Microsemi's (MSCC) CEO Jim Peterson on Q3 2016 Results - Earnings Call Transcript

| About: Microsemi Corporation (MSCC)

Microsemi Corporation (NASDAQ:MSCC)

Q3 2016 Results Earnings Conference Call

July 28, 2016 4:45 p.m. ET

Executives

Terri Donnelly - Executive Assistant Microsemi Corp.

John Hohener - EVP & Chief Financial Officer

Jim Peterson - Chairman & Chief Executive Officer

Paul Pickle - President and Chief Operating Officer

Steve Litchfield - EVP & Chief Strategy Officer

Analysts

Harsh Kumar - Stephens

Mitch Steves - RBC Capital Markets

Steve Smigie - Raymond James

Quinn Bolton - Needham & Company

William Stein - SunTrust

David Wong - Wells Fargo

Ambrish Srivastava - BMO

Christopher Longiaru - Sidoti & Company

Operator

Ladies and gentlemen, thank you for standing by and welcome to Microsemi's Third Quarter Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn today's conference over to Terri Donnelly, call coordinator. Please go ahead.

Terri Donnelly

Good afternoon and welcome to Microsemi's earnings conference call for the third quarter of fiscal year 2016. 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 Chairman of the Board and Chief Executive Officer; of Paul Pickle, our President and Chief Operating 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 Web site under the investors section. Our Web site 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 current expectations and is continually subject to reassessment due to changing market conditions and other factors. Therefore it 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 September 27, 2015, and Form 10-Q for the quarter ended April 3, 2016.

With that said, I'm going to turn the call over to John to discuss our financial results. Here's John Hohener.

John Hohener

Thank you, Terri. In the third quarter we reported net sales of $431.4 million, above the midpoint of our guidance and up 36% from the $317.1 million we reported in the third quarter of 2015. Net sales were down 3% sequentially from our March quarter due to our previously announced divestitures. For the third quarter of 2016, we recorded GAAP and non-GAAP gross margins of 61.9%, a sequential increase of 1680 basis points on a GAAP basis and 90 basis points on a non-GAAP basis, due to continued execution of our strategic plan and increased absorption in our business.

Compared to the third quarter of 2015, GAAP gross margin increased 760 basis points and non-GAAP gross margin increased 490 basis points. For the fourth quarter, we expect to benefit from increased revenue and incremental synergies and forecast non-GAAP gross margin to improve between 10 and 70 basis points. Compared to the year ago third quarter, GAAP operating income for the third quarter of 2016, more than doubled to $51.2 million. As a reminder, we recorded a GAAP operating loss of $97.9 million in the second quarter of 2016, primarily reflecting charges associated with the acquisition of PMC.

Included in GAAP operating results for the third quarter of 2016 were non-cash charges of $44.9 million and amortization of intangibles and $18.9 million in stock-based compensation. We estimate the stock-based compensation expense will increase slightly to $19.5 million next quarter. For the third quarter of 2016, we also recorded restructuring, acquisition and divestiture cost of $7.8 million.

GAAP net income for the third quarter of 2016 was $115.2 million or $1 per diluted share, including a pre-tax gain of $125.5 million from the previously announced divestitures. We also recorded pre-tax charges of $19.6 million related to OID and other refinancing related charges.

During our third quarter, non-GAAP operating expense was $144.2 million. Non-GAAP selling, general and administrative expenses decreased from $66.9 million or 15.1% of sales for the second quarter of 2016 to $61.2 million or 14.2% of sales for the third quarter of 2016. Savings were the result of continued synergies and previously announced divestitures. Non-GAAP research and development expense correspondingly decreased from $87.8 million or 19.8% of sales to $83 million, or 19.2% of sales.

These savings were also the result of continuous synergies and previously announced divestitures. We expect overall operating expense for the fourth quarter to decrease between $2.2 million and $3.2 million driven by operational efficiencies and continued incremental synergies. Non-GAAP operating income and operating margin for the third quarter was $122.7 million and 28.5% respectively. These amounts compared to $116.2 million and 26.1% of sales for the second quarter of 2016 and $78.8 million and 24.9% for the third quarter of 2015.

