MICROCHIP TECHNOLOGY INC (MCHP)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Note Regarding Forward-looking Statements

This report, including "Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II - Item 1A. Risk Factors" contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance and revenue sources.  We use words such as "anticipate," "believe," "can," "continue," "could," "expect," "future," "intend," "plan," and similar expressions to identify forward-looking statements.  Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under "Risk Factors," beginning at page 36 and elsewhere in this Form 10-Q.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on these forward-looking statements.  We disclaim any obligation to update information contained in any forward-looking statement.  These forward-looking statements include, without limitation, statements regarding the following:

•Our expectation that we will experience period-to-period fluctuations in operating results, gross margins, and product mix;

•The effects that uncertain global economic conditions and fluctuations in the global credit and equity markets may have on our financial condition and results of operations;

•The effects and amount of competitive pricing pressure on our product lines and modest pricing declines in certain of our more mature proprietary product lines;

•Our ability to moderate future average selling price declines;

•Our expectations regarding our inventory levels and revenue growth;

•The amount of, and changes in, demand for our products and those of our customers;

•The impact of national security protections, trade restrictions and changes in tariffs, including those impacting China;

•Our intent to vigorously defend our legal positions and our expectations of the impact of litigation on our operations;

•The future impact on our business in response to public health concerns;

•Our goal to continue to be more efficient with our selling, general and administrative expenses;

•Our belief that customers recognize our products and brand name and our use of distributors as an effective supply channel;

•The ability of our partners to provide services, supplies, and materials and continued performance under financial challenges;

•Our belief that familiarity with and adoption of development tools from us and from our third-party development tool partners will be an important factor in the future selection of our embedded control products;

•The accuracy of our estimates of the useful life and values of our property, assets and other liabilities;

•The possibility of future pricing fluctuations in our analog product line;

•The impact of any supply disruption we may experience;

•Our ability to effectively utilize our facilities at appropriate capacity levels or obtain sufficient capacity from our manufacturing, assembly and test sub-contractors;

•Our ability to maintain manufacturing yields;

•The maintenance of our competitive position based on our investments in new and enhanced products;

•The cost effectiveness of using our own assembly and test operations;

•Our plans to continue to transition certain outsourced assembly and test capacity to our internal facilities;

•Our expectations regarding investments in equipment and facilities and the timeline of expansions of our manufacturing capacity;

•The continued development of the embedded control market based on our strong technical service presence;

•Our anticipated level of capital expenditures;

•The possibility that loss of, or disruption in the operations of, one or more of our distributors could reduce our future net sales and/or increase our inventory returns;

•Our intent, including length, timing, planned closure days, to reduce production levels at global fabrication facilities, or closure of facilities completely and its impact on inventory levels and estimated cash savings;

•Our expectations regarding LTSAs and the realization of deferred revenue;

•The continuation and amount of quarterly cash dividends;

•The sufficiency of our existing sources of liquidity to finance anticipated capital expenditures and otherwise meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on them;

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•Our belief that the capital expenditures to be incurred over the next 12 months will provide sufficient manufacturing capacity to support the growth of our production capabilities for our new products and technologies and to bring in-house more of the production requirements that are currently outsourced;

•Our belief that our IT system compromise will not have a material adverse effect on our business or result in any material damage to us;

•Our expectation that we will continue to be the target of cyber-attacks, computer viruses, unauthorized access and other attempts to breach or otherwise compromise the security of our IT systems and data;

•Our plans to modify and enhance our cybersecurity risk management processes and strategy;

•The benefits and risks of the use of artificial intelligence by us, our partners and customers, or malicious third parties and its impact on our products, our labor and technological needs, and regulatory or intellectual property compliance;

•The impact of the resolution of legal actions on our business, and the accuracy of our assessment of the probability of loss and range of potential loss;

•The amounts and timing, and our plans and expectations relating to the proposed income adjustment from the Malaysian Inland Revenue Board;

•Our belief that the expiration of any tax holidays will not have a material impact on our effective tax rate;

•Our expectations regarding our tax expense, unrecognized tax benefits, cash taxes and effective tax rate;

•The impact on our business from the global minimum tax (GMT) and the Side-by-Side system introduced by the Organisation for Economic Co-operation and Development;

•Our belief that the estimates used in preparing our condensed consolidated financial statements are reasonable;

•Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis;

•Our ability to obtain and maintain patents and intellectual property licenses and minimize the effects of litigation or other disputes or the loss of patent protection;

•The level of risk we are exposed to for product liability claims or indemnification claims;

•The effect of fluctuations in market interest rates on our income and/or cash flows;

•The effect of fluctuations in currency rates;

•The impact of inflation on our business;

•Our ability to increase our borrowings or seek additional equity or debt financing to maintain or expand our facilities, or to fund cash dividends, share repurchases, acquisitions or other corporate activities, and that the timing and amount of such financing requirements will depend on a number of factors;

•Our expected debt obligation maturities, including the conversion of debt, Depositary Shares, and Series A Preferred Stock, and plans to refinance or repay our existing debt;

•Our expectations regarding the amounts and timing of repurchases under our stock repurchase program;

