¹  Use of Non-GAAP Financial Measures:  Our non-GAAP adjustments, where applicable, include the effect of discontinued operations, 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), preclusion of revenue recognition under GAAP for inventory in the distribution channel on the acquisition dates of our acquisitions, revenue recognition changes related to Atmel and Micrel distributors, resulting from changes to business practices with those distributors, non-cash interest expense on our convertible debentures, gains on equity securities, impairments on available-for-sale investments, the related income tax implications of these items, tax adjustments in accordance with ASC 740-270 and non-recurring tax events.  Our non-GAAP results for the nine months ended December 31, 2016 reflect an adjustment for a manufacturing excursion issue with one of our suppliers.  Our non-GAAP net sales outlook for the March 2017 quarter reflects accounting for revenue for Atmel distributors on a sell-through basis.  Net sales from Atmel's sell-through distributors that the distributors owned as of the acquisition date is not recognized for GAAP purposes.  We believe that our disclosure of non-GAAP net sales provides investors with useful information regarding the actual end market demand for our products.

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 or other expenses related to transactions.  Management excludes all of these items from its internal operating forecasts and models.

We are using non-GAAP net sales, 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, non-GAAP income tax rate, non-GAAP net income from continuing operations, and non-GAAP diluted earnings per share from continuing operations 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.  Specifically, we do not consider such items when developing and monitoring our budgets and spending.  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  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.

³  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 March 2017 quarter between $69 and $71 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).

MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (unaudited)
		Three Months ended								Nine Months Ended
		December 31,								December 31,
		2016				2015				2016				2015
Net sales		$	834,366			$	540,344			$	2,505,141			$	1,615,687
Cost of sales		369,107				247,626				1,280,771				713,002
Gross profit		465,259				292,718				1,224,370				902,685
Research and development		132,433				97,022				418,111				276,958
Selling, general and administrative		111,017				76,270				388,651				223,377
Amortization of acquired intangible assets		82,791				48,312				243,356				126,764
Special charges (income) and other, net		20,944				(5,018		)		52,522				3,187
Operating expenses		347,185				216,586				1,102,640				630,286
Operating income		118,074				76,132				121,730				272,399
Losses on equity method investments		(55		)		(56		)		(167		)		(289		)
Other expense, net		(34,521		)		(25,918		)		(103,578		)		(48,430		)
Income before income taxes		83,498				50,158				17,985				223,680
Income tax benefit		(23,837		)		(11,053		)		(15,699		)		(32,890		)
Net income from continuing operations		107,335				61,211				33,684				256,570
Discontinued operations:
Loss from discontinued operations		(191		)		—				(7,514		)		—
Income tax benefit		(31		)		—				(1,561		)		—
Net loss from discontinued operations		(160		)		—				(5,953		)		—
Net income		107,175				61,211				27,731				256,570
Less: Net loss attributable to noncontrolling interests		—				—				—				207
Net income attributable to Microchip Technology		$	107,175			$	61,211			$	27,731			$	256,777
Basic net income per common share attributable to Microchip Technology stockholders
Net income from continuing operations		$	0.50			$	0.30			$	0.16			$	1.26
Net loss from discontinued operations		—				—				(0.03		)		—
Net income attributable to Microchip Technology		$	0.50			$	0.30			$	0.13			$	1.26
Diluted net income per common share attributable to Microchip Technology stockholders
Net income from continuing operations		$	0.46			$	0.28			$	0.14			$	1.18
Net loss from discontinued operations		—				—				(0.02		)		—
Net income attributable to Microchip Technology		$	0.46			$	0.28			$	0.12			$	1.18
Basic common shares outstanding		216,210				203,294				215,360				203,267
Diluted common shares outstanding		235,424				217,975				233,351				217,280

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