# MICROCHIP TECHNOLOGY INC (MCHP) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MICROCHIP TECHNOLOGY INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/827054/000082705423000080/mchp-20230331.htm
Accession: 0000827054-23-000080
Filing date: 2023-05-25
Report date: 2023-03-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/MCHP/
All MD&A years: /company/MCHP/mda/
Previous year: /company/MCHP/mda/fy2022/ (FY 2022)
Next year: /company/MCHP/mda/fy2024/ (FY 2024)

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 12 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:

•The future impact on our business in response to the COVID-19 pandemic or other public health concerns;

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

•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;

•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;

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

•Our expectation that our days of inventory at June 30, 2023 will be 159 to 164 days;

•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;

•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;

•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 expectation of continued investment in expanding our manufacturing capacity during the next 12 months;

•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 expectations regarding LTSAs and Preferred Supply Program;

•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;

•Our belief that our IT system compromise has not had a material adverse effect on our business or resulted 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;

•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;

37

Table of Contents

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

•Our expectation regarding the treatment of our unrecognized tax benefits in calendar year 2023;

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

•The impact of the geographical dispersion of our earnings and losses on our effective tax rate;

•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 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 provide an inclusive 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 use 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; 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.

38

Table of Contents

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." For an overview of our business and recent trends, refer to "Part I Item 1. Business."

We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with 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 fiscal 2023 compared to fiscal 2022, 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 2023 compared to fiscal 2022. For our discussion of our fiscal 2022 results compared to fiscal 2021 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, 2022 filed with the SEC on May 20, 2022 which is incorporated by reference herein.

Critical Accounting Policies and Estimates

General 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.  We review the accounting policies we use in reporting our financial results on a regular basis.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities.  On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventories, income taxes and contingencies.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Our results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions.  We review these estimates and judgments on an ongoing basis.  We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. 

Revenue Recognition

We generate revenue primarily from sales of our semiconductor products to distributors and non-distributor customers (direct customers) and, to a lesser extent, from royalties paid by licensees of our intellectual property. We apply the following five-step approach to determine the timing and amount of revenue recognition: (i) identify the contract with the customer, (ii) identify performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the performance obligation is satisfied.

Sales to our distributors are governed by a distributor agreement, a purchase order, and an order acknowledgment. Sales to distributors do not meet the definition of a contract until the distributor has sent in a purchase order, we have acknowledged the order, we have deemed the collectability of the consideration to be probable, and legally enforceable rights and obligations have been created. As is customary in the semiconductor industry, we offer price concessions and stock rotation rights to many of our distributors. As these are forms of variable consideration, we estimate the amount of consideration to which we will be entitled using recent historical data and applying the expected value method. After the transaction price has been determined and allocated to the performance obligations, we recognize revenue when the performance obligations are satisfied. Substantially all of the revenue generated from contracts with distributors is recognized at, or near to, the time risk and title of the inventory transfers to the distributor.

Sales to our direct customers are generally governed by a purchase order and an order acknowledgment. Sales to direct customers usually do not meet the definition of a contract until the direct customer has sent in a purchase order, we have acknowledged the order and deemed the collectability of the consideration to be probable, and legally enforceable rights and obligations have been created. Generally, the transaction price associated with contracts with direct customers is set at the standalone selling price and is not variable. After the transaction price has been determined and allocated to the performance obligations, we recognize revenue when the performance obligations are satisfied. Substantially all of the revenue generated from contracts with direct customers is recognized at, or near to, the time risk and title of the inventory transfers to the customer.

39

Table of Contents

We entered into LTSAs with certain of our customers that purchase through distributors or directly from us. Under these LTSAs, we receive an upfront deposit and minimum purchase commitments from the customer in exchange for assured supply over the contract period, which typically ranges from three to five years. If the customer meets the minimum purchase commitments defined in the contract, we return the deposit to the customer. If not, we may retain all, or a portion of the deposit which will be recognized as revenue as the remaining performance obligations under the LTSAs are satisfied. The upfront deposits collected are recorded as deferred revenue in accrued liabilities or other long-term liabilities depending on the expected timing of the satisfaction of the underlying performance obligations.

Revenue generated from our licensees is governed by licensing agreements. Our primary performance obligation related to these agreements is to provide the licensee the right to use the intellectual property. The final transaction price is determined by multiplying the usage of the license by the royalty, which is fixed in the licensing agreement. Revenue is recognized as usage of the license occurs.

