Orange County Business Journal, Monday, November 11, 1996 at 18:48
What has been a lackluster year for the semiconductor industry is
shaping up to be a gainful one for Santa Ana-based Microsemi Corp.
The maker of semiconductors, diodes and transistors has seen sales
and profits surge, the fruits of Microsemi's transformation from
defense contractor to diversified electronics supplier. The results,
too, are the byproduct of a restructuring that saw Microsemi shed a
string of unprofitable acquisitions from a 1980s buying binge.
"What you see is core business performance," said Philip Frey Jr.,
CEO and president of Microsemi for the past 25 years and chairman
For the nine months ending June 30, Microsemi had sales of $116
million, a 21% increase from the same period last year. Net income
was $5.6 million, a 40% increase from a year ago.
Microsemi's results for the quarter ending Sept. 30, the last in
its fiscal year, are due out this month. Frey said the company
doesn't expect any surprises. Analysts are projecting continued
growth in both sales and net income, despite softness in some of the
Frey (pronounced Fry) has spent most of his life in the defense
electronics industry, but in recent years has steered Microsemi from
its reliance on defense contractors.
The company was founded in 1959 as Micro Semiconductor in Culver
City. In 1969, Micro Semiconductor was acquired by Standard
Resources, a New York public company, which later adopted the Micro
In 1971, the New York operation was spun off and Frey was brought
on from Teledyne Inc.'s semiconductor division in Hawthorne to head
what would become Microsemi. At the time, the company had annual
sales of about $500,000, almost entirely to defense industry
customers. In 1972, the company moved from Culver City to Santa Ana.
Microsemi still was almost exclusively a defense business in 1987,
but by then sales were close to $50 million. That same year, the
company did a $35 million convertible bond offering, the proceeds of
which were used to acquire about a dozen companies, most of them
struggling "bargain" buys.
When the acquisitions began straining profitability, Frey didn't
waste a lot of time admitting his mistake. In 1989, Microsemi began
selling them off.
Sales, which hit a then-high of $104 million in 1989, fell to $83
million by 1991. But they've grown almost every year since and are
expected by analysts to exceed $150 million for the fiscal year just
Now, even as the 69-year-old Frey begins considering handing over
daily operations to a successor, the venerable executive still has
ambitions for Microsemi.
His goal is to grow sales into the $225 million range in the next
two years. Frey also is looking to grow the company's profit by
about 25% in the same time frame and lift Microsemi's pretax margin
from about 10% now to about 15%. That, he hopes, will increase Wall
Street's appreciation of Microsemi.
At a price-to-earnings ratio last week of 12, Microsemi's trailing
12-month P/E ratio is about the same as that of its competitor,
International Rectifier Corp. of El Segundo, but only about half
that of another competitor, Micrel Inc. of San Jose.
The company is selling at "a bargain rate," contended Frey.
"There is possible expansion for the stock."
Part of Microsemi's predicament has been distinguishing itself in
an industry closely tied to the computer market and subject to
fluctuation. A slowdown in the computer industry this year has
lowered semiconductor industry sales growth to about 5%, down from
27% last year.
Microsemi makes high-reliability semiconductors, custom diodes and
transistors. Its components are used in the computer, medical,
telecommunications, defense and aerospace industries to process
electric signals and regulate power and voltage in all types of
devices and equipment. Microsemi products are found in cellular
phones, computer monitors, satellites and Patriot missiles.
Customers include computer makers Hewlett-Packard, Compaq and AST
Research of Irvine, and technology companies such as AT&T and
Motorola. In the medical industry, Microsemi's products go into
pacemakers and equipment made by Medtronic and Siemens. Commercial
space industry customers include Hughes, Lockheed Martin and Loral,
while military buyers include Northrop Grumman and McDonnell Douglas.
Five years ago, about 70% of Microsemi's sales were to military
customers. Today, that figure is about 30%, with the remainder
spread out among the commercial space, computer, telecommunications,
medical and transportation industries. Military, however, remains
the single largest segment (see chart, page 12). And the customer
base is broad.
"No one customer is greater than 4% of our revenue," Frey said.
"We are happy with the market mix."
Microsemi has gained commercial market share in the face of
competition from industry giants such as National Semiconductor,
Motorola, ITT and General Instruments, as well as from mainstay
competitors like International Rectifier, Micrel and Siliconex Inc.
of Santa Clara.
The company's strategy has been to target niche, underserved
markets with specialized products. Microsemi operates at the high
end of the industry; while the average selling price for a diode is
1 or 2 cents, a custom Microsemi diode goes for about $1.
