Microchip Technology Announces Second Quarter Fiscal Year 2012 Financial Results

Microchip Technology Announces Second Quarter Fiscal Year 2012 Financial Results

• NET SALES OF $340.6 MILLION, DOWN 9.1% SEQUENTIALLY AND DOWN 10.9% YEAR¬OVER-YEAR

• ON A GAAP BASIS: GROSS MARGIN OF 57.2%; OPERATING INCOME OF $97.6 MILLION; NET INCOME OF $79.3 MILLION; AND EPS OF 40 CENTS PER DILUTED SHARE

• ON A NON-GAAP BASIS: GROSS MARGIN OF 58.2%; OPERATING INCOME OF $110.0 MILLION; NET INCOME OF $92.6 MILLION; AND EPS OF 46 CENTS PER DILUTED SHARE

• RECORD 32-BIT REVENUE, UP 10.4% SEQUENTIALLY

• RECORD LICENSING REVENUE OF $22.0 MILLION

• 84TH CONSECUTIVE QUARTER OF PROFITABILITY

CHANDLER, Arizona – November 3, 2011 – (NASDAQ: MCHP) – Microchip Technology Incorporated, a leading provider of microcontroller, analog and Flash-IP solutions, today reported results for the three months ended September 30, 2011 as summarized in the following table:

1 See the “Use of Non-GAAP Financial Measures” section of this release. 2 Earnings per share has been calculated based on the diluted shares outstanding of Microchip on a consolidated basis.

Net sales for the second quarter of fiscal 2012 were $340.6 million, down 9.1% sequentially from net sales of $374.5 million in the immediately preceding quarter, and down 10.9% from net sales of $382.3 million in the prior year’s second fiscal quarter. GAAP net income for the second quarter of fiscal 2012 was $79.3 million, or

40 cents per diluted share, down 20.1% from GAAP net income of $99.3 million, or 49 cents per diluted share, in the immediately preceding quarter, and down 24.3% from GAAP net income from continuing operations of $104.7 million, or 55 cents per diluted share, in the prior year’s second fiscal quarter.

Non-GAAP net income for the second quarter of fiscal 2012 was $92.6 million, or 46 cents per diluted share, down 16.8% from non-GAAP net income of $111.4 million, or 55 cents per diluted share, in the immediately preceding quarter, and down 22.6% from non-GAAP net income of $119.6 million, or 63 cents per diluted share, in the prior year’s second fiscal quarter. For the second quarter of fiscal 2012 and fiscal 2011, 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 costs and legal and other general and administrative expenses associated with acquisitions), losses on equity securities, and non-cash interest expense on our convertible debentures. A reconciliation of our non-GAAP and GAAP results is included in this press release.

Microchip also announced today that its Board of Directors declared a quarterly cash dividend on its common stock of 34.8 cents per share. The quarterly dividend is payable on December 5, 2011 to stockholders of record on November 21, 2011.

“Our September quarter results are consistent with what others in the industry have reported. The poor economic conditions are impacting the broader semiconductor industry as can be seen from the earnings reports over the past few weeks,” said Steve Sanghi, President and CEO. “The overall macroeconomic environment is weak and the Christmas build season did not materialize as expected during the quarter. We saw broad-based weakness across all sales channels in all geographies.”

Mr. Sanghi added, “We continue to invest in new products and technologies and believe we are well-positioned to gain market share in our strategic product lines as market conditions improve.”

“Our 32-bit microcontroller business demonstrated strong revenue growth in the September quarter and was up 10.4% on a sequential basis, and was up over 158% from the year-ago quarter to achieve a new record,” said Ganesh Moorthy, Chief Operating Officer.

“Our analog revenue was down only 0.7% sequentially which was significantly better than most of our industry peers. Our analog attach strategy is working well and we are continuing to gain market share in analog,” added Mr. Moorthy.

Mark Reiten, Vice President of Microchip’s Licensing division commented, “Our licensing business achieved a new record in the September quarter producing $22 million in revenue, up 6.5% sequentially and up 27.3% over the year ago quarter. Our SuperFlash technology continues to be recognized as a best-in-class flash technology for embedded applications. We continue to expand the number of licensees that are using this technology at various wafer foundries, as well as fabs owned by integrated device manufacturers.”

Eric Bjornholt, Microchip’s Chief Financial Officer, said, “Microchip’s cash and investment balance at the end of the September quarter was $1.78 billion and grew by $58.1 million during the quarter. Microchip paid a dividend of $66.3 million in the September quarter and cumulative dividends paid have now exceeded $1.5 billion.”

“While the floods in Thailand have been devastating for its citizens and for many businesses, particularly those north of Bangkok, our two facilities located almost 50 miles east of Bangkok have continued to operate normally,” said Mr. Moorthy. “We have experienced sporadic issues with our supply chain, all of which have been mitigated by triggering our contingency plans and use of alternative sourcing. We continue to work to ensure the safety and well-being of all our employees, while supporting our customers’ business needs.”

