Microsemi Corp. F4Q08 (Qtr End 10/31/08) Earnings Call Transcript

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 |  About: Microsemi Corporation (MSCC)
by: SA Transcripts

Microsemi Corp (NASDAQ:MSCC)

Q4 2008 Earnings Call

November 13, 2008 4:45 pm ET

Executives

James Peterson – President, CEO

John Hohener – Vice President, CFO

Steve Litchfield – Executive Vice President, President, Analog Mixed Signal

Analysts

Rick Shafer – Oppenheimer

Tore Svanburg – Thomas Weisel Partners

Craig Berger – FBR

Patrick Wang – Wedbush Morgan Securities

Nick Aberle – Caris & Company

Harsh Kumar – Morgan Keegan

Steven Smigie – Raymond James

[Christopher Longarue – Sidoti & Company]

Shawn Webster – J.P. Morgan

Vernon Essi – Needham & Company

Operator

At this time I would like to welcome everyone to the Microsemi's fiscal 2008 and four quarter earnings conference call. (Operator Instructions) Miss Donnelly, you may begin your conference.

Miss Donnelly

Welcome to Microsemi's fourth quarter and fiscal year 2008 conference call. I am Terry 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 Vice President and Chief Financial Officer, Steve Litchfield, our Executive Vice President and President of the Analog Mixed Signal Group and Rob Adams, our Vice President of Business Development.

A recording of this conference call will be available on the Microsemi web site under the investor section. Our web site is located at www.microsemi.com. Due to changes in the public company's abilities to communicate with analysts and investors brought about by the SEC rules on fair disclosure, 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 13, 2008 and is continually subject to reassessment due to changing market conditions and other factors and therefore must be considered only as managements present opinion and 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 opinions, predictions and present expectations.

Actual future events or results may differ materially. I refer you for some of the risks to see Microsemi's report on Form 10-K for the fiscal year ended September 30, 2007 which was filed with the SEC on November 21, 2007 and Form 10-Q for the quarter ended June 30, 2008 which was filed with the SEC on August 5, 2008. Information about Microsemi filed with SEC is available free of charge at www.sec.gov.

These reports identify important factors that could cause actual results to differ materially from our projections. That said, we can begin. Here's Jim Peterson.

James Peterson

I'd like to thank all of you for joining us this afternoon for Microsemi's fourth quarter and fiscal year 2008 earnings call. Microsemi had a great year, outperforming the market with a 16.2% growth in revenue and a 37% increase in profits. In addition, operating cash flow for the year increased 306% or $92 million over the previous year.

Net sales for Microsemi's fourth quarter were $134.7 million up 4.2% from the $129.3 million reported for the third quarter of fiscal 2008 and up 12.5% from $119.7 million in the year ago fourth quarter.

The fourth quarter 2008 produced non-GAAP earnings of $0.36 per diluted share, up from $0.34 per diluted share in the prior quarter and up $0.08 or 29.7% from the $0.28 reported in the year ago fourth quarter. Non-GAAP gross margins were 52.5% up 60 basis points sequentially from the 51.9% reported last quarter and up 150 basis points from the year ago fourth quarter.

Non-GAAP operating margins were 28.3% up 80 basis points sequentially and 410 basis points from the year ago fourth quarter.

We're also proud to announce that our GAAP margins improved 180 basis points from our previous quarter and at 46.8% are up 720 basis points from a year ago. We are proud of these results and it demonstrates Microsemi's ability to execute on its growth and margin improvement strategy despite deteriorating economic conditions.

Microsemi is not immune to the current industry crisis. However, it certainly is resistant due to our diversity and our focus on the high liability markets which have a limited exposure to the current economic conditions. So let's forget all the Wall Street, Main Street stuff and jump right into our six end markets from the weakest to the strongest.

Notebooks, LCD TV's, End Displays is on or about 10% of our revenues. These are our most consumer exposed end markets and we expect soft performance in the December quarter. LCD TV is the largest component of this end market and we all have seen from the leading TV OEM's such as Sony or suppliers such as Corning demand is slowing as we get into the holiday selling season. Notebook is marginally better as early design wins have begun to move to production volume. We expect this end market to be down sequentially.

Mobile and connectivity are about 14% of revenue. Our products here are in the POE and the wireless land end markets. We continue to see solid results for our wireless land power amplifiers and demand is encouraging due to the ongoing ramp for the U211N networking solutions and a proliferation of our customer base. However, our POE products have been moving very slowly as enterprise demand had waned in the current environment.

