"). During the second quarter of fiscal 2018, the Company terminated the 2018 Tranche and in connection with such termination increased the commitments for the 2020 Tranche. As of September 30, 2017, the 2020 Tranche commitment under the credit facility was $2.727 billion. Subsequent to September 30, 2017, the Company obtained additional 2020 Tranche commitments bringing the aggregate 2020 Tranche commitments to $2.822 billion.

The financial covenants include, among others, limits on the Company's consolidated senior ratio and total leverage ratio. The maximum Total Leverage Ratio (capitalized terms not otherwise defined in this Form 10-Q have the meaning of the defined terms in the applicable agreements) cannot exceed 5.00 to 1.00 and is calculated as Consolidated Total Indebtedness, excluding the Junior Debt up to a $700 million maximum, to Consolidated EBIDTA for a period of four quarters. The Total Leverage Ratio may be temporarily increased to 5.50 to 1.00 for a period of four consecutive quarters in conjunction with a Permitted Acquisition occurring during the first four quarters following the acquisition. The Total Leverage Ratio then decreases to 5.25 to 1.00 for three consecutive quarters, finally returning to the stated 5.00 to 1.00 Total Leverage Ratio after a period of seven consecutive fiscal periods. The Company can elect to use this special feature, also referred to as an Adjusted Covenant Period, not more than one time from and after February 8, 2017, the effective date of the February 2017 amendment (discussed below), and may elect to terminate an Adjusted Covenant Period prior to the end of the Adjusted Covenant Period. The Credit Facility also requires that the Senior Leverage Ratio not exceed 3.50 to 1.00, which is calculated as Consolidated Senior Indebtedness to Consolidated EBIDTA for four consecutive quarters. The Company is also required to comply with an Interest Coverage Ratio of less than 3.50 to 1.00, measured quarterly.

In June 2017, in connection with the settlement of the 2007 Junior Debt, the Company amended the Credit Agreement to (i) extend the time period during which the Company is permitted to repurchase, redeem or exchange the 2007 Junior Debt and (ii) amend the maximum total leverage ratio covenant to extend the time period for permitted refinancings or exchanges of the 2007 Junior Debt that may be excluded from the calculation of the ratio, subject to certain conditions.

The Credit Agreement has a $125 million foreign currency sublimit, a $25 million letter of credit sublimit and a $25 million swingline loan sublimit. The Company has the option to obtain additional tranche commitments or additional indebtedness as long as the Senior Leverage Ratio is equal to or less than 2.50 to 1.00.

In February 2017, the Company used $1,682.5 million of the proceeds from the issuance of the 2017 Senior Debt and 2017 Junior Debt to pay off the entire balance on its line of credit. In connection with the February 2017 amendment to the Credit Agreement, the Company incurred $2.1 million of issuance fees which will be amortized over the term of the facility and for which the balance is recorded net of any outstanding Credit Facility balance. At September 30, 2017 and March 31, 2017, there were no outstanding borrowings under the revolving credit facility.

24



The Company's obligations under the Credit Agreement are guaranteed by certain of its subsidiaries meeting materiality thresholds set forth in the Credit Agreement. To secure the Company's obligations under the Credit Agreement, the Company and its domestic subsidiaries are required to pledge the equity securities of certain of their respective material subsidiaries, subject to certain exceptions and limitations. In addition, in connection with the February 2017 amendment, the Company and the guarantor subsidiaries granted a security interest in substantially all of their personal property to secure the obligations under the Credit Agreement.

The loans under the Credit Agreement bear interest, at the Company's option, at the base rate plus a spread of 0.25% to 1.25% or an adjusted LIBOR rate (based on one, two, three, or six-month interest periods) plus a spread of 1.25% to 2.25%, in each case with such spread being determined based on the consolidated leverage ratio for the preceding four fiscal quarters (in the case of the 2018 tranche revolving loans) or the consolidated senior leverage ratio (in the case of the 2020 tranche revolving loans). The base rate means the highest of JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a margin equal to 0.50% and the adjusted LIBOR rate for a 1-month interest period plus a margin equal to 1.00%. Swingline loans accrue interest at a per annum rate based on the base rate plus the applicable margin for base rate loans. Base rate loans may only be made in U.S. Dollars. The Company is also obligated to pay other customary administration fees and letter of credit fees for a credit facility of this size and type.

