Maxim Integrated Products' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Maxim Integrated Products (MXIM)

Q3 2012 Earnings Call

April 26, 2012 5:00 pm ET

Executives

Bruce E. Kiddoo - Chief Financial Officer and Senior Vice President

Tunç Doluca - Chief Executive Officer, President and Director

Analysts

Venkatesh Nathamuni - JP Morgan Chase & Co, Research Division

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Vernon P. Essi - Needham & Company, LLC, Research Division

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

Unknown Analyst

James Schneider - Goldman Sachs Group Inc., Research Division

Uche X. Orji - UBS Investment Bank, Research Division

Shawn R. Webster - Macquarie Research

Ross Seymore - Deutsche Bank AG, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

JoAnne Feeney - Longbow Research LLC

Doug Freedman - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Maxim Integrated Products Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Venk Nathamuni, managing Director of Investor Relations. Please go ahead, sir.

Venkatesh Nathamuni - JP Morgan Chase & Co, Research Division

Thank you, operator and welcome, everyone to Maxim Integrated Products Fiscal Third quarter 2012 Earnings Conference Call. With me on the call today are Chief Executive Officer, Tunç Doluca; and Chief Financial Officer, Bruce Kiddoo.

During today's call, we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty and that future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website, all available from the company without charge.

Now I will turn the call over to Bruce.

Bruce E. Kiddoo

Thanks, Venk. I will review our third quarter financial results. Revenue for the third quarter was $571 million, down 3% from the second quarter. Our revenue mix by major market in Q3 was approximately 41% for consumer, 27% industrial, 17% communications and 15% computing. Our consumer business declined slightly, due to seasonal trends. Our industrial business was flat as distributors stopped producing inventory. Our communication business was down slightly due to continued weakness in base stations, partially offset by the end of the inventory correction in fiber optics.

Our computing business was down across most segments. Gross margin, excluding special items, was 60.4%, essentially flat with the prior quarter. Unfavorable variances from lower utilizations were offset by lower spending and lower inventory reserves. Special items in Q3 gross margin were intangible asset amortization from acquisitions.

Operating expenses, excluding special items, were $214 million, down 4% from Q2. Salary expense declined in Q3 because Q2 was a 14-week quarter. Special items in Q3 operating expenses were primarily acquisition-related charges. The impairment of excess manufacturing assets and a gain from the sale of a building.

Special items and discontinued operations were approximately $32 million in after-tax gain from the sale of our clock synchronization and next-generation 12-gig storage product lines. Q3 GAAP operating income, excluding special items, was $131 million or 23% of revenue. The Q3 GAAP tax rate, excluding special items, was 24% compared to 26% in the prior quarter due to ongoing improvements from our international tax structure.

Special items in the Q3 tax rate included prior period cost-sharing expenses related to our international restructuring. GAAP earnings per share, excluding special items was $0.33, down slightly from $0.34 in Q2 as lower operating expenses and lower tax rate offset the lower revenue.

Turning to the balance sheet and cash flow. During the quarter, cash flow from operations was $196 million or 34% of revenue. Inventory declined slightly to 89 days from 91 days in the prior quarter. Inventory in the channel, excluding catalog distributors, increased 1 day to 57 days. In dollar terms, general inventory declined by 4%.

Net capital expenditures totaled $44 million in Q3, as we invested in long-term manufacturing capacity and new facilities, offset partially by the sale of a building. Free cash flow was $140 million or 25% of revenue. Share repurchases totaled $29 million in Q3 as we bought back 1.1 million shares. Finally, in Q3, we paid $64 million in dividends to our shareholders. Overall, total cash, cash equivalents and short-term investments increased by $119 million in the third quarter to $936 million.

Moving onto guidance. Our beginning Q4 backlog is $388 million, up approximately 6% from the prior quarter. Based on this beginning backlog and expected turns, we forecast Q4 revenue of $590 million to $620 million or up approximately 6% at the midpoint from Q3. Q4 gross margin, excluding special items, is estimated at 60% to 63%, improving due to higher revenue, associated higher utilization and strong spending controls. Other variables that may influence Q4 gross margin include product mix and inventory reserves.

Special items in Q4 gross margin are estimated at slightly over $9 million, primarily for amortization of intangible assets. Q4 operating expenses, excluding special items, are expected to be up 2% to 3% sequentially, less than half of the revenue increase. The increase in OpEx is due primarily to higher variable bonus and moving costs for our new headquarters building.

Special items in Q4 operating expenses are estimated at $4 million, primarily for amortization of intangible assets. This excludes potential items that may occur during the quarter.

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