MSCC

Microsemi Corporation (MSCC)

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Microsemi (MSCC)

Q4 2011 Earnings Call

November 10, 2011 4:45 pm ET

Executives

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

Terri Donnelly - IR

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

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

Analysts

Harsh N. Kumar - Morgan Keegan & Company, Inc., Research Division

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

Quinn Bolton - Needham & Company, LLC, Research Division

Christopher J. Longiaru - Sidoti & Company, LLC

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

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

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

Daniel M. Gelbtuch - Phoenix Partners Group, LP, Research Division

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

Presentation

Operator

Good afternoon. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the the Microsemi's Fourth Quarter Earnings and Fiscal Year 2011 Conference Call. [Operator Instructions] Thank you. Ms. Terri Donnelly, you may begin your conference.

Terri Donnelly

Good afternoon, and welcome to Microsemi's year-end fourth quarter 2011 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 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 10, 2011, 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 October 3, 2010, which was filed with the SEC on November 23, 2010, and our Form 10-Q for our third quarter fiscal year of 2011 that was filed with the SEC on August 5, 2011.

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's John Hohener.

John W. Hohener

Thank you, Terri. Net sales for the quarter ended October 2, 2011, were a record $227.3 million, up 4.9% from $216.7 million in the third quarter of 2011 and up 50.3% from the $151.2 million reported in the year-ago fourth quarter. Net sales for the full fiscal year were a record $835.9 million, up 61.3% from sales for the fiscal year of 2010, up $518.3 million. Just to be clear, results from this quarter do not include any contribution related to the acquisition of Zarlink that closed in our December quarter. References to our core business refer to Microsemi prior to the Zarlink acquisition.

Our non-GAAP gross margin was 57.3%, up 20 basis points from our third quarter of 2011 and up 810 basis points from the 49.2% recorded in the year-ago fourth quarter. Our GAAP gross margin was 57.1%, which differs to non-GAAP due only to noncash purchase accounting adjustments and was up 10 basis points from the 57% in our third quarter of 2011 and up 800 basis points from the 49.1% in our prior year fourth quarter.

This quarter, non-GAAP selling, general and administrative expenses were $38.1 million or 16.7% of sales compared to $37.3 million or 17.2% of sales in the third quarter and compared to $24.2 million or 16% of sales in the fourth quarter of last year. SG&A in our core business will be down next quarter, driven by cost controls inherent with the current market environment. However, we expect total SG&A to be up next quarter between $2.6 million and $3 million, primarily due to having Zarlink for a portion of the quarter. Research and development costs were $32.4 million or 14.3% of sales compared to $29.6 million or 13.6% of sales in the third quarter, and compared to $16.7 million or 11% of sales in the year-ago fourth quarter.

R&D in our core business will also be down next quarter, driven by cost controls throughout the company. However, with Zarlink being present for a portion of the quarter if our -- and our continuing investment in the latest generation of our product roadmap, we expect total R&D spending to increase between $5.8 million and $6.3 million next quarter.

Our non-GAAP operating income was $59.7 million or 26.3% of sales compared with $56.8 million or 26.2% of sales in the third quarter of 2011 and $33.5 million or 22.1% in the prior year fourth quarter. The continuing increase in operating income and margin highlights our strategic success in integrating acquisitions, driving organic growth and delivering improved profitability to our shareholders. We recorded $4.5 million in non-GAAP interest and other expense in the quarter compared to $4.6 million in the third quarter. With the successful acquisition of Zarlink, we refinanced our existing term loan, which increased it by $425 million. This will result in an increase in our interest and other expense moving forward. We expect the total amount to be approximately $12.4 million in our first quarter and approximately $13.2 million in each successive quarter.

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