MSCC

Microsemi Corporation (MSCC)

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Microsemi Corp. (MSCC)

F3Q10 (Qtr End 06/27/2010) Earnings Call

July 22, 2010 4:45 pm ET

Executives

Terri Donnelly - Coordinator

Jim Peterson - President & CEO

John Hohener - VP & CFO

Analysts

Steve Smigie - Raymond James

Quinn Bolton - Needham & Company

Harsh Kumar - Morgan Keegan

Nicholas Aberle - Janney Capital Markets

Rick Schafer - Oppenheimer

Adam Benjamin - Jefferies

David Wong - Wells Fargo

Presentation

Operator

At this time, I would like to welcome everyone to the Microsemi's third quarter earnings conference call. (Operator Instructions)

I would now like to turn the call over to Terri Donnelly.

Terri Donnelly

Good afternoon and welcome to Microsemi's third quarter 2010 earnings conference call. I'm 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; and of John Hohener, our Vice President and Chief Financial 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 22, 2010 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 27, 2009, and our Form 10-Q for the fiscal quarter ended March 28, 2010, which were filed with the SEC on November 24, 2009 and April 30, 2010 respectively.

That said, I'm going to turn the call over to John to discuss our financial results and then to Jim, who will address our end market and overall business strategy.

Here is John Hohener.

John Hohener

Thank you, Terri. Net sales for the quarter ended June 27, 2010 were a record $136 million, up 15.1% from $118.2 million in the second quarter of 2010 and up 27.1% from $107 million reported in the year ago of third quarter. Gross margin in the third quarter was 48.4% up 100 basis points from $47.4 in the second quarter of 2010 and up 620 basis points from the 42.2% gross margin we reported in the year ago third quarter.

Approximately 50 basis points were $700,000 of the sequential improvement is related to cost savings associated with our Scottsdale transition. When we announced the closure of the Scottsdale facility, we stated the gross margin impact related to these saving would equate to between $20 million and $25 million on an annual basis or 400 to 500 basis points when applied to fiscal year 2009 consensus sales estimates.

As of today, our best estimates of the quarterly gross margin improvements relating to the Scottsdale closure are as follows. We expect an additional $350,000 from each of the next two quarter. We then expect to close away from fab operations at the end of November, a five month pull in, which should yield margin improvement of an additional $2 million from our March 2011 quarter.

We expect the complete closure of the facility, including the assembly and test areas to occur at the end of February 2011, another two months pull in. This is expected to result in margin improvement of an additional $2.5 million from our June 2011 quarter. All of these improvements results in an annualized savings of $23.6 million. This quarter, non-GAAP selling, general and administrations expenses were $21.6 million or 15.9% of sales compared to $18.2 million or 15.4% of sales in the second quarter of 2010, and compared to $19.1 million or 17.9% of sales in the third quarter of last year.

The increase is associated with the light division and increased costs to support higher sales as well as accelerating the planned closure of Scottsdale. We expect SG&A to trend up by $750,000 to $1 million next quarter, primarily due to having White for a full quarter.

Research and Development costs were $14.8 million or 10.9% of sales compared to $12.1 million or 10.2 % of sales in the second quarter of 2010, and compared to $10 million or 9.4% of sales in the year-ago third quarter. R&D costs trended higher due to increased new product development and White R&D expense. We expect R&D costs to trend up by $1 million to $1.5 million next quarter, primarily due to continued increased spending on product development and having White for a full quarter.

We have spoken numerous times about the increased breadth of products and increased SAM via our acquisitions strategy where we are increasing our product development effort to realize the benefits of these transactions.

Our non-GAAP operating income was $29.4 million or 21.6% compared to $25.8 million or 21.8% in the second quarter of 2010, and $16.2 million or 15.1% in the prior year third quarter. Non-GAAP net income was $24.7 million or $.030 per diluted share compared to $21.4 million or $0.26 per diluted share in the second quarter of 2010. And $12.6 million or $0.15 per diluted share in the diluted share in the year ago third quarter. A year-over-year improvement of 100%.

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