Microchip Reports Very Good Fiscal Quarter In Spite of Challenging Economic Backdrop

May 11, 2019 by Scott McMahan

Microchip Technology Inc., posted financial results for Q4 of fiscal year 2019, which ended March 31, 2019. The company reported net sales of $1.330 billion, down 3.3% sequentially and up 32.7% from net sales of $1.002 billion in the prior year's fourth fiscal quarter. The net sales were above the midpoint for the company's guidance of $1.327 billion.

On a GAAP basis, the company had a gross margin of 61.7%. It had an operating income of $284.6 million and achieved a net income of $174.7 million for the quarter and an EPS of $0.70 per diluted share. This EPS was much higher than the company's guidance of GAAP EPS of $0.21 to $0.38 per diluted share.

For Fiscal Year 2019

Microchip recorded record GAAP net sales of $5.350 billion. and record Non-GAAP net sales of $5.476 billion. On a GAAP basis the company had gross margins of 54.8% for fiscal year 2019.

The company had a record operating income of $714.3 million and achieved a net income of $355.9 million, which was adversely impacted by purchase accounting adjustments associated with acquisitions.

For the year, Microchip posted an EPS of $1.42 per diluted share, an increase of 39.4% from net income of $255.4 million, or $1.03 per diluted share in the previous fiscal year.

Noteably, the prior year's GAAP net income results were significantly adversely impacted by one-time tax adjustments related to the Tax Cuts and Jobs Act of 2017.

Microchip announced that its Board of Directors declared a record quarterly cash dividend on its common stock of 36.55 cents per share. The quarterly dividend is payable on June 4, 2019 to stockholders of record on May 21, 2019.

"Our March quarter financial results were very good in spite of a challenging economic backdrop," said Steve Sanghi, Chief Executive Officer. "Our net sales came in above the mid-point of our narrowed guidance range that we issued on March 5, 2019. Our GAAP and non-GAAP gross margin percentage were above the high-end of our guidance and our operating expenses as a percentage of sales were below the low-end of our guidance. As a result, our operating margins were well above the high-end of our guidance, reflecting the strength of our business model."

Mr. Sanghi added, "End-market demand, which reflects sell-through activities in the distribution channel, was $10.4 million higher than GAAP (sell-in) revenue in the March 2019 quarter. As a result, distribution inventory declined from 36 days to 35 days. We believe that barring any negative development on the U.S. China trade front, our distributors are carrying a reasonable level of inventory to support end-market demand."

"Last month Gartner reported their microcontroller market share data for calendar year 2018. We are pleased to report that we expanded our market share in 8-bit, 16-bit and 32-bit microcontrollers and grew faster in all three product categories when compared to our large competitors in these markets," said Ganesh Moorthy, President and Chief Operating Officer.

"The integration of Microsemi with Microchip continues to progress at a rapid pace. We are achieving synergies in the business units, sales, operations and support functions, while we relentlessly march toward the long-term synergy targets we have outlined for our stockholders," Mr. Moorthy said.

"We paid down $277.5 million of total debt during the March quarter, reflecting a cumulative pay down of $1.156 billion over the last nine months, as we continued to tightly 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," Eric Bjornholt, Microchip's Chief Financial Officer, said.

"Last quarter we said that barring any negative development on the trade front, we expected the March 2019 quarter to mark the bottom of this cycle for Microchip. Secondly, we said last quarter that we did not know the shape of the recovery and it would depend somewhat on the outcome of the trade talks. Towards that end, the U.S. did not get a settlement on the trade front. In fact, in recent days, the rhetoric has turned more negative with 25% duties on $200 billion of Chinese goods expected to go into effect this Friday. Therefore, the uncertainty related to U.S. China trade relations continues," Mr. Sanghi added.

Mr. Sanghi concluded, "Given the continued uncertainty, we expect weaker than seasonal business conditions for Microchip. We continue to operate our business prudently for long-term shareholder value and we believe that end market demand will continue to be stronger that GAAP sell-in revenue in the June quarter, and the channel and customer inventory will continue to decrease. We expect net sales for our products to be about flat sequentially plus or minus five percent in the June 2019 quarter."