10-K 1 mscc201510k.htm 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________________________________________ 
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                          to                                         
Commission file number # 000-08866
_______________________________________________ 
MICROSEMI CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
 
95-2110371
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
One Enterprise, Aliso Viejo, California 92656
(Address of principal executive offices) (Zip Code)
(949) 380-6100
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
  
Name of each exchange on which registered
Common Stock, $0.20 par value;
  
NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
_______________________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer   x
  
Accelerated Filer  o
Non-Accelerated Filer  o
  
Smaller Reporting Company  o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes  o    No  x
The aggregate market value of Common Stock held by non-affiliates of the registrant, based upon the closing sale price on March 27, 2015 was approximately $3,341,000,000.
The number of outstanding shares of Common Stock on November 4, 2015 was 96,204,392
Documents Incorporated by Reference
Part III:    Incorporated by reference are portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be filed not later than 120 days after the close of the registrant’s fiscal year ended September 27, 2015.



TABLE OF CONTENTS
 
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15

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IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Annual Report on Form 10-K must be read in its entirety and contains forward-looking statements within the meaning of the federal securities laws. Any statements that do not relate to historical or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use of forward-looking words, such as "can," "may," "will," "could," "should," "project," "believe," "anticipate," "expect," "plan," "estimate," "forecast," "potential," "intend," "maintain," "continue" and variations of these words and comparable words. In addition, all of the information herein that does not state a historical fact is forward-looking, including any statement or implication about an estimate or a judgment, or an expectation as to a future time, future result or other future circumstance. Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions. Examples of forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, statements concerning:     
demand, growth and sales expectations for our products;
expectations that plant consolidations will result in anticipated cost savings without unanticipated costs or expenses;
expectations regarding tax exposures and future tax rates, our ability to realize deferred tax assets and the outcome or effects of examinations by U.S., state or foreign jurisdictions;
expectations regarding competitive conditions;
new market opportunities and emerging applications for our products;
expectations concerning the anticipated benefits of our acquisitions;  
expectations we will be able to successfully integrate acquired companies and personnel with our existing operations;
expectations that we will be able to identify or complete prospective acquisitions in a market with increasing competition from other potential acquirers, the effects of a consolidating semiconductor industry and high valuations of acquisition candidates;
the uncertainty of litigation, administrative and similar matters, the associated costs and expenses, and the potential material adverse effect these matters could have on our business and results of operations;
beliefs our customers will not cancel orders or terminate or renegotiate their purchasing relationships with us;
expectations concerning the potential termination or renegotiation of U.S. government contracts, uncertainties of governmental appropriations and national defense policies and priorities and the effects of past or future government shutdowns and contract terminations or renegotiations on our business and results of operations;
expectations we will not suffer production delays as a result of a supplier's inability to supply parts;
the effect of events such as natural disasters and related disruptions on our operations; 
beliefs that we stock adequate supplies of all materials;
beliefs that we will be able to successfully resolve any disputes and other business matters as anticipated;
beliefs that we will be able to meet our operating cash and capital commitment requirements in the foreseeable future;
critical accounting estimates;
expectations regarding our financial and operating results;
expectations regarding our liquidity and capital resources, including our loan covenants;
expectations regarding our performance and competitive position in future periods; and

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expectations regarding our outlook for our end markets.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results that the forward-looking statements suggest. You are urged to carefully review the disclosures we make in this report concerning risks and other factors that may affect our business and operating results, including those made under the heading "Item 1A. RISK FACTORS" included below in this Annual Report on Form 10-K, as well as in our other reports filed with the Securities and Exchange Commission ("SEC"). Forward-looking statements are not a guarantee of future performance and should not be regarded as a representation by us or any other person that all of our estimates will necessarily prove correct or that all of our objectives or plans will necessarily be achieved. You are cautioned, therefore, not to place undue reliance on these forward-looking statements, which are made only as of the date of this report. We do not intend, and undertake no obligation, to update or revise the forward-looking statements to reflect events or circumstances after the date of this report, whether as a result of new information, future events or otherwise.

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PART I
ITEM 1.
BUSINESS

INTRODUCTION
Microsemi Corporation was incorporated in Delaware in 1960. Unless the context otherwise requires, the "Company," "Microsemi," "we," "our," "ours" and "us" refer to Microsemi Corporation and its consolidated subsidiaries. The Company is publicly traded under the symbol "MSCC" on the Nasdaq Stock Market LLC. Our company headquarters are located at One Enterprise in Aliso Viejo, California 92656 and our telephone number is (949) 380-6100.
We are a leading designer, manufacturer and marketer of high-performance analog and mixed-signal semiconductor solutions differentiated by power, security, reliability and performance. We offer one of the industry's most comprehensive portfolios of semiconductor technology. Our products include high-performance and radiation-hardened analog mixed-signal integrated circuits ("ICs"); field programmable gate arrays ("FPGAs"); system on chip solutions ("SoCs") and application-specific integrated circuits ("ASICs"); power management products; timing and synchronization devices and precise time solutions, setting the world's standard for time; voice processing devices; radio frequency ("RF") solutions; discrete components; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ("PoE") integrated circuits and midspans; as well as custom design capabilities and services.
The principal end markets we serve include Aerospace, Communications, Defense & Security, and Industrial. Today, Microsemi products are found in applications such as: communications infrastructure systems, both wireless and wired LAN systems, implantable pacemakers and defibrillators, missile systems, military and commercial satellites and aircrafts, oil field equipment and airport security systems.
 Our website address is http://www.microsemi.com. Our filings with the SEC of annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to such forms, are made accessible on such website as soon as reasonably practicable after such documents are electronically filed with or furnished to the SEC and are always available free of charge. Additionally, the SEC maintains a website containing reports, proxy and information statements, and other information regarding our filings at http://www.sec.gov. Also accessible on our website are our code of ethics, governance guidelines, conflict minerals policy and Form SD, Foreign Corrupt Practices Act policy, internal audit charter and charters for the Audit Committee, Compensation Committee, Executive Committee and Governance and Nominating Committee of our Board of Directors. Such website is not intended to constitute any part of this report and is not incorporated by reference herein.
Please read the information under the heading "Item 1A. RISK FACTORS" below, which describes and refers to some of the important risks and uncertainties that could affect Microsemi’s future business and prospects.
We report results of operations on the basis of fifty-two and fifty-three week periods. The fiscal years ended on September 27, 2015, September 28, 2014, and September 29, 2013 consisted of fifty-two weeks. In referencing a year, we are referring to the fiscal year ended on the Sunday generally closest to September 30.
Mission and Vision Statements
Mission: Strengthen and leverage the industry's most comprehensive product technology portfolio, differentiated by power, security, reliability and performance, to expand our leadership position in high-value, high-barrier-to-entry markets. Develop innovative leading-edge solutions that provide our customers with an unparalleled competitive edge, and deliver best-in-class technical service and support.
Vision: Leading-edge semiconductor solutions, solving the most difficult problems where performance matters, reliability is vital and security is non-negotiable.
Our growth strategy is dependent on our ability to successfully develop new technologies and products, and is complemented by our ability to implement our selective acquisitions strategy. New technologies or products we may develop may not lead to an incremental increase in revenues, and there is a risk 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

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assurance 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.
MARKETS
Our products include discretes and ICs, modules, and subsystem solutions that enhance customer designs by improving performance, security, reliability and power consumption. The principal end markets we serve include:
Aerospace – Microsemi’s high-performance solutions are used by the majority of commercial airliners manufactured today, including the latest advanced models such as the Boeing 787 Dreamliner, Airbus A350 and Airbus A380. Microsemi's high-reliability products are used in most satellites and in a wide range of commercial and military avionics systems. Microsemi’s product offering for aerospace include radiation hardened and radiation tolerant solutions for the satellite market to which it supplies all of the top manufacturers.
Communications – Microsemi is a key supplier to top-tier companies focused on wired and wireless communications products. These products are deployed in applications ranging from the central office to the enterprise and the home, and to a broad array of wired and wireless networked devices. Microsemi boasts the largest and most complete timing product offering, as well as the industry's only end to end timing product portfolio. Microsemi also pioneered the concept and development of PoE technology and offers ICs and system solutions (midspans) based on this increasingly popular power transmission solution.
Defense & Security – Microsemi’s solutions are used by all Tier 1 prime contractors in a variety of homeland and offshore security applications. Microsemi's defense and security solutions are also used in products such as unmanned aerial vehicles, smart munitions, radar applications, next-generation body scanners, and radio and guidance systems.
Industrial – Microsemi delivers secure and highly reliable solutions for applications including industrial controls, machine-to-machine (M2M) communications, energy exploration and drilling, semiconductor capital equipment and alternative energy platforms. Microsemi is also a leading supplier of ultra-low power wireless solutions used in medical devices including implantable defibrillators and pacemakers, MRI machines, and portable medical equipment.
Recent Product Introductions
Microsemi marketed a number of recently introduced products, including:
Its highest security and capacity serial advanced technology attachment (SATA) solid state drive (SSD) for defense, intelligence, unmanned aerial vehicle (UAV) and other defense-related network area storage (NAS) applications;
The first device in its new family of sensor interface integrated circuits (ICs) based upon inductive sensing technology, the LX3301A, the first inductive sensor IC in the market utilizing linear variable differential transformer (LVDT) architecture implementations on printed circuit boards (PCB);
The smallest radio module it has ever produced, the ZL70323, which is optimized for implantable medical devices such as pacemakers, cardiac defibrillators and neurostimulators;
Its RTG4™ field programmable gate array (FPGA) development kit, providing space designers with an evaluation and development platform for applications such as data transmission, serial connectivity, bus interface and high-speed designs using Microsemi's RTG4 high-speed signal processing radiation-tolerant FPGA device;
A compact form factor SATA SSD for industrial, defense, intelligence, UAV as well as secure laptops where ultimate security for data-at-rest is required;
An ANSI/VITA 42.3-2014-compliant PCI Express interface XMC form factor SATA SSD for industrial and defense applications where ultimate security for data-at-rest is required;
Its PD-9001GI and PD-9501GI Power-over-Ethernet (PoE) midspan injectors, expanding the company's industry-leading PoE product offering into new industrial and outdoor applications;

