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EX-32 - EXHIBIT 32 - MICROCHIP TECHNOLOGY INCex32q1fy19.htm
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EX-31.1 - EXHIBIT 31.1 - MICROCHIP TECHNOLOGY INCex311q1fy19.htm

 

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 June 30, 2018.
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
mlogo.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 August 6, 2018
Common Stock, $0.001 par value
 
235,557,828 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 millions, except share and per share amounts)
(unaudited)


Item1.
Financial Statements

ASSETS
June 30,
2018
 
March 31,
2018
Cash and cash equivalents
$
635.2

 
$
901.3

Short-term investments
14.5

 
1,295.3

Accounts receivable, net
789.4

 
563.7

Inventories
1,104.8

 
476.2

Other current assets
274.5

 
119.8

Total current assets
2,818.4

 
3,356.3

Property, plant and equipment, net
1,078.4

 
767.9

Goodwill
7,273.2

 
2,299.0

Intangible assets, net
6,248.9

 
1,662.0

Long-term deferred tax assets
1,675.8

 
100.2

Other assets
154.1

 
71.8

Total assets
$
19,248.8

 
$
8,257.2

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accounts payable
$
318.2

 
$
144.1

Accrued liabilities
491.3

 
229.6

Deferred income on shipments to distributors

 
333.8

Current portion of long-term debt
1,329.8

 
1,309.9

Total current liabilities
2,139.3

 
2,017.4

Long-term debt
10,019.8

 
1,758.4

Long-term income tax payable
836.7

 
754.9

Long-term deferred tax liability
854.2

 
205.8

Other long-term liabilities
275.0

 
240.9

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; 253,232,909 shares issued and 235,494,410 shares outstanding at June 30, 2018; 253,232,909 shares issued and 235,027,767 shares outstanding at March 31, 2018
0.2

 
0.2

Additional paid-in capital
2,637.0

 
2,562.5

Common stock held in treasury: 17,738,499 shares at June 30, 2018; 18,205,142 shares at March 31, 2018
(647.7
)
 
(662.6
)
Accumulated other comprehensive loss
(14.9
)
 
(17.6
)
Retained earnings
3,149.2

 
1,397.3

Total stockholders' equity
5,123.8

 
3,279.8

Total liabilities and stockholders' equity
$
19,248.8

 
$
8,257.2

See accompanying notes to condensed consolidated financial statements

3


MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
(unaudited)
 
Three Months Ended
 
June 30,
 
2018
 
2017
Net sales
$
1,212.5

 
$
972.1

Cost of sales (1)
570.5

 
387.7

Gross profit
642.0

 
584.4

 
 

 
 

Research and development  (1)
171.9

 
130.5

Selling, general and administrative  (1)
164.0

 
114.3

Amortization of acquired intangible assets
133.7

 
120.8

Special charges and other, net (1)
40.1

 
(2.8
)
 Operating expenses
509.7

 
362.8

 
 
 
 
Operating income
132.3

 
221.6

Losses on equity method investment
(0.1
)
 
(0.1
)
Other income (expense):
 
 
 
Interest income
5.7

 
3.5

Interest expense
(90.4
)
 
(49.5
)
Loss on settlement of convertible debt

 
(13.8
)
Other (loss) income, net
(9.8
)
 
4.5

Income before income taxes
37.7

 
166.2

Income tax provision (benefit)
2.0

 
(4.4
)
Net income
$
35.7

 
$
170.6

 
 
 
 
Basic net income per common share
$
0.15

 
$
0.74

Diluted net income per common share
$
0.14

 
$
0.70

Dividends declared per common share
$
0.3635

 
$
0.3615

Basic common shares outstanding
235.2

 
229.4

Diluted common shares outstanding
252.2

 
242.9

(1) Includes share-based compensation expense as follows:
 
 
 
Cost of sales
$
3.6

 
$
3.4

Research and development
$
14.1

 
$
10.3

Selling, general and administrative
$
11.7

 
$
8.7

Special charges and other, net
$
15.9

 
$

See accompanying notes to condensed consolidated financial statements

4


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

 
Three Months Ended
 
June 30,
 
2018
 
2017
Net income
$
35.7

 
$
170.6

Components of other comprehensive income:
 
 
 
Available-for-sale securities:
 
 
 
Unrealized holding losses, net of tax effect
(5.6
)
 
(0.9
)
Reclassification of realized transactions, net of tax effect
5.6

 

Defined benefit plans:
 
 
 
Actuarial gains (losses) related to defined benefit pension plans, net of tax (provision) benefit
4.4

 
(4.1
)
Reclassification of realized transactions, net of tax effect
0.3

 
0.2

Change in net foreign currency translation adjustment
(0.3
)
 

Other comprehensive income (loss), net of tax effect
4.4

 
(4.8
)
Comprehensive income
$
40.1

 
$
165.8


See accompanying notes to condensed consolidated financial statements


5

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

 
Three Months Ended
 
June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
35.7

 
$
170.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
172.8

 
151.8

Deferred income taxes
87.2

 
(21.9
)
Share-based compensation expense related to equity incentive plans
45.3

 
22.4

Loss on settlement of convertible debt

 
13.8

Amortization of debt discount on convertible debt
27.5

 
25.9

Amortization of debt issuance costs
3.0

 
1.6

Losses on equity method investments
0.1

 
0.1

Gains on sale of assets

 
(4.6
)
Impairment of intangible assets
2.0

 
0.1

Losses on available-for-sale investments, net
5.2

 

Amortization of premium on available-for-sale investments
(0.2
)
 
0.5

Other non-cash adjustments
(0.1
)
 

Changes in operating assets and liabilities, excluding impact of acquisitions:
 
 
 
Increase in accounts receivable
(55.2
)
 
(50.6
)
Decrease (increase) in inventories
83.8

 
(9.9
)
Increase in deferred income on shipments to distributors

 
16.0

Increase (decrease) in accounts payable and accrued liabilities
(2.2
)
 
31.2

Change in other assets and liabilities
(88.6
)
 
(13.0
)
Change in income tax payable
(13.9
)
 
11.0

Net cash provided by operating activities
302.4

 
345.0

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investments
(167.7
)
 
(487.4
)
Maturities of available-for-sale investments
66.7

 
110.0

Sales of available-for-sale investments
1,376.6

 

Acquisition of Microsemi, net of cash acquired
(7,851.2
)
 

Investments in other assets
(1.6
)
 
(2.0
)
Proceeds from sale of assets
0.1

 
10.2

Capital expenditures
(89.4
)
 
(22.2
)
Net cash used in investing activities
(6,666.5
)
 
(391.4
)
Cash flows from financing activities: (1)
 

 
 

Proceeds from Issuance of 2023 and 2021 Senior Notes
1,989.5

 

Proceeds from borrowings on Term Loan Facility
3,000.0

 

Repayments of revolving loan under credit facility
(151.5
)
 
(60.0
)
Proceeds from borrowings on revolving loan under credit facility
3,485.5

 
60.0

Repayment of debt assumed in Microsemi acquisition
(2,056.9
)
 

Deferred financing costs
(72.6
)
 

Payment of cash dividends
(85.5
)
 
(82.9
)
Proceeds from sale of common stock
6.5

 
4.5

Tax payments related to shares withheld for vested restricted stock units
(16.8
)
 
(10.7
)
Capital lease payments
(0.2
)
 
(0.2
)
Net cash provided by (used in) financing activities
6,098.0

 
(89.3
)
Net decrease in cash, cash equivalents, and restricted cash
(266.1
)
 
(135.7
)
Cash and cash equivalents, and restricted cash at beginning of period (2)
901.3

 
908.7

Cash and cash equivalents, and restricted cash at end of period (2)
$
635.2

 
$
773.0

Schedule of significant non-cash financing activity:
(1)During the three months ended June 30, 2017, the Company issued $111.3 million principal amount of 2017 Junior Convertible Debt and 3.2 million shares of common stock in exchange for $111.3 million principal amount of 2007 Junior Convertible Debt. Refer to Note 13 Debt and Credit Facility for further discussion.
Schedule of restricted cash:
(2) In the three months ended June 30, 2018, the Company adopted ASU 2016-18 - Statement of Cash Flows: Restricted Cash. The following table presents the balance of restricted cash which consists of cash denominated in a foreign currency and restricted in use due to a foreign taxing authority requirement (in millions):

6

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

 
 
As of
 
 
March 31, 2017

 
June 30, 2017

 
March 31, 2018

 
June 30, 2018

Restricted cash
 
$

 
$
39.0

 
$
42.1

 
$
39.5


See accompanying notes to condensed consolidated financial statements

7



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. All dollar amounts in the financial statements and tables in these notes, except per share amounts, are stated in millions of U.S. dollars unless otherwise noted.
 
