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MICROSEMI CORP - 10-Q/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q includes current beliefs, expectations and other forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to certain factors, including those discussed in Part II, Item 1A, "Risk Factors" and elsewhere in this Quarterly Report. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") and the accompanying consolidated financial statements and notes thereto must be read in conjunction with the MD&A and the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, in its entirety. OVERVIEW We are a leading designer, manufacturer and marketer of high-performance analog and mixed-signal semiconductor solutions differentiated by power, security, reliability and performance. Our semiconductors manage and control or regulate power, protect against transient voltage spikes and transmit, receive and amplify signals. We offer one of the industry's most comprehensive portfolios of semiconductor technology. Our products include high-performance, high-reliability radio frequency (RF) and power components, analog and RF integrated circuits (ICs), standard and customizable system-on-chip solutions (SoCs/cSoCs), and mixed-signal and radiation-tolerant field programmable gate arrays ("FPGAs"). We also offer subsystems and modules that include application-specific power modules and Power-over-Ethernet ("PoE") midspans. Our products include individual components as well as IC solutions that enhance customer designs by improving performance, reliability and battery optimization, reducing size or protecting circuits. The principal end markets that we serve include Communications, Defense & Security, Aerospace and Industrial. Power management generally refers to a class of standard linear integrated circuits ("SLICs") that perform voltage regulation and reference in most electronic systems. The definition of power management has broadened in recent years to encompass other devices and modules, often application-specific standard products ("ASSPs"), which address particular aspects of power management, such as audio or display related ICs. This business is composed of both a core platform of traditional SLICs, such as low dropout regulators ("LDOs") and pulse width modulators ("PWMs"), and differentiated ASSPs such as backlight inverters, audio amplification ICs and small computer standard interface terminators. Our IC products are used in data storage, wireless local area network ("LAN"), automobiles, telecommunications, test instruments, defense and aerospace equipment, high-quality sound reproduction and data transfer equipment. Our individual component semiconductor products include silicon rectifiers, zener diodes, low leakage and high voltage diodes, temperature compensated zener diodes, transistors, subminiature high power transient suppressor diodes and pin diodes used in magnetic resonance imaging ("MRI") machines. We also manufacture semiconductors for commercial applications, such as automatic surge protectors, transient suppressor diodes used for telephone applications and switching diodes used in computer systems. A partial list of these products includes: implantable cardioverter defibrillator and heart pacer switching, charging and transient shock protector diodes, low leakage diodes, transistors used in jet aircraft engines and high performance test equipment, high temperature diodes used in oil drilling sensing elements operating at 200 degrees centigrade, temperature compensated zener or rectifier diodes used in missile systems and power transistors. We have implemented a growth strategy through continuous innovation complemented by strategic acquisitions to strengthen our product and technology portfolio with the intent of broadening our customer base and increasing our technology footprint in customers' end designs in high-value, high barrier-to-entry markets where power matters, security is non-negotiable, and reliability is vital. This allows us to offer an increased value proposition, gather a larger portion of the bill of materials, and engage with customers as a strategic partner as opposed to a socket provider. We believe this strategy strengthens our position in the industry as it protects and grows our share within those markets with the highest barriers to entry, and increases our served available market. Recent industry leading innovations include: • The industry's first advanced front-end power device ICs for high-power HDBase-T and four-pair PoE applications, representing the only solution that is compliant with Power-over-HDBaseT and receives up to 95 watts using an internal field-effect transistor; • A 5 gigahertz LX5509 power amplifier (PA) for IEEE 802.11ac-also known as fifth generation Wi-Fi-wireless access points and media devices, which is the first commercially available PA that can transmit at similar