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A new high performance precise time and frequency product, the SyncSystem 4380A Master Timing Reference, for use in metrology, defense, communications, aerospace and other applications where performance and reliability are vital; and
Its updated Libero system-on-chip (SoC) Version 11.6 comprehensive design software tool used for the development of the company's latest FPGA products.
Sales
Net sales were $1.25 billion, $1.14 billion and $0.98 billion in 2015, 2014 and 2013, respectively. Net sales by originating geographic area and end market are disclosed in Note 15 of the notes to the consolidated financial statements included in this Annual Report on Form 10-K, which information is incorporated herein by reference. A discussion of the risks attendant to our international operations are included in Item 1A, Risk Factors, under the heading, "International operations and sales expose us to material risks and may increase the volatility of our operating results," which information is incorporated herein by reference. A discussion of results of operations may be found in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K.
ACQUISITIONS
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 markets where performance 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 "total solution" partner as opposed to a single 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.
We have in the past acquired a number of businesses or companies, additional product lines and assets. We currently expect to continue to expand and diversify our operations with additional acquisitions that allow Microsemi to strengthen its position in high-value, high barrier-to-entry markets, while delivering increased value to shareholders and customers.
Microsemi’s acquisition strategy focuses on combining our technical talent, product portfolios and roadmaps with those companies that allow us to leverage customer synergies, expand design capabilities and increase market share with key customers in the Aerospace, Communications, Defense & Security, and Industrial markets. Our customer base benefits from access to a broader portfolio of cutting-edge solutions from a single source, while adding greater scale and efficiencies to our business model. Acquisitions are an important component of Microsemi’s growth strategy and the Company will continue to evaluate acquisitions that support its objectives.
In April 2015, we acquired Vitesse Semiconductor Corporation ("Vitesse"), which designs and markets a diverse portfolio of high-performance semiconductors, application software, and integrated turnkey systems solutions for carrier, enterprise and Internet of Things ("IoT") networks worldwide.  Vitesse products enable the fastest-growing network infrastructure markets including mobile access/IP edge, cloud access and industrial-IoT networking.
MANUFACTURING AND SUPPLIERS
We depend on third party subcontractors, primarily in Asia, for wafer fabrication, assembly, testing and packaging of an increasing portion of our products. At the end of 2015, over 90% of our wafer, assembly and test requirements are currently sourced from third party foundries and subcontractors. We expect this percentage may increase due, in part, to the manufacturing of our next-generation products by third party subcontractors in Asia and from activity at recently acquired operations.
Our wafer designs requirements are increasing in technological complexity and in order to meet our designs specifications, our foundry partners must expend resources for capital equipment and to develop or improve manufacturing processes. Our foundry partners' inability or unwillingness to expend these resources could adversely affect our business and operating results. The assembly, testing and packaging of our products is performed by a limited group of subcontractors. Disruption or termination of any of these subcontractors could occur and such disruptions or terminations could harm our business and operating results.

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We utilize third party logistics services, including transportation, warehouse and shipping services. These service providers are subject to interruptions that affect their ability to service us, including the availability of transportation services, disruptions related to work stoppages, volatility in fuel prices and security incidents or natural events at manufacturing, shipping or receiving points or along transportation routes.
We generally do not have any long-term agreements with our subcontractors. As a result, we may be unable to directly control our quality assurance and product delivery schedules. The cost of product replacements or returns and other warranty matters in connection with quality assurance problems caused by third party subcontractors could materially adversely affect our operating results, financial condition and cash flows. Third party manufacturers generally will have longer lead times for delivery of products as compared with our internal manufacturing, and therefore, when ordering from these suppliers, we will be required to make longer-term estimates of our customers' current demand for products, and these estimates are difficult to make accurately. Also, due to the amount of time typically required to qualify assemblers and testers, we could experience delays in the shipment of our products if we are forced to find alternate third parties to assemble or test our products. Any product delivery delays in the future could have a material adverse effect on our operating results, financial condition and cash flows. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated. In addition, these subcontractors must be qualified by the U.S. government or customers for high-reliability processes. Historically the Defense Logistics Agency has rarely qualified any foreign manufacturing or assembly lines for reasons of national security; therefore, our ability to move certain manufacturing offshore may be limited or delayed.
In the event any of our subcontractors were to experience financial, operational, production or quality assurance difficulties resulting in a reduction or interruption in supply to us, our operating results could suffer until alternate qualified subcontractors, if any, were to become available and active.
Many of our manufacturing and processing operations are controlled in accordance with military and other rigid commercial and industrial specifications. At our facilities with wafer processing capabilities, we manufacture and process products, starting from purchased silicon wafers. At our locations without wafer processing capabilities, processed wafers are sourced from third parties or our other facilities. We purchase silicon wafers, other semiconductor materials and packaging piece parts from domestic and international suppliers generally on long-term purchase commitments, that are cancelable on 30 to 90-days’ notice. Significantly all materials are available from multiple sources. In the case of sole source items, we have never suffered production delays as a result of suppliers’ inability to supply the parts. We believe we stock adequate supplies for all materials, based upon backlog, delivery lead-time and anticipated new business. In the ordinary course of business, we enter into cancelable purchase agreements with some of our major suppliers to supply products over periods of up to 18 months. We also purchase a portion of our finished wafers from several foundry sources.
Processed silicon wafers are separated into individual dice that are then assembled in packages and tested in accordance with our test procedures. A major portion of our semiconductor manufacturing effort takes place after the semiconductor is assembled. Parts are tested a number of times, visually screened and environmentally subjected to shock, vibration, "burn in" and electrical tests in order to prove and assure reliability. As noted above, certain subcontract suppliers provide packaging and testing for our products necessary to deliver finished products. We pay those suppliers for assembled or fully-tested products meeting predetermined specifications.
RAW MATERIALS
Our manufacturing processes use certain key raw materials critical to our products. These include silicon wafers, certain chemicals and gases, ceramic and plastic packaging materials and various precious metals. We also rely on subcontractors to supply finished or semi-finished products that are marketed through our various sales channels. We obtain raw materials and semi-finished or finished products from various sources, although the number of sources for any particular material or product may be limited. We feel our current supply of essential materials is adequate; however, shortages have occurred from time to time and could occur again.

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RESEARCH AND DEVELOPMENT
We believe continuing timely development and introduction of new products is essential to maintaining our competitive position. We currently conduct most of our product development effort in-house. We also employ outside consultants to assist with product design. We expense the cost of research and development as incurred. Research and development expenses are principally comprised of payroll and related costs, masks and supplies, software tools, and consulting costs. 
We spent $200.3 million, $192.0 million and $170.6 million in 2015, 2014 and 2013 respectively, for research and development. 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 process and core architecture development for next generation programmable products, higher power PoE solutions, the continued roadmap development of our industry-leading timing and synchronization products, our silicon germanium (SiGe) RF power amplifier solutions for wireless LAN applications, and the ongoing development of gallium nitride (GaN) and silicon carbide (SiC) power management and RF solutions.
PATENTS, LICENSES, AND OTHER INTELLECTUAL PROPERTY RIGHTS
We have registered several of our trademarks with the U.S. Patent and Trademark Office and in foreign jurisdictions. We rely to some extent upon confidential trade secrets and patents to develop and maintain our competitive position. It is our policy to seek patent protection for significant inventions that may be patented, though we may elect, in appropriate cases, not to seek patent protection even for significant inventions if other protection, such as maintaining the invention as a trade secret, is considered more advantageous or cost-effective. We believe patent and mask work protection could grow in significance but presently is of less significance in our business than experience, innovation, and management skill. No individual patent contributed significantly to our 2015, 2014 or 2013 net sales. 
Due to the many technological developments and the technical complexity of the semiconductor industry, it is possible certain of our designs or processes may involve infringement of patents or other intellectual property rights held by others. From time to time, we have received, and in the future may receive, notice of claims of infringement by our products on intellectual property rights of third parties. If any such infringements were alleged to exist, we might be obligated to seek a license from the holder of the rights and might have liability for past infringement. In the past, it has been common semiconductor industry practice for patent holders to offer licenses on reasonable terms and rates. Although in some situations, typically where the patent directly relates to a specific product or family of products, patent holders have refused to grant licenses. The practice of offering licenses appears to be generally continuing. However, no assurance can be given that we will be able to obtain licenses as needed in all cases or that the terms of any license that may be offered will be acceptable to us. In those circumstances where an acceptable license is not available, we would need either to change the process or product so that it no longer infringes or stop manufacturing the product or products involved in the infringement, which might be costly and could adversely affect our revenues and operating results. 
Please see the information set forth under the subheading "Any failure by us to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete," within the section below entitled "ITEM 1A. RISK FACTORS."
SALES TO THE U.S. GOVERNMENT
Approximately 27% of total net sales in 2015 were in the Defense & Security end market and while we service defense markets outside of the United States, sales in this end market correlate to direct sales to U.S. government agencies, customers whose principal sales are to the U.S. government agencies or to subcontractors whose material sales are to the U.S. government agencies. Future sales are subject to the uncertainties of governmental appropriations and national defense policies and priorities, including lingering impacts of sequestration under the Budget Control Act of 2011, constraints of the budgetary process and timing and potential changes in these policies and priorities. Additionally, the long-term outlook for the fiscal position of the U.S. federal government is also uncertain, as illustrated by the 2013 budget negotiations and the shutdown of non-essential U.S. federal government services in October 2013.
We have experienced delays and reduction in appropriations on programs that include our products. Further delays, reductions in, or terminations of, government contracts or subcontracts, including those caused by any past or future shutdown of the U.S. federal government, could materially and adversely affect our operating results. While we generally