 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, 2018.  As further discussed in Note 3, on May 29, 2018, the Company completed its acquisition of Microsemi Corporation (Microsemi) and the Company's first quarter fiscal 2019 financial results include Microsemi's results beginning as of such acquisition date. The results of operations for the three months ended June 30, 2018 are not indicative of the results that may be expected for the fiscal year ending March 31, 2019 or for any other period.

Note 2. Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

On April 1, 2018, the Company adopted ASU 2014-09-Revenue from Contracts with Customers (Topic 606) and all related amendments (“New Revenue Standard”) using the modified retrospective method. The Company has applied the new revenue standard to all contracts that were entered into after adoption and to all contracts that were open as of the initial date of adoption. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the adoption of the new standard to impact net sales on an ongoing basis depending on the relative amount of revenue sold through distributors, the change in inventory held by distributors, and the changes in price concessions granted to distributors. Previously, the Company deferred revenue and cost of sales on shipments to distributors until the distributor sold the product to their end customer. As required by the new revenue standard, the Company no longer defers revenue and cost of sales, but rather, estimates the effects of returns and allowances provided to distributors and records revenue at the time of sale to the distributor. Sales to non-distributor customers, under both the previous and new revenue standards, are generally recognized upon the Company’s shipment of the product. The cumulative effect of the changes made to our condensed consolidated April 1, 2018 balance sheet for the adoption of the new revenue standard is summarized in the table of opening balance sheet adjustments below. In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our condensed consolidated income statement and balance sheet for the period ended June 30, 2018 was as follows (in millions):

Income Statement
 
For the three months ended June 30, 2018
 
As reported
 
Balances without adoption of New Revenue Standard
 
Effect of Change Higher / (Lower)
Net Sales
 
$
1,212.5

 
$
1,210.0

 
$
2.5

Cost of Sales
 
$
570.5

 
$
571.7

 
$
(1.2
)
Gross Profit
 
$
642.0

 
$
638.3

 
$
3.7

Income tax provision (benefit)
 
$
2.0

 
$
(0.3
)
 
$
2.3

Net Income
 
$
35.7

 
$
34.3

 
$
1.4


8


Balance Sheet
 
As of June 30, 2018
 
As reported
 
Balances without adoption of New Revenue Standard
 
Effect of Change Higher / (Lower)
ASSETS
 
 
 
 
 
 
Accounts receivable, net
 
$
789.4

 
$
845.7

 
$
(56.3
)
Inventories
 
$
1,104.8

 
$
1,109.9

 
$
(5.1
)
Other current assets
 
$
274.5

 
$
256.8

 
$
17.7

Long-term deferred tax assets
 
$
1,675.8

 
$
1,700.5

 
$
(24.7
)
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Accrued liabilities
 
$
491.3

 
$
471.2

 
$
20.1

Deferred income on shipments to distributors
 
$

 
$
349.5

 
$
(349.5
)
Long-term deferred tax liability
 
$
854.2

 
$
837.4

 
$
16.8

 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Retained Earnings
 
$
3,149.2

 
$
2,905.0

 
$
244.2


The significant changes in our financial statements noted in the table above are primarily due to the transition from sell-through revenue recognition to sell-in revenue recognition as required by the New Revenue Standard, which eliminated the balance of deferred income on shipments to distributors, significantly reduced accounts receivable, and significantly increased retained earnings.

During the three months ended June 30, 2018, the Company adopted ASU 2016-01-Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard requires available-for-sale equity investments to be measured at fair value with changes in fair value recognized in net income. The adoption of this standard did not have a material impact on the Company's financial statements.

During the three months ended June 30, 2018, the Company adopted ASU 2016-16-Intra-Entity Transfers of Assets Other Than Inventory. This standard addresses the recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset other than inventory.  This standard has been applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The adoption of this standard resulted in a cumulative-effect increase in the Company's deferred tax assets of approximately $1.58 billion, a decrease to the Company's deferred tax liabilities of $1.1 million, a decrease to other assets of $24.1 million, and a decrease of $1.7 million to other long-term liabilities.

During the three months ended June 30, 2018, the Company adopted ASU 2016-18-Statement of Cash Flows: Restricted Cash. This standard requires that the statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard has been applied using a retrospective transition method to each period presented. The adoption of this standard did not have a material impact on the Company's financial statements.

The following table summarizes the opening balance sheet adjustments related to the adoption of the New Revenue Standard, ASU 2016-01-Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU 2016-16-Intra-Entity Transfers of Assets Other Than Inventory (in millions):

9


 
 
Balance as of
 
Adjustments from
 
Balance as of
 
 
March 31, 2018
 
ASC Topic 606
 
ASU 2016-01
 
ASU 2016-16
 
April 1, 2018
ASSETS
 
 
 
 
 
 
 
 
 
 
Accounts receivable, net
 
$
563.7

 
$
(45.6
)
 
$

 
$

 
$
518.1

Inventories
 
$
476.2

 
$
(5.1
)
 
$

 
$

 
$
471.1

Other current assets
 
$
55.9

 
$
17.2

 
$

 
$

 
$
73.1

Long-term deferred tax assets
 
$
100.2

 
$
(23.1
)
 
$

 
$
1,579.4

 
$
1,656.5

Other assets
 
$
71.8

 
$

 
$

 
$
(24.1
)
 
$
47.7

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
Accrued liabilities
 
$
229.6

 
$
18.5

 
$

 
$

 
$
248.1

Deferred income on shipments to distributors
 
$
333.8

 
$
(333.8
)
 
$

 
$

 
$

Long-term deferred tax liability
 
$
205.8

 
$
16.8

 
$

 
$
(1.1
)
 
$
221.5

Other long-term liabilities
 
$
240.9

 
$

 
$

 
$
(1.7
)
 
$
239.2

 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss
 
$
(17.6
)
 
$

 
$
(1.7
)
 
$

 
$
(19.3
)
Retained earnings
 
$
1,397.3

 
$
241.9

 
$
1.7

 
$
1,558.1

 
$
3,199.0


Recently Issued Accounting Pronouncements Not Yet Adopted

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

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

In June 2016, the FASB issued ASU 2016-13-Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.  This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which 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 condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02-Leases. This standard requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in

10


Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The standard is to be applied using the modified retrospective approach to all periods presented. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

Note 3. Business Acquisitions
Acquisition of Microsemi
On May 29, 2018, the Company completed its acquisition of Microsemi Corporation, a publicly traded company headquartered in Aliso Viejo, California. The Company paid an aggregate of approximately $8.19 billion in cash to the stockholders of Microsemi. The total consideration transferred in the acquisition, including approximately $53.9 million of non-cash consideration for the exchange of certain share-based payment awards of Microsemi for stock awards of the Company, was approximately $8.25 billion. In addition to the consideration transferred, the Company recognized in its consolidated financial statements $3.15 billion in liabilities of Microsemi consisting of debt, taxes payable and deferred, restructuring, and contingent and other liabilities of which $2.06 billion of existing debt was paid off. The Company financed the purchase price using approximately $8.10 billion of borrowings consisting of $3.10 billion under its amended and restated revolving line of credit (the "Credit Facility"), $3.0 billion under the term loan feature of the Credit Facility ("Term Loan Facility"), and $2.0 billion in newly issued senior secured notes. The Company incurred $22.0 million in acquisition costs related to the acquisition. As a result of the acquisition, Microsemi became a wholly owned subsidiary of the Company. Microsemi offers a comprehensive portfolio of semiconductor and system solutions for aerospace and defense, communications, data center and industrial markets. The Company's primary reason for this acquisition was to expand the Company's range of solutions, products and capabilities by extending its served available market.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of Microsemi have been included in the Company's consolidated financial statements as of the closing date of the acquisition. Under the acquisition method of accounting, the aggregate amount of consideration paid by the Company was allocated to Microsemi's net tangible assets and intangible assets based on their estimated fair values as of May 29, 2018.  The excess of the purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The factors contributing to the recognition of goodwill were based upon the Company's conclusion that there are strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill has been allocated to the Company's semiconductor products reporting segment.  None of the goodwill related to the Microsemi acquisition is deductible for tax purposes.  The Company has retained independent third-party appraisers to assist management in its ongoing valuation of the acquired assets and liabilities.
The purchase price allocation has not been finalized and is based on estimates and assumptions that are subject to change related to the valuation of inventory, intangible assets, taxes and other assets and liabilities. This could result in adjustments to the fair values of the assets acquired and liabilities assumed, the useful lives of intangible assets, the residual amount allocated to goodwill and deferred income taxes recognized. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuation and estimates of useful lives. The purchase price allocation is preliminary and could change materially during the measurement period.


