Microchip Technology Incorporated
05/21/2026 | Press release | Distributed by Public on 05/21/2026 14:42
Annual Report for Fiscal Year Ending March 31, 2026 (Form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Note Regarding Forward-looking Statements
This report, including "Item 1. Business," "Item 1A. Risk Factors," and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our strategy, financial performance and revenue sources. We use words such as "anticipate," "believe," "can," "continue," "could," "expect," "future," "intend," "plan," and similar expressions to identify forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under "Risk Factors," beginning at page 14 and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement. These forward-looking statements include, without limitation, statements regarding the following:
•Our expectation that we will experience period-to-period fluctuations in operating results, gross margins, and product mix;
•The effects that uncertain global economic conditions and fluctuations in the global credit and equity markets may have on our financial condition and results of operations;
•The effects and amount of competitive pricing pressure on our product lines and modest pricing declines in certain of our more mature proprietary product lines;
•Our ability to moderate future average selling price declines;
•Our expectations regarding our inventory levels and revenue growth;
•The amount of, and changes in, demand for our products and those of our customers;
•The impact of national security protections, trade restrictions and changes in tariffs, including those impacting China;
•Our intent to vigorously defend our legal positions and our expectations of the impact of litigation on our operations;
•The future impact on our business in response to public health concerns;
•Our goal to continue to be more efficient with our selling, general and administrative expenses;
•Our belief that customers recognize our products and brand name and our use of distributors as an effective supply channel;
•Our belief that familiarity with and adoption of development tools from us and from our third-party development tool partners will be an important factor in the future selection of our embedded control products;
•The accuracy of our estimates of the useful life and values of our property, assets and other liabilities;
•The possibility of future pricing fluctuations in our analog product line;
•The impact of any supply disruption we may experience;
•Our ability to effectively utilize our facilities at appropriate capacity levels or obtain sufficient capacity from our manufacturing, assembly and test sub-contractors;
•Our ability to maintain manufacturing yields;
•The maintenance of our competitive position based on our investments in new and enhanced products;
•The cost effectiveness of using our own assembly and test operations;
•Our plans to continue to transition certain outsourced assembly and test capacity to our internal facilities;
•Our expectations regarding investments in equipment and facilities and the timeline of expansions of our manufacturing capacity;
•The continued development of the embedded control market based on our strong technical service presence;
•Our anticipated level of capital expenditures;
•The possibility that loss of, or disruption in the operations of, one or more of our distributors could reduce our future net sales and/or increase our inventory returns;
•Our intent, including length, timing, planned closure days, to reduce production levels at global fabrication facilities, or closure of facilities completely and its impact on inventory levels and estimated cash savings;
•Our expectations regarding LTSAs and the realization of deferred revenue;
•The continuation and amount of quarterly cash dividends;
•The sufficiency of our existing sources of liquidity to finance anticipated capital expenditures and otherwise meet our anticipated cash requirements, and the effects that our contractual obligations are expected to have on them;
•Our belief that the capital expenditures to be incurred over the next 12 months will provide sufficient manufacturing capacity to support the growth of our production capabilities for our new products and technologies and to bring in-house more of the production requirements that are currently outsourced;
•Our belief that our IT system compromise will not have a material adverse effect on our business or result in any material damage to us;
•Our expectation that we will continue to be the target of cyber-attacks, computer viruses, unauthorized access and other attempts to breach or otherwise compromise the security of our IT systems and data;
•Our plans to modify and enhance our cybersecurity risk management processes and strategy;
•The benefits and risks of the use of artificial intelligence by us, our partners and customers, or malicious third parties and its impact on our products, our labor and technological needs, and regulatory or intellectual property compliance;
•The impact of the resolution of legal actions on our business, and the accuracy of our assessment of the probability of loss and range of potential loss;
•The amounts and timing, and our plans and expectations relating to the proposed income adjustment from the Malaysian Inland Revenue Board;
•Our expectation regarding the treatment of our unrecognized tax benefits in the next 12 months;
•Our belief that the expiration of any tax holidays will not have a material impact on our effective tax rate;
•Our expectations regarding our tax expense, cash taxes and effective tax rate;
•The impact on our business from the global minimum tax (GMT) and the Side-by-Side system introduced by the Organisation for Economic Co-operation and Development;
•Our belief that the estimates used in preparing our consolidated financial statements are reasonable;
•Our actions to vigorously and aggressively defend and protect our intellectual property on a worldwide basis;
