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Microsemi Reports Fiscal Third Quarter 2014 Results

Companies mentioned in this article: Microsemi Corporation

ALISO VIEJO, Calif., July 24, 2014 /PRNewswire/ -- Microsemi Corporation (Nasdaq: MSCC), a leading provider of semiconductor solutions differentiated by power, security, reliability and performance, today reported unaudited results for its third quarter of fiscal 2014 ended June 29, 2014.

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Net sales for Microsemi's third quarter of fiscal 2014 were $292.3 million, up 20.5 percent from the third quarter of 2013. GAAP gross margin was 52.5 percent and GAAP operating margin was 2.2 percent. GAAP net loss for the third quarter of fiscal 2014 was $4.3 million or $0.05 per diluted share. GAAP results reflect the effect of non-cash purchase accounting entries of $2.2 million, as well as restructuring related charges of $7.9 million for inventory and $11.2 million for facilities and equipment.

For the third quarter of fiscal 2014, non-GAAP gross margin was 56.0 percent and non-GAAP operating margin was 22.6 percent. Non-GAAP net income was $54.8 million or $0.58 per diluted share.

"Microsemi reported broad-based revenue growth in the fiscal third quarter, and we see this trend accelerating in the fourth quarter," said James J. Peterson, chairman and CEO of Microsemi. "Against this backdrop, our focus on cost control and improving leverage metrics to our stated goal is driving profit growth. We look forward to continued execution of our strategy to the benefit of our shareholders."

Business Outlook

Microsemi currently expects net sales in the fourth quarter of fiscal year 2014 of between $299 million and $305 million and expects non-GAAP diluted earnings per share of between $0.62 and $0.66.

Microsemi regularly announces a quarterly outlook in the form of issuing a news release and does not undertake to update any of this information between such public announcements to reflect subsequent events or circumstances. Please refer to the "SAFE HARBOR" STATEMENT below for risks that may affect future actual results.

Non-GAAP Financial Measures

For further information regarding Microsemi's non-GAAP financial measures, please refer to "Notes on Non-GAAP Financial Measures" below. GAAP results are reconciled to non-GAAP results in the accompanying financial tables.

During the third quarter of 2014, we recorded $7.9 million in inventory write-offs from restructuring activities, $11.2 million in facility consolidation and equipment charges and restructuring charges of $3.6 million, primarily for severance. These charges are further described in "Notes on Non-GAAP Financial Measures" below.

Information for Third Quarter 2014 Earnings Conference Call and Webcast:

Date: Thursday, July 24, 2014
Time: 4:45 p.m. EDT (1:45 p.m. PDT)

To access the webcast, log on to www.microsemi.com, go to the Investors section, and then to IR Events and Presentations. To listen to the live webcast, visit this website approximately 15 minutes prior to the start of the call to register, download and install any necessary audio software. For those unable to participate during the live webcast, a replay will be available shortly after the call on the Microsemi website for 90 days.

To participate in the conference call by telephone, call 877-264-1110 at approximately 4:30 p.m. EDT (1:30 p.m. PDT). International callers can call 706-634-1357. Please provide the following ID number: 69142364.

About Microsemi

Microsemi Corporation (Nasdaq: MSCC) offers a comprehensive portfolio of semiconductor and system solutions for communications, defense & security, aerospace and industrial markets. Products include high-performance and radiation-hardened analog mixed-signal integrated circuits, FPGAs, SoCs and ASICs; power management products; timing and synchronization devices and precise time solutions, setting the world's standard for time; voice processing devices; RF solutions; discrete components; security technologies and scalable anti-tamper products; Power-over-Ethernet ICs and midspans; as well as custom design capabilities and services. Microsemi is headquartered in Aliso Viejo, Calif., and has approximately 3,400 employees globally. Learn more at www.microsemi.com.