Non-GAAP EBITDA for the third quarter was $133.8 million, increasing $46.3 million or 53% from the prior year third quarter and increasing $5.1 million or 4% sequentially despite the sequential decline in revenue as related to the divestitures. For the third quarter of 2016, we recorded $32.5 million in non-GAAP interest and other expense, compared to $34.5 million with a majority of the decrease reflecting $371.6 million in principal payments.

This was offset somewhat by borrowings outstanding for the full quarter that were only outstanding for 11 out of 13 weeks of the second quarter in conjunction with the acquisition of PMC. We expect non-GAAP interest and other expense of approximately $26 million, reflecting a favorable amendment to our credit facility which closed on June 29, of this year. Given the timing of the amendment, the favorable interest rates did not benefit our third quarter.

Reflecting the $371.6 million of principal payments, we ended the third quarter with an overall debt balance of $2.27 billion with a blended interest rate of 4.42%. We ended the quarter with a gross leverage ratio of 3.9 and 3.7 on a net debt basis, well ahead of our 18-month goal for reaching for 3.0. Our non-GAAP effective tax rate was 7% for the third quarter of 2016, reflecting operational integration of prior acquisitions, recent divestitures and other tax optimization activities. We continually evaluate our operational plan and expect a non-GAAP effective tax rate of approximately 7.5% for the fourth quarter.

Non-GAAP net income for the third quarter was $84 million or $0.73 per diluted share compared to the midpoint of our guide of $0.72. Our diluted share count for the third quarter of 2016 was 114.6 million and we expect share count of 115.2 million for the fourth quarter. At the end of the third quarter, accounts receivable were $241.7 million with DSO flat at 48 days. Inventories were $231.2 million and days of inventory improved from 137 days to 128 days.

For the third quarter, operating cash flow was $45.3 million, including payments for restructuring cost of $6.7 million, acquisition divestiture cost of $2.8 million and debt modification and payments of $16.1 million, all of which are reflected as a reduction in operation cash flow. Adjusting for these payments, operating cash flow would have been $71 million. For the third quarter, free cash flow was $34.1 million and $59.8 million on an adjusted basis.

Under our new debt structure, our cash payments for interest expense will not always match our accrued amounts primarily due to the timing of payments. This reduced our cash flow by approximately $15 million this quarter. Existing our fourth quarter, our business will support quarterly free cash flow generation at a post divestiture run rate of $100 million to $105 million.

Capital spending was $11.2 million in the third quarter, compared to $12.5 million in the prior quarter. Our annualized target remains $60 million. Depreciation and amortization expense was $56.5 million and we expect this amount to be approximately $55.7 million, reflecting recent divestitures. We ended the quarter with a book to bill ratio of less than 1:1, reflecting typical December quarter seasonality. Our best estimate of the end-market percentage breakout of net sales for the third quarter, which reflect recent divestitures, was approximately aerospace and defense, 26%; communications, 38; data center, 21%; and industrial, 15%.

Now for our business outlook. Microsemi currently expects net sales in the fourth quarter of fiscal 2016 of between $438 million and $458 million and expects non-GAAP diluted earnings per share of between $0.83 and $0.97.

Today we are also happy to announce that we will be having an analyst day on September 8 in New York City. More details will follow. With that, I will turn the call over to Jim.

Jim Peterson

Thanks, John. I would like to start off with three key takeaways for today. First, Microsemi is executing to its plan. As you have seen with the results, Microsemi is delivering on revenue growth while hitting record GM and operating margin targets.

Our new products continue to deliver growth at record profit levels. This execution is also demonstrated by our integration of PMC. We are well on our way to delivering $100 million in synergies. Gross and operating margins are at record levels and we believe we will come in on plan for revenue forecasted for the 2016 calendar year.

The data center and the server markets continue to do extremely well, growing double-digits this quarter. The hyperscale customers continue to ramp and the relationship strengthens in that market. Second, Microsemi is dead set on driving cash flow and delevering. Simply put, our mantra has not changed. We are going to drive cash flow and delever to three turns or less within 18 months of the close.

