MSCC

Microsemi Corporation (MSCC)

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Microsemi (MSCC)

Q1 2013 Earnings Call

January 24, 2013 4:45 pm ET

Executives

Terri Donnelly

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

James J. Peterson - Chief Executive Officer, President, Director and Chairman of Executive Committee

Paul Pickle - Former Senior Vice President of Integrated Circuit Group

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

Analysts

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

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

Mark Delaney - Goldman Sachs Group Inc., Research Division

Harsh N. Kumar - Stephens Inc., Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Quinn Bolton - Needham & Company, LLC, Research Division

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

Amit Chanda - Wells Fargo Securities, LLC, Research Division

Patrick Wang - Evercore Partners Inc., Research Division

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

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

Craig Berger - FBR Capital Markets & Co., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Microsemi's First Quarter Earnings Call. [Operator Instructions] Thank you.

I will now like to turn today's conference over to Terri Donnelly. Please go ahead.

Terri Donnelly

Good afternoon, and welcome to Microsemi's Earnings Conference Call for Microsemi's First Quarter of Fiscal 2013. 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; Steve Litchfield, our Executive Vice President and Chief Strategy Officer; and of Paul Pickle, our Executive Vice President, Integrated Circuits Group.

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 issues guidance in the form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of January 24, 2013, 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 differ materially.

For a review of Risk Factors, please refer to Microsemi's report on Form 10-K for the fiscal year ended September 30, 2012, which was filed with the SEC on November 21, 2012.

With that said, I am 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 December 30, 2012 were $247.6 million, up 2.8% from the $240.9 million reported a year ago. This was at the low end of our guidance, due to on overall difficult environment. Bookings were down for the quarter, resulting in a book-to-bill ratio of less than 1:1.

Microsemi expects that net sales in the second quarter of fiscal year 2013 will decline 4% to 8% sequentially, as we continue to see weakness in our industrial and communication end markets.

As the market further softened during the quarter, we took a number of actions. We accelerated planned consolidation activities, and also made reductions in headcount to help reduce our overall cost structure at the lower revenue expectations.

Our GAAP and non-GAAP gross margin was 57.6%, a sequential increase of 40 basis points. Our gross margin improvement was driven by growing sales of newer higher margin products and a continued realization of operational cost reductions. We expect non-GAAP gross margins to be between 55.5% and 56.5% next quarter, as a result of lower utilization.

This quarter, non-GAAP selling, general and administrative expenses were $42.7 million, a favorable decrease of $500,000 compared to $43.2 million in the prior quarter.

Next quarter, we forecast a further decrease in SG&A of between $700,000 and $1.5 million based on a number of actions around accelerating consolidation, offshore moves and headcount cuts, initially offset by higher payroll taxes that reset at the beginning of the calendar year.

Research and Development costs were $43.2 million, compared to $42.8 million in the prior quarter increase of $400,000. We continue to be very committed to new product development and will invest R&D dollars in our core strategic initiatives.

That said, we are working to streamline our cost in this area and do expect the decline of between $1 million to $2 million next quarter. Our non-GAAP operating income was $56.7 million or 22.9% of sales compared to $64.5 million or 24.5% of sales in the fourth quarter of 2012, and $51.8 million or 21.5% reported last year.

We recorded $8.3 million in non-GAAP interest and other expense compared to $8.5 million last quarter, reflecting the previously announced pay down of our term debt of $25 million.

In subsequent to the December quarter, we paid down an incremental $25 million of our term debt. This paydown will allow us to see a decrease in interest and other expense of approximately $200,000 the next quarter. Non-GAAP net income was within our guidance, at $45 million or $0.50 per diluted share, compared to $51.8 million or $0.58 per diluted share last quarter, and up significantly from the $33.6 million or $0.39 per diluted share reported a year ago.

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