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Microchip Technology 10-Q 2011 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended December 31, 2010.
OR
For the transition period from __________ to __________
Commission File Number: 0-21184
 MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
2355 W. Chandler Blvd., Chandler, AZ 85224-6199
(480) 792-7200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's
Principal Executive Offices)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
(Do not check if a smaller reporting company)
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Item 1. Financial Statements
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in thousands, except share and per share amounts)
(unaudited)
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in thousands, except per share amounts)
(Unaudited)
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(in thousands)
(Unaudited)
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
(Unaudited)
The accompanying unaudited condensed consolidated financial statements include the accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries (the Company). All intercompany balances and transactions have been eliminated in consolidation. The Company owns 100% of the outstanding stock in all of its subsidiaries.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. With the exception of certain adjustments associated with the acquisition of Silicon Storage Technology, Inc. (SST), all such adjustments are, in the opinion of management, of a normal recurring nature. Certain information and footnote disclosures normally included in audited consolidated financial statements have been condensed or omitted pursuant to such SEC rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2010. The results of operations for the nine months ended December 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2011 or for any other period.
As further discussed in Note 3, on April 8, 2010, the Company completed its acquisition of SST and the Company's fiscal 2011 financial results include SST's results beginning April 9, 2010.
The Company adopted the provisions of Accounting Standards Codification (ASC) 810-10 (previously included in Financial Accounting Standard 167) on April 1, 2010. The Company noted no arrangements at April 1, 2010 which would be within the scope of ASC 810-10. Upon completing the acquisition of SST, the Company evaluated whether any of SST's relationships with other entities would result in those entities being consolidated under the variable-interest accounting guidance. Based on the Company's evaluation, this guidance had no impact on the Company's financial position, results of operations or cash flows.
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2009-13, Multiple Deliverable Revenue Arrangements (codified in ASC 605-25) in October 2009. This guidance is effective for fiscal periods beginning on or after June 15, 2010, with early adoption permitted. The new revenue recognition guidance is for arrangements that include both software and non-software related deliverables. This guidance requires entities to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of VSOE or other third party evidence of the selling price. Additionally, the guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
(3) Acquisition of Silicon Storage Technology, Inc.
On April 8, 2010, the Company acquired SST, a public company based in Sunnyvale, California, in a merger transaction for $3.05 per share, or a total of $353.8 million, which included $295.4 million of cash consideration for the outstanding shares of SST common stock, and $58.4 million of SST shares acquired by the Company on March 8, 2010. The fair value of the SST shares held by the Company on April 8, 2010 was equal to the fair value at March 8, 2010, the date the shares were acquired, and the Company did not recognize any gain or loss on such shares. The SST business acquired included a variety of different business units including a licensing business focused on opportunities in the embedded control market, a microcontroller business, a variety of memory businesses and a Wi-Fi business. The Company's primary reason for this acquisition was to gain access to SST's SuperFlash® technology and extensive patent portfolio, which it believes are critical building blocks for advanced microcontrollers.
The acquisition was accounted for under the acquisition method of accounting, with the Company identified as the acquirer, and the operating results of SST have been included in the Company's condensed consolidated financial statements as of the effective date of the acquisition. Under the acquisition method of accounting, the total purchase price was allocated to SST's net tangible assets and intangible assets based on their estimated fair values as of April 8, 2010. The excess purchase price over the value of the net tangible assets and intangible assets was recorded to goodwill. The Company has not completed its allocation of goodwill to its reporting segments.
None of the goodwill related to the SST acquisition is deductible for tax purposes. The Company retained an independent third-party appraiser to assist management in its valuation; however, the purchase price allocation has not been finalized. Completion of the valuation could result in adjustments to the carrying value of the assets acquired and liabilities assumed, the useful lives of intangible assets and residual amount allocated to goodwill. The remaining areas of the purchase price allocation may be subject to change as the allocation relates to accrued liabilities, deferred tax assets and long-term income taxes payable, purchased intangible assets and goodwill. The preliminary allocation of the purchase price is based on the best estimates of management and is subject to revision based on the final valuations and estimates of useful lives.
