Microchip Technology (MCHP) Q4 2019 Earnings Call Transcript

Microchip Technology (MCHP -1.01%)
Q4 2019 Earnings Call
May. 08, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day everyone, and welcome to the Microchip's fourth-quarter fiscal 2019 financial results conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Eric Bjornholt, chief financial officer. Please go ahead sir.

Eric Bjornholt -- Chief Financial Officer

Good morning everybody. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases of last evening, as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations.

In attendance with me today are Steve Sanghi, Microchip's chairman and CEO; and Ganesh Moorthy, Microchip's president and COO. I will comment on our fourth-quarter and full fiscal-year 2019 financial performance, and Steve and Ganesh will then give their comments on the results, discuss the current business environment, as well as our guidance and provide an update on our integration activities associated with the Microsemi acquisition. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and 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 in comparing GAAP and non-GAAP results. I want to remind investors that during the quarter ending June 30, 2018, we adopted the new GAAP revenue recognition standard, which requires revenue to be recognized at the time products are sold to distributors versus our historical revenue recognition policy where revenue on such transactions were deferred until the product was sold by our distributors to an end customer. We continue to track and measure our performance internally based on direct revenue plus distribution sell-through activity, and we'll provide a metric for this called end-market demand in our earnings release each quarter. Therefore, along with our GAAP and non-GAAP results based on distribution sell-in, we will also provide investors with our end-market demand based on distribution sell out but will not provide a P&L on end-market demand.

End-market demand in the March 2019 quarter was $1.34 billion, which was $10.4 million above our GAAP revenue. I will now go through some of the operating results, including net sales, gross margin and operating expenses. I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based compensation and certain other adjustments. Our fiscal 2019 non-GAAP results are calculated as the sum of the non-GAAP sell-through-based information we disclosed previously for each of the first three quarters of fiscal 2019 plus the non-GAAP sell-in-based information disclosed today for the fourth quarter of fiscal 2019.

Net sales in the March quarter were $1.33 billion, which was above the midpoint of our guidance and down 3.3% sequentially. We have posted a summary of our GAAP net sales in the end-market demand by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were 62.2% and well above the midpoint of our guidance, which was 61.5%. Operating expenses were at the low end of our guidance range at 25.8% of sales, and operating income was $484.1 million [Inaudible] 36.4% of sales.

Non-GAAP net income was $370.4 million. Non-GAAP earnings per diluted share was $1.48, which was over $0.8 above the midpoint of our guidance of $1.395. For fiscal 2019, on a non-GAAP basis, net sales were a record $5.476 billion and up 37.6% year over year. Gross margins were a record 62.1%.

Operating expenses were 24.3% of sales, and operating income was 37.7% of sales. Net income was a record $1.636 billion, and non-GAAP EPS was a record $6.55 per diluted share. Please note that for fiscal-year 2019, our non-GAAP results are based on our publicly reported non-GAAP results, which Q1 through Q3, as mentioned before, were based on sell-through revenue recognition in the distribution channels, and Q4 was based on sell-in revenue recognition in the distribution channel. Fiscal-year 2020 non-GAAP results will be based on sell-in revenue recognition in line with our GAAP revenue reporting and the revenue recognition standard adopted during the first quarter of fiscal 2019.

On a GAAP basis, gross margins were 61.7% and include the impact of $4 million of share-based compensation and $1.8 million of acquired inventory valuation costs. Total operating expenses were $535.9 million and include acquisition intangible amortization of $176.9 million, special income of $23.3 million, $4.4 million of acquisition-related and other costs and share-based compensation of $35.1 million. The GAAP net income was $174.7 million, or $0.70 per diluted share and includes an income tax benefit of $23.5 million. The GAAP tax benefit in the quarter related to a variety of matters including tax reserve releases due to statute of limitations expiring, tax reform refinements and tax benefits associated with restructuring the Microsemi operations into the Microchip global structure.

On a GAAP basis for fiscal 2019, net sales were a record $5.35 billion and up 34.4% year over year. Gross margins were 54.8%. Operating expenses were 41.4% of sales, and operating income was 13.4% of sales. Net income was $355.9 million, and EPS was $1.42 per diluted share.

The non-GAAP cash tax rate was 1.4% in the March quarter and 3% for fiscal-year 2019. For cash planning purposes, we were able to defer the payment of some of our fiscal '19 taxes into fiscal '20, and this was one of the reasons our FY '19 tax rate was lower than originally projected. We expect our non-GAAP tax rate for fiscal '20 to be between 5% and 6%, exclusive of the transition tax, any potential tax associated with restructuring the Microsemi operations into the Microchip global structure and any tax on settlements related to taxes accrued in prior fiscal years. We have many tax attributes and net operating losses and tax credits, as well as U.S.

interest deductions that we believe will keep our cash tax payments low. The future cash tax payments associated with the transition tax is expected to be about $246 million and will be paid over the next seven years. We have posted a schedule of our projected transition tax payments on the investor relations page of our website. Moving on to the balance sheet.

You will notice that Microchip's accounts receivable balance is up significantly from the prior quarter. We have made an accounting presentation change to reclassify the distributor price adjustments that reduce the amount of cash we ultimately receive from our distributors from a reduction in the AR balance to an increase in accrued liabilities. Remember that we generally sell to our distributors at a price that is higher than the ultimate sales price, and then that price is reduced by a distributor price adjustment when the ultimate sale occurs to the distributors' customers. Excluding this reclassification, our accounts receivable balance was up about $5 million in the quarter.

Our inventory balance at March 31, 2019 was $711.7 million. All the inventory markup for Microsemi required for GAAP purchase accounting has now been sold through and is no longer reflected in the ending inventory balance. We had 128 days of inventory at the end of the March quarter, up five days from the prior-quarter level. Inventory out of distributors in the March quarter were at 35 days, compared to 36 days at the end of December.

We believe that barring any negative developments in the U.S.-China trade front, our distributors are holding a reasonable level of inventory to support end-market demand. The cash flow from operating activities was $403.4 million in the March quarter. As of March 31, the consolidated cash and total investment position was $430.9 million. We paid down $277.5 million of total debt in the March quarter, and the net debt on the balance sheet reduced by $272.3 million.

At March 31, our debt outstanding includes $3.267 billion of borrowings under our line of credit, $1.912 billion of term loan B, $2 billion in high-grade bonds and $4.481 billion of convertible debt. Our EBITDA in the March quarter was $544.4 million, and our trailing 12-month EBITDA was $2.212 billion. Our net debt to EBITDA, excluding our very long dated convertible debt that matures in 2037 and is more equity-like in nature was 4.8 at March 31, 2019. Our net leverage metrics are based on 12-month trailing EBITDA, which will continue to provide some headwinds due to the distribution inventory reductions that were made in the June and September quarter for Microsemi, which caused our shipment activity to be significantly less than the end-market demand during these periods.