•Our ability to obtain and maintain patents and intellectual property licenses and minimize the effects of litigation or other disputes or the loss of patent protection;
•The level of risk we are exposed to for product liability claims or indemnification claims;
•The effect of fluctuations in market interest rates on our income and/or cash flows;
•The effect of fluctuations in currency rates;
•The impact of inflation on our business;
•Our ability to increase our borrowings or seek additional equity or debt financing to maintain or expand our facilities, or to fund cash dividends, share repurchases, acquisitions or other corporate activities, and that the timing and amount of such financing requirements will depend on a number of factors;
•Our expected debt obligation maturities, including the conversion of debt, Depositary Shares, and Series A Preferred Stock, and plans to refinance or repay our existing debt;
•Our expectations regarding the amounts and timing of repurchases under our stock repurchase program;
•Our expectation that our reliance on third-party contractors may increase over time as our business grows;
•Our ability to collect accounts receivable;
•The impact of the legislative and policy changes implemented or which may be implemented by the current administration on our business and the trading price of our stock;
•Our belief that our culture, values, and organizational development and training programs will continue to provide a work environment where our employees are empowered and engaged to deliver the best embedded control solutions;
•Our belief that our continued success is driven by the skills, knowledge, and innovative capabilities of our personnel, a strong technical service presence, and our ability to rapidly commercialize new and enhanced products;
•The potential impact of changes in regulations or in their enforcement, including with respect to the capital expenditures or other costs or expenses;
•The impact of any failure by us to adequately control the storage, use, discharge and disposal of regulated substances;
•Estimates and plans regarding pension liability and payments expected to be made for benefits earned;
•Our expectations regarding past or potential future acquisitions, joint development agreements or other strategic relationships and any related benefits; and
•The impact on our business stemming from Russia's invasion of Ukraine.
Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth in "Item 1A. Risk Factors," and elsewhere in this Form 10-K. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update the information contained in any forward-looking statement.
Introduction
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document, as well as with other sections of this Annual Report on Form 10-K, including "Item 8. Financial Statements and Supplementary Data."
We begin our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a discussion of our Business and Macroeconomic Environment followed by the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then discuss our results of operations for fiscal 2026 compared to fiscal 2025, followed by an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the section titled "Liquidity and Capital Resources." Our liquidity and capital resources section generally discusses fiscal 2026 compared to fiscal 2025. For our discussion of fiscal 2025 results compared to fiscal 2024 for both our results of operations and our liquidity and capital resources sections, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2025 filed with the SEC on May 23, 2025 which is incorporated by reference herein.
Business and Macroeconomic Environment
During fiscal 2025, our overall business was weak as we navigated through a large inventory correction due to our customers holding excess levels of inventory. In March 2025, we implemented a business recovery plan which included restructuring actions to reduce our costs, resize our manufacturing operations and reduce our headcount. In fiscal 2026, we saw an improvement in our business due to increased demand after our customers reduced excess inventory levels. Net sales in all our product lines and all our geographies increased in fiscal 2026 compared to fiscal 2025. Consistent with our recovery plan, we reduced inventory in fiscal 2026 compared to fiscal 2025 and we are now in a significant revenue growth mode and we expect our inventory to continue to decline as we appropriately manage our manufacturing and foundry resources. However, there continues to be uncertainty regarding overall macroeconomic conditions, including increased geopolitical tensions, risk of a recession, and the effects of potential trade policies, including tariffs.
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. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventories and income taxes. 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). 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 of semiconductor products to our customers are governed by a purchase order, an order acknowledgment, and a distributor agreement in the case of our distributor customers. Sales to customers do not meet the definition of a contract until the customer 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. 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.
Overall, our estimates of adjustments to contract price due to variable consideration under our contracts with distributor customers, based on our assumptions, have been materially consistent with our actual results. However, these estimates are subject to management's judgment and actual provisions could be different from our estimates, resulting in future adjustments to our revenue and operating results. A 100-basis point increase in the blended price concession rate would have changed the measurement of our refund liability recorded within accrued liabilities by approximately $4.0 million as of March 31, 2026.
