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Microchip Technology Announces Financial Results for Third Quarter Fiscal Year 2014

CHANDLER, Ariz. — (BUSINESS WIRE) — January 30, 2014 — Microchip Technology Incorporated (NASDAQ: MCHP), a leading provider of microcontroller, mixed-signal, analog and Flash-IP solutions, today reported results for the three months ended December 31, 2013 as summarized in the following table:

   
(in millions, except earnings per diluted share and percentages)     Three Months Ended December 31, 2013
      GAAP1    

% of Net
Sales

   

Non-
GAAP1

   

% of Net
Sales

Net Sales     $482.4           $482.4      
Gross Margin     $282.7     58.6%     $284.6     59.0%
Operating Income     $116.9     24.2%     $153.8     31.9%

Other Expense (including Gains/Losses on Equity Method Investments)

    $4.3           $4.5      
Income Tax Expense     $7.2           $16.4      
Net Income     $105.4     21.9%     $132.9     27.5%
Earnings per Diluted Share     48 cents           61 cents      

1 See the “Use of Non-GAAP Financial Measures” section of this release.

 

Consolidated net sales for the third quarter of fiscal 2014 were $482.4 million, down 2.1% sequentially from net sales of $492.7 million in the immediately preceding quarter, and up 15.9% from net sales of $416.0 million in the prior year’s third fiscal quarter. Consolidated GAAP net income for the third quarter of fiscal 2014 was $105.4 million, or 48 cents per diluted share, up from a GAAP net income of $99.8 million, or 46 cents per diluted share, in the immediately preceding quarter, and up from GAAP net income of $10.2 million, or 5 cents per diluted share, in the prior year’s third fiscal quarter.

Consolidated non-GAAP net income for the third quarter of fiscal 2014 was $132.9 million, or 61 cents per diluted share, down 2.6% from non-GAAP net income of $136.4 million, or 63 cents per diluted share, in the immediately preceding quarter, and up 57.2% from non-GAAP net income of $84.5 million, or 41 cents per diluted share, in the prior year’s third fiscal quarter. For the third quarters of fiscal 2014 and fiscal 2013, our non-GAAP results exclude the effect of share-based compensation, expenses related to our acquisition activities (including intangible asset amortization, inventory valuation costs, severance costs, and legal and other general and administrative expenses associated with acquisitions), non-cash interest expense on our convertible debentures, a gain recognized on a strategic investment in a company we acquired during the third quarter of fiscal 2014, and non-recurring tax events. A reconciliation of our non-GAAP and GAAP results is included in this press release.

Microchip also announced today that its Board of Directors declared a quarterly cash dividend on its common stock of 35.5 cents per share. The quarterly dividend is payable on March 7, 2014 to stockholders of record on February 21, 2014.

“We were pleased with our execution and financial results in the December quarter. Looking at the December 2013 quarter compared to the year ago quarter, net sales were up 15.9% and reflected our continued market share gains in our strategic product lines,” said Steve Sanghi, President and CEO. “Our net sales and non-GAAP earnings per share exceeded the mid-point of our guidance given on December 3, 2013.”

Mr. Sanghi added, “We had two key announcements for our 32-bit products during the December quarter. The first was the introduction of our PIC32MZ family of products that have the highest computation performance of any microcontroller in their category as well as the best software efficiency. The second was the introduction of our MPLAB Harmony integrated software platform, which is the industry’s first software framework to integrate both internal and third party middleware, drivers, peripheral libraries and real time operating systems which simplifies and accelerates our customers’ development process. Both of these introductions have received broad industry accolades and customer acceptance which bodes well for Microchip’s future growth in this market.”

“Microcontroller net sales were up 17.8% in the December quarter compared to the year ago quarter,” said Ganesh Moorthy, Chief Operating Officer. “16-bit and 32-bit microcontroller net sales were up 27.9% and 29.5% respectively, in the December quarter compared to the year ago quarter. Our microcontroller results continue to outperform the industry and we are gaining significant market share.”