Inventories

Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method.  We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions.  If actual market conditions are less favorable than those we projected, additional inventory write-downs may be required.  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. In determining whether there is a risk of obsolescence, we evaluate projected demand over periods that align with demand forecasts used to develop manufacturing plans and inventory build decisions and write down inventory on hand that is in excess of estimated demand. Management reviews and adjusts the estimates as appropriate based on specific situations. For example, demand can be adjusted up for new products for which historic sales are not representative of future demand. Alternatively, demand can be adjusted down to the extent any existing products are being replaced or discontinued. Historically, a 1% variance in the estimated demand for our products would have changed the estimated net realizable value of our inventory by approximately $4.0 million as of March 31, 2023.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to record our income taxes in each of the jurisdictions in which we operate. This process involves determining our actual current tax exposure together with assessing temporary and permanent differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and to the extent we believe that recovery is not likely, we must establish a valuation allowance. We provided valuation allowances for certain of our deferred tax assets, where it is more likely than not that some portion, or all of such assets, will not be realized. 

Various taxing authorities in the U.S. and other countries in which we do business scrutinize the tax structures employed by businesses.  Companies of our size and complexity are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations.  We are currently being audited by the tax authorities in the U.S. and in various foreign jurisdictions. At this time, we do not know what the outcome of these audits will be. We record benefits for uncertain tax positions based on an assessment of whether it is more likely than not that the tax positions will be sustained based on their technical merits under currently enacted law. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, we recognize the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.  

The accounting model related to the valuation of uncertain tax positions requires us to presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information and that each tax position will be evaluated without consideration of the possibility of offset or aggregation with other positions.  The recognition requirement for the liability exists even if we believe the possibility of examination by a taxing authority or discovery of the related risk matters is remote or where we have a long history of the taxing authority not performing an exam or overlooking an issue.  We will record an adjustment to a previously recorded position if new information or facts related to the position are identified in a subsequent period.  Generally, adjustments to the positions are recorded through the income statement.  Generally, adjustments will be recorded in periods subsequent to the initial recognition in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate, the closing of a statutory audit period or

40

Table of Contents

changes in applicable law.  Due to the inherent uncertainty in the estimation process and in consideration of the criteria of the accounting model, amounts recognized in the financial statements in periods subsequent to the initial recognition may significantly differ from the estimated exposure of the position under the accounting model.

Contingencies

In the ordinary course of our business, we are exposed to various liabilities as a result of contracts, product liability, customer claims, governmental investigations and other matters.  Additionally, we are involved in a limited number of legal actions, both as plaintiff and defendant.  Consequently, we could incur uninsured liability in any of those actions.  We also periodically receive 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 we are a party and other claims, although the outcomes are generally not determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of operations.  Litigation, governmental investigations and disputes relating to the semiconductor industry are not uncommon, and we are, from time to time, subject to such litigation, governmental investigations and disputes.  As a result, no assurances can be given with respect to the extent or outcome of any such litigation, governmental investigations or disputes in the future.

We accrue for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, we review each of our matters and, where it is probable that a liability has been or will be incurred, we accrue for all probable and reasonably estimable losses. Where we can reasonably estimate a range of losses we may incur regarding such a matter, we record an accrual for the amount within the range that constitutes our best estimate. If we can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, we use the amount that is the low end of such range. Contingencies of an acquired company that exist as of the date of the acquisition are measured at fair value if determinable, which generally is based on a probability weighted model. If fair value is not determinable, contingencies of an acquired company are recognized when they become probable and reasonably estimable.

Results of Operations

The following table sets forth certain operational data as a percentage of net sales for fiscal 2023 and fiscal 2022:

[[GREPCENT_TABLE]]
[["","","","","","Fiscal Year Ended March 31,"],["","","","","","","","","","","","2023","","2022"],["Net sales","","","","","","","","","","","100.0","%","","100.0","%"],["Cost of sales","","","","","","","","","","","32.5","","","34.8"],["Gross profit","","","","","","","","","","","67.5","","","65.2"],["Research and development","","","","","","","","","","","13.3","","","14.5"],["Selling, general and administrative","","","","","","","","","","","9.5","","","10.5"],["Amortization of acquired intangible assets","","","","","","","","","","","7.8","","","12.7"],["Special (income) charges and other, net","","","","","","","","","","","\u2014","","","0.4"],["Operating income","","","","","","","","","","","36.9","%","","27.1","%"]]
[[/GREPCENT_TABLE]]

Net Sales

We operate in two industry segments and engage primarily in the design, development, manufacture and sale of semiconductor products as well as the licensing of our SuperFlash and other technologies.  We sell our products to distributors and OEMs in a broad range of markets, perform ongoing credit evaluations of our customers and generally require no collateral.  In certain circumstances, a customer's financial condition may require collateral, and, in such cases, the collateral would be typically provided in the form of letters of credit.