Inventories
Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method. We record a charge to cost of sales to write down our inventory for estimated excess, obsolete 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 excess or obsolete inventory, 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. A 1% variance in the estimated demand for our products would have changed the estimated net realizable value of our inventory by approximately $1.6 million as of March 31, 2026.
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.
Various taxing authorities in the U.S. and other countries in which we do business may 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 measurement 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 closing of a statutory audit period or changes in applicable law, or interactions with taxing authorities. Due to the inherent uncertainty in the estimation process, including the complexity involved to interpret and apply tax laws, 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.
Results of Operations
The following table sets forth certain operational data as a percentage of net sales for fiscal 2026 and fiscal 2025:
| Fiscal Year Ended March 31, | |||||||||||
| 2026 | 2025 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of sales | 42.3 | 43.9 | |||||||||
| Gross profit | 57.7 | 56.1 | |||||||||
| Research and development | 23.0 | 22.4 | |||||||||
| Selling, general and administrative | 14.3 | 14.0 | |||||||||
| Amortization of acquired intangible assets | 9.2 | 11.2 | |||||||||
| Special charges and other, net | 0.8 | 1.8 | |||||||||
| Operating income | 10.4 | % | 6.7 | % | |||||||
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 2026 and fiscal 2025 (dollars in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||
| 2026 | 2025 | Change | |||||||||||||||
| Net sales | $ | 4,713.1 | $ | 4,401.6 | 7.1 | % | |||||||||||
The increase in net sales in fiscal 2026 compared to fiscal 2025 was primarily due to increased demand after customers reduced excess inventory levels as well as new customer design win activity entering production. Due to the size, complexity and diversity of our customer base, we are not able to quantify any material factor contributing to the changes in net sales. See our "Business and Macroeconomic Environment" discussion above for further information on our business outlook.
Other factors that we believe contributed to the changes in our reported net sales for fiscal 2026 compared to fiscal 2025 and which are drivers of long-term trends in our net sales but which factors we are not able to quantify include:
•economic and competitive conditions in the semiconductor industry;
•our various new product offerings that have increased our served available market;
•intense competition in our key markets;
•customers' needs for the flexibility offered by our programmable solutions;
•increasing semiconductor content in our customers' products; and
•geopolitical conditions, tariffs and other trade restrictions.
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 changes in our net sales in fiscal 2026 or fiscal 2025.
Net sales by product line for fiscal 2026 and fiscal 2025 were as follows (dollars in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||
| 2026 | % | 2025 | % | ||||||||||||||||||||
| Mixed-signal Microcontrollers | $ | 2,355.4 | 50.0 | $ | 2,249.7 | 51.1 | |||||||||||||||||
| Analog | 1,329.0 | 28.2 | 1,157.0 | 26.3 | |||||||||||||||||||
| Other | 1,028.7 | 21.8 | 994.9 | 22.6 | |||||||||||||||||||
| Total net sales | $ | 4,713.1 | 100.0 | $ | 4,401.6 | 100.0 | |||||||||||||||||
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 50.0% and 51.1% of our net sales in fiscal 2026 and fiscal 2025, respectively.
Net sales of our mixed-signal microcontroller products increased approximately 4.7% in fiscal 2026 compared to fiscal 2025. The increase in net sales was primarily due to increased demand after customers reduced excess inventory levels as well as new customer design win activity entering production.
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 remained relatively stable in recent periods due to the proprietary nature of these products. We have in the past been 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 26.3% of our net sales in fiscal 2026 and fiscal 2025, respectively.
Net sales from our analog product line increased approximately 14.9% in fiscal 2026 compared to fiscal 2025. The increase in net sales was primarily due to increased demand due to a portion of our customer base having reduced excess inventory levels as well as new customer design win activity entering production.
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 21.8% and 22.6% of our net sales in fiscal 2026 and fiscal 2025, respectively.
