MICROCHIP TECHNOLOGY, INC. 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 37 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 certain supply chain constraints will continue through calendar 2022 and into calendar 2023; •That local governments could require us or our suppliers to reduce production, cease operations, or implement mandatory vaccine requirements, and we could experience constraints in fulfilling customer orders; •Our expectation that we will experience period-to-period fluctuations in operating results due to general industry or economic conditions; •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 effect of product mix, capacity utilization, yields, fixed cost absorption, competition and economic conditions on gross margin; •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 impactingChina ; •Our expectation that in the future we will acquire additional businesses that we believe will complement our existing businesses; •Our expectation that in the future we will enter into joint development agreements or other strategic relationships with other companies; •The level of orders that will be received and shipped within a quarter, including the impact of our product lead times; •Our goal to continue to be more efficient with our selling, general and administrative expenses; •Our expectation that our days of inventory atDecember 31, 2022 will be 143 to 147 days; •Our belief that customers recognize our products and brand name and use distributors as an effective supply channel; •The accuracy of our estimates of the useful life and values of our property, assets and other liabilities; •Our ability to increase the proprietary portion of our analog product line and the effect of such an increase; •The impact of any supply disruption we may experience; •Our ability to effectively utilize our facilities at appropriate capacity levels; •The likelihood of our stock price to fluctuate in the future; •Our ability to maintain manufacturing yields; •The maintenance of our competitive position based on our investments in new and enhanced products; •The success of our licensing business depending on the continued market acceptance of our technologies and on our ability to further develop such technologies and to introduce new technologies; •The potential of the Preferred Supply Program and the long-term supply agreements to satisfy commitments to our suppliers, enable us to forecast capital equipment requirements and employee needs, ramp up manufacturing and manufacture products more efficiently; •The cost effectiveness of using our own assembly and test operations; •The greater functionality in new product designs afforded by our proprietary design and manufacturing processes; •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 through calendar 2022 and during the next twelve months; •The continued development of the embedded control market based on our strong technical service presence; 24 -------------------------------------------------------------------------------- Table of Contents •Our expectation that foundry capacity will continue to be limited due to strong demand for wafers across the industry; •Our expectation that we will continue to operate our manufacturing facilities at or above normal capacity if the current supply constraints relative to demand continue; •Our anticipated level of capital expenditures; •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 twelve 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; •The impact of seasonality on our business; •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; •Our plans to pursue all available administrative and judicial remedies necessary to resolve the Statutory Notice of Deficiency we received; •Our expectation regarding the treatment of our unrecognized tax benefits in calendar year 2022; •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 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 patents and intellectual property licenses and minimize the effects of litigation; •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; •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 plans to continue to undertake efforts to conform to current regulatory obligations and evolving best practices; •Our plans to continue to comply with applicableU.S. sanctions regardingUkraine ; •The costs we expect to incur associated with certain disclosure requirements; •Estimates and plans regarding pension liability and payments expected to be made for benefits earned; and •The impact on our business stemming fromRussia's invasion ofUkraine . 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. 25 -------------------------------------------------------------------------------- Table of Contents 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 give the reader 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 and six months endedSeptember 30, 2022 compared to the three and six months endedSeptember 30, 2021 , 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
The COVID-19 pandemic initially resulted in a global disruption in economic activity by adversely affecting production, creating supply chain and market disruption, and adversely impacting businesses and individuals. However, in the second half of fiscal 2021, business conditions were unexpectedly strong as businesses and individuals adapted to the effects of the pandemic. In response to global supply constraints, we worked to mitigate the impact of the pandemic on our business by qualifying alternative suppliers, increasing our inventory of raw materials, ramping our internal factories and adding assembly and test capacity to increase our manufacturing capability while securing additional capacity with our subcontractors wherever possible. However, strong customer demand continued to outpace capacity in the first six months of fiscal 2023 and in fiscal 2022 as we continued to experience constraints in our internal and external factories and their related manufacturing supply chains. We expect that certain supply chain constraints will persist through calendar 2022 and into calendar 2023; however, recent uncertainty in theU.S. and world economies may lessen the impact of such constraints in future periods. In addition, rising interest rates and high inflation in theU.S. may result in a slowdown in the economy and reduce customer demand in our industry. We are unable to predict the timing or impact of any such slowdown on our business. In order to provide prioritized capacity to our customers, we launched our Preferred Supply Program inFebruary 2021 , which provides our customers with prioritized capacity beginning six months after the customer places an order for 12 months of continuous, non-cancellable and non-reschedulable backlog. In the first three quarters of calendar 2022, we entered into certain long-term supply agreements with our customers for products that will be shipped in future periods. We also entered into certain long-term supply agreements with key suppliers. In response to the pandemic, we have taken proactive preventative measures to enable a safe environment for our employees and operation of our manufacturing sites. While our global manufacturing sites have been fully operational in recent periods, we strategically implemented plans intended to provide more assurance of business continuity in the event severe outbreaks or government requirements were to impact our operations.