Rich Simoncic, Vice President, Analog and Interface Products Division, said, “Our analog net sales grew 0.4% sequentially in the December quarter, the 9th consecutive quarter of sequential growth, achieving a new record, and continues to perform exceptionally well. Analog net sales were up 16.7% in the third quarter from the year ago quarter. Analog net sales represented 22.6% of Microchip’s overall net sales in the December quarter. Our franchise continues to be one of the highest performers in the industry.”

Eric Bjornholt, Microchip’s Chief Financial Officer, said, “We had strong free cash flow generation in the December quarter of $110.3 million prior to our dividend payment. The dividend that we announced today marks the 40th occasion that we have increased our dividend payment, and cumulative dividends paid are over $2.1 billion.”

Mr. Sanghi concluded, “We entered the March quarter with a stronger backlog position than we had entering the December quarter. The March quarter is adversely impacted by the Chinese New Year in Asia but is typically quite strong in Europe. Taking the global economic picture and these factors into consideration we expect Microchip’s total net sales in the March quarter to be flat to up 3% sequentially.”

Microchip’s Recent Highlights:

Fourth Quarter Fiscal Year 2014 Outlook:

The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially.

   
Microchip Consolidated Guidance
      GAAP    

Non-GAAP
Adjustments

    Non-GAAP1
                   
Net Sales     $482.4 to $496.8 million           $482.4 to $496.8 million
Gross Margin2     58.55% to 58.75%     $2.2 million     59.0% to 59.2%
Operating Expenses2     33.45% to 33.85%     $32.1 to $33.0 million     26.8% to 27.2%
Other Expense     $7.8 million     $2.3 million     $5.5 million
Income Tax Expense     11.8% to 12.8%     $2.4 to $2.7 million     10.5% to 11.5%
Net Income     $97.1 to $104.0 million     $33.8 to $35.2 million     $130.9 to $139.2 million

Diluted Common Shares
Outstanding3

   

Approximately 221.7
million shares

   

Approximately 0.6
million shares

   

Approximately 221.1
million shares

Earnings per Diluted Share     43 to 47 cents     Approximately 16 cents     59 to 63 cents

1 See the “Use of Non-GAAP Financial Measures” section of this release.

2 Earnings per share have been calculated based on the diluted shares outstanding of Microchip on a consolidated basis.

3 See Footnote 2 under the “Use of Non-GAAP Financial Measures” section of this release.

       
 

1

Use of Non-GAAP Financial Measures: Our Non-GAAP adjustments, where applicable, include the effect of share-based compensation, expenses related to our acquisition activities (including intangible asset amortization, inventory valuation costs, restructuring costs, severance costs, earn-out adjustments and legal and other general and administrative expenses associated with acquisitions), and non-cash interest expense on our convertible debentures, gains on strategic investments, the related income tax implications of these items and nonrecurring tax events.

 
We are required to estimate the cost of certain forms of share-based compensation, including employee stock options, restricted stock units and our employee stock purchase plan, and to record a commensurate expense in our income statement. Share-based compensation expense is a non-cash expense that varies in amount from period to period and is affected by the price of our stock at the date of grant. The price of our stock is affected by market forces that are difficult to predict and are not within the control of management. The non-GAAP adjustments related to the impact of our acquisitions, gains on strategic investments, nonrecurring tax events and a portion of our interest expense related to our convertible debentures are either non-cash expenses or non-recurring expenses related to such transactions. Accordingly, management excludes all of these items from its internal operating forecasts and models.
 
We are using non-GAAP net sales, non-GAAP gross profit, non-GAAP gross profit percentage, non-GAAP operating expenses in dollars and as a percentage of sales including non-GAAP research and development expenses and non-GAAP selling, general and administrative expenses, non-GAAP operating income, non-GAAP other expense, net, non-GAAP income tax/tax rate, non-GAAP net income, and non-GAAP diluted earnings per share which exclude the items noted in the immediately preceding paragraph, as applicable, to permit additional analysis of our performance.
 

