GAAP net sales for the second quarter of fiscal 2020 were $1.338 billion, down 6.6% from net sales of $1.433 billion in the prior year's second fiscal quarter.
GAAP net income for the second quarter of fiscal 2020 was $108.9 million, or $0.43 per diluted share, up from GAAP net income of $96.3 million, or $0.38 per diluted share, in the prior year's second fiscal quarter. For the second quarters of fiscal 2020 and fiscal 2019, GAAP net income was significantly adversely impacted by purchase accounting adjustments associated with our acquisitions.
Non-GAAP net income for the second quarter of fiscal 2020 was $365.7 million, or $1.43 per diluted share, down from non-GAAP net income of $398.5 million, or $1.58 per diluted share, in the prior year's second fiscal quarter. For the second quarters of fiscal 2020 and fiscal 2019, 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 and other restructuring costs, and legal and other general and administrative expenses associated with acquisitions including legal fees and expenses for litigation and investigations related to our Microsemi acquisition), IT security remediation costs, non-cash interest expense on our convertible debentures, losses on the settlement of debt, and gains and losses related to available-for-sale investments. For the second quarters of fiscal 2020 and fiscal 2019, our non-GAAP income tax expense is presented based on projected cash taxes for the fiscal year, excluding transition tax payments under the Tax Cuts and Jobs Act. A reconciliation of our non-GAAP and GAAP results is included in this press release.
Prior to the fourth quarter of fiscal 2019, we reported non-GAAP net sales based on end-market demand, which excluded the effect of our distributors increasing or decreasing their inventory holdings. Beginning with the fourth quarter of fiscal 2019, we changed the information included in our financial guidance and provide net sales guidance based on sell-in revenue recognition under the new GAAP standard.
Microchip announced today that its Board of Directors has declared a record quarterly cash dividend on its common stock of 36.65 cents per share. The quarterly dividend is payable on December 5, 2019 to stockholders of record on November 21, 2019.
"Our September quarter financial results were reasonably good despite a challenging economic environment," said Steve Sanghi, Chief Executive Officer. "Our net sales were slightly below the midpoint of our guidance provided on August 6, 2019. Our non-GAAP gross margins were up to 62.2% in the September quarter, and very close to a record high. Our non-GAAP operating margin was also up to 36.7%, above the midpoint of our guidance. We delivered $1.43 of non-GAAP diluted earnings per share, which was at the midpoint of our guidance."
Mr. Sanghi added, "End-market demand, which reflects sell-through activities in the distribution channel, was $8.6 million higher than GAAP (sell-in) revenue in the September 2019 quarter. As a result, distribution inventory days declined from 32 to 30 days. We have only had one quarter in the past fifteen years where our days of inventory at our distributors have been lower than the levels at the end of the September 2019 quarter."
"The end-market demand for our microcontroller business was down 1.3% and for our analog business was up 0.2% compared to the June 2019 quarter. Microcontrollers represented 53.3% and analog represented 28.7% of our end-market demand in the September quarter. We continue to introduce a steady stream of new and innovative products in both microcontroller and analog that we believe position us well for future growth,"
said Ganesh Moorthy, President and Chief Operating Officer.
Mr. Moorthy added, "The integration of Microsemi with Microchip continues to progress well. On the business systems front, we went live with a few more systems on November 1, 2019. We are pleased with the synergies we have achieved since we closed the acquisition despite the weaker macro-economic environment over the past several quarters."
Eric Bjornholt, Microchip's Chief Financial Officer, said, "We paid down $315.5 million of total debt during the September quarter, reflecting a cumulative pay down of $1.729 billion over the past five quarters, as we continued to manage our working capital requirements for the business. We will continue to use substantially all of our excess cash generation after dividends to reduce the amount of debt on our balance sheet as quickly as possible."