The following table summarizes our net sales for fiscal 2023 and fiscal 2022 (dollars in millions):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","Fiscal Year Ended March 31,"],["","","","","","","","","","","","","","","","","","2023","","2022","","Change"],["Net sales","","","","","","","","","","","","","","","","","$","8,438.7","","","$","6,820.9","","","23.7","%"]]
[[/GREPCENT_TABLE]]

41

Table of Contents

The increase in net sales in fiscal 2023 compared to fiscal 2022 was primarily due to strong business conditions that began in the second half of fiscal 2021 as businesses and individuals adapted to the effects of the COVID-19 pandemic. Business conditions continued to be strong throughout fiscal 2022 and fiscal 2023. In the second half of fiscal 2023, there began to be some increased uncertainty as to the future direction of the global economy due to rising interest rates and high inflation. Additionally, semiconductor industry conditions have resulted in increased costs throughout our supply chain, which we have been generally passing on to our customers in the form of price increases. Our price increases were implemented at various times and in various amounts throughout fiscal 2022 and fiscal 2023 with respect to our very broad range of customers and products. These price increases also contributed to the increase in net sales during fiscal 2023 compared to fiscal 2022. Due to the complexity of the implementation of the price increases and the changes in product, geographic and customer mix, we are not able to quantify the impact of the price increases on our net sales. Additionally, the increase in net sales was positively impacted by strength in all of our product lines. Due to the size, complexity and diversity of our customer base, we are not able to quantify any material factor contributing to the changes other than the net demand fluctuations in the end market we serve. See our Item 1. "Business - Business and Macroeconomic Environment" discussion for further information on our business outlook.

Other factors that we believe contributed to changes in our reported net sales for fiscal 2023 compared to fiscal 2022 and which are drivers of long-term trends in our net sales but which factors we are not able to quantify include:

•semiconductor industry conditions;

•our various new product offerings that have increased our served available market;

•customers’ increasing needs for the flexibility offered by our programmable solutions; and

•increasing semiconductor content in our customers’ products through our Total Systems Solutions.

We sell a large number of products to a large and diverse customer base and there was not any single product or customer that accounted for a material portion of the change in our net sales in fiscal 2023 or fiscal 2022.

Net sales by product line for fiscal 2023 and fiscal 2022 were as follows (dollars in millions):

[[GREPCENT_TABLE]]
[["","","","","Fiscal Year Ended March 31,"],["","","","","","","","","","","","","","","","","","","","","2023","","%","","2022","","%"],["Mixed-signal Microcontrollers","","","","","","","","","","","","","","","","","","","","$","4,755.7","","","56.3","","","$","3,814.8","","","56.0"],["Analog","","","","","","","","","","","","","","","","","","","","2,376.9","","","28.2","","","1,939.1","","","28.4"],["Other","","","","","","","","","","","","","","","","","","","","1,306.1","","","15.5","","","1,067.0","","","15.6"],["Total net sales","","","","","","","","","","","","","","","","","","","","$","8,438.7","","","100.0","","","$","6,820.9","","","100.0"]]
[[/GREPCENT_TABLE]]

Mixed-signal Microcontrollers

Our mixed-signal microcontroller product line represents the largest component of our total net sales.  Mixed-signal microcontrollers and associated application development systems accounted for approximately 56.3% and 56.0% of our net sales in fiscal 2023 and fiscal 2022, respectively.

Net sales of our mixed-signal microcontroller products increased approximately 24.7% in fiscal 2023 compared to fiscal 2022. The increase in net sales was due primarily to strength in demand for our mixed-signal microcontroller products in end markets that we serve and our price increases.

Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. However, the overall average selling prices of our mixed-signal microcontroller products have increased in recent periods and have remained relatively stable over time due to the proprietary nature of these products.  We have in the past been able to, and expect in the future to be able to, moderate average selling price declines in our mixed-signal microcontroller product lines by introducing new products with more features and higher prices.  

Analog

Our analog product line includes analog, interface, mixed-signal and timing products. Our analog product line accounted for approximately 28.2% and 28.4% of our net sales in fiscal 2023 and fiscal 2022, respectively.

Net sales from our analog product line increased approximately 22.6% in fiscal 2023 compared to fiscal 2022. The increase in net sales was primarily due to strength in demand for our analog products in end markets that we serve and our price increases.

42

Table of Contents

We consider a majority of the products in our analog product line to be proprietary in nature, where prices are relatively stable, similar to the pricing stability experienced in our mixed-signal microcontroller products. The non-proprietary portion of our analog product line will experience price fluctuations, driven primarily by the current supply and demand for those products.

Other

Our other product line includes FPGA products, royalties associated with licenses for the use of our SuperFlash and other technologies, sales of our intellectual property, fees for engineering services, memory products, timing systems, manufacturing services (wafer foundry and assembly and test subcontracting), legacy application specific integrated circuits, and certain products for aerospace applications. Revenue from these services and products accounted for approximately 15.5% and 15.6% of our net sales in fiscal 2023 and fiscal 2022, respectively.