PLEASE READ THE FOLLOWING FACTORS THAT CAN MATERIALLY AFFECT MICROSEMI'S FUTURE RESULTS.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Any statements set forth in the news release that are not entirely historical and factual in nature are forward-looking statements, including without limitation statements concerning Microsemi's net sales and earnings guidance, our belief that our overall strategy continues to bring benefit to our shareholders, and any other statements or beliefs regarding the company's plans or expectations. These forward-looking statements are based on Microsemi's current expectations and are inherently subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. The potential risks and uncertainties include, but are not limited to, such factors as continued negative or worsening worldwide economic conditions or market instability; downturns in the highly cyclical semiconductor industry; our ability to successfully implement our acquisitions strategy or integrate acquired companies; uncertainty as to the future profitability of acquired businesses, and delays in the realization of, or the failure to realize, any accretion from acquisition transactions; acquiring, managing and integrating new operations, businesses or assets, and the associated diversion of management attention or other related costs or difficulties; intense competition in the semiconductor industry and resultant downward price pressure; Microsemi's reliance on government contracts for a portion of its sales, including impacts of sequestration under the Budget Control Act of 2011, and any past or future government shutdowns; the effect of events such as natural disasters and related disruptions on our operations; the concentration of the factories that service the semiconductor industry; delays in beginning production, implementing production techniques, resolving problems associated with technical equipment malfunctions, or issues related to government or customer qualification of facilities; our dependence on third parties for key functions; increases in the costs of credit and the availability of credit or additional capital only under more restrictive conditions or not at all; changes to laws or regulations; unanticipated changes in Microsemi's tax obligations, results of tax examinations or exposure to additional income tax liabilities; risks related to the company's international operations and sales, including availability of transportation services, political instability and currency fluctuations; changes in generally accepted accounting principles; principal, liquidity and counterparty risks related to Microsemi's holdings in securities; inability to develop new technologies and products to satisfy changes in customer demand or the development by the company's competitors of products that decrease the demand for Microsemi's products; unfavorable or declining conditions in end markets; inability of Microsemi's compound semiconductor products to compete successfully with silicon-based products; production delays related to new compound semiconductors; variability of the company's manufacturing yields; potential effects of system outages; inability by Microsemi to fulfill customer demand and resulting loss of customers; variations in customer order preferences; difficulties foreseeing future demand; rises in inventory levels and inventory obsolescence; potential non-realization of expected orders or non-realization of backlog; failure to make sales indicated by the company's book-to-bill ratio; environmental or other regulatory matters or litigation, or any matters involving contingent liabilities or other claims; the uncertainty of litigation, the costs and expenses of litigation, the potential material adverse effect litigation could have on Microsemi's business and results of operations if an adverse determination in litigation is made, and the time and attention required of management to attend to litigation; difficulties in determining the scope of, and procuring and maintaining, adequate insurance coverage; difficulties and costs of protecting patents and other proprietary rights; the hiring and retention of qualified personnel in a competitive labor market; any circumstances that adversely impact the end markets of acquired businesses; and difficulties in closing or disposing of operations or assets or transferring work, assets or inventory from one plant to another. In addition to these factors and any other factors mentioned elsewhere in this news release, the reader should refer as well to the factors, uncertainties or risks identified in Microsemi's most recent Form 10-K and any subsequent Form 10-Q reports filed by Microsemi with the SEC. Additional risk factors may be identified from time to time in Microsemi's future filings. The forward-looking statements included in this release speak only as of the date hereof, and Microsemi does not undertake any obligation to update these forward-looking statements to reflect subsequent events or circumstances. Amounts reported in this release are preliminary and subject to finalization prior to the filing of our next Form 10-Q.