The table below represents the preliminary allocation of the purchase price to the acquired net assets based on their estimated fair values as of April 8, 2010, as well as the associated estimated useful lives of the acquired intangible assets at that date. There were no changes to the purchase price allocation in the three months ended December 31, 2010.
As of the date of acquisition, the gross contractual amount of trade accounts receivable acquired was $44.8 million.
Purchased intangible assets include core and developed technology, in-process research and development, trademarks and trade names, customer-related intangibles and acquisition-date backlog. The preliminary estimated fair values of the core and developed technology and in-process research and development were determined based on the present value of the expected cash flows to be generated by the respective existing technology or future technology. The core and developed technology intangible assets are being amortized on a technology-by-technology basis with the amortization recorded for each technology commensurate with the expected cash flows used in the initial determination of fair value. In-process research and development is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off.
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Trademarks and trade names include SST's corporate trade name as well as the SuperFlash trademark. The preliminary estimated fair value of the trademarks and trade names was determined based on the income approach, using the relief from royalty methodology. Trademarks and trade names are being amortized using the straight-line method, which management believes is materially consistent with the pattern of benefit to be realized by these assets.
Customer-related intangible assets consist of SST's contractual relationships and customer loyalty related to the distributor and end-customer relationships, and the preliminary fair values of the customer-related intangibles were determined based on the projected revenues for the licensing entity and the microcontroller entity. An analysis of expected attrition and revenue growth for existing customers was prepared from SST's historical customer information. A similar analysis was performed for the acquired intangible assets related to the business units held for sale. Customer relationships are being amortized in a manner consistent with the estimated cash flows associated with the existing customers and anticipated retention rates. Backlog relates to the value of orders not yet shipped by SST at the acquisition date, and the preliminary fair values were based on the estimated profit associated with those orders. Backlog related assets are being recognized commensurate with recognition of the revenue for the orders on which the backlog intangible assets were determined. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $2.0 million was established as a net deferred tax liability for the future amortization of the intangible assets.
Contingent liabilities were recorded in the amount of $13.0 million, as an adverse outcome was determined to be probable and estimable at the acquisition date. The Company was not able to determine the fair value of these contingencies, and as such, the amount recorded reflects the Company's estimate of the outcome of these matters. At December 31, 2010, there were no changes to the amount recognized at the acquisition date related to these contingencies. The amount recorded is presented within accrued liabilities.
The amount of continuing SST revenue and earnings included in the condensed consolidated statements of income for the period April 9, 2010 to September 30, 2010 was $114.9 million and $17.4 million, respectively. The amount of continuing SST revenue included in the condensed consolidated statements of income for the three months ended December 31, 2010 was $56.8 million. The amount of continuing SST revenue included in the condensed consolidated statements of income for the period April 9, 2010 to December 31, 2010 was $171.7 million. The operations of SST have been fully integrated into the Company’s operations as of October 1, 2010 and as such, cost of sales and operating expenses were no longer segregated in the three months ended December 31, 2010.
The following unaudited pro-forma consolidated results of operations for the three and nine-month periods ended December 31, 2010 and 2009, assume the SST acquisition occurred as of April 1 of each year and have been restated for the operations of SST that have been discontinued. The pro-forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2010 and April 1, 2009 or of results that may occur in the future (amounts in thousands):
(4) Discontinued Operations and Assets Held for Sale
Discontinued operations includes the following product families that were acquired in the acquisition of SST: NAND Drives, NAND controllers, Smart Card ICs, Combo Memory, Concurrent SuperFlash, Small-Sector Flash and many-time Programmable Flash memories and certain serial NOR Flash products from 512K to 64MB density in the geographic regions of Taiwan, China, Hong Kong, Singapore, Malaysia, Thailand, Indonesia, Vietnam and Philippines. These product lines have been marketed for sale since the acquisition of SST on April 8, 2010 based on management's decision regarding them not being a strategic fit into the Company's product portfolio. On May 21, 2010, the Company completed a transaction to sell the NAND Drives, NAND controllers, Smart Card ICs, Combo Memory, Concurrent SuperFlash, Small-Sector Flash and many-time Programmable Flash memories to Greenliant Systems Ltd. The sale price in this transaction was determined by management to represent fair value, and accordingly, no gain or loss was recognized on the sale of the net assets. In this sale, the Company disposed of
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approximately $23.6 million of assets held for sale, primarily comprised of inventory, property, plant and equipment, intangible assets and non-marketable securities. On July 8, 2010, the Company granted an exclusive limited license for the manufacture of certain Serial NOR-Flash products to Professional Computer Technology, Ltd. ("PCT"). The license to PCT is limited to the industry segments of optical disc drives, set top boxes, electronic books, video games, digital displays, DVD player/recorder, notebook computers, netbooks, desktop computers, PC monitors, mass storage devices, printers/scanners/copiers/faxes, PC-CAM, point of sale devices, graphic cards, servers/clients/workstations, and mobile phones. PCT has no license to sell these products to any other industry segment or geographic region other than those listed above. Certain multi-national customers are excluded from this license.