Strategy
We develop, manufacture and sell smart, connected and secure embedded control
solutions used by our customers for a wide variety of applications. Our
strategic focus includes general purpose and specialized 8-bit, 16-bit, and
32-bit microcontrollers, microprocessors, analog, FPGA, and memory products.
With over 30 years of technology leadership, our broad product portfolio is a
Total System Solution (TSS) for our customers that can provide a large portion
of the silicon requirements in their applications. TSS is a combination of
hardware, software and services which help our customers increase their revenue,
reduce their costs and manage their risks compared to other solutions. Our
synergistic product portfolio empowers disruptive growth trends, including 5G,
data centers, artificial intelligence and machine learning, Internet of Things
(IoT) and edge computing, advanced driver assist systems (ADAS) and autonomous
driving, and electric vehicles, in key end markets such as automotive, aerospace
and defense, communications, consumer appliances, data centers and computing,
and industrial.
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Our manufacturing operations include wafer fabrication, wafer probe, assembly
and test. The ownership of a substantial portion of our manufacturing resources
is an important component of our business strategy, enabling us to maintain a
high level of manufacturing control, resulting in us being one of the lowest
cost producers in the embedded control industry. By owning wafer fabrication
facilities and our assembly and test operations, and by employing statistical
techniques (statistical process control, designed experiments and wafer level
monitoring), we have been able to achieve and maintain high production
yields. Direct control over manufacturing resources allows us to shorten our
design and production cycles. This control also allows us to capture a portion
of the wafer manufacturing and assembly and testing profit margin. We outsource
a significant portion of our manufacturing requirements to third parties and the
amount of our outsourced manufacturing has increased in recent years due to our
acquisitions of Microsemi and other companies that outsourced all or substantial
portions of their manufacturing. In light of our manufacturing strategy and
potential grant funding from the CHIPS Act, as well as state and local grants
and subsidies, we are in the early stages of considering building a 300 mm U.S.
based wafer fabrication facility for specialized, trailing edge technologies.
This project, if we decide to pursue it, would be intended to provide
competitive growth capacity, as well as geographic and geopolitical
diversification. The availability of grants, subsidies and other incentives will
all be important considerations in our analysis and will also help determine the
location and timing for the facility.
We employ proprietary design and manufacturing processes in developing our
embedded control products. We believe our processes afford us both
cost-effective designs in existing and derivative products and greater
functionality in new product designs. While many of our competitors develop and
optimize separate processes for their logic and memory product lines, we use a
common process technology for both microcontroller and non-volatile memory
products. This allows us to more fully leverage our process research and
development costs and to deliver new products to market more rapidly. Our
engineers utilize advanced computer-aided design tools and software to perform
circuit design, simulation and layout, and our in-house photomask and wafer
fabrication facilities enable us to rapidly verify design techniques by
processing test wafers quickly and efficiently.