Mr. Sanghi concluded, “The macroeconomic conditions continue to be weak, but we believe that the shipment rates in December will be below the consumption rates of our customers. We expect the inventory burn-off to be largely over by the end of the December quarter and anticipate the December quarter to mark the bottom of this industry cycle for revenue, gross margin and earnings per share. We are modeling December quarter revenue to be flat to down seven percent. We expect the March 2012 quarter to be sequentially up in revenue, gross margin and earnings.”

Microchip’s Recent Highlights:

• Microchip announced the shipment of its 10 billionth PIC® microcontroller (MCU) to Samsung Electronics Co., Ltd. Microchip delivered this 10 billionth MCU, the 32-bit PIC32MX340F256, approximately 10 months after delivering its nine billionth.

• Microchip continues to bring industry-leading innovation to the 8-bit MCU market, having just introduced several new low-cost and low-power microcontrollers with configurable logic and a high level of peripheral integration in 6- to 20-pin packages. These chips were awarded the Embeddy Hardware Best in Show at the Boston Embedded Systems Conference.

• Microchip shipped 43,084 development systems during the September quarter, demonstrating the continued strong interest in its products. The total cumulative number of development systems shipped now stands at 1,200,215.

• In order to further speed customer designs, Microchip launched the Embedded Code Source, an application store for the embedded community that provides free software and firmware for PIC MCUs, along with the ability to rate and review each download. This interactive site includes free code from both Microchip and its large network of third-party developers, who are also available for expert advice and contract programming.

• In the human-interface arena, Microchip introduced two new development tools. One enables the design of PIC32-based graphical user interfaces without an external graphics chip, while the other enables touch-screen development.

• For the rapidly expanding global energy-metering market, Microchip and Kalkitech announced a certified DLMS software stack that enables the worldwide interoperability of smart meters that are based on its 16-bit PIC MCUs. Microchip also announced its first six-channel analog front end for three-phase energy metering. Finally, the Company unveiled a utility-band power-line soft-modem development kit, which enables low-cost communication and control in utility power meters, in-home energy monitoring, and the smart grid.

• Microchip continued to grow its broad analog portfolio with lower-noise, auto-zero operational amplifiers for sensor, signal-conditioning and instrumentation applications. The Company also introduced a new family of voltage regulators, and a Wi-Fi® RF power amplifier.

• To facilitate development with its 32-bit microcontrollers, Microchip introduced two new kits. One speeds the design of speech and audio recording/playback products, such as docks, and home and automotive sound systems. To further enable hobbyist and student development with the PIC32, Microchip and Digilent unveiled expansion boards and software libraries for their Arduino™-compatible chipKIT™ platform, along with a new online forum and wiki for chipKIT users.

• In other award news, Microchip was selected as one of “Arizona’s Most Admired Companies” for 2011 by Arizona Business Magazine and BestCompaniesAZ. Microchip earned the award based on its excellence in four categories—workplace culture, leadership excellence, corporate and social responsibility, and customer opinion.

Third Quarter Fiscal Year 2012 Outlook:

The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially.

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.

• Microchip’s inventory at December 31, 2011 is expected to be about flat to slightly up from the September quarter. This will enable us to continue to service our customers with very short lead times while allowing us to push out future capital expenditures. The 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, 2011 are expected to be approximately $11 million. Capital expenditures for all of fiscal year 2012 are anticipated to be approximately $70 million. We are continuing to take actions to invest in the equipment needed to support the expected growth of our new products and technologies.

• The diluted common shares outstanding presented in the guidance table above assumes an average Microchip stock price in the December 2011 quarter of $35 per share.

• We expect net cash generation during the December quarter of approximately $75 million to $85 million prior to the dividend payment.

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), losses on equity securities, and non-cash interest expense on our convertible

debentures and the related income tax implications of these items.

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. The value of our equity securities varies in amount from period to period and is affected by fluctuations in the market prices of such securities that we cannot predict and are not within the control of management. The non-GAAP adjustments related to the impact of our acquisitions and a portion of our interest expense related to our convertible debentures are either non-cash expenses or non-recurring expenses related to such transactions. Tax events related to IRS settlements, the reinstatement of the R&D tax credit and other one-time tax events are non-recurring events in our business. Accordingly, management excludes all of these items from its internal operating forecasts and models.

We are using 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 including gains (losses) on equity method investments, non-GAAP income tax/tax rate, non-GAAP net income, and non-GAAP diluted earnings per share which exclude the items noted in the immediately preceding paragraph, 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 its business. Specifically, we do not consider such items when developing and monitoring our budgets and spending. As described above, the economic substance behind our decision to exclude such items relates either to these charges being non-cash in nature, or to the one-time nature of the events, or in the case of our equity securities, because such item is difficult to predict and not within the control of management. 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 2011 quarter of $35 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, analog products and memory products sold and licensing revenue; variances in manufacturing yields; fixed cost absorption; wafer fab loading levels; 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.

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