For financial statement purposes, the results of operations for these discontinued businesses have been segregated from those of the continuing operations and are presented in the Company's condensed consolidated financial statements as discontinued operations and the net assets of the remaining discontinued business have been presented as assets held for sale.
At the time of the acquisition, the Company determined that it would hold SST's SuperFlash Memory and RF businesses as assets held for sale, in addition to other businesses that the Company has sold since the acquisition date. After operating the SST business for two quarters, the Company found synergies between SST's RF business and the Company's wireless, microcontroller and analog businesses. On the memory side, after divesting the low margin business to PCT, the Company had substantially improved the gross margin for the rest of the SuperFlash Memory business. The Company also determined that running some volume on the memory business is critical to proving out the SuperFlash technology before it can be licensed. As a result, the Company decided to integrate the SuperFlash Memory and RF businesses of SST into the ongoing businesses of the Company during the second quarter of fiscal 2011.
The results of discontinued operations for the three and nine months ended December 31, 2010 are as follows (in thousands):
In the three months and nine months ended December 31, 2010, the Company had inventory write-downs of approximately $1.3 million and $3.6 million, respectively, related to discontinued operations.
Assets held for sale as of December 31, 2010 include a building in Macao being actively marketed for sale with a net book value of $1.1 million.
(5) Special Charges
During the three and nine months ended December 31, 2010, the Company incurred $0.6 million and $1.7 million, respectively, of severance-related and office closing costs associated with the acquisition of SST. See Note 3 for more information related to this acquisition.
During the nine months ended December 31, 2009, the Company agreed to the terms of a patent license with an unrelated third-party and signed an agreement on July 9, 2009. The patent license settled alleged infringement claims. The total payment made to the third-party in July 2009 was $1.4 million, $1.2 million of which was expensed in the first quarter of fiscal 2010 and the remaining $0.2 million was recorded as a prepaid royalty that was amortized over the remaining life of the patent, which expired in June 2010.
(6) Segment Information
In connection with the acquisition of SST, the Company re-evaluated its segment reporting, based on the nature of the products and services provided to customers, and the information provided to the Company's chief operating decision maker. Based on that evaluation, the Company determined its reporting segments include semiconductor products and technology licensing. The technology licensing segment is a result of the acquisition of SST, and thus for the three and nine months ended December 31, 2009, net sales and gross profit are solely attributable to the semiconductor product segment. The Company does not allocate operating expenses, interest income, interest expense, other income or expense, or provision for or benefit from income taxes to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is beneficial in evaluating segment performance. Additionally, the Company does not allocate assets to segments for internal reporting purposes as it does not manage its segments by such metrics.
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The following table represents revenues and gross profit for each segment (in thousands):
(7) Investments
The Company's investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to the Company's investment guidelines and market conditions. The following is a summary of available-for-sale and marketable equity securities at December 31, 2010 (amounts in thousands):
The following is a summary of available-for-sale and trading securities at March 31, 2010 (amounts in thousands):
At December 31, 2010, the Company's available-for-sale debt securities, and marketable equity securities are presented on the condensed consolidated balance sheets as short-term investments of $690.6 million and long-term investments of $381.8 million. At March 31, 2010, the Company’s available-for-sale debt securities, marketable equity securities and trading securities are presented on the condensed consolidated balance sheets as short-term investments of $722.2 million and long-term investments of $317.2 million.