Net sales related to these products and services increased approximately 3.4% in fiscal 2026 compared to fiscal 2025. The increase in net sales was primarily due to sales of certain of our intellectual property rights and also due to a portion of our customer base having worked through their previous high inventory balances and needing to purchase products at a higher level to support demand. 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 45% of our net sales in fiscal 2026 and fiscal 2025, respectively. With the exception of Arrow Electronics, our largest distributor, which accounted for 12% and 10% of our net sales in fiscal 2026 and in fiscal 2025, respectively, no other distributor or direct customer accounted for more than 10% of our net sales during these periods. 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 and 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. 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, 2026, our distributors maintained 26 days of inventory of our products compared to 33 days at March 31, 2025. Over the past ten fiscal years, the days of inventory maintained by our distributors have fluctuated between approximately 17 days and 43 days. Inventory holding patterns at our distributors had a material adverse impact on our net sales in fiscal 2025 and the first half of 2026, as our distributors held relatively high levels of inventory and purchased fewer products from us.
Sales by Geography
Sales by geography for fiscal 2026 and fiscal 2025 were as follows (dollars in millions):
| Fiscal Year Ended March 31, | |||||||||||||||||||||||
| 2026 | % | 2025 | % | ||||||||||||||||||||
| Americas | $ | 1,391.3 | 29.5 | $ | 1,325.7 | 30.2 | |||||||||||||||||
| Europe | 968.9 | 20.6 | 878.1 | 19.9 | |||||||||||||||||||
| Asia | 2,352.9 | 49.9 | 2,197.8 | 49.9 | |||||||||||||||||||
| Total net sales | $ | 4,713.1 | 100.0 | $ | 4,401.6 | 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 75% of our total net sales in each of fiscal 2026 and fiscal 2025. Net sales increased in all geographies 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. 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.
Gross Profit
Our gross profit in fiscal 2026 was $2.72 billion, or 57.7% of net sales, compared to $2.47 billion, or 56.1% of net sales, in fiscal 2025.
The primary reasons for the increase in gross profit of $253.2 million in fiscal 2026 compared to fiscal 2025 were due to changes in product mix, higher licensing revenue and lower inventory reserves. The net impact of product mix 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 impact of unabsorbed capacity charges was an unfavorable impact of $27.8 million in fiscal 2026 compared to fiscal 2025. Unabsorbed capacity charges are expensed as incurred when we operate our manufacturing facilities below normal levels. The net impact to our gross profit from inventory reserve charges was a favorable impact of $115.3 million 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 in fiscal 2026 compared to fiscal 2025.
Our overall inventory levels were $1.04 billion at March 31, 2026, compared to $1.29 billion at March 31, 2025. We maintained 185 days of inventory on our balance sheet at March 31, 2026 compared to 251 days of inventory at March 31, 2025. Our overall inventory level in dollars and days decreased as a result of our efforts to balance manufacturing production, customer demand and inventory levels. Our inventory amounts are impacted by timing of shipment activity in the quarter, the timing of receipt of raw materials, foundry wafers, and strategic last time buy materials and completion of finished goods.
We operate assembly and test facilities in Thailand and the Philippines. Approximately 67% of our assembly requirements were performed in our internal assembly facilities during each of fiscal 2026 and fiscal 2025. During fiscal 2026, approximately 69% of our test requirements were performed in our internal facilities, compared to approximately 67% during fiscal 2025. 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. In addition, we have specialized assembly and test facilities dedicated to our aerospace and defense products in Germany, France, Ireland, the United Kingdom, the Philippines, Thailand, and the United States. These facilities are designed to support the unique requirements of these sectors, helping to accelerate time to market and ensure consistent, high-quality products. We plan to continue to selectively 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 2026, approximately 65% of our net sales came from products that were produced at outside wafer foundries, compared to approximately 64% during fiscal 2025. This percentage may vary based on supply and demand conditions in the market.
We anticipate that our 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 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 2026 were $1.09 billion, or 23.0% of net sales, compared to $983.8 million, or 22.4% of net sales, for fiscal 2025. 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 $102.1 million, or 10.4%, for fiscal 2026 compared to fiscal 2025. The primary reasons for the increase in R&D expenses in fiscal 2026 compared to fiscal 2025 were higher employee compensation costs, including higher share-based compensation partially offset by our restructuring efforts.
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 fiscal 2026 were $674.3 million, or 14.3% of net sales, compared to $617.7 million, or 14.0% of net sales, for fiscal 2025. 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 FAEs who work to stimulate demand from sales offices worldwide by assisting customers in the selection and use of our products.