11


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

 
May 29, 2018
Assets acquired
 
Cash and cash equivalents
$
340.0

Accounts receivable
216.1

Inventories
716.8

Prepaid expenses and other current assets
66.6

Property, plant and equipment
241.2

Goodwill
4,974.2

Purchased intangible assets
4,722.0

Long-term deferred tax assets
19.2

Other assets
101.2

Total assets acquired
11,397.3

 
 
Liabilities assumed
 
Accounts payable
(226.9
)
Other current liabilities
(174.8
)
Long-term debt
(2,056.9
)
Deferred tax liabilities
(545.7
)
Long-term income tax payable
(101.6
)
Other long-term liabilities
(46.3
)
Total liabilities assumed
(3,152.2
)
Purchase price allocated
$
8,245.1


Purchased Intangible Assets
Weighted Average
 
 
 
Useful Life
 
May 29, 2018
 
(in years)
 
(in millions)
Core and developed technology
10
 
$
3,803.0

In-process research and development
 
434.0

Customer-related
10
 
448.1

Backlog
1
 
36.9

Total purchased intangible assets
 
 
$
4,722.0

Purchased intangible assets include core and developed technology, in-process research and development, customer-related intangibles and acquisition-date backlog.
The estimated fair values of the core and developed technology and in-process research and development are being determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology The core and developed technology intangible assets are being amortized in a manner based on the expected cash flows used in the initial determination of fair value.
In-process research and development is capitalized until such time as the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.
Customer-related intangible assets consist of Microsemi's contractual relationships and customer loyalty related to its distributor and end-customer relationships. The fair values of the customer-related intangibles are being determined based on expected attrition and revenue growth for Microsemi's existing customers as of the acquisition date.  Customer relationships are being amortized in a manner based on the estimated cash flows associated with the existing customers and anticipated retention rates.

12


Backlog relates to the value of orders not yet shipped by Microsemi at the acquisition date, and the fair values are being determined based on the estimated profit associated with those orders. Backlog related assets had a one year useful life and are being amortized on a straight-line basis over that period.
The total weighted average amortization period of intangible assets acquired as a result of the Microsemi transaction is 9 years. Amortization expense associated with acquired intangible assets is not deductible for tax purposes.  Thus, approximately $757.5 million was established as a net deferred tax liability for the future amortization of the intangible assets.

The amount of continuing Microsemi net sales and net loss included in the Company's condensed consolidated statements of income for the three months ended June 30, 2018 was approximately $188.5 million and $34.0 million, respectively.

The following unaudited pro-forma consolidated results of operations for the three months ended June 30, 2018 and 2017 assume the closing of the Microsemi acquisition occurred as of April 1, 2017. The pro-forma adjustments are mainly comprised of acquired inventory fair value costs and amortization of purchased intangible assets. The pro-forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2017 or of results that may occur in the future (in millions except per share data):
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
Net sales
$
1,426.8

 
$
1,430.2

Net income (loss)
$
109.9

 
$
(275.3
)
Basic net income (loss) per common share
$
0.47

 
$
(1.20
)
Diluted net income (loss) per common share
$
0.44

 
$
(1.20
)

Note 4. 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 months ended June 30, 2018 (in millions):
 
Three Months Ended
 
June 30, 2018
 
Net Sales
 
Gross Profit
Semiconductor products
$
1,185.8

 
$
615.3

Technology licensing
26.7

 
26.7

Total
$
1,212.5

 
$
642.0


The following table represents net sales and gross profit for each segment for the three months ended June 30, 2017 (in millions):
 
Three Months Ended
 
June 30, 2017
 
Net Sales
 
Gross Profit
Semiconductor products
$
947.1

 
$
559.4

Technology licensing
25.0

 
25.0

Total
$
972.1

 
$
584.4



13


Note 5. Net Sales
 
The following table represents the Company's net sales by product line (in millions):
 
Three Months Ended
 
June 30,
 
2018
Microcontrollers
$
722.5

Analog, interface, mixed signal and timing products
331.9

Memory products
50.0

Field-programmable gate array products
37.8

Technology licensing
26.7

Multi-market and other
43.6

Total net sales
$
1,212.5


All of the product lines listed above are included in the Company's Semiconductor Product segment with the exception of Technology Licensing, which belongs to the Technology Licensing segment.

The following table represents the Company's net sales by contract type (in millions).
 
Three Months Ended
 
June 30,
 
2018
Distributors
$
645.7

Direct Customers
540.1

Licensees
26.7

Total net sales
$
1,212.5


Distributors are customers that buy products with the intention of reselling them. Distributors generally have a distributor agreement with the Company to govern the terms of the relationship. Direct customers are non-distributor customers, which generally do not have a master sales agreement with the Company. The Company's direct customers primarily consist of original equipment manufacturers (OEMs) and, to a lesser extent, contract manufacturers. Licensees are customers that have licensing agreements to use the Company's SuperFlash® embedded flash and Smartbits® one time programmable NVM technologies. All of the contract types listed in the table above are included in the Company's Semiconductor Product segment with the exception of Licensees, which belongs to the Technology Licensing segment.

Substantially all of the Company's net sales is recognized from contracts with customers, and therefore, subject to the new revenue recognition standard.

Semiconductor Product Segment

For contracts related to the purchase of semiconductor products, the Company satisfies its performance obligation when control of the ordered product transfers to the customer. The timing of the transfer of control depends on the agreed upon shipping terms with the customer, but generally occurs upon shipment, which is when physical possession of the product has been transferred and legal title of the product transfers to the customer. Payment is generally due within 30 days of the ship date. Payment is generally collected after the Company satisfies its performance obligation, therefore contract liabilities are uncommon. Also, the Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a contract asset. Refer to Note 10 for the opening and closing balances of the Company's receivables. As contracts with customers generally have an expected duration of one year or less, the balance of open performance obligations as of period end that will be recognized as revenue subsequent to June 30, 2019 is immaterial.

Generally, there is only a single performance obligation in the Company's contracts with customers for semiconductor products; as such, the entire transaction price is allocated to the single performance obligation and allocation of the transaction price to individual performance obligations is not necessary. The consideration received from customers is fixed, with the

14


exception of consideration from certain distributors. Certain of the Company's distributors are granted price concessions and return rights, which result in variable consideration. The amount of revenue recognized for sales to these certain distributors is adjusted for estimates of the price concessions and return rights that are expected to be claimed. These estimates are based on the recent history of price concessions and stock rotations.

Technology Licensing Segment

For contracts related to the licensing of the Company’s technology, the Company satisfies its performance obligation and recognizes revenue as usage of the license occurs. The transaction price is fixed by the license agreement. Payment is collected after the Company satisfies its performance obligation, and therefore no contract liabilities are recorded. The Company does not record contract assets due to the fact that the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, the Company recognizes a receivable instead of a contact asset. Refer to Note 10 for the opening and closing balances of the Company’s receivables. As contracts are based on usage of the license, the Company is exempted from disclosures related to open performance obligations as of period-end.