Net sales related to these products and services increased approximately 22.4% in fiscal 2023 compared to fiscal 2022. The increase in net sales was primarily due to strength in demand for our products in end markets that we serve and our price increases. Net sales of our other product line can fluctuate over time based on general economic and semiconductor industry conditions as well as changes in demand for our FPGA products, licenses, engineering services, memory products, timing systems, and manufacturing services (wafer foundry and assembly and test subcontracting).

Distribution

Distributors accounted for approximately 47% and 48% of our net sales in fiscal 2023 and fiscal 2022, respectively. With the exception of Arrow Electronics, our largest distributor, which made up 11% of our net sales, no other distributor or direct customer accounted for more than 10% of our net sales in fiscal 2023. In fiscal 2022, no distributor or direct customer accounted for more than 10% of our net sales. Our distributors focus primarily on servicing the product requirements of a broad base of diverse customers. We believe that distributors provide an effective means of reaching this broad and diverse customer base.  We believe that customers recognize Microchip for its products and brand name and use distributors as an effective supply channel.

Generally, we do not have long-term agreements with our distributors and we, or our distributors, may terminate our relationships with each other with little or no advance notice, with the exception of orders placed under our Preferred Supply Program or otherwise designated as non-cancellable.  The loss of, or the disruption in the operations of, one or more of our distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns.

At March 31, 2023, our distributors maintained 24 days of inventory of our products compared to 17 days at March 31, 2022.  Over the past ten fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 17 days and 40 days.  Inventory holding patterns at our distributors may have a material impact on our net sales.

Sales by Geography

Sales by geography for fiscal 2023 and fiscal 2022 were as follows (dollars in millions):

[[GREPCENT_TABLE]]
[["","","","","","Fiscal Year Ended March 31,"],["","","","","","","","","","","","","","","","","","","","","","2023","","%","","2022","","%"],["Americas","","","","","","","","","","","","","","","","","","","","","$","2,169.0","","","25.7","","","$","1,659.3","","","24.3"],["Europe","","","","","","","","","","","","","","","","","","","","","1,774.8","","","21.0","","","1,391.0","","","20.4"],["Asia","","","","","","","","","","","","","","","","","","","","","4,494.9","","","53.3","","","3,770.6","","","55.3"],["Total net sales","","","","","","","","","","","","","","","","","","","","","$","8,438.7","","","100.0","","","$","6,820.9","","","100.0"]]
[[/GREPCENT_TABLE]]

Americas sales include sales to customers in the U.S., Canada, Central America and South America. Sales to foreign customers accounted for approximately 78% of our total net sales in each of fiscal 2023 and fiscal 2022. Although our net sales in all geographies increased in fiscal 2023 compared to fiscal 2022, net sales in Asia decreased as a percentage of total net sales in fiscal 2023 compared to fiscal 2022 primarily due to economic weakness in the China market caused by uncertain economic conditions, slowing growth, and the impact of the COVID-19 related lock-downs. Substantially all of our foreign sales are U.S. dollar denominated. Our sales force in the Americas and Europe supports a significant portion of the design activity for products which are ultimately shipped to Asia.

43

Table of Contents

Gross Profit

Our gross profit in fiscal 2023 was $5.70 billion, or 67.5% of net sales, compared to $4.45 billion, or 65.2% of net sales, in fiscal 2022. The primary reason for the increase in gross profit in fiscal 2023 compared to fiscal 2022 was the net impact of product mix and average gross profit per unit of $1.31 billion in fiscal 2023. The net impact of product mix and average gross profit per unit may fluctuate over time due to the mix of sales volumes of lower or higher margin products, changes in selling prices, and fluctuations in product costs. We are not able to separately quantify these impacts on our gross profit. The net impact to our gross profit of inventory reserve charges was $89.0 million in fiscal 2023 which adversely impacted our gross profit in fiscal 2023 compared to fiscal 2022. The gross margin impact of changes in licensing revenue, which has no associated cost of sales, and the impact of unabsorbed capacity charges in fiscal 2023 compared to fiscal 2022 was not material.

Our overall inventory levels were $1.32 billion at March 31, 2023, compared to $854.4 million at March 31, 2022. We maintained 169 days of inventory on our balance sheet at March 31, 2023 compared to 125 days of inventory at March 31, 2022. Inventory increased primarily as a result of our efforts to balance manufacturing production, customer demand and inventory levels including accommodating requests from certain customers to push-out orders. Our inventory levels are impacted by the timing of receipt of raw materials, foundry wafers, and strategic last time buy materials and completion of finished goods. We expect our days of inventory levels at June 30, 2023 to be 159 to 164 days.