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function as a subcontractor, further changes in U.S. government procurement regulations and practices, particularly surrounding initiatives to reduce costs, may adversely impact the contracting environment and our operating results.
Generally, the U.S. government and its contractors and subcontractors may terminate their contracts with us at any time, with or without cause. In the first quarter of 2014, the U.S. government terminated for convenience a $75 million contract. We have in the past experienced the termination of at least one other contract due to the termination of the underlying government contract. All government contracts are also subject to price renegotiation in accordance with the U.S. Government Renegotiation Act. By reference to such contracts, all of the purchase orders we receive that are related to government contracts are subject to these possible events. In addition, the October 2013 shutdown of non-essential U.S. government services and any future government shutdowns may significantly increase the risk of further contract terminations or renegotiations, and any such termination or renegotiation could have a material adverse impact upon our revenues and results of operations.  
In addition, we are required to maintain compliance with government regulations, particularly for our facilities and products that service the defense and security markets. Maintaining compliance with these regulations, including audit requirements of the U.S. government and our customers that are subject to these requirements, requires that we devote resources to matters that include training, personnel, information technology and facilities. Failure to maintain in compliance may result in the loss of certifications, fines and penalties that may materially and adversely affect our operating results  
From time to time, we have experienced declining Defense & Security-related sales, primarily as a result of contract award delays and reduced security and defense program funding. We may be unable to adequately forecast or respond to the timing of and changes to demand for Defense & Security-related products. In the past, defense-related spending on programs we participate in has increased at a rate that has been slower than expected, been delayed or declined. Our prospects for additional defense and security related sales may be adversely affected in a material manner by numerous events or actions outside our control.
COMPETITIVE CONDITIONS
The semiconductor industry, including the areas in which we do business, is highly competitive. We expect intensified competition from existing competitors and new entrants. Competition is based on price, product performance, product availability, quality, reliability and customer service. In addition, companies not currently in direct competition with us may introduce competing products in the future. Some of our current competitors are Altera Corporation; Texas Instruments, Inc.; Integrated Device Technology, Inc.; Linear Technology Corp.; M/A COM Technology Solutions Inc.; Maxim Integrated Products, Inc.; Semtech Corp.; Silicon Laboratories, Inc.; Skyworks Solutions, Inc.; and Xilinx, Inc. Several of these companies are larger than we are and have greater financial and other resources than we have and may therefore be better able than we are to penetrate new markets, pursue acquisition candidates, and withstand adverse economic or market conditions. We expect intensified competition from both these existing competitors and new entrants into our markets. To the extent we are not able to compete successfully in the future, our financial condition, operating results or cash flows could be harmed.
We have implemented a growth strategy through continuous innovation complemented by strategic acquisitions with the intent of increasing our technology footprint in customers’ end designs in high-value, high barrier-to-entry markets. 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.
SEASONALITY
Generally, we are affected by the seasonal trends of the semiconductor and related industries. The impacts of seasonality are to some extent dependent on product and market mix of products shipped. These impacts can change from time to time and are not predictable. Factors that increase seasonality include, for example, holiday work schedules during our first fiscal quarter that tend to limit production and holiday demand that tends to increase net sales in the Communications end market during our fiscal first and fourth quarters.

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ENVIRONMENTAL REGULATIONS
To date, our compliance with federal, state and local laws or regulations that have been enacted to regulate the environment has not had a material adverse effect on our capital expenditures, earnings, or competitive or financial position. 
Federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in semiconductor manufacturing processes. In addition, under some laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated or if we send waste to a landfill or recycling facility that becomes contaminated, even if we did not cause the contamination. Also, we may be subject to common law claims if we release substances that damage or harm third parties. Further, future changes in environmental laws or regulations may require additional investments in capital equipment or the implementation of additional compliance programs in the future. Any failure to comply with environmental laws or regulations could subject us to serious liabilities and could have material adverse effects on our operating results and financial condition. 
In the conduct of our manufacturing operations, we have handled and do handle materials that are considered hazardous, toxic or volatile under federal, state or local laws. The risk of accidental release of such materials cannot be completely eliminated. In addition, we operate or own facilities located on or near real property that was formerly owned and operated by others. These properties were used in ways that involved hazardous materials. Contaminants may migrate from or within or through property. These risks may give rise to claims. We may be financially responsible for third parties, who are responsible for contamination, if they do not have funds, or if they do not make funds available when needed, to pay remediation costs imposed under environmental laws and regulations. 
EMPLOYEES
At the end of 2015, we employed approximately 2,000 persons domestically and 1,700 persons at our international facilities. None of our employees are represented by a labor union; however, some employees in Europe are represented by an employee works council pursuant to local regulations. We have experienced no work stoppages and believe our employee relations are good.
ITEM 1A.
RISK FACTORS

Negative or uncertain worldwide economic conditions could prevent us from accurately forecasting demand for our products, which could adversely affect our operating results or market share.  
Negative worldwide economic conditions and market instability in recent years have made it increasingly difficult for us, our customers and our suppliers to accurately forecast future product demand trends. If signs of improvement in the global economy do not progress as expected and global economic conditions worsen, our forecasts of product demand trends could prove to be incorrect and could cause us to produce excess products that can depress product prices, increase our inventory carrying costs and result in obsolete inventory. Alternatively, this forecasting difficulty could cause a shortage of products, or materials used in our products, that could result in an inability to satisfy demand for our products and a loss of market share.
Negative or uncertain worldwide economic conditions may adversely affect our business, financial condition, cash flow and results of operations.
Recent domestic and global economic conditions have presented unprecedented and challenging conditions reflecting continued concerns about the availability and cost of credit, downgrades and continued negative pressure on sovereign credit ratings, the mortgage market, declining real estate values, volatility in energy costs, decreased consumer confidence and spending and added concerns fueled by the federal government's interventions in the financial and credit markets. These conditions have contributed to instability in both the domestic and international capital and credit markets, potentially increased the cost of credit and diminished expectations for the global economy. In addition, these conditions make it extremely difficult for our customers to accurately forecast and plan future business activities and could cause businesses to slow spending on our products, which could cause our sales to decrease or result in an extension of our sales cycles. Due to these conditions, our customers may have difficulties obtaining capital at adequate or historical levels to finance their ongoing businesses and operations, which could impair their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our cash flows would be negatively impacted. We cannot predict the timing, strength or duration of any economic slowdown

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or subsequent economic recovery, worldwide or within our industry. If signs of improvement in the global economy do not progress as expected and economic conditions worsen, our business, financial condition, cash flows and results of operations will be adversely affected.
We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel with existing operations.
We have in the past acquired a number of businesses or companies, additional product lines and assets, and we may continue to expand and diversify our operations with additional acquisitions. We may be unable to identify or complete prospective acquisitions for many reasons, including increasing competition from other potential acquirers, the effects of a consolidating semiconductor industry and high valuations of acquisition candidates. In addition, applicable antitrust laws and other regulations may limit our ability to acquire targets or force us to divest an acquired business. If we are unable to identify suitable targets or complete acquisitions, our growth prospects may suffer, and we may not be able to realize sufficient scale advantages to compete effectively in all markets. To the extent we are successful in making acquisitions, if we are unsuccessful in integrating acquired companies or product lines with existing operations, or if integration is more difficult or more costly than anticipated, we may experience disruptions that could have a material adverse effect on our business, financial condition and results of operations. In addition, the market price of our common stock could be adversely affected if the effect of any acquisitions on the Microsemi consolidated group's financial results is dilutive or is below the market's or financial analysts' expectations. Some of the risks that may affect our ability to integrate or realize any anticipated benefits from acquired companies, businesses or assets include those associated with:
unexpected losses of key employees or customers of the acquired company;
conforming the acquired company's standards, processes, procedures and controls with our operations;
coordinating new product and process development;
increasing complexity from combining recent acquisitions;
hiring additional management and other critical personnel;
increasing the scope, geographic diversity and complexity of our operations;
difficulties in consolidating facilities and transferring processes and know-how;
other difficulties in the assimilation of acquired operations, technologies or products;
diversion of management's attention from other business concerns; and
adverse effects on existing business relationships with customers.
In connection with acquisitions, we may:
use a significant portion of our available cash; 
issue equity securities, which would dilute current stockholders' percentage ownership;
incur substantial debt;  
incur or assume contingent liabilities, known or unknown, including potential lawsuits, infringement actions and similar liabilities;  
incur impairment charges related to goodwill or other intangibles;  
incur large, immediate accounting write-offs; and  
face antitrust or other regulatory inquiries or actions.
There can be no assurance the benefits of any acquisitions will outweigh the attendant costs, and if they do not, our results of operations and stock price may be adversely affected.

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Reliance on government contracts for a significant portion of our sales could have a material adverse effect on results of operations.
A significant portion of our sales are or may be derived from U.S. government agencies or customers whose principal sales are to U.S. government agencies which creates concentrations of credit risk. Future sales are subject to the uncertainties of governmental appropriations and national defense policies and priorities, including lingering impacts of sequestration under the Budget Control Act of 2011, constraints of the budgetary process and timing and potential changes in these policies and priorities. Additionally, the long-term outlook for the fiscal position of the U.S. federal government is also uncertain, as illustrated by the 2013 budget negotiations and the shutdown of non-essential U.S. federal government services in October 2013.
We have experienced delays and reduction in appropriations on programs that include our products. Further delays, reductions in or terminations of government contracts or subcontracts, including those caused by any past or future shutdown of the U.S. federal government, could materially and adversely affect our operating results. While we generally function as a subcontractor, further changes in U.S. government procurement regulations and practices, particularly surrounding initiatives to reduce costs, may adversely impact the contracting environment and our operating results.
Generally, the U.S. government and its contractors and subcontractors may terminate their contracts with us at any time, with or without cause. In the first quarter of 2014, the U.S. government terminated for convenience a $75 million contract. We have in the past experienced the termination of at least one other contract due to the termination of the underlying government contract. All government contracts are also subject to price renegotiation in accordance with the U.S. Government Renegotiation Act. By reference to such contracts, all of the purchase orders we receive that are related to government contracts are subject to these possible events. In addition, the recent shutdown of non-essential U.S. government services and any future government shutdowns may significantly increase the risk of further contract terminations or renegotiations, and any such termination or renegotiation could have a material adverse impact upon our revenues and results of operations.
In addition, we are required to maintain compliance with government regulations, particularly for our facilities and products that service the defense and security markets. Maintaining compliance with these regulations, including audit requirements of the U.S. government and our customers that are subject to these requirements, requires we devote resources to matters including training, personnel, information technology and facilities. Failure to maintain compliance may result in the loss of certifications and fines and penalties that may materially and adversely affect our operating results
Microsemi's aggregate net sales to the Defense & Security end market represented approximately 27% of total net sales in 2015. From time to time, we have experienced declining security and defense-related sales, primarily as a result of contract award delays and reduced security and defense program funding. We may be unable to adequately forecast or respond to the timing of and changes to demand for security and defense-related products. In the past, defense-related spending on programs we participate in has increased at a rate that has been slower than expected, been delayed or declined. Our prospects for additional defense and security related sales may be adversely affected in a material manner by numerous events or actions outside our control.
International operations and sales expose us to material risks and may increase the volatility of our operating results.
Net sales from international markets represent a significant portion of total net sales and totaled 51% in 2015. These sales were principally to customers in Europe and Asia. Foreign sales are classified as shipments to foreign destinations. We maintain several international facilities or contracts with entities outside the United States, including Canada, China, France, India, Ireland, Israel, Japan, Korea, Malaysia, Macau, the Philippines, Taiwan, Thailand and the United Kingdom. There are risks inherent in doing business internationally, including:
legislative or regulatory requirements and potential changes in or interpretations of requirements in the United States and in the countries in which we manufacture or sell our products;
trade restrictions, including sanctions and the suspension of export licenses;
compliance with and changes in import/export regulations;
restrictions in the transfer or repatriation of funds;