Note 6. 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 income (in millions):

 
Three Months Ended
 
June 30,
 
2018
 
2017
Restructuring
 
 
 
Employee separation costs
$
45.1

 
$
1.1

Gain on sale of assets

 
(4.4
)
Impairment charges
2.0

 

Contract exit costs
(7.0
)
 
0.6

Other

 
(0.1
)
Total
$
40.1

 
$
(2.8
)

The Company continuously evaluates its existing operations in an attempt to identify and realize cost savings opportunities and operational efficiencies. This same approach is applied to businesses that are acquired by the Company and often the operating models of acquired companies are not as efficient as the Company's operating model which enables the Company to realize significant savings and efficiencies. As a result, following an acquisition, the Company will from time to time incur restructuring expenses; however, the Company is often not able to estimate the timing or amount of such costs in advance of the period in which they occur. The primary reason for this is that the Company regularly reviews and evaluates each position, contract and expense against the Company's strategic objectives, long-term operating targets and other operational priorities. Decisions related to restructuring activities are made on a "rolling basis" during the course of the integration of an acquisition whereby department managers, executives and other leaders work together to evaluate each of these expenses and make recommendations. As a result of this approach, at the time of an acquisition, the Company is not able to estimate the 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 the three months ended June 30, 2018 were related to the Company's most recent business acquisitions, and resulted from workforce, property and other operating expense rationalizations as well as combining product roadmaps and manufacturing operations. These expenses were for employee separation costs and intangible asset impairment charges. The impairment charges in the three months ended June 30, 2018 were recognized as a result of writing off intangible assets purchased from Microsemi prior to the close of the acquisition. Additional costs will be incurred in the future as additional synergies or operational efficiencies are identified in connection with the Microsemi transaction and other previous acquisitions.

All of the Company's restructuring activities occurred in its semiconductor products segment. The Company incurred $95.0 million in costs since the start of fiscal 2016 in connection with employee separation activities, of which $45.1 million and $1.1 million was incurred during the three months ended June 30, 2018, and 2017 respectively. The Company could incur

15


future expenses as additional synergies or operational efficiencies are identified. The Company is not able to estimate future expenses, if any, to be incurred in employee separation costs. The Company has incurred $38.5 million in costs in connection with contract exit activities since the start of fiscal 2016 which includes income of $7.0 million and costs of $0.6 million for the three months ended June 30, 2018 and 2017, respectively. The $7.0 million income was attributable to a change in assumptions on the vacated lease liability related to Atmel causing a change in timing and amount of cash flows under liability. While the Company expects to incur further acquisition-related contract exit expenses, it is not able to estimate the amount at this time.

In the three months ended 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 is being paid monthly starting in calendar year 2018 and depends 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.

The following is a roll forward of accrued restructuring and other exit charges from April 1, 2018 to June 30, 2018 (in millions):
 
Restructuring
 
Non-Restructuring
 
 
 
Employee Separation Costs
 
Exit Costs
 
Other Costs
 
Total
Balance at April 1, 2018 - Restructuring Accrual
$
0.8


$
27.3


$
19.1

 
$
47.2

Additions due to Microsemi acquisition
11.4


6.6



 
18.0

Charges/income
29.2


(7.0
)


 
22.2

Payments
(2.1
)

(2.1
)

(0.7
)
 
(4.9
)
Non-cash - Other


0.3


0.2

 
0.5

Balance at June 30, 2018 - Restructuring Accrual
$
39.3


$
25.1


$
18.6

 
$
83.0

Current
 
 
 
 
 
 
$
55.6

Non-current
 
 
 
 
 
 
27.4

Total
 
 
 
 
 
 
$
83.0


The restructuring liability of $83.0 million is included in accrued liabilities and other long-term liabilities on the Company's condensed consolidated balance sheet as of June 30, 2018.

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 debt securities at June 30, 2018 (in millions):
 
Available-for-sale Debt Securities
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Time deposits
$
11.3

 

 

 
$
11.3


At June 30, 2018, short-term investments of $14.5 million included available-for-sale debt securities of $11.3 million and marketable equity securities of $3.2 million.


16


The following is a summary of available-for-sale debt securities at March 31, 2018 (in millions):
 
Available-for-sale Debt Securities
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale debt securities:
 
 
 
 
 
 
 
Government agency bonds
$
723.2

 
$

 
$

 
$
723.2

Municipal bonds - taxable
14.9

 

 

 
14.9

Time deposits
11.5

 

 

 
11.5

Corporate bonds and debt
542.9

 

 

 
542.9

Total
$
1,292.5

 
$

 
$

 
$
1,292.5


 At March 31, 2018, short-term investments of $1.30 billion included available-for-sale debt securities of $1.29 billion and marketable equity securities of $2.8 million.

  The Company sold available-for-sale debt securities for proceeds of $1.38 billion during the three months ended June 30, 2018 to help finance the acquisition of Microsemi. The Company had no sales of available-for-sale debt securities during the three months ended June 30, 2017. During the three months ended June 30, 2018, the Company recognized a loss of $5.6 million on available-for-sale debt securities. During fiscal 2018, the Company recognized an impairment of $15.5 million on available-for-sale debt securities based on its evaluation of available evidence and the Company's intent to sell these investments which were subsequently sold in the first quarter of fiscal 2019. The Company determines the cost of available-for-sale debt securities sold on a first-in first-out (FIFO) basis at the individual security level for sales from multiple lots. For sales of marketable equity securities, the Company uses an average cost basis at the individual security level. Gains and losses recognized in earnings are credited or charged to other income (expense) on the consolidated statements of income.

As of June 30, 2018 and March 31, 2018, the Company had no available-for-sale debt securities in an unrealized loss position.

The amortized cost and estimated fair value of the available-for-sale debt securities at June 30, 2018, by contractual maturity are shown below (in millions). Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale debt securities as available for current operations.
 
Adjusted
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale debt securities
 
 
 
 
 
 
 
Due in one year or less
$
11.3

 
$

 
$

 
$
11.3


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.


17


Marketable Debt Instruments

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

Assets Measured at Fair Value on a Recurring Basis
 
Assets measured at fair value on a recurring basis at June 30, 2018 are as follows (in millions):
 
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Total
Balance
Assets
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
Money market mutual funds
$
46.4

 
$

 
$
46.4

Deposit accounts

 
588.8

 
588.8

Short-term investments:
 
 
 
 
 
Marketable equity securities
3.2

 

 
3.2

Time deposits

 
11.3

 
11.3

Total assets measured at fair value
$
49.6

 
$
600.1

 
$
649.7


Assets measured at fair value on a recurring basis at March 31, 2018 are as follows (in millions):

18


 
Quoted Prices
in Active
Markets for
 Identical
Instruments
(Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Total Balance
Assets
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
Money market mutual funds
$
121.0

 
$

 
$
121.0

Deposit accounts

 
641.6

 
641.6

Commercial Paper

 
118.7

 
118.7

Government agency bonds

 
20.0

 
20.0

Short-term investments:
 
 
 
 
 
Marketable equity securities
2.8

 

 
2.8

Corporate bonds and debt

 
542.9

 
542.9

Time deposits

 
11.5

 
11.5

Government agency bonds

 
723.2

 
723.2

Municipal bonds - taxable

 
14.9

 
14.9

Total assets measured at fair value
$
123.8

 
$
2,072.8

 
$
2,196.6


There were no transfers between Level 1 and Level 2 during the three months ended June 30, 2018 or the fiscal year ended March 31, 2018. There were no assets measured on a recurring basis using significant unobservable inputs (Level 3).

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

The Company's non-marketable and cost method investments are monitored on a quarterly basis for impairment charges.  The fair values of these investments have been determined as Level 3 fair value measurements because the valuations use unobservable inputs that require management's judgment due to the absence of quoted market prices. There were no impairment charges recognized on these investments during each of the three-month periods ended June 30, 2018 and June 30, 2017. These investments are included in other assets on the condensed consolidated balance sheets.

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

Note 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 June 30, 2018 based upon unobservable inputs. The fair values of these investments have been determined as Level 3 fair value measurements. The fair values of the Company's line of credit borrowings are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements and approximate carrying value excluding debt issuance costs. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the Company's line of credit borrowings at June 30, 2018 approximated the carrying value and are considered Level 2 in the fair value hierarchy described in Note 8. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy. 


19


Fair Value of Subordinated Convertible Debt, Senior Secured Notes, and Term Loan Facility

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

The following table shows the carrying amounts and fair values of the Company's senior and junior subordinated convertible debt, senior secured notes, and term loan facility as of June 30, 2018 and March 31, 2018 (in millions).

 
June 30, 2018
 
March 31, 2018
 
Carrying Amount (1)
 
Fair Value
 
Carrying Amount (1)
 
Fair Value
2023 Notes
$
982.8

 
$
1,005.5

 
$

 
$

2021 Notes
$
983.1

 
$
1,001.7

 
$

 
$

Term Loan Facility
$
2,965.8

 
$
3,000.0

 
$

 
$

2017 Senior Convertible Debt
$
1,451.3

 
$
2,416.7

 
$
1,437.6

 
$
2,459.2

2015 Senior Convertible Debt
$
1,322.3

 
$
3,011.2

 
$
1,309.9

 
$
3,079.1

2017 Junior Convertible Debt
$
328.9

 
$
814.2

 
$
326.7

 
$
876.9


(1) The carrying amounts presented are net of debt discounts and debt issuance costs (see Note 13. Debt and Credit Facility for further information).