Selling, general and administrative expenses increased $56.6 million, or 9.2%, for fiscal 2026 compared to fiscal 2025. The primary reasons for the increase in selling, general and administrative expenses were higher employee compensation costs, including higher share-based compensation partially offset by our restructuring efforts.
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 2026 was $431.1 million compared to $490.9 million in fiscal 2025. 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 Charges and Other, Net
During fiscal 2026, we incurred special charges and other, net of $39.7 million primarily due to restructuring expenses, including $21.8 million related to the closure of our Tempe, Arizona wafer fabrication facility and $14.5 million related to contract exit costs. During fiscal 2025, we incurred special charges and other, net of $79.2 million primarily due to restructuring expenses, including $45.7 million related to contract exit costs and $27.1 million related to employee separation costs.
Other Income (Expense)
Interest income in fiscal 2026 was $11.4 million compared to $9.2 million in fiscal 2025.
Interest expense in fiscal 2026 was $221.3 million compared to $259.2 million in fiscal 2025. The primary reasons for the decrease in interest expense in fiscal 2026 compared to fiscal 2025 were lower debt balances and lower interest rates.
Other loss, net, in fiscal 2026 was $6.7 million compared to other loss, net of $5.7 million in fiscal 2025. The primary reason for the change in other loss during fiscal 2026 compared to fiscal 2025 relates to foreign currency exchange rate fluctuations.
Provision for Income Taxes
Our provision 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, 2026, decreased over the same period last year as a result of changes in the amount of pre-tax income earned, R&D credits, and the effects of foreign operations.
Our effective tax rate in fiscal 2026 includes a $55.6 million tax benefit received from current year generated R&D credits, which reduced our effective tax rate by 20.3%; an $83.0 million tax benefit for the notional interest deduction, which reduced our effective tax rate by 30.4%; and a $119.6 million tax expense for the effects of foreign operations, which increased our effective tax rate by 43.7%.
Our effective tax rate in fiscal 2025 includes a $60.1 million tax benefit received from current year generated R&D credits, which reduced our effective tax rate by 154.4%; a $55.0 million tax expense for the effects of foreign operations, which increased our effective tax rate by 141.3%; and a $45.1 million tax expense related to changes in various tax reserves, which increased our effective tax rate by 115.8%.
In September 2021, we received a Statutory Notice of Deficiency (2007 to 2012 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 U.S. Tax Court challenging the 2007 to 2012 Notice. In September 2023, we received a Revenue Agent Report (RAR) from the IRS for fiscal 2013 and fiscal 2016. In October 2023, we received a Statutory Notice of Deficiency (2014 to 2015 Notice) from the IRS for fiscal 2014 and fiscal 2015. The disputed amounts for fiscal 2013 to fiscal 2016 largely relate to transfer pricing matters. In December 2023, we filed a petition in the U.S. Tax Court challenging the 2014 to 2015 Notice. In September 2025, we reached a settlement with the IRS for fiscal 2007 through fiscal 2015.
In May 2023, we received a proposed income adjustment from the Malaysian Inland Revenue Board (IRB) for fiscal 2020. In December 2023, we received a Notice of Assessment from the IRB asserting the same proposed income adjustment. In March 2025, we entered into a Consent Judgment before the High Court, agreeing that the dispute will be heard before the Special Commissioners of Income Tax (SCIT). It was also agreed that the payment on the taxes assessed is stayed and the IRB will pause all enforcement and proceedings against the collection of the taxes assessed until the appeal before the SCIT is concluded. If the adjustment is upheld by the highest court that has jurisdiction over this matter in Malaysia, it could result in income taxes and penalties up to MYR 1.9 billion (approximately $480.2 million based on the exchange rate as of March 31, 2026). The disputed amounts largely relate to the characterization of certain assets. The timing of adjudicating this matter is uncertain but could occur in the next 18 months.
We firmly believe that the IRB assessment is without merit and we plan to pursue all available administrative and judicial remedies necessary to resolve the matter. 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 these to determine the adequacy of our tax reserves. The ultimate outcome of disputes of this nature is uncertain, and if the IRB were to prevail on 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 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
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 Organisation for Economic Co-operation and Development has introduced a global minimum corporate tax framework (GMT), with phased implementation starting January 1, 2024. While the U.S. has not adopted GMT, several countries where we operate have enacted related legislation, and others are expected to follow. In January 2026, the Organisation for Economic Co-operation and Development published a side-by-side system, which excludes U.S. multi-national entities from certain aspects of the GMT. We will continue to monitor developments around this guidance. The impact of the GMT for the fiscal year ended March 31, 2026 was not material to our financial results.