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tax regulations and treaties and potential changes in regulations and treaties in the United States and in and between countries in which we manufacture or sell our products;
fluctuations in income tax expense and net income due to differing statutory tax rates in various domestic and international jurisdictions;
uncertain interpretations of and difficulties enforcing intellectual property laws;
local business and cultural factors that may differ from our domestic standards and practices, including business practices from which we are prohibited from engaging by the Foreign Corrupt Practices Act (the "FCPA") and other anti-corruption laws and regulations;
availability of transportation services, including disruptions related to work stoppages, security incidents or natural events at manufacturing, shipping or receiving points or along transportation routes;
work stoppages or disruption of local labor supply;
communication interruptions;
economic and political instability, including the recent uncertainty in the global financial markets;
acts of war or terrorism, or health issues (such as Sudden Acute Respiratory Syndrome, Avian Influenza, H7N9 Virus, or the Ebola Virus), which could disrupt our manufacturing and logistical activities;
changes in tariffs and freight rates;
potentially longer payment cycles and difficulties in collecting receivables;
difficulties and enforcing contracts generally; and
currency exchange rate fluctuations, devaluation of foreign currencies, hard currencies shortages and exchange rate fluctuations.
International sales of our products that service the aerospace, defense and security markets are subject to U.S. and local government regulations and procurement policies and practices including regulations relating to import-export control. Violations of export control regulations could result in suspension of our ability to export our products. Depending on the scope of the suspension, this could have a material effect on our ability to perform certain international contracts. In addition, failure to maintain compliance with U.S. and foreign government regulations, including the FCPA and foreign anti-corruption measures, may result in fines and penalties that may materially and adversely affect our operating results.
If political, military, transportation, health or other issues in foreign countries result in cancellations of customer orders or contribute to a general decrease in economic activity or corporate spending, or directly impact Microsemi's marketing, manufacturing, financial and logistics functions, our consolidated results of operations and financial condition could be materially adversely affected. In addition, the laws of certain foreign countries may not protect our products, assets or intellectual property rights to the same extent as do U.S. laws. Therefore, the risk of piracy of our technology and products, which could result in a material adverse effect on our financial condition, operating results and cash flows, may be greater in those foreign countries.
We may not make the sales that are suggested by our order rates, backlog or book-to-bill ratio, and our book-to-bill ratio may be affected by product mix.
Undue reliance should not be placed on our backlog or book-to-bill ratios or changes to these amounts. We determine bookings substantially based on orders that are scheduled for delivery within 12 months. However, lead times for the release of purchase orders depend, in part, upon the scheduling practices of individual customers, and delivery times of new or non-standard products can be affected by scheduling factors and other manufacturing considerations. The rate of booking new orders can vary significantly from month to month. Customers frequently change their delivery schedules or cancel orders. We have in the past experienced long lead times for some of our products, which may have therefore resulted in orders in backlog being duplicative of other orders in backlog, which would increase backlog without resulting in additional revenues. Because of long lead times in certain products, our book-to-bill ratio may not be an indication of sales in subsequent periods. Uncertain worldwide economic conditions and market instability have

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also resulted in hesitance of our customers to place orders with long delivery schedules, which contributes to limited visibility into our markets.
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.
Relevant portions of the semiconductor industry, and the facilities that serve or supply this industry, tend to be concentrated in certain areas of the world. Events such as natural disasters and related disruptions, epidemics and health advisories like those related to Sudden Acute Respiratory Syndrome, Avian Influenza, H7N9 Virus, or the Ebola Virus, flooding, drought, earthquakes, tsunamis, power outages and infrastructure disruptions, and terrorism, civil unrest and political instability in those areas, have from time to time in the past, and may again in the future, adversely affect the semiconductor industry. In particular, events such as these could adversely impact our ability to manufacture or deliver our products and result in increased costs and a loss of revenue. Similarly, a localized risk affecting our employees or the staff of our suppliers could impair the total volume of products that we are able to manufacture, which could adversely affect our results of operations and financial condition.
In the first quarter of 2012, severe flooding in certain regions of Thailand forced a shutdown of our operations in two subcontracted facilities in Thailand. The two Thailand facilities together accounted for as much as 5% of our total quarterly revenues. In response to the impact of flooding at subcontractor facilities in Thailand, we implemented plans to move production to other facilities outside the affected area. Production capabilities at these other facilities compensated for the loss of production in the flooded facilities in Thailand and we believe 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 future natural disasters, could affect our revenue, consolidated financial position, results of operations and cash flows.
We are dependent on third parties for key functions including foundries for wafer supplies, subcontractors for assembly, test and packaging services and vendors for logistics, and problems at these third parties could adversely affect our business and operating results.
We depend on third party subcontractors, primarily in Asia, for wafer fabrication, assembly, testing and packaging of an increasing portion of our products. At the end of 2015, over 90% of our wafer, assembly and test requirements were sourced from third party foundries and subcontractors. We expect these percentages may increase due, in part, to the manufacturing of our next-generation products by third party subcontractors in Asia and from activity at recently acquired operations.
Our wafer designs requirements are increasing in technological complexity and in order to meet our designs specifications, our foundry partners must expend resources for capital equipment and develop or improve manufacturing processes. Our foundry partners' inability or unwillingness to expend these resources could adversely affect our business and operating results. The assembly, testing and packaging of our products is performed by a limited group of subcontractors. Disruption or termination of any of these subcontractors could occur and such disruptions or terminations could harm our business and operating results.
We utilize third party logistics services, including transportation, warehouse and shipping services. These service providers are subject to interruptions that affect their ability to service us, including the availability of transportation services, disruptions related to work stoppages, volatility in fuel prices and security incidents or natural events at manufacturing, shipping or receiving points or along transportation routes.
We generally do not have any long-term agreements with our subcontractors. As a result, we may be unable to directly control our quality assurance and product delivery schedules. The cost of product replacements or returns and other warranty matters in connection with quality assurance problems caused by third party subcontractors could materially adversely affect us. Third party manufacturers generally will have longer lead times for delivery of products as compared with our internal manufacturing, and therefore, when ordering from these suppliers, we will be required to make longer-term estimates of our customers' current demand for products, and these estimates are difficult to make accurately. Also, due to the amount of time typically required to qualify assemblers and testers, we could experience delays in the shipment of our products if we are forced to find alternate third parties to assemble or test our products. Any product delivery delays in the future could have a material adverse effect on our operating results, financial condition and cash flows. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated. In addition, these subcontractors must be qualified by the U.S.

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government or customers for high-reliability processes. Historically the Defense Logistics Agency has rarely qualified any foreign manufacturing or assembly lines for reasons of national security; therefore, our ability to move certain manufacturing offshore may be limited or delayed.
In the event any of our subcontractors were to experience financial, operational, production or quality assurance difficulties resulting in a reduction or interruption in supply to us, our operating results could suffer until alternate qualified subcontractors, if any, were to become available and active.
Provisions in our credit facility and our leverage could adversely affect our consolidated financial position and our ability to operate our business.
Our credit facility requires that we comply with financial and restrictive covenants. Although we are currently in compliance with these covenants, unexpected downturns in our business may trigger certain covenants that increase our cost of borrowing, decrease the amounts available under our credit facility, or both. The current amount outstanding on our credit facility exceeds our current cash and cash equivalents balance, and we may incur additional debt in the future. Some of the risks associated with our leverage include the following:
our ability to obtain additional financing in the future for acquisitions, capital expenditures, general corporate purposes or other purposes may be impaired;
our current credit facility only permits borrowing on variable rates of interest and increases in certain benchmark interest rates will increase the cost of borrowing;  
leverage will increase our vulnerability to declining economic conditions, particularly if the decline is prolonged;  
failure to comply with any of our debt covenants may result in an event of default which, if not cured or waived, could have a material adverse effect on us;  
financial and restrictive covenants may adversely affect or limit our ability to implement business plans, react to changes in economic conditions, benefit from changes in tax regulations, pay a cash dividend or execute repurchases of our common stock;  
debt service payments will continue to have a negative impact on our cash flows; and prepayment terms may discourage us from refinancing our current credit agreement or reduce the benefit of lower interest rates.
Both our customers and we are subject to laws, regulations and similar requirements, changes to which may adversely affect our business and operations.
We are subject to laws, regulations and similar requirements that affect our business and operations, including, but not limited to, the areas of commerce, import and export control (especially related to products in our Defense & Security end market), financial disclosures, intellectual property, income and other taxes, anti-trust, anti-corruption, labor, environmental, health and safety. Our compliance in these areas may be costly, especially in areas where there are inconsistencies between the various jurisdictions in which we operate. While we have implemented policies and procedures to comply with laws and regulations, there can be no assurance our employees, contractors, suppliers or agents will not violate such laws and regulations or our policies. Any such violation or alleged violation could materially and adversely affect our business. Any changes or potential changes to laws, regulations or similar requirements, or our ability to respond to these changes, may significantly increase our costs to maintain compliance or result in our decision to limit our business, products or jurisdictions in which we operate, any of which could materially and adversely affect our business and operations.
Federal and state regulatory agencies, including the United States Federal Communications Commission and the various state public utility commissions and public service commissions, regulate most of our domestic telecommunications customers. Similar government oversight also exists in the international market. While we may not be directly affected by this legislation, such regulation of our customers may negatively impact our business. For instance, the sale of our products may be affected by the imposition upon certain of our customers of common carrier tariffs and the taxation of telecommunications services. These regulations are continuously reviewed and changed by the various governmental agencies. Changes in current or future laws or regulations, in the United States or elsewhere, could negatively impact our business and operating results.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act includes provisions regarding certain minerals and metals, known as conflict minerals, mined from the Democratic Republic of Congo and adjoining countries. These provisions require companies to undertake due diligence procedures and report on the use of conflict minerals in its products, including products manufactured by third parties. Compliance with these provisions has caused and will continue to cause us to incur costs to determine whether our supply chain is conflict free and we may face difficulties if our suppliers are unwilling or unable to verify the source of their materials. Our ability to source these minerals and metals may also be adversely impacted. In addition, our customers may require that we provide them with a certification and our inability to do so may disqualify us as a supplier.
Unanticipated changes in our tax provisions, or exposure to additional income tax liabilities or unfavorable results of tax examinations could affect our financial results.
We are subject to federal and state income taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we record in intercompany transactions for inventory, services, licenses, funding and other items. We are subject to ongoing tax examinations in various jurisdictions. Tax authorities may disagree with our intercompany charges or other tax positions and assess additional taxes. Our application of transfer pricing has been the primary subject of the current examination of our U.S. federal income tax returns. We regularly assess the likely outcomes of examinations in order to determine the appropriateness of our tax provision. However, the actual outcomes of examinations could result in large and unexpected tax liabilities for past tax periods and may have a material impact on our consolidated financial position, results of operations or cash flows. In addition, our effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates and benefits, chases in available credits and incentives, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, especially tax laws related to foreign operations, and the discovery of new information in the course of our tax return preparation process. Any of these changes could materially affect our operating results, cash flows and financial condition.
We hold cash and cash equivalents at various foreign subsidiaries that may not be readily available to meet domestic cash requirements.
Our various foreign subsidiaries hold cash and cash equivalents and as we intend to reinvest certain foreign earnings indefinitely these balances held outside the United States may not be readily available to meet our domestic cash requirements. We require a substantial amount of cash in the United States for operating requirements, purchases of property and equipment, debt service, repurchases of our common stock and potentially for future acquisitions. If we are unable to meet our domestic cash requirements using domestic cash flows from operations, domestic cash and cash equivalents, or by settling loans receivable with our foreign subsidiaries, it may be necessary for us to consider repatriation of earnings we have designated as permanently reinvested. This may require us to record additional income tax expense and remit additional taxes, which could have a material effect on our results of operations, cash flows and financial condition.
Our operating results may fluctuate in future periods, which could cause our stock price to decline.
We have experienced, and expect to experience in future periods, fluctuations in net sales and operating results from period to period. Our projections and results may be subject to significant fluctuations as a result of a number of factors including:
the timing of orders from and shipment of products to major customers;
an unexpected reduction in sales to, or loss of, key customers;
our product mix;
changes in the prices of our products;
manufacturing delays or interruptions;
delays or failures in testing and processing products for defense, security and aerospace applications;
inventory obsolescence or write-downs;
restructuring charges;

