2 We are not able to estimate the amount of Special Charges and Other, net that may be incurred during the quarter ending December 31, 2019. Therefore, our estimate of GAAP operating expenses excludes any amount that may be recognized as Special Charges and Other, net in the quarter ending December 31, 2019.
3 The forecast for GAAP tax expense excludes any unexpected tax events that may occur during the quarter, as these amounts cannot be forecasted.
4 Represents expected cash tax rate for fiscal 2020 excluding any transition tax payments associated with the Tax Cuts and Jobs Act.
5 In the case of a net loss, diluted common shares outstanding exclude potentially dilutive common shares from employee equity incentive plans and common shares issuable upon the exchange of our convertible debentures as the related impact would have been anti-dilutive.
- Microchip's inventory days in the December 2019 quarter are expected to be in the range of 131 to 144 days, compared to 131 days at September 30, 2019. 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, 2019 are expected to be between $20 million and $25 million. Capital expenditures for all of fiscal 2020 are expected to be between $90 million and $100 million. We are continuing to invest in the equipment needed to support the growth of our production capabilities for fast-growing new products and technologies and to bring in-house more of the assembly and test operations that are currently outsourced.
Use of End-Market Demand Metric: End-market demand is the net dollar amount of our products, licensing revenue and other services delivered to our direct (non-distributor) customers and by our distributors to their customers. We are able to calculate end-market demand based on information that our distributors provide us about their product shipments to their customers and inventory holdings. The value of end-market demand from our distributors is calculated as the net transaction value of these shipments. We believe that our end-market demand metric reflects true end-market demand based on when product is sold to direct customers or by our distributors to an end customer.
Under the new GAAP revenue recognition standard, we are required to recognize revenue when control of the product changes from us to a customer or distributor. We focus our sales and marketing efforts on creating demand for our products in the end markets we serve and not on moving inventory into our distribution network. Therefore, the elements of our internal performance and executive and employee compensation metrics that are based on sales and operating results are measured using the value of the end-market demand for our products. We use end-market demand for these purposes because we do not believe that the underlying value of our business benefits from increases in the value of inventory that is held in the supply chain. As many of our products are designed into customer applications with relatively long lives, such value is only realized when the end-market demand is created and the supply chain sells the inventory to the end customer. We believe the use of end-market demand is also important to investors and users of our financial statements as it reflects the final outcome of our sales activities whereas our GAAP net sales are based on estimates made earlier in (or before the end of) the process of creating and fulfilling demand is complete. We also manage our manufacturing and supply chain operations, including our distributor relationships, towards the goal of having our products available at the time and location the end customer desires. Management uses end-market demand to manage and assess the profitability of our business and when developing and monitoring our budgets and spending. Many of our investors have requested that we disclose end-market demand metric because they believe it is useful in understanding our performance as it provides better information regarding end-market demand for our products. Therefore, we believe that it is useful to investors for us to disclose end-market demand. Our determination of end-market demand metric might not be the same as similarly titled measures used by other companies.
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 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 on available-for-sale investments. For the second quarters of fiscal 2020 and 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.
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, unusual or infrequent items or other expenses related to transactions. Management excludes all of these items from its internal operating forecasts and models.
We are using non-GAAP operating expenses in dollars including non-GAAP research and development expenses and non-GAAP selling, general and administrative expenses, non-GAAP other expense, net, and non-GAAP income tax rate, 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 and for compensation purposes. We also use our non-GAAP results when developing and monitoring our budgets and spending. Our determination of these 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 these 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.
Generally, gross margin fluctuates over time, driven primarily by the mix of 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.
Diluted Common Shares Outstanding can vary for, among other things, the trading price of our common stock, the 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 repurchases or issuances of shares of our common stock. The diluted common shares outstanding presented in the guidance table above assumes an average Microchip stock price in the December 2019 quarter between $94 and $104 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).
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in millions except per share amounts) (unaudited) | |||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net sales | $ | 1,337.8 | $ | 1,432.5 | $ | 2,660.4 | $ | 2,644.9 | |||||||
| Cost of sales | 510.3 | 743.2 | 1,017.7 | 1,313.6 | |||||||||||
| Gross profit | 827.5 | 689.3 | 1,642.7 | 1,331.3 | |||||||||||
| Research and development | 219.8 | 221.9 | 438.9 | 393.8 | |||||||||||
| Selling, general and administrative | 172.3 | 176.6 | 340.2 | 340.7 | |||||||||||
| Amortization of acquired intangible assets | 248.2 | 169.9 | 496.7 | 303.6 | |||||||||||
| Special charges and other, net | 3.6 | 18.2 | 11.7 | 58.3 | |||||||||||
| Operating expenses | 643.9 | 586.6 | 1,287.5 | 1,096.4 | |||||||||||
| Operating income | 183.6 | 102.7 | 355.2 | 234.9 | |||||||||||
| Losses on equity method investment | — | (0.1 | ) | — | (0.1 | ) | |||||||||
| Other expense, net | (130.1 | ) | (142.0 | ) | (261.2 | ) | (236.5 | ) | |||||||
| Income (loss) before income taxes | 53.5 | (39.4 | ) | 94.0 | (1.7 | ) | |||||||||
| Income tax benefit | (55.4 | ) | (135.7 | ) | (65.6 | ) | (133.7 | ) | |||||||
| Net income | $ | 108.9 | $ | 96.3 | $ | 159.6 | $ | 132.0 | |||||||
| Basic net income per common share | $ | 0.46 | $ | 0.41 | $ | 0.67 | $ | 0.56 | |||||||
| Diluted net income per common share | $ | 0.43 | $ | 0.38 | $ | 0.63 | $ | 0.52 | |||||||
| Basic common shares outstanding | 238.4 | 235.8 | 238.1 | 235.5 | |||||||||||
| Diluted common shares outstanding | 255.3 | 251.8 | 254.6 | 252.0 | |||||||||||