Implementation of POE represents a large capital expense and at this stage, anything requiring capital expense will be delayed. As such, we expect this end market to be down sequentially.

Industrial, Semi cap, Solar, on or about 7% of our revenue. This end market has declined over the last couple of years due to the fall off in semi conductor capital equipment demand. While the semi cap has bottomed the last two quarters, we still have no bankable visibility into what might begin to recover.

Solar however, is a rising star in this group and increasing as a percentage of the total. All considered, we expect this group to be flat to down in the December quarter.

Now let's move to the HiRail business which accounts for on or about 69% of our total revenues last quarter. Given our continued strength in these end markets, Microsemi continues to be well positioned to grow and outpace our peers as these businesses are largely offset by the weakness we are seeing in the commercial market places.

Here it goes. Defense on or about 33% of revenue. Our defense end markets remain strong with solid backlog and growing domestic and international revenue base. The product is relevant through vertical integration. We are expanding our marketing opportunity and market share. An excellent example of new product development is the introduction of sonar carbide technology which offers clear and better advantages than radar, and electronic warfare application. This market is strengthening.

Medical and implantable medical, on or about 14% of revenue. Medical was our second strongest performer last quarter. We expect it to be our best end market for Q1 and [break in audio].

Satellite bookings are way hot driven both by domestic and international customers in defense and commercial applications. We continue to grow our product offering and market share in this market. We also continue to see long time strength in the aerospace industry despite head line concerns. While the media is focused on the 787, and smaller planes such as 737, our demand to replace less efficient and maintenance prone planes such as the MD 80's and older generation 737's and the airbus 820's. Additionally, refurbishment remains a strong market for us. Expect continued performance from this end market.

I would like to also mention while others have abandoned the HiRail markets and chasing the consumer product dream, we have shown our commitment to serve the defense, aerospace and satellite markets by investing well over $150 million U.S. dollars to support our customers requiring higher liability products.

While I feel the suppliers have finished touting Legacy HiRail revenues for investor relations purposes, Microsemi will be there for its customers. We plan to continue our growth and investment strategy in this space. To the short, add a lot of mix that go down, off set by HiRail. Looking for solid again in September with a $1.05 to one book to bill.

In summary, our fourth quarter clearly demonstrates our ability to outgrow our peers. We executed then on our business plan this quarter and have positioned the company to delivery a strong 2009 year. With that, let me turn the call over to John for the financial details for the fourth quarter 2008 and the outlook for Microsemi's first fiscal quarter 2009 ending in December.

John Hohener

As Jim previously mentioned, net sales for the quarter ended September 28, 2008 were $134.7 million sequentially up 4.2% from the $129.3 million reported in the third quarter and up 12.5% from $119.7 million in the year ago fourth quarter.

Net sales for our fiscal year 2008 were $514.1 million, up $71.8 million or 16.2% from the $442.3 million reported in 2007. On a non-GAAP basis, our fiscal 2008 net income increased $28.6 million or 37% to $105.8 million. Our non-GAAP diluted earnings per share increased from $1.01 to $1.33.

Non-GAAP gross margin for the quarter was 52.5% compared to 51.9% in the third quarter and 51% in the fourth quarter of last year. This quarter non-GAAP selling, general and administrative expenses were $21.1 million or 15.7% of sales as compared to $20.6 million or 15.9% of sales in the third quarter and $20.4 million or 17% of sales in the fourth quarter of last year.

Research and development costs were $11.5 million or 8.5% of sales compared to $11 million or 8.5% of sales in the third quarter and $11.6 million or 9.7% of sales in the year ago fourth quarter.

Our non-GAAP operating margin was 28.3% compared to 27.5% in the third quarter and 24.2% in the prior year fourth quarter. We are well on our way to our corporate goal of 30%.

For the fourth quarter non-GAAP net income was $29 million or $0.36 per diluted share. This compares to $0.34 in the prior quarter and $0.28 per diluted share in the year ago fourth quarter, a 28.6% increase.

Our non-GAAP effective tax rate was 25% in the fourth quarter compared to 24.9% in the third quarter and 26.7% in the year ago fourth quarter.

Our fourth quarter results include restructuring costs and other charges. These include $7.6 million for transitional Ilex capacity, a decrease of $1.3 million from the previous quarter, $3.1 million in amortization of acquisition related intangibles, $4.8 million related to stock based compensation and $600,000 in restructuring and other charges.