Interest is due and payable in arrears quarterly for loans bearing interest at the base rate and at the end of an interest period (or at each three-month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. Interest expense related to the credit agreement was approximately $2.3 million and $5.0 million in the three and six months ended September 30, 2017, respectively, compared to $12.0 million and $23.6 million for the three and six months ended September 30, 2016, respectively. Principal, together with all accrued and unpaid interest, is due and payable on the tranche maturity date, which is February 4, 2020. The Company pays a quarterly commitment fee on the available but unused portion of its line of credit which is calculated on the average daily available balance during the period. The Company may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions and reimbursement of certain costs in the case of prepayments of LIBOR loans.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries' ability to, among other things, incur subsidiary indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, repurchase stock, enter into restrictive agreements and enter into sale and leaseback transactions, in each case subject to customary exceptions for a credit facility of this size and type. The Company is also required to maintain compliance with a senior leverage ratio, a total leverage ratio and an interest coverage ratio, all measured quarterly and calculated on a consolidated bases. At September 30, 2017, the Company was in compliance with these covenants.

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

Note 14.     Pension Plans

In connection with its acquisition of Atmel, the Company assumed unfunded defined benefit pension plans that cover certain French and German employees. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Pension liabilities and charges are based upon various assumptions, updated annually, including discount rates, future salary increases, employee turnover, and mortality rates. The Company's French pension plan provides for termination benefits paid to covered French employees only at retirement, and consists of approximately one to five months of salary. The Company's German pension plan provides for defined benefit payouts for covered German employees following retirement.


25


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

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Service costs
$
388

 
$
363

 
$
741

 
$
727

Interest costs
249

 
241

 
489

 
484

Amortization of actuarial loss
219

 

 
422

 

Settlements and curtailments
(36
)
 

 
(36
)
 
231

Net pension period cost
$
820

 
$
604

 
$
1,616

 
$
1,442

 
Interest costs and amortization of actuarial losses are recorded in the other income, net line item in the statement of operations. The Company's net periodic pension cost for fiscal 2018 is expected to be approximately $2.6 million. Cash funding for benefits paid was $0.2 million and $0.3 million for the three and six months ended September 30, 2017, respectively, and $0.1 million and $0.2 million for the three and six months ended September 30, 2016, respectively. The Company expects total contributions to these plans to be approximately $0.7 million in fiscal 2018.

Note 15.
Contingencies

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

As a result of its acquisition of Atmel, which closed April 4, 2016, the Company became involved with the following lawsuits:
In re: Continental Airbag Products Liability Litigation. On May 11, 2016, an Amended and Consolidated Class Action Complaint ("Complaint") was filed in the United States District Court for the Southern District of Florida (Miami Division) against Atmel, Continental Automotive Systems, Inc., Honda Motor Co., Ltd. and an affiliate, and Daimler AG and an affiliate. The Complaint which includes claims arising under federal law and Florida, California, New Jersey, Michigan and Louisiana state law alleges that class members unknowingly purchased or leased vehicles containing defective airbag control units (incorporating allegedly defective application specific integrated circuits manufactured by the Company's Atmel subsidiary between 2006 and 2010), and thereby suffered financial harm, including a loss in the value of their purchased or leased vehicles. The plaintiffs are seeking, individually and on behalf of a putative class, unspecified compensatory and exemplary damages, statutory penalties, pre- and post-judgment interest, attorneys' fees, and injunctive and other relief. The Company's Atmel subsidiary contested plaintiffs' claims vigorously, and on May 23, 2017 the case was ordered to be dismissed.
Continental Claim ICC Arbitration. On December 29, 2016, Continental Automotive GmbH ("Continental") filed a Request for Arbitration with the ICC, naming as respondents the Company's subsidiaries Atmel Corporation, Atmel SARL, Atmel Global Sales Ltd., and Atmel Automotive GmbH (collectively, "Atmel").  The Request alleges that a quality issue affecting Continental airbag control units in certain recalled vehicles stems from allegedly defective Atmel application specific integrated circuits ("ASICs").  The Continental airbag control units, ASICs and vehicle recalls are also at issue in In re: Continental Airbag Products Liability Litigation, described above.  Continental seeks to recover from Atmel all related costs and damages incurred as a result of the vehicle manufacturers’ airbag control unit-related recalls, currently alleged to be $69.7 million (but subject to increase). The Company's Atmel subsidiaries intend to defend this action vigorously.
Southern District of New York Action by LFoundry Rousset ("LFR") and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, individually and on behalf of a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York (the "District Court") against the Company's Atmel subsidiary, French