Management believes these non-GAAP measures are useful to investors because they enhance the understanding of our historical financial performance and comparability between periods. Many of our investors have requested that we disclose this non-GAAP information because they believe it is useful in understanding our performance as it excludes non-cash and other charges that many investors feel may obscure our underlying operating results. Management uses these non-GAAP measures to manage and assess the profitability of our business. Specifically, we do not consider such items when developing and monitoring our budgets and spending. As described above, the economic substance behind our decision to exclude such items relates either to these charges being non-cash in nature, or to the one-time nature of the events. Our determination of the above non-GAAP measures might not be the same as similarly titled measures used by other companies, and it should not be construed as a substitute for amounts determined in accordance with GAAP. There are limitations associated with using non-GAAP measures, including that they exclude financial information that some may consider important in evaluating our performance. Management compensates for this by presenting information on both a GAAP and non-GAAP basis for investors and providing reconciliations of the GAAP and non-GAAP results.

 

2

Diluted Common Shares Outstanding can vary for, among other things, the trading price of our common stock, the actual exercise of options or vesting of restricted stock units, the potential for incremental dilutive shares from our convertible debentures (additional information regarding our share count is available in the investor relations section of our website under the heading “Supplemental Financial Information”), and the repurchase or the issuance of stock. The diluted common shares outstanding presented in the guidance table above assumes an average Microchip stock price in the March 2014 quarter of $45 per share (however, we make no prediction as to what our actual share price will be for such period or any other period and we cannot estimate what our stock option exercise activity will be during the quarter).

 

3

Generally, gross margin fluctuates over time, driven primarily by the mix of microcontrollers, analog products and memory products sold and licensing revenue; variances in manufacturing yields; fixed cost absorption; wafer fab loading levels; inventory reserves; pricing pressures in our non-proprietary product lines; and competitive and economic conditions. Operating expenses fluctuate over time, primarily due to net sales and profit levels.

 
 
 
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(Unaudited)
               
 
 

Three Months Ended
December 31,

Nine Months Ended
December 31,

2013     2012 2013 2012
 
Net sales $ 482,372 $ 416,047 $ 1,437,833 $ 1,151,479
Cost of sales 199,652   215,619   599,676   552,059  
Gross profit 282,720 200,428 838,157 599,420
 
Operating expenses:
Research and development 76,341 71,377 227,680 184,285
Selling, general and administrative 66,856 69,368 201,934 196,727
Amortization of acquired intangible assets 21,804 39,711 73,225 71,615
Special charges 801   2,559   2,491   24,953  
165,802   183,015   505,330   477,580  
 
Operating income 116,918 17,413 332,827 121,840
Gains (losses) on equity method investments 150 (229 ) (211 ) (382 )
Other expense, net (4,480 ) (7,492 ) (18,486 ) (18,783 )
 
Income before income taxes 112,588 9,692 314,130 102,675
Income tax provision (benefit) 7,187   (481 ) 30,344   34,976  
 
Net income $ 105,401   $ 10,173   $ 283,786   $ 67,699  
 
Basic net income per common share $ 0.53   $ 0.05   $ 1.43   $ 0.35  
Diluted net income per common share $ 0.48   $ 0.05   $ 1.31   $ 0.33  
 
Basic common shares outstanding 198,759   194,958   197,845   194,157  
Diluted common shares outstanding 219,089   204,405   215,943   204,553  
 
 
 
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

         
 
ASSETS
 
December 31, March 31,
2013 2013
(Unaudited)
Cash and short-term investments $ 1,307,402 $ 1,578,597
Accounts receivable, net 224,273 229,955
Inventories 274,629 242,334
Other current assets 162,724   185,484
Total current assets 1,969,028 2,236,370
 