Our GAAP gross margin was 46.8% up 180 basis points from 45% in the third quarter and up 720 basis points from 39.6% in the year ago fourth quarter. Operational efficiencies, especially with the continuing ramp at our IRN facility are responsible for this marked improvement. Our GAAP operating margin improved 230 basis points from our previous quarter, or $3.8 million.

For the fourth quarter, our GAAP net income was $17.3 million or $0.21 per diluted share as compared to $13.9 million or $0.17 per diluted share in the third quarter and $10.1 million or $0.13 per diluted share in the year ago fourth quarter, a 62% increase.

Capital spending was $8.3 million this quarter compared to $6.3 million in the third quarter, the increase primarily due to our IRN expansion. Depreciation and amortization expense for the quarter was $8 million compared to $7 million in the third quarter.

Our accounts receivable were $103.5 million at the end of the fourth quarter compared to $93 million at the end of the third quarter due primarily to increased revenue in our purchase of Semicoa.

Inventories at the end of the fourth quarter were $122.1 million compared to third quarter levels of $116.6 million. Though increasing in absolute dollars primarily due to Semicoa, our dated inventory dropped from 170 from the prior quarter of 172 days and 179 days in the year ago fourth quarter.

Cash generation was strong again this quarter. Our operating cash increased $20.8 million during the quarter to a yearly total of $91.8 million. After accounting for three cash acquisitions during the quarter, our year end cash investment position was $169.2 million, an increase of $61.5 million.

Our best estimate of the end market percentage break out of net sales for the fourth quarter was approximately; defense, 33% the same as Q3, commercial air satellite, 22% up 2% from Q3, medical, 14% up 1% from Q3, notebooks, LCD TV's and displays 10%, down 1% from Q3, mobile connectivity which includes POE, 14% down 2% from Q3 and industrial semi cap 7%, the same as Q3.

Now for the business outlook; Microsemi expects that for the first quarter of fiscal year 2009, our sales will be within a range of down 3% to up 2% sequentially. On a non-GAAP basis, we expect earnings for the first quarter of fiscal year 2009 to be $0.36 to $0.37 per diluted share.

With that, I'll turn it you back over to Jim Peterson.

James Peterson

With that, we can take questions from analysts.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Rick Shafer – Oppenheimer.

Rick Shafer – Oppenheimer

We've seen a couple of your competitors pre-announce this week. I'm sure you factored this into your guidance, but can you give us any color as to what you're seeing out there and part of that is I'm just curious what you're seeing in terms of any difficulty with collections or stretching out of your accounts receivable.

James Peters

We've seen what's come out of National, Semitech and Intel and the industry in general. Let me just talk about the concern that they had. One was they had quite honestly was the survivability of their suppliers. We have that same concern. What we're doing here at Microsemi is looking at suppliers and make sure we have strong second sources and the like, and I think that's one of the major concerns in the industry is checking that out.

The second one is customer survivability in a couple of ways. One, let's be sure our customers can pay. I think what's going on right now in distribution, specifically in the Pacific Rim, the cost through is the same as others are seeing out there in the market space which is, I think they're trying to sell their products and not replenishing them, and using that money because they can't raise money any other way.

We see the same thing predominantly in those two sections, in analog mixed signal, offset nicely by the rock solid customer base of high reliability. I think the other thing that we've heard out there is at least from income, is their concern even if they can raise money in this environment with their CapEx expense.

Microsemi, our total CapEx last year was about $25 million and I'm going forward since Ireland ramp up is largely over, now it's a matter of getting utilization out of that site. I think my CapEx next year will be down to less than $20 million. So I think once again, we're offsetting this a bit because of the strength of the higher liability.

Rick Shafer – Oppenheimer

Would you attribute your relative strength versus peers who are all guiding a lot more negative for the fourth quarter, would you attribute more of that to your recent M&A or is it more organic or can you talk about the relative strength in that?

James Peterson

For years I always heard is it organic or is it acquisition, and my answer in today's environment is yes. We do a little bit of both. Certainly in the high realm we're helped a little bit because I baked in a couple of small private acquisitions. We did three over the last year and they were all accredited to Microsemi. What we're trying to do with our position, we haven't bought back stock. We've been invested our shareholders and stakeholders when there's money into accreditive acquisitions so our strength is pretty much on this end slightly organic and most certainly from some M&A activity.

Rick Shafer – Oppenheimer

Going forward are there a few more of these small M&A type acquisitions that you're still looking at?