power levels in both IEEE 802.11n and IEEE 802.11ac networks; 18-------------------------------------------------------------------------------- Table of Contents • Its first family of clock distribution differential fan-out buffers, which supports clock rates of up to 750 megahertz; two types of outputs, low voltage positive emitter coupled logic (LVPECL) and low voltage differential signaling (LVDS); and multiple fan-out ratios; • The addition of the Extended Flow (E Flow) to its RT ProASIC®3 FPGA device family, providing additional screening options and a higher level of reliability assurance required in many critical space applications; • PD-9001GR, a single-port 802.3at PoE midspan providing one of the highest levels of energy-efficiency and one of the industry's smallest midspan devices, which complies with IEEE802.3at standards for delivering up to 30 W of power to network devices such as WLAN access points, IP cameras and VoIP, and is also designed for emerging high power applications; • A new family of 1200 volt Schottky diodes based on silicon carbide ("SiC") material and technology, which are targeted at a wide range of industrial applications including solar inverters, welding, plasma cutters, fast vehicle charging, oil exploration, and other high power, high voltage applications where power density, higher performance and reliability are important; • Expanding its family of RF transistors based on gallium nitride on SiC technologies with a new S-band 500 W RF device-the 2729GN-500-which is targeted at high-power air traffic control airport surveillance radar (ASR) applications; • The world's first monolithic silicon germanium RF front-end device for the 5th generation of Wi-Fi devices based on IEEE 802.11ac standard; • Two new cost-reduced versions of its transient voltage suppressor devices in its patented plastic large area device (PLAD) package featuring a lower cost 15 kilowatt MPLAD15KP and 30 kW MPLAD30KP TVS families which meet lightning-protection requirements in aircraft, including the multi-stroke standard (RTCA DO-160E), that have grown in importance as a result of the introduction and growing use of composite body airframes; • A new ultra low power RF transceiver for short-range wireless applications where power consumption is of utmost importance, with only 2 milliamps of current required to transmit and receive data, enabling extremely long battery life and miniaturization; • Its ZL880 series, a fourth generation subscriber line chipset featuring low power, dual-channel wideband foreign exchange service (FXS) voice solutions for broadband residential gateways, cable embedded multimedia terminal adapters (eMTAs) and fiber to the premise (F TTX) applications; and • SECURRE-Stor™, a highly secure, encrypted 2.5-inch SATA solid state drive designed to provide exceptional data protection for commercial, banking/financial, medical, industrial and smart grid applications. SECURRE-Stor has achieved the federal information processing standard (FIPS) AES 256 encryption certification and is available in 64- and 128-gigabyte storage densities. Our growth strategy is dependent on our ability to successfully develop new technologies and products, and complemented by our ability to implement our selective acquisitions strategy. New technologies or products that we may develop may not lead to an incremental increase in revenues, and there is a risk that these new technologies or products will decrease the demand for our existing products and result in an offsetting reduction in revenues. There can be no assurance that the benefits of any acquisition will outweigh the attendant costs, and if they do not, our results of operations and stock price may be adversely affected. Net sales increased $6.7 million or 3% to $247.6 million for the quarter ended December 30, 2012 ("Q1 2013") from $240.9 million for the quarter ended January 1, 2012 ("Q1 2012"). Gross profit increased $16.8 million to $142.6 million (57.6% of net sales) for Q1 2013 from $125.7 million (52.2% of net sales) for Q1 2012. The increase in gross profit was primarily a result of contributions from the acquisition of Zarlink Semiconductor, Inc. (we sometimes refer to this division herein as "Microsemi - CMPG"), margin improvements resulting from integration and cost improvement activities and acquisition-related inventory charges in Q1 2012 of $6.1 million. 