Microchip Technology Announces Financial Results for Second Quarter Fiscal Year 2015

Third Quarter Fiscal Year 2015 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     $500.9 to $528.2 million     $7.1 million     $508.0 to $535.3 million
Gross Margin2     56.5% to 56.7%     $11.6 to $12.1 million     58.0% to 58.2%
Operating Expenses 2     39.55% to 40.05%     $60.9 to $64.4 million     27.0% to 27.5%
Other Expense     $9.8 million     $2.5 million     $7.3 million
Income Tax Expense     11.4% to 11.8%     $7.7 million     10.6% to 11.0%
Net Income before noncontrolling interest     $64.0 to $71.6 million     $67.4 to $71.2 million     $131.4 to $142.8 million
Less Net Income (Loss) from

noncontrolling interest

    ($1.5 million)     $1.9 million     $0.3 million
Net Income     $65.5 to $73.1 million     $65.5 to $69.3 million     $131.1 to $142.5 million

Diluted Common Shares Outstanding 3

    Approximately 222.7 million shares     Approximately 0.7 million shares     Approximately 222 million shares
Earnings per Diluted Share     29 to 33 cents     30 to 31 cents     59 to 64 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 3 under the "Use of Non-GAAP Financial Measures" section of this release.
  • Excluding any purchase accounting impacts from the Supertex and ISSC acquisitions, Microchip's inventory days at December 31, 2014 are expected to increase to between 2 days and 13 days. Our actual inventory level will depend on the inventory that our distributors decide to hold to support their customers, overall demand for our products and our production levels.
  • Capital expenditures for the quarter ending December 31, 2014 are expected to be approximately $40 million and capital expenditures for all of fiscal year 2015 are anticipated to be approximately $150 million. We are continuing to take actions to selectively invest in the equipment needed to support the expected growth of our new products and technologies.
  • We expect net cash generation during the December quarter of $110 million to $140 million prior to the dividend payment and our acquisition related activities.
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, severance costs, and legal and other general and administrative expenses associated with acquisitions), non-cash interest expense on our convertible debentures, the related income tax implications of these items and non-recurring tax events. Our non-GAAP net sales reflect revenue from product in the acquired companies' distribution channel at the acquisition date that is not included in GAAP net sales.
 
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. Our other non-GAAP adjustments 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 (benefit)/tax rate, non-GAAP net income, and non-GAAP diluted earnings per share which exclude the items noted above, 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. 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 December 2014 quarter of $43 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, mixed-signal products, analog products and memory products sold and licensing revenue; variances in manufacturing yields; fixed cost absorption; wafer fab loading levels; costs of wafers from foundries; 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 Six months ended
September 30, September 30,
2014   2013 2014 2013
 
Net sales $ 546,243 $ 492,669 $ 1,075,119 $ 955,461
Cost of sales 238,789   203,806   461,146   400,024  
Gross profit 307,454 288,863 613,973 555,437
 
Operating expenses:
Research and development 88,814 78,254 173,184 151,339
Selling, general and administrative 71,114 69,368 140,369 135,078
Amortization of acquired intangible assets 45,433 23,744 82,077 51,421
Special charges (income) 775   (11 ) 1,079   1,690  
206,136   171,355   396,709   339,528  
 
Operating income 101,318 117,508 217,264 215,909
Losses on equity method investments (35 ) (101 ) (67 ) (361 )
Other expense, net (10,579 ) (6,201 ) (19,502 ) (14,006 )
 
Income before income taxes 90,704 111,206 197,695 201,542
Income tax (benefit) provision (1,334 ) 11,400   15,748   23,157  
Net income 92,038 99,806 181,947 178,385
Less: Net loss attributable to noncontrolling interests 1,603     1,603    
Net income attributable to Microchip Technology $ 93,641   $ 99,806   $ 183,550   $ 178,385  
 
Basic net income per common share attributable to Microchip Technology stockholders $ 0.47   $ 0.50   $ 0.92   $ 0.90  
Diluted net income per common share attributable to Microchip Technology stockholders $ 0.42   $ 0.46   $ 0.82   $ 0.83  
 
Basic common shares outstanding 200,629   197,825   200,408   197,388  
Diluted common shares outstanding 225,284   216,475   224,906   214,371  
 
 
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

     
ASSETS
 
September 30, March 31,
2014 2014
(Unaudited)
Cash and short-term investments $ 1,283,109 $ 1,344,785
Accounts receivable, net 287,473 242,405
Inventories 275,746 262,725
Deferred tax assets 62,411 67,490
Other current assets 70,226   51,994
Total current assets 1,978,965 1,969,399
 