James Peterson

We've got a couple on the list. We're certainly looking at them. Realize these are private companies. They're usually companies that the management team have been around for a lot of years, they're looking for what's next in their life and/or they find themselves in a financial bind. If it adds to our product line or vertically integrates up, we'll certainly do it. But the key word for a guy like you and certainly for me to tell you is accretive.

Rick Shafer – Oppenheimer

You usually give us the turn numbers for the quarter. Maybe since you're so late this quarter reporting maybe what the turns are from here to the end of the year for you to do your guidance either at this point and maybe give us a hint. I know you don't usually give our backlog but if you would give us a hint there.

James Peterson

Turns for this quarter, we only need on or about 15% to 20% from this point forward which is much better than where we were last quarter at this time. As you know we have long lead time products so we're in fact steady with turns. It's like falling off a log. It's pretty easy.

Backlog, I never give backlog out but I think the environment is different than we've ever seen before so let me take a poke at it. Our backlog is in strong shape. We've been talking about that for about a year, year and a half. I'll venture to guess our backlog is probably on or about 40% stronger than one year ago last, that's 40% stronger than a year ago last.

Operator

Your next question comes from Tore Svanburg – Thomas Weisel Partners.

Tore Svanburg – Thomas Weisel Partners

Could you talk a little bit about current turns? Are they holding up? Are you seeing any changes?

James Peterson

We're better off than we were last quarter. Three to get to the end of this quarter. We need about 15% no more than 20% of turns to close our quarter in the mid 40 guidance.

Tore Svanburg – Thomas Weisel Partners

And you're guiding your earnings to be flat to up. Should we assume there's a little bit of gross margin leverage in there?

James Peterson

Yes. Assume on or about 30 basis points sequentially. We're in an interesting situation where we could, if sales were to hit midpoint which is minus three to plus two or what we call flattish, round up to flattish from a mathematical point of view. We will be strengthening in the gross margin area.

Tore Svanburg – Thomas Weisel Partners

Out of the three acquisitions you made this year, you made two that were a little bit bigger, Babcock and Semicoa. Can you just take now the opportunity to talk a little bit more about both companies and for us to understand a little bit more how that strengthens your competitive positioning?

James Peterson

Semicoa was kind of a tuck in and Babcock is a vertically integrated acquisition, both product companies. Babcock actually integrates nicely into high level solutions for satellite and a little bit of some missiles. Babcock also puts us into a market; I think they were the only merchant supplier in a market with a [inaudible] $20 million and a [inaudible] of about $600 million. So I think both of those are nice accretive additions to Microsemi.

Operator

Your next question comes from Craig Berger – FBR.

Craig Berger – FBR

The commercial aerospace market, it seems like it grew double digits for you on a sequential basis.

James Peterson

Satellite and commercial air. They're kind of blocked together.

Craig Berger – FBR

How sustainable is that? Should we think about an inventory bubble forming there? Should we get concerned about growth like that in the satellite market?

James Peterson

We were behind on customers' demands for the last 18 months. We're now starting to supply what the customers are asking for. You can expect that to be strong. We only guide one quarter, but you could expect that to be strong for the next year.

Craig Berger – FBR

How much of those delinquencies have you satisfied or how much tension is left in that order book?

James Peterson

A lot less tension. I think I'll be caught up on the DX rating by the end of December. I should be caught up on all DX rating for all the customers out there. They're actually coming in and shaking my hand and smiling.

Craig Berger – FBR

Can you give us an update on the move to Ireland and the gross margin impacts associated with that?

James Peterson

The best impact of the whole thing is the efficiencies. In Ireland I get about 20% better efficiencies. I said we'd do on or about over $100 million next year, in FY '09. I think we're more than on track to do that. It's been a very successful transition. I'm excited about the dedication of the employees there and I would suggest that others look at Ireland.

Craig Berger – FBR

We've heard that the [inaudible] in Asia are converting product to cash as fast as possible. What are you seeing on that front? How long can this supply chain freeze last from what you're seeing?

James Peterson

I think you're dead on. I think you were the first one to catch the wave by the way. As I read through the reports I think it's a concern. I've got some people in my company, a team flying over talking to the end customers, talking to the distributors. One thing different, even the analog mixed signal is, we're usually the number one, number two supplier, no more than number three in any of our markets. I think those that have tremendous amount of competitors, four, five, six are going to find themselves in a difficult spot.

Also for us it's on or about 10%, 10 points as we hand out business, so it's substantially less than I think what the others are going to be seeing but it is certainly a concern. People should be cautious of it.