Our debt EBITDA ratio has fallen from an initial 4.8 turns to 3.7 turns in less than two full quarters. Lastly, Microsemi's product portfolio is positioned for growth. We are actively taking market share with our new products. The portfolio of technology is extremely strategic to our customer base and our engagement is at an all-time high. We are taking advantage of this now to drive significant value creation for our shareholders. Our technology with our FPGAs, Ethernet switching and storage products uniquely positions us with our customers.

That having been said, I am going to turn the floor to Paul for more color on the quarter.

Paul Pickle

Thank you, Jim. Communications, our largest end market, accounted for 38% of revenues and was up 41% year-over-year and 1% sequentially, totaling approximately $162 million.

Optical and Ethernet switching applications continued to exhibit solid revenue and booking strength. And OTN, primarily on 100 gig coherent platforms, we are seeing strong design win acceptance for our DIGI-G4 optical processor solution across China, North America, Japan and Europe. We are hard at work in leveraging our largely sole source position in this market and to growing technology partnerships with virtually all of the major communications equipment supplier worldwide.

We are seeing a strong opportunity from funneling OTN switching, [DTON] [ph], OTN front haul and router applications. As expected, we also had some weakness in the quarter due to our China broadband gateway business. This business has been extremely strong, leading up to Q3 and is going through some digestion of channel inventory. We have been able to offset some of this weakness with market acceptance of new products, such as line drivers and our voice processing products which are ramping.

We had a nice contribution from Ethernet switching products which grew 14% for the quarter, and we have a strong seasonal forecast to fiscal Q4. This is a highly strategic market for us and the competitive dynamics are increasingly favorable. Ethernet is a high barrier to entry market and we are one of only three players in this industry today with an Ethernet hardware stack. Customers are demanding more feature-rich devices and this is playing to our strength in software development and differentiation.

As we all know, scale matters and the scale Microsemi has brought to our Ethernet switching products since the acquisition last year is starting to pay dividend. In fact, tier one vendors who have never before considered our solutions previously are showing Microsemi some of the largest Ethernet RFPs in the history of the company. As we turn RFPs into design wins and ultimately revenues, we expect long-term outsize growth for our Ethernet products.

Aerospace and defense was $113 million in Q3, down almost 15% sequentially and 14% year-over-year, accounting for 26% of total revenues. This was driven by our recent divestiture completed in the quarter. Recall that the business was approximately $120 million of non-strategic revenue on an annual basis, the majority of which came from defense applications. So while the numbers are down this quarter, it is exclusively a function of the divestiture. Microsemi is more committed to defense than ever before as the opportunities continue to grow with our portfolio and positioning in this market.

Replacing the divested board level and packaging revenues, with increased dollar content in the form of FPGAs and timing products, for example, will drive faster and more profitable growth through the next defense cycle. Wrapping up this end market, aerospace showed solid growth in the quarter, up approximately 13% primarily from commercial air. Satellite bookings were strong, bolstering our confidence in a late 2016 recovery with growth in 2017.

Data center was 21% of revenues in the June quarter, up $7 million or 8% sequentially to $92 million. As detailed previously, this end market is primarily comprised of storage controllers, interconnect devices and board level products along with various power management and Ethernet switching products. While the storage industry is in transition, demand for storage has never been greater and is growing exponentially. In the next term, we expect to see growth from market share gains driven by newer products such as our 12 gig SAS solutions.

With favorable competitive market dynamics and a well-engineered product offering, we expect to gain significant market share as Purley processor designs ramp and as hyperscale applications become a larger component of revenue.

As we saw in defense, our industrial results were affected by the divestiture last quarter. Industrial was down 3% sequentially and 4% year-over-year for the June quarter, totaling $64 million and approximately 15% of total revenues. Otherwise, medical ultra-low power radios continued to deliver strong and steady results and are on track for double digit growth this year, while more macro exposed products continue to grow modestly as forecasted.