Property, plant & equipment, net 585,102 531,967
Long-term investments 841,277 798,712
Other assets 1,205,283   767,552
Total assets $ 4,610,627   $ 4,067,630
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Accounts payable and other current liabilities $ 208,399 $ 170,781
Short-term borrowings 17,500 17,500
Deferred income on shipments to distributors 159,585   147,798
Total current liabilities 385,484 336,079
 
Long-term line of credit 624,375 300,000
Long-term borrowings, net 322,767 331,385
Convertible debentures 376,729 371,873
Long-term income tax payable 139,343 179,966
Long-term deferred tax liability 469,370 375,316
Other long-term liabilities 40,351 37,550
 
Microchip Technology stockholders' equity 2,203,421 2,135,461
Noncontrolling interests 48,787  
Total equity 2,252,208   2,135,461
Total liabilities and stockholders' equity $ 4,610,627   $ 4,067,630
 
 

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 Six months ended
September 30, September 30,
2014   2013 2014   2013
Net sales, as reported $ 546,243 $ 492,669 $ 1,075,119 $ 955,461
Distributor revenue recognition adjustment     2,469  
Non-GAAP net sales $ 546,243   $ 492,669   $ 1,077,588   $ 955,461
 

RECONCILIATION OF GAAP GROSS PROFIT TO NON-GAAP GROSS PROFIT

       
Three months ended Six months ended
September 30, September 30,
2014   2013 2014   2013
Gross profit, as reported $ 307,454 $ 288,863 $ 613,973 $ 555,437
Distributor revenue recognition adjustment 1,362
Share-based compensation expense 2,640 1,864 4,695 3,833
Acquisition-related acquired inventory valuation costs 12,690     20,501    
Non-GAAP gross profit $ 322,784   $ 290,727   $ 640,531   $ 559,270  
Non-GAAP gross profit percentage 59.1 % 59.0 % 59.4 % 58.5 %
 

RECONCILIATION OF GAAP RESEARCH AND DEVELOPMENT EXPENSES TO NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES

       
Three months ended Six months ended
September 30, September 30,
2014   2013 2014   2013
Research and development expenses, as reported $ 88,814 $ 78,254 $ 173,184 $ 151,339
Share-based compensation expense (7,261 ) (6,931 ) (13,570 ) (12,621 )
Non-GAAP research and development expenses $ 81,553   $ 71,323   $ 159,614   $ 138,718  
Non-GAAP research and development expenses as a percentage of net sales 14.9

%

14.5 % 14.8 % 14.5 %
 

RECONCILIATION OF GAAP SELLING, GENERAL AND ADMINISTRATIVE EXPENSES TO NON-GAAP SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

       
Three months ended Six months ended
September 30, September 30,
2014   2013 2014   2013
Selling, general and administrative expenses, as reported $ 71,114 $ 69,368 $ 140,369 $ 135,078
Share-based compensation expense (5,372 ) (6,205 ) (10,329 ) (11,202 )
Acquisition-related costs (1,801 ) (383 ) (2,737 ) (1,271 )
Non-GAAP selling, general and administrative expenses $ 63,941   $ 62,780   $ 127,303   $ 122,605  
Non-GAAP selling, general and administrative expenses as a percentage of net sales 11.7 % 12.7 % 11.8 % 12.8 %
 

RECONCILIATION OF GAAP OPERATING EXPENSES TO NON-GAAP OPERATING EXPENSES

       
Three months ended Six months ended
September 30, September 30,
2014   2013 2014   2013
Operating expenses, as reported $ 206,136 $ 171,355 $ 396,709 $ 339,528
Share-based compensation expense (12,633 ) (13,136 ) (23,899 ) (23,823 )
Acquisition-related costs (1,801 ) (383 ) (2,737 ) (1,271 )
Amortization of acquired intangible assets (45,433 ) (23,744 ) (82,077 ) (51,421 )
Special charges (775 ) 11   (1,079 ) (1,690 )
Non-GAAP operating expenses $ 145,494   $ 134,103   $ 286,917   $ 261,323  
Non-GAAP operating expenses as a percentage of net sales 26.6 % 27.2 % 26.6 % 27.4 %
 