•Our expectation that our reliance on third-party contractors may increase over time as our business grows;

•Our ability to collect accounts receivable;

•The impact of the legislative and policy changes implemented or which may be implemented by the current administration on our business and the trading price of our stock;

•Our belief that our culture, values, and organizational development and training programs will continue to provide a work environment where our employees are empowered and engaged to deliver the best embedded control solutions;

•Our belief that our continued success is driven by the skills, knowledge, and innovative capabilities of our personnel, a strong technical service presence, and our ability to rapidly commercialize new and enhanced products;

•The potential impact of changes in regulations or in their enforcement, including with respect to the capital expenditures or other costs or expenses;

•The impact of any failure by us to adequately control the storage, use, discharge and disposal of regulated substances;

•Estimates and plans regarding pension liability and payments expected to be made for benefits earned;

•Our expectations regarding past or potential future acquisitions, joint development agreements or other strategic relationships and any related benefits; and

•The impact on our business stemming from Russia’s invasion of Ukraine and military conflict in the Middle East.

Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth in "Item 1A. Risk Factors," and elsewhere in this Form 10-Q.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on these forward-looking statements.  We disclaim any obligation to update the information contained in any forward-looking statement.

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Introduction

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document.

We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations with a summary of business and macroeconomic developments followed by a summary of our overall business strategy to provide an overview of the goals and overall direction of our business. This is followed by a discussion of the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then discuss our Results of Operations for the three months ended June 30, 2026 compared to the three months ended June 30, 2025, followed by an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the section titled "Liquidity and Capital Resources."

Business and Macroeconomic Environment

In March 2025, we implemented a business recovery plan which included restructuring actions to reduce our costs, resize our manufacturing operations and reduce our headcount. In fiscal 2026, we saw an improvement in our overall business due to increased demand after our customers reduced excess inventory levels. Consistent with our recovery plan, we reduced inventory in fiscal 2026 and our inventory days decreased sequentially in the June 2026 quarter and we are now experiencing strong revenue growth. Net sales in each of our product lines and each of our geographies as well as net sales to our distributors increased sequentially in the June 2026 quarter compared to the March 2026 quarter. While current market trends are positive, there continues to be uncertainty regarding overall macroeconomic conditions, including increased geopolitical tensions, risk of a recession, and the effects of potential trade policies, including tariffs.

Strategy

We develop, manufacture and sell smart, connected and secure embedded control solutions used by our customers for a wide variety of applications. With over 35 years of technology leadership, our broad product portfolio offers a Total System Solution for our customers that can provide a large port

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Note Regarding Forward-looking Statements

This report, including "Item 1. Business," "Item 1A. Risk Factors," and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance and revenue sources.  We use words such as "anticipate," "believe," "can," "continue," "could," "expect," "future," "intend," "plan," and similar expressions to identify forward-looking statements.  Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under "Risk Factors," beginning at page 14 and elsewhere in this Form 10-K.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on these forward-looking statements.  We disclaim any obligation to update information contained in any forward-looking statement.  These forward-looking statements include, without limitation, statements regarding the following:

•Our expectation that we will experience period-to-period fluctuations in operating results, gross margins, and product mix;

•The effects that uncertain global economic conditions and fluctuations in the global credit and equity markets may have on our financial condition and results of operations;

•The effects and amount of competitive pricing pressure on our product lines and modest pricing declines in certain of our more mature proprietary product lines;

•Our ability to moderate future average selling price declines;

•Our expectations regarding our inventory levels and revenue growth;

•The amount of, and changes in, demand for our products and those of our customers;

•The impact of national security protections, trade restrictions and changes in tariffs, including those impacting China;

•Our intent to vigorously defend our legal positions and our expectations of the impact of litigation on our operations;

•The future impact on our business in response to public health concerns;

•Our goal to continue to be more efficient with our selling, general and administrative expenses;

•Our belief that customers recognize our products and brand name and our use of distributors as an effective supply channel;

•Our belief that familiarity with and adoption of development tools from us and from our third-party development tool partners will be an important factor in the future selection of our embedded control products;

•The accuracy of our estimates of the useful life and values of our property, assets and other liabilities;

•The possibility of future pricing fluctuations in our analog product line;

•The impact of any supply disruption we may experience;

•Our ability to effectively utilize our facilities at appropriate capacity levels or obtain sufficient capacity from our manufacturing, assembly and test sub-contractors;

•Our ability to maintain manufacturing yields;

•The maintenance of our competitive position based on our investments in new and enhanced products;

•The cost effectiveness of using our own assembly and test operations;

•Our plans to continue to transition certain outsourced assembly and test capacity to our internal facilities;

•Our expectations regarding investments in equipment and facilities and the timeline of expansions of our manufacturing capacity;

•The continued development of the embedded control market based on our strong technical service presence;

•Our anticipated level of capital expenditures;

•The possibility that loss of, or disruption in the operations of, one or more of our distributors could reduce our future net sales and/or increase our inventory returns;

•Our intent, including length, timing, planned closure days, to reduce production levels at global fabrication facilities, or closure of facilities completely and its impact on inventory levels and estimated cash savings;