At December 31, 2010, $12.9 million of the fair value of the Company's investment portfolio was invested in auction rate securities (ARS). With the continuing liquidity issues in the global credit and capital markets, the Company's ARS have experienced multiple failed auctions from September 2007 through the date of this report. While the Company continues to earn interest on these investments based on a pre-determined formula with spreads tied to particular interest rate indices, the estimated market value for these ARS no longer approximates the original purchase value.
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The fair value of the failed ARS of $12.9 million has been estimated based on market information and estimates determined by management and could change significantly based on market conditions. The Company evaluated the impairments in the value of these ARS, determining its intent to sell these securities prior to the recovery of its amortized cost basis resulted in the securities being other-than-temporarily impaired and has recognized impairment charges on these investments of $0.4 million and $1.3 million, respectively, in the three and nine months ended December 31, 2010, and impairment charges on these investments of $0.5 million and $2.2 million, respectively, in the three and nine months ended December 31, 2009.
The Company believes that, based on its current unrestricted cash, cash equivalents and short-term investment balances, the current lack of liquidity in the credit and capital markets for ARS will not have a material impact on its liquidity, cash flow or ability to fund its operations.
At December 31, 2010, the Company evaluated its investment portfolio and noted unrealized losses of $0.9 million on its debt securities, which were due to fluctuations in interest rates and credit market conditions. Management does not believe any of the unrealized losses represent other-than-temporary impairment based on its evaluation of available evidence as of December 31, 2010, except for the ARS described above. The Company's intent is to hold these investments until these assets are no longer impaired. For those investments not scheduled to mature until after December 31, 2010, such recovery is not anticipated to occur in the next year and these investments have been classified as long-term investments.
The amortized cost and estimated fair value of the available-for-sale securities at December 31, 2010, by maturity, excluding marketable equity securities of $53.6 million and corporate debt of $3.5 million, which have no contractual maturity, are shown below (amounts in thousands). Expected maturities can differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties, and the Company views its available-for-sale securities as available for current operations.
During the three and nine months ended December 31, 2010 and the nine months ended December 31, 2009, the Company had an immaterial amount of realized gains and losses from sales of available-for-sale securities. During the three months ended December 31, 2009, the Company had no realized gains or losses from sales of available-for-sale securities.
Marketable Equity Investments
The Company acquired investments in public companies as part of the SST acquisition valued at $47.1 million at the time of acquisition. These public companies are listed on the Taiwan Stock Exchange and include: King Yuan Electronics Company Limited (KYE); Insyde Software Corporation (Insyde); Powertech Technology, Incorporated (PTI); and Professional Computer Technology, Ltd. (PCT). During the quarter ended December 31, 2010, Apacer Technology, Inc. (Apacer) completed an Initial Public Offering on the Taiwan Stock Exchange and is now publicly traded. The Company reclassified this investment out of non-marketable equity investments to marketable equity investments resulting in an increase in the fair value of the marketable equity investments of $9.0 million as of December 31, 2010. As of the quarter ended December 31, 2010, approximately $0.3 million and $53.3 million of these investments have been included in short-term and long-term available-for-sale investments, respectively, based upon management's intent to hold such securities until recovery. Cash dividends and other distributions of earnings from the investees, if any, are included in other income at the date of record. The Company has classified the shares owned in these companies as marketable securities. As of December 31, 2010, the Company had an unrealized loss in other comprehensive income of $2.9 million on these marketable securities, which the Company has determined to be a temporary impairment.
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Non-marketable Equity Investments
The Company has certain investments in privately held companies with a carrying value of $19.3 million at December 31, 2010. As part of the acquisition of SST, the Company acquired certain investments in privately held companies with a carrying value of $29.7 million at the date of the acquisition. These investments had a carrying value of $17.1 million at December 31, 2010 as a result of sales of investments of $4.5 million and a reclassification to marketable equity investments of $8.1 million. The investments in privately held companies are accounted for using the cost or the equity method of accounting, as appropriate. Each period the Company evaluates whether an event or change in circumstances has occurred that may indicate an investment has been impaired. If upon further investigation of such events the Company determines the investment has suffered a decline in value that is other than temporary, the Company writes down the investment to its estimated fair value. At December 31, 2010, the Company determined there were no such impairments. These investments are included in other assets on the condensed consolidated balance sheet.