(Financial Tables Follow)


                                                                                                       MICROSEMI CORPORATION

                                                                                           Selected GAAP and Non-GAAP Financial Measures

                                                                               (unaudited, in millions, except for percentages and per share amounts)


                                     Quarter Ended                               Nine Months Ended
                                     -------------                               -----------------

                            Jun 29,                Mar 30,          Jun 30,                      Jun 29,                   Jun 30,
                                2014                     2014             2013                           2014                      2013
                                ----                     ----             ----                           ----                      ----

    Net sales                            $292.3                                        $287.0                                                        $242.6          $834.9   $725.6


    Selected GAAP Financial
     Measures

    Gross profit                         $153.6                                        $148.6                                                        $138.3          $440.5   $414.4

    Gross margin               52.5%                          51.8%                                  57.0%                                          52.8%   57.1%

    Operating income                       $6.3                                          $7.3                                                         $25.2           $20.8    $62.6

    Operating margin            2.2%                           2.5%                                  10.4%                                           2.5%    8.6%

    Net income (loss)                    $(4.3)                                       $(6.8)                                                        $18.3          $(9.7)   $29.6

    Diluted earnings (loss)
     per share                          $(0.05)                                      $(0.07)                                                        $0.20         $(0.10)   $0.33


    Selected Non-GAAP
     Financial Measures

    Gross profit                         $163.7                                        $158.3                                                        $138.3          $465.1   $414.4

    Gross margin               56.0%                          55.2%                                  57.0%                                          55.7%   57.1%

    Operating income                      $66.2                                         $59.3                                                         $54.8          $179.6   $161.4

    Operating margin           22.6%                          20.7%                                  22.6%                                          21.5%   22.2%

    Net income                            $54.8                                         $47.7                                                         $44.8          $145.4   $128.6

    Diluted earnings per
     share                                $0.58                                         $0.51                                                         $0.49           $1.54    $1.42


    Additional details reconciling
     the selected GAAP financial
     measure to the selected non-
     GAAP financial measure may be
     found in the "Schedule
     Reconciling Selected Non-
     GAAP Financial Measures to
     Comparable GAAP Financial
     Measures" and "Notes on Non-
     GAAP Financial Measures."


                                                                                                           MICROSEMI CORPORATION

                                                                                         Schedule Reconciling Selected Non-GAAP Financial Measures

                                                                                                   to Comparable GAAP Financial Measures

                                                                                          (unaudited, in millions, except for per share amounts)



                                           Quarter Ended                            Nine Months Ended
                                           -------------                            -----------------

                                  Jun 29,                 Mar 30,         Jun 30,                          Jun 29,                 Jun 30,
                                      2014                    2014              2013                             2014                      2013
                                      ----                    ----              ----                             ----                      ----

    GAAP gross profit                              $153.6                                          $148.6                                            $138.3                $440.5    $414.4

    Manufacturing profit in
     acquired inventory (1)            2.2                            9.7                                          -                                   16.7          -

    Inventory write-offs from
     restructuring activities (2)      7.9                              -                                         -                                    7.9          -

    Non-GAAP gross profit                          $163.7                                          $158.3                                            $138.3                $465.1    $414.4
                                                                                                                                                                        ------    ------


    GAAP operating income                            $6.3                                            $7.3                                             $25.2                 $20.8     $62.6

    Adjustments to GAAP gross
     profit                           10.1                            9.7                                          -                                   24.6          -

    Restructuring and other
     special charges (2)               3.6                            6.2                                        1.5                                    18.1        9.5

    Facility consolidation and
     equipment charges                11.2                              -                                         -                                   11.2          -

    Amortization of intangible
     assets (3)                       23.4                           24.3                                       21.0                                    69.7       63.9

    Stock based compensation (4)      11.3                           11.4                                        7.1                                    32.8       25.4

    Acquisition costs (5)              0.3                            0.4                                          -                                    2.4          -
                                       ---                            ---                                        ---                                    ---        ---

    Non-GAAP operating income                       $66.2                                           $59.3                                             $54.8                $179.6    $161.4
                                                    -----                                           -----                                             -----                ------    ------


    GAAP net income (loss)                         $(4.3)                                         $(6.8)                                            $18.3                $(9.7)    $29.6

    Adjustments to GAAP gross
     profit and operating income      59.9                           52.0                                       29.6                                   158.8       98.8