In the second half of the calendar year, we expect to see some acceleration in industrial results as we ramp our high voltage power solutions into automotive EV charging stations in China amidst a state-subsidized environmental and economic development program. In summary, we are extremely pleased with our June quarter. Two divestitures and the first full quarter of contribution from PMC masked what was greater than 3% sequential growth from our core business.

I will now turn the call back over to Jim.

Jim Peterson

Thanks, Paul. With that, I thank you for your interest and support. And we will now take questions from our analysts. In the interest of time, please limit yourself to one well-thought out question and if necessary, a brief follow up. Susan?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tore Svanberg of Stifel.

Unidentified Analyst

This is [Erik] [ph] calling in for Tore. Nice results and congrats on the record numbers. Just on your gross margin, in the past you have benefited from continued facility consolidation as well as contribution from PMC. Going forward, where do you see the biggest impact to gross margins coming from? Can you lay out the various components that make up those assumptions?

Jim Peterson

Good question. Yes, certainly, exactly as you have talked about, increased absorption, we're still going to see that. We are still going to see some synergy that will come into play as we have talked about, as it relates to PMC. Normally, when we talked about our synergies, that comes later in the year. That will probably come in the fourth calendar quarter. You will see some uptick there as well. And we are still consolidating and moving production to some of our lower cost facilities. So you are going to see an uptick in all of those contributing to growth in gross margin.

Unidentified Analyst

Okay, thanks. And then, maybe, just on the debt. It looks like in the leverage ratios you continue to make good progress and pay debt down aggressively. And I think you also had amended your credit agreement, so it certainly helps on the interest payment. But in terms of you hitting your leverage ratio of 3 times, you said you're ahead of that goal. How much of that is pulled in because of those strategic assets versus you making a lot of progress because of your operating cash flow? Thanks.

Jim Peterson

Well, I would say we are certainly, if those divestitures didn't happen we still would have been comfortable with our 3.0. That certainly helps and certainly allows us to be more aggressive in addressing our overall debt and continuing to pay down and beating that target.

Operator

Your next question comes from the line of Harsh Kumar, Stephens.

Harsh Kumar

Congratulations on some pretty strong numbers and guide. Maybe a question for Paul or Jim. Jim, you guys have done historically a very good job with acquisitions, controlling the OpEx and bringing that down. Can you give us some broad thoughts on how we should think about OpEx just on a longer term basis, just beyond even the September quarter?

Jim Peterson

Sure. So, I guess the best way to look at it, we have got a target model for ourselves along the lines of 13% SG&A, 17% R&D, and that's kind of a longer term target. We would like to stick to that budget, so if you thought in terms of a 30, 31, you wouldn't be too far off.

Harsh Kumar

Okay, fair enough. And for my follow up, so you guys have been paying down debt pretty aggressively, sold a few things. Once you get past this quarter, how should I think of your debt pay down strategy? Are we going to, sort of be looking back at that $100 million per quarter kind of thought or is there some other change to it?

John Hohener

Well, certainly we haven't changed the uses of our cash. Debt is the primary and only focus for us now in terms of our free cash flow. So as we move forward, that will continue to be. We have an aggressive target to get to 3.0 and then we will reassess possibly other alternatives for cash, but right now that is the use of cash.

Operator

Your next question comes from the line of Mitch Steves of RBC Capital Markets.

Mitch Steves

So first off on the M&A front, I want to talk about that real quick. You guys mentioned that you are dead set on getting to 3.0 in terms of leverage. So is it fair to say that we would not see any sort of M&A deal announced between now and that timeframe?

Jim Peterson

Yes, let me be clear. Our focus here is that our product portfolio is positioned for growth. We are focusing on growth at this point and you will not see M&A to the short. You will not.

Mitch Steves

Okay, perfect. And then, secondly, on the gross margin line. It looks like the mix should actually improve for you guys going forward. So, I guess, what percent of the uptick, if I were to look sequentially, was due to COGS savings versus just an increase in a, I guess, mix dynamic?

John Hohener

If you are talking about our specific guide for Q4, certainly mix would probably be the more favorable piece of that. But we are not breaking that out in terms of our overall guide.