The following is a summary of the non-marketable equity investments at December 31, 2010 and March 31, 2010 (amounts in thousands):
The Company's non-marketable equity investments include an investment in Grace Semiconductor Manufacturing Corporation (GSMC), a privately held Cayman Islands company. GSMC has a wholly owned subsidiary, Grace, which is a wafer foundry with operations in Shanghai, China. The investment in GSMC had a fair-value of $15.2 million as of April 8, 2010, the acquisition date of SST. At December 31, 2010, the investment is valued at cost. The investment in GSMC includes Series D preferred shares valued at $14.4 million, common shares valued at $0.6 million and Series D options valued at $0.2 million. The Company does not have any long-term obligations to purchase products from GSMC and is not obligated to provide GSMC with any additional financing.
(8) Fair Value Measurements
Accounting rules for fair value clarify that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis at December 31, 2010 are as follows (amounts in thousands):
Assets and liabilities measured at fair value on a recurring basis at March 31, 2010 are as follows (amounts in thousands):
For Level 3 valuations, the Company estimated the fair value of its ARS based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security. The estimated fair values that are categorized as Level 3 as well as the marketable equity securities could change significantly based on future market conditions.
The following tables present a reconciliation for all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2010, and the three and nine months ended December 31, 2009 (amounts in thousands):
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Assets and liabilities measured at fair value on a recurring basis are presented/classified on the condensed consolidated balance sheets at December 31, 2010 as follows (amounts in thousands):
Assets and liabilities measured at fair value on a recurring basis are presented/classified in the consolidated balance sheets at March 31, 2010 as follows (amounts in thousands):
Financial Assets Not Recorded at Fair Value on a Recurring Basis
The Company's non-marketable equity and cost method investments are not recorded at fair value on a recurring basis. These investments were recorded at fair-value as of April 8, 2010, the date of the SST acquisition, and are monitored on a quarterly basis for impairment charges. The investments will only be recorded at fair value when an impairment charge is recognized. These investments are included in other assets on the condensed consolidated balance sheet. No non-recurring fair value measurements were recorded during the period. See further discussion of non-marketable investments in Note 7.
(9) Fair Value of Financial Instruments
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months. The carrying amount of short-term and long-term investments approximates fair value as the securities are marked to market as of each balance sheet date with any unrealized gains and losses reported in stockholders' equity. The carrying amount of equity and cost-method investments approximates fair value at December 31, 2010 due to the short period of time that has elapsed since the recognition of these assets at fair value. There were no equity and cost–method investments at March 31, 2010. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the amounts. The fair value of the Company's junior subordinated convertible debentures was $1,418.8 million at December 31, 2010, based on the trading price of the bonds, compared to the carrying value of $345.6 million. See Note 15 for additional information regarding the carrying value of the Company's junior subordinated convertible debentures.
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(10) Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
The components of inventories consist of the following (amounts in thousands):
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.
(12) Intangible Assets and Goodwill
Intangible assets consist of the following (amounts in thousands):
During the three-month period ended December 31, 2010, the Company completed an acquisition with total purchase consideration of approximately $5.5 million, including contingent consideration valued at approximately $2.0 million. This purchase resulted in the recognition of $4.3 million of intangible assets, comprised of $2.2 million of developed technology, $0.8 million of in-process technology, $0.9 million of customer related intangible assets and $0.4 million of covenants not to compete.
The Company amortizes intangible assets over their expected useful lives, which range between 1 and 20 years. In the nine-month period ended December 31, 2010, the Company acquired $33.6 million of developed technology which has a weighted average amortization period of 10 years, $14.0 million of customer-related intangible assets with an amortization period of 10 years, $1.7 million of trademarks and trade names with an amortization period of 5 years, $2.3 million of intangible assets related to backlog with an amortization period of six months to one year, $1.7 million of in-process technology which will begin amortization once the technology reaches technological feasibility, and $0.4 million of intangible assets related to covenants not to compete with an amortization of three years. The following is an expected amortization schedule for the intangible assets for the remainder of fiscal year 2011 through fiscal year 2015, absent any future acquisitions or impairment charges (amounts in thousands):
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Amortization expense attributed to intangible assets was $3.5 million and $10.2 million for the three and nine months ended December 31, 2010, respectively, and $0.9 million and $2.7 million for the three and nine months ended December 31, 2009, respectively. The Company found no indication of impairment of its intangible assets for the nine months ended December 31, 2010.