•Our expectations regarding LTSAs and the realization of deferred revenue;

•The continuation and amount of quarterly cash dividends;

•The sufficiency of our existing sources of liquidity to finance anticipated capital expenditures and otherwise meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on them;

•Our belief that the capital expenditures to be incurred over the next 12 months will provide sufficient manufacturing capacity to support the growth of our production capabilities for our new products and technologies and to bring in-house more of the production requirements that are currently outsourced;

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•Our belief that our IT system compromise will not have a material adverse effect on our business or result in any material damage to us;

•Our expectation that we will continue to be the target of cyber-attacks, computer viruses, unauthorized access and other attempts to breach or otherwise compromise the security of our IT systems and data;

•Our plans to modify and enhance our cybersecurity risk management processes and strategy;

•The benefits and risks of the use of artificial intelligence by us, our partners and customers, or malicious third parties and its impact on our products, our labor and technological needs, and regulatory or intellectual property compliance;

•The impact of the resolution of legal actions on our business, and the accuracy of our assessment of the probability of loss and range of potential loss;

•The amounts and timing, and our plans and expectations relating to the proposed income adjustment from the Malaysian Inland Revenue Board;

•Our expectation regarding the treatment of our unrecognized tax benefits in the next 12 months;

•Our belief that the expiration of any tax holidays will not have a material impact on our effective tax rate;

•Our expectations regarding our tax expense, cash taxes and effective tax rate;

•The impact on our business from the global minimum tax (GMT) and the Side-by-Side system introduced by the Organisation for Economic Co-operation and Development;

•Our belief that the estimates used in preparing our consolidated financial statements are reasonable;

•Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis;

•Our ability to obtain and maintain patents and intellectual property licenses and minimize the effects of litigation or other disputes or the loss of patent protection;

•The level of risk we are exposed to for product liability claims or indemnification claims;

•The effect of fluctuations in market interest rates on our income and/or cash flows;

•The effect of fluctuations in currency rates;

•The impact of inflation on our business;

•Our ability to increase our borrowings or seek additional equity or debt financing to maintain or expand our facilities, or to fund cash dividends, share repurchases, acquisitions or other corporate activities, and that the timing and amount of such financing requirements will depend on a number of factors;

•Our expected debt obligation maturities, including the conversion of debt, Depositary Shares, and Series A Preferred Stock, and plans to refinance or repay our existing debt;

•Our expectations regarding the amounts and timing of repurchases under our stock repurchase program;

•Our expectation that our reliance on third-party contractors may increase over time as our business grows;

•Our ability to collect accounts receivable;

•The impact of the legislative and policy changes implemented or which may be implemented by the current administration on our business and the trading price of our stock;

•Our belief that our culture, values, and organizational development and training programs will continue to provide a work environment where our employees are empowered and engaged to deliver the best embedded control solutions;

•Our belief that our continued success is driven by the skills, knowledge, and innovative capabilities of our personnel, a strong technical service presence, and our ability to rapidly commercialize new and enhanced products;

•The potential impact of changes in regulations or in their enforcement, including with respect to the capital expenditures or other costs or expenses;

•The impact of any failure by us to adequately control the storage, use, discharge and disposal of regulated substances;

•Estimates and plans regarding pension liability and payments expected to be made for benefits earned;

•Our expectations regarding past or potential future acquisitions, joint development agreements or other strategic relationships and any related benefits; and

•The impact on our business stemming from Russia’s invasion of Ukraine.

Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth in "Item 1A. Risk Factors," and elsewhere in this Form 10-K.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on these forward-looking statements.  We disclaim any obligation to update the information contained in any forward-looking statement.

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Introduction

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document, as well as with other sections of this Annual Report on Form 10-K, including "Item 8. Financial Statements and Supplementary Data."

We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a discussion of our Business and Macroeconomic Environment followed by the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.  We then discuss our results of operations for fiscal 2026 compared to fiscal 2025, followed by an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the section titled "Liquidity and Capital Resources." Our liquidity and capital resources section generally discusses fiscal 2026 compared to fiscal 2025. For our discussion of fiscal 2025 results compared to fiscal 2024 for both our results of operations and our liquidity and capital resources sections, refer to "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2025 filed with the SEC on May 23, 2025 which is incorporated by reference herein.

Business and Macroeconomic Environment

During fiscal 2025, our overall business was weak as we navigated through a large inventory correction due to our customers holding excess levels of inventory. In March 2025, we implemented a business recovery plan which included restructuring actions to reduce our costs, resize our manufacturing operations and reduce our headcount. In fiscal 2026, we saw an improvement in our business due to increased demand after our customers reduced excess inventory levels. Net sales in all our product lines and all our geographies increased in fiscal 2026 compared to fiscal 2025. Consistent with our recovery plan, we reduced inventory in fiscal 2026 compared to fiscal 2025 and we are now in a significant revenue growth mode and we expect our inventory to continue to decline as we appropriately manage our manufacturing and foundry resources. However, there continues to be uncertainty regarding overall macroeconomic con

[Excerpt truncated for page length; the complete text is on the linked full-MD&A page.]