19-------------------------------------------------------------------------------- Table of Contents Uncertain macroeconomic conditions worldwide subject us to certain risks (see Part II, Item 1A, Risk Factors, "Negative or uncertain worldwide economic conditions may adversely affect our business, financial condition, cash flow and results of operations," "The concentration of the facilities that service the semiconductor industry, including facilities of current or potential vendors or customers, makes us more susceptible to events or disasters affecting the areas in which they are most concentrated," and "We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel with existing operations.") In response to the impact of flooding at subcontractor facilities in Thailand in the first quarter of fiscal year 2012, we implemented plans that moved production to other facilities outside the affected area. We believe that current production capabilities at these other facilities can compensate in the near future for the loss of production in the flooded facilities in Thailand and that we have recovered from this event as of the end of the second quarter of 2012. However, unforeseen impacts on our customers, suppliers or subcontractors as a result of the flooding in Thailand could continue to affect our revenue, consolidated financial position, results of operations and cash flows. We closed our Scottsdale facility during the second quarter of 2011. We may make further specific determinations to consolidate, close, sell or divest additional facilities, operations or product lines, which could be announced at any time. Possible adverse consequences from current and future consolidation or disposition activities may include a loss of revenues and various accounting charges such as workforce reduction, including severance and other termination benefits and for excess facilities, including lease termination fees, future contractual commitments to pay lease charges, facility remediation costs and moving costs to remove property and equipment from facilities. We may also be adversely impacted from inventory buildup in preparation for the transition of manufacturing, disposition costs, impairments of goodwill, a possible immediate loss of revenues, and other items in addition to normal or attendant risks and uncertainties. We may be unsuccessful in any of our current or future efforts to consolidate our business into a smaller number of facilities. Our plans to minimize or eliminate any loss of revenues during consolidation may not be achieved. Markets Our products include individual components as well as IC solutions that enhance customer designs by improving performance, reliability and battery optimization, reducing size or protecting circuits. The principal end markets that we serve include: • Communications - Products in this end market include broadband power amplifiers and monolithic microwave integrated circuits ("MMICs") targeted at 802.11 a/b/g/n/e, phase-locked loop, clock synthesis and distribution devices, Synchronous Ethernet ("SyncE"), packet timing devices, voice circuits, FPGAs, multiple-in multiple-out ("MIMO"), LED, cold cathode fluorescent lamp ("CCFL") controllers, visible light sensors, PWM controllers, voltage regulators, EMI/RFI filters, transient voltage suppressors and class-D audio circuits. Applications for these products include wi-max and wireless LAN devices, PoE devices, portable devices, set top box and telecom applications, monitors, and storage devices. • Defense & Security - Products in this end market include mixed-signal analog integrated circuits, JAN, JANTX, JANTXV and JANS high-reliability semiconductors, as well as modules including diodes, zeners, diode arrays, transient voltage suppressors, bipolar transistors, MOSFETs, IGBTs, small signal analog integrated circuits, small signal transistors, relays, silicon-controlled rectifiers ("SCRs"), RF transceivers, subsystems and FPGAs. These products are utilized in a variety of applications including radar and communications, defense electronics, homeland security, threat detection, targeting and fire control and other power conversion and related systems in military platforms. • Aerospace - Products in this end market include offerings such as JAN, JANTX, JANTXV and JANS high-reliability semiconductors and modules, as well as analog mixed-signal products including diodes, zeners, diode arrays, transient voltage suppressors, bipolar transistors, small signal analog integrated circuits, relays, small signal transistors, SCRs, MOSFETs, IGBTs and FPGAs. These products are utilized in a variety of applications including electronic applications for large aircrafts and regional jets, commercial radar and communications, satellites, cockpit electronics, and other power conversion and related systems in space and aerospace platforms. • Industrial - Products in this end market include MOSFETs, IGBTs, FPGAs, power modules, ultra thin bypass diodes, bridge rectifiers, and high-voltage assemblies for use in industrial equipment, semiconductor capital equipment and solar power applications. Industrial applications also include zener diodes, high-voltage diodes, MOSFETs, IGBTs, transient voltage suppressors and thyristor surge protection devices that are designed into implantable defibrillators, pacemakers and neurostimulators, as well as PIN diode switches, dual diode modules, switched-most power supplies ("SMPS") and RF gradient amplifiers for use in MRI systems. 