Microsemi Management Discusses Q2 2012 Results - Earnings Call Transcript

Microsemi (MSCC)

Q2 2012 Earnings Call

April 25, 2012 4:45 pm ET

Executives

Terri Donnelly -

John W. Hohener - Chief Financial Officer, Chief Accounting Officer, Executive Vice President, Secretary and Treasurer

James J. Peterson - Ceo, President, Director, Chairman of Executive Committee and Member of Special Committee

Analysts

Quinn Bolton - Needham & Company, LLC, Research Division

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Patrick Wang - Evercore Partners Inc., Research Division

Daniel M. Gelbtuch - Cantor Fitzgerald & Co., Research Division

Christopher Rolland - FBR Capital Markets & Co., Research Division

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Mark Delaney - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good afternoon. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Microsemi's Fiscal Second Quarter Earnings Call. [Operator Instructions] Thank you. Ms. Terri Donnelly, conference call coordinator, you may begin your conference.

Terri Donnelly

Good afternoon, and welcome to Microsemi's Second Fiscal Quarter 2012 Earnings Conference Call. I am Terri Donnelly, coordinator of this call.

In a few moments, you will hear from and have an opportunity to ask questions of Jim Peterson, our President and Chief Executive Officer; John Hohener, our Executive Vice President and Chief Financial Officer; and of Steve Litchfield, our Executive Vice President and Chief Strategy Officer.

A recording of this conference call will be available on the Microsemi website under the Investors section. Our website is located at www.microsemi.com.

Microsemi issued guidance in a form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of April 25, 2012, and is continually subject to reassessment due to changing market conditions and other factors, therefore, must be considered only as management's present opinion. Actual results may be materially different, however, management undertakes no obligation to update these or any forward-looking statements whether as a result of new information, future events or otherwise. If an update to our business outlook is provided, the information will be in the form of a news release. We wish to caution you that all of our statements, except the company's past financial results, are just our current opinions, predictions and expectations. Actual future events or results may be -- differ materially.

For a review of risk factors, please refer to Microsemi's report on Form 10-K for the fiscal year ended October 2, 2011, which was filed with the SEC on November 23, 2011, and our latest Form 10-Q, which was filed with the SEC on February 8, 2012.

With that said, I'm looking to turn the call over to John to discuss our financial results, and then Jim will address our end markets and overall business strategy. Here's John Hohener.

John W. Hohener

Thank you, Terri. Net sales for the quarter ended April 1, 2012, were a record $249.3 million, up 3.5% from $240.9 million in the first quarter of 2012 and up 20.2% from the $207.5 million reported in the year-ago second quarter.

Our non-GAAP gross margin came in at the high end of our guidance at 55%, an increase of 30 basis points from our prior quarter. During the quarter, we completed the relocation of production previously located in Thailand. We expect our non-GAAP gross margin to increase between 80 and 120 basis points next quarter, driven by improved manufacturing efficiencies and product absorption.

Our GAAP gross margin was 52.9%, which differed from non-GAAP due to noncash purchase accounting adjustments related to our acquisitions of Zarlink and Maxim's timing, synchronization and synthesis businesses, as well as Thailand-related, noncash inventory charges net of insurance proceeds. Our GAAP gross margin was up 70 basis points from the 52.2% in our first quarter of 2012 and up 830 basis points from the 44.6% in our prior year second quarter.

This quarter, non-GAAP selling, general and administrative expenses were $40 million or 16% of sales compared to $40.5 million or 16.8% of sales in the first quarter and compared to $35.3 million or 17% of sales in the second quarter of last year. For the third quarter, we expect total SG&A to end [ph] at 15% of sales. Compared to the first quarter, the SG&A change included the addition of incremental expense from Zarlink for a full quarter. It was offset by savings from cost control and spending efficiencies within the company.

Research and development costs were $42.2 million or 16.9% of sales compared to $39.6 million or 16.4% of sales in the first quarter and compared to $28.2 million or 13.6% of sales in the year-ago second quarter with the increase in dollars, due primarily to incremental expense at Zarlink for a full quarter and the incremental Maxim's timing, synchronization and synthesis businesses. For the third quarter, we expect total R&D to stay at roughly 16.9% of sales, representing our continued commitment to our product roadmap.

Our non-GAAP operating income was $54.9 million or 22% of sales, compared to $51.8 million or 21.5% of sales in the first quarter of 2012 and $53 million or 25.6% in the prior year second quarter. We recorded $10.1 million in non-GAAP interest and other expense in the second quarter compared to $11.8 million in the first quarter, reflecting the refinancing during the second quarter of our term loan to a rate of 4% from 5.75%. We expect the total amount of interest and other expense to be approximately $9 billion in the third quarter.

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