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variations in the cost of components for our products;
limited availability of components we obtain from a single or a limited number of suppliers; and
seasonal and other fluctuations in demand for our products.
We have in the past closed, combined, sold or disposed of certain of our operations, have current plans to combine certain of our operations and may determine to do so in the future, which could reduce our sales volume, profitability and result in significant restructuring costs.
We face major technical challenges in regards to transferring component manufacturing between locations. Before a transfer of manufacturing, we must be finished qualifying the new facility appropriately with the U.S. government or certain customers. In addition, to mitigate the potential for manufacturing disruptions following a closure, we typically build inventory to support the transition process. While we generally plan to retain revenues and income of those operations by transferring the manufacturing elsewhere within Microsemi's subsidiaries, our plans may change at any time based on reassessment of the alternatives and consequences. While we hope to benefit overall from increased gross margins and increased capacity utilization rates at remaining operations, the remaining operations will need to bear the corporate administrative and overhead costs, which are charges to income that had been allocated to the discontinued business units. Moreover, delays in effecting our consolidations could result in changes in the timing of realized costs savings and in greater than anticipated costs incurred to achieve our projected longer-range savings.
We may make further specific determinations to consolidate, close, sell or divest of 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 and environmental 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.
We may not be able to develop new technologies and products to satisfy changes in customer demand or industry standards, and our competitors could develop products that decrease the demand for our products.
Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the semiconductor industry. Our financial performance depends, in part, on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. If we are unable to continue to reduce package sizes, improve manufacturing yields and expand sales, we may not remain competitive. Our recent spending on research and development was principally to develop new higher-margin application-specific products, including, among others, our process and core architecture development for next generation programmable products, higher power PoE solutions, the continued roadmap development of our industry-leading timing and 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. The competitiveness of designs we have introduced, including power-over-ethernet, CCFL and LED drivers, class-D audio amplifiers, InGaP RF power amplifiers for wireless LAN applications, development and adoption of silicon carbide technology, ASICs, VDMOS products for high frequency communications and S-band products for RF applications, are subject to various risks and uncertainties we are not able to control, including changes in customer demand and the introduction of new or superior technologies by others. Moreover, any failure by us in the future to develop new technologies or timely react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenues and a loss of our market share to our competitors. New technologies or products we may develop may not lead to an incremental increase in revenues, and there is a risk these new technologies or products will decrease the demand for our existing products and result in an offsetting reduction in revenues. In addition, products or technologies developed by others may render our products or technologies obsolete or non-competitive. A fundamental shift in technologies in our product markets could have a material adverse effect on our competitive position within the industry.
Additionally, our ability to compete within our industry will depend on our ability to identify and ensure compliance with constantly evolving industry standards. The emergence of new industry standards could render our products

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incompatible with products developed by major manufacturers. As a result, we could be required to invest significant time and effort and incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards, it could have a material adverse effect on our business operations and financial results.
We must commit resources to research and development, design, and production prior to receipt of purchase commitments and could lose some or all of the associated investment.
We sell products primarily pursuant to purchase orders for current delivery, rather than pursuant to long-term supply contracts. Many of these purchase orders may be revised or canceled without penalty. As a result, we must commit resources to the research, design and production of products without any advance purchase commitments from customers. Any inability to sell a product after we devote significant resources to it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
There may be unanticipated costs associated with appropriately scaling our manufacturing capacity to meet expected changes in customer demand.
We may incur unanticipated costs as we scale our manufacturing capacity to meet expected changes in customer demand. During periods of anticipated increases in customer demand, we may determine our business will require increased manufacturing capacity on our part and on the part of certain outside foundries, assembly shops, or testing facilities for some of our integrated circuit products or other products. Expansion activities are subject to a number of risks, including:
unavailability or late delivery of the advanced, and often customized, equipment used in the production of our specialized products;
availability of qualified manufacturing personnel;
delays in bringing new production equipment on-line;
delays in supplying satisfactory designs or products to our existing customers;
unforeseen environmental, engineering or manufacturing qualification problems relating to existing or new facilities; and
overexpansion may result in unfavorable manufacturing variances, restructuring costs and impairments.
These and other risks may affect the ultimate cost and timing of any expansion of our capacity.
Downturns in the highly cyclical semiconductor industry have in the past adversely affected our operating results, cash flows and the value of our business, and may continue to do so in the future.
The semiconductor industry is highly cyclical and is characterized by constant technological change, rapid product obsolescence and price erosion, short product life-cycles, consolidations of customers, and fluctuations in product supply and demand. During recent years we, as well as many others in our industry, have experienced significant declines in the pricing of, as well as demand for, products during the "down" portions of these cycles, which have sometimes been severe and prolonged. We have also noted consolidations of customers, particularly our distributors, which may adversely affect our pricing leverage or ability to maintain sufficient distributor channel inventory to meet end customer demand. In the future, these downturns may prove to be as, or possibly even more, severe than past ones. Our ability to sell our products depends, in part, on continued demand in each of our diverse end markets. Each of these end markets has, in the past, experienced reductions in demand, and current and future downturns in any of these markets may continue to adversely affect our revenues, operating results, cash flows and financial condition.
The semiconductor business is subject to downward price pressure.
The market for our products has been characterized by declining selling prices, and we anticipate that our average selling prices will decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty. The pricing pressure in the semiconductor industry in past years has been due to a large number of factors, many of which were not easily foreseeable, such as the Asian currency crisis, industry-wide excess manufacturing capacity, weak economic growth, the slowdown in capital spending that followed the "dot-com" collapse,

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the reduction in capital spending by telecom companies and satellite companies, and the effects of the tragic events of terrorism on September 11, 2001. Similar to past years, recent unfavorable economic conditions have resulted in a tightening of the credit markets. If signs of improvement in the global economy do not progress as expected and global economic conditions worsen, we may experience a decline in our average selling prices. In addition, our competitors have in the past, and may again in the future, lower prices in order to increase their market share. Continued downward price pressure in the industry may reduce our operating results and harm our financial and competitive position.
The semiconductor industry is highly competitive.
The semiconductor industry, including the areas in which we do business, is highly competitive. We expect intensified competition from existing competitors and new entrants. Competition is based on price, product performance, product availability, quality, reliability and customer service. In addition, companies not currently in direct competition with us may introduce competing products in the future. Some of our current major competitors are Altera Corporation; Texas Instruments, Inc.; Integrated Device Technology, Inc.; Linear Technology Corp.; M/A COM Technology Solutions Inc.; Maxim Integrated Products, Inc.; Semtech Corp.; Silicon Laboratories, Inc.; Skyworks Solutions, Inc.; and Xilinx, Inc. Several of these companies are larger than we are and have greater resources than we have and may therefore be better able than we are to penetrate new markets, pursue acquisition candidates, and withstand adverse economic or market conditions. We expect intensified competition from both of these existing competitors and new entrants into our markets. To the extent we are not able to compete successfully in the future, our financial condition, operating results or cash flows could be harmed.
Compound semiconductor products may not successfully compete with silicon-based products.
Our choice of technologies for development and future implementation may not reflect future market demand. The production of gallium arsenide (GaAs), indium gallium phosphide (InGaP), indium gallium arsenide phosphide (InGaAsP) SiGe or SiC ICs is more costly than the production of silicon circuits, and we believe it will continue to be more costly in the future. The costs differ because of higher costs of raw materials, lower production yields and higher unit costs associated with lower production volumes. Silicon semiconductor technologies are widely used in process technologies for integrated circuits, and these technologies continue to improve in performance. As a result, we must offer compound semiconductor products that provide vastly superior performance to that of silicon for specific applications in order for our products to be competitive with silicon products. If we do not offer compound semiconductor products that provide sufficiently superior performance to offset the cost differential and otherwise successfully compete with silicon-based products, our revenues and operating results may be materially and adversely affected.
Production delays related to new compound semiconductors could adversely affect our future results.
We utilize process technology to manufacture compound semiconductors such as GaAs, InGaP, InGaAsP, SiGe and SiC primarily to manufacture semiconductor components. We are pursuing this development effort internally as well as with third party foundries. Our efforts sometimes may not result in commercially successful products. Certain competitors offer this capability and our customers may purchase our competitors' products instead of ours for this reason. In addition, the third party foundries we use may delay delivery of, or even completely fail to deliver, technology and products to us. Our business and financial prospects could be materially and adversely affected by any failure by us to timely produce these products.
We may be unable to retain our customers due in part to our inability to fulfill our customer demand and other factors.
Our ability to fulfill our customers' demand for our products is and will continue to be dependent in part on our order volumes and long lead times with regards to our manufacturing and testing of certain high-reliability products. The lead time for manufacturing and testing of high-reliability products can be many months. In response to current demand, we have recently increased our capital expenditures for production equipment as well as increased expenses for personnel at certain manufacturing locations. We may have delays or other difficulties in regards to increasing our production and in hiring and retaining qualified personnel. In addition, we have raised prices on certain products, primarily in our Aerospace, Defense & Security and Industrial end markets. Manufacturing delays and price increases may result in our customers reducing their purchase levels with us and/or seeking alternative solutions to meet their demand. In addition, the current demand may not continue in the future. Decreased sales as a result of a loss of one or more significant customers could materially and adversely impact our business and results of operations.