20-------------------------------------------------------------------------------- Table of Contents Restructuring and Severance Charges In 2009, we approved consolidation plans that resulted in the closure of our manufacturing facility in Scottsdale, Arizona ("Scottsdale"), which ceased production during the quarter ended April 3, 2011. The Scottsdale facility occupied a 135,000 square foot leased facility. For Scottsdale, facility termination costs relate primarily to remaining obligations under facility and equipment leases and are expected to be paid through 2016. The following table reflects the restructuring activities for the Scottsdale facility and the accrued liabilities in the consolidated balance sheets at the dates below (amounts in thousands): Facility Employee Termination Severance Costs Total Balance at September 30, 2012 $ 117 $ 5,848 $ 5,965 Reversal of prior provision (117 ) - (117 ) Cash expenditures - (392 ) (392 ) Balance at December 30, 2012 $ - $ 5,456 $ 5,456 At September 30, 2012, we had recorded severance and restructuring accruals of $2.3 million from reductions in force at our various facilities other than Scottsdale. We recorded additional provisions, primarily related to activities at Microsemi - CMPG, for severance and retention payments totaling $1.0 million for the quarter ended December 30, 2012. Provisions for severance in the quarter ended December 30, 2012 covered approximately 50 individuals in manufacturing, engineering and sales. Employee severance is expected to be paid within the next twelve months. Contract termination costs relate primarily to remaining obligations under facility leases and are expected to be paid through 2020. Other associated costs related primarily to relocation costs that we incurred for the consolidation of several facilities in Northern California. The following table reflects the related restructuring activities and the accrued liabilities in the consolidated balance sheets at the dates below (amounts in thousands): Employee Contract Termination Severance Costs Other Associated Costs Total Balance at September 30, 2012 $ 2,122 $ 190 $ - $ 2,312 Provisions 850 103 14 967 Cash expenditures (731 ) (175 ) (14 ) (920 ) Other non-cash settlement 263 - - 263 Balance at December 30, 2012 $ 2,504 $ 118 $ - $ 2,622 RESULTS OF OPERATIONS Net sales increased $6.7 million or 3% between the quarters ended December 30, 2012 ("Q1 2013") and January 1, 2012 ("Q1 2012") to $247.6 million for Q1 2013 from $240.9 million for Q1 2012. Estimated sales by end markets are based on our understanding of end market uses of our products. An estimated breakout of net sales by end markets is approximately as follows (amounts in thousands): Quarter Ended December 30, January 1, 2012 2012 Communications $ 76,738 $ 75,124 Defense & Security 75,622 69,115 Aerospace 48,224 49,123 Industrial 47,014 47,558 Total $ 247,598 $ 240,920 Net sales in the Communications end market increased $1.6 million to $76.7 million in Q1 2013 from $75.1 million in Q1 2012. While this end market benefited from the contributions of voice circuit and timing and synchronization products, our overall Communications end market is sensitive to macroeconomic conditions and capital expenditure deployment, which resulted in limited growth between Q1 2013 and Q1 2012. We expect to continue expanding our market opportunity in timing and synchronization products and believe we are well poised for growth based on our expectation of telecommunications 21-------------------------------------------------------------------------------- Table of Contents carrier spend on these products. That said, due to macroeconomic conditions, we expect net sales in this end market to decline in the upcoming quarter based on current and expected backlog. Net sales in the Defense & Security end market increased $6.5 million to $75.6 million in Q1 2013 from $69.1 million in Q1 2012. Sales were adversely impacted by the lack of a 2012 federal budget through Q1 2012 and uncertainty surrounding the defense budget was reflected in cautious procurement plans of our customers. While the uncertainty of sequestration remains, this end market has grown steadily over the last year. We believe the most recent budget emphasizes command, control, communications, computers, intelligence, surveillance and reconnaissance and equates to growing electronic content. We also believe that net sales benefited from increasing international defense sales, enabled in part by our security product offerings, and that Microsemi's dollar content in defense programs will increase as our products move up the value chain. We believe the Department of Defense and Homeland Security budgets for electronic content, an area of Microsemi focus, will continue to expand and contribute to growth in this end market. However, we