Craig Berger – FBR

How do we think about OpEx growth in this environment? What are your key read selling for calendar Q1.

James Peterson

OpEx growth, certainly our OpEx we're watching it closely. We do expect it to go up in dollars moving forward primarily due to our Babcock acquisition and that includes both R&D as well as SG&A in our fiscal Q1.

Craig Berger – FBR

Can you give us what you might be seeing on the order book for calendar Q1 revenues and should we be thinking about that as a growth quarter, a down quarter, flat quarter?

James Peterson

I think we'll address that on the third week of January. You're going to get all of that.

Operator

Your next question comes from Patrick Wang – Wedbush Morgan Securities.

Patrick Wang – Wedbush Morgan Securities

On the guidance how does your view of the end mark demand for analog factor into it? What would you rank as weakest or second weakest?

James Peterson

When I went through the different market segments, I went from weakest to strongest. I'll repeat that for you.

Notebook, LCD TV's weakest, Mobile connectivity, weakest, Industrial, Semi cap, Solar getting stronger, defense, medical, commercial and satellite strongest.

Patrick Wang – Wedbush Morgan Securities

I meant more towards your guidance than the previous quarter.

James Peterson

The message is simple. High performance analog mixed signal down. It's about 30% of our business. The semi set of our business is up, so if you were to do the pencil math, we're seeing about the same thing in the analog mixed signal business as the most recent updates that you would get from those that are reported. So the math and you'll see that we're pretty much dead on.

Patrick Wang – Wedbush Morgan Securities

I noticed your IOS capacity is down by $1.3 million due to the [inaudible] closing. I expected it to be a little more than that. Any reason why it came in where it did or was I thinking about it a little too aggressively?

James Peterson

You were probably a little aggressive. I think $1.3 million is worth applause.

Patrick Wang – Wedbush Morgan Securities

On inventory, you said the bump up was mainly because of Semicoa. The other stuff, is analog in there?

James Peterson

I ran the report as both of those so we continue to have the regular turns that we see in the analog mixed signal and we're building inventory to support that backlog we have in Irel.

Operator

Your next question comes from Nicolaus Aberle – Caris & Company.

Nicolaus Aberle – Caris & Company

On gross margin, as your high role gets stronger here and analog slows down a little bit are you actually seeing a positive mix shift from that because it used to be the reverse. Has high role gotten so strong on the gross margin front that it actually helps?

James Peterson

Certainly the mix is helping a little bit and of course the manufacturing, everything we're doing in the company. We're getting a tremendous amount of productivity. Our GAAP gross margins jumped up to 46.8% and strengthening next quarter. The plan here, we went into, let's just touch it, on or about 10 quarters ago we said, okay, we've got a lot of pressure about closing the GAAP to the non-GAAP.

It's been the best initiative and exercise this company has ever seen. Here we are now last quarter was four to six quarters to get there, now we're saying certainly three to five quarters, we'll close the GAAP to no-GAAP where it should be seamless and when we get to that point, I'm going to be encouraging the entire planet to follow our team.

Nicolaus Aberle – Caris & Company

Can you also remind us what you're long term gross margin target is.

James Peterson

From GAAP, 55% gross margins, operating margins 30%. It's been that since I started, still there.

Nicolaus Aberle – Caris & Company

On bookings excluding satellite are you seeing anything different now on the aerospace or defense side going into the first half of 2009?

James Peterson

Defense is doing okay. It's positive. Once again, weak analog mixed signal, strong high role.

Nicolaus Aberle – Caris & Company

Can we get an update on LED and secondly wireless land as we move to 802.11N do we see the competitive environment changing at all?

Steve Litchfield

With regard to wireless land I think it's probably one of the businesses that's holding up relatively well amidst a real slow down on some of the consumer products. But all in all I'd say it's doing pretty well. I think we've got some good engagements with some customers right now that will enable us to do very well in 2009.

With regards to the LED transition, we still see it happening within the notebook as well as the TV market. It's definitely a little more aggressive in the notebook market and we've got products addressing that. We've actually done a really nice job of leveraging some of the capabilities that we had from our acquisition and really has been targeted to the TV space. We've actually been able to leverage some of that technology into the notebook space.

So we're actually excited about it. In the beginning we saw it, the TV is still relatively slow to transition but the notebook is getting a lot more aggressive right now, but our intent is to participate in both.

Niccolaus Aberle – Caris & Company

When will we expect LED to be a more material part of total revenue?

