Microsemi Management Discusses Q3 2012 Results - Earnings Call Transcript

Microsemi (MSCC)

Q3 2012 Earnings Call

July 26, 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

Steven G. Litchfield - Chief Strategy Officer and Executive Vice President

Analysts

Jason Rechel - Oppenheimer & Co. Inc., Research Division

Andrew Huang - Sterne Agee & Leach Inc., Research Division

Harsh N. Kumar - Stephens Inc., Research Division

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

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Patrick Wang - Evercore Partners Inc., Research Division

Christopher J. Longiaru - Sidoti & Company, LLC

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

Presentation

Operator

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

Terri Donnelly

Good afternoon, and welcome to Microsemi's Third 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; of 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 the form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of July 26, 2012 and is continually subject to reassessment due to our 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 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 May 8, 2012.

With that said, I'm going 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 is John Hohener.

John W. Hohener

Thank you, Terri. Net sales for the quarter ended July 1, 2012, were a record $259.2 million, up 4% sequentially from the $249.3 million and up 20% from the year-ago quarter of $216.7 million. Our non-GAAP gross margin was 56.2%, a sequential increase of 120 basis points and at the top of our guidance. This was driven by increased revenue, focused on new high-margin products and realization of operational synergies. We expect our non-GAAP gross margin to increase between 30 and 70 basis points next quarter, driven by continued improvement in manufacturing efficiencies and product absorption.

Our GAAP gross margin, which incorporates only noncash purchase accounting adjustments from our recent acquisitions, was 55.8%, a sequential increase of 290 basis points. In Q4, we don't expect any further noncash purchase accounting adjustments. This quarter, non-GAAP selling, general and administrative expenses were $41 million or 15.8% of sales compared to $40 million or 16% of sales in the prior quarter and compared to $37.3 million or 17.2% of sales reported a year ago. For the next quarter, we expect total SG&A to decrease slightly as a percentage of revenue.

Research and development costs were $44 million or 17% of sales compared to $42.2 million or 16.9% of sales in the prior quarter and compared to $29.6 million or 13.6% of sales reported a year ago. The increase compared to prior year was due primarily in our investment of new product development. For the next quarter, we expect total R&D to decrease slightly as a percentage of revenue.

Our non-GAAP operating income was $60.7 million or 23.4% of sales compared to $54.9 million or 22% of sales in the second quarter and $56.8 million or 26.2% recorded last year. We recorded $8.8 million in non-GAAP interest and other expense compared to $10.1 million last quarter, reflecting a full quarter's impact from the refinancing we completed last quarter. In addition, subsequent to our quarter end, we paid down $30 million of our term debt. This pay-down will allow us to see a decrease in interest and other expense of approximately $200,000 next quarter.

Non-GAAP net income was $48.3 million or $0.55 per diluted share compared to $40.3 million or $0.46 per diluted share last quarter, an increase of 20%, and $42 million or $0.49 per diluted share reported a year ago. Our non-GAAP effective tax rate for the quarter was 7%, reflecting ongoing improvements in our tax structure. We expect this tax rate will continue next quarter.

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