Property, plant & equipment, net 520,565 514,544
Long-term investments 723,925 257,450
Other assets 789,590   843,041
 
Total assets $ 4,003,108   $ 3,851,405
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Accounts payable and other current liabilities $ 158,926 $ 202,659
Short-term borrowings 9,409 -
Deferred income on shipments to distributors 143,315   138,952
Total current liabilities 311,650 341,611
 
Long-term line of credit 300,000 620,000
Long-term borrowings, net 340,444 -
Convertible debentures 369,618 363,385
Long-term income tax payable 179,246 182,723
Deferred tax liability 388,620 388,250
Other long-term liabilities 38,422 21,966
 
Stockholders’ equity 2,075,108   1,933,470
 
Total liabilities and stockholders’ equity $ 4,003,108   $ 3,851,405
 
 
 
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(in thousands except per share amounts and percentages)
(Unaudited)
                   
 
RECONCILIATION OF GAAP NET SALES TO NON-GAAP NET SALES
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Net sales, as reported $ 482,372 $ 416,047 $ 1,437,833 $ 1,151,479
Distributor revenue recognition adjustment -   -   -   24,748  
Non-GAAP net sales $ 482,372   $ 416,047   $ 1,437,833   $ 1,176,227  
 
RECONCILIATION OF GAAP GROSS PROFIT TO NON-GAAP GROSS PROFIT
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Gross profit, as reported $ 282,720 $ 200,428 $ 838,157 $ 599,420
Distributor revenue recognition adjustment - - - 15,868
Share-based compensation expense 1,841 1,834 5,674 5,758
Acquisition-related acquired inventory valuation and other costs 42   30,808   42   54,958  
Non-GAAP gross profit $ 284,603   $ 233,070   $ 843,873   $ 676,004  
Non-GAAP gross profit percentage 59.0 % 56.0 % 58.7 % 57.5 %
 
RECONCILIATION OF GAAP RESEARCH AND DEVELOPMENT EXPENSES TO NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Research and development expenses, as reported $ 76,341 $ 71,377 $ 227,680 $ 184,285
Share-based compensation expense (6,141 ) (6,172 ) (18,762 ) (16,562 )
Acquisition-related costs -   -   -   (17 )
Non-GAAP research and development expenses $ 70,200   $ 65,205   $ 208,918   $ 167,706  
Non-GAAP research and development expenses as a percentage of net sales 14.6 % 15.7 % 14.5 % 14.3 %
 
RECONCILIATION OF GAAP SELLING, GENERAL AND ADMINISTRATIVE EXPENSES TO NON-GAAP SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Selling, general and administrative expenses, as reported $ 66,856 $ 69,368 $ 201,934 $ 196,727
Share-based compensation expense (5,737 ) (6,114 ) (16,939 ) (22,339 )
Acquisition-related costs (503 ) (1,035 ) (1,774 ) (6,054 )
Non-GAAP selling, general and administrative expenses $ 60,616   $ 62,219   $ 183,221   $ 168,334  
Non-GAAP selling, general and administrative expenses as a percentage of net sales 12.6 % 15.0 % 12.7 % 14.3 %
 
RECONCILIATION OF GAAP OPERATING EXPENSES TO NON-GAAP OPERATING EXPENSES
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Operating expenses, as reported $ 165,802 $ 183,015 $ 505,330 $ 477,580
Share-based compensation expense (11,878 ) (12,286 ) (35,701 ) (38,901 )
Acquisition-related costs (503 ) (1,035 ) (1,774 ) (6,071 )
Amortization of acquired intangible assets (21,804 ) (39,711 ) (73,225 ) (71,615 )
Special charges (801 ) (2,559 ) (2,491 ) (24,953 )
Non-GAAP operating expenses $ 130,816   $ 127,424   $ 392,139   $ 336,040  
Non-GAAP operating expenses as a percentage of net sales 27.1 % 30.6 % 27.3 % 28.6 %
 