26


subsidiary, Atmel Rousset S.A.S. ("Atmel Rousset"), and LFoundry GmbH ("LF"), LFR's German parent. The case purports to relate to Atmel Rousset's June 2010 sale of its wafer manufacturing facility in Rousset, France to LF, and LFR's subsequent insolvency, and later liquidation, more than three years later. The District Court dismissed the case on August 21, 2015, and the United States Court of Appeals for the Second Circuit affirmed the dismissal on June 27, 2016. On July 25, 2016, the plaintiffs filed a notice of appeal from the District Court's June 27, 2016 denial of their motion for relief from the dismissal judgment. On May 19, 2017, the United States Court of Appeals for the Second Circuit affirmed the June 27, 2016 order dismissing the case.
Individual Labor Actions by former LFR Employees. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in a French labor court. The Company's Atmel Rousset subsidiary believes that each of these actions is entirely devoid of merit, and, further, that any assertion by any of the Claimants of a co-employment relationship with the Atmel Rousset subsidiary is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. The Company's Atmel Rousset subsidiary therefore intends to defend vigorously against each of these claims.
The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, the Company accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, the Company records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, the Company uses the amount that is the low end of such range. As of September 30, 2017, the Company's estimate of the aggregate potential liability that is possible but not probable is approximately $100 million in excess of amounts accrued.
The Company's technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or trade secret infringement by the Company's proprietary technology.  The terms of these indemnification provisions approximate the terms of the outgoing technology license agreements, which are typically perpetual unless terminated by either party for breach. The possible amount of future payments the Company could be required to make based on agreements that specify indemnification limits, if such indemnifications were required on all of these agreements, is approximately $153.0 million. There are some licensing agreements in place that do not specify indemnification limits.  As of September 30, 2017, the Company had not recorded any liabilities related to these indemnification obligations and the Company believes that any amounts that it may be required to pay under these agreements in the future will not have a material adverse effect on its financial position, cash flows or results of operations.

Note 16.
Derivative Instruments
 
Freestanding Derivative Forward Contracts

The Company has international operations and is thus subject to foreign currency rate fluctuations.  Approximately 99% of the Company's sales are U.S. Dollar denominated. However, a significant amount of the Company's expenses and liabilities are denominated in foreign currencies and subject to foreign currency rate fluctuations.  To help manage the risk of changes in foreign currency rates, the Company periodically enters into derivative contracts comprised of foreign currency forward contracts to hedge its asset and liability foreign currency exposure and a portion of its foreign currency operating expenses.  Foreign exchange rate fluctuations after the effects of hedging activity resulted in net gains of $5.0 million and $9.6 million during the three and six months ended September 30, 2017, respectively, compared to net losses of $2.9 million and $2.2 million during the three and six months ended September 30, 2016, respectively.  As of September 30, 2017 and March 31, 2017, the Company had no foreign currency forward contracts outstanding. The Company recognized an immaterial amount of net realized gains and losses on foreign currency forward contracts in each of the three and six months ended September 30, 2017 and 2016. Gains and losses from changes in the fair value of these foreign currency forward contracts and foreign currency exchange rate fluctuations are credited or charged to other income (expense). The Company does not apply hedge accounting to its foreign currency derivative instruments.

Commodity Price Risk

The Company is exposed to fluctuations in prices for energy that it consumes, particularly electricity and natural gas. The Company also enters into variable-priced contracts for some purchases of electricity and natural gas, on an index basis. The Company seeks, or may seek, to partially mitigate these exposures through fixed-price contracts. These contracts meet the

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characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales” exception under authoritative guidance and require no mark-to-market adjustment.

Note 17.
Comprehensive Income (Loss)

The following table presents the changes in the components of accumulated other comprehensive income (loss) (AOCI), net of tax, for the six months ended September 30, 2017 (amounts in thousands):
 
Unrealized
holding gains (losses)
available-for-sale securities
 
Defined benefit pension plans
 
Foreign
Currency
 
Total
Accumulated other comprehensive income (loss) at March 31, 2017
$</