We are committed to continuing our investment in new and enhanced products,
including development systems, and in our design and manufacturing process
technologies. We believe these investments are significant factors in
maintaining our competitive position. Our current research and development
activities focus on the design of new microcontrollers, digital signal
controllers, memory, analog and mixed-signal products, FPGAs, timing systems,
Flash-IP, development systems, software and application-specific software
libraries. We are also developing new design and process technologies to achieve
further cost reductions and performance improvements in our products.
We market and sell our products worldwide primarily through a network of direct
sales personnel and distributors. Our direct sales force focuses on a wide
variety of strategic accounts in three geographical markets: the Americas ,
Europe and Asia . We currently maintain sales and technical support centers in
major metropolitan areas in all three geographic markets. We believe that a
strong technical service presence is essential to the continued development of
the embedded control market. Many of our CEMs, ESEs, and sales managers have
technical degrees or backgrounds and have been previously employed in high
technology environments. We believe that the technical and business knowledge of
our sales force is a key competitive advantage in the sale of our products. The
primary mission of our ESE team is to provide technical assistance to customers
and to conduct periodic training sessions for the balance of our sales
team. ESEs also frequently conduct technical seminars and workshops in major
cities around the world or through online webcasts. Our licensing division has
dedicated sales, technology, design, product, test and reliability personnel
that support the requirements of our licensees.
See the risk factor captioned "Our operating results are impacted by seasonality
and wide fluctuations of supply and demand in the industry" on page 43 for
discussion of the impact of seasonality on our business.
Critical Accounting Policies and Estimates
Except for the changes discussed in "Recently Adopted Accounting Pronouncements" in Note 2 to our condensed consolidated financial statements in this Form 10-Q, there were no changes to our critical accounting policies and estimates during the first six months of the fiscal year endingMarch 31, 2023 compared to our "Critical Accounting Policies and Estimates" as previously described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . 27 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table sets forth certain operational data as a percentage of net sales for the periods covered by this report:
Three Months Ended September 30, Six Months Ended September 30,
2022 2021 2022 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 32.6 35.2 32.9 35.5
Gross profit 67.4 64.8 67.1 64.5
Research and development 13.0 14.9 13.3 15.1
Selling, general and
administrative 9.8 10.9 9.7 11.0
Amortization of acquired
intangible assets 8.0 13.2 8.3 13.4
Special charges (income) and
other, net 0.2 0.6 (0.3) 0.6
Operating income 36.4 % 25.2 % 36.1 % 24.4 %
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 the periods covered by this report (dollars in millions):
Three Months Ended September 30 , Six Months Ended
2022 2021 Change 2022 2021 Change
Net sales $ 2,073.2 $ 1,649.8 25.7 % $ 4,036.8 $ 3,219.2 25.4 %
The increases in net sales in the three and six months ended September 30, 2022
compared to the three and six months ended September 30, 2021 were 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 in the three and six months ended
September 30, 2022 although there is increased uncertainty as to the future
direction of the U.S. 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 passing on to our customers in
the form of price increases. These price increases also contributed to the
increase in net sales during the three and six months ended September 30, 2022
compared to the three and six months ended September 30, 2021 . Our price
increases were implemented at various times and in various amounts throughout
fiscal 2022 with respect to our very broad range of customers and products. 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.
Other factors that we believe contributed to changes in our reported net sales
for the three and six months ended September 30, 2022 compared to the three and
six months ended September 30, 2021 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 the three and six months ended
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Net sales by product line for the periods covered by this report were as follows
(dollars in millions):
Three Months Ended September 30, Six Months Ended September 30,
2022 % 2021 % 2022 % 2021 %
Microcontrollers $ 1,179.5 56.9 $ 894.0 54.1 $ 2,242.5 55.6 $ 1,796.5 55.8
Analog 572.5 27.6 490.9 29.8 1,152.5 28.5 923.0 28.7
Other 321.2 15.5 264.9 16.1 641.8 15.9 499.7 15.5
Total net sales $ 2,073.2 100.0 $ 1,649.8 100.0 $ 4,036.8 100.0 $ 3,219.2 100.0
Microcontrollers
Our microcontroller product line represents the largest component of our total
net sales. Microcontrollers and associated application development systems
accounted for approximately 56.9% and 55.6% of our net sales for the three and
six months ended September 30, 2022 , respectively, compared to approximately
54.1% and 55.8% of our net sales for the three and six months ended September
30, 2021 , respectively.
