[April 30, 2013] MICROSEMI CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Tweet (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 monolithic line card device for optical transport network (OTN) transport and switching applications; • High temperature NOR flash memory products tailored to meet the environmental demands of oil and gas industries' downhole drilling such as temperatures of 150°C and higher, while providing improved endurance benefits to systems designers; • More than a dozen new devices in its new generation of 1200 volt (V) non-punch through (NPT) IGBTs which include 25A, 50A and 70A current ratings, and are designed for a wide range of industrial applications requiring high power and high performance such as arc welders, solar inverters, and uninterruptible and switch mode power supplies. 17-------------------------------------------------------------------------------- Table of Contents • A new family of U.S. Defense Logistics Agency (DLA)-qualified Schottky diodes for aerospace and defense applications requiring high density power and excellent heat dissipation (typically 0.2-0.85 degrees C per watt (C/W); • A new generation of industrial temperature, silicon carbide (SiC) standard power modules ideally suited for use in high power switch mode power supplies, motor drives, uninterruptible power supplies, solar inverters, oil exploration and other high power, high voltage industrial applications requiring high performance and reliability. • A complete medical network (med-net) radio link for implantable medical devices such as pacemakers, cardiac defibrillators and neurostimulators that's comprised of the Company's ZL70321 implantable radio module and its ZL70120 base station radio module for external device controllers. 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 decreased $14.0 million or 6% between the quarters ended March 31, 2013 ("Q2 2013") and April 1, 2012 ("Q2 2012") to $235.3 million for Q2 2013 from $249.3 million for Q2 2012 and decreased $7.3 million or 1% between the six months ended March 31, 2013 ("2013 YTD") and April 1, 2012 ("2012 YTD") to $482.9 million for 2013 YTD from $490.2 million for 2012 YTD. Gross profit increased $1.6 million to $133.5 million (56.7% of net sales) for Q2 2013 from $131.9 million (52.9% of net sales) for Q2 2012 and increased $18.4 million to $276.0 million (57.2% of net sales) in 2013 YTD from $257.6 million (52.5% of net sales) for 2012 YTD. For the six month periods, the increase in gross profit was primarily a result of contributions from the acquisition of Zarlink Semiconductor, Inc. ("Zarlink" or sometimes referred to herein as "Microsemi - CMPG"), which was completed during Q1 2012, margin improvements resulting from integration and cost improvement activities and acquisition-related inventory charges of $2.0 million in Q2 2012 and $8.1 million in 2012 YTD, which did not recur in 2013. 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. Current production capabilities at these other facilities have compensated for the loss of production in the flooded facilities in Thailand and we believe that we 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, or other disasters, 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 have current plans to and 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 for 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: 18-------------------------------------------------------------------------------- Table of Contents • 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 aircraft 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. 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, contract 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): Employee Contract Termination Severance Costs Total Balance at September 30, 2012 $ 117 $ 5,848 $ 5,965 Reversal of prior provision (117 ) - (117 ) Cash expenditures - (779 ) (779 ) Balance at March 31, 2013 $ - $ 5,069 $ 5,069 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 for severance and retention payments totaling $7.2 million for the six months ended March 31, 2013. Provisions for severance in the six months ended March 31, 2013 covered approximately 120 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): 19-------------------------------------------------------------------------------- Table of Contents Employee Contract Termination Severance Costs Other Associated Costs Total Balance at September 30, 2012 $ 2,124 $ 190 $ - $ 2,314 Provisions 7,098 103 27 7,228 Cash expenditures (5,146 ) (206 ) (27 ) (5,379 ) Other non-cash settlement (201 ) (3 ) - (204 ) Balance at March 31, 2013 $ 3,875 $ 84 $ - $ 3,959 RESULTS OF OPERATIONS Net sales decreased $14.0 million or 6% between the quarters ended March 31, 2013 ("Q2 2013") and April 1, 2012 ("Q2 2012") to $235.3 million for Q2 2013 from $249.3 million for Q2 2012 and decreased $7.3 million or 1% between the six months ended March 31, 2013 ("2013 YTD") and April 1, 2012 ("2012 YTD") to $482.9 million for 2013 YTD from $490.2 million for 2012 YTD. 