MICROCHIP TECHNOLOGY INC

Microchip Technology Incorporated develops, manufactures and sells smart, connected and secure embedded control solutions used by its customers for a wide variety of applications. The company's strategic focus includes general purpose and specialized mixed-signal microcontrollers, microprocessors, analog, FPGA, data center, networking, and memory products. In July 2024, Microchip entered the 64-bit mixed-signal microprocessor market furthering its expansion beyond 32-bit architecture. The company's synergistic product portfolio empowers disruptive growth trends, including AI/ML, data centers, edge computing and IoT, E-mobility, networking and connectivity, and sustainability in key end markets such as automotive, aerospace and defense, communications, consumer appliances, data centers and computing, and industrial. Embedded control systems have been incorporated into thousands of products and subassemblies in a wide variety of applications and markets worldwide.

The semiconductor industry is intensely competitive and has historically been characterized by price erosion and rapid technological change. Microchip competes with major domestic and international semiconductor companies, some of which have greater market recognition and greater financial, technical, marketing, distribution and other resources. The company also competes with a number of companies that it believes have copied, cloned, pirated or reverse engineered its proprietary product lines in such countries as China and Taiwan. Microchip competes principally on the basis of the technical innovation and performance of its embedded control products, including performance and specifications, analog, digital and mixed-signal functionality and level of functional integration, field programmability, memory density, low power consumption, extended voltage ranges, reliability, security and functional safety, packaging alternatives, and a comprehensive suite of development tools. The company believes that other important competitive factors include its broad product portfolio offering a Total System Solution through a combination of hardware, software and services, ease of use, functionality of application development systems, hardware, software and tool compatibility within product families to increase migration flexibility, dependable delivery, quality and availability, technical and innovative service and support, time to market, total solution cost, and availability of easy to adopt reference designs and documentation.

Microchip generates revenue primarily from sales of its semiconductor products to distributors and non-distributor customers (direct customers) and, to a lesser extent, from royalties paid by licensees of intellectual property. The company applies a five-step approach to determine the timing and amount of revenue recognition: identify the contract with the customer, identify performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the performance obligation is satisfied. Substantially all of the revenue generated from contracts with customers is recognized at, or near to, the time risk and title of the inventory transfers to the customer, which is generally upon shipment. The company offers price concessions and stock rotation rights to many of its distributors, which are forms of variable consideration. Microchip also enters into long-term supply agreements (LTSAs) with certain customers, under which it receives an upfront deposit and minimum purchase commitments in exchange for assured supply over the contract period, which typically ranges from three years to five years. The company markets and sells its products worldwide primarily through a network of direct sales personnel and distributors to approximately 101,000 unique customers.

Microchip's mixed-signal microcontroller product line represents the largest component of its total net sales, accounting for approximately 50.0% ¹ and 51.1% ² of net sales in fiscal 2026 and fiscal 2025, respectively. The company offers a broad family of proprietary general purpose mixed-signal microcontroller products, with significant analog and mixed-signal functionality incorporated within them, marketed under multiple brand names. Microchip targets the 8-bit, 16-bit, and 32-bit mixed-signal microcontroller and 32-bit and 64-bit embedded mixed-signal microprocessor markets. In July 2024, the company entered the 64-bit mixed-signal microprocessor market with its PIC64 family of high-performance multi-core processors, consisting of 64-bit RISC-V microprocessors designed for high-performance, mission-critical applications across industrial, aerospace, defense and space sectors. Microchip is an industry leader in product families including storage controllers, memory controllers and switches designed to address high-performance compute, storage, and connectivity requirements in AI data center and enterprise infrastructure. Net sales of mixed-signal microcontroller products increased approximately 4.7% ³ in fiscal 2026 compared to fiscal 2025, primarily due to increased demand after customers reduced excess inventory levels as well as new customer design win activity entering production.