Mr. Sanghi concluded, "There is continued uncertainty in the economic environment, specifically as it relates to the U.S. and China trade dispute and hence we had limited backlog visibility from our customers and distributors to start the quarter. However, although we started the December quarter with much lower backlog than the September quarter, October bookings were the highest since June 2018, and the backlog for the quarter is filling at a much steeper rate. While we estimate our net sales in the December 2019 quarter to be down between 2% and 10% sequentially, there are early signs that we may be at a positive inflexion point."
Microchip's Highlights for the Quarter Ended September 30, 2019:
- Delivered the Analog Embedded SuperFlash® Technology - SuperFlash memBrain™ neuromorphic memory solution, providing substantial reduction in compute power to improve Artificial Intelligence (AI) inference at the edge and enhancing system architecture implementation.
- Announced the industry’s first commercially available serial memory controller - the
SMC 1000 8x25G, enabling CPUs and other compute-centric SoCs to utilize four times the memory channels of parallel attached DDR4 DRAM within the same package footprint. Recognized with best-of-show award at Flash Memory Summit 2019 for enabling high memory bandwidth required by next-generation CPUs and SoCs for Artificial Intelligence (AI) and Machine Learning (ML).
- Introduced the Trust Platform for the CryptoAuthenticaion™ family, the industry’s first pre-provisioned solution providing secure key storage for low-, mid- and high-volume device deployments using the ATECC608A secure elements.
- Announced the Smart Embedded Vision initiative providing for designing intelligent machine vision systems with low-power PolarFire® FPGAs.
- Announced two solutions that simplify USB Type-C Power Delivery (PD) - the
USB705x family enabling fast device charging with PD implementations, and the
UPD301A standalone USB Type-C PD controller simplifying the implementation of basic USB Type-C PD charging functionality.
- Introduced the SST26VF Serial Quad I/O™ (SQI™) 3V Flash family, the industry’s first NOR Flash devices to offer integrated MAC address options.
Third Quarter Fiscal Year 2020 Outlook:
Beginning with the fiscal quarter ending March 31, 2019, we changed the information included in our financial guidance in response to comments from and discussions with the Staff of the Securities and Exchange Commission. We are now providing net sales guidance based on sell-in revenue recognition under the new GAAP standard. We are also providing guidance and reporting non-GAAP gross margin percentage, operating expense percentage, operating profit percentages and diluted earnings per share based on sell-in GAAP revenue. We are also providing information on end-market demand so that investors will have information on the consumption in the marketplace of our products by our customers or our distributors. We do not use end-market demand for any of our non-GAAP income statement calculations. Please see "Use of End-Market Demand Metric" below for information on how we calculate end-market demand.
The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially. We are not able to predict whether inventory at our distributors will increase or decrease and are therefore providing a range of GAAP net sales guidance. In recent years, we have seen net inventory at our distributors increase or decrease by a significant amount in a single quarter.
| Microchip Consolidated Guidance | |||
| Net Sales | $1.204 to $1.311 billion | ||
| GAAP | Non-GAAP Adjustments | Non-GAAP 1 | |
| Gross Margin | 60.5% to 60.9% | $5.5 to $6.5 million | 61.0% to 61.4% |
| Operating Expenses 2 | 48.6% to 52.1% | $290.0 to $294.0 million | 26.2% to 28.0% |
| Operating Income | 8.5% to 12.3% | $295.5 to $300.5 million | 33.0% to 35.2% |
| Other Expense, net | $120.0 to $122.0 million | $31.0 million | $89.0 to $91.0 million |
| Income Tax Provision (Benefit) | $8.2 to $(6.6) million 3 | $13.4 to $28.8 million | $21.6 to $22.2 million 4 |
| Net (Loss) Income | $(26.4) to $45.6 million | $302.7 to $313.1 million | $286.7 to $348.3 million |
| Diluted Common Shares Outstanding | Approximately 239.3 5 to 263.2 million shares | Approximately 0 to 17.5 million shares | Approximately 256.8 to 263.2 million shares |
| (Loss) Earnings per Diluted Share | (11) to 17 cents | $1.15 to $1.23 | $1.12 to $1.32 |