Net sales of our microcontroller products increased 31.9% and 24.8% in the three
and six months ended September 30, 2022 , respectively, compared to the three and
six months ended September 30, 2021 . These sales increases were due primarily to
strength in demand for our 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 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 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 27.6% and 28.5% of our net sales for the three and six months endedSeptember 30, 2022 , respectively, compared to approximately 29.8% and 28.7% of our net sales for the three and six months endedSeptember 30, 2021 , respectively. Net sales from our analog product line increased 16.6% and 24.9% in the three and six months endedSeptember 30, 2022 , respectively, compared to the three and six months endedSeptember 30, 2021 , primarily due to strength in demand for our analog products in end markets that we serve and our price increases.
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 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 15.9% of our net sales for the three and six months endedSeptember 30, 2022 , respectively, compared to approximately 16.1% and 15.5% of our net sales for the three and six months endedSeptember 30, 2021 , respectively. Net sales related to these services and products increased 21.3% and 28.4% in the three and six months endedSeptember 30, 2022 , respectively, compared to the three and six months endedSeptember 30, 2021 . The increases in net sales were 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, and manufacturing services (wafer foundry and assembly and test subcontracting). 29 -------------------------------------------------------------------------------- Table of Contents Distribution Distributors accounted for approximately 46% of our net sales in each of the three and six months endedSeptember 30, 2022 , compared to approximately 50% of our net sales in each of the three and six months endedSeptember 30, 2021 . The decreases in the distribution percentage of our total net sales were due to lower Preferred Supply Program participation among our distributors as priority of supply under the Preferred Supply Program is more prevalent with direct customers. With the exception of Arrow Electronics, our largest distributor, which made up 10% of our net sales, no other distributor or end customer accounted for more than 10% of our net sales in the six months endedSeptember 30, 2022 . In the six months endedSeptember 30, 2021 , no distributor or end 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. AtSeptember 30, 2022 , our distributors maintained 19 days of inventory of our products compared to 17 days atMarch 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. Our distributor inventory days are near historic lows due to the imbalance between the supply of and the demand for our products in the current supply-constrained environment.
Sales by Geography
Sales by geography for the periods covered by this report were as follows (dollars in millions):
Three Months Ended September 30, Six Months Ended September 30,
2022 % 2021 % 2022 % 2021 %
Americas $ 525.1 25.3 $ 419.8 25.4 $ 1,021.3 25.3 $ 792.9 24.6
Europe 415.8 20.1 324.6 19.7 813.4 20.1 634.3 19.7
Asia 1,132.3 54.6 905.4 54.9 2,202.1 54.6 1,792.0 55.7
Total net sales $ 2,073.2 100.0 $ 1,649.8 100.0 $ 4,036.8 100.0 $ 3,219.2 100.0
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 the three and six months ended September 30, 2022
compared to approximately 77% and 78% of our total net sales in the three and
six months ended September 30, 2021 , respectively. Substantially all of our
foreign sales are U.S. dollar denominated. Sales to customers in Europe as a
percentage of total net sales increased in the three and six months ended
September 30, 2022 compared to the three and six months ended September 30, 2021
primarily due to strength in demand in our microcontroller and analog product
lines. Our sales force in the Americas and Europe supports a significant portion
of the design activity for products which are ultimately shipped to Asia .