Microchip's analog product line accounted for approximately 28.2% ⁴ and 26.3% ⁵ of net sales in fiscal 2026 and fiscal 2025, respectively, and consists of several families including power management, linear, mixed-signal, high voltage, thermal management, discrete diodes and MOSFETs, RF, gate drivers, safety, security, timing, application specific standard products (ASSPs), USB, ethernet, wireless and other interface products. Net sales from the analog product line increased approximately 14.9% ⁶ in fiscal 2026 compared to fiscal 2025, primarily due to increased demand as a portion of the customer base reduced excess inventory levels and new customer design win activity entering production. The company's other product line includes FPGA products, royalties associated with licenses for the use of its SuperFlash and other technologies, sales of 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 products for aerospace applications. Revenue from these services and products accounted for approximately 21.8% ⁷ and 22.6% ⁸ of net sales in fiscal 2026 and fiscal 2025, respectively, and increased approximately 3.4% ⁹ in fiscal 2026 compared to fiscal 2025. The technology licensing business generates license fees and royalties associated with technology licenses for the use of Microchip's SuperFlash embedded flash and other technologies, and the company licenses its Non-Volatile Memory technologies to foundries, integrated device manufacturers and design partners throughout the world.

In fiscal 2026, Microchip derived 47% ¹⁰ of its net sales through distributors compared to 45% ¹¹ in fiscal 2025. Arrow Electronics, the company's largest distributor, made up 12% ¹² and 10% ¹³ of net sales in fiscal 2026 and fiscal 2025, respectively. In July 2024, Microchip entered the 64-bit mixed-signal microprocessor market. In December 2024, the company announced its decision to close its Fab 2 manufacturing operations in Tempe, Arizona, and the closure was completed in May 2025. In March 2025, Microchip implemented a business recovery plan which included restructuring actions to reduce costs, resize manufacturing operations and reduce headcount. In fiscal 2026, the company incurred special charges and other, net of $39.7 million ¹⁴ primarily due to restructuring expenses, including $21.8 million ¹⁵ related to the closure of the Tempe, Arizona wafer fabrication facility and $14.5 million ¹⁶ related to contract exit costs. In fiscal 2025, the company incurred special charges and other, net of $79.2 million ¹⁷ primarily due to restructuring expenses, including $45.7 million ¹⁸ related to contract exit costs and $27.1 million ¹⁹ related to employee separation costs. In fiscal 2026, the company paid cash dividends to common stockholders of $984.0 million ²⁰ and to preferred stockholders of $108.5 million ²¹. No shares were repurchased under the company's stock repurchase authorization in fiscal 2026.

In fiscal 2026, Microchip saw an improvement in its business due to increased demand after customers reduced excess inventory levels, with net sales in all product lines and all geographies increasing compared to fiscal 2025. Net sales for fiscal 2026 were $4,713.1 million ²² compared to $4,401.6 million ²³ in fiscal 2025, an increase of 7.1% ²⁴. Gross profit in fiscal 2026 was $2.72 billion ²⁵, or 57.7% ²⁶ of net sales, compared to $2.47 billion ²⁷, or 56.1% ²⁸ of net sales, in fiscal 2025. Operating income was $490.1 million ²⁹ in fiscal 2026 compared to $296.3 million ³⁰ in fiscal 2025. Net income in fiscal 2026 was $230.0 million ³¹ compared to a net loss of $0.5 million ³² in fiscal 2025. Diluted net income per common share was $0.22 ³³ in fiscal 2026 compared to a diluted net loss per common share of $0.01 ³⁴ in fiscal 2025. Net cash provided by operating activities was $962.1 million ³⁵ in fiscal 2026 compared to $898.1 million ³⁶ in fiscal 2025.

Microchip's growth strategy is centered on providing a Total System Solution (TSS) for its customers, which is a combination of hardware, software and services that can provide a large portion of the silicon requirements in their applications. The company's strategic focus includes general purpose and specialized mixed-signal microcontrollers, microprocessors, analog, FPGA, data center, networking, and memory products. In July 2024, Microchip entered the 64-bit mixed-signal microprocessor market with its PIC64 family of high-performance multi-core processors, designed for high-performance, mission-critical applications across industrial, aerospace, defense and space sectors, integrating networking, virtualization support, AI/ML acceleration, security and high-speed networking. The company's synergistic product portfolio empowers disruptive growth trends, including AI/ML, data centers, edge computing and IoT, E-mobility, networking and connectivity, and sustainability in key end markets such as automotive, aerospace and defense, communications, consumer appliances, data centers and computing, and industrial. Microchip's storage controller portfolio includes Adaptec and Microsemi branded storage controllers, SAS/SATA expanders, and accelerators that enable reliable SAS/SATA and NVMe storage connectivity, data protection, and workload offload, while its memory controller portfolio includes Compute Express Link (CXL) and PCIe memory expansion and management devices that support disaggregated and scalable memory architectures. The company's switch and retimer portfolio includes PCIe Gen 3, Gen 4, Gen 5, and Gen 6 solutions, including Switchtec branded products, that provide high-speed, low-latency interconnect, signal conditioning, and fabric expansion for server, storage, accelerator, and networking platforms.

