MSCC

Microsemi Corporation (MSCC)

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Microsemi (MSCC)

Q4 2012 Earnings Call

November 08, 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 - Chief Executive Officer, President, Director and Chairman of Executive Committee

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

Analysts

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

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

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

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

Quinn Bolton - Needham & Company, LLC, Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Richard Sewell - Stephens Inc., Research Division

Michael C. Lucarelli - Evercore Partners Inc., Research Division

Mark Delaney - Goldman Sachs Group Inc., Research Division

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

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to Microsemi's Fourth Quarter and Fiscal 2012 Earnings Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn today's conference over to Ms. Terri Donnelly. Please go ahead.

Terri Donnelly

Good afternoon and welcome to Microsemi's fourth fiscal quarter and year end 2012 earnings conference call. I am Terri Donnelly, coordinator of this call. In a few moments, we 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; 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 8, 2012, 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 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 August 6, 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's John Hohener.

John W. Hohener

Thank you, Terri. Net sales for the quarter ended September 30, 2012, were a record $263.1 million, up 1.5% sequentially from $259.2 million, and up 15.7% from the $227.3 million reported a year ago. Revenue for the fiscal year 2012 was a record $1,012,500,000, an increase of 21.1% over FY 2011. Microsemi expects that net sales in the first quarter of fiscal year 2013 will decline 2% to 6% sequentially. Our revenue decline this quarter, although less than our peers, is due to macro weakness, mitigated by relatively stable aerospace and defense end markets.

Our non-GAAP gross margin was 57.2%, a sequential increase of 100 basis points versus our guidance of 30 to 70 basis points at the beginning of the quarter. Our GAAP gross margin was also 57.2%, a sequential increase of 140 basis points. Our gross margin improvement was driven by growing sales of newer higher-margin products and the realization of operational cost reductions as we drove improvements ahead of schedule. We expect our non-GAAP gross margin to improve between 40 and 80 basis points next quarter, driven by continued improvement in manufacturing efficiencies and product mix.

This quarter, non-GAAP selling, general and administrative expenses were $43.2 million or 16.4% of sales, compared to $41 million or 15.8% of sales in the prior quarter. This was slightly higher than expected due to a handful of items, including sales additions, IT infrastructure upgrades, IP-related legal expense and real estate consolidations. Next quarter, we will hold SG&A flat in dollars as we continue to support a significant number of new product introductions that will drive organic revenue growth in coming quarters.

Research and development costs were $42.8 million or 16.3% of sales compared to $44 million or 17% of sales in the prior quarter, a favorable decrease of $1.2 million or 70 basis points. During the quarter, we had lower expense related to mask and design tools compared to earlier periods. But as we continue to invest in new product development, we expect R&D to increase between $1 million and $2 million next quarter.

Our non-GAAP operating income was $64.5 million or 24.5% of sales, compared to $60.7 million or 23.4% of sales in the third quarter, and $59.7 million or 26.3% reported last year. We recorded $8.5 million in non-GAAP interest and other expense compared to $8.8 million last quarter, reflecting the previously announced paydown of our term debt of $30 million. As we mentioned at our Analyst Day, we intend to pay down $100 million of our debt in our current fiscal year. To that point, subsequent to the quarter end, 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 next quarter.

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