Microchip Technology (MCHP) Q3 2012 Earnings Call February 02, 2012 5:00 pm ET Executives J. Eric Bjornholt - Chief Financial Officer, Principal Accounting Officer and Vice President Ganesh Moorthy - Chief Operating officer and Executive Vice President Steve Sanghi - Chairman, Chief Executive Officer and President Analysts Venkatesh Nathamuni - JP Morgan Chase & Co, Research Division James Schneider - Goldman Sachs Group Inc., Research Division Christopher Caso - Susquehanna Financial Group, LLLP, Research Division Kevin Cassidy - Stifel, Nicolaus & Co., Inc., Research Division Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division Terence R. Whalen - Citigroup Inc, Research Division Harsh N. Kumar - Morgan Keegan & Company, Inc., Research Division Presentation Operator
I will comment on our third quarter of fiscal year 2012 financial performance, and Steve and Ganesh will then give their comments on the results, discuss the current business environment and discuss our guidance. We will then be available to respond to specific investor and analyst questions.We are including information in our press release in this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at www.microchip.com, which we believe you will find useful when comparing GAAP to non-GAAP results. I will now go through some of the operating results. I will be referring to gross margin and operating expense information on a non-GAAP basis prior to the effects of share base compensation and acquisition-related expenses. Net sales in December quarter were $329.2 million and were down sequentially 3.4% from net sales of $340.6 million in the immediately preceding quarter and were down 10.5% from net sales of $367.8 million in the December 2010 quarter. Looking at revenue by geography for the December quarter, Americas were down 3.4% sequentially, Europe was down 15.3% sequentially and Asia was up 1.9% sequentially. All geographies were impacted by the weak economic and industry conditions we experienced, with Asia being the strongest and Europe being the weakest as compared to our expectations. Our non-GAAP results were in line with our quarterly guidance provided on November 3, 2011. On a non-GAAP basis, gross margins were 56.8% in the December quarter, and non-GAAP operating expenses were 26.3% of sales. Operating income was 30.5% of sales, and net income was $85.4 million or $0.42 per diluted share. On a full GAAP basis, gross margins, including share-based compensation and acquisition-related intangible amortization, were 55.8% in the December quarter. Total operating expenses were $95.7 million or 29.1% of sales and includes share-based compensation of $8.6 million, acquisition-related expenses of $1.2 million and $0.7 million of special income associated with acquisitions from prior years. GAAP net income of $77.5 million or $0.38 per diluted share and was favorably impacted by $4.1 million of nonrecurring tax events.
In the December quarter, the non-GAAP tax rate was 12.7%, and the GAAP tax rate was 7.4% as a result of the nonrecurring tax events discussed earlier. Our tax rate is impacted by the mix of geographical profits, withholding taxes associated with our licensing businesses, gains or losses on trading securities and the percentage of our cash that is invested in tax-advantaged securities. We expect our combined forward-looking effective tax rate on both the GAAP and non-GAAP basis to be about 12.5% to 13%.To summarize the after-tax impact that the non-GAAP adjustments had on Microchip's earnings per share in the December quarter, share-based compensation was about $0.043, acquisition-related items were about $0.011, noncash interest expense was about $0.006 and the favorable tax event was about $0.02. The dividend declared today of $0.349 per share will be paid on March 6, 2012, to shareholders of record on February 21, 2012. The cash payment associated with this dividend will be approximately $67.1 million. Moving onto the balance sheet. Microchip's inventory at December 31 was $217.9 million or 137 days, up 5 days from the prior-quarter levels. The total combined inventory held either by Microchip or its distributors was down 6 days on a sequential basis. Inventory at our distributors was 35 days, which is down 11 days from the prior-quarter level. The change that we experienced in distribution inventory levels is that largest one quarter change we have ever experienced. However, I remind you that our distribution revenues throughout the world is recognized on a sell-through basis. At December 31, Microchip's accounts receivable balance was $149.3 million, an increase of 4.8% from the balance as of the end of December. Receivable balances continue to be in great condition with excellent payment performance from our customers. Read the rest of this transcript for free on seekingalpha.com