Goodwill activity for the nine months ended December 31, 2010 was as follows (amounts in thousands):
The Company is still in the process of allocating goodwill to its reporting units as it relates to the acquisition of SST.
In the quarter ended December 31, 2010, the Company made contingent consideration payments to the previous owners of R&E International in the amount of $11.7 million. The Company acquired R&E International on March 31, 2009. The contingent consideration payment resulted in the de-recognition of negative goodwill in the amount of approximately $2.4 million recorded on the acquisition date and the recognition of approximately $9.3 million of goodwill which was allocated to the semiconductor products reporting unit.
The Company found no indication of impairment on its goodwill balance during the nine-month periods ended December 31, 2010 or 2009, and, absent future indicators of impairment, the annual impairment test will be performed in the fiscal fourth quarter.
(13) Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in thousands):
Depreciation expense attributed to property, plant and equipment was $23.6 million and $69.9 million for the three and nine months ended December 31, 2010, respectively, and $21.8 million and $65.0 million for the three and nine months ended December 31, 2009, respectively.
(14) Income Taxes
The provision for income taxes reflects tax on foreign earnings and federal and state tax on U.S. earnings. The Company had an effective tax rate from continuing operations of 12.4% for the nine-month period ended December 31, 2010 and an effective tax rate of 8.2% for the nine-month period ended December 31, 2009. The Company's effective tax rate is lower than statutory rates in the U.S. due primarily to its mix of earnings in foreign jurisdictions with lower tax rates, changes in tax regulations and the reinstatement of the R&D tax credit in the quarter ended December 31, 2010. In the nine-month period ended December 31, 2010, the Company's effective tax rate was lowered as a result of a tax settlement with the I.R.S. in the three months ended December 31, 2009.
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At March 31, 2010, the Company had $57.1 million of unrecognized tax benefits. Unrecognized tax benefits increased by $50.5 million in the nine months ended December 31, 2010 compared to March 31, 2010 primarily as a result of the unrecognized tax benefits acquired in the acquisition of SST, the ongoing accrual for uncertain tax positions and the accrual of deficiency interest on these positions.
The Company files U.S. federal, U.S. state, and foreign income tax returns. For U.S. federal, and in general for U.S. state tax returns, the fiscal 2006 through fiscal 2010 tax years remain open for examination by tax authorities. The I.R.S. is currently auditing the Company's fiscal years ended March 31, 2006, 2007 and 2008. For foreign tax returns, the Company is generally no longer subject to income tax examinations for years prior to fiscal 2002.
The Company recognizes liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on its estimate of whether, and the extent to which, additional tax payments are more likely than not. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.
The Company believes that it maintains adequate reserves to offset any potential income tax liabilities that may arise upon final resolution of matters for open tax years. If such reserve amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed necessary. If such amounts prove to be less than an ultimate assessment, a future charge to expense would be recorded in the period in which the assessment is determined. Although the timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.
(15) 2.125% Junior Subordinated Convertible Debentures
The Company's $1.15 billion principal amount of 2.125% junior subordinated convertible debentures due December 15, 2037, are subordinated in right of payment to any future senior debt of the Company and are effectively subordinated in right of payment to the liabilities of the Company's subsidiaries. The debentures are convertible, subject to certain conditions, into shares of the Company's common stock at an initial conversion rate of 29.2783 shares of common stock per $1,000 principal amount of debentures, representing an initial conversion price of approximately $34.16 per share of common stock. As of December 31, 2010, none of the conditions allowing holders of the debentures to convert had been met. As a result of cash dividends paid since the issuance of the debentures, the conversion rate has been adjusted to 34.4383 shares of common stock per $1,000 of principal amount of debentures, representing a conversion price of approximately $29.04 per share of common stock.