We operate assembly and test facilities in Thailand, the Philippines, and other locations throughout the world. Approximately 59% of our assembly requirements were performed in our internal assembly facilities during each of fiscal 2023 and fiscal 2022. During fiscal 2023, approximately 67% of our test requirements were performed in our internal facilities, compared to approximately 64% during fiscal 2022. The percentage of our assembly and test operations that are performed internally fluctuates over time based on supply and demand conditions in the semiconductor industry, our internal capacity capabilities and our acquisition activities. We believe that the assembly and test operations performed at our internal facilities provide us with significant cost savings compared to third party contractor assembly and test costs, as well as increased control over these portions of the manufacturing process. We plan to continue to invest in assembly and test equipment to increase our internal capacity capabilities and transition certain outsourced assembly and test capacity to our internal facilities.

We rely on outside wafer foundries for a significant portion of our wafer fabrication requirements. During fiscal 2023, approximately 63% of our net sales came from products that were produced at outside wafer foundries, compared to approximately 60% during fiscal 2022.

We anticipate that our gross margins will fluctuate over time, driven primarily by capacity utilization levels, the overall product mix of mixed-signal microcontroller, analog, FPGA products, memory products, and technology licensing revenue and the percentage of net sales of each of these products in a particular quarter, as well as manufacturing yields, fixed cost absorption, and competitive and economic conditions in the markets we serve. We continue to transition products to more advanced process technologies to reduce future manufacturing costs.

Research and Development

R&D expenses for fiscal 2023 were $1.12 billion, or 13.3% of net sales, compared to $989.1 million, or 14.5% of net sales, for fiscal 2022. We are committed to investing in new and enhanced products, including development systems software, and in our design and manufacturing process technologies.  We believe these investments are significant factors in maintaining our competitive position.  R&D costs are expensed as incurred.  Assets purchased to support our ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or that have alternative future uses and are amortized over their expected useful lives.  R&D expenses include labor, depreciation, masks, prototype wafers, and expenses for the development of process technologies, new packages, and software to support new products and design environments.

R&D expenses increased $129.2 million, or 13.1%, for fiscal 2023 compared to fiscal 2022. The primary reasons for the increase in R&D expenses in fiscal 2023 compared to fiscal 2022 were increases in headcount and employee compensation as well as higher product development costs.

R&D expenses fluctuate over time, primarily due to revenue and operating expense investment levels.

44

Table of Contents

Selling, General and Administrative

Selling, general and administrative expenses for fiscal 2023 were $797.7 million, or 9.5% of net sales, compared to $718.9 million, or 10.5% of net sales, for fiscal 2022.  Our goal is to continue to be more efficient with our selling, general and administrative expenses. Selling, general and administrative expenses include salary expenses related to field sales, marketing and administrative personnel, advertising and promotional expenditures and legal expenses as well as costs related to our direct sales force, CEMs and ESEs who work remotely from sales offices worldwide to stimulate demand by assisting customers in the selection and use of our products.

Selling, general and administrative expenses increased $78.8 million, or 11.0%, for fiscal 2023 compared to fiscal 2022. The primary reasons for the increase in selling, general and administrative expenses were increases in headcount and employee compensation.

Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense investment levels.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets in fiscal 2023 was $669.9 million compared to $862.5 million in fiscal 2022. The primary reason for the decrease in acquired intangible asset amortization was due to the use of accelerated amortization methods for assets placed in service in previous fiscal years.

Special (Income) Charges and Other, Net

During fiscal 2023, we earned special income and other, net of $4.0 million primarily related to a favorable resolution of a previously accrued legal matter partially offset by restructuring costs of acquired and existing wafer fabrication operations to increase operational efficiency. During fiscal 2022, we incurred special charges and other, net of $29.5 million primarily related to restructuring of acquired and existing wafer fabrication operations to increase operational efficiency, legal contingencies and exiting non-manufacturing facilities including contract termination costs, employee severance, and the disposal of assets. Restructuring expenses incurred during fiscal 2023 and fiscal 2022 include $16.8 million and $21.1 million, respectively, related to the restructuring of our wafer fabrication operations.

Other Income (Expense)

Interest income in fiscal 2023 was $2.1 million compared to $0.5 million in fiscal 2022.

Interest expense in fiscal 2023 was $203.9 million compared to $257.0 million in fiscal 2022. The primary reasons for the decrease in interest expense in fiscal 2023 compared to fiscal 2022 relates to the adoption of ASU 2020-06 on April 1, 2022, which eliminated the amortization of debt discount on our Convertible Debt, and the cumulative pay down of our debt offset by higher interest rates on our outstanding variable rate debt.