Gross Profit
Our gross profit in the three months endedSeptember 30, 2022 was$1.40 billion , or 67.4% of net sales, compared to$1.07 billion , or 64.8% of net sales, in the three months endedSeptember 30, 2021 . Our gross profit in the six months endedSeptember 30, 2022 was$2.71 billion , or 67.1% of net sales, compared to$2.08 billion , or 64.5% of net sales, in the six months endedSeptember 30, 2021 . Gross margin increased in the three and six months endedSeptember 30, 2022 compared to the three and six months endedSeptember 30, 2021 primarily as a result of higher utilization of our factories due to increased customer demand. Our overall inventory levels were$1.03 billion atSeptember 30, 2022 , compared to$854.4 million atMarch 31, 2022 . We maintained 139 days of inventory on our balance sheet atSeptember 30, 2022 compared to 125 days of inventory atMarch 31, 2022 . Inventory increased primarily as a result of our efforts to balance manufacturing production, demand and inventory levels. Our inventory levels are impacted by the timing of receipt of raw materials and foundry wafers, fulfilling 30 -------------------------------------------------------------------------------- Table of Contents sales demand, and variations between our forecasted and actual demand. We expect our days of inventory levels atDecember 31, 2022 to be 143 to 147 days. We operate assembly and test facilities inThailand ,the Philippines , and other locations throughout the world. Approximately 59% of our assembly requirements were performed in our internal assembly facilities during each of the three and six months endedSeptember 30, 2022 andSeptember 30, 2021 . During the three and six months endedSeptember 30, 2022 , approximately 69% and 67%, respectively, of our test requirements were performed in our internal test facilities, compared to approximately 64% during the three and six months endedSeptember 30, 2021 . 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. Approximately 63% of our net sales came from products that were produced at outside wafer foundries in each of the three and six months endedSeptember 30, 2022 , compared to 60% and 59% in the three and six months endedSeptember 30, 2021 , respectively.
Research and Development
R&D expenses for the three months endedSeptember 30, 2022 were$268.6 million , or 13.0% of net sales, compared to$246.2 million , or 14.9% of net sales, for the three months endedSeptember 30, 2021 . R&D expenses for the six months endedSeptember 30, 2022 were$537.6 million , or 13.3% of net sales, compared to$484.6 million , or 15.1% of net sales, for the six months endedSeptember 30, 2021 . 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$22.4 million , or 9.1%, for the three months endedSeptember 30, 2022 over the same period last year. R&D expenses increased$53.0 million , or 10.9%, for the six months endedSeptember 30, 2022 over the same period last year. The primary reasons for the increases in R&D costs were increases in employee compensation and higher product development costs.
R&D expenses fluctuate over time, primarily due to revenue and operating expense investment levels.
Selling, General and Administrative
Selling, general and administrative expenses for the three months endedSeptember 30, 2022 were$202.4 million , or 9.8% of net sales, compared to$179.9 million , or 10.9% of net sales, for the three months endedSeptember 30, 2021 . Selling, general and administrative expenses for the six months endedSeptember 30, 2022 were$391.3 million , or 9.7% of net sales, compared to$354.2 million , or 11.0% of net sales, for the six months endedSeptember 30, 2021 . 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$22.5 million , or 12.5%, for the three months endedSeptember 30, 2022 over the same period last year. Selling, general and administrative expenses increased$37.1 million , or 10.5%, for the six months endedSeptember 30, 2022 over the same period last year.
The
primary reason for the increases in selling, general and administrative expenses was increases in employee compensation.
Selling, general and administrative expenses fluctuate over time, primarily due to revenue and operating expense investment levels.
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Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets for the three and six months ended
September 30, 2022 was $167.5 million and $335.1 million , respectively, compared
to $215.7 million and $431.3 million for the three and six months ended
September 30, 2021 , respectively. The primary reason for the decreases in
acquired intangible asset amortization was due to the use of accelerated
amortization methods for assets placed in service in previous fiscal years.
