Microchip Technology Announces Financial Results for Second

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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