RECONCILIATION OF GAAP OPERATING INCOME TO NON-GAAP OPERATING INCOME

       
Three months ended Six months ended
September 30, September 30,
2014   2013 2014   2013
Operating income, as reported $ 101,318 $ 117,508 $ 217,264 $ 215,909
Distributor revenue recognition adjustment 1,362
Share-based compensation expense 15,273 15,000 28,594 27,656
Acquisition-related acquired inventory valuation and other costs 14,491 383 23,238 1,271
Amortization of acquired intangible assets 45,433 23,744 82,077 51,421
Special charges (income) 775   (11 ) 1,079   1,690  
Non-GAAP operating income $ 177,290   $ 156,624   $ 353,614   $ 297,947  
Non-GAAP operating income as a percentage of net sales 32.5 % 31.8 % 32.8 % 31.2 %
 

RECONCILIATION OF GAAP OTHER EXPENSE, NET TO NON-GAAP OTHER EXPENSE, NET

       
Three months ended Six months ended
September 30, September 30,
2014   2013 2014   2013
Other expense, net, as reported $ (10,579 ) $ (6,201 ) $ (19,502 ) $ (14,006 )
Convertible debt non-cash interest expense 2,445   2,235   4,810   4,396  
Non-GAAP other expense, net $ (8,134 ) $ (3,966 ) $ (14,692 ) $ (9,610 )
Non-GAAP other expense, net, as a percentage of net sales -1.5 % -0.8 % -1.4 % -1.0 %
 

RECONCILIATION OF GAAP INCOME TAX (BENEFIT) PROVISION TO NON-GAAP INCOME TAX PROVISION

       
Three months ended Six months ended
September 30, September 30,
2014   2013 2014   2013
Income tax (benefit) provision, as reported $ (1,334 ) $ 11,400 $ 15,748 $ 23,157
Income tax rate, as reported -1.5 % 10.3 % 8.0 % 11.5 %
Distributor revenue recognition adjustment 375
Share-based compensation expense 1,833 1,589 3,253 2,991
Acquisition-related acquired inventory valuation costs, intangible asset amortization and other costs 6,201 357 8,897 780
Special charges (income) 271 (4 ) 384 633
Convertible debt non-cash interest expense 908 837 1,787 1,646
Non-recurring tax events 10,517   1,995   6,052   1,995  
Non-GAAP income tax provision $ 18,396   $ 16,174   $ 36,496   $ 31,202  
Non-GAAP income tax rate 10.9 % 10.6 % 10.8 % 10.8 %
 

RECONCILIATION OF GAAP NET INCOME ATTRIBUTABLE TO MICROCHIP TECHNOLOGY AND GAAP DILUTED NET INCOME PER COMMON SHARE ATTRIBUTABLE TO MICROCHIP TECHNOLOGY STOCKHOLDERS TO NON-GAAP NET INCOME ATTRIBUTABLE TO MICROCHIP TECHNOLOGY AND NON-GAAP DILUTED NET INCOME PER COMMON SHARE ATTRIBUTABLE TO MICROCHIP TECHNOLOGY STOCKHOLDERS

       
Three months ended Six months ended
September 30, September 30,
2014   2013 2014   2013
Net income attributable to Microchip Technology, as reported $ 93,641 $ 99,806 $ 183,550 $ 178,385
Noncontrolling interests (2,090 ) (2,090 )
Distributor revenue recognition adjustment, net of tax effect 987
Share-based compensation expense, net of tax effect 13,440 13,411 25,341 24,665
Acquisition-related acquired inventory valuation costs, intangible asset amortization and other costs, net of tax effect 53,723 23,770 96,418 51,912
Special charges (income), net of tax effect 504 (7 ) 695 1,057
Convertible debt non-cash interest expense, net of tax effect 1,537 1,398 3,023 2,750
Non-recurring tax events (10,517 ) (1,995 ) (6,052 ) (1,995 )
Non-GAAP net income attributable to Microchip Technology $ 150,238   $ 136,383   $ 301,872   $ 256,774  
Non-GAAP net income attributable to Microchip Technology as a percentage of net sales 27.5 % 27.7 % 28.0 % 26.9 %
 
Diluted net income per common share attributable to Microchip Technology stockholders, as reported $ 0.42   $ 0.46   $ 0.82   $ 0.83  
Non-GAAP diluted net income per common share attributable to Microchip Technology stockholders $ 0.67   $ 0.63   $ 1.35   $ 1.20  
Diluted common shares outstanding, as reported 225,284   216,475   224,906   214,371  
Diluted common shares outstanding Non-GAAP 224,682   215,764   224,286   213,691  
 

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