recognize that the current uncertainty surrounding the U.S. federal budget and the potential for sequestration may result in short-term delays in defense programs and potentially moderate growth in the upcoming quarter. Net sales in the Aerospace end market decreased $0.9 million to $48.2 million in Q1 2013 from $49.1 million in Q1 2012. We noted an increase in demand and order rates for commercial aircraft at aircraft manufacturers and tier one suppliers, growing electronic content in current aircraft, refurbishment programs for older aircraft and demand for the high-reliability radar and avionics solutions we provide. However, we noted some cyclicality in this end market and what we believe to be a temporary slowdown in our space level products, primarily due to the timing of delivery into satellite programs. For the upcoming quarter, we expect this end market to remain stable. Net sales in the Industrial end market decreased $0.5 million to $47.0 million in Q1 2013 from $47.6 million in Q1 2012. While this end market benefited from the contributions of ultra low power radio products for medical applications, we expect cyclicality for products in this end market, as well as overall economic uncertainty to adversely impact this end market in the upcoming quarter. Over the intermediate to longer term, we believe that our differentiated medical products and early design-in activity in industrial automation applications will result in growth for this end market. Net sales by originating geographical area were as follows (amounts in thousands): Quarter Ended December 30, January 1, 2012 2012 United States $ 97,673 $ 153,281 Europe 74,078 33,228 Asia 75,847 54,411 Total $ 247,598 $ 240,920 Gross profit increased $16.8 million to $142.6 million (57.6% of sales) for Q1 2013 from $125.7 million (52.2% of sales) for Q1 2012. The increases in gross profit were primarily a result of contributions from Microsemi - CMPG, margin improvements resulting from integration and cost improvement activities and acquisition-related inventory charges in Q1 2012 of $6.1 million. Selling, general and administrative expenses decreased $3.4 million to $51.4 million for Q1 2013 from $54.7 million in Q1 2012. Selling, general and administrative expenses increased overall primarily due to the incremental costs incurred from acquisitions. We also recorded acquisition related costs of $6.1 million in Q1 2012 which were offset by a reduction in litigation reserves of $2.7 million. Research and development expense increased $3.6 million to $43.2 million for Q1 2013 from $39.6 million for Q1 2012. The increase in 2013 was due to additional product development to support our organic growth and additional research and development activities from our most recent acquisitions. The principal focus of our research and development activities has been to improve processes and to develop new products that support the growth of our businesses. The spending on research and development was principally to develop new higher-margin application-specific products, including, among others, our 65nm process development for next generation programmable products, higher power PoE solutions, the continued roadmap development of our industry-leading timing & synchronization products, our SiGe RF power amplifier solutions for wireless LAN applications, and the ongoing development of GaN and SiC power management and RF solutions. Amortization of intangible assets decreased $3.2 million to $21.7 million for Q1 2013 from $24.9 million for Q1 2012. The decrease was primarily from the amortization of backlog related to Microsemi - CMPG that had an amortizable life of one year. These amounts include amortization related to acquired completed technology of $9.8 million for Q1 2013 and $10.8 million for Q1 2012 22-------------------------------------------------------------------------------- Table of Contents Restructuring charges amounted to $0.9 million for Q1 2013 compared to $7.2 million for Q1 2012. The variances relate to the timing and announcement of restructuring activities. The amount recorded in the first quarter of 2012 included $6.4 million restructuring expense primarily from Microsemi - CMPG. Interest expense was $8.4 million for Q1 2013 compared to $12.0 million for Q1 2012. The decrease in interest expense was due to a lower term loan balance of $751.0 million at December 30, 2012 compared to $798.0 million at January 1, 2012 and a reduction in interest rate to 4.00% at Q1 2013 compared to 5.75% at Q1 2012. In addition, during Q1 2012, approximately $49.6 million was outstanding on our revolving credit facility for most of the quarter. Other expense, net, was $0.1 million for Q1 2013 compared to $32.4 million for Q1 2012. We elected the fair value option in accounting for the term loan balance outstanding under our Credit Agreement through October 2, 2011 and changes in fair value of the