Microchip's technology licensing business is based on its SuperFlash and other technologies, and the success of this business depends on the continued market acceptance of these technologies and on the company's ability to further develop such technologies, to introduce new technologies, and to enforce its license terms. The company licenses its Non-Volatile Memory technologies to foundries, integrated device manufacturers and design partners throughout the world for use in the manufacture of their advanced mixed-signal microcontroller products, gate array, RF, analog and neuromorphic compute products that require embedded non-volatile memory. The company's portfolio of mid-range and low-end FPGAs is recognized for its low power consumption, defense grade security features, and robust reliability across mission-critical environments, and is complemented by AI enabled integrated development tools, intellectual property (IP) cores, and system-level solutions. Microchip's offerings support a wide array of applications, including Edge AI systems, industrial automation, automotive systems, defense and aerospace platforms, aviation systems, space-grade deployments, and communications infrastructure, where power efficiency, longevity, functional safety, tamper proof cybersecurity and lifecycle stability are essential.

In fiscal 2026, Microchip operated at below normal capacity levels resulting in unabsorbed capacity charges of $200.8 million ³⁷, compared to $173.0 million ³⁸ in fiscal 2025. The net impact of unabsorbed capacity charges was an unfavorable impact of $27.8 million ³⁹ in fiscal 2026 compared to fiscal 2025. The net impact to gross profit from inventory reserve charges was a favorable impact of $115.3 million ⁴⁰ in fiscal 2026 compared to fiscal 2025. The gross margin impact of changes in licensing revenue, which has no associated cost of sales, was a favorable impact of $32.7 million ⁴¹ in fiscal 2026 compared to fiscal 2025. The company anticipates that its gross margins will fluctuate over time, driven primarily by capacity utilization levels, the overall mix of products sold during the period, as well as manufacturing yields, unabsorbed capacity charges, and competitive and economic conditions in the markets it serves. Microchip continues to transition products to more advanced process technologies to reduce future manufacturing costs.

Microchip's manufacturing operations include wafer fabrication, wafer probe, assembly, test and systems builds. The ownership of a substantial portion of its manufacturing resources is an important component of its business strategy, enabling it to maintain a high level of manufacturing control. In the fourth quarter of fiscal 2024, the company paused its expansion and capital equipment investment plan at Fab 4 in Gresham, Oregon and Fab 5 in Colorado Springs, Colorado through fiscal 2027, though select investments are still being made. In December 2024, the company announced its decision to close its Fab 2 manufacturing operations in Tempe, Arizona, and the closure was completed in May 2025. During fiscal 2026, approximately 35% ⁴² of the company's sales came from products produced at its own wafer fabrication facilities located in the U.S., and approximately 65% ⁴³ of sales came from products produced at outside wafer foundries. During fiscal 2026, approximately 67% ⁴⁴ of the company's assembly requirements were performed in its internal facilities and approximately 69% ⁴⁵ of test requirements were performed in internal facilities. The company plans to continue to invest in assembly and test equipment both internally and externally to increase capacity, capabilities, efficiency and supply resiliency. Microchip's investments in equipment and facilities during the next 12 months are expected to be approximately $100.0 million ⁴⁶.

Research and development expenses for fiscal 2026 were $1.09 billion ⁴⁷, or 23.0% ⁴⁸ of net sales, compared to $983.8 million ⁴⁹, or 22.4% ⁵⁰ of net sales, for fiscal 2025. The company is committed to investing in new and enhanced products, including development systems software, and in its design and manufacturing process technologies. Capital expenditures were $91.1 million ⁵¹ and $126.0 million ⁵² in fiscal 2026 and fiscal 2025, respectively, primarily for the selective expansion of production capacity and the addition of research and development equipment. In November 2021, the company's Board of Directors authorized the repurchase of up to $4.00 billion ⁵³ of its common stock, of which approximately $1.56 billion ⁵⁴ remained available for repurchases as of March 31, 2026. No shares were repurchased under this authorization in fiscal 2026. A quarterly dividend of $0.455 ⁵⁵ per share of common stock was declared on May 7, 2026, and the company expects the aggregate cash dividend on its common stock for the June 2026 quarter to be approximately $246.9 million ⁵⁶. With respect to shares of Series A Preferred Stock, dividends are cumulative at an annual rate of 7.50% ⁵⁷ on the liquidation preference of $1,000.00 ⁵⁸ per share.