Note 10.
Other Financial Statement Details

Accounts Receivable
 
Accounts receivable consists of the following (in millions):
 
June 30, 2018
 
March 31, 2018
Trade accounts receivable
$
782.6

 
$
557.8

Other
8.9

 
8.1

Total accounts receivable, gross
791.5

 
565.9

Less allowance for doubtful accounts
2.1

 
2.2

Total accounts receivable, net
$
789.4

 
$
563.7


Inventories

The components of inventories consist of the following (in millions):
 
June 30, 2018
 
March 31, 2018

Raw materials
$
74.1

 
$
26.0

Work in process
685.2

 
311.8

Finished goods
345.5

 
138.4

Total inventories
$
1,104.8

 
$
476.2


Inventories are valued at the lower of cost and net realizable value using the first-in, first-out method. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable. The inventory balance at June 30, 2018 includes a $309.7 million acquired inventory fair value adjustment resulting from the acquisition of Microsemi.


20


Property, Plant and Equipment

Property, plant and equipment consists of the following (in millions):
 
June 30, 2018
 
March 31, 2018
Land
$
84.7

 
$
73.4

Building and building improvements
616.1

 
508.5

Machinery and equipment
2,146.3

 
1,943.9

Projects in process
144.0

 
118.3

Total property, plant and equipment, gross
2,991.1

 
2,644.1

Less accumulated depreciation and amortization
1,912.7

 
1,876.2

Total property, plant and equipment, net
$
1,078.4

 
$
767.9

 
Depreciation expense attributed to property, plant and equipment was $38.0 million and $29.0 million for the three months ended June 30, 2018 and 2017, respectively.

Note 11.     Intangible Assets and Goodwill
 
Intangible assets consist of the following (in millions):
 
 
June 30, 2018
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Core and developed technology
 
$
5,754.9

 
$
(737.6
)
 
$
5,017.3

Customer-related
 
1,165.1

 
(416.0
)
 
749.1

Backlog
 
36.9

 
(0.4
)
 
36.5

In-process research and development
 
445.1

 

 
445.1

Distribution rights
 
0.3

 
(0.1
)
 
0.2

Other
 
1.5

 
(0.8
)
 
0.7

Total
 
$
7,403.8

 
$
(1,154.9
)
 
$
6,248.9


 
 
March 31, 2018
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Core and developed technology
 
$
1,952.3

 
$
(644.4
)
 
$
1,307.9

Customer-related
 
716.9

 
(375.9
)
 
341.0

In-process research and development
 
12.1

 

 
12.1

Distribution rights
 
0.3

 
(0.1
)
 
0.2

Other
 
1.5

 
(0.7
)
 
0.8

Total
 
$
2,683.1

 
$
(1,021.1
)
 
$
1,662.0


The Company amortizes intangible assets over their expected useful lives, which range between 1 and 15 years. During the three months ended June 30, 2018, due to the acquisition of Microsemi, the Company acquired $3.80 billion of core and developed technology which has a weighted average amortization period of 10 years, $448.1 million of customer-related intangible assets which have a weighted average amortization period of 10 years, $36.9 million of intangible assets related to backlog with an amortization period of 1 year, and $434.0 million of in-process technology which will begin amortization once the technology reaches technological feasibility. In the three months ended June 30, 2018, $1.0 million of in-process research and development intangible assets reached technological feasibility and was reclassified as core and developed technology and began being amortized over the respective estimated useful lives. The following is an expected amortization schedule for the intangible assets for the remainder of fiscal 2019 through fiscal 2023, absent any future acquisitions or impairment charges (in millions):


21


Fiscal Year Ending
March 31,
Projected Amortization
Expense
2019
$855.5
2020
$1,045.1
2021
$983.7
2022
$704.3
2023
$612.1
 
Amortization expense attributed to intangible assets was $134.8 million and $122.8 million for the three months ended June 30, 2018 and 2017, respectively. In the three months ended June 30, 2018, approximately $1.0 million of amortization expense was charged to cost of sales, and approximately $133.8 million was charged to operating expenses.  In the three months ended June 30, 2017, approximately $2.0 million of amortization expense was charged to cost of sales, and approximately $120.8 million was charged to operating expenses.  The Company recognized $2.0 million of intangible asset impairment charges in the three months ended June 30, 2018. The impairment charges were recognized as a result of writing off intangibles assets purchased from Microsemi prior to the close of the acquisition. The Company recognized an immaterial amount of intangible asset impairment charges in the three months ended June 30, 2017. The impairment charges were related to the Microsemi acquisition and were attributable to the intangible assets being owned by the Company prior to the acquisition date.

Goodwill activity for the three months ended June 30, 2018 was as follows (in millions):
 
Semiconductor Products Reporting Unit
 
Technology Licensing Reporting Unit
Balance at March 31, 2018
$
2,279.8

 
$
19.2

Additions due to the acquisition of Microsemi
4,974.2

 

Balance at June 30, 2018
$
7,254.0

 
$
19.2

 
At March 31, 2018, 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 June 30, 2018, 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 an effective tax rate of 5.2% for the three months ended June 30, 2018 and a negative effective tax rate of 2.6% for the three months ended June 30, 2017.  

The Company's effective tax rate for the three months ended June 30, 2018 is higher compared to the prior year primarily due to the impact of the new Global Intangible Low-Taxed Income (“GILTI”) tax in the United States, offset by pre-tax losses in higher tax jurisdictions and tax benefits from increased tax credit generation. The Company's effective tax rate is different than statutory rates in the U.S. due primarily to various purchase accounting adjustments from the Microsemi acquisition as well as one-time discrete tax benefits related to changes in U.S. and foreign tax laws. In addition, the Company has numerous tax holidays it receives related to its Thailand manufacturing operations based on its investment in property, plant and equipment in Thailand, as well as Microsemi’s tax holiday in Malaysia that effectively reduces its Malaysia net income tax rate to zero in that jurisdiction. 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 effective tax rate. Microsemi’s tax holiday in Malaysia was granted in 2009 and is effective through December 2019, subject to continued compliance with the tax holiday’s requirements. The material components of foreign income taxed at a rate lower than the U.S. are earnings accrued in Thailand, Malta and Ireland.

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

22


its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax laws applied to the facts of each matter.

The Company believes it maintains appropriate reserves to offset any potential income tax liabilities that may arise upon final resolution of matters for open tax years.  If such reserve amounts ultimately prove to be unnecessary, the resulting reversal of such reserves could result in tax benefits being recorded in the period the reserves are no longer deemed necessary.  If such amounts prove to be less than an ultimate assessment, a future charge to expense would be recorded in the period in which the assessment is determined.

The following tables summarize the activity related to the Company’s gross unrecognized tax benefits for the three months ended June 30, 2018 and the year ended March 31, 2018 (in millions):

 
Three Months Ended June 30, 2018
Balance at March 31, 2018
$
436.0

Increases related to acquisitions
284.0

Decreases related to settlements with tax authorities

Decreases related to statute of limitation expirations
(2.2
)
Increases related to current year tax positions
3.5

Decreases related to prior year tax positions
(11.6
)
Balance at June 30, 2018
$
709.7

 
Year Ended March 31, 2018
Balance at March 31, 2017
$
398.5

Increases related to acquisitions

Decreases related to settlements with tax authorities
(0.1
)
Decreases related to statute of limitation expirations
(10.9
)
Increases related to current year tax positions
30.3

Increases related to prior year tax positions
18.2

Balance at March 31, 2018
$
436.0


As of June 30, 2018, the Company had accrued approximately $36.4 million related to the potential payment of interest on the Company’s uncertain tax positions. The current year increase to the potential payment of interest is primarily composed of a $23.2 million increase related to acquisitions. As of March 31, 2018, the Company had accrued approximately $12.9 million related to the potential payment of interest on the Company’s uncertain tax positions. As of June 30, 2018, the Company had accrued for approximately $72.8 million of penalties related to its uncertain tax positions. The current year increase to the potential payment of penalties is primarily composed of a $15.8 million increase related to acquisitions. As of March 31, 2018, the Company had accrued for approximately $67.9 million of penalties related to its uncertain tax positions.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted into law. The Act provides for numerous significant tax law changes and modifications including the reduction of the U.S. federal corporate income tax rate from 35.0% to 21.0%, the requirement for companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign-sourced earnings.