Steve Litchfield

We're shipping it to markets today, but still it's pretty small. It's hard to say. For TV I still don't expect it until next year in a material way. And for the most part, our [inaudible] products that are selling and the notebooks are still going to be the dominant share for our business at least through 2009.

James Peterson

The total exposure for that, notebooks and TV and all displays from Microsemi is only on or about 10% of revenue.

Operator

Your next question comes from Harsh Kumar – Morgan Keegan.

Harsh Kumar – Morgan Keegan

Gross and operating margin again went up very impressive there. Can you talk about what the key drivers there were and also give us in the same vein an update on the Colorado facility.

James Peterson

Operational efficiencies without question. Product mix without question. Pretty much shoulder to the wheel, sweat and equity from the company.

Let's me talk about Colorado, I'm glad you brought that up. Colorado, we made a little shift in strategy there based on the strength of some business. Last quarter I said we were going to have to stay hard to close October 1 and we had begun the decommissioning. I also mentioned that we would have the building listed for sale and I mentioned we would notify the employees. So let me give you an update.

One, the building is up for sale. It is listed. Secondly, we have notified all our employees and we've issued [inaudible]. The real change I've done here, is I am starting wafers. I'm going to continue to start wafers through April 1. It's one line, one dedicated product for Boston Scientific and in exchange for keeping this one line open, Boston Scientific has issue Microsemi the largest purchase order we've ever received.

I talked to Boston and I told them I was going to mention it and there was a purchase order for on or about $30 million shippable within the next four quarters. In exchange for that Boston Scientific has qualified our Garden Grove facilities so we'll move the wafers from Colorado over to Garden Grove so it's one dedicated line and in this environment we'll see who in their right mind would walk away from a high margin $30 million purchase order with a customer like Boston Scientific who last quarter announced that their business had grown double digits, about 11%.

We believe that they've taken on or about a 6% market share in their space and they are a wonderful, wonderful partner for Microsemi.

Harsh Kumar – Morgan Stanley

Talking about medical in that vein, you sound really excited about that business line. I know you're looking for content increases. Can you talk about where you are and how much the content was and what you're expecting?

James Peterson

There are very few markets out there that are growing. The portable defibrillators are growing somewhere between 8% to 11% just to be fair. Also the international market is probably growing 20% plus. The real name of the game though is domestic growth in the [inaudible] so we need to find a market in this environment that's growing that strong and you have a nice position spot in that you stay and you stick with it.

We stopped talking dollar content after we blew right through $100 per share of portable defibrillators and I can tell you we're way beyond that in most of our platforms, probably double or more in most of our platforms today, so I'm not giving a hard number but I am excited about that market space.

Harsh Kumar – Morgan Stanley

Babcock, how much is that contributing if you don't mind telling us that?

James Peterson

I don't mind telling you what a private company contributes. If you dialed in about a $3 million number you wouldn't be too far from fact. Maybe a little higher, maybe a little lower.

Operator

Your next question comes from Steven Smigie – Raymond James.

Steven Smigie – Raymond James

In Ireland, you have utilization you want to fill up. What sort of a time frame, where is the utilization now and if you fill that how does it affect gross margin.

James Peterson

I don't have the hard number with me. I'm going to take a guess because we've put a lot of equipment there. I'm going to guess about 75% to 90%.

Steve Litchfield

That's probably right but we have the capability to grow a greater footprint over there as the demand calls for so we're quite excited about our opportunities there.

James Peterson

The real thing there is some yield enhancement and the like but the productivity in the whole Ireland thing has just been exceptionally pleasing.

Steven Smigie – Raymond James

I think you're going to get some tax benefits moving revenue over there. I'm curious what the tax rate looks like over the next year.

John Hohener

As you know, we saw a great improvement in this year getting down to around 25%. We certainly see that trending down as a result of Ireland and some other initiatives that we're doing and we're trending down to the range of 23% as I said last time.

Steven Smigie – Raymond James

Could you talk a little bit about how much of your military business comes from U.S. versus international applications? Obviously if there's a change in administration in the U.S. and they cut back on spending would that be significant to you or do you think that's not a significant issue?

James Peterson

Anybody that's in the higher liability space, defense, satellite and the like should take note to what we're seeing here. It's hard to really put your finger on what's domestic and what's international because to goes to sub contractors and shifts around quite a bit. I guess maybe 70% domestic and 30% international including Europe.

I think what you're going to see in the administration is they're going to look real hard at a lot of the defense programs that are out there and you know what? They should. I think a fresh eye is something that's real beneficial to that particular space. Some will survive. Some won't. Microsemi is at about every program.