Loss on settlement of debt in fiscal 2023 was $8.3 million compared to $113.4 million in fiscal 2022. In fiscal 2023, the losses related to the settlement of a portion of our outstanding 2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, and our 2017 Junior Convertible Debt. In fiscal 2022, the losses primarily related to the settlement of a portion of our outstanding 2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, and our 2017 Junior Convertible Debt as well as the amendment and restatement of our Credit Agreement and the repayment of $1.00 billion aggregate principal amount outstanding of our 3.922% 2021 Notes.

Other income, net, in fiscal 2023 was $3.8 million compared to other income, net of $2.8 million in fiscal 2022. The primary reasons for the change in other income during fiscal 2023 compared to fiscal 2022 relates to foreign currency exchange rate fluctuations and gains on equity investments.

Provision for Income Taxes

Our provision or benefit for income taxes is attributable to U.S. federal, state, and foreign income taxes. Our effective tax rate for the fiscal year ended March 31, 2023, increased significantly over the same period last year primarily due to a provision in the TCJA. Research and development expenditures incurred after March 31, 2022, must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on the location in which the research activities are

45

Table of Contents

conducted. The resulting capitalization of research and development expenditures impacts the calculation of our global intangible low-taxed income (GILTI), which is treated as a period cost, beginning in the first quarter of fiscal 2023.

Our effective tax rate in fiscal 2023 includes a $63.8 million tax benefit received from current year generated R&D credits, which reduced our effective tax rate by 2.2%; an $11.4 million tax benefit for share-based compensation deductions, which reduced our effective tax rate by 0.4%; a $50.6 million tax expense related to changes in various tax reserves, which increased our effective tax rate by 1.7%; and a $258.9 million tax expense for the effects of foreign operations, which increased our effective tax rate by 8.9%.

Our effective tax rate in fiscal 2022 includes a $49.5 million tax benefit received from current year generated R&D credits, which reduced our effective tax rate by 3.3%; a $17.6 million tax benefit for share-based compensation deductions, which reduced our effective tax rate by 1.2%; a $47.1 million tax benefit related to changes in various tax reserves, which reduced our effective tax rate by 3.2%; a $139.9 million tax expense for the effects of foreign operations, which increased our effective tax rate by 9.4%; and a $25.5 million tax benefit related to the settlement of convertible debt, which reduced our effective tax rate by 1.7%.

We are subject to taxation in many jurisdictions in which we have operations. The effective tax rates that we pay in these jurisdictions vary widely, but they are generally lower than our combined U.S. federal and state effective tax rate. Our domestic blended statutory tax rate in each of fiscal 2023 and fiscal 2022 was approximately 22%. Our non-U.S. blended statutory tax rates in fiscal 2023 and fiscal 2022 were lower than this amount. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, tax holidays, financing arrangements and other factors. Our effective tax rate has been and will continue to be impacted by the geographical dispersion of our earnings and losses.

Our foreign tax rate differential benefit primarily relates to our operations in Malta taxed at a 5.0% statutory tax rate and Ireland taxed at a 12.5% statutory tax rate. Additionally, our Thailand manufacturing operations are currently subject to numerous tax holidays granted to us based on our investment in property, plant, and equipment in Thailand. Our tax holiday periods in Thailand expire at various times in the future; however, we actively seek to obtain new tax holidays, otherwise we will be subject to tax at the statutory tax rate of 20.0%. We do not expect the future expiration of any of our tax holiday periods in Thailand to have a material impact on our effective tax rate.

In September 2021, we received a Statutory Notice of Deficiency (Notice) from the United States Internal Revenue Service (IRS) for fiscal 2007 through fiscal 2012. The disputed amounts largely relate to transfer pricing matters. In December 2021, we filed a petition in the United States Tax Court challenging the Notice.

In May 2023, we received a proposed income adjustment from the Malaysian Inland Revenue Board (IRB) for fiscal 2020, which if upheld by the highest court that has jurisdiction over this matter in Malaysia, could result in income taxes up to $420.0 million, exclusive of interest and penalties. The disputed amounts largely relate to the characterization of certain assets. Depending on the outcome of the IRB audit, we may need to take the matter to court in Malaysia, and if we do, we may be required to pay the assessment and then request a refund from the court upon a series of favorable rulings. The timing of adjudicating this matter is uncertain but could commence in the next 12 months.

We firmly believe that the assessments described above are without merit and plan to pursue all available administrative and judicial remedies necessary to resolve these matters. We intend to vigorously defend our positions and we are confident in our ability to prevail on the merits. We regularly assess the likelihood of adverse outcomes resulting from examinations such as these to determine the adequacy of our tax reserves. We believe that the final adjudication of these matters will not have a material impact on our consolidated financial position and results of operations or cash flows. However, the ultimate outcome of disputes of this nature is uncertain, and if the IRS and IRB were to prevail on their assertions, the assessed tax, penalties, and deficiency interest could have a material adverse impact on our financial position, results of operations or cash flows.