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Unfavorable or uncertain conditions in certain markets our original equipment manufacturer customers address may cause fluctuations in our rate of revenue growth or financial results.
Demand for our products is dependent on demand for our customers' products. Markets for our customers' product may not develop in the manner or in the time periods our customers anticipate. If domestic and global economic conditions worsen, overall spending may be reduced or shifted to products other than those made by our customers, which would adversely impact demand for products in these markets. Reduced sales by our customers will adversely impact demand by our customers for our products and could also slow new product introductions by our customers and by us. Lower net sales of our products would have an adverse effect on our revenue, cash flow and results of operations.
Fluctuations in sales of high-reliability products for use in medical devices may adversely affect our financial results.
Although the market for medical devices is growing, customers in this market could reduce their reliance on outside suppliers. The medical device market also fluctuates based on several other factors, such as product recalls and the need to secure regulatory approvals. Product recalls can, from time to time, accelerate sales to levels that cannot be sustained for long periods of time. The timing and qualification of new generations of products brought to market by OEMs can also result in fluctuations in order rates.
Variability of our manufacturing yields may affect our gross margins and profits.
Our manufacturing yields vary significantly among products, depending on the complexity of a particular product's design and our experience in manufacturing that type of product. We have in the past experienced difficulties in achieving planned yields, which have adversely affected our gross margins and profits.
The fabrication of semiconductor products is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous circuits on each wafer to be non-functional, thereby reducing yields. These difficulties primarily include:
defects in masks, which are used to transfer circuit patterns onto our wafers;
impurities in the materials used;
contamination of the manufacturing environment; and
equipment failure.
Because a large portion of our costs of manufacturing is relatively fixed and average selling prices for our products tend to decline over time, it is critical for us to improve the number of shippable circuits per wafer and increase the production volume of wafers in order to maintain and improve our results of operations. Yield decreases can result in substantially higher unit costs, which could materially and adversely affect our operating results and have done so in the past. Moreover, our process technologies have primarily utilized standard silicon semiconductor manufacturing equipment, and production yields of compound integrated circuits have been relatively low compared with silicon circuit devices. We may be unable to continue to improve yields in the future, and we may suffer periodic yield problems, particularly during the early production of new products or introduction of new process technologies. In either case, our results of operations could be materially and adversely affected.
Some of our facilities and the facilities of our suppliers and customers are located near major earthquake fault lines.
Our headquarters, our major operating facilities, and certain other critical business operations and customers are located near known major earthquake fault lines. We presently do not have earthquake insurance. We could be materially and adversely affected in the event of a major earthquake.

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Delays in beginning production, implementing production techniques, resolving problems associated with technical equipment malfunctions, or issues related to government or customer qualification of facilities could adversely affect our manufacturing efficiencies, our ability to realize cost savings and the timing and amount of revenue we realize.
Microsemi's consolidated manufacturing efficiency will be an important factor in our future profitability, and we may be unsuccessful in our efforts to maintain or increase our manufacturing efficiency. Our manufacturing processes, and those utilized by our third-party subcontractors, are highly complex, require advanced and costly equipment and are sometimes modified in an effort to improve yields and product performance. We have from time to time, experienced difficulty in transitioning manufacturing processes to different facilities or adopting new manufacturing processes. As a consequence, we have at times experienced delays in product deliveries and reduced yields. Every silicon wafer fabrication facility utilizes very precise processing, and processing difficulties and reduced yields commonly occur, often as a result of contamination of the material. Reduced manufacturing yields can often result in manufacturing and shipping delays due to capacity constraints. Therefore, manufacturing problems can result in additional operating expenses and delayed or lost revenues. Microsemi may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, upgrading existing facilities, relocating processes to different facilities, or changing its process technologies, any of which could result in a loss of future revenues or an increase in manufacturing costs.
Interruptions, delays or cost increases affecting our materials, parts, equipment or subcontractors may impair our competitive position.
Our manufacturing operations, and the outside manufacturing operations that we use increasingly, in some instances, depend upon obtaining a governmental qualification of the manufacturing process, and in all instances, adequate supplies of materials including wafers, parts and equipment (including silicon, mold compounds and lead frames) on a timely basis from third parties. Some of the outside manufacturing operations we use are based in foreign countries. Our results of operations could be adversely affected if we are unable to obtain adequate supplies of materials, parts and equipment in a timely manner or if the costs of materials, parts or equipment increase significantly. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although we generally use materials, parts and equipment available from multiple suppliers, we have a limited number of suppliers for some materials, parts and equipment. In addition, if signs of improvement in the global economy do not progress as expected and global economic conditions worsen, our suppliers may cease operations or be unable to obtain capital at adequate or historical levels to finance their ongoing businesses and operations, which could impair their ability to continue to supply us. If alternate suppliers for these materials, parts and equipment are not available, our operations could be interrupted, which would have a material adverse effect on our operating results, financial condition and cash flows.
Fixed costs may reduce operating results if our sales fall below expectations.
Our expense levels are based, in part, on our expectations for future sales. Many of our expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could materially and adversely affect our operating results. This challenge could be made even more difficult if lead times between orders and shipments are shortening.
Failure to manage consolidation of operations effectively could adversely affect our margins and earnings.
Our ability to successfully offer and sell our products requires effective planning and management processes. Our consolidations and realignments of operations, and expected future growth, may place a significant strain on our management systems and resources, including our financial and managerial controls, reporting systems, procedures and information technology. In addition, we will need to continue to train and manage our workforce worldwide. Any unmet challenges in that regard could negatively affect our results of operations.
Any failure by us to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.
We rely heavily on our proprietary technologies. Our future success and competitive position depend in part upon our ability to obtain or maintain protection of certain proprietary technologies used in our principal products. We do not have significant patent protection on many aspects of our technology. The protection of some of our technology as

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"trade secrets" will not necessarily protect us from all uses by other persons of our technology, or their use of technology that is similar or superior to that which is embodied in our trade secrets. In addition, others may be able to independently duplicate or exceed our technology in whole or in part. In the instances in which we hold patents or patent licenses, such as with respect to some circuit components for notebook computers and LCD TVs, any patents held by us may be challenged, invalidated or circumvented, or the rights granted under any patents may not provide us with competitive advantages. Patents often provide only narrow protection and require public disclosure of information that may otherwise be subject to trade secret protection. In addition, patents eventually expire and are not renewable.
Obtaining or protecting our proprietary rights may require us to defend claims of intellectual property infringement by our competitors. We could also become subject to lawsuits in which it is alleged we or companies we have acquired have infringed or are infringing upon the intellectual property rights of others with or without our prior awareness of the existence of those third-party rights, if any. Litigation in connection with our intellectual property, whether instituted by us or others, could be very costly and distract management and other resources from our business. We are currently involved in certain patent litigation to protect our patents and patent rights, which could cause legal costs to increase above normal levels over the next several years. It is not possible to estimate the exact amounts of these costs, but it is possible these costs could have a negative effect on our future results.
Moreover, if any infringement, real or imagined, happens to exist, arise or is claimed in the future, we may be exposed to substantial liability for damages and may need to obtain licenses from the patent owners, discontinue or change our processes or products or expend significant resources to develop or acquire non-infringing technologies. We may not be successful in such efforts, or such licenses may not be available under reasonable terms. Any failure by us to develop or acquire non-infringing technologies or to obtain licenses on acceptable terms could have a material adverse effect on our operating results, financial condition and cash flows.
Our products may be found to be defective or hazardous and we may not have sufficient liability insurance.
There is at any time a risk that our products may be found to be defective or to contain, without the customer's knowledge, certain prohibited hazardous chemicals after we have already shipped the products in volume, perhaps requiring a product replacement or recall. We may be subject to product returns that could impose substantial costs and have a material and adverse effect on our business, financial condition and results of operations. Our aerospace, defense, and industrial businesses in particular expose us to potential liability risks that are inherent in the manufacturing and marketing of high-reliability electronic components for critical applications. Production of many of these products is sensitive to minute impurities, which can be introduced inadvertently in manufacturing. Any production mistake can result in large and unanticipated product returns, product liability and warranty liability. Environmental regulations have imposed on every major participant in the electronics industry a new burden of determining and tracking the presence and quantity of certain chemicals in the content of supplies we buy and add to our products for sale and to inform our customers about each of our finished goods' relevant chemical contents. The management and execution of this process is very challenging, and mistakes in this information gathering process could have a material adverse effect on our business.
We may be subject to product liability claims with respect to our products. Our product liability insurance coverage may be insufficient to pay all such claims. In addition, product liability insurance may become too costly for us to maintain or may become completely unavailable to us in the future. We may not have sufficient resources to satisfy any product liability claims not covered by insurance, which would materially and adversely affect our financial position.
Environmental liabilities could adversely impact our consolidated financial position.
Federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in our semiconductor manufacturing processes or in our finished goods. Under recent environmental regulations, we are responsible for determining whether certain toxic metals or certain other toxic chemicals are present in any given component we purchase and in each given product we sell. These environmental regulations have required us to expend a portion of our resources and capital on relevant compliance programs. In addition, under other laws and regulations, we could be held financially responsible for remedial measures if our current or former properties are contaminated or if we send waste to a landfill or recycling facility that becomes contaminated, even if we did not cause the contamination. Also, we may be subject to additional common law claims if we release substances that damage or harm third parties. Further, future changes in environmental laws or regulations may require additional investments in capital equipment or the implementation of additional compliance programs in the future. Any