Special Charges (Income) and Other, Net
During the three months endedSeptember 30, 2022 , we incurred special charges and other, net of$4.3 million . During the six months endedSeptember 30, 2022 , we incurred special income and other, net of$12.6 million . During the three and six months endedSeptember 30, 2021 , we incurred special charges and other, net of$10.2 million and$20.7 million , respectively. The income incurred was primarily related to the favorable resolution of a previously accrued legal matter and the remaining charges incurred were primarily related to restructuring of acquired and existing wafer fabrication operations to increase operational efficiency. Other Income (Expense)
Interest income in the three and six months ended
Interest expense in the three and six months endedSeptember 30, 2022 was$53.3 million and$103.6 million , respectively, compared to$64.8 million and$137.1 million , respectively, for the three and six months endedSeptember 30, 2021 . The primary reasons for the decreases in interest expense relates to the adoption of ASU 2020-06 onApril 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. During the three and six months endedSeptember 30, 2022 , we recognized losses of$2.1 million and$8.3 million , respectively, 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. During the three and six months endedSeptember 30, 2021 , we recognized losses of$85.2 million and$85.5 million , respectively, 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 repayment of$1.00 billion aggregate principal amount outstanding of our 3.922% 2021 Notes. Other loss, net in the three months endedSeptember 30, 2022 was$0.8 million compared to$1.6 million for the three months endedSeptember 30, 2021 . Other income, net in the six months endedSeptember 30, 2022 was$0.9 million compared to other loss, net of$1.1 million for the six months endedSeptember 30, 2021 .
Provision for Income Taxes
Our provision or benefit for income taxes is attributable toU.S. federal, state, and foreign income taxes. A comparison of our tax rates for the six months endedSeptember 30, 2022 andSeptember 30, 2021 is not meaningful due to the amount of pre-tax income, and income tax expense recorded during the prior period. 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 combinedU.S. federal and state effective tax rate. Our domestic blended statutory tax rate in each of the six months endedSeptember 30, 2022 andSeptember 30, 2021 was approximately 22%. Our non-U.S. blended statutory tax rates in the six months endedSeptember 30, 2022 andSeptember 30, 2021 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 and assets inThailand ,Malta , andIreland . OurThailand manufacturing operations are currently subject to numerous tax holidays granted to us based on our investment in property, plant, and equipment inThailand . Our tax holiday periods inThailand 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%. We do not expect the future expiration of any of our tax holiday periods inThailand to have a material impact on our effective tax rate. The remaining material components of foreign income taxed at a rate lower than theU.S. are earnings accrued inIreland at a 12.5% statutory tax rate and earnings accrued inMalta at a 5.0% statutory tax rate. 32
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InSeptember 2021 , we received a Statutory Notice of Deficiency (Notice) from the Internal Revenue Service (IRS) for fiscal 2007 through fiscal 2012. The disputed amounts largely relate to transfer pricing matters. We firmly believe that the assessments are without merit and plan to pursue all available administrative and judicial remedies necessary to resolve this matter. InDecember 2021 , we filed a petition inthe United States Tax Court challenging the Notice. We intend to vigorously defend our position 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 this to determine the adequacy of our tax reserves. We believe that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows and that we have adequate tax reserves for all tax matters. However, the ultimate outcome of disputes of this nature is uncertain, and if theIRS were to prevail on all of its 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 theU.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. ForU.S. federal, and in general forU.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 theU.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. InAugust 2022 , theU.S. government enacted the Inflation Reduction Act of 2022 (Inflation Reduction Act) into law. The Inflation Reduction Act includes a new corporate alternative minimum tax (Corporate AMT) of 15% on the adjusted financial statement income (AFSI) of corporations with average AFSI exceeding$1.00 billion over a three-year period. The Corporate AMT is effective for us beginning in fiscal 2024. We are evaluating the Corporate AMT and its potential impact on our futureU.S. tax expense, cash taxes, and effective tax rate. Additionally, the Inflation Reduction Act imposes a 1% excise tax on the fair market value of net stock repurchases made afterDecember 31, 2022 . We are evaluating the excise tax and its potential impact on our futureU.S. tax expense, cash taxes, and effective tax rate. 33 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources
We had
Operating Activities
Net cash provided by operating activities was$1.63 billion in the six months endedSeptember 30, 2022 , primarily due to higher net income of$1.05 billion , adjusted for non-cash and non-operating charges of$739.3 million and net cash outflows of$159.1 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities in the six months endedSeptember 30, 2022 include an increase in trade accounts receivable driven primarily by higher net sales and an increase in inventories related to increased production levels and higher costs of materials and production costs in support of customer demand for our products, offset by increases in accrued and other liabilities driven by higher sales related reserves. Net cash provided by operating activities was$1.24 billion in the six months endedSeptember 30, 2021 , primarily due to net income of$494.8 million , adjusted for non-cash and non-operating charges of$763.0 million and net cash outflows of$16.2 million from changes in our operating assets and liabilities.