RECONCILIATION OF GAAP OPERATING INCOME TO NON-GAAP OPERATING INCOME
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Operating income, as reported $ 116,918 $ 17,413 $ 332,827 $ 121,840
Distributor revenue recognition adjustment - - - 15,868
Share-based compensation expense 13,719 14,120 41,375 44,659
Acquisition-related acquired inventory valuation and other costs 545 31,843 1,816 61,029
Amortization of acquired intangible assets 21,804 39,711 73,225 71,615
Special charges 801   2,559   2,491   24,953  
Non-GAAP operating income $ 153,787   $ 105,646   $ 451,734   $ 339,964  
Non-GAAP operating income as a percentage of net sales 31.9 % 25.4 % 31.4 % 28.9 %
 
RECONCILIATION OF GAAP OTHER EXPENSE, NET TO NON-GAAP OTHER EXPENSE, NET
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Other expense, net, as reported $ (4,480 ) $ (7,492 ) $ (18,486 ) $ (18,783 )
Convertible debt non-cash interest expense 2,286 2,089 6,682 6,106
Gain on shares of acquired company (2,438 ) -   (2,438 ) -  
Non-GAAP other expense, net $ (4,632 ) $ (5,403 ) $ (14,242 ) $ (12,677 )
Non-GAAP other expense, net, as a percentage of net sales -1.0 % -1.3 % -1.0 % -1.1 %
 
RECONCILIATION OF GAAP INCOME TAX PROVISION (BENEFIT) TO NON-GAAP INCOME TAX PROVISION
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Income tax provision (benefit), as reported $ 7,187 $ (481 ) $ 30,344 $ 34,976
Income tax rate, as reported 6.4 %

-5.0

% 9.7 % 34.1 %
Distributor revenue recognition adjustment - - - 3,404
Share-based compensation expense 1,510 2,755 4,501 7,496
Acquisition-related acquired inventory valuation costs, intangible asset amortization and other costs 392 7,416 1,172 12,803
Special charges 300 1,367 933 12,843
Convertible debt non-cash interest expense 856 784 2,502 2,291
Non-recurring tax events 6,172   3,645   8,167   (26,071 )
Non-GAAP income tax provision $ 16,417   $ 15,486   $ 47,619   $ 47,742  
Non-GAAP income tax rate 11.0 % 15.5 % 10.9 % 14.6 %
 
RECONCILIATION OF GAAP NET INCOME AND GAAP DILUTED NET INCOME PER SHARE TO NON-GAAP NET INCOME AND NON-GAAP DILUTED NET INCOME PER SHARE
 
Three Months Ended Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Net income, as reported $ 105,401 $ 10,173 $ 283,786 $ 67,699
Distributor revenue recognition adjustment, net of tax effect - - - 12,464
Share-based compensation expense, net of tax effect 12,209 11,365 36,874 37,163
Acquisition-related acquired inventory valuation costs, intangible asset amortization and other costs, net of tax effect 21,957 64,138 73,869 119,841
Special charges, net of tax effect 501 1,192 1,558 12,110
Gain on shares of acquired company (2,438 ) - (2,438 ) -
Convertible debt non-cash interest expense, net of tax effect 1,430 1,305 4,180 3,815
Non-recurring tax events (6,172 ) (3,645 ) (8,167 ) 26,071  
Non-GAAP net income $ 132,888   $ 84,528   $ 389,662   $ 279,163  
Non-GAAP net income as a percentage of net sales 27.5 % 20.3 % 27.1 % 23.7 %
 
Diluted net income per share, as reported $ 0.48   $ 0.05   $ 1.31   $ 0.33  
Non-GAAP diluted net income per share $ 0.61   $ 0.41   $ 1.81   $ 1.37  
Diluted common shares outstanding, as reported 219,089   204,405   215,943   204,553  
Diluted common shares outstanding Non-GAAP 218,371   204,123   215,251   204,231  
 
 

Microchip will host a conference call today, January 30, 2014 at 5:00 p.m. (Eastern Time) to discuss this release. This call will be simulcast over the Internet at www.microchip.com. The webcast will be available for replay until February 6, 2014.