The weaker economic environment also has negatively impacted our EBITDA in the December 2018 and March 2019 quarters. We are committed to using substantially all of our excess cash generation beyond our dividend payments to reduce our debt levels, and we expect our debt levels to reduce significantly over the next several years. Our dividend payment in the March quarter was $86.7 million. Capital expenditures were $40.1 million in the March 2019 quarter and $228.9 million in fiscal-year 2019.

We expect about $35 million in capital spending in the June quarter and overall capital expenditures for fiscal-year 2020 to be between $130 million and $150 million. We continue to add capital to support the growth of our production capabilities for our new products and technologies and to bring in house more of the assembly and test operations that are currently outsourced. These capital investments will bring some gross margin improvement to our business, particularly for the outsourced Atmel and Microsemi manufacturing activities that we are bringing into our own factories. Depreciation expense in the March quarter was $48.4 million.

I will now turn it over to Ganesh to give his comments on the performance of the business in the March quarter and provide an update on some of the Microsemi integration activities. Ganesh?

Ganesh Moorthy -- President and Chief Operating Officer

Thank you, Eric, and good morning everyone. Before I get started, I'd like to clarify that the product-line comparisons I will be sharing with you today are based on end-market demand, which is how Microchip measures its performance internally. Let's start by taking a closer look at microcontrollers. Our microcontroller business was sequentially down 4.6% compared to the December quarter, reflecting the broad macro weakness in the markets we serve.

Microcontrollers, however, were up 8.6% from the year-ago quarter. On a fiscal-year basis, fiscal-year '19 microcontroller revenue was a record at over $3 billion and grew 15% over fiscal-year '18. Microcontrollers represented 53.3% of our end-market demand in the March quarter. During the quarter, we continued to introduce a steady stream of innovative new microcontrollers, ranging from the industry's first Arm-based microcontroller with space-qualified versions that have scalable levels of radiation performance, new dual and single-core dsPIC33 Digital Signal controllers with built-in functional safety, the industry's smallest IEEE 802.15.4-compliant module that combines an ultra low power microcontroller with a sub gigahertz radio.

And last but not least, we unveiled our unified 32-bit microcontroller software framework called Harmony, extending support for Atmel-originated SAM microcontrollers in Microchip's development tool environment. We now support our MIPS-based microcontrollers, as well as our Arm-based microcontrollers on a single development environment of MPLAB and Harmony. Last month, Gartner released their microcontroller market share report for calendar-year 2018. We are pleased to report that Microchip retained the number one position for 8-bit microcontrollers.

Once again, we gain market share as we grow faster than the 8-bit microcontroller market overall. And in fact, we are now 73% larger than the number two player. In the 16-bit microcontroller market, we remain in the number five position and continue to gain significant market share as we grew faster than all our top competitors and at about 5x the growth rate of the 16-bit microcontroller market. In the 32-bit microcontroller market, we remain in the number six position and gained significant market share as we grew almost at 2x the growth rate of the 32-bit microcontroller market.

We were also the fastest-growing franchise among the top six players who make up over 80% of the 32-bit microcontroller market. These results are despite Gartner rolling up our 32-bit microcontroller revenue to be 30% lower than the over $1 billion revenue that we informed you of in our last conference call. Had Gardner used our actual calendar-year 2018 32-bit microcontroller revenue, we would have moved up to the number four ranking. Additionally, our 32-bit microcontroller revenue in fiscal-year '19 was over $1.1 billion, demonstrating continued momentum.

For microcontrollers overall, we remain in the number three position and grew faster than the two players ahead of us. The Gartner reported revenue is considerably lower than our publicly reported revenue for calendar-year 2018. Using our publicly reported revenue, we would be approximately 13% and approximately 18% away from the top two players ahead of us as we continue our relentless march toward the number one spot. Our microcontroller portfolio and roadmap has never been stronger.

We believe we have the new product momentum and the customer engagement to continue to gain even more share in 2019 as we further build the best-performing microcontroller franchise in the industry. Now moving to analog. Our analog business was sequentially down 5.8% compared to the December quarter, reflecting the same broad macro weakness our microcontroller business experienced. Analog, however, was up 60.2% from the year-ago quarter.

On a fiscal-year basis, fiscal-year '19 analog revenue was a record and well over $1.5 billion and grew 64.6% over fiscal-year '18. Analog represented 29% of our end-market demand in the March quarter. During the quarter, we continue to introduce a steady stream of innovative analog products, including a new analog-to-digital converter family that enables high-speed, high-resolution analog-to-digital conversions in harsh environments. Our FPGA business was sequentially down 5% as compared to the December quarter, reflecting the same broad macro weakness.

However, design wins in our new low-power mid-range PolarFire family continue to grow strongly, and we are optimistic about this product family adding another leg of growth for the future. During the quarter, we introduced the PolarFire FPGA imaging and video solution that supports resolutions as high as 4K in the small, low-power form factors necessary for a wide range of imaging and video applications. We also released our Libero SoC design tool, which delivers a unified design suite. FPGA represented 7% of end-market demand in the March quarter.

Moving next to our licensing business. This business is sequentially down 42.3% as compared to the December quarter. The production activity of our licensing customers has been cut significantly in response to industry conditions. Also, as we mentioned in our February conference call, we did not expect nor have any meaningful patent licensing revenues in the March quarter while we did in the December quarter.

Our patent licensing strategy is to monetize portions of the substantial patent portfolio we inherited through our acquisitions by licensing select patents to players in non-competitive fields of use while retaining the rights to these patents in our products as well. Investors should expect that the revenue contribution from patent licensing in the future will be lumpy from quarter to quarter. Our memory business was sequentially up 3.8% in the March quarter as compared to the December quarter. And finally, our multi-market and other business was up 3.5% sequentially as compared to the December quarter.

A quick update about our Microsemi integration as we come up on the one-year anniversary after the close. Business units, sales, operations and support groups are all making good progress. Our thanks go to the combined company employees who are working hand in hand to achieve accelerated synergy results. Overall, we're ahead of our energy targets and expect continued synergy gains for many quarters to come.

Business systems and operations integration is taking the longest time to complete as we are conducting this complex transition in phases. The first and second phases were completed on November 1 and February 1, respectively, for a combined total of four business units. The third phase went live on May 1 and involved four more business units. With that, we are about one-third of the way through the business systems and operations integration, and more phase releases are planned every quarter.