loan balances are reflected as adjustments to the income statement. In connection with the Credit Agreement, we entered into interest rate swap agreements for the purpose of minimizing the variability of cash flows in the interest rate payments of our variable rate borrowings. In connection with the acquisition of Zarlink, we entered into a foreign currency forward agreement in the fourth quarter of 2011 to minimize our foreign currency risk associated with the transaction that we funded in Canadian Dollars ("CAD"). We reflect the change in fair value of our term loan balances, swaps and forward contract through other income or expense. We recorded income of $5.1 million in Q1 2012 related to these adjustments. During Q1 2012, we amended our credit facility and accounted for the amendment as a debt extinguishment. Accordingly, we recorded $34.0 million in debt extinguishment costs in other income (expense). For Q1 2013, we recorded an income tax provision of $3.0 million and an income tax benefit of $0.3 million for Q1 2012. The difference in our effective rate from the U.S. statutory rate of 35 percent primarily reflects changes in the ratio of domestic and international pre-tax income and valuation allowances on both U.S. and foreign deferred tax assets. The effective tax provision for Q1 2013 was the combined calculated tax expenses/benefits for various jurisdictions. CAPITAL RESOURCES AND LIQUIDITY We had $203.3 million and $204.3 million in cash and cash equivalents at December 30, 2012 and September 30, 2012, respectively. In Q1 2013 and Q1 2012, we financed our operations with cash generated from operations. A significant portion of our cash and cash equivalents are domiciled in the United States and we believe that we will be able to meet our future capital and liquidity requirements without significant tax consequences. Net cash provided by operating activities increased $8.9 million to $28.1 million for Q1 2013 from $19.2 million for Q1 2012. A summary of net cash provided by operating activities for Q1 2013 and Q1 2012 is as follows (amounts in thousands): Q1 2013 Q1 2012 Net income (loss) $ 14,214 $ (44,602 ) Depreciation and amortization 29,047 33,316 Provision for doubtful accounts (174 ) (91 ) Amortization of deferred financing cost 344 - Settlement of foreign currency forward - (3,701 ) Loss on disposition or impairment of assets - 1,893 Deferred income taxes (489 ) (509 ) Stock-based compensation 8,083 7,531 Net change in working capital accounts (20,155 ) 12,544 Net change in other long term assets and liabilities (2,761 ) 12,829 Net cash provided by operating activities $ 28,109 $ 19,210 Accounts receivable increased $6.2 million to $159.4 million at December 30, 2012 from $153.2 million at September 30, 2012. The increase in accounts receivable was primarily due the timing of sales towards the end of the quarter ended December 30, 2012. Inventories decreased $0.2 million to $158.9 million at December 30, 2012 from $159.1 million at September 30, 2012. Current liabilities decreased $16.1 million to $140.4 million at December 30, 2012 from $156.5 million at September 30, 2012. The decrease was due primarily to the payments of accrued bonus and profit sharing. Net cash used in investing activities was $8.5 million for Q1 2013 for purchases of property and equipment compared to $549.0 million for Q1 2012. Net cash used in investing activities in Q1 2012 consisted of $540.3 million in cash payments, net of cash acquired, for the acquisition of Microsemi - CMPG, $12.4 million in purchases of property and equipment offset by $3.7 million for the settlement of foreign currency forward. 23-------------------------------------------------------------------------------- Table of Contents Net cash (used in) provided by financing activities was $(20.6) million for Q1 2013 compared to $396.7 million for Q1 2012. Net cash used in financing activities in Q1 2013 consisted of principal repayments of $25.0 million under our credit agreement offset by $4.4 million in net proceeds from the exercise of stock awards. Net cash provided by financing activities in Q1 2012 primarily consisted of net borrowings of $425.8 million under our credit agreement for the acquisition of Microsemi - CMPG and $1.9 million related to proceeds from stock awards, offset by $(31.0) million in credit facility issuance and refinancing costs. During the quarter ended April 1, 2012, we entered into Amendment No. 3 to our Credit Agreement dated as of November 2, 2010 with Morgan Stanley Senior Funding, Inc. ("MSSF") and the lenders referred to therein (as amended, the "Third Amended and Restated Credit Agreement"). In accordance with ASC 470-50, we accounted for the third amendment as a debt modification with respect to amounts that remained in the syndicate and a debt extinguishment with respect to amounts that exited the syndicate. Pursuant to the Third Amended and