Investing Activities
Net cash used in investing activities was$284.6 million in the six months endedSeptember 30, 2022 compared to$208.7 million in the six months endedSeptember 30, 2021 . During the six months endedSeptember 30, 2022 andSeptember 30, 2021 , net investing activities 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 in the six months endedSeptember 30, 2022 were$232.2 million compared to$164.8 million in the six months endedSeptember 30, 2021 . Capital expenditures were primarily for the expansion of production capacity and the addition of research and development equipment. Towards the second half of fiscal 2021, we started to invest more significantly to expand our manufacturing capacity in response to supply constraints relative to current demand levels and we expect this to continue through calendar 2022. We currently expect to invest between$500 million and$600 million in equipment and facilities during the next twelve months. We believe that the capital expenditures anticipated to be incurred over the next twelve 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 our production requirements that are currently outsourced. We expect to finance our capital expenditures through our existing cash balances and cash flows from operations. InAugust 2022 , theU.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. Such incentives may potentially be available to us, our competitors and foundries; however, there can be no assurance that we will receive any such 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$1.36 billion in the six months endedSeptember 30, 2022 compared to$1.06 billion in the six months endedSeptember 30, 2021 . Significant transactions affecting our net financing cash flows included: •in the first six months of fiscal 2023,$597.4 million 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 •in the first six months of fiscal 2022,$806.6 million 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 the first six months of fiscal 2023 and fiscal 2022, we paid cash dividends to our stockholders of$319.1 million and$234.3 million , respectively, and •in the first six months of fiscal 2023, we repurchased shares of our common stock for$442.4 million . InDecember 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 onDecember 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 ofSeptember 30, 2022 , the principal amount of our 34 -------------------------------------------------------------------------------- Table of Contents outstanding indebtedness was$7.34 billion . AtSeptember 30, 2022 , we had$972.1 million of outstanding borrowings under the Revolving Credit Facility compared to$1.40 billion atMarch 31, 2022 .
Capital Returns
InNovember 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 the first six months of fiscal 2023, we repurchased approximately 6.5 million shares of our common stock for$442.4 million under this authorization. We did not repurchase any shares of our common stock in the first six months of fiscal 2022. As ofSeptember 30, 2022 , approximately$3.13 billion remained available for repurchases under the program. As ofSeptember 30, 2022 , we held approximately 27.8 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. InOctober 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$5.36 billion . A quarterly cash dividend of$0.301 per share was paid onSeptember 2, 2022 in the aggregate amount of$166.1 million . A quarterly dividend of$0.328 per share was declared onNovember 3, 2022 and will be paid onDecember 6, 2022 to stockholders of record as ofNovember 22, 2022 . We expect the aggregate cash dividend for theDecember 2022 quarter to be approximately$181.0 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 11. Commitments and Contingencies", "Note 7. Debt" and "Note 12. Income Taxes" of the notes to our condensed 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, the COVID-19 pandemic, or other factors, and any additional equity financing would result in incremental ownership dilution to our existing stockholders. We 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.
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