We expect the overall business and operational integration will take about another 12 to 15 more months to complete. Finally, prior to our acquisition, Microsemi had announced the closing of a small four-inch fab in Bend, Oregon. The last wafers came out of this fab at the end of the March quarter, and we ceased production on schedule. Additionally, we were able to find a buyer for the fab and closed the sale last week.

The sale price was not material to Microchip. Let me now pass it to Steve for some comments about our business and our guidance going forward. Steve?

Steve Sanghi -- Chairman and Chief Executive Officer

Thank you, Ganesh, and good morning everyone. Today, I would like to first reflect on the results of the fiscal fourth-quarter of 2019. I will then provide guidance for the fiscal first quarter of 2020. Our March quarter GAAP and non-GAAP net sales based on sell-in revenue recognition came in just a tad above the midpoint of our guidance.

The business in the quarter proceeded as we had expected. Our end-market demand measured by sell-through was about $10 million higher than the sell-in revenue. But unfortunately, we cannot call sell-through-based market demand as revenue anymore based on the new revenue recognition standard. The end-market demand was stronger than sell-in revenue, which is consistent with our thesis that the channel is continuing to manage their working capital conservatively by reducing inventory due to uncertainty.

Our consolidated non-GAAP gross margin at 62.2% exceeded the high end of our guidance. Our consolidated non-GAAP operating margin of 36.4% was also above the high end of our guidance. These growth and operating margin percentages are the highest results we have ever posted at the bottom of the cycle. Our consolidated non-GAAP earnings per share exceeded the midpoint of our guidance by over $0.8 per share.

On a non-GAAP basis, this was also our 114th consecutive profitable quarter. I want to thank all employees of Microchip, including employees from all of our acquisitions, for their contribution. One other area I wanted to point out is our debt payments. In the March quarter, we paid down $277.5 million of our debt.

Our total debt payment since the end of June 2018 has been $1.156 billion. With expected $250-million payment in the June quarter, we expect to have paid down about $1.4 billion of our debt since the closing of the Microsemi transaction on May 29, 2018, which we feel is excellent progress. In addition, with Federal Reserve Board expected to be on hold for any further interest rate increases, we are optimistic that the peak of our debt-to-EBITDA leverage is behind us, and we should see meaningful reduction in leverage in the next one year starting this June quarter. Now I will provide you guidance for the June quarter.

The guidance we provided for the September quarter of last year, which reflected our caution on business conditions, turned out in retrospect to be spot on and was a harbinger for broader industry weakness through the last several quarters. In our last quarter's earnings call, we said that barring any negative development on the trade front, we see the March 2019 quarter to mark the bottom of this cycle for a Microchip. Secondly, we said that last quarter we did not know the shape of the recovery, whether it is V, U or L shaped, and it would depend somewhat on the outcome of the trade talks. Towards that end, we did not get a settlement on the trade front.

In fact, in recent days, the rhetoric has turned more negative with 25% duties on $200 billion of Chinese goods expected to go into effect this Friday. Therefore, the uncertainty related to U.S.-China trade relations continues. Given this continued uncertainty, we see weaker-than-seasonal business conditions for Microchip. We continue to operate our business prudently for long-term shareholder value, and we believe that the end-market demand will continue to be stronger than the GAAP sell-in revenue in the June quarter, and that channel and customer inventory will continue to decrease.

Given this color about business conditions, we expect net sales for our products to be about flat sequentially, plus or minus 5% in the June 2019 quarter. We want to correct some of the analysts' and investors' perception about what is a seasonal growth for us in the June quarter. If you take our past year's revenue as reported and average them for the calculation of the June quarter's seasonality, you will get a very wrong result. It is because several of our acquisitions closed in April.

Supertec's acquisition closed on April 1, 2014. Atmel acquisition closed on April 3, 2016, and Microsemi acquisition closed on May 29, 2018. If we make the calculation based on removing the acquired company sales in the first quarter, then based on the last seven years, our average net sales in the June quarter were up about 3% sequentially. Therefore, our current flattish guidance at the midpoint for June quarter is below historical seasonality for classic Microchip.

We expect our non-GAAP gross margin to be between 61.8% and 62.2% of sales. We expect non-GAAP operating expenses to be between 25.3% and 26.3% of sales. We expect the non-GAAP operating profit percentage to be between 35.5% and 36.9% of sales. We expect our non-GAAP earnings per share to be between $1.26 per share to $1.49 per share.

Now the next question is what happens after the June quarter? The hints coming out of Washington regarding the status of U.S.-China trade talks continue to oscillate between positive and negative. While there is no guarantee that talks will end successfully with a settlement, we believe that any finality of such talks will remove some of the uncertainty and will have positive effect on the business. China has already taken a number of stimulus measures to boost business, including a cut in the VAT from 16% to 13%, cutting the personal income tax rate and cutting reserve requirements of the banks, thus increasing the money supply. We have seen some strength in our China business from the bottom in the March quarter and expect more strength to pick up in the second half of calendar 2019.

The automotive business continues to be weak around the world because of car production down in U.S., Europe and China. We expect that our automotive business bottomed in March quarter two and should start to recover from the low base and strengthen into the second half of calendar 2019. Considering all of the above factors, we are renewing our belief that barring any negative developments on the trade front, we will expect the business recovery to pick up in the second half of calendar 2019. Given all the complications of accounting for our acquisitions, including amortization of intangibles, restructuring charges and inventory write off on acquisitions, Microchip will continue to provide guidance and track its results on a non-GAAP basis, except for net sales, which will be on a GAAP basis.

We believe that non-GAAP results provide more meaningful comparison to prior quarters, and we request that the analysts continue to report their non-GAAP estimates to First Call. With this, operator, will you please poll for questions?

Questions & Answers:

Operator

Of course. Thank you. [Operator instructions] OK, we will now take our first question from John Pitzer from Credit Suisse. Please go ahead.

Your line is open.

John Pitzer -- Credit Suisse -- Analyst

Yes. Good morning guys. Thanks for letting me ask questions. Steve, my first question, very helpful; help us understand how you're viewing seasonality into the June quarter.

But just given all the acquisitions, and I think a couple of quarters ago you talked about still trying to understand the seasonality of all the new businesses together, I'm wondering if you can just level set everyone on the call and help us understand how you think about seasonality in September, December and March, as well as June.

Steve Sanghi -- Chairman and Chief Executive Officer

John, we're are able to give forward-looking seasonality for multiple quarters yet. We haven't  had enough experience on the Microsemi front. Some of the last year's performance was affected by the inventory reduction we undertook in distribution. So we haven't had a number of normal quarters.