The filing identifies several structural headwinds and execution risks that management explicitly flagged to the growth plan. The semiconductor industry is intensely competitive and has historically been characterized by price erosion and rapid technological change. The company's operating results are affected by a wide variety of factors, including general economic, industry, public health or political conditions in the U.S. or internationally, including uncertain economic conditions in U.S., China and Europe, changes in geopolitical conditions, interest rates, persistent inflation, tariffs or instability in the banking sector. Trade restrictions and increase in tariffs, including those on business in China, or focused on specific companies or types of products, pose risks. The company depends on orders that are received and shipped in the same quarter and has limited visibility to product shipments other than orders placed under certain LTSAs. The company's net sales in any given quarter depend upon a combination of shipments from backlog, and orders that are both received and shipped in the same quarter, which it calls turns orders. The level of turns orders has in the past and may in the future decrease in periods where customers are holding excess inventory of Microchip's products.

Geopolitical instability in the Middle East may disrupt critical semiconductor materials, increase fuel costs, and adversely affect the company's ability to meet customer demand. The region is a major source of global oil production and a critical transit point for maritime shipping routes, and current conflict in the Middle East is disrupting supplies of critical semiconductor materials including helium and bromine, both essential for wafer fabrication processes. Qatar accounts for more than one-third of the world's helium production, and approximately two-thirds of global bromine production originates from Israel and Jordan. The company's operations rely heavily on global logistics networks that depend on stable and cost-effective fuel supplies. The company also faces risks related to tariffs and trade restrictions, including the U.S. imposition of additional tariffs on various imports and retaliatory tariffs from other countries. On February 20, 2026, the U.S. Supreme Court ruled that certain tariffs collected pursuant to the International Emergency Economic Powers Act (IEEPA) were unconstitutional, and although Microchip was the importer of record for products subject to those tariffs and should be entitled to a refund, the timing and amount of any such recovery is not yet clear.

The company's operating results are impacted by global economic conditions and may fluctuate due to factors including uncertain economic conditions in the U.S., China and Europe, changes in geopolitical conditions, interest rates, persistent inflation, tariffs or instability in the banking sector. Trade restrictions and increase in tariffs, including those on business in China, pose significant risks, and on September 13, 2025, China's Ministry of Commerce initiated an antidumping investigation of imports into China of analog semiconductors originating in the United States. The company is highly dependent on foreign sales, with approximately 75% ⁵⁹ of net sales made to foreign customers in fiscal 2026, including 18% ⁶⁰ in China and 15% ⁶¹ in Taiwan. Geopolitical instability in the Middle East may disrupt critical semiconductor materials, as Qatar accounts for more than one-third of the world's helium production and approximately two-thirds of global bromine production originates from Israel and Jordan. The company faces a potential tax liability from the Malaysian Inland Revenue Board (IRB) of up to MYR 1.9 billion ⁶² (approximately $480.2 million ⁶³ based on the exchange rate as of March 31, 2026) related to a proposed income adjustment for fiscal 2020. The company's technology licensing business exposes it to various risks, and its licensees may experience disruptions in production or reduced production levels which would adversely affect the revenue received. The company's success depends on its ability to introduce new products on a timely basis, and it has experienced delays from time to time in completing new product development.

Management's message to shareholders emphasizes that during fiscal 2025, the overall business was weak as the company navigated through a large inventory correction due to customers holding excess levels of inventory. In March 2025, the company implemented a business recovery plan which included restructuring actions to reduce costs, resize manufacturing operations and reduce headcount. In fiscal 2026, the company saw an improvement in its business due to increased demand after customers reduced excess inventory levels, with net sales in all product lines and all geographies increasing compared to fiscal 2025. Consistent with the recovery plan, the company reduced inventory in fiscal 2026 compared to fiscal 2025 and is now in a significant revenue growth mode, expecting inventory to continue to decline as it appropriately manages manufacturing and foundry resources. However, there continues to be uncertainty regarding overall macroeconomic conditions, including increased geopolitical tensions, risk of a recession, and the effects of potential trade policies, including tariffs. The company's strategic priorities include continuing to invest in new and enhanced products, including development systems software, and in design and manufacturing process technologies, as these investments are believed to be significant factors in maintaining its competitive position. The company also aims to continue to be more efficient with its selling, general and administrative expenses.