Let's talk about the international contribution and what I think we're going to be seeing. I think you're going to see a little bit of foray from Lockheed Martin [inaudible] I think you'll see the same thing with Boeing. I think you're going to see large defense contractors, manufacturers strengthening their international relationships for a couple of reasons.

One, because the international suppliers because they do a lot of outsourcing internationally. They're going to step up to the bar. And where we might fall short in spending for defense in the United States, I think the international forces will certainly work closer with our manufacturers here.

And secondly, world peace is not near an end, and I think those nations that need support to ensure world peace on their territories might have to start building some of the equipment themselves and therefore the financial contribution will certainly be coming in stronger in international over the next five years.

All in all, what I hear on the street for the next one to two years, not a lot of change in modification. Two year beyond, all bets off, but we will certainly be involved in the decisions. And one last reminder, we're in every military program out there. Some get re-funded. We're in it. Some get strongly funded. We're in it. Some get down ticked. We're in that as well. But we'll keep you appraised on a quarter by quarter basis.

Steven Smigie – Raymond James

In the past it seems like you've been pretty steadily chugging along at 3% sequential growth per quarter roughly, if I factor in letting me make my own decisions on what could happen to your analog mixed signal business, can you see that the military stuff is still going to be tracking about what it's been tracking or is it a feeling that the delinquencies change that?

James Peterson

I think you'll see more of what's here. I think next quarter expect analog mixed signal down, HiRail strong. I think the analog mixed signals base is going to ugly for the next couple of quarters and I think companies have got to work around that and get ready for it. We have.

Operator

Your next question comes from [Christopher Longarue – Sidoti & Company]

[Christopher Longarue – Sidoti & Company]

With respect to Boeing, they've been making a lot of headlines lately, have you seen any change in the order array with respect to the 787 and how do you see that business going forward?

James Peterson

That airplane has certainly had a lot of media. I know the 737 today, they can't get a $0.73 bolt or stuff like that for fuselage. The total commercial air business for Microsemi at Boeing is certainly less than 2%, so it's not a tremendous impact on Microsemi in any direction.

That having been said, when other's might or begin to push out to supply product, we were on a delinquency program for Boeing. We were behind on our product shipments. Having been pushed out a little bit they certainly didn't come to Microsemi to push out.

Our sales to Boeing, a lot of our sales go through system contractors. Even though during the strike, system contractors, I think it was costing Boeing, it would have cost them more to cancel some of their system contracts so they kept a lot of the contracts alive.

There's one more little note in there. Airbus was taking what Boeing wouldn't.

Operator

Your next question comes from Shawn Webster – J.P. Morgan.

Shawn Webster – J.P. Morgan

What was your actual turns in the September quarter?

James Peterson

It was probably on or about 30% to 35%. Pretty much I think where we dialed in.

Shawn Webster – J.P. Morgan

Circling back to the acquisitions, how much was Semicoa in your Q4 and what do you think it will contribute in Q1.

James Peterson

In Q4 we expect it to be on or about $2.3 million. I think if you took that and went slightly to the right side or the left you wouldn't be too far off.

Shawn Webster – J.P. Morgan

And will it be the same level in Q1?

James Peterson

Yes, slightly to the right, slightly to the left, you'd be dead on.

Shawn Webster – J.P. Morgan

Were your utilization rates, were they flat, down or up in your September quarter?

James Peterson

Hard liability utilization was probably up, and analog mixed signal a lot of it is foundry so I don't have the hard answer for you. I'd guess down because everything else I've seen from there has been down.

Shawn Webster – J.P. Morgan

The biggest contribution in the inventory you said was your acquisitions or was it also your builds?

John Hohener

Certainly it's as we've come to support our delinquencies we have been building up some inventory and that's one way we've been eating into that backlog.

Shawn Webster – J.P. Morgan

For the sequential change in your gross margins GAAP or non-GAAP do you attribute most of it to mix in utilization rates or was there something else happening sequentially?

John Hohener

We're talking about the efficiencies in Ireland which is a big contribution as well as efficiencies in the rest of our manufacturing operations.

Shawn Webster – J.P. Morgan

Do you think that's the number one thing, because you had a pretty big mix shift to HiRail in the quarter?

John Hohener

I think that was the number one thing. Put the mix in the right direction. You were wanting me to catalyst for my initiative to fix this thing.

