Microsemi Reports Second Quarter 2013 Results

GAAP operating margin was 5.0 percent, improving 50 basis points over the prior year quarter. GAAP net loss for the second quarter of 2013 was $2.9 million or $(0.03) per share.

For the second quarter of fiscal 2013, non-GAAP gross margin was 56.7 percent, improving 170 basis points over the prior year quarter. Non-GAAP operating margin was 21.2 percent, decreasing 80 basis points over the prior year quarter. Non-GAAP net income was $38.9 million and non-GAAP diluted earnings per share were $0.43.

We exit the March quarter with increasing confidence as our visibility has improved, said James J. Peterson, president and CEO of Microsemi. Our book-to-bill ratio moved back above 1:1, profitability benefited from the cost control measures we initiated and we saw a number of significant design win successes for Microsemi's total solution market approach. As we look to the second half of 2013 and beyond, we remain confident in our unique opportunity to grow revenues and profitability to the benefit of our shareholders.

Business Outlook
Microsemi expects net sales in the third quarter of fiscal year 2013 to increase 2 percent to 4 percent, sequentially, and expects non-GAAP diluted earnings per share of between $0.47 and $0.50.

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.

Information for Second Quarter 2013 Earnings Conference Call and Webcast:

Date: Thursday, April 25, 2013
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 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 website for 90 days.

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; and
-non-GAAP net income and diluted earnings per share.

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) Restructuring activities relate to efforts to reduce costs and involve the closure, sale and consolidation of certain facilities. As these facilities are not expected to have a continuing contribution to operations or 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. Restructuring and other special charges include severance and other costs related to these facilities. Other special charges also include gains or losses on litigation, net of settlement costs, primarily related to acquisition-related matters. Loss on facility closure and asset disposal relate to property and equipment destroyed in the Thailand flood in October 2011, offset by insurance recoveries when they were received. 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. In the second quarter of 2013, we recorded debt extinguishment and refinancing expense of $3.0 million from a credit facility amendment that reduced the interest rate and extended the maturity of our term loan, and modified financial covenants in Microsemi's favor. In the second quarter of 2012, we recorded debt extinguishment and refinancing expense of $1.5 million from a credit facility amendment that reduced the interest rate on our term loan. In the first quarter of 2012, we increased our credit facility in conjunction with the acquisition of Zarlink and recorded $34.0 million in debt extinguishment expense. 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. We entered into a foreign currency forward near the end of the fourth quarter of 2011 to minimize exposure to USD/CAD exchange rates in conjunction with the acquisition of Zarlink. We recognized a $15.4 million gain on settlement in the first quarter of 2012 that was offset by a $10.3 million loss from fair value changes in term loan balances and interest rate swaps, all of which we excluded from our non-GAAP results. 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 on 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, non-cash valuation allowance charges and releases related to deferred tax assets. These amounts are excluded as non-GAAP adjustments as the requirement or releases of valuation allowance related to restructuring activities or acquisitions are not viewed by management as being reflective of the business' ongoing tax position.

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. 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.