    Loss from facility closure
     and asset disposal (2)              -                             -                                         -                                      -       0.2

    Credit facility issuance and
     refinancing costs (6)             0.2                            0.9                                        0.2                                     1.3        3.8

    (Gain) in debt and derivative
     instruments (7)                 (0.1)                         (0.1)                                     (0.3)                                  (0.5)     (1.0)

    Income tax effect on non-
     GAAP adjustments (8)            (0.9)                           1.7                                      (3.0)                                  (4.5)     (2.8)
                                      ----                            ---                                       ----                                    ----       ----

    Non-GAAP net income                             $54.8                                           $47.7                                             $44.8                $145.4    $128.6
                                                    -----                                           -----                                             -----                ------    ------


    GAAP diluted earnings (loss)
     per share                                    $(0.05)                                        $(0.07)                                            $0.20               $(0.10)    $0.33

    Effect of non-GAAP
     adjustments on diluted
     earnings per share                             $0.63                                           $0.58                                             $0.29                 $1.64     $1.09
                                                    -----                                           -----                                             -----                 -----     -----

    Non-GAAP diluted earnings
     per share                                      $0.58                                           $0.51                                             $0.49                 $1.54     $1.42
                                                    -----                                           -----                                             -----                 -----     -----


    Weighted-average diluted
     shares used in calculating
     non-GAAP diluted earnings
     per share                        94.8                           94.1                                       91.7                                    94.2       90.8


    Operating cash flow                             $54.4                                           $30.2                                             $52.6                $147.1    $112.6

    Capital expenditures             (8.0)                         (8.7)                                    (13.6)                                 (28.9)    (31.1)

    Free cash flow                                  $46.4                                           $21.5                                             $39.0                $118.2     $81.5
                                                    -----                                           -----                                             -----                ------     -----


    Additional details
     reconciling the selected
     non-GAAP financial measure
     to the selected GAAP
     financial measure may be
     found in "Notes on Non-GAAP
     Financial Measures."


                                                            MICROSEMI CORPORATION

                                     Summary of Schedule Reconciling Selected Non-GAAP Financial Measures

                                                    to Comparable GAAP Financial Measures

                                            (unaudited, in millions, except for per share amounts)


                               Quarter Ended June 29, 2014
                              ---------------------------

                      GAAP                              Non-GAAP
                                                      Adjustments              Non-GAAP
                         ----                         -----------              --------

    Net sales                               $292.3                                      $                   - $292.3

    Gross profit                            $153.6                                                      $10.1  $163.7

    Operating income                          $6.3                                                      $59.9   $66.2

    Net income (loss)                       $(4.3)                                                     $59.1   $54.8

    Diluted earnings
     (loss) per share                      $(0.05)                                                     $0.63   $0.58


    Additional details reconciling
     the selected non-GAAP
     financial measure to the
     selected GAAP financial
     measure may be found in the
     "Schedule Reconciling
     Selected Non-GAAP Financial
     Measures to Comparable GAAP
     Financial Measures" and
     "Notes on Non-GAAP Financial
     Measures."


                                                                                                    MICROSEMI CORPORATION

                                                                                          Consolidated Condensed Statement of Income

                                                                                      (unaudited, in millions, except per share amounts)


                                            Quarter Ended                            Nine Months Ended
                                            -------------                            -----------------

                                   Jun 29,                Mar 30,         Jun 30,                    Jun 29,                 Jun 30,
                                       2014                   2014              2013                       2014                      2013
                                       ----                   ----              ----                       ----                      ----

    Net sales                                     $292.3                                     $287.0                                         $242.6                $834.9   $725.6

    Cost of sales                     138.7                         138.4                                104.3                                394.4      311.2
                                      -----                         -----                                -----                                -----      -----

    Gross profit                                  $153.6                                     $148.6                                         $138.3                $440.5   $414.4
                                                  ------                                     ------                                         ------                ------   ------


    Operating expenses

    Selling, general and
     administrative                                $61.0                                      $62.5                                          $48.8                $179.1   $152.5