Restated Credit Agreement, MSSF has provided $860.0 million in senior secured lien credit facilities, consisting of a term loan facility in an aggregate principal amount of $810.0 million and a revolving credit facility in an aggregate principal amount of $50.0 million. Under the Third Amended and Restated Credit Agreement, the current applicable margin on revolving loans and swingline loans determined at the Base Rate is 3.00% to 3.75% and revolving loans and swingline loans determined at the Eurodollar Rate is 4.00% to 4.75%, depending on Microsemi's consolidated leverage ratio. For term loans, the current applicable margin on term loans determined at the Base Rate is 2.00% and on term loans determined at the Eurodollar Rate is 3.00%. The "Base Rate" is defined as a rate per annum equal to the greatest of (a) the prime rate, (b) 1/2 of 1% per annum above the federal funds effective rate, (c) the one-month Eurodollar Rate plus 1%, and (d) in the case of any term loans, 2.00%. The "Eurodollar Rate" is defined as (a) the rate per annum offered for deposits of dollars for the applicable interest period that appears on Reuters Screen LIBOR01 Page as of 11:00 A.M., London, England time, two (2) business days prior to the first day of such interest period or (b) if no such offered rate exists, such rate will be the rate of interest per annum as determined by the administrative agent (rounded upwards, if necessary, to the nearest 1/100 of 1%) at which deposits of dollars in immediately available funds are offered at 11:00 A.M., London, England time, two (2) business days prior to the first day in the applicable interest period by major financial institutions reasonably satisfactory to the administrative agent in the London interbank market for such interest period and for an amount equal or comparable to the principal amount of the loans to be borrowed, converted or continued as Eurodollar Rate loans on such date of determination. In the case of term loans, the Eurodollar Rate will not be lower than 1.00%. The principal amount outstanding under our term loan facility is a Eurodollar Rate loan and is subject to an interest rate of 4.00% as of December 30, 2012. As of December 30, 2012, we had $751.0 million borrowed under the term loan facility and no borrowings under the revolving facility. The fair value of our term loan balance was $756.6 million. In January 2013, we made a principal repayment on our term loan of $25.0 million. The amended term loan facility matures in February 2018 and principal amortizes at $8.1 million per year. During the quarter ended December 30, 2012, we completed an optional principal prepayment of $25.0 million. While there are currently no scheduled principal repayments until the maturity date, our credit agreement stipulates an annual payment of a percentage of Excess Cash Flow beginning after 2013. The ECF Percentage is between 0% and 50% depending on our Consolidated Leverage Ratio as of the end of a fiscal year. Pursuant to the Third Amended and Restated Credit Agreement, we can request, at any time and from time to time, the establishment of one or more term loan and/or revolving credit facilities with commitments in an aggregate amount not to exceed $200.0 million as of December 30, 2012. We expect to pay an undrawn commitment fee ranging from 0.25% to 0.625% depending on our consolidated leverage ratio, on the unused portion of the revolving facility. If any letters of credit are issued, then we expect to pay a fronting fee equal to 0.25% per annum of the aggregate face amount of each letter of credit and a participation fee on all outstanding letters of credit at a per annum rate equal to the margin then in effect with respect to Eurodollar Rate-based loans on the face amount of such letter of credit. The Amended and Restated Credit Agreement includes financial covenants requiring a maximum leverage ratio and minimum fixed charge coverage ratio and also contains other customary affirmative and negative covenants and events of default. We were in compliance with our financial covenants as of December 30, 2012. 24-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies that we believe could have the most significant effect on our reported results and require subjective or complex judgments is contained in Note 1 of the notes to the financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-11, the objective of which is to provide additional disclosures on the effect or potential effect of rights of setoff associated with an entity's recognized assets and recognized liabilities within the scope of the update. The update primarily impacts financial instruments and derivatives subject to a master netting arrangement or similar agreement. ASU No. 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (the first quarter of our fiscal year 2014). We are currently evaluating the disclosures required under this ASU. |