In July 2025, the U.S. government enacted the One Big Beautiful Bill Act (OBBBA), which includes permanent extensions of certain Tax Cuts and Jobs Act provisions and changes to the international tax framework. The effects of these changes have been recognized in the period ending March 31, 2026. The impact of OBBBA for the fiscal year ended March 31, 2026 was not material to our financial results. We will continue to evaluate the broader implications of OBBBA, including the effects of future regulatory guidance and interpretations.
Liquidity and Capital Resources
We had $240.3 million in cash and cash equivalents at March 31, 2026, a decrease of $531.4 million from the March 31, 2025 balance.
Operating Activities
Net cash provided by operating activities was $962.1 million in fiscal 2026 primarily due to net income of $230.0 million, adjusted for non-cash and non-operating charges of $899.8 million and net cash outflows of $167.7 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities in fiscal 2026 include an increase in trade accounts receivable driven primarily by higher revenue and timing of shipments and collections, a decrease in income tax payable due to tax payments and settlements, a decrease in accrued liabilities and other long-term liabilities primarily due to cash refunded to our customers under certain LTSAs, offset by a decrease in inventories as a result of our efforts to balance manufacturing production, customer demand and inventory levels. Net cash provided by operating activities was $898.1 million in fiscal 2025 primarily due to net loss of $0.5 million, adjusted for non-cash and non-operating charges of $798.5 million and net cash inflows of $100.1 million from changes in our operating assets and liabilities.
Investing Activities
Net cash used in investing activities was $195.5 million for fiscal 2026 compared to $287.8 million for fiscal 2025. In fiscal 2026 and fiscal 2025, 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 $91.1 million and $126.0 million in fiscal 2026 and fiscal 2025, respectively. Capital expenditures were primarily for the selective expansion of production capacity and the addition of research and development equipment. Consistent with the slowing macroeconomic environment in fiscal 2025, we paused most of our factory expansion actions and reduced our planned capital investments through fiscal 2027. Our investments in equipment and facilities during the next 12 months are expected to be approximately $100.0 million. 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.
Financing Activities
Net cash used in financing activities was $1.30 billion for fiscal 2026 compared to $158.3 million for fiscal 2025. Significant transactions affecting our net financing cash flows included:
•in fiscal 2026, $1.20 billion of cash used to paydown our 4.25% 2025 Notes and $173.7 million of net proceeds generated from our Commercial Paper program, and $900.0 million of proceeds generated from the issuance of our 2026 Senior Convertible Debt, and
•in fiscal 2025, $1.45 billion of net proceeds from the issuances of our Series A Preferred Stock, and
•in fiscal 2025, $516.5 million of net cash used to pay down certain principal of our debt including settlement of our 2020 Convertible Debt, settlement of our 2025 Term Loan Facility, purchase of our capped call options, and
the repayment of our 0.983% 2024 Notes partially funded by proceeds from the issuances of our 4.900% 2028 Senior Notes, our 5.050% 2030 Senior Notes, our 2024 Senior Convertible Debt and our Commercial Paper, and
•in fiscal 2026 and fiscal 2025, we paid cash dividends to our common stockholders of $984.0 million and $975.7 million, respectively, and
•in fiscal 2026, we paid cash dividends to our preferred stockholders of $108.5 million, and
•in fiscal 2025, we repurchased shares of our common stock for $96.5 million.