    Research and development           48.0                          49.3                                 42.2                                141.5      127.3

    Amortization of intangible
     assets                            23.4                          24.3                                 21.0                                 69.7       63.9

    Restructuring charges               3.4                           4.8                                  1.1                                 15.8        8.1

    Facility consolidation charges     11.2                             -                                   -                                11.2          -

    Acquisition costs                   0.3                           0.4                                    -                                 2.4          -

      Total operating expenses                    $147.3                                     $141.3                                         $113.1                $419.7   $351.8
                                                  ------                                     ------                                         ------                ------   ------


    Operating income                                $6.3                                       $7.3                                          $25.2                 $20.8    $62.6
                                                    ----                                       ----                                          -----                 -----    -----


    Interest and other (expense),
     net                              (7.1)                        (8.8)                               (7.0)                              (23.8)    (26.7)
                                       ----                          ----                                 ----                                -----      -----

    Income (loss) before income
     taxes                                        $(0.8)                                    $(1.5)                                         $18.2                $(3.0)   $35.9

    Provision (benefit) for income
     taxes                              3.5                           5.3                                (0.1)                                 6.7        6.3

    Net income (loss)                             $(4.3)                                    $(6.8)                                         $18.3                $(9.7)   $29.6
                                                   =====                                      =====                                          =====                 =====    =====


    Earnings (loss) per share

    Basic                                        $(0.05)                                   $(0.07)                                         $0.20               $(0.10)   $0.33

    Diluted                                      $(0.05)                                   $(0.07)                                         $0.20               $(0.10)   $0.33


    Weighted-average common
     shares outstanding

    Basic                              93.1                          92.8                                 89.8                                 92.7       89.2

    Diluted                            93.1                          92.8                                 91.7                                 92.7       90.8


                              MICROSEMI CORPORATION

                       Consolidated Condensed Balance Sheet

                             (unaudited, in millions)


                     Jun 29,                                Sep 29,
                         2014                                     2013
                         ----                                     ----

    ASSETS

    Current assets

    Cash and cash
     equivalents                                $183.3                     $256.4

    Accounts
     receivable, net    184.2                                      162.1

    Inventories, net    196.7                                      162.0

    Deferred income
     taxes               24.1                                       15.9

    Other current
     assets              38.4                                       26.2
                         ----                                       ----

      Total current
       assets                                   $626.7                     $622.6

    Property and
     equipment, net     144.9                                      125.2

    Goodwill            852.6                                      790.2

    Intangible
     assets, net        354.3                                      315.2

    Deferred income
     taxes               30.8                                       30.2

    Other assets         32.6                                       29.3

    TOTAL ASSETS                              $2,041.9                   $1,912.7
                                              ========                   ========


    LIABILITIES AND
     STOCKHOLDERS'
     EQUITY

    Current
     liabilities

    Accounts payable                             $73.9                      $69.6

    Accrued
     liabilities         85.9                                       63.0

    Current maturity
     of long-term
     liabilities          3.8                                        0.6
                          ---                                        ---

      Total current
       liabilities                              $163.6                     $133.2

    Credit facility     726.0                                      676.0

    Deferred income
     taxes               37.1                                       27.0

    Other long-term
     liabilities         48.5                                       44.4

    Stockholders'
     equity           1,066.7                                    1,032.1

    TOTAL
     LIABILITIES AND
     STOCKHOLDERS'
     EQUITY                                   $2,041.9                   $1,912.7
                                              ========                   ========

Notes on Non-GAAP Financial Measures

To supplement the consolidated financial results prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), this press release and its attachments include non-GAAP financial measures which are adjusted for the items listed in the footnotes below. Management reports the following non-GAAP financial measures:

    --  non-GAAP gross profit and gross margin;
    --  non-GAAP operating income and operating margin;
    --  non-GAAP net income and diluted earnings per share; and
    --  free cash flow.