Then we got hit by all this U.S.-China trade issues for the last couple of quarters that we have been fighting and are now looking for the recovery. So the historic seasonality for June quarter I mentioned was to remove the acquired company's first-quarter revenue and then average the last seven years. We certainly can do that for the September and December quarter and provide that information to the investors, but that would be backward-looking seasonality. We are not yet able to give you information on the forward-looking seasonality.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. And then just as my follow up. On the CAPEX guidance for the new fiscal year, it's down fairly meaningfully year over year. To what extent is that just a reflection of the weak business environment? Or is this just really some of the CAPEX projects you had in place to help integrate the acquisitions that are mostly behind you? And how do we think about kind of the run rate of CAPEX whether as a percent of sales or an absolute dollar number from kind of what you're projecting for the current fiscal year?

Eric Bjornholt -- Chief Financial Officer

OK. This is Eric. I can take that question. So as indicated, we're projecting somewhere between $130 million and $150 million in CAPEX for fiscal '20.

That's down from about $230 million in fiscal '19. Fiscal '19, we had some kind of one-time events associated with some building projects that we talked about the last few conference calls that was in the $60 million to $70 million range, and we had put capacity in place in the first half of last fiscal year expecting the environment to be stronger. So I think we're pretty well positioned. And then we also have a full year of Microsemi, or a couple more months in fiscal '20 compared to fiscal '19.

So all that combined, I think our CAPEX projection is a reasonable range for the current year. I think over the course of time, we'll be in that 3% to 4% of sales, and there'll be peaks and valleys to that just based on the environment that we're facing at that time.

John Pitzer -- Credit Suisse -- Analyst

Thanks guys.

Operator

Thank you. We will now take our next question from Chris Danely from Citi. Please go ahead. Your line is open.

Chris Danely -- Citi -- Analyst

Thanks guys. So, Steve, your tone seems a little more pessimistic than it did three months ago. So has anything changed? Is this just because we're looking at another $200 billion? Has anything changed in your business over the last week or the last, I guess, three months since you were last on the call to make you a little more pessimistic on how things are going?

Steve Sanghi -- Chairman and Chief Executive Officer

Well, what changed is really the tone on the U.S.-China trade front going from a lot of positive signals coming from various officials, including Secretary Mnuchin and all that over the last couple of months, and then turning into a tweet by President Trump on Sunday that the 25% tariffs on $200 billion of Chinese goods are going into effect this Friday, resulting into a cancellation of the visit by Vice-Premier of China first. And then later on, he repeat back the visit and he's now arriving on Thursday. So the rhetoric has turned meaningfully negative here and causing significant uncertainty. Now there hasn't been a lot of time since that news to gauge the reaction of our distributors and customers.

And as you know, we have very broad distribution and thousands and thousands of customers. And in a couple of days, you cannot really gauge all that. So yes, our tone has turned distinctly negative due to those developments.

Chris Danely -- Citi -- Analyst

Sure. I guess if this wasn't going on, maybe last week or the week before, what would your guidance be? And what have you heard from your customers kind of as the quarter has progressed on their tone of business?

Steve Sanghi -- Chairman and Chief Executive Officer

I think that's kind of a would have, should have, could have. We don't know. But certainly, our guidance would have been much more narrower in the range versus a wide range. And the guidance would have been more positive on the midpoint than the one we have provided now.

Ganesh Moorthy -- President and Chief Operating Officer

Chris, I would add also the trade resolution has also been delayed. So not only is it the most recent news from the weekend. When we were speaking to everybody back in February, there was a much earlier date for resolution. So that continues to push out and create uncertainty as well.

Steve Sanghi -- Chairman and Chief Executive Officer

During our conference call last quarter, which I think was on February 9 or something, the trade resolution was supposed to happen prior to March 1. So it was relatively imminent. Then it was delayed to May 1. And then it didn't happen on May 1.

And then the events turned negative. So there has been a substantial delay and change on that front.

Chris Danely -- Citi -- Analyst

OK, thanks.

Operator

Thank you. We will now take our next question from Harlan Sur from J.P. Morgan. Please go ahead.

Harlan Sur -- J.P. Morgan -- Analyst

Morning. Thank you for taking my question. You know, last year at analyst day, which was held in early March of last year, you guys were able to accurately call out the trends for the June quarter and even provide June quarter's sequential growth outlook. And I think a big part of the analysis back then was the rate of backlog build for the June quarter post Chinese New Year, which in a normalized demand environment kind of flattens out during CNY and then rises post Chinese New Year.

So I guess the question is, or it seems like you didn't see this type of recovery in the backlog this year. So maybe if you could just provide us with some color here on the backlog trends post CNY this year and what are the current backlog trends telling you about the September quarter?

Steve Sanghi -- Chairman and Chief Executive Officer

So I think the environment is of significant uncertainty because of U.S.-China trade talks this year. Then it was last year, there was no such uncertainty. The the only uncertainty we were dealing with last year was investors' perception about the letters we had written a year before, which many investors felt that pulled the demand up and there'll be a correction. And I think we showed through the charts that there was no such effect of the letters we write.

Those letters are simply to inform our customers, broad base of the 120,000-plus customers, the environment we were dealing with. And through backlog and turns and various metrics, we showed to the investors that our business was in good shape and we were not really seeing any challenges. The environment today with uncertainty were the two largest markets we have, which are the U.S. and China.

Together they make close to 50% of our business, if not more; is of significant more uncertainty. And simply looking at the backlog and turns and all that in the middle of the quarter cannot make up for a large amount of customer sentiment. So having said all that, our backlog on April 1 started lower than our backlog was on January 1 because last-quarter bookings were weak. So our backlog started lower.

However, the bookings quarter to date in this quarter for the month of April and few days in May has been stronger than the bookings we got during the same time last quarter, from January 1 to February timeframe. So the bookings are stronger, and the turns coming from those bookings are stronger because the lead times are short. But with significant change in the sentiment driven by just the events of the last few days, it's very difficult to project what the distributor and customer sentiment would be in the balance of the quarter. Just imagine, if you were a supplier and you didn't know whether you'll be able to pass on a 25% tariff increase to your customers, whether your customer will then choose to buy their product from Korea or Taiwan or somewhere else and not from the Chinese supplier, in that environment you would take actions to protect your business by not having large amount of inventory, only building to firm orders and negotiating with your customers what kind of price increase you can pass on.

Those are all uncertainties thousands and thousands of customers have been dealing with for quite a while, impacting our business.

Eric Bjornholt -- Chief Financial Officer

I think the one other thing I would add to what Steve said is comparing the sentiment at March 1 last year when we did our Analyst Day to today, the other significant change over that time period is lead times have contracted significantly. And so that gives customers flexibility to place very short-term orders on us and to be responsive, which wasn't necessarily the case over a year ago back in March.

Harlan Sur -- J.P. Morgan -- Analyst

Great. Thanks for all the insights there. My follow-up question is strong showing on the market share front and MCUs for 2018. On 32-bit, you guys grew your business almost 900 basis points faster than the overall market.