Operator

Your next question comes from the line of Steve Smigie of Raymond James.

Steve Smigie

I will add my congratulations to some good results and good debt pay down. I just wanted to ask about the strength you're seeing across some of your products. Some in data center, some in communications seem particularly healthy. You touched on it a little bit, but how much of that success is coming from the markets picking up versus, say, some competitive dynamics for some of your competitors are maybe being overly aggressive on pricing. Meaning raising pricing, allowing you to enter the market or consolidation creating opportunities for you?

Paul Pickle

Well, I have to say, and we talked about it in the prepared remarks, that certainly the market dynamics are providing very nice opportunity for us. We have made a couple of players that weren't players before. With the scale that we bring, we are now engaging on a very real strategic level with some of the big customers out there. So, we're definitely benefiting from that.

OTN definitely has gone through an upswing. So if I look at it, it's a product cycle, there is not really competitive dynamic to note there. We have been developing products for a little while. The industry has been talking about OTN, this OTN overhaul and upgrade for the past two years and we are now starting to see that swing in the right direction for us. We have a number of components in that area that we have been developing on. So, that's really just new product development taking off. But certainly in the areas of Ethernet and storage in particular, there are some market dynamics, competitive dynamics, that are helping us.

Steve Smigie

Great. Thanks. And I'm going to try to slip two questions into my follow up. Any further color you can give us on FPGA business, where you are seeing successes? And then just on CapEx, I know you reiterated the $60 million, what are you expecting to get out of that, the $60 million? What could drive it higher or lower? And I know it's a ways out, but how would we think about the trajectory potentially into the next year? Thanks.

Paul Pickle

Sure, on FPGA, in particular with our Gen 4 product, we have had great success. We talked about secure boot, secure load. The other aspect of it is the high reliability play. If you look at data center, those customers really are what I would call high reliability customers. It plays to our strengths and our heritage as a company, but with FPGAs specifically we have got something called single event upset immunity. We have done a really nice job capturing PLD sockets there in control plane specific applications.

With the storage products that we have today, we have been pleasantly surprised on an uptick in opportunities that we have with FPGA in storage and data center. It is not necessarily the same accelerator function type FPGA growth that you have heard about in data center, more of a supervisory management function. But there, again, the high reliability aspect is quite nice. And then, I don't want to leave out RTG4, our rad tolerant Gen 4 design. We have gotten better than expected acceptance of that product. We started shipping preproduction orders to customers so they can start their testing. And so we're really happy to see that happen in the space market.

Regarding CapEx, we set a target that we think is reasonable to achieve. We have been tracking underneath that $15 million a quarter. I don't expect anything to really push that higher. Last year, when we did see a spike, it was related to capacity that we needed to put in place and we announced that to you guys so you would see it coming.

Operator

Your next question comes from the line of Quinn Bolton of Needham & Company.

Quinn Bolton

You sort of alluded to the fact you are starting now to see some bigger RFPs for some of the acquired businesses. Just wondering if you could comment also on the behavior of some of your competitors and pricing, and whether that is giving you opportunities to either come in with better pricing and/or negotiate higher market share in some of the storage and enterprise switching markets. And then I've got a follow up. Thanks.

Jim Peterson

It's an interesting question. Litch, you want to give a little color on that?

Steve Litchfield

Yes, I mean we have talked about this a lot and I think a lot of people are aware in the storage market as well as in the Ethernet switching market, these are two particular areas, big product lines, and those are probably the two that you are alluding to. We have definitely seen competitors raise prices, in some cases pretty aggressively and customer is very excited to see us at the table, to see us accumulating assets that they can put up against them. And I would just say that our value proposition there is quite large. The relationship that we have had, and Jim talked to it earlier in his prepared remarks, this really explains a lot of our positioning and why we are excited today versus, say, two years ago.