Non-GAAP financial measures are not prepared in accordance with GAAP; therefore, the information is not necessarily comparable to other companies' financial information and should be considered as a supplement to, not a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP.

Management believes it is useful to provide these non-GAAP financial measures and a reconciliation to comparable GAAP financial measures as we believe they enhance an investor's overall understanding of our financial performance and future prospects by being more reflective of our core operational activities and more comparable with our results over various periods. By disclosing non-GAAP financial measures, management intends to provide investors with an alternate measure to evaluate and compare Microsemi's operating results and trends for the periods presented. Management uses non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance. The items reconciling GAAP financial measures to non-GAAP financial measures and additional comments and the usefulness of each item are set forth below:


             (1)    Manufacturing profit in acquired
                     inventory results from purchase
                     accounting entries to increase the
                     value of inventory acquired to its
                     fair value. As the acquired
                     inventory is sold, the associated
                     manufacturing profit in acquired
                     inventory increases cost of goods
                     sold and reduces gross profit.
                     Management believes it is useful to
                     exclude manufacturing profit in
                     acquired inventory as it does not
                     reflect continuing operations of
                     acquired entities and to facilitate
                     comparability of gross profit
                     between periods. In addition,
                     management excludes the impact of
                     manufacturing profit in acquired
                     inventory in internal measurements
                     of gross profit.


             (2)    In Microsemi's effort to streamline
                     our product lines and strategic
                     focus, as well as integrate the
                     Symmetricom products, we have exited
                     or deemphasized several areas. This
                     improved operating expense from
                     various cost reductions. We
                     periodically evaluate the
                     profitability of our various
                     offerings. Should the actual or
                     expected profitability fall below an
                     acceptable threshold, we may decide
                     to stop offering a product, in part
                     to reallocate manufacturing,
                     operations, engineering, sales and
                     support resources to products we
                     expect to generate greater returns.
                     During the third quarter of 2014,
                     our evaluation led us to selectively
                     exit product offerings that we
                     believe will continue to lag our
                     overall profitability goals. This
                     resulted in inventory charges of
                     $7.9 million. We believe that for
                     many of these products, market
                     dynamics dictate that price is the
                     primary differentiator rather than
                     our value-added core competencies
                     of power, reliability, security and
                     performance.

Related to the streamlining of our operations, we also recorded facility consolidation and equipment charges on both leased and owned properties and engineering equipment for development projects we are no longer pursuing. Facilities consisted of manufacturing sites, as well as sales, engineering and administrative space. Charges related to these facilities and equipment totaled $11.2 million during the third quarter of 2014.

Restructuring and other special charges consists primarily of severance and other costs related to the consolidation of operations and strategic discontinuation of products. Other special charges also include gains or losses on litigation, net of settlement costs, primarily related to acquisition-related matters. These amounts totaled $3.6 million for the third quarter of 2014.

As the operations and products referred to above are not expected to have a continuing contribution to operations or they are expected to have a diminishing contribution during the transition phase, management believes excluding such items from Microsemi's operations is useful to investors as it provides a means of evaluating Microsemi's on-going operations. Management believes that utilizing non-GAAP financial measures that exclude these items is useful in providing an alternate measure to evaluate core operating activities and management excludes these items in its evaluation of operations and for strategic decision making, forecasting future results and evaluating current performance.


             (3)    Amortization of acquisition related
                     intangible assets is excluded from
                     internal analysis of Microsemi's
                     operations and management does not
                     view this non-cash expense as
                     reflective of the business' current
                     performance. Management believes
                     that utilizing non-GAAP financial
                     measures that exclude this non-
                     cash item is useful in providing an
                     alternate measure that excludes the
                     variability caused by purchase
                     accounting factors.


             (4)    Stock based compensation is excluded
                     by management when evaluating
                     operating activities and for
                     strategic decision making,
                     forecasting future results and
                     evaluating current performance.
                     Management believes that utilizing
                     non-GAAP financial measures that
                     exclude this non-cash item is
                     useful in providing an alternate
                     measure that excludes the
                     variability caused by different
                     methodologies and subjective
                     assumptions used in the valuation
                     of equity awards across different
                     companies.