"Our competition does everything with relatively standard
products. The Motorolas and the General Instruments don't do too
many special things," Frey said. "These market areas aren't easily
attacked by competition."
The strategy has helped Microsemi fare better than the industry as
a whole in what has been a turbulent year. The company counts a
healthy backlog of about $70 million. Microsemi's book-to-bill ratio
- a three-month average of bookings and billings that is an
indicator of future business - has remained relatively strong even
as that of the industry has dipped to historic lows this year.
Microsemi's book-to-bill ratio hasn't gone below 1.0 this year and
currently is at 1.04. That compares to an industry book-to-bill
ratio that hit a low of about 0.85 earlier this year and rebounded
to 0.99 in September.
Frey attributed the company's bettering of the industry to its
diversification. He said Microsemi has seen a slowing in the
telecommunications and computer industries, but sales to medical
companies and to the space industry, particularly in Europe, have
Next year, Frey is projecting continued growth in those markets
and in the company's military business, expanded opportunities in
the computer industry and a rebound in telecommunications.
For long-term growth, Frey is looking to new markets and expansion
in existing ones.
Microsemi is betting heavily on the PowerMite, a new surface mount
diode package that is about twice the size of a pinhead. The
PowerMite, which is used in cellular phones and portable computer PC
cards, has been licensed to Motorola in a deal that gives a portion
of Motorola's Malaysian production to Microsemi. Orders for
PowerMite already have brought Microsemi's Watertown, Mass., plant
"That looks like it will be a significant product for us," Frey
Acquisition of product lines is another growth tactic. The
company recently bought lines from National Semiconductor and SGS
Thomson Microelectronics, and earlier purchased lines from Raytheon
and Unitrode Corp. of Merrimack, N.H. Microsemi's goal is to buy
lines that no longer make sense for larger competitors but are
compatible with a smaller company like itself.
New markets hold potential growth area for Microsemi. For one,
the company is looking to tap the automotive industry, where it
currently does a small amount of business, amounting to about 2% of
its revenue. While Frey said he doesn't expect the automotive market
to become a major piece of business, a new, low-cost Microsemi plant
in Shanghai, China, should help to grow its presence some in that
Tapping new customers in existing markets is another course. In
telecommunications, where Microsemi already counts Nokia, Motorola
and Northern Telecom as customers, others such as Ericsson and
Siemens represent potential new clients. In the computer industry,
the continued trend toward smaller, more powerful components
represents potential new applications for the company, Frey said.
In all of its markets, international sales stand to grow for
Microsemi, which counts facilities in Ireland, India and Hong Kong.
Only 10% of the company's total a few years ago, international sales
now are about 30%. Frey projects that could grow to about 50%.
In addition to the everyday risks of the fast-moving semiconductor
industry, the challenge for Microsemi is to protect its coveted
niche and manage its growth. Increased size will put pressure on the
company's decentralized operations, which, in addition to a diode
plant in Santa Ana that employs 550, includes U.S. facilities in
Arizona, Massachusetts and Colorado. The plants have some overlap,
which Frey said provides for internal competition.
"We are set up with good managers and our facilities are modern
enough to carry the load," Frey said. "The real test will be on the
marketing side to see if we can find new markets to sustain the
At the same time, the beginnings of a transition have begun at
Microsemi. Frey is looking to shift his job from hands-on manager to
"My role is changing," he said. "I will become more involved with
financial relations and acquisitions and partnerships. The
day-to-day will be turned over to a replacement who will carry on
the way we have."
A search for a new CEO is in the early stages, both outside and
inside the company. Frey envisions remaining as chairman.
"I intend to stay in this role for a few years yet," he said. "I
don't think you have to get out until you stop contributing."
PHILIP FREY JR.
Position: Chairman, president, CEO
1995 compensation: $539,000
Born: Hackensack, N.J.
Education: Engineering degree, RCA Institute, New York
Resume: Naval petty officer; VP, general manager, semiconductor
division, Teledyne Inc.; president, CEO, Microsemi, 1971; elected
chairman in 1987
Home: Big Canyon, Newport Beach
Family: Wife of 46 years, Nancy Rodgers Frey, recently deceased
Hobbies: Tennis, deep-sea fishing, antique furniture restoration
Headquarters: 2830 S. Fairview St.,
Employees: 2,300 (550 in OC)
Main Product: Semiconductors, diodes
Major shareholders: Philip Frey Jr., 10% (worth about $11 million
at recent price of 11); Wechsler & Co. Inc. (owns debentures
convertible into 19% of stock); Froley, Revy Investment Co. Inc.,
(owns debentures convertible into 14%)
Symbol: MSCC (Nasdaq)