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failure to comply with existing or future environmental laws or regulations could subject us to significant liabilities and could have a material adverse effect on our operating results, cash flows and financial condition.
In the conduct of our manufacturing operations, we have handled and do handle materials that are considered hazardous, toxic or volatile under federal, state and local laws. The risk of accidental release of such materials cannot be completely eliminated. In addition, we operate or own facilities located on or near real property that was formerly owned and operated by others. These properties were used in ways that involved hazardous materials. Contaminants may migrate from, within or through any such property, which may give rise to claims against us. Third parties who are responsible for contamination may not have funds, or may not make funds available when needed, to pay remediation costs imposed upon us jointly with them under environmental laws and regulations.
Litigation could adversely impact our consolidated financial position.
We are and have been involved in various litigation matters, including from time to time, litigation relating to employment matters, commercial transactions, intellectual property matters, contracts, environmental matters and matters related to compliance with governmental regulations. Litigation is inherently uncertain and unpredictable. The potential risks and uncertainties include, but are not limited to, such factors as the costs and expenses of litigation and the time and attention required of management to attend to litigation. An unfavorable resolution of any particular legal claim or proceeding, and/or the costs and expenses incurred in connection with a legal claim or proceeding, could have a material adverse effect on our consolidated financial position or results of operations.
Our future success depends, in part, upon our ability to continue to attract and retain the services of our executive officers or other key management or technical personnel.
We could potentially lose the services of any of our senior management personnel at any time due to a variety of factors that could include, without limitation, death, incapacity, military service, personal issues, retirement, resignation or competing employers. Our ability to execute current plans could be adversely affected by such a loss. We may fail to attract and retain qualified technical, sales, marketing and managerial personnel required to continue to operate our business successfully. Personnel with the expertise necessary for our business are scarce and competition for personnel with proper skills is intense. Also, attrition in personnel can result from, among other things, changes related to acquisitions, retirement and disability. We may not be able to retain existing key technical, sales, marketing and managerial employees or be successful in attracting, developing or retaining other highly-qualified technical, sales, marketing and managerial personnel, particularly at such times in the future as we may need to fill a key position. If we are unable to continue to develop and retain existing executive officers or other key employees or are unsuccessful in attracting new highly-qualified employees, our business, financial condition and results of operations could be materially and adversely affected.
The volatility of our stock price could affect the value of an investment in our stock and our future financial position.
The market price of our stock has fluctuated widely. Between September 28, 2014 and September 27, 2015, the market sale price of our common stock ranged between a low of $20.61 and a high of $37.41. The historical market prices of our common stock may not be indicative of future market prices. We may not be able to sustain or increase the value of our common stock. The trading price of our common stock may be influenced by factors beyond our control, such as the recent unprecedented volatility of the financial markets and the current uncertainty surrounding domestic and foreign economies. Declines in the market price of our stock could adversely affect our ability to retain personnel with stock incentives, to acquire businesses or assets in exchange for stock and/or to conduct future financing activities with or involving our common stock.
At times, our working capital levels have risen, which adversely affects cash flow.
At times, our working capital levels have risen and the increase has adversely affected cash flow. A factor contributing to the increase in our working capital has related to acquisitions with increases in accounts receivable and inventory generally exceeding increases in accounts payable and accrued liabilities. Another factor resulting in an increase in working capital has been a buildup of inventory prior to the consolidation of our manufacturing operations. We built inventory cushions during the transition of manufacturing between facilities in order to maintain an uninterrupted supply of product. Obsolescence of any inventory has recently and could in the future result in adverse effects on our future results of operations and future revenue. We periodically evaluate the profitability of our various offerings and in 2014, our evaluation led us to selectively exit product offerings we believe will continue to lag our overall profitability goals.

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This resulted in inventory charges of $7.9 million. We believe 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.
There may be some potential effects of system outages or data security breaches, which could adversely affect our operations, financial results or reputation.
We face risks from electrical or telecommunications outages, computer hacking or other general system failure. We rely heavily on our internal information and communications systems and on systems or support services from third parties to manage our operations efficiently and effectively. Any of these are subject to failure. System-wide or local failures that affect our information processing could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, a system failure or data security breach could also result in the unintentional disclosure of confidential information about us, our customers or our employees, which could result in our incurring costs for remedial or preventative actions, damage our reputation with customers and reduce demand for our products and services. Further, insurance coverage does not generally protect from normal wear and tear, which can affect system performance. Any applicable insurance coverage for an occurrence could prove to be inadequate. Coverage may be or become unavailable or inapplicable to any risks then prevalent. We are upgrading and integrating, and have plans to upgrade and integrate further, our enterprise information systems, and these efforts may cause additional strains on personnel and system resources or may result in potential system outages.
Our accounting policies and estimates have a material effect on the financial results we report.
Critical accounting policies and estimates have a material effect on our calculations and estimations of amounts in our financial statements. Our operating results and balance sheets may be adversely affected either to the extent that actual results prove to be materially lower than previous accounting estimates or to the extent that accounting estimates are revised adversely. We base our critical accounting policies, including our policies regarding revenue recognition, reserves for returns, rebates, price protections, and bad debt and inventory valuation, on various estimates and subjective judgments we may make from time to time. The judgments made can significantly affect net income and our balance sheets. We are required to make significant judgments concerning inventory, and whether it becomes obsolete or excess, and concerning impairments of long-lived assets and of goodwill. Our judgments, estimates and assumptions are subject to change at any time. In addition, our accounting policies may change at any time as a result of changes in generally accepted accounting principles as they apply to us or changes in other circumstances affecting us. Changes in accounting policy have affected and could further affect, in each case materially and adversely, our results of operations or financial position.
If, in the future, we conclude our internal control over financial reporting is not effective, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the companies' internal control over financial reporting in their annual reports on Form 10-K, including an assessment by management of the effectiveness of the filing company's internal control over financial reporting. In addition, the independent registered public accounting firm auditing a public company's financial statements must attest to the effectiveness of the company's internal control over financial reporting. There is a risk that in the future we may identify internal control deficiencies that suggest that our controls are no longer effective. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations.
Our investments in securities subject us to principal, liquidity and counterparty risks that could adversely affect our financial results.
We invest cash balances primarily in money market funds. At times, we have also entered into interest rate swap and foreign currency forward contracts. While all of our investments to date are highly rated and we believe our counterparties to be highly rated, current credit market disruptions may adversely affect the value and liquidity of these investments and may affect the ability of our counterparties to fulfill their contractual obligations.

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We may have increasing difficulty attracting and retaining qualified outside Board members.
The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and shareholder claims, as well as governmental and creditor claims that may be made against them in connection with their positions with publicly-held companies. Outside directors are becoming increasingly concerned with the availability of directors' and officers' liability insurance to pay on a timely basis the costs incurred in defending shareholder claims. Directors' and officers' liability insurance is expensive and difficult to obtain. The SEC and the NASDAQ Stock Market have also imposed higher independence standards and certain special requirements on directors of public companies. Accordingly, it may become increasingly difficult to attract and retain qualified outside directors to serve on our Board.
Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover of Microsemi that might otherwise result in our stockholders receiving a premium over the market price for their shares.
Provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult an acquisition of Microsemi by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors.
These provisions include:
Section 203 of the Delaware General Corporation Law, which prohibits a merger with a 15%-or-greater stockholder, such as a party that has completed a successful tender offer, without board approval until three years after that party became a 15%-or-greater stockholder; and
The authorization in the certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover or in a way that may dilute an investment in our common stock.
Certain provisions of our charter documents, including provisions eliminating the ability of stockholders to call special meetings and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Microsemi. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors.
ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.
PROPERTIES

We are headquartered in Aliso Viejo, California. We conduct engineering, research and development, sales and administration activities at our principal owned and leased facilities. We also conduct manufacturing at the locations denoted with an asterisk. A list of locations of these facilities is as follows:
Arizona
Indiana
Ottawa, Canada
Phoenix*
West Lafayette
 
 
 
Macau SAR, China
California
Massachusetts
 
Aliso Viejo
Beverly*
Shanghai, China*
Camarillo*
Lawrence*
 
Cupertino
Lowell*
Shenzhen, China
Garden Grove*
 
 
San Diego
Oregon
Herlev, Denmark
San Jose*
Bend*
 
Santa Clara*
 
Bruges, France*
Santa Rosa*
Pennsylvania
 
 
Reading
Hyderabad, India
Colorado
Allentown
 
Boulder*

Ennis, Ireland*
 
Texas
 
Georgia
Austin
Hod Hasharon, Israel
Atlanta
Dallas
 
 
 
Manila, Philippines*
 
 
 
 
 
Cabuyao, Philippines*
 
 
 
 
 
Caldicot, United Kingdom*
We also lease sales offices throughout the world. We believe our existing facilities are well maintained and in good operating condition and they are adequate for our foreseeable business needs.
ITEM 3.
LEGAL PROCEEDINGS

We are involved in pending litigation, administrative and similar matters arising out of the normal conduct of our business, including litigation relating to acquisitions, employment matters, intellectual property matters, commercial transactions, contracts, environmental matters and matters related to compliance with governmental regulations. The ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore, not predictable with assurance. In the opinion of management, the final outcome of these matters, if they are adverse, will not have a material adverse effect on our financial position, results of operations or cash flows. However, there can be no assurance with respect to such result, and monetary liability, financial impact or other sanctions imposed on us from these matters could differ materially from those projected.
On February 23, 2015, the Ironworkers Local No. 25 Pension Fund filed a shareholder derivative class action lawsuit in Delaware Chancery Court against the Company’s current and former directors, including James J. Peterson, Dennis R. Leibel, Thomas R. Anderson, William E. Bendush, Paul F. Folino, William L. Healey, Matthew E. Massengill and James V. Mazzo, and Royal Bank of Canada ("RBC"). The lawsuit challenged a provision in the Company’s credit agreement, as amended prior to that date, that allegedly triggered an event of default if a majority of the board of directors was replaced through various means over a specified period of time. The plaintiff alleged that the directors