A telephonic replay of the conference call will be available at approximately 8:00 p.m. (Eastern Time) January 30, 2014 and will remain available until 5:00 p.m. (Eastern Time) on February 6, 2014. Interested parties may listen to the replay by dialing 719-457-0820 and entering access code 3532700.

Cautionary Statement:

The statements in this release relating to our continued market share gains in strategic product lines, 32-bit product introductions boding well for our future growth, our microcontroller results continuing to outperform the industry, gaining significant microcontroller market share, our analog products continuing to perform exceptionally well, our analog franchise continuing to be one of the highest performers in the industry, adverse impact of Chinese New Year and typically strong conditions in Europe, the global economic picture and factors, expecting net sales in the March quarter to be flat to up 3% sequentially, our fourth quarter fiscal 2014 guidance (GAAP and Non-GAAP as applicable) including net sales, gross margin, operating expenses, other expense, income tax expense, net income, diluted common shares outstanding, earnings per diluted share, inventory days, ability to continue to service our customers with very short lead times while allowing us to control capital expenditures, capital expenditures for the March 2014 quarter and for fiscal 2014, selectively investing to support the expected growth of our new products and technologies, net cash generation and assumed average stock price in the March 2014 quarter are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause our actual results to differ materially, including, but not limited to: any continued economic uncertainty due to U.S. budgetary, debt ceiling or other issues, any unexpected fluctuations or weakness in the U.S. or global economies, changes in demand or market acceptance of our products and the products of our customers; the mix of inventory we hold and our ability to satisfy short-term orders from our inventory; changes in utilization of our manufacturing capacity and our ability to effectively manage our production levels; competitive developments including pricing pressures; the level of orders that are received and can be shipped in a quarter; the level of sell-through of our products through distribution; changes or fluctuations in customer order patterns and seasonality; foreign currency effects on our business; our ability to continue to realize the expected benefits of our acquisitions; the impact of any other significant acquisitions that we may make; our ability to obtain a sufficient supply of wafers from third party wafer foundries and the cost of such wafers, the costs and outcome of any current or future tax audit or any litigation involving intellectual property, customers or other issues; our actual average stock price in the March 2014 quarter and the impact such price will have on our share count; disruptions in our business or the businesses of our customers or suppliers due to natural disasters (including any floods in Thailand), terrorist activity, armed conflict, war, worldwide oil prices and supply, public health concerns or disruptions in the transportation system; and general economic, industry or political conditions in the United States or internationally.

For a detailed discussion of these and other risk factors, please refer to Microchip's filings on Forms 10-K and 10-Q. You can obtain copies of Forms 10-K and 10-Q and other relevant documents for free at Microchip’s website ( www.microchip.com) or the SEC's website ( www.sec.gov) or from commercial document retrieval services.

Stockholders of Microchip are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date such statements are made. Microchip does not undertake any obligation to publicly update any forward-looking statements to reflect events, circumstances or new information after this January 30, 2014 press release, or to reflect the occurrence of unanticipated events.

About Microchip:

Microchip Technology Incorporated is a leading provider of microcontroller, mixed-signal, analog and Flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide. Headquartered in Chandler, Arizona, Microchip offers outstanding technical support along with dependable delivery and quality. For more information, visit the Microchip website at www.microchip.com.

Note: The Microchip name and logo, GestIC, RightTouch, PIC, MPLAB, dsPIC, and MOST are registered trademarks of Microchip Technology Inc. in the USA and other countries. All other trademarks mentioned herein are the property of their respective companies.


Contact:

Microchip Technology Incorporated
INVESTOR RELATIONS CONTACT:
J. Eric Bjornholt, 480-792-7804
CFO