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Microchip Technology Reports Seven Percent Increase in Revenue

4/28/2003 - Microchip Technology Incorporated, a leading provider of microcontroller and analog semiconductors, reported results for the three months ended March 31, 2003 and the fiscal year ended March 31, 2003. Net sales for the fourth quarter were $159.7 million, down 5% sequentially from $167.5 million in the immediately preceding quarter, and up 7% from sales of $148.8 million in the prior year’s fourth quarter. Net income for the fourth quarter was $33.0 million or 16 cents per diluted share, down 9% sequentially from net income of $36.4 million or 17 cents per diluted share in the immediately preceding quarter, and up 25% from net income of $26.3 million or 13 cents per diluted share in the prior year’s fourth quarter.

Net sales for the fiscal year ended March 31, 2003 were $651.5 million, an increase of 14% from net sales of $571.3 million in the prior fiscal year. On a pro forma basis, net income for the fiscal year ended March 31, 2003 was $133.9 million, or 64 cents per diluted share, an increase of 41% from net income of $94.8 million, or 45 cents per diluted share in the prior year. On a GAAP basis, net income for the fiscal year ended March 31, 2003 was $88.2 million, or 42 cents per diluted share, a decrease of 7% from net income of $94.8 million, or 45 cents per diluted share in the prior year. Pro forma diluted earnings per share for fiscal year 2003 exclude the effects of the Fab 3 (Puyallup, WA) impairment charge, an in process research and development charge (related to the acquisition of PowerSmart) and the cumulative effect of the change in accounting principle related to the Company’s revenue recognition policy associated with sales to regional Asian distributors. A reconciliation of the Company’s GAAP results to its pro forma results is included later in this press release.

On March 18, 2003, Microchip announced a change in its revenue recognition policy relating to sales to regional Asian distributors. Microchip changed from recognizing revenue when product is shipped to these distributors (Point of Purchase “POP”) to recognizing revenue when these distributors sell the product to their customers (Point of Sale “POS”). Historically, Microchip has recognized revenue from its Americas, European and multinational Asian distributors at POS, but has recognized revenue from regional Asian distributors at POP. The focus on demand creation and sell-through to end customers is in the long-term best interest of Microchip. Revenue recognition at POS as Microchip's sole revenue recognition policy is a more refelective measure of end customer demand. Instituting this change at this point will result in a revenue recognition policy that is uniform throughout the Company. To implement the change in revenue recognition, Microchip has recorded a cumulative effect of change in accounting principle of $11.4 million as of April 1, 2002, which was the beginning of fiscal year 2003. This represents the amount of income that is now deferred as of that date under the POS method. Quarterly operating results for the first three quarters of fiscal year 2003 have been adjusted to conform to this change in accounting policy. These adjustments resulted in a cumulative revenue reduction of $8.7 million for the first three quarters of fiscal year 2003, and a cumulative net income reduction of $2.4 million for the same period.

The Company expects to declare a quarterly cash dividend within the next week. Microchip initiated quarterly cash dividend payments in the third quarter of fiscal year 2003, and has made two cash dividend payments of $.02 per share each.

“Microchip’s performance in a very difficult environment reflects the hard work, determination and commitment of our global enterprise. In fiscal year 2003, we delivered year over year revenue growth of 14%, achieved substantial market share gains in the 8-bit microcontroller market, attained operating profits among the highest in the industry, and maintained a healthy, debt-free balance sheet. While the year did not finish as we anticipated, our fiscal year 2003 achievements validate that our business model is working solidly. Looking ahead, our business is expected to generate between $175 and $200 million in free cash flows in fiscal year 2004, confirming the overall continued strength of our business enterprise,” said Steve Sanghi, Microchip’s President and CEO.

“As announced in our April 7, 2003 press release, we are focusing on the closure of Fab 1 (Chandler, AZ) and integrating certain personnel, equipment and processes into our Fab 2 (Tempe, AZ),” Mr. Sanghi continued. “After the completion of the integration process, our gross margins are expected to be approximately 54%, with further improvement anticipated after Fab 4 commences production.

“Visibility in the current global economic and geopolitical environment continues to be very difficult. Despite the current uncertainties, we remain confident in the long-term performance of our proprietary microcontroller and analog products,” Mr. Sanghi concluded.

Microchip’s Fourth Quarter Highlights:

• Microchip announced initial high yields from its Fab 4 semiconductor manufacturing facility in Gresham, Oregon. All of the necessary manufacturing processes are working, the qualification wafers are in progress and the first wafers produced yielded 91% usable die.
• Expanding its industry-leading power-managed portfolio, Microchip debuted seven PIC16F Flash microcontrollers that feature nanoWatt Technology. These devices offer the flexibility of reprogrammable Flash memory coupled with new power-managed features and are designed to reduce the overall power consumption within embedded systems.
• Microchip introduced a highly flexible PICmicro® microcontroller family that helps simplify motor-control design. The PIC18F2439/2539/4439/4539 Flash microcontrollers increase flexibility for variable speed control, reduce noise and maximize energy efficient operation in single-phase motor control applications.
• The MPLAB® In-Circuit Emulator (ICE) 4000 debuted to support Microchip’s high-end PIC18F Flash microcontrollers and dsPIC digital signal controllers. The MPLAB ICE 4000 provides full speed, low voltage emulation, interchangeable processor modules and device adapters.
• The low-cost PICkit 1 Flash Starter Kit for low-pin count PICmicro Flash microcontrollers was introduced. Available for only $36 (US), the PICkit 1 Flash Starter Kit is an easy-to-use programmer, evaluation and development kit for the Company’s popular 8- and 14-pin Flash microcontrollers.
• The Company expanded its analog portfolio with a new family of low voltage, low cost operational amplifiers. These 1 MHz op amps reduce supply voltage demand, making them ideal for extending battery life and other low-voltage applications.
• The TC72/77 serial output temperature sensors were selected by analogZONE as the recipient of its annual "Product of the Year" award for 2002. Twenty-six products were recognized this year, and Microchip was one of two companies to bring home the award in the sensor category.
• Microchip introduced a 500mA Synchronous Buck-DC-to-DC synchronous step-down converter that operates over a multitude of input and output conditions. The MCP1601 provides designers with an efficient method of transforming battery or bus voltage to system requirements.
• Microchip unveiled its first PowerSmart® battery monitoring device featuring Accuron? technology for Nickel Metal Hydride (NiMH) applications. The new PS402 is a Smart Battery System-compliant, battery management integrated circuit that integrates all rechargeable battery monitoring functions for NiMH batteries on a single chip. With accuracy to within +/-1 percent, the PS402 provides the host system and user with valuable information that can be utilized for enhanced power management while providing the system’s user with optimum predictability.