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 Six Months Ended March 31, April 1, March 31, April 1, 2013 2012 2013 2012 Communications $ 64,383 $ 77,231 $ 141,121 $ 152,355 Defense & Security 79,445 71,466 155,067 140,581 Aerospace 44,185 52,879 92,409 102,002 Industrial 47,320 47,730 94,334 95,288 Total $ 235,333 $ 249,306 $ 482,931 $ 490,226 Net sales in the Communications end market decreased $12.8 million to $64.4 million in Q2 2013 from $77.2 million in Q2 2012 and decreased $11.2 million to $141.1 million in 2013 YTD from $152.4 million in 2012 YTD. While this end market benefited from increased 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 a decline in net sales. During Q2 2013, PoE, power management, RF and voice circuit products were especially impacted by macroeconomic factors. 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 carrier spend on these products. Though macroeconomic conditions are expected to temper growth, we expect that net sales in this end market are expected to increase in the upcoming quarter due to seasonality, market share gains and market expansion in PoE products and increased capacity in RF products, with continued steady growth from our timing and synchronization products. Net sales in the Defense & Security end market increased $8.0 million to $79.4 million in Q2 2013 from $71.5 million in Q2 2012 and increased $14.5 million to $155.1 million in 2013 YTD from $140.6 million in 2012 YTD. Sales for Q2 2012 and 2012 YTD 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. We believe that net sales have benefited from our industry leading technology breadth and total solutions approach and as a result, we are currently bidding for more potential dollar value than any time in our past. We recognize that the current uncertainty surrounding the U.S. federal budget and sequestration may result in short-term delays in defense programs but believe in our long term growth prospects for this end market. Net sales in the Aerospace end market decreased $8.7 million to $44.2 million in Q2 2013 from $52.9 million in Q2 2012 and decreased $9.6 million to $92.4 million in 2013 YTD from $102.0 million in 2012 YTD. 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. During Q2 2013, however, sales of space level products were adversely impacted by longer lead times affecting the timing of sales. Space level bookings have increased and we expect increased shipments of space level products along with steady commercial aerospace sales. 20-------------------------------------------------------------------------------- Table of Contents Net sales in the Industrial end market decreased $0.4 million to $47.3 million in Q2 2013 from $47.7 million in Q2 2012 and decreased $1.0 million to $94.3 million in 2013 YTD from $95.3 million in 2012 YTD. With the exception of solar products, bookings were steady for medical, semicapital equipment, industrial lasers, MRI and other broadline industrial applications. 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 geographic area based on a customer's ship-to location were as follows (amounts in thousands): Quarter Ended Six Months Ended March 31, April 1, March 31, April 1, 2013 2012 2013 2012 United States $ 134,486 $ 126,471 $ 255,214 $ 244,218 Europe 31,735 40,045 72,164 88,348 Asia 64,051 76,465 145,716 145,877 Other 5,061 6,325 9,837 11,783 Total $ 235,333 $ 249,306 $ 482,931 $ 490,226 As a percentage of consolidated net sales, customers with a ship-to location in Hong Kong totaled 10.8% and 11.4% for the quarter and six months ended April 1, 2012, respectively. We began reporting net sales by geographic area based on a customer's ship-to location in Q2 2013 and prior year amounts have been adjusted to conform to current year presentation. Gross profit increased $1.6 million to $133.5 million (56.7% of net sales) for Q2 2013 from $131.9 million (52.9% of net sales) for Q2 2012 and increased $18.4 million to $276.0 million (57.2% of net sales) in 2013 YTD from $257.6 million (52.5% of net sales) in 2012 YTD. For the six month periods, the increase in gross profit was primarily a result of contributions from Microsemi - CMPG, which was completed during Q1 2012, margin improvements resulting from integration and cost improvement activities and acquisition-related inventory charges of $2.0 million in Q2 2012 and $8.1 million in 2012 YTD, which did not recur in 2013. Selling, general and administrative ("SG&A") expenses increased $0.3 million to $52.3 million for Q2 2013 from $52.0 million in Q2 2012 and decreased $3.0 million to $103.7 million in 2013 YTD from $106.7 million in 2012 YTD. Research and development expense decreased $0.2 million to $42.0 million for Q2 2013 from $42.2 million for Q2 2012 and increased $3.3 million to $85.1 million in 2013 YTD from $81.8 million in 2012 YTD. While incremental costs from recent acquisitions contributed to increased SG&A and research and development expenses, increases were offset by cost control measures, especially in SG&A. 