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, excess capacity charges to normalize acquired inventory levels, severance and other restructuring costs, and legal and other general and administrative expenses associated with acquisitions), non-cash interest expense on our convertible debentures, adjustments for a manufacturing excursion issue with one of our suppliers, losses on the settlement of debt, and losses on available-for-sale investments. For the fourth quarter of fiscal 2019, our non-GAAP income tax expense is presented based on projected cash taxes for fiscal 2019, excluding transition tax payments under the Tax Cuts and Jobs Act. For the fourth quarter of fiscal 2018, our non-GAAP income tax expense is presented in a manner that excludes the tax impact of non-GAAP adjustments calculated using the applicable tax rates in the jurisdictions where the adjustments occurred, tax adjustments in accordance with ASC 740-270, and one-time tax events.
Prior to the fourth quarter of fiscal 2019, we reported non-GAAP net sales based on end-market demand, which excluded the effect of our distributors increasing or decreasing their inventory holdings. Beginning with the fourth quarter of fiscal 2019, we changed the information included in our financial guidance and provide net sales guidance based on sell-in revenue recognition under the new GAAP standard. For the fiscal year ended March 31, 2019, our non-GAAP results are calculated as the sum of the non-GAAP results we disclosed previously for each of the first three quarters of fiscal 2019 plus the non-GAAP results for the fourth quarter of fiscal 2019 based on sell-in revenue recognition. We also present an end-market demand metric which reflects the net dollar amount of our products, licensing revenue and other services delivered to our direct (non-distributor) customers and by our distributors to their customers. See the "Use of End-Market Demand" section of this press release.
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. Our other non-GAAP adjustments are either non-cash expenses, unusual or infrequent items or other expenses related to transactions. Management excludes all of these items from its internal operating forecasts and models.
We are using non-GAAP operating expenses in dollars including non-GAAP research and development expenses and non-GAAP selling, general and administrative expenses, non-GAAP other expense, net, and non-GAAP income tax rate, which exclude the items noted above, 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 our business and for compensation purposes. We also use our non-GAAP results when developing and monitoring our budgets and spending. Our determination of these 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 these 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.
Generally, gross margin fluctuates over time, driven primarily by the mix of microcontrollers, mixed-signal products, analog products and memory products sold and licensing revenue; variances in manufacturing yields; fixed cost absorption; wafer fab loading levels; costs of wafers from foundries; 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.
Diluted Common Shares Outstanding can vary for, among other things, the trading price of our common stock, the 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 repurchases or issuances of shares of our common stock. The diluted common shares outstanding presented in the guidance table above assumes an average Microchip stock price in the June 2019 quarter between $95 and $105 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).
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in millions except per share amounts) (unaudited) | ||||||||||||||||
| Three Months Ended | Twelve Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net sales | $ | 1,329.8 | $ | 1,002.3 | $ | 5,349.5 | $ | 3,980.8 | ||||||||
| Cost of sales | 509.3 | 387.2 | 2,418.2 | 1,560.1 | ||||||||||||
| Gross profit | 820.5 | 615.1 | 2,931.3 | 2,420.7 | ||||||||||||
| Research and development | 214.8 | 133.5 | 826.3 | 529.3 | ||||||||||||
| Selling, general and administrative | 167.5 | 114.5 | 682.9 | 452.1 | ||||||||||||
| Amortization of acquired intangible assets | 176.9 | 122.8 | 674.1 | 485.5 | ||||||||||||
| Special (income) charges and other, net | (23.3 | ) | 0.2 | 33.7 | 17.5 | |||||||||||
| Operating expenses | 535.9 | 371.0 | 2,217.0 | 1,484.4 | ||||||||||||
| Operating income | 284.6 | 244.1 | 714.3 | 936.3 | ||||||||||||
| Losses on equity method investment | (0.1 | ) | (0.1 | ) | (0.2 | ) | (0.2 | ) | ||||||||
| Other expense, net | (133.3 | ) | (55.8 | ) | (509.6 | ) | (198.8 | ) | ||||||||
| Income before income taxes | 151.2 | 188.2 | 204.5 | 737.3 | ||||||||||||
| Income tax (benefit) provision | (23.5 | ) | 41.5 | (151.4 | ) | 481.9 | ||||||||||
| Net income | $ | 174.7 | $ | 146.7 | $ | 355.9 | $ | 255.4 | ||||||||
| Basic net income per common share | $ | 0.74 | $ | 0.63 | $ | 1.51 | $ | 1.10 | ||||||||
| Diluted net income per common share | $ | 0.70 | $ | 0.58 | $ | 1.42 | $ | 1.03 | ||||||||
| Basic common shares outstanding | 237.2 | 234.6 | 236.2 | 232.9 | ||||||||||||
| Diluted common shares outstanding | 250.9 | 251.5 | 249.9 | 248.9 | ||||||||||||