As the debentures can be settled in cash upon conversion, for accounting purposes, the debentures were bifurcated into a liability component and an equity component, which are initially recorded at fair value. The carrying value of the equity component at December 31, 2010 and at March 31, 2010 was $822.4 million. The estimated fair value of the liability component of the debentures at the issuance date was $327.6 million, resulting in a debt discount of $822.4 million. The unamortized debt discount was $803.6 million at December 31, 2010 and $808.7 million at March 31, 2010. The carrying value of the debentures was $345.6 million at December 31, 2010 and $340.7 million at March 31, 2010. The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 27 years. In the three and nine months ended December 31, 2010, the Company recognized $1.7 million and $5.1 million, respectively, in non-cash interest expense related to the amortization of the debt discount. In the three and nine months ended December 31, 2009, the Company recognized $1.6 million and $4.7 million, respectively, in non-cash interest expense related to the amortization of the debt discount. The Company recognized $6.1 million and $18.3 million of interest expense related to the 2.125% coupon on the debentures in the three and nine months ended December 31, 2010 and 2009, respectively.
The debentures also include certain embedded features related to the contingent interest payments, the Company making specific types of distributions (e.g., extraordinary dividends), the redemption feature in the event of changes in tax law, and penalty interest in the event of a failure to maintain an effective registration statement. These features qualify as derivatives and are bundled as a compound embedded derivative that is measured at fair value. The fair value of the derivative as of December 31, 2010 was $0.4 million, compared to the value at September 30, 2010 and March 31, 2010 of $0.7 million. These changes in the fair value of the derivatives resulted in a reduction of interest expense in the three and nine-month periods ended December 31, 2010 of approximately $0.3 million. The fair value of the derivatives as of December 31, 2009 and September 30, 2009 was $0.6 million, compared to the value at March 31, 2009 of $0.5 million. These changes in the fair value of the derivatives resulted in an increase in interest expense in the nine-month period ending December 31, 2009 of $0.1 million. The balance of the debentures on the Company's condensed consolidated balance sheet at December 31, 2010 of $345.6 million includes the fair value of the embedded derivative.
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(16) Contingencies
In the ordinary course of the Company's business, it is involved in a limited number of legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. The Company also periodically receives notifications from various third parties alleging infringement of patents, intellectual property rights or other matters. With respect to pending legal actions to which the Company is a party, although the outcomes of these actions are not generally determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations. Litigation relating to the semiconductor industry is not uncommon, and the Company is, and from time to time has been, subject to such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
The Company's technology license agreements generally include an indemnification clause that indemnifies the licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark or trade secret infringement by the Company's proprietary technology. The terms of these guarantees approximate the terms of the technology license agreements, which typically range from five to ten years. The Company's current license agreements expire from 2011 through 2030. The possible amount of future payments the Company could be required to make based on agreements that specify indemnification limits, if such indemnifications were required on all of these agreements, is approximately $85 million. There are some licensing agreements in place that do not specify indemnification limits. The Company had not recorded any liabilities related to these indemnification obligations as of December 31, 2010.
(17) Derivative Instruments
The Company has international operations and is thus subject to foreign currency rate fluctuations. To manage the risk of changes in foreign currency rates, the Company periodically enters into derivative contracts comprised of foreign currency forward contracts to hedge its asset and liability foreign currency exposure and a portion of its foreign currency operating expenses. Approximately 99% of the Company's sales are U.S. Dollar denominated. To date, the exposure related to foreign exchange rate volatility has not been material to the Company's operating results. As of December 31, 2010 and March 31, 2010, the Company had no foreign currency derivatives outstanding. The Company recognized an immaterial amount of net realized losses on foreign currency derivatives in the three months ended December 31, 2010 and an immaterial amount of net realized gains on foreign currency derivatives in the nine months ended December 31, 2010 and the three and nine-month periods ended December 31, 2009.
Comprehensive income consists of net income offset by net unrealized gains and losses on available-for-sale investments. The components of other comprehensive income and related tax effects were as follows (amounts in thousands):
Comprehensive income was $101.8 million and $293.2 million for the three and nine-month periods ended December 31, 2010, respectively, and $67.8 million and $139.7 million for the three and nine-month periods ended December 31, 2009, respectively.
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(19) Employee Benefit Plans
Share-Based Compensation Expense
The following table presents the details of the Company's share-based compensation expense (amounts in thousands):
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