Shawn Webster – J.P. Morgan

For your DSO's you talked a little bit about that earlier, but we haven't seen this kind of higher level of DSO's in a long time. Is there anything that's a concern or was there a bigger contributor in your acquisitions again or can you parse it out for us?

John Hohener

I think DSO's are going to be going up because of what's going on in the Pacific Rim. I think we certainly are focusing on it, and once again I encourage others to have a look at it, to try on it.

Shawn Webster – J.P. Morgan

For you inventory dollars, do you think they'll be up again in the December quarter?

John Hohener

They will be up again primarily because of Babcock. Remember Babcock occurred in our fiscal Q1. Other than that, they'll probably trend to the right. In other words, not meaningfully up or down.

Shawn Webster – J.P. Morgan

Do you think your utilization rates will be flat, down or up for December?

John Hohener

I'm going to guess slightly up in higher liability, analog mixed signal I'm hoping same as last quarter. The only thing about analog mixed signal, more or less that's all been outsourced now so it's really an insignificant issue. At this point in time it's really focused on our HiRail utilization rates is what you need to be focused on rather than our analog mixed signal.

Shawn Webster – J.P. Morgan

Your HiRail lead times are about 22 to 30 weeks last quarter, where are they sitting now?

James Peterson

Lead times as a whole, let me give you the normal lines of where we are right now. Analog mixed signal, we're still getting eight to ten weeks normalized last quarter and the quarter before it was about 12 to 14 so that's coming down, certainly a sign of the times.

Higher liability 20 to 26 weeks, normalized quarters back 20 to 30 so it's pretty much consistent. Satellite greater than 36 weeks now, normalized, greater than 36 weeks.

Operator

Your next question comes from Vernon Essi – Needham & Company.

Vernon Essi – Needham & Company

You said you saw some strength in Notebook, but what specifically was going on there? Was it more of a market share shift or are you see incremental units.

James Peterson

We've talked before in the past, I think you know that we were tracking it. It's design momentum and market share for Microsemi that's making this look strong for us. I don't think materially a lot in revenue in a spike, and certainly we're excited even in this environment to the market shifts.

Vernon Essi – Needham & Company

You broke out a little bit about the medical side. That Boston Scientific program, should we be thinking about this as sort of a refresh as an incremental opportunity in terms of dollar content. In other words, you gave a $30 million number. I assume some of this is going to be refresh, it's not going to be incremental to what your run rate is.

James Peterson

I think you'll get a blend of refresh and slight incremental on for those who got their models.

Vernon Essi – Needham & Company

On the balance sheet, I'm look at, what was the consolidated figure for long term assets, what was the good will and intangibles content of that in the quarter?

John Hohener

We ended at 250 up slightly from 230, the addition again becoming Semicoa.

Operator

You have a follow up question from Harsh Kumar – Morgan Keegan.

Harsh Kumar – Morgan Keegan

I think you get your normal ESP increase in your HiRail business about this time. Can you talk about if those are going through okay?

James Peterson

Let me mention first, the reason we do that is cost of goods for our suppliers go up. It's a shrinking, declining market place and what we try to do is let our customers know what we do in that area. We historically for the last five years have told our customers that they should expect that we raise the prices on or about 10% to offset these costs so we can continue to supply the military base customers.

We implement it on or about October 1, and it's on track. Remember, that with lead times of 20 weeks for the satellite, 36 weeks for a lot of others, three quarters out. It's dead on track.

Harsh Kumar – Morgan Keegan

You tax strategy is in play, obviously to bring taxes down. Is it pretty fair for us to look for somewhat of a slight decrease in tax rate going forward maybe ending the year at about 22%?

James Peterson

John said it looks like on or about 23%, and that is certainly, our tax program is nothing more than a result of our operating efficiencies and what we're doing world wide and Ireland.

Harsh Kumar – Morgan Keegan

So should we model 22% for the whole year or bring it down to 22% at the end of the year?

James Peterson

I think if a CFO tells you that he's trying to get to 23%, I'd probably model at 23%.

Operator

There are no more questions. Mr. Peterson are there any closing remarks?

James Peterson

Thank you for joining us today and for your questions. By the way of review; here are the main points we've covered.

We continue to improve both our GAAP and non-GAAP gross operating net margins. Cash and investments increased by $61.5 million over the prior year to under $69.2 million. We continue to make substantial improvements of our capacity utilization and operating efficiencies.

For future financial conferences, please refer to our web site. We encourage you to attend one or all of these conferences. If you're not able to attend we encourage you to listen to our presentations via web cast.

Thank you again for being with us, and have a great day.

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