In March 2025, we entered into a Second Amended and Restated Credit Agreement (the Second Amended and Restated Credit Agreement) pursuant to which the Credit Agreement, was amended and restated in its entirety. The Second Amended and Restated Credit Agreement provides for an unsecured revolving loan facility in an aggregate principal amount of up to $2.25 billion, with a $250.0 million foreign currency sublimit, a $25.0 million letter of credit sublimit and a $20.0 million swingline loan sublimit. The Second Amended and Restated Credit Agreement amended the maximum total leverage ratio financial covenant to the following: 5.50 to 1.00 for period ending March 31, 2025, 5.50 to 1.00 for period ending June 30, 2025, 6.25 to 1.00 for period ending September 30, 2025, 5.75 to 1.00 for period ending December 31, 2025, 4.75 to 1.00 for period ending March 31, 2026, 4.00 to 1.00 for period ending June 30, 2026, 3.75 to 1.00 for period ending September 30, 2026, and 3.50 to 1.00 for any such period ended after the Restatement Effective Date that is not a period ending during the Covenant Relief Period. The Covenant Relief Period means the period following the Restatement Effective Date to (but excluding) the earlier of (a) December 31, 2026 and (b) the date in which the Total Leverage Ratio for the most recently ended fiscal quarter shall not exceed 3.50 to 1.00 and certain other conditions are satisfied.
In September 2023, we established a Commercial Paper program under which we may issue short-term unsecured promissory notes. Pursuant to the Credit Agreement, the maximum principal amount outstanding at any time under the Commercial Paper program is $2.25 billion with a maturity of up to 397 days from the date of issue. The Commercial Paper is sold from time to time at a discount from par or alternatively, sold at par and bears interest rates that will vary based on market conditions and the time of issuance. Our intent is to reduce the amounts that would otherwise be available to borrow under our Revolving Credit Facility by the outstanding amount of Commercial Paper. As of March 31, 2026, the principal amount of our outstanding indebtedness was $5.54 billion. We had no outstanding borrowings under the Revolving Credit Facility at March 31, 2026 and at March 31, 2025. At March 31, 2026, we had $349.0 million outstanding principal amount of Commercial Paper compared to $175.0 million at March 31, 2025.
In March 2025, we issued 29.7 million Depositary Shares, representing approximately 1.5 million shares of our Series A Preferred Stock. The Series A Preferred Stock has a $1,000.00 per share liquidation preference and $0.001 per share par value. As a result of the transaction, we received cash proceeds of $1.45 billion, net of underwriting fees and other issuance costs.
Dividends and Share Repurchases
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. No shares were repurchased under this authorization fiscal 2026. In fiscal 2025, we repurchased approximately 1.0 million shares of our common stock for $90.0 million under this authorization. As of March 31, 2026, approximately $1.56 billion remained available for repurchases under the program. As of March 31, 2026, we held approximately 36.3 million shares as treasury shares. Any future repurchases of shares of our common stock will be evaluated 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 on our common stock have totaled approximately $8.61 billion. A quarterly dividend of $0.455 per share of common stock was declared on May 7, 2026 and will be paid on June 5, 2026 to stockholders of record as of May 22, 2026. We expect the aggregate cash dividend on our common stock for the June 2026 quarter to be approximately $246.9 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 maintain our level of quarterly cash dividends depending upon market conditions, our results of operations, and potential changes in tax laws.
With respect to shares of our Series A Preferred Stock, dividends are cumulative at an annual rate of 7.50% on the liquidation preference of $1,000.00 per share of Series A Preferred Stock. To date, our cumulative dividend payments on our Series A Preferred Stock have totaled approximately $108.5 million. A quarterly cash dividend of $18.750 per share of Series A Preferred Stock was declared on May 7, 2026 and will be paid on June 15, 2026 to the holders of Series A Preferred Stock of record as of June 1, 2026.
We believe that our existing sources of liquidity combined with cash generated from operations, borrowings under our Revolving Credit Facility and proceeds from issuance of our Commercial Paper 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 10. Leases", "Note 6. Debt" and "Note 12. 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 our Commercial Paper program or seek additional equity or debt financing from time to time to refinance our existing debt, maintain or expand our wafer fabrication and product assembly and test facilities, for cash dividends, for share repurchases or for acquisitions or other purposes. In addition, the holders of our 2024 Senior Convertible Debt can require us to repurchase such debt on June 1, 2027 if the price per share of our common stock is less than the conversion price of such debt on the applicable measurement date. Our intention is to finance any required repurchase of the 2024 Senior Convertible Debt by using availability under our Revolving Credit Facility, our Commercial Paper program or other debt or equity financing. The timing and amount of any such financing requirements will depend on a number of factors, including the maturity dates of our existing debt, our level of dividend payments on our common stock and Series A Preferred Stock, 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 plan to refinance our existing notes as they mature and we may from time to time seek to refinance certain of our other outstanding debt or Convertible Debt through issuances of new notes or convertible debt, term loans, Commercial Paper, 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 economic uncertainty, geopolitical conditions or military conflicts, tariffs, high interest rates, high inflation, instability in the banking sector, public health concerns, or other factors, and any additional equity financing or convertible debt financing would result in incremental ownership dilution to our existing stockholders.