And I don't think Microsemi had any 32-bit MCUs. So pretty much all organic. You've got your MIPS architecture, you've got your Arm family. Guys, could you just help us understand the drivers of this strong outperformance? I assume maybe part of it is helping your customers move up the stack? But what are some of the other dynamics driving this strong market share performance?

Ganesh Moorthy -- President and Chief Operating Officer

So it is not completely correct that Microsemi had no 32-bit microcontrollers. They did have a class of what we call specialized microcontrollers, which are 32-bit microcontrollers. But in general, the the classic Microchip 32-bit products of both architectures, MIPS and Arm, have been doing extremely well. As you know, we acquired the Arm microcontrollers through the Atmel acquisition.

So that has given us the ability to serve a broader set of customers, a broader set of applications. And so that combination of both what classic Microchip could do with the 32-bit microcontrollers we had that are more general purpose, plus some of the specialized microcontrollers that came from Microsemi all contributed to the last 12 months or the calendar-year '18 growth numbers that you see.

Harlan Sur -- J.P. Morgan -- Analyst

Great, thank you.

Operator

Thank you. We will now take our next question from Rajvindra Gill from Needham & Company. Please go ahead. Your line is open.

Rajvindra Gill -- Needham and Company -- Analyst

Yes. Thank you for taking my question. Yes, just a follow up on the China trade issue. I'm trying to get a sense in terms of how the issues with trade and how it translates to actual orders on the ground.

A lot of the companies in the coverage space saw kind of an abrupt cut in orders from their customers in China, starting in December, different from kind of past cycles and then have been starting to see some rebound. And given kind of your guidance, and June reflected kind of weaker seasonal trends even though, to the comment from Trump came out on Sunday, I'm just trying to reconcile your guidance and just the short nature of the change in sentiment because it only happened last week; and the actual impact that you're seeing on the ground to give way to give the guidance in the first place.

Steve Sanghi -- Chairman and Chief Executive Officer

So, Rajeev, it's very, very difficult to accurately assess the impact of a substantial negative turn on the development of trade talks. That's why we have a fairly broad guidance, not being accurately able to model the impact. These are not the issues where there is a historic record of what happens. I mean, these kind of things haven't happened in history.

It's only in the last couple of quarters. And I think we predicted the downturn better than anybody in the industry. We were the first one to predict that. And in many of the earnings report this season came before Trump's tweet on Sunday citing the talks had turned negative.

So having that knowledge that these talks have turned negative [Inaudible] our announcement last night in our earnings, we had to put the possibility of negative customer behavior. One thing I have described before to analysts and investors in our various calls and meetings, is the world economy largely runs on people building to forecast. Every manufacturer builds a large amount of their products on forecast from electronic stores to grocery stores to furniture stores. You go to a store, a grocery store is full of grocery.

And you put it in the bags and you go home. If the manufacturers did not put the grocery store inventory, you would go there and just place your order and come back in two days to pick it up. So in an uncertain environment, when our customers are not able to figure out the demand for their products because they do not know whether they will be able to pass a 25% tariff to their end customers in their environment, they stop building to a forecast and they largely want to build to hard orders where they can negotiate the price increase. And that is happening with our industrial customers, with our consumer customers, housing, appliance customers.

You have heard where prices are for washers and dryers and others have gone up 20%. So in that environment, the ecosystem squeezes down the inventory, from end customer inventory to loading docks to intermediate hubs to stores to everywhere else. And that creates a negative impact on our ability to supply chips, which then eventually go into parts. And you have seen that phenomena experienced by every other semiconductor manufacturer whose revenue has fallen in the last six, nine months where back in August, nobody was confirming that there's a problem, and we said there was a problem.

Does that make sense, Rajeev?

Rajvindra Gill -- Needham and Company -- Analyst

Hello?

Steve Sanghi -- Chairman and Chief Executive Officer

Yes.

Rajvindra Gill -- Needham and Company -- Analyst

Yes, I think that makes sense. It's a moving target. I just read now that Trump says the Chinese Vice-Premier is coming to the US to "make a deal." So I guess it's a constant change. But I appreciate it, thank you.

Operator

Thank you. We'll now take our next question from Vivek Arya from Bank of America Merrill Lynch. Please go ahead.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question. Steve, I know we are trying to get the best sense for June, and I understand and appreciate that it's a moving target so the conservatism is justified. My first question is that, just in terms of what you have actually seen so far in terms of bookings from your customers in China or U.S. or Europe, is it fair to say that any of these concerns about trade have not yet reflected in those bookings so far? Have you seen any turn? I realize that we are just within a week of all these political developments.

But so far, is it fair to say that you have not really seen any negative development in bookings from any geography or end market or anything along those lines?

Steve Sanghi -- Chairman and Chief Executive Officer

So, Vivek, you have to first decide from what timeframe you're comparing. If you're simply comparing it to what we talked last Friday, yes, we have not seen an impact in the last two days because it's just too hard to gauge. But if your timeframe is February 9, our last call, then we have seen the impact. At that time, the trade settlement was supposed to happen prior to March 1.

Then it got delayed to May 1. Then we didn't see it on May 1 either. So all that time, we have seen the impact on bookings and customers' ability to want to build the appropriate amount of inventory for the business and from the end point inventories to loading docks to hubs to everything else. If your reference point is our last earnings call, yes, the business is weaker then what it could have been if there was a settlement on March 1.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Got it. I ask that, Steve, just because I think your March numbers were actually fine, and I think what you mentioned was that so far in June, the bookings have also been fine. But let me leave that aside for a second. On Microsemi, could you remind us how much earnings accretion you finally saw now that fiscal '19 is over? And how much earnings accretion we should be thinking about from a fiscal '20 perspective? Thank you.

Eric Bjornholt -- Chief Financial Officer

OK. So we have not broken out in the current quarter, the quarter we're just reporting, what the Microsemi contribution was. We are definitely ahead of schedule. We had mentioned last quarter that we had achieved our kind of one-year target of run rate of $0.75 accretion.

We were above that as of the end of December and that things are continuing to progress. We're taking costs out of the system. Ganesh gave commentary in terms of how we're doing on business units and sales and support groups from an integration perspective. So making good progress.

We still feel good about our long-term synergy numbers and are working toward that, but we haven't broken out and aren't breaking out at this point in time the specific accretion that we have achieved so far.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

OK, thank you.

Operator

Thank you. We will now take our next question from William Stein from SunTrust. Please go ahead, your line is open.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking my questions. I have two. First, the company posted some better-than-expected results on the gross margin line.

