MSCC

Microsemi Corporation (MSCC)

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Microsemi Corporation (MSCC)

F4Q2010 Earnings Call Transcript

November 11, 2010 4:45 pm ET

Executives

Terri Donnelly – IR

John Hohener – CFO, VP - Finance, CAO, Treasurer and Secretary

Jim Peterson – President and CEO

Analysts

Steve Smigie – Raymond James

Mike Pachter – Wedbush Securities

Quinn Bolton – Needham

Rick Schafer – Oppenheimer

Nicholas Aberle – Janney Capital Markets

David Wong – Wells Fargo

Harsh Kumar – Morgan Keegan

Christopher Longiaru – Sidoti & Company

Presentation

Operator

Good afternoon. My name is Patrick and I will be your conference operator today. At this time, I would like to welcome everyone to the yearend and fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. Donnelly, you may begin the conference.

Terri Donnelly

Good afternoon. And welcome to Microsemi's yearend and fourth quarter 2010 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, 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 investor 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 November 11, 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 future – 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 June 27, 2010 which were filed with the SEC on November 24, 2009 and August 5, 2010 respectively.

That said, I am 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 October 3, 2010 were a record $151.2 million, up 11.2% from $136 million in the third quarter of 2010 and up 37.9% from the $109.7 million reported in the year ago fourth quarter. Net sales for the full fiscal year were $518.3 million, up 14.4% from sales for fiscal 2009 of $453 million.

Gross margin in the fourth quarter was 49.2%, up 80 basis points from the $48.4 in the third quarter of 2010 and up 410 basis points from the 45.1% gross margin we reported in the year ago fourth quarter. Approximately 40 basis points or $500,000 of the sequential improvement is related to cost savings associated with our Scottsdale transition.

In addition our White acquisition achieved our previously announced gross margin target of 50%, up from 39% at purchase. Moreover, they reached our corporate operating margin goals of 30%, up from 8% at purchase. Our gross margin forecast for the next quarter which includes Actel is expected to be in the range of 53% to 54%.

We are still on track to close the Scottsdale wafer fab operations at the end of November. We expect the complete closure of the facility, including the assembly and test operations to occur at the end of February 2011. Total annualized savings when complete will equate to $24 million at the high end of our original goal.

This quarter non-GAAP selling, general and administrative expenses were $24.2 million or 16% of sales, compared to $21.6 million or 15.9% of sales in the third quarter of 2010 and compared to $18.2 million or 16.6% of sales in the fourth quarter of last year. The increase was primarily associated with having White for a full quarter. In addition, we had 14 weeks of expenses in this quarter.

We expect SG&A to increase by $7 to $8 million next quarter, primarily due to the addition of Actel. Research and development costs were $16.7 million or 11% of sales compared to $14.8 million or 10.9% of sales in the third quarter of 2010 and compared to $10.4 million or 9.5% of sales in the year ago fourth quarter.

R&D costs trended higher due to increased new product development and having White for a full quarter. And also as a reminder, we had 14 weeks of expenses this quarter. We have spoken numerous times about the increased breath of products and expanded SAM through our acquisition strategy and new product development efforts. Next quarter we expect R&D costs to increase by $8 to $9 million including the addition of Actel.

Our non-GAAP operating income was $33.5 million or 22.1% compared to $29.4 million or 21.6% in the third quarter of 2010 and $20.8 million or 19% in the prior year fourth quarter. Non-GAAP net income was $28.8 million or $0.35 per diluted share, compared to $24.7 million or $0.30 per diluted share in the third quarter of 2010, a 16.7% increase and $16.2 million or $0.20 per diluted share in the year ago fourth quarter.

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