That portfolio that we have, the customers see that. The strategy of bringing more silicon per application per customer is really paying very big dividends. And so when a competitor goes in and raises prices, we are right there and seeing possibilities to take market share. Are there possibilities where we have raised prices? Yes. There is definitely examples of that. You know our history, Quinn. We have not been shy about doing this where appropriate. But, quite frankly, right now we have got a lot, a lot of interest from our customers just to pull through new products and newer opportunities that we have not seen historically.

Quinn Bolton

Got it, great. And then just follow up on the storage market. Can you just let us know, I mean, obviously, there is a transition over time away from HDDs to SSDs or to flash-based technologies. I'm just kind of wondering ,in the acquired PMC storage business, how much of that is driven by hard disk drives or are you sort of memory agnostic in that SAS controllers, the RAID controllers work with both HDDs as well as flash? Thanks.

Steve Litchfield

So I think they are -- I guess, I would have to start out, look, the demand for storage has never been greater, right. So I think we have said all along, we came right out of the gate when we bought the company and talking about the real future is more on the flash side. That's where we are investing money. That's where the future is. That's where we're engaged with the hyperscale guys. That said, we are engaged with all these customers still addressing HDD. Clearly most of the buzz, most of the talk out in the market is talking about flash, but that said, we are still creating a lot of revenues. We have got a lot of market share gains that really haven't played out entirely. 12G SAS, we've talked about. You have heard us say that that's still flowing through the channel right now. And, quite frankly, as we move forward, there is more upside in the second half of 2017 into '18 as Purley starts to ramp.

So, look, I am hesitant to talk about one rather than the other. We really need to talk about both of them because both of them have growth in our pipeline right now. But long term, it really is about flash and that's where we are seeing the most success and the biggest growth rates as well.

Operator

Your next question comes from the line of William Stein of SunTrust.

William Stein

Congrats on the nice results and the outlook. I believe the company made an adjustment to its channel strategy during the quarter in terms of the partnerships with distribution and I'm hoping you might talk to us a little bit about the rationale and the expected impact of that change. And then I have a follow-up as well.

Jim Peterson

Yes, I think probably the most important factor is that this is a multi-quarter transition, so it will be a very smooth transition at Microsemi. Essentially, we were seeking, I mean we believe that we now have a way to better cover our products and our strategy and get enhanced customer service with this change.

William Stein

Okay, and Jim, I have a follow up for you, if I can. It looks like the board put in place a long term incentive program that sort of changes or adds to, perhaps, some incentives for you. Can you talk about the nexus for that and how that might change the strategy at the company, let's say?

John Hohener

Yes. This is John. Let me take a shot at it in terms of speaking for the board in this regard. What it comes down to is the board at this time believes the timing is perfect to further incent Jim. We have seen this done in other situations and properly incenting does lead to greater performance and we have seen that as well. And also from a governance standpoint, the industry has pushed towards performance based TSRs and this retention agreement aligns with that. Also, they felt that the timing was perfect after acquiring the most transformative acquisition in the company's history and we believe that therefore performance is going to directly lead to significant shareholder value expansion in this regard.

Operator

Your next question comes from the line of David Wong of Wells Fargo.

David Wong

My first question, can you help us understand a little bit about your leverage goals? When you get down to your 3.0 ratio that you are working towards, would your plan be to build a cash buffer out of cash flow before you do further acquisitions, or would you be open to taking out further debt and taking the leverage up again for a new acquisition?

Jim Peterson

Good question. I think you can say that both of those are on the table. Certainly what we have done in the past is when we took our leverage ratio down, and at the time it was 2.5 before the acquisition of PMC, we thought what was the best use of cash and we felt our stock was undervalued at the time and we actually went and bought back some shares. So we will evaluate at that point in time but certainly, depending upon what the cost of our debt is compared to what we can do with our cash, we would continue to pay down debt, absent any other better alternative.

David Wong

Great. And for my follow up, could you remind us what your long term gross margin goal is once you have achieved the various consolidations and synergies you are working on now?

Jim Peterson

Sure. Steve, why don't you jump on that one?