Can you help us understand whether that's attributed more to mix or cost savings from Microsemi or anything else? And then I have a follow up, please.

Eric Bjornholt -- Chief Financial Officer

OK. So I'll take that. So we exceeded the midpoint of our non-GAAP gross margin guidance by about 70 basis points. The very strong gross margins were driven by a variety of reasons, including favorable product mix and ongoing cost reductions.

So it always is a mix of things. There's a lot of moving parts [Inaudible] groos margin, but we're making good progress on integration and the product mix was favorable in the quarter also to help us with that. And even at the midpoint of our guidance in the current quarter at 62%, we're only really 1% away from our long-term target of 63%. So I think things have really held up well in this downturn.

Yes, our inventory situation is a little bit higher than our target. But with short lead times and customers and distributors being in a pattern of decreasing their inventory levels, it gives us the best ability to respond very proactively to their needs.

Steve Sanghi -- Chairman and Chief Executive Officer

I would reemphasize one point that I made in my prepared remarks that as we go through various cycles, you can look at in the last 20 years, this would be the highest gross and operating margin nearly at the bottom of the cycle. In the past you will see this kind of growth in operating margin usually on the top of the cycle. So this is how much we have improved creating higher highs and higher lows. So from [Inaudible] go further in the next couple of years, complete this integration, have better loading in our factories with the demand coming back, it's really a good feeling to think about where the growth in operating margins could go.

William Stein -- SunTrust Robinson Humphrey -- Analyst

I appreciate those comments. One follow up, if I can, turning to the Microsemi acquisition. Less about the integration but more about the inventory. I understand from the prepared remarks that you've worked through all of the Microsemi inventory that was on your own balance sheet.

I was hoping you can comment on inventory not only in the channel but in any other places like at customers to the degree you can see it. Is that worked down to more normal levels where this is less of a deterrent to growth going forward? Or is there still some inventory in channel or at customers to work down? Thank you.

Eric Bjornholt -- Chief Financial Officer

Yes. So I think we've done a good job of working through the issues that were identified early on in the acquisition. The Microsemi distribution inventory, take you back to the September quarter, it was reduced to about 2.6 months over the course of the first four months of holding the asset, and the shipment activity into this distribution was impacted dramatically by that. But that has stayed very constant.

That 2.6 months has stayed the same in the December quarter and the March quarter. So we think we've got a good balance there, and there can be a business unit or two that has a little bit of elevated inventory and it's just taking some time to bleed that down. But overall, I think we're in good position. And the other things that we had talked about was contracts, manufacturing inventory and things like that, and I think all those have been corrected at this point in time.

Steve or Ganesh might have some additional comments to make.

Ganesh Moorthy -- President and Chief Operating Officer

The only comment I'd make is I, think in terms of end customers, we really don't get inventory reports. So we don't think there's a big overhang there, but we don't have much visibility into it. Our own inventory internally, we're continuing to work down. So this is our production areas.

And we have been running lower than what the sell-through is in terms of what we're building. And that is slowly coming back into levels that should be, but it's not completely where it needs to be.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Eric Bjornholt -- Chief Financial Officer

And we did take an under capacity utilization charge in the quarter overall for our various factories of a little over $7 million in the last quarter.

Steve Sanghi -- Chairman and Chief Executive Officer

And as the demand comes back and when that $7 million charge goes away, that $7 million lands up in the gross margin.

Eric Bjornholt -- Chief Financial Officer

Yes, eventually.

Operator

Thank you. We will now take our next question from Craig Ellis from B. Riley FBR. Please go ahead.

Your line is open.

Craig Ellis -- B. Riley FBR -- Analyst

Yes. Thanks for taking the question. I'll start with the clarification on two operating items. First, debt reduction came in much better than expected, at least on my front.

And the outlook suggests that the improvement that the company saw versus expectation is structural, so I wanted to get some clarification on that and further on the comments that Ganesh had in his prepared remarks, where he outlined three milestones that had been achieved with business integration. The clarification there is, is the financial benefit fairly linear with the milestones achieved so that we're about one-third of the way through the financial benefit? Or is it front-end loaded or back-end loaded?

Eric Bjornholt -- Chief Financial Officer

So, Craig, just to clarify, you had started off with, it's an OPEX question, right?

Craig Ellis -- B. Riley FBR -- Analyst

The first one is debt reduction and the $277 million. I thought that was above the expectation of the company. What's the cause of the positive variance?

Eric Bjornholt -- Chief Financial Officer

OK. All right. So we've continued to really manage our working capital requirements quite tightly and had good execution there and just managing our overall cash balances worldwide. So we've outperformed on debt pay down, no doubt about that, over the last couple of quarters; and made good progress.

I'd mentioned that our debt to EBITDA is still 4.8. And we expect as we progress in the second half of 2019 and the EBITDA improves, we're going to continue to be using all our excess cash generation to pay down debt that we will see some significant improvements in our debt to EBITDA. So I think it's working capital management. We talked about CAPEX a little bit earlier.

Also, CAPEX being down significantly in fiscal '20 as a projected number compared to fiscal '19 will also help on the cash flow, and we should expect to see the debt come down significantly over the course of the next 12 months.

Ganesh Moorthy -- President and Chief Operating Officer

To your second question on the business and operations integration, on a longer term basis, it's more linear. But quarter to quarter, we're going to see more or less effects depending on are we able to retire some of the prior ERP systems completely or not? And so it's not entirely linear looking at it quarter to quarter.

Craig Ellis -- B. Riley FBR -- Analyst

Thank you. And then the follow up is for Steve. Steve, you've given us a very clear picture of the dynamic that you're seeing now and the way recent political developments are impacting your thinking. What I wanted to do is is reconcile that with comments that I thought I heard you say that there could be a pickup in the back half of the year.

Is that potential pick up more predicated on a favorable set of developments that could happen on the macro front? Or is it closer proximity to typical enterprise and consumer builds that would take place in the back half of the year or something else? Thank you.

Steve Sanghi -- Chairman and Chief Executive Officer

I think there are two possibilities on the trade front. Actually, three. One, the worst would be that trade talks break and there's a 25% duty not only on the $200 billion of goods but another $325 billion of goods that are threatened. That would be the worst-case scenario.

But the other possibilities are there is some very good settlement where, whatever the issues are between the two countries on IP theft and forced transfers of technology and all those things, there's a system put in place to monitor all these and issues are resolved and tariffs come down. That would be the best-case scenario. And the other one is that there is some sort of finality, but it's not as good as the U.S. wants.

As long as there is a finality on the settlement where the people know what the rules are, then the manufacturers can adjust to those rules and can negotiate with their customers to pass the additional cost, whether it's 5%, 10% duty cost. As long as there's a finality I think will be positive for the business. Of course, it will be extremely positive if there's a settlement and duties go away and there is a very good environment. But even if it is not the ultimate best but there's some sort of finality, I think that would be better than the uncertainty we're dealing with.