Summarized Financial Information
The tables below present the summarized financial information on a combined basis for Microchip Technology Incorporated and the following subsidiaries of Microchip Technology Incorporated that provide guarantees of our Senior Notes: Atmel Corporation, Microchip Holding Corporation, Microchip Technology LLC, Silicon Storage Technology, Inc., Microsemi Corporation, and Microchip Storage Solutions LLC (such subsidiaries collectively, the Subsidiary Obligors). The debt securities are fully and unconditionally guaranteed by the aforementioned subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under Regulation S-X and is not intended to present our financial position or results of operations in accordance with generally accepted accounting principles as such principles are in effect in the U.S.
We have presented summarized financial information below for Microchip Technology Incorporated and the Subsidiary Obligors after the elimination of intercompany transactions and balances among Microchip Technology Incorporated and the Subsidiary Obligors and investments in any subsidiaries (in millions). The Subsidiary Obligors regularly sell goods and services to non-guarantor subsidiaries (Non-Guarantors) and the Subsidiary Obligors regularly purchase goods and services from Non-Guarantor through intercompany arrangements. The summarized financial information does not eliminate the effects of these intercompany arrangements and separately presents the net effect of all of the Subsidiary Obligors' transactions with Non-Guarantor for the financial measures presented below.
| March 31, | |||||||||||
| 2026 | 2025 | ||||||||||
| Current assets, excluding intercompany | $ | 243.3 | $ | 671.8 | |||||||
| Intercompany receivables from Non-Guarantors | 3,579.0 | 3,527.3 | |||||||||
| Goodwill and intangible assets | 4,595.3 | 4,586.8 | |||||||||
| Non-current assets, excluding intercompany | 1,127.6 | 1,213.6 | |||||||||
| Non-current intercompany receivables from Non-Guarantors | 179.8 | 181.6 | |||||||||
| Total assets | $ | 9,725.0 | $ | 10,181.1 | |||||||
| March 31, | |||||||||||
| 2026 | 2025 | ||||||||||
| Current liabilities, excluding intercompany | $ | 240.9 | $ | 314.9 | |||||||
| Intercompany payables due to Non-Guarantors | 6,583.8 | 6,095.1 | |||||||||
| Long-term debt | 5,496.4 | 5,630.4 | |||||||||
| Non-current liabilities, excluding intercompany | 919.6 | 959.6 | |||||||||
| Non-current intercompany payables due to Non-Guarantors | 2,113.0 | 2,116.2 | |||||||||
| Total liabilities | $ | 15,353.7 | $ | 15,116.2 | |||||||
| Fiscal Year Ended March 31, | |||||||||||
| 2026 | 2025 | ||||||||||
| Revenue, excluding intercompany | $ | 1,431.0 | $ | 1,365.3 | |||||||
| Revenue from Non-Guarantors | 250.3 | 400.2 | |||||||||
| Total revenue | $ | 1,681.3 | $ | 1,765.5 | |||||||
| Gross profit, excluding intercompany | 1,070.8 | 971.0 | |||||||||
| Gross loss from Non-Guarantors | (415.3) | (378.9) | |||||||||
| Total gross profit | $ | 655.5 | $ | 592.1 | |||||||
| Operating income, excluding intercompany | 582.3 | 483.0 | |||||||||
| Operating loss from Non-Guarantors | (415.3) | (378.9) | |||||||||
| Total operating income | $ | 167.0 | $ | 104.1 | |||||||
| Net income, excluding intercompany | 348.9 | 210.8 | |||||||||
| Net loss from Non-Guarantors | (429.2) | (402.8) | |||||||||
| Total net loss | $ | (80.3) | $ | (192.0) | |||||||
Recently Issued Accounting Pronouncements
Refer to "Note 1. Significant Accounting Policies" to our consolidated financial statements regarding recently issued accounting pronouncements.
Microchip Technology Incorporated published this content on May 21, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on May 21, 2026 at 20:42 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]