Microchip Sales Up 24.7% / Income Adversely Impacted by Microsemi Acquisition

Microchip Technology Incorporated reported results for the three months ended June 30, 2018 including: GAAP net sales for the first quarter of fiscal 2019 were $1.213 billion, up 24.7% from GAAP net sales of $972.1 million in the prior year's first fiscal quarter.

GAAP net income for the first quarter of fiscal 2019 was $35.7 million, or $0.14 per diluted share, down from GAAP net income of $170.6 million, or $0.70 per diluted share, in the prior year's first fiscal quarter. The current year's GAAP net income results were significantly adversely impacted by purchase accounting adjustments associated with the acquisition of Microsemi.

"Our June quarter financial results were strong," said Steve Sanghi, Chief Executive Officer. "Our non-GAAP net sales came in above the mid-point of our guidance that we issued on May 31, 2018, resulting in record non-GAAP net income and earnings per share."

Mr. Sanghi added, "Since our acquisition of Microsemi Corporation on May 29, 2018, we have been actively engaged in further understanding the opportunities and challenges of this business. While we have lots of work to do to achieve our long-term financial targets, we have high confidence in our team's ability to achieve these results over time."

Summary of results:

• Record GAAP net sales of $1.213 billion, up 21.0% sequentially and up 24.7% from the year ago quarter. Microchip was unable to provide GAAP net sales guidance.
• Record Non-GAAP net sales of $1.217 billion, up 21.4% sequentially and up 25.2% from the year ago quarter. The midpoint of our guidance provided on May 31, 2018 was non-GAAP net sales of $1.207 billion.
• On a GAAP basis: gross margin of 52.9%; operating income of $132.3 million; net income of $35.7 million; and EPS of $0.14 per diluted share, adversely impacted by $226.9 million of Microsemi purchase accounting, restructuring and other charges. Microchip was unable to provide GAAP guidance.
• On a non-GAAP basis: record gross margin of 62.2%; record operating income of $473.5 million and 38.9% of net sales; record net income of $405.8 million and record EPS of $1.61 per diluted share, up 22.9% from the year ago quarter. Our guidance provided on May 31, 2018 was non-GAAP EPS of $1.41 to $1.55 per diluted share.
• Record quarterly dividend declared of 36.40 cents per share.
• Completed acquisition of Microsemi Corporation on May 29, 2018.

"In the June 2018 quarter, our overall microcontroller net sales were $728.6 million, up 10.8% from the March 2018 quarter and our overall analog net sales were $328.5 million, up 35% from March 2018," said Ganesh Moorthy, President and Chief Operating Officer. "Our microcontroller business excluding Microsemi, as well as our analog business excluding Microsemi, both set new records in the June quarter."

Mr. Moorthy added, "The integration of Microsemi with Microchip has been in high gear since we closed the acquisition. We are moving thoughtfully and quickly to realize the synergies we had planned on, while continuing to identify incremental synergy opportunities working as a joint team."

Eric Bjornholt, Microchip's Chief Financial Officer, said, "Cash flow from operations was $302.4 million in the June 2018 quarter. Over the next several years, we intend to use substantially all of our net cash generation, beyond our dividend payments, to de-leverage the balance sheet."

Mr. Sanghi added, "Beginning April 1, 2018, we adopted the new GAAP revenue recognition standard which requires us to recognize revenue at the time products are sold to distributors. Prior to this change, revenue on such transactions were deferred until the product was sold by our distributor to an end customer. We are not able to provide guidance on a GAAP basis as we are not able to predict whether inventory at our distributors will increase or decrease in relation to end-market demand.

“As evidence of this uncertainty, in recent years, we have seen net inventory at our distributors increase or decrease by a significant amount in a single quarter. Our non-GAAP revenue will be based on what we believe reflects true end-market demand as we measure revenue based on when product is sold by our distributors to an end customer.

"Based on anticipated end-market demand, we expect our non-GAAP total net sales in the September 2018 quarter to be between $1.474 billion and $1.550 billion. Our non-GAAP earnings per share are expected to be between $1.65 and $1.83,” Mr. Sanghi concluded.