             (5)    Acquisition costs for business
                     combinations are expensed as
                     incurred, in accordance with
                     relevant accounting guidance,
                     rather than capitalized into the
                     purchase price of an acquisition.
                     Management excludes these expenses
                     when evaluating operating
                     activities and for strategic
                     decision making, forecasting future
                     results and evaluating current
                     performance. Management believes
                     that utilizing non-GAAP financial
                     measures that exclude this item is
                     useful in providing an alternate
                     measure that excludes the
                     variability caused by purchase
                     accounting factors.


             (6)    Debt issuance and refinancing costs
                     have been excluded as they are
                     discrete charges we incurred to
                     issue or refinance our credit
                     facility. Management excludes these
                     expenses from internal measurements
                     of credit facility interest rates
                     and in evaluating current
                     performance. Management believes
                     that utilizing non-GAAP financial
                     measures that exclude this item is
                     useful in providing an alternate
                     measure that is reflective of the
                     ongoing characteristics of the
                     amended credit facility.


             (7)    Changes in the fair value of term
                     loan balances outstanding and
                     related interest rate swaps do not
                     result in a change to the principal
                     we owe and are non-cash amounts
                     that management excludes from
                     internal measurements and from
                     forecasting future results. We
                     elected the fair value option in
                     accounting for term loan balances
                     outstanding under Microsemi's
                     credit facility prior to the
                     October 2011 amendment of our
                     credit facility and changes in fair
                     value of the loan balances and
                     related interest rate swaps were
                     reflected as adjustments to the
                     income statement. We did not elect
                     the fair value option on subsequent
                     amendments and are reporting the
                     current term loan balance at par.
                     Subsequent to the first quarter of
                     2012, only our interest rate swaps
                     were recorded under fair value
                     accounting. We entered into
                     interest rate swaps as a cash flow
                     hedge on our variable rate term
                     loan, but as these swaps did not
                     qualify for hedge accounting, we
                     record gains and losses for the
                     change in fair value. Management
                     excludes these gains and losses
                     from internal measurements and in
                     evaluating current performance.
                     Management believes that utilizing
                     non-GAAP financial measures that
                     exclude this item is useful in
                     providing an alternate measure that
                     excludes these non-cash fair value
                     adjustments that do not reflect
                     ongoing operations or the ultimate
                     settlement amount of our term loan.


             (8)    The tax effect of non-GAAP
                     adjustments represents the
                     difference in the provision for
                     income taxes that resulted from
                     non-GAAP adjustments to pretax
                     income and also certain
                     acquisition-related and
                     nondeductible stock-based
                     compensation items, and non-cash
                     valuation allowance charges and
                     releases related to deferred tax
                     assets. These amounts are excluded
                     as non-GAAP adjustments as the
                     restructuring activities and
                     acquisitions are not viewed by
                     management as being reflective of
                     the business' ongoing tax position.

Free cash flow is a non-GAAP financial measure defined as operating cash flow less capital expenditures. We consider free cash flow to be a liquidity measure which provides useful information to management and investors about the amount of cash generated by the business after our capital expenditures, which can then be used for strategic opportunities including, among others, investing in Microsemi's business, making strategic acquisitions, and strengthening the balance sheet. Management uses free cash flow as a supplemental measure to the net change in cash and cash equivalents as presented in Microsemi's consolidated statements of cash flows prepared in accordance with GAAP which incorporates all cash movements during the period.

Guidance is provided only on a non-GAAP basis due to the inherent difficulty of forecasting the timing or amount of certain items that have been excluded from the forward-looking non-GAAP measures, and a reconciliation to the comparable GAAP guidance has not been provided because certain factors that are materially significant to Microsemi's ability to estimate the excluded items are not accessible or estimable on a forward-looking basis.

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SOURCE Microsemi Corporation