Various taxing authorities in the U.S. and other countries in which we do business are increasing their scrutiny of the tax structures employed by businesses.  Companies of our size and complexity are regularly audited by the taxing authorities in the jurisdictions in which they conduct significant operations.  For U.S. federal, and in general for U.S. state tax returns, our fiscal 2007 and later tax returns remain effectively open for examination by the taxing authorities. We are currently being audited by the tax authorities in the U.S. and in various foreign jurisdictions. At this time, we do not know what the outcome of these audits will be. We record benefits for uncertain tax positions based on an assessment of whether it is more likely than not that the tax positions will be sustained based on their technical merits under currently enacted law. If this threshold

46

Table of Contents

is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, we recognize the largest amount of the tax benefit that is more than 50% likely to be realized upon ultimate settlement.

In August 2022, the U.S. government enacted the Inflation Reduction Act into law. The Inflation Reduction Act includes a new Corporate AMT of 15.0% on the AFSI of corporations with average AFSI exceeding $1.00 billion over a three-year period, as well as a 1% excise tax on the net fair market value of stock repurchases made after December 31, 2022. The Corporate AMT is effective for us beginning in fiscal 2024. We are evaluating the Inflation Reduction Act and its potential impact on our tax expense, cash taxes, and effective tax rate.

Liquidity and Capital Resources

We had $234.0 million in cash and cash equivalents at March 31, 2023, a decrease of $85.4 million from the March 31, 2022 balance.  

Operating Activities

Net cash provided by operating activities was $3.62 billion in fiscal 2023, primarily due to higher net income of $2.24 billion, adjusted for non-cash and non-operating charges of $1.40 billion and net cash outflows of $16.0 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities in fiscal 2023 include an increase in trade accounts receivable driven primarily by higher net sales and an increase in inventories related to increased raw materials, foundry wafers, finished goods, receipt of strategic last time buy materials, and accommodating requests form certain customers to push-out orders, offset by increases in accrued and other liabilities driven by higher deferred revenue and sales related reserves, including cash collected from customers under our LTSAs. The cash collected from these LTSAs is refundable when customers fulfill their purchase commitments. In future periods, we expect cash inflows under these LTSAs to decrease, and cash outflows to increase as amounts are refunded to customers (see "Note 2. Net Sales" to our consolidated financial statements). Net cash provided by operating activities was $2.84 billion in fiscal 2022, primarily due to net income of $1.29 billion, adjusted for non-cash and non-operating charges of $1.52 billion and net cash inflows of $34.2 million from changes in our operating assets and liabilities.

Investing Activities

Net cash used in investing activities was $599.5 million for fiscal 2023 compared to $477.7 million for fiscal 2022. Fiscal 2023 and fiscal 2022 investing cash flows primarily related to capital purchases and investments in other assets.

Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions. Capital expenditures were $486.2 million and $370.1 million in fiscal 2023 and fiscal 2022, respectively. Capital expenditures were primarily for the expansion of production capacity and the addition of research and development equipment. Consistent with the slowing macroeconomic environment in the March 2023 quarter, we have paused most of our factory expansion actions and reduced our planned capital investments for fiscal 2024. We currently intend to invest between $300 million and $400 million in equipment and facilities during the next 12 months. We believe that the capital expenditures anticipated 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 assembly and test operations that are currently outsourced. We expect to finance our capital expenditures through our existing cash balances and cash flows from operations.  In February 2023, we announced our plan to invest $880 million over the next several years to expand our SiC and silicon production capacity, including the production of 8-inch wafers, at our Fab 5 facility. In August 2022, the U.S. government enacted the CHIPS Act which is to provide billions of dollars of cash incentives and a new investment tax credit to increase domestic manufacturing capacity in our industry. We expect to receive the cash benefit associated with the investment tax credit for qualifying capital expenditures in future periods and expect to apply for other incentives provided by the legislation; however, there can be no assurance that we will receive any such other incentives, what the amount and timing of any incentive we receive will be, as to which other companies will receive incentives and whether the legislation will have a positive or negative impact on our competitive position.

Financing Activities

Net cash used in financing activities was $3.10 billion for fiscal 2023 compared to net cash used in financing activities of $2.33 billion for fiscal 2022. Significant transactions affecting our net financing cash flows included:

•in fiscal 2023, $1.47 billion of cash used to pay down certain principal of our debt, including our 2015 Senior Convertible Debt, our 2017 Senior Convertible Debt, our 2017 Junior Convertible Debt, and our Revolving Credit Facility, and

47

Table of Contents

•in fiscal 2022, $1.38 billion of cash used to pay down certain principal of our debt, including the cash portion of the settlement of our 2015 Senior Convertible Debt, our 2017 Senior Convertible Debt and our 2017 Junior Convertible Debt, our Revolving Credit Facility and our 3.922% 2021 Notes, partially funded by the issuance of our senior notes, and

•in fiscal 2023 and fiscal 2022, we paid cash dividends to our stockholders of $695.3 million and $503.8 million, respectively, and

•in fiscal 2023 and fiscal 2022, we repurchased shares of our common stock for $945.8 million and $425.6 million, respectively.