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 $5.4 million to $21.1 million for Q2 2013 from $26.5 million for Q2 2012 and decreased $8.5 million to $42.8 million in 2013 YTD from $51.3 million in 2012 YTD. 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 $19.5 million for 2013 YTD and $20.6 million for 2012 YTD. Restructuring charges amounted to $6.3 million for Q2 2013 compared to $0.1 million for Q2 2012 and $7.1 million for 2013 YTD compared to $7.3 million for 2012 YTD. The variances relate to the timing and announcement of restructuring activities. Interest expense, net was $7.7 million for Q2 2013 compared to $10.2 million for Q2 2012 and $16.1 million for 2013 YTD compared to $22.0 million for 2012 YTD. The decrease in interest expense was due to a lower term loan balance of $726.0 million at March 31, 2013 compared to $808.0 million at April 1, 2012 and a reduction in interest rate to 3.75% during Q2 2013 compared to 4.00% during Q2 2012. Other expense, net, was $3.6 million for Q2 2013 compared to $1.0 million for Q2 2012 and $3.5 million for 2013 YTD compared to $33.4 million for 2012 YTD. During Q2 2013, we entered into Amendment No. 4 to our Credit Agreement dated as of November 2, 2010 with MSSF and the lenders referred to therein (as amended, the "Credit Agreement"), which among other things, reduce the interest rate on our term loan to 3.75%. We accounted for the fourth amendment as a debt modification with respect to amounts that remained in the syndicate and a debt extinguishment with respect to the $277.5 million that exited the syndicate and recorded debt extinguishment expense of $3.0 million. The amendment did not impact the net principal balance outstanding. 21-------------------------------------------------------------------------------- Table of Contents In connection with the original Credit Agreement, in 2011, 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 Q4 2011 to minimize our foreign currency risk associated with the transaction that we funded in Canadian Dollars. 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 the 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). During the Q2 2012, we further amended our credit facility and accounted for this 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. As such, we immediately expensed $1.2 million in financing costs related to the debt extinguishment. Subsequent to the amendment in the first quarter of 2012, we did not elect the fair value option on our outstanding term loan balances. For Q2 2013 and 2013 YTD, we recorded an income tax provision of $3.4 million and $6.3 million, respectively. For Q2 2012 and 2012 YTD, we recorded an income tax provision of $4.7 million and $4.4 million, respectively. The difference in our effective rate from the U.S. statutory rate of 35 percent is primarily a result of income being taxed in foreign jurisdictions at a lower rate which is partially offset by jurisdictions where we have not provided benefit for the current period losses as they are not expected to be realized in the foreseeable future. Our effective tax rates for Q2 2013 and 2013 YTD varies significantly when compared to the same periods for the prior year primarily because of changes in the mix of income by jurisdiction and having a pre-tax income for the Q2 2013 and 2013 YTD compared to pre-tax loss for Q2 2012 and 2012 YTD. The effective tax provision for each period was the combined calculated tax expenses/benefits for various jurisdictions. CAPITAL RESOURCES AND LIQUIDITY We had $206.9 million and $204.3 million in cash and cash equivalents at March 31, 2013 and September 30, 2012, respectively. During 2013 YTD and 2012 YTD, 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 decreased $1.2 million to $60.0 million for 2013 YTD from $61.3 million for 2012 YTD. A summary of net cash provided by operating activities for 2013 YTD and 2012 YTD is as follows (amounts in thousands): Six Months Ended 2013 2012 Net income (loss) $ 11,309 $ (49,394 ) Depreciation and amortization 57,385 68,302 Provision for doubtful accounts (148 ) (284 ) Amortization of deferred financing cost 596 1,528 Settlement of foreign currency forward - (3,701 ) Loss on disposition or impairment of assets - 1,513 Deferred income taxes 2,347 (997 ) Stock-based compensation 18,278 17,577 Net change in working capital accounts (29,194 ) 11,087 Net change in other long term assets and liabilities (524 ) 15,663 Net cash provided by operating activities $ 60,049 $ 61,294 Accounts receivable increased $5.2 million to $158.4 million at March 31, 2013 from $153.2 million at September 30, 2012. The increase in accounts receivable was primarily due to the timing of sales towards the end of 2013 YTD. Inventories increased $3.7 million to $162.7 million at March 31, 2013 from $159.1 million at September 30, 2012, with the increase primarily due to the anticipation of sales growth in the third quarter of 2013. Current liabilities decreased $19.6 million to $136.9 million at March 31, 2013 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 $17.6 million for 2013 YTD compared to $606.9 million for 2012 YTD. Net cash used in investing activities for 2013 YTD was for purchases of property and equipment. Net cash used in investing activities in 2012 YTD consisted of net cash consideration of $540.2 million and $44.0 million, respectively, for the acquisitions of Microsemi - CMPG and the timing, synchronization and synthesis business of Maxim Integrated Products, Inc., $26.7 million in purchases of property and equipment offset by $3.7 million for the settlement of foreign currency forward and $0.3 million in insurance proceeds. 22-------------------------------------------------------------------------------- Table of Contents Net cash (used in) provided by financing activities was $(39.9) million for 2013 YTD compared to $400.3 million for 2012 YTD. Net cash used in financing activities in 2013 YTD consisted of principal repayments of $50.0 million under our credit agreement and $0.6 million in credit facility refinancing costs, offset by $10.7 million in net proceeds from the exercise of stock awards. Net cash provided by financing activities in 2012 YTD primarily consisted of net borrowings of $435.8 million under our credit agreement and $6.3 million in net proceeds from stock awards, offset by $41.8 million in credit facility issuance and refinancing costs. During the quarter ended March 31, 2013, we entered into Amendment No. 4 to our Credit Agreement . The amendment extended the term loan maturity date, provided new pricing terms and modified certain financial covenant provisions. We accounted for the fourth 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 and recorded debt extinguishment expense of $3.0 million. The amendment did not impact the net principal balance outstanding. Under the Credit Agreement, we may borrow under a "Base Rate" or "Eurodollar Rate". 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 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 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 applicable interest rate margin per annum for each type of loan at March 31, 2013 is as follows: Base Rate Eurodollar Rate Revolving Loans and Swingline Loans 3.50% 4.50% Term Loans 1.75% 2.75% As of March 31, 2013, term loan borrowings were under the Eurodollar Rate and subject to an interest rate of 3.75%. The fair value of our term loan balance was $731.4 million based on a market quote provided to us by MSSF and we classify this valuation as a Level 2 fair value measurement. The amended term loan facility matures in February 2020 and principal amortizes at $7.3 million per year. During the six months ended March 31, 2013, we completed optional principal prepayments of $50.0 million. Subsequent to March 31, 2013, we completed an additional optional principal prepayment of $27.0 million. While there are currently no scheduled principal repayments until the maturity date, the Credit Agreement stipulates an annual payment of a percentage of Excess Cash Flow ("ECF"). The ECF percentage is between 0% and 50% depending on our consolidated leverage ratio as of the end of a fiscal year. We currently pay an undrawn commitment fee of 0.375% 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 Credit Agreement includes financial covenants requiring a maximum leverage ratio and minimum fixed charge coverage ratio that are applicable only when revolving loans or swingline loans are outstanding at the end of a fiscal quarter and also contains other customary affirmative and negative covenants and events of default. We were in compliance with our financial covenants as of March 31, 2013. 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. 23-------------------------------------------------------------------------------- Table of Contents RECENTLY ISSUED ACCOUNTING STANDARDS In December 2011, the FASB issued 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 assessing the disclosures required under this ASU. In February 2013, the FASB issued ASU No. 2013-04, the objective of which is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance in the update requires that these arrangements be recorded as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently assessing the impact of this ASU on our consolidated financial position and results of operations. [ Back To TMCnet.com's Homepage ]