Microsemi Tops, Grabs White Electronic – Analyst Blog

Microsemi Corporation’s (MSCC) second quarter earnings for fiscal 2010 beat the Zacks Consensus by a penny.

 

 

The company reported revenue of $118.2 million, up 4.8% sequentially, 11.9% year over year and better than management’s expectations of a 2-4% increase.

 

 

Microsemi’s Analog/Mixed Signal products cater to three end markets—mobile/connectivity, notebooks/LCD TVs/display and industrial/semicap.

 

The mobile/connectivity business (16% of revenue in the last quarter) grew 19.7% sequentially and 105.2% from the year-ago quarter. The business continues to be driven by the WLAN and POE product lines. Management believes that the rapid adoption of POE technology is expanding Microsemi’s share in this market. The company has also introduced a WLAN module for the fast-growing smartphone market. Overall, the segment promises to grow into one of the strongest for Microsemi over the next few quarters.

 

Notebooks/LCD TVs/displays generated 7% of revenue, representing a sequential decrease of 8.3% and a year-over-year increase of 44.9%. The LCD TV and display markets were up sequentially in the seasonally down March quarter, although this was offset by weakness in notebooks. The significant increase from the prior year was partially on account of easy comps (March 2009 was severely recession-impacted) and partially on account of recovery at key tier-one customers and growing penetration among tier-two OEMs and ODMs. 

 

The industrial/semicap market continued on the growth path, increasing 34.7% sequentially and 36.5% from the comparable year-ago quarter. The segment generated 9% of second quarter revenue. Particularly, the company’s traditional semiconductor capital equipment products witnessed increased demand, which was complemented by an expanding customer base and a better product mix. Microsemi also saw growing interest for emerging energy technologies (solar, wind and battery), which should translate into revenue through the year. Going forward in 2010, this market should be one of the strongest for Microsemi.

 

The High Reliability product line also caters to three end markets—defense, commercial air/space and medical.

 

The defense segment generated 37% of second quarter revenue, down 0.6% sequentially and up 11.0% year over year. The increase from the year-ago quarter was attributable to increased penetration at existing customers and expansion of the customer base, as well as improved conditions in the defense market overall.

 

The commercial air/space markets generated 22% of revenue, up 0.2% sequentially and down 0.5% year over year. The basically flat comparisons are due to the fact that this is essentially a long lead time business. The company has started seeing much higher order rates and the backlog continues to grow. This segment is benefiting from increased infrastructure spending in Asian markets, such as India and China, as well as stronger demand at aerospace customers, such as Boeing. Microsemi will also benefit from its increasing dollar content at some of the newer projects. The satellite business is also strong, with increased spending on both defense and commercial satellites it is expected to create opportunities for the company to boost its dollar content.

 

The medical segment (9% of quarterly revenue) also saw improving demand. Although the company is still largely dependent on a handful of ICD customers, all of these customers stepped up purchases in the last quarter. We are particularly encouraged by the return to growth of the MRI segment, which was one of the few segments within the medical vertical to have been severely impacted by the recession. Increased spending on MRI equipment is an indication of credit availability and the improved financial health of customers, since MRI equipment is a capital expenditure for them. As a result, the segment grew 4.8% sequentially. The decline from the year-ago quarter moderated around 38.9%.

 

 

Management did not provide specific information regarding orders, backlog or lead times, although they did mention that bookings continue to grow and backlog remains healthy. The book-to-bill ratio again exceeded unity.

 

In the December quarter, lead times in the analog/mixed signal business shrunk were at 6-8 weeks. Overall high-reliability lead times shrunk from 20-30 weeks to around 15-26 weeks. Satellite lead times were in the 36-week range.

 

 

The pro forma gross margin was 47.4%, down 226 basis points (bp) from the previous quarter’s 49.6%. Despite the higher volumes that brought in some efficiency, results continued to be impacted by the Scottsdale facility, which will not be closed down until the first quarter of the next fiscal year. 

 

The operating expenses of $36.4 million were slightly lower than the previous quarter’s $36.7 million. However, the operating margin declined 49 bps, impacted by the lower gross margin and partially offset by lower SG&A and flattish R&D expenses as a percentage of sales.

 

The pro forma net income of $16.5 million or 14.0% of sales compares with $15.4 million, or 13.6% in the previous quarter and $8.5 million, or 8.1%, in the year-ago quarter. Special items in the last quarter were restructuring charges, acquisition-related charges, intangibles amortization and one-time legal charges, which had a net impact of -$0.05 per share on a tax adjusted basis.

 

Including these items, the fully diluted GAAP net income was $12.2 million ($0.15 per share) compared to $8.0 million ($0.10 per share) in the Dec 2009 quarter and loss of $16.6 million ($0.21 per share) in the Mar quarter of 2009.

 

 

Microsemi has a strong, debt-free balance sheet. Inventories increased 7.8% in the last quarter, as management built up stock to service the much higher level of demand. However, inventory turns were maintained at 2.5X. DSOs went down from 58 to 54 days. DSOs have shown great improvement over the past year or so, indicating much-improved collections.

 

The cash and investments balance at quarter-end was $292.5 million, up $57.6 0million during the quarter. Cash generated from operations was $28.8 million and capex was $3.1 million, netting a free cash flow of $25.7 million.

 

 

For the fiscal third quarter, management sees revenue growth of 3-5% and earnings per share of around $0.28-$0.30, excluding the impact of the White Electronics acquisition.

 

 

 

Some time back, Microsemi made a bid for the tendered 13.5 million shares in White Electronics, which constitutes a 57% stake in that company. The offer closed yesterday, with Microsemi accepting all the tendered shares.

 

White Electronics’ packages, assemblies and high-efficiency memory devices are targeted at the defense and aerospace markets, which management hopes will expand the company’s total available market.

 

Microsemi will also use White’s expertise in anti-tamper technologies to build a position in the precision mortar and precision guided-kit programs through the bundling of existing Microsemi products with White products and the development of new products incorporating technologies from both companies. 

 

The acquisition will be immediately accretive, since White generates 50%+ gross margins, which are much better than the corporate average.

 

We reiterate our Neutral rating on Microsemi shares.