The Arizona Association of Industries awarded Microchip the 2003 Co-Manufacturer of the Year in the Large Manufacturer category for the Company’s consistent, steady growth and success, and strong support of education in Arizona. Q1 FY2004 Outlook:

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

Continuing uncertainty in the global semiconductor industry and low visibility make it very difficult to predict demand and other related matters. Microchip will provide a mid-quarter update on June 10, 2003. See “Conference Call and Updates” section below for details.

As indicated below, certain of the Q1 FY2004 Outlook line items are pro forma and exclude the effect of accelerated depreciation due to the announced closure of Fab 1 and other related expenses. Microchip expects these charges will be taken in the first quarter of fiscal year 2004, and are currently expected to be between $27 and $33 million, for which Microchip estimates $24 to $29 million will represent accelerated depreciation, and $3 to $4 million will be other related expenses. The majority of the total charges will be reflected in cost of sales.

• Net sales for the first fiscal quarter ending June 30, 2003 is currently anticipated to be between $157 and $164 million (down approximately 2% to up approximately 3% compared to the immediately preceding quarter).
• Pro forma gross margins for the first fiscal quarter ending June 30, 2003 are expected to be approximately 54%¹. Generally, gross margins will fluctuate over time, driven primarily by the mix of microcontrollers, analog products and memory products sold, manufacturing yields, fixed cost absorption, wafer fab loading levels, pricing pressures in our non-proprietary product lines, and competitive and economic conditions.
• Operating expenses for the first fiscal quarter ending June 30, 2003 are expected to be between $44.2 and $44.7 million. Operating expenses fluctuate over time, primarily due to revenue and profit levels.
• The pro forma tax rate for the first fiscal quarter ending June 30, 2003 is anticipated to be approximately 25.5%.²
• Pro forma earnings per diluted share for the first fiscal quarter ending June 30, 2003 are anticipated to be between 15 and 16 cents. ³
• Inventories at June 30, 2003 are anticipated to be approximately 141 days. The level of inventories fluctuates over time, primarily due to sales volume and overall capacity utilization.
• Capital expenditures for the quarter ending June 30, 2003 are expected to be approximately $15 million, and capital expenditures for fiscal year 2004 are expected to total approximately $40 to $45 million. The level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.
• Based on cash projected to be generated from operations and current projected capital expenditure levels, we expect to add approximately $50 million to our existing cash balances during the quarter ending June 30, 2003.
• Microchip announced on August 7, 2002 that its Board of Directors had authorized a stock buy-back of up to 2.5 million shares. Microchip has been buying stock in the open market since that date. To date, 1,264,700 shares have been repurchased at a cost of $27.1 million. Future purchases will depend upon market conditions and corporate considerations.

About Microchip
Microchip Technology Inc. manufactures the popular PICmicro® field-programmable RISC microcontrollers, which serve 8- and 16-bit embedded control applications, and a broad spectrum of high-performance linear and mixed-signal, power management and thermal management devices. The Company also offers complementary microperipheral products including interface devices; microID® RFID devices; serial EEPROMs; and the patented KEELOQ® security devices. This synergistic product portfolio targets thousands of applications and a growing demand for high-performance designs in the automotive, communications, computing, consumer and industrial control markets. The Company's quality systems are ISO 9001 (1994 version) and QS9000 (1998 version) certified. Microchip is headquartered in Chandler, Arizona with design facilities in Mountain View, California, Plano, Texas, Bangalore, India, and Lausanne, Switzerland; semiconductor fabrication facilities in Tempe and Chandler, Arizona, Puyallup, Washington, and Gresham, Oregon, and assembly and test operations near Bangkok, Thailand. Microchip employs approximately 3,350 people worldwide and has sales offices throughout Asia, Europe, Japan and the Americas. More information on the Company can be found at www.microchip.com.

The Microchip logo and name, PICmicro®, KEELOQ® , MPLAB®, microID®, and PowerSmart® are registered trademarks of Microchip Technology Incorporated. dsPIC^TM, Accuron^TM, and PICkit^TM are trademarks of Microchip Technology Incorporated.

1 GAAP gross margins for the first fiscal quarter ending June 30, 2003 are expected to be between 35% and 39%.
2 GAAP tax rate for the first fiscal quarter ending June 30, 2003 is expected to be between -17% and 8%.
3 GAAP earnings per diluted share for the first fiscal quarter ending June 30, 2003 are expected to be between 5 and 8 cents.

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