Accounting Standards Codification ("ASC") 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin ("SAB") 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. The Company recorded a reasonable estimate when measurable and with the understanding that the provisional amount is subject to further adjustments under SAB 118. In addition, for significant items for which the Company could not make a reasonable estimate, no provisional amounts were recorded. Amounts will be recorded during the measurement period allowed under SAB 118 when a reasonable estimate can be made, or when the effect of the Act is known. As of March 31, 2018, the Company made a reasonable estimate of the effects on the one-time transition tax, its existing deferred tax balances and the release of its valuation allowances on foreign tax credits due to the Act, and the Company recognized a provisional amount of income tax expense of $471.6 million, which decreased diluted net income per

23


common share by $1.89 for the fiscal year ended March 31, 2018 and which was included as a component of income tax provision from continuing operations. As of June 30, 2018, the Company has not made any adjustments to the provisional estimates recorded on the financial statements for the fiscal year ended March 31, 2018. The Company will continue to refine what the provisional balances and adjustments may be made under SAB 118 during the measurement period as a result of future changes in interpretation, information available, assumptions made by the Company and/or issuance of additional guidance and these adjustments could be material.

The Company has not yet completed its calculation of the total post-1986 E&P for its foreign subsidiaries. The one-time transition tax is based in part on the amount of those earnings held in cash and other specified assets either as of the end of fiscal 2018 or the average of the year-end balances for fiscal 2016 and fiscal 2017. The Company's calculation of this amount will change with further analysis and guidance from the U.S. federal and state tax authorities about the application of these new rules. The Company will continue to evaluate the impact of the tax law change as it relates to the accounting for the outside basis difference of its foreign entities.

On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation.  This opinion reversed the prior decision of the United States Tax Court.  On August 7, 2018, the decision on July 24, 2018 was withdrawn. We will continue to monitor the case and will quantify the potential impact as more information is available.

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)
 
 
 
 
 
 
 
June 30, 2018
 
March 31, 2018
Senior Secured Indebtedness
 
 
 
 
 
 
Revolving Credit Facility
 
 
 
 
 
 
 
$
3,334.0

 
$

Term Loan Facility
 

 

 
 
 
3,000.0

 

2023 Notes, maturing June 1, 2023 ("2023 Notes")
 
4.333%
 

 
 
 
1,000.0

 

2021 Notes, maturing June 1, 2021 ("2021 Notes")
 
3.922%
 

 
 
 
1,000.0

 

Total Senior Secured Indebtedness
 
 
 
 
 
 
 
8,334.0

 

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

 
$
2,070.0

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

 
1,725.0

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

 
686.3

Total Convertible Debt
 
 
 
 
 
 
 
4,481.3

 
4,481.3

 
 
 
 
 
 
 
 
 
 
 
Gross long-term debt including current maturities
 
 
 
 
 
 
 
12,815.3

 
4,481.3

Less: Debt discount (2)
 
 
 
 
 
 
 
(1,355.7
)
 
(1,372.9
)
Less: Debt issuance costs (3)
 
 
 
 
 
 
 
(110.0
)
 
(40.1
)
Net long-term debt including current maturities
 
 
 
 
 
 
 
11,349.6

 
3,068.3

Less: Current maturities (4)
 
 
 
 
 
 
 
(1,329.8
)
 
(1,309.9
)
Net long-term debt
 
 
 
 
 
 
 
$
10,019.8

 
$
1,758.4

 
 
 
 
 
 
 
 
 
 
 
(1) As each of the convertible instruments may be settled in cash upon conversion, for accounting purposes, they were bifurcated into a liability component and an equity component, which are both initially recorded at fair value.  The amount allocated to the equity component is the difference between the principal value of the instrument and the fair value of the

24


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):  
 
June 30,
 
March 31,
 
2018
 
2018
2023 Notes
$
(5.2
)
 
$

2021 Notes
(5.1
)
 

2017 Senior Convertible Debt
(602.9
)
 
(616.3
)
2015 Senior Convertible Debt
(388.4
)
 
(400.3
)
2017 Junior Convertible Debt
(354.1
)
 
(356.3
)
Total unamortized discount
$
(1,355.7
)
 
$
(1,372.9
)
(3) Debt issuance costs include the following (in millions):
 
June 30,
 
March 31,
 
2018
 
2018
Senior Credit Facility
$
(18.6
)
 
$
(5.9
)
Term Loan Facility
(34.2
)
 

2023 Notes
(12.0
)
 

2021 Notes
(11.8
)
 

2017 Senior Convertible Debt
(15.8
)
 
(16.1
)
2015 Senior Convertible Debt
(14.3
)
 
(14.8
)
2017 Junior Convertible Debt
(3.3
)
 
(3.3
)
Total debt issuance costs
$
(110.0
)
 
$
(40.1
)

(4) Current maturities include the full balance of the 2015 Senior Convertible Debt.

Expected maturities relating to the Company’s long-term debt (including current maturities) as of June 30, 2018 are as follows (in millions):
Fiscal year ending March 31,
 
Expected Maturities
2019
 
$
5.6

2020
 
7.5

2021
 
7.5

2022
 
1,007.5

2023
 
7.5

Thereafter
 
11,779.7

Total
 
$
12,815.3


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

25


Summary of Conversion Features - Each series of Convertible Debt is convertible, subject to certain conditions, into cash, shares of the Company's common stock or a combination thereof, at the Company's election, at specified Conversion Rates (see table below), adjusted for certain events including the declaration of cash dividends. Except during the three-month period immediately preceding the maturity date of the applicable series of Convertible Debt, each series of Convertible Debt is convertible only upon the occurrence of (1) such time as the closing price of the Company's common stock exceeds the Conversion Price (see table below) by 130% for 20 days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter or (2) during the 5 business day period after any 10 consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day or (3) upon the occurrence of certain corporate events specified in the indenture of such series of Convertible Debt. In addition, for each series, if at the time of conversion the applicable price of the Company's common stock exceeds the applicable Conversion Price at such time, the applicable Conversion Rate will be increased by up to an additional maximum incremental shares rate, as determined pursuant to a formula specified in the indenture for the applicable series of Convertible Debt, and as adjusted for cash dividends paid since the issuance of such series of Convertible Debt. However, in no event will the applicable Conversion Rate exceed the applicable Maximum Conversion Rate specified in the indenture for the applicable series of Convertible Debt (see table below). The following table sets forth the applicable Conversion Rates adjusted for dividends declared since issuance of such series of Convertible Debt and the applicable Incremental Share Factors and Maximum Conversion Rates as adjusted for dividends paid since the applicable issuance date:
 
Dividend adjusted rates as of June 30, 2018
 
Conversion Rate, adjusted
 
Approximate Conversion Price, adjusted
 
Incremental Share Factor, adjusted
 
Maximum Conversion Rate, adjusted
2017 Senior Convertible Debt
10.1557

 
$
98.47

 
5.0779

 
14.4720

2015 Senior Convertible Debt
15.8372

 
$
63.14

 
7.9186

 
22.1720

2017 Junior Convertible Debt
10.3371

 
$
96.74

 
5.1686

 
14.4720


As of June 30, 2018, the holders of the 2015 Senior Convertible Debt have the right to convert their debentures between July 1, 2018 and September 30, 2018 because the Company's common stock price has exceeded the Conversion Price by 130% for the specified period of time during the quarter ended June 30, 2018. As of June 30, 2018, the 2015 Senior Convertible Debt is convertible and had a value if converted above par of $1.14 billion. The 2015 Senior Convertible Debt is included in the current portion of long-term debt.

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.