In December 2021, we amended and restated our Credit Agreement in its entirety. The amended and restated Credit Agreement provides for an unsecured revolving loan facility up to $2.75 billion that terminates on December 16, 2026. The Credit Agreement also permits us, subject to certain conditions, to add one or more incremental term loan facilities or increase the revolving loan commitments up to $750.0 million. As of March 31, 2023, the principal amount of our outstanding indebtedness was $6.47 billion. At March 31, 2023, we had $100.0 million of outstanding borrowings under the Revolving Credit Facility compared to $1.40 billion at March 31, 2022. Our 4.333% 2023 Notes mature on June 1, 2023, and we intend to finance the repayment of such notes using available borrowings under our Revolving Credit Facility.

Capital Returns

In November 2021, our Board of Directors authorized the repurchase of up to $4.00 billion of our common stock in the open market or in privately negotiated transactions. In fiscal 2023, we repurchased approximately 12.9 million shares of our common stock for $945.8 million under this authorization. In fiscal 2022, we repurchased approximately 5.6 million shares of our common stock for $425.6 million under this authorization. As of March 31, 2023, approximately $2.63 billion remained available for repurchases under the program. As of March 31, 2023, we held approximately 32.3 million shares as treasury shares. Our current intent is to regularly repurchase shares of our common stock over time based on our cash generation, leverage metrics, and market conditions.

In October 2002, we announced that our Board of Directors had approved and instituted a quarterly cash dividend on our common stock.  To date, our cumulative dividend payments have totaled approximately $5.74 billion. Cash dividends paid per share were $1.263 and $0.910 during fiscal 2023 and fiscal 2022, respectively. Total dividend payments amounted to $695.3 million and $503.8 million during fiscal 2023 and fiscal 2022, respectively. A quarterly dividend of $0.383 per share was declared on May 4, 2023 and will be paid on June 5, 2023 to stockholders of record as of May 22, 2023. We expect the aggregate cash dividend for the June 2023 quarter to be approximately $209.0 million. Our Board is free to change our dividend practices at any time and to increase or decrease the dividend paid, or not to pay a dividend on our common stock on the basis of our results of operations, financial condition, cash requirements and future prospects, and other factors deemed relevant by our Board.  Our current intent is to increase our quarterly cash dividends depending upon market conditions, our results of operations, and potential changes in tax laws.

We believe that our existing sources of liquidity combined with cash generated from operations and borrowings under our Revolving Credit Facility will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months. Our long-term liquidity requirements primarily arise from working capital requirements, interest and principal repayments related to our outstanding indebtedness, capital expenditures, cash dividends, share repurchases, and income tax payments. For additional information regarding our cash requirements see "Note 10. Commitments and Contingencies", "Note 9. Leases", "Note 5. Debt" and "Note 11. Income Taxes" to our consolidated financial statements. The semiconductor industry is capital intensive and in order to remain competitive, we must constantly evaluate the need to make significant investments in capital equipment for both production and research and development and to expand our existing facilities or potentially construct new facilities.  We may increase our borrowings under our Revolving Credit Facility or seek additional equity or debt financing from time to time to maintain or expand our wafer fabrication and product assembly and test facilities, for cash dividends, for share repurchases or for acquisitions or other purposes.  The timing and amount of any such financing requirements will depend on a number of factors, including our level of dividend payments, changes in tax laws and regulations regarding the repatriation of offshore cash, demand for our products, changes in industry conditions, product mix, competitive factors and our ability to identify suitable acquisition candidates.  We may from time to time seek to refinance certain of our outstanding notes or Convertible Debt through issuances of new notes or convertible debt, tender offers, exchange transactions or open market repurchases. Such issuances, tender offers or exchanges or purchases, if any, will depend on prevailing market conditions, our ability to negotiate acceptable terms, our liquidity position and other factors. There can be no assurance that any financing will be available on acceptable terms due to uncertainties resulting from rising interest rates, higher inflation, economic uncertainty, instability in the banking sector, the COVID-19 pandemic, or other factors, and any additional equity financing would result in incremental ownership dilution to our existing stockholders. We

48

Table of Contents

also plan to pursue incentives under the CHIPS Act to increase our domestic manufacturing capacity; however, there can be no assurance that we will receive any such incentives or what the amount and timing of any incentive we receive will be.

Recently Issued Accounting Pronouncements

Refer to Note 1 to our consolidated financial statements regarding recently issued accounting pronouncements.