Steve Litchfield

Okay. Yes, David, we have talked about for a long time getting to 60-30. We hit that. I guess we went over the 60% last quarter, we did 61.9% this quarter. And so I think where we stand right now, we are guiding that up again. We don't expect to change this goal today, right. So the company has been very focused on topline growth and we think with this portfolio that we've talked about, better positioned than ever to execute and deliver that revenue growth and you have seen that from us. We did greater than 3% this year. Last year, we delivered 6.5% organic growth. So we want to continue to grow that topline and we don't want to raise that gross margin target up too high such that it limits that topline growth.

Where we do see a little bit of opportunity is on the bottom line or the bottom, the operating margin side. We do see the ability to expand that further. We have not changed this goal in any way, but we definitely see some opportunity to address the operating margin line and expand that further.

Operator

Your next question comes from the line of Ambrish Srivastava of BMO.

Ambrish Srivastava

I had a question on the free cash flow. Could you, just looking at this quarter, I guess there were some one time impact to the free cash flow, but just remind us the target exiting this fiscal year. And also, more longer term, you now have a business which is a lot more profitable. What is the long term, what is the right way to think about how much free cash flow per sales the company is capable of generating? Thank you.

John Hohener

Yes. Certainly, you saw this quarter we had some onetime expenses that we talked about in the prepared remarks related to acquisitions and divestitures. We do think most of that is behind us. But we also, as we know, cash flow can be, I will call it, volatile from quarter to quarter. And an example of that was in this period the way our interest became due, we had about a $15 million, I would call it, a hit to the quarter that wouldn't be on a straight line basis.

To answer your point, we do expect free cash flow to improve. As we continue to grow the business, we are going to continue to realize more synergies and, quite frankly, as we continue to pay down debt and have less interest load, we will continue to utilize that cash to continue to pay down and generate free cash flow. So, yes, more to come as the business expands, for sure.

Operator

[Operator Instructions] Your next question comes from the line of Mark Delaney of Goldman Sachs.

Unidentified Analyst

This is Timothy on for Mark and thank you for taking the questions. My first question is on the timing of the debt pay down. When do you anticipate that Microsemi can reach and go below the 3 times leverage target?

Jim Peterson

Well, our stated goal is 18 months from inception, which was back in January, when we said in the prepared remarks that we believe we are significantly ahead of that schedule right now.

Unidentified Analyst

Okay. And just a quick follow up on EPS guidance. I was wondering if there was a reason behind the larger range of EPS guidance this quarter versus last quarter.

Jim Peterson

Good question. Paul, why don't you touch on the range of EPS?

Paul Pickle

I mean the range of the EPS is similar percentage. In fact, I think it's slightly tighter percentage than last quarter. So in our mind it's not really different.

Operator

Your next question comes from the line of Christopher Longiaru of Sidoti & Company.

Christopher Longiaru

Congratulations on the results. My question has more to do with, you talk about taking share on boards across your end markets. I think this is pretty evident by what happened with a little bit of weakness in the channel in China and you still beat the numbers. So I just want to know, you talked about growing a little bit more than the industry organically, has that expectation changed? And if so, can you give us an idea relative to the industry that you would expect to grow?

Jim Peterson

I will throw one out there and then I will pass it on. Our product portfolio has never been this strongly positioned and the fact that our product portfolio and the ability we have with our products for an extremely strong systems sell.

Paul Pickle

Yes The story really hasn't changed. We are building a company that can grow 6% to 8%. We have completed a transformative acquisition in our minds that certainly adds to the portfolio, but if you take Ethernet, the application of data center, the number of products that we can bring to that space across the board, wireless, wireline growth. And then, I will of course, mention the classics, comm, air and defense content. We are seeing additional growth there. We have got some nice opportunities. And we have seen, because of the competitive dynamics, customers are slotting us or developing us as a supplier, calling us a strategic supplier and forming those relationships today. So, I don't think the story changes. This is exactly what we set out to do and we just need to continue to drive in that direction.

Operator

There are no further questions at this time. I would now like to turn the conference back over to Jim Peterson for any closing remarks.

Jim Peterson

Okay. Thank you for joining us today. Hey, guys, have a great day.

Operator

Thank you for participating in today's conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!