26


Interest expense related to long-term debt includes the following (in millions):
 
Three Months Ended
June 30,
 
2018
 
2017
Interest expense on convertible debt
 
 
 
Debt issuance amortization
$
0.9

 
$
0.9

Amortization of debt discount - non cash interest expense
27.5

 
25.9

Coupon interest expense
19.3

 
19.4

Total interest expense on convertible debt
47.7

 
46.2

Interest expense on Term Loan Facility and Senior Secured Notes
 
 
 
Debt issuance amortization
1.3

 

Interest expense
18.3

 

Total interest expense on Term Loan Facility and Senior Secured Notes
19.6

 

Total interest expense on convertible debt, Term Loan Facility, and Senior Secured Notes
$
67.3

 
$
46.2


The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 8.63 years, 6.63 years, and 18.63 years for the 2017 Senior Convertible Debt, 2015 Senior Convertible Debt, and 2017 Junior Convertible Debt, respectively.  

In November 2017, the Company called $14.6 million in principal value of the remaining outstanding 2007 Junior Convertible Debt with an effective date of December 15, 2017 for which substantially all holders submitted requests to convert. Prior to the call, conversion requests were received in both the second and third quarters of fiscal 2018. Total conversions for fiscal 2018 were for a principal amount of $32.5 million for which the Company settled the principal amount in cash and issued 0.5 million shares of its common stock in respect of the conversion value in excess of the principal amount for the conversions occurring prior to the call notice and $41.0 million in cash for the conversion value in excess of the principal amount for the conversion requests received after the call notice. A loss on total conversions was recorded for $2.2 million.

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

In February 2017, the Company issued the 2017 Senior Convertible Debt and 2017 Junior Convertible Debt for net proceeds of $2.04 billion and $567.7 million, respectively. In connection with the issuance of these instruments, the Company incurred issuance costs of $33.7 million, of which $17.8 million and $3.4 million was recorded as debt issuance costs related to the 2017 Senior Convertible Debt and 2017 Junior Convertible Debt, respectively, and will be amortized using the effective interest method over the term of the debt. The balance of $12.5 million in fees was recorded to equity.  Interest on both instruments is payable semi-annually on February 15 and August 15 of each year.

In February 2015, the Company issued the 2015 Senior Convertible Debt for net proceeds of approximately $1.69 billion. In connection with the issuance, the Company incurred issuance costs of $30.3 million, of which $20.4 million was recorded as debt issuance costs and will be amortized using the effective interest method over the term of the debt. The balance of $9.9 million was recorded to equity.


27


The Company utilized the proceeds from the issuances of the 2017 Senior Convertible Debt, 2017 Junior Convertible Debt, and 2015 Senior Convertible Debt to reduce amounts borrowed under its Credit Facility and to settle a portion of the 2007 Junior Convertible Debt in privately negotiated transactions. In February 2017 and February 2015, the Company settled $431.3 million and $575.0 million, respectively, in aggregate principal of its 2007 Junior Convertible Debt. The 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 Convertible 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 statements of income 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 Convertible Debt, the consideration was allocated to the liability and equity components using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt prior to the retirement. The transactions resulted in a loss on settlement of 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.

Senior Secured Notes

Issuances and Settlements of Senior Secured Notes - In May 2018, the Company issued $1.00 billion aggregate principal amount of 3.922% Senior Secured Notes due 2021 (the “2021 Notes”) and $1.00 billion aggregate principal amount of 4.333% Senior Secured Notes due 2023 (the “2023 Notes”, and together with the 2021 Notes, the "Senior Secured Notes") to qualified institutional buyers in a Rule 144A offering. In connection with the issuance of these instruments, the Company incurred issuance costs of $24.4 million and recorded a debt discount of $10.5 million for fees deducted from the proceeds, which will both be amortized using the effective interest method over the term of the debt. The 2021 Notes mature on June 1, 2021 and the 2023 Notes mature on June 1, 2023. Interest on the 2021 Notes accrues at a rate of 3.922% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2018. Interest on the 2023 Notes accrues at a rate of 4.333% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2018.

The Company may, at its option, redeem some or all of the 2021 Notes prior to June 1, 2021 at a price equal to the greater of (a) 100% of the principal amount of the 2021 Notes redeemed or (b) the sum of the present value of all remaining scheduled payments of principal and interest (discounted in accordance with the indenture for the 2021 Notes) that would have been due on the redeemed 2021 Notes, in each case, plus accrued and unpaid interest to, but excluding, the redemption date. The Company may, at its option, redeem some or all of the 2023 Notes, (i) if prior to May 1, 2023 (one month prior to the maturity date of the 2023 Notes), at a price equal to the greater of (a) 100% of the principal amount of the 2023 Notes redeemed or (b) the sum of the present value of all remaining scheduled payments of principal and interest (discounted in accordance with the indenture for the 2023 Notes) that would have been due on the redeemed 2023 Notes, in each case, plus accrued and unpaid interest to, but excluding, the redemption date, and (ii) if on or after May 1, 2023 (one month prior to maturity of the 2023 Notes), at a redemption price equal to 100% of the principal amount of the notes redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company experiences a specified change of control triggering event, the Company must offer to repurchase the Notes at a price equal to 101% of the principal amount of the Notes repurchased, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
The Notes are guaranteed by certain of the Company's subsidiaries (each such guarantee, a “Note Guarantee”) that have also guaranteed the obligations under the Company's Credit Facility and under the Term Loan Facility (the Term Loan Facility together with the Credit Facility, the “Senior Credit Facilities”) that was entered into in connection with the Merger.
The Notes and the Note Guarantees are secured, on a pari passu first lien basis with the Senior Credit Facilities, by substantially all of the tangible and intangible assets (other than certain excluded assets) of the Company and the guarantors that secure obligations under the Senior Credit Facilities, in each case subject to certain thresholds, exceptions and permitted liens, as set forth in the indenture for the Senior Secured Notes and the Security Agreement, dated May 29, 2018, by and among the Company, the subsidiary guarantors party thereto and the Collateral Agent (the "Security Agreement").


28


Credit Facility

In May 2018, the Company amended and restated the Credit Facility to, among other things, increase the size of the Revolving Loan Facility (as defined below) thereunder to $3.84 billion from $3.12 billion at March 31, 2018. In connection with the amendment and restatement of the Credit Facility, the Company incurred issuance costs of $13.6 million which will be amortized using the effective interest method over the term of the debt.

The Credit Facility provides for a revolving loan facility (the "Revolving Loan Facility") in an aggregate principal amount of approximately $3.84 billion, with a $250.0 million foreign currency sublimit, a $50.0 million letter of credit sublimit and a $25.0 million swingline loan sublimit.  The Credit Facility consists of approximately $244.3 million of revolving loan commitments (the "2020 Revolving Loans") that terminate on February 4, 2020 (the "2020 Maturity Date") and approximately $3.60 billion of revolving loan commitments (the "2023 Revolving Loans" and, together with the 2020 Revolving Loans, the "Revolving Loans") that terminate on May 18, 2023 (the "2023 Maturity Date").  The Revolving Loans bear interest, at the Company’s option, at (a) in the case of 2020 Revolving Loans, the base rate plus a spread of 0.25% to 1.25% or an adjusted LIBOR rate plus a spread of 1.25% to 2.25%, and (b) in the case of 2023 Revolving Loans, the base rate plus a spread of 0.00% to 1.00% or an adjusted LIBOR rate plus a spread of 1.00% to 2.00%, in each case, with such spread being determined based on the consolidated senior leverage ratio for the preceding four fiscal quarter period. 

The Credit Facility permits the Company to add one or more incremental term loan facilities (in addition to the Term Loans) and/or increase the commitments under the Revolving Loan Facility from time to time, subject, in each case, to the receipt of additional commitments from existing and/or new lenders and pro forma compliance with a consolidated senior leverage ratio set forth in the Credit Facility.

The Company has the option to obtain additional tranche commitments or additional indebtedness in minimum increments of $10 million so long as, on a proforma basis, the Senior Leverage Ratio is equal to or less than (a) 4.25 to 1.00 if such Incremental Term Loan is made on or following the first anniversary of the Microsemi Acquisition Closing Date but prior to the second anniversary of the Closing Date and (b) 3.75 to 1.00 if such Incremental Term Loan is made on or after the second anniversary of the Microsemi Acquisition Closing Date.

The Company’s obligations under the Credit Facility are guaranteed by certain of its subsidiaries meeting materiality thresholds set forth in the Credit Facility. To secure the Company’s obligations under the Credit Facility and the subsidiary guarantors’ obligations under the guarantees, the Company and each of the subsidiary guarantors has granted a security interest in substantially all its assets, subject to certain exceptions and limitations.