Craig Ellis -- B. Riley FBR -- Analyst

That's very helpful. Thanks gentlemen.

Operator

Thank you. We will now take our next question from Harsh Kumar from Piper Jaffray. Please go ahead, your line is open.

Harsh Kumar -- Piper Jaffray -- Analyst

Yes. Hey guys. First of all, we appreciate your position trying to guide in all this [Inaudible] trade chatter and running the company prudently for the long term. Steve, now you've taken share for quite a bit of time in what is a mature 8-bit market.

What do you think are some of the things that Microchip specifically is doing that is helping you take share in that market?

Steve Sanghi -- Chairman and Chief Executive Officer

Well, I don't really want to tell my competitors how I'm taking share. I would simply say that if somebody doesn't develop anymore 8-bit parts and adds no innovation to them simply because they buy a thesis that 8-bit market is not growing and put all their energy in the 32-bit, then they will continuously become more and more uncompetitive in the 8-bit and we'll continue to gain share, which is really what's happening. There are many more things we are doing, but we are continuously able to show 8-bit customers how they can keep on utilizing our newer and newer 8-bit microcontrollers and continue to add innovation and not having to go to 16 and 32-bit microcontrollers. And therefore, we've taken a lot of share.

Harsh Kumar -- Piper Jaffray -- Analyst

Fair enough. Steve, thanks for that color. And then I wanted to ask about-- you cited some bookings data on some order data. All of it seems to be improving.

The back half commentary is improving. Would it be fair for me to assume that you basically haircutted what you might, let's say you were doing earnings last week, you might have had a completely different commentary, completely different sort of guide. You simply haircutted that based on the developments this week. Is that a fair assumption?

Steve Sanghi -- Chairman and Chief Executive Officer

Yes, that's a fair assumption.

Harsh Kumar -- Piper Jaffray -- Analyst

OK. Thank you.

Operator

Thank you. [Operator instructions] We'll now move on to our next question from Kevin Cassidy from Stifel. Please go ahead. Your line is open.

Kevin Cassidy -- Stifel Financial Corp. -- Analyst

OK. Thank you for taking my question. Steve, you had mentioned the automotive market. You thought that that had hit a bottom and coming back.

Can you give a little more detail around that? And also, just maybe what your content increases might be for this year.

Ganesh Moorthy -- President and Chief Operating Officer

So I think the way to think about it is that it's not that it is rebounding into this quarter. I think we said it's hitting bottom and it is heading to where, as we look into the second half, things are getting better. The content increases, a constant effort that we drive. We have shown you some of the slides and investor forums where we have 60, 70, 80 different components.

And that continues to take place in various car makers. May not be for the same design and every car maker, but it is a part of how we drive the market. It is a part of how the market is evolving. There is more and more electronics that is going into safety, into convenience, into some of these new electric and electrification and ADAS, those type of trends.

And we have our fair share in all of those areas. And I think the last piece is the European WLTP regulational change. I think the last remnants of that will get cleared by the end of this quarter. It has taken longer to clear, but we believe that all of that clears as we go through the end of this quarter.

So those are all the different factors going into some of the color that Steve provided.

Kevin Cassidy -- Stifel Financial Corp. -- Analyst

OK. Maybe just as a follow up, the China VAT tax. Have you seen more positive bookings from the Chinese automotive companies?

Ganesh Moorthy -- President and Chief Operating Officer

We haven't really broken down to Chinese automotive specifically. I think if we look at China overall, we are seeing stronger bookings. And this should be a part of that reflected in most of the other areas, markets that are in China.

Steve Sanghi -- Chairman and Chief Executive Officer

The lower VAT went into effect, I think, on April 1. So just like in the U.S. when tax law changes or sales tax changes in a city or a state or some other rule change or interest rate changes, it only takes a while to affect the economy. And I don't know if that's enough time for us to measure that a Chinese customer changed their orders based on the VAT.

I think that takes longer term to take hold in the economy. We're going to get orders from Chinese customers based on them having orders from their customers to build the modules, build the cars or whatever. And that's not likely to change in four weeks of that changing.

Kevin Cassidy -- Stifel Financial Corp. -- Analyst

OK. Thank you.

Operator

Thank you. We will now take our next question from Mark Delaney from Goldman Sachs.

Mark Delaney -- Goldman Sachs -- Analyst

Yes, good morning. Thanks for taking the questions. First question is on operating expenses, which was pointed out came in at the low end or just below guidance. Can you help us better understand to what extent those are structural cost takeouts that helped the better performance on cost or more timing or other temporal factors?

Eric Bjornholt -- Chief Financial Officer

Sure. So I mean, we've done what I consider to be a very good job in managing OPEX over the last several quarters. We've essentially beat significantly on OPEX in both September and December and came in at the low end of guidance here in the current quarter. So we're managing the the operations very tightly given the environment that we're facing.

And as the environment improves in the second half, if it improves, we will have investments to make in the business that will have those dollars go up. So we're holding OPEX flat at the midpoint of guidance in the current quarter, and that's pretty tight control and again, would expect that OPEX will increase over time as we need to invest in the business to drive the long-term health at 40%-plus operating margin goals that we have.

Mark Delaney -- Goldman Sachs -- Analyst

Got it, that's helpful. There's a lot of discussion on the call about the distribution business. Just hoping maybe to pivot a little bit and better understand some of the trends in the direct business that came over from from Microsemi acquisition. I believe servers and storage were markets that we're served on an OEM-direct basis.

Can you help us understand how bookings and market share is trending in those areas? And I think cross-selling the full portfolio was part of the strategy. How successful has that been? Thank you.

Ganesh Moorthy -- President and Chief Operating Officer

So there is weakness in some of those markets, as you have seen reported by other players as well. I don't think there's anything particular about bookings that would give us any insight there. In terms of the cross-selling, those customers have given us access for other solutions that classic Microchip had, and we are having good progress and discussions on how those can be incorporated into next-generation designs using Microchip classic solutions that surround some of the storage and other networking solutions that Microsemi brought. So the customer access has been extremely useful to take solutions that are necessary in the market, but we did not have as good customer access as Microchip stand-alone.

Operator

Great, thank you. We will now move on to our next question. It comes from Christopher Rolland from Susquehanna International Group.

Christopher Rolland -- Susquehanna International Group -- Analyst

Susquehanna. Yes. One for Eric and one for Steve. I guess, Eric, the $7 million in underutilization, is there a level of company utilizations which you deem underutilized? And then also, if you could talk about where utilizations are now and your inventory levels and if you have plans to bring them down.

Thanks.

Eric Bjornholt -- Chief Financial Officer

OK. So really the underutilization is looked at on a factory-by-factory basis based on historical norms. So there isn't kind of a one size fits all for that and we've got our three large fabs, three large assembly and tests the Microchip classic has had historically, and then a bunch of smaller factories that have come through the Microsemi acquisition. So it's kind of a case-by-case scenario that we look at that.

And we don't break out a specific capacity utilization percentage. We just haven't done that historically. But we've got lots of capacity in place and so we're well poised to be able to respond to growth as it comes in the future with pretty low CAPEX. So that's a good thing.

The second piece of your question was what?

Christopher Rolland -- Susquehanna International Group -- Analyst

Was internal inventory. And do you guys have a plan to work that down? How do you feel about that level?

Eric Bjornholt -- Chief Financial Officer

OK. So inventory was up five days in the quarter to 128. We've kind of had a target of 115 to 120 that we've talked about, and so inventory is on the higher end. But I think it is prudent for us to hold that level of inventory, given the fact that the distribution inventory has come down and customers are managing their own inventory quite conservatively.

We believe, again, we don't get real-time reports from them, so it allows us to respond quickly in this uncertain environment where customers are needing to respond quickly when they get demand because they're not building to forecasts, as Steve kind of described before. So longer term, our goal would be to get the inventory down to 120 days or less. But that's not the environment that we're facing right now.

Ganesh Moorthy -- President and Chief Operating Officer

A little extra inventory at this part of the cycle also prevents CAPEX expenses on the other side of the cycle. So these are products with very long lives. There is little to no obsolescence risk. And so it does help from a overall cycle standpoint to have some inventory investment that can then then defray CAPEX spending on the other side of the cycle.

Steve Sanghi -- Chairman and Chief Executive Officer

I would say also that our inventory is a lot lower than some of the larger other analog players' inventory I have heard about. So while our target is 115 to 120, you would expect that this part of the cycle, when you're at the near bottom of the cycle, the inventory to be higher than the higher end of that. And yet, I think when I compare it, our inventory is lower than a lot of other players.

Ganesh Moorthy -- President and Chief Operating Officer

Yes, there are many at 150-ish.

Steve Sanghi -- Chairman and Chief Executive Officer

Yes.

Christopher Rolland -- Susquehanna International Group -- Analyst

Yes. That is fair. And then, Steve, for you, if a trade deal was reached, would you still view kind of the return of business as a potential bonanza, or are you more tempered here? Is there something that makes you more tempered? Just these negotiations, it seems like even if we think something is finalized, they may not be.

Steve Sanghi -- Chairman and Chief Executive Officer

I think having seen the yoyo sentiment on the trade talks, I would rather wait for the talks to conclude than analyze what that finality is, whether it ends up at 10% duty or something higher than that or it goes all the way to zero and have a chance to understand our customers' and distributors' reaction through our salespeople and talking to some directly, to really make an informed opinion rather than just throw something out.

Christopher Rolland -- Susquehanna International Group -- Analyst

Yes, that's fair. Thanks guys.

Operator

Thank you. We will now take our next question from Craig Hettenbach from Morgan Stanley. Please go ahead. Your line is open.

Craig Hettenbach -- Morgan Stanley -- Analyst

Thanks. I understand all the focus on China in terms of what's happening from a macro, but was hoping, Steve, you can talk about trends that you're seeing in Europe and the United States as well.

Steve Sanghi -- Chairman and Chief Executive Officer

Well, trends in U.S. and Europe are really not that great either. A lot of our U.S. customers are impacted because of the same trade issues.

Industrial customers build a lot of their products in China and are having to pay the tariff costs, which are currently 10% going to 25%. So our industrial business in the U.S. is impacted. Our consumer business, which is in the consumer appliance area, is impacted.

The automotive business is impacted not because of tariffs, but I think the automotive in general, automotive production is down in all three geographies.

Ganesh Moorthy -- President and Chief Operating Officer

But China's weak too, and so China was a big export for European automotive.

Steve Sanghi -- Chairman and Chief Executive Officer

Yes. So go ahead, comment on Europe. I was going to go there.

Ganesh Moorthy -- President and Chief Operating Officer

So I think Europe is seeing some of those headwinds that are, none of these are confined to just one geography. There is interconnection between how global economies play. And so for example, on the European car makers, especially the luxury car makers, they've had significant declines because the China market has been very weak for them. And that ripples through into some of the lower, in recent times, lower GDPs coming through some of the European economies.

And many of them, like Germany, are highly export-oriented and affected by any impact in other regions of the world. And so there is a continued uncertainty and weakness that expands beyond just China and the U.S., but in part driven by what's happening in these economies.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. And just a follow up question on the commentary of inventory, the expectation that you think it will be drawn down again in the June quarter. Do you think that the customers or distributors will be reaching kind of limits of how far they will take it down? Or if things remained uncertain directionally, you think it would still go lower in terms of their inventory management?

Steve Sanghi -- Chairman and Chief Executive Officer

I think distributors will assess what the sales out is. And if the sales out is decreasing because of whatever, then they will continue to draw down inventory. If they expect that sales out is increasing, then they would start to grow inventories to serve that sales out. So it's not that inventory is changing that much in months of inventory, it's mostly a multiple of really what their expectation of sales out is.

And many after Chinese distributors, their sales out has been much lower in December and March quarters, a lot of it driven by trade issues because their end customers couldn't sell the product given the duties.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it, I appreciate your color.

Operator

Thank you. As there are no further questions at this time, I would like to hand the call back over to you, Mr. Sanghi, for any additional closing remarks.

Steve Sanghi -- Chairman and Chief Executive Officer

Well, we want to thank you. There was a very large participation on this call compared to what we have had in the last several quarters. We've got lots of very, very good questions from investors and analysts and thank you for giving us a chance to explain our views on U.S.-China trade, where the things are, how the business is. And we'll see some of you as we get on the road to various conferences this quarter.

Thank you very much.

Operator

[Operator signoff]

Duration: 80 minutes

Call participants:

Eric Bjornholt -- Chief Financial Officer

Ganesh Moorthy -- President and Chief Operating Officer

Steve Sanghi -- Chairman and Chief Executive Officer

John Pitzer -- Credit Suisse -- Analyst

Chris Danely -- Citi -- Analyst

Harlan Sur -- J.P. Morgan -- Analyst

Rajvindra Gill -- Needham and Company -- Analyst

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

William Stein -- SunTrust Robinson Humphrey -- Analyst

Craig Ellis -- B. Riley FBR -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Kevin Cassidy -- Stifel Financial Corp. -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

Christopher Rolland -- Susquehanna International Group -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

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