In May 2018, the Company borrowed $3.0 billion aggregate principal amount of loans under the Term Loan Facility ("Term Loans"). In connection with such borrowings, the Company incurred issuance costs of $34.7 million which will be amortized using the effective interest method over the term of the debt. The Credit Facility provides for quarterly amortization payments of the Term Loans on the last business day of each March, June, September and December, commencing with the last business day of the first full fiscal quarter to occur after the Merger effective date, equal to 0.25% of the aggregate original principal amount of the Term Loans. In addition, the Credit Facility requires mandatory prepayments of the Term Loans from the incurrence of debt not otherwise permitted to be incurred under the Credit Facility, certain asset sales and certain excess cash flow. Mandatory prepayments with excess cash flow (as defined in the Credit Facility) are required to be made beginning with the Company’s fiscal year ending March 30, 2020 in an amount equal to 50%, 25% or 0% of the excess cash flow for such fiscal year, depending on the Company’s senior leverage ratio. The Company may prepay the Term Loans at any time without premium or penalty. Term Loans repaid or prepaid may not be reborrowed.

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 Facility was approximately $14.8 million in the three months ended June 30, 2018 compared to $2.7 million for the three months ended June 30, 2017. Principal, together with all accrued and unpaid interest, is due and payable on the respective tranche maturity date, which is February 4, 2020 for the 2020 tranche revolving loans and May 18, 2023 for the 2023 tranche revolving loans. The Company pays a quarterly commitment fee on the available but unused portion of its line of credit which is calculated on the average daily available balance during the period. The Company may prepay the loans and terminate the commitments, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts in the case of commitment reductions and reimbursement of certain costs in the case of prepayments of LIBOR loans.

The Credit Facility 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

29


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 June 30, 2018, the Company was in compliance with these financial covenants.

The financial covenants include, among others, limits on the Company's consolidated total leverage ratio and senior 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 (a) 6.75 to 1.00 for any such period ended on or after the Microsemi Acquisition Closing Date to (but excluding) the first anniversary of the Microsemi Acquisition Closing Date, (b) 6.25 to 1.00 for any such period ended on or after the first anniversary of the Microsemi Acquisition Closing Date to (but excluding) the second anniversary of the Microsemi Acquisition Closing Date and (c) 5.75 to 1.00 for any such period ended on or after the second anniversary of the Microsemi Acquisition Closing Date. The total leverage ratio is calculated as Consolidated Total Indebtedness, excluding the Junior Convertible Debt up to a $700 million maximum, to Consolidated EBIDTA for a period of four consecutive quarters. The Credit Facility also requires that the Senior Leverage Ratio not exceed (a) 4.75 to 1.00 for any such period ended from (and including) the Microsemi Acquisition Closing Date to (but excluding) the first anniversary of the Microsemi Acquisition Closing Date, (b) 4.25 to 1.00 for any such period ended on or after the first anniversary of the Microsemi Acquisition Closing Date to (but excluding) the second anniversary of the Microsemi Acquisition Closing Date and (c) 3.75 to 1.00 for any such period ended on or after the second anniversary of the Microsemi Acquisition Closing Date. The senior leverage ratio is calculated as Consolidated Senior Indebtedness to Consolidated EBIDTA for four consecutive quarters. The Company is also required to comply with a Minimum Interest Coverage Ratio of at least (a) 3.25 to 1.00 for any period ended on or after the Microsemi Acquisition Closing Date, measured quarterly.

The Credit Facility 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 Facility. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the Credit Facility at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts.

Note 14.     Pension Plans

The Company has defined benefit pension plans that cover certain French and German employees. Most of these acquired defined pension plans are unfunded; however, one of the pension plans in Germany is insured and the Company has pledged the insurance contracts to the pensioners. Accordingly, the contracts are now considered to be a plan asset. As the plan assets are insurance contracts, the Company does not control the investment strategy and thus cannot influence the return on investments. The insurance payments are guaranteed by the insurer and should the insurer default on its obligation, the security fund for insurance companies in Germany would assume the contracts. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Pension liabilities and charges are based upon various assumptions, updated annually, including discount rates, future salary increases, employee turnover, and mortality rates. The Company's French pension plan provides for termination benefits paid to covered French employees only at retirement, and consists of approximately one to five months of salary. The Company's German pension plan provides for defined benefit payouts for covered German employees following retirement.

The aggregate net pension expense relating to these plans is as follows (in millions):

 
Three Months Ended
 
June 30,
 
2018
 
2017
Service costs
$
0.4

 
$
0.4

Interest costs
0.3

 
0.2

Amortization of actuarial loss
0.3

 
0.2

Net pension period cost
$
1.0

 
$
0.8

 

30


Interest costs and amortization of actuarial losses are recorded in the other income, net line item in the statements of income. The Company's net periodic pension cost for fiscal 2019 is expected to be approximately $3.2 million. Cash funding for benefits paid was $0.2 million and $0.1 million for the three months ended June 30, 2018 and 2017, respectively. The Company expects total contributions to these plans to be approximately $1.2 million in fiscal 2019.

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 legal matters:
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 included claims arising under federal law and Florida, California, New Jersey, Michigan and Louisiana state law and alleged 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 were 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 were 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 $227.7 million. The Company's Atmel subsidiaries intend to defend this action vigorously.
Southern District of New York Action by LFoundry Rousset ("LFR") and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, individually and on behalf of a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York (the "District Court") against the Company's Atmel subsidiary, French subsidiary, Atmel Rousset S.A.S. ("Atmel Rousset"), and LFoundry GmbH ("LF"), LFR's German parent. The case purports to relate to Atmel Rousset's June 2010 sale of its wafer manufacturing facility in Rousset, France to LF, and LFR's subsequent insolvency, and later liquidation, more than three years later. The District Court dismissed the case on August 21, 2015, and the United States Court of Appeals for the Second Circuit affirmed the dismissal on June 27, 2016. On July 25, 2016, the plaintiffs filed a notice of appeal from the District Court's June 27, 2016 denial of their motion for relief from the dismissal judgment. On May 19, 2017, the United States Court of Appeals for the Second Circuit affirmed the June 27, 2016 order dismissing the case.
Individual Labor Actions by former LFR Employees. In the wake of LFR's insolvency and liquidation, over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in a French labor court. The Company's Atmel Rousset subsidiary believes that each of these actions is entirely devoid of merit, and, further, that any assertion by any of the Claimants of a co-employment relationship with the Atmel Rousset subsidiary is based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. The Company's Atmel Rousset subsidiary therefore intends to defend vigorously against each of these claims. Additionally, complaints have been filed in a regional court in France on behalf of the same group of employees against Microchip Technology Rousset, Atmel

31


Switzerland Sarl, Atmel Corporation and Microchip Technology Incorporated alleging that the sale of the Atmel Rousset production unit to LFoundry GmbH was fraudulent and should be voided. These claims are based largely on the same specious arguments as listed in the Southern District of New York Action listed above. The defendant entities therefore intend to defend vigorously against these claims.
The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, the Company accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, the Company records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, the Company uses the amount that is the low end of such range. As of June 30, 2018, 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 $162.7 million. There are some licensing agreements in place that do not specify indemnification limits.  As of June 30, 2018, 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 losses of $4.4 million for the three months ended June 30, 2018, compared to net gains of $4.5 million for the three months ended June 30, 2017.  As of June 30, 2018 and March 31, 2018, the Company had no foreign currency forward contracts outstanding. The Company recognized an immaterial amount of net losses and gains on foreign currency forward contracts in each of the three months ended June 30, 2018 and 2017. 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 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 three months ended June 30, 2018 (in millions):

32


 
Unrealized
holding gains (losses)
available-for-sale debt securities
 
Defined benefit pension plans
 
Foreign
Currency
 
Total
Accumulated other comprehensive income (loss) at March 31, 2018
$
1.9

 
$
(10.1
)
 
$
(9.4
)
 
$
(17.6
)
Impact of change in accounting principle
(1.7
)
 

 

 
(1.7
)
Opening Balance as of April 1, 2018
0.2

 
(10.1
)
 
(9.4
)
 
(19.3
)
Other comprehensive (loss) income before reclassifications
(5.6
)
 
4.4

 
(0.3
)
 
(1.5
)
Amounts reclassified from accumulated other comprehensive loss
5.6

 
0.3

 

 
5.9

Net other comprehensive loss

 
4.7

 
(0.3
)
 
4.4

Accumulated other comprehensive income (loss) at June 30, 2018