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breached their fiduciary duties by permitting the Company to agree to the challenged change of control term on the theory that the term could have had the effect of entrenching incumbent board members. The lawsuit also alleged that RBC aided and abetted the purported breaches of fiduciary duties by the directors. The lawsuit sought an order invalidating the challenged change of control term and an award of attorneys’ fees and costs to the plaintiff's lawyers. On March 31, 2015, before any substantive proceedings in the lawsuit, the Company amended the credit agreement to remove the challenged change of control term, and disclosed the amendment in a Form 8-K filed with the Securities and Exchange Commission on April 1, 2015. On June 18, 2015, the Chancery Court entered an order of dismissal, as stipulated by the parties, providing that the lawsuit be dismissed with prejudice as to the plaintiff, and without prejudice to other putative class members, following the satisfaction of certain specified events including the payment of an agreed-upon amount of attorneys’ fees and costs to the plaintiff’s counsel and the filing of the Company’s 10-Q for the quarter ended June 28, 2015. All of the conditions of dismissal were satisfied as of July 30, 2015. The final resolution of this matter did not have a material impact on our financial position or results of operations.
ITEM 4.
MINE SAFETY DISCLOSURES

Inapplicable

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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)
Market Information 
Our Common Stock is traded on the NASDAQ Global Select Market under the symbol MSCC. The following table sets forth the high and low sales prices at which our Common Stock traded as reported on the NASDAQ Global Select Market. 
Fiscal Year ended September 27, 2015
High
 
Low
1st Quarter
$
29.26

 
$
20.61

2nd Quarter
$
37.41

 
$
25.36

3rd Quarter
$
37.18

 
$
32.05

4th Quarter
$
36.53

 
$
28.24

 
 
 
 
Fiscal Year ended September 28, 2014
High
 
Low
1st Quarter
$
26.71

 
$
20.22

2nd Quarter
$
26.65

 
$
22.16

3rd Quarter
$
27.91

 
$
22.21

4th Quarter
$
27.58

 
$
23.55

 
Issuer Purchases of Equity Securities
The following table summarizes the activity related to stock repurchases for the quarter ended September 27, 2015 (amounts in millions, except per share amounts):
 
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
June 29, 2015 to July 26, 2015
 
0.4

 
$
32.95

 
0.4

 
$
138.0

July 27, 2015 to August 23, 2015
 
0.4

 
32.77

 
0.4

 
125.0

August 24, 2015 to September 27, 2015
 

 

 

 
125.0

 
 
0.8

 
$
32.86

 
0.8

 
$
125.0

On September 9, 2014, Microsemi Corporation's Board of Directors authorized the repurchase of up to $100.0 million of the Company's common stock before September 30, 2016. On July 21, 2015, Microsemi Corporation's Board of Directors authorized a new stock repurchase program for the repurchase of up to an additional $100.0 million of the Company's common stock before July 31, 2017. Repurchases under either authorization may be made in the open market or through privately negotiated transactions and may also be made under a Rule 10b5-1 plan.  The number of shares to repurchase and the timing of such repurchases will be based on several factors, including the price of the Company's common stock, potential alternate and general market and business conditions.
During the twelve months ended September 27, 2015, under September 9, 2014 authorization, the Company repurchased 2.7 million shares for $75.0 million at an average price of $28.03 under the program. Repurchased shares were retired and returned to authorized shares. Under the existing board authorizations, $125.0 million of common stock may still be repurchased.

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Possible Volatility of Stock Prices 
The market prices of securities issued by technology companies, including ours, have been and will be volatile. The securities of many technology companies have experienced extreme price and volume fluctuations, which have often not necessarily been related to their respective operating performances. Quarter to quarter variations in operating results, changes in earnings estimates by analysts, announcements of technological innovations or new products, announcements of major contract awards, events involving other companies in or out of the industry, economic conditions, events involving war or terrorism, and other events or factors may have a significant impact (positive or negative) on the market price of our Common Stock. 
(b)
Approximate Number of Common Equity Security Holders 
Title of Class
 
Approximate Number of Record Holders (as of November 5, 2015)
Common Stock, $0.20 Par Value
 
653
 
The number of stockholders of record treats all of the beneficial holders of shares held in one "nominee" or "street name" as a unit. 
(c)
Dividends
We have not paid cash dividends in the last five years and have no current plans to do so. Our credit facility contains covenants that may limit the amount of cash dividends we may pay.
(d) 
Performance Graph
The following graph compares the cumulative total return on the Company’s common stock for the five-year period ended September 27, 2015 to the total returns of 1) the "NASDAQ Composite Total Return" and 2) the "NASDAQ US Benchmark Electronics Components & Equipment". This comparison assumes in each case that $100 was invested at the close of market on October 1, 2010, the last trading day immediately preceding the Company's fifth preceding fiscal year, and that any dividends were reinvested. The Company’s fiscal year ends on the Sunday generally closest to September 30 each year. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Microsemi Corporation, NASDAQ Composite Total Return
And the NASDAQ US Benchmark Electronics Components & Equipment
* Indexes calculated on month-end basis.
The stock performance graph shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities under that section and shall not be deemed to be incorporated by reference into any filing of Microsemi under the Securities Act of 1933, as amended, or the Exchange Act.

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ITEM 6.
SELECTED FINANCIAL DATA

 
For the five fiscal years in the period ended on September 27, 2015
 
(Amounts in millions, except per share data)
 
2015
 
2014
 
2013
 
2012
 
2011
Selected Consolidated Income Statement Data:
 
 
 
 
 
 
Net sales
$
1,245.6

 
$
1,138.3

 
$
975.9

 
$
1,012.5

 
$
835.9

Gross profit
$
684.3

 
$
611.5

 
$
557.2

 
$
552.6

 
$
441.2

Operating income
$
122.6

 
$
54.2

 
$
89.4

 
$
58.3

 
$
55.0

Net income (loss)
$
84.6

 
$
23.1

 
$
43.7

 
$
(29.7
)
 
$
55.7

Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.90

 
$
0.25

 
$
0.49

 
$
(0.35
)
 
$
0.66

Diluted
$
0.88

 
$
0.24

 
$
0.48

 
$
(0.35
)
 
$
0.65

Weighted-average shares outstanding
 
 
 
 
 
 
 
 
 
Basic
94.2

 
92.9

 
89.5

 
85.8

 
83.9

Diluted
95.9

 
94.5

 
91.3

 
85.8

 
85.7

Selected Consolidated Balance Sheet Data:
 
 
 
 
 
 
Working capital
$
535.0

 
$
457.4

 
$
489.4

 
$
404.9

 
$
424.2

Total assets
$
2,450.1

 
$
2,056.4

 
$
1,912.7

 
$
1,934.6

 
$
1,482.5

Long-term liabilities
$
1,014.3

 
$
779.6

 
$
747.4

 
$
850.2

 
$
436.7

Stockholders’ equity
$
1,207.2

 
$
1,115.6

 
$
1,032.2

 
$
928.0

 
$
892.1

 
The selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K, which discusses the effect of business combinations.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K 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 I, Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K. 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 its entirety.
Unless the context otherwise requires, the "Company," "Microsemi," "we," "our," "ours" and "us" refer to Microsemi Corporation and its consolidated subsidiaries.
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. We offer one of the industry's most comprehensive portfolios of semiconductor technology. Our products include high-performance and radiation-hardened analog mixed-signal integrated circuits ("ICs"); field programmable gate arrays ("FPGAs"); system on chip solutions ("SoCs") and application-specific ICs; power management products; timing and synchronization devices and precise time solutions, setting the world's standard for time; voice processing devices; radio frequency ("RF") solutions; discrete components; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ICs and midspans; as well as custom design capabilities and services.
The principal end markets we serve include Aerospace, Communications, Defense & Security, and Industrial. Today, Microsemi products are found in applications such as: communications infrastructure systems, both wireless and wired

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LAN systems, implantable pacemakers and defibrillators, missile systems, military and commercial satellites and aircrafts, oil field equipment and airport security systems.
Mission and Vision Statements
Mission: Strengthen and leverage the industry's most comprehensive product technology portfolio, differentiated by power, security, reliability and performance, to expand our leadership position in high-value, high-barrier-to-entry markets. Develop innovative leading-edge solutions that provide our customers with an unparalleled competitive edge, and deliver best-in-class technical service and support.
Vision: Leading-edge semiconductor solutions, solving the most difficult problems where performance matters, reliability is vital and security is non-negotiable.
Our growth strategy is dependent on our ability to successfully develop new technologies and products, and is complemented by our ability to implement our selective acquisitions strategy. New technologies or products we may develop may not lead to an incremental increase in revenues, and there is a risk 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 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.
Summary of Financial Results
Net sales, gross profit and gross margin were as follows (amounts in millions, except percentages):
 
 
2015
 
2014
 
2015 vs 2014 $
 
2015 vs 2014 %
 
2013
 
2014 vs 2013 $
 
 2014 vs 2013%
Net sales
 
$
1,245.6

 
$
1,138.3

 
$
107.3

 
9.4
%
 
$
975.9

 
$
162.4

 
16.6
%
Gross profit
 
684.3

 
611.5

 
$
72.8

 
11.9
%
 
$
557.2

 
$
54.3

 
9.7
%
Gross margin
 
54.9
%
 
53.7
%
 
1.2
%
 
 
 
57.1
%
 
(3.4
)%
 
 
As discussed further in "Results of Operations", we recorded net sales increases in all of our end markets in 2015 as compared to 2014. On November 5, 2015, we announced we expect our consolidated net sales for the first quarter of 2016 to be between $325 million and $329 million. We recorded an increase in net sales between 2014 and 2013, with sales in each of our end markets benefiting from our acquisition of Symmetricom, Inc. ("Symmetricom"), which occurred in the first quarter of 2014. For 2014, we estimated between 10% to 15% of net sales were derived from products acquired in the Symmetricom acquisition. Net sales related to products from the acquisition of Vitesse Semiconductor Corporation ("Vitesse"), which occurred in the third quarter of 2015, contributed approximately 3% of net sales for 2015.
Gross profit increased $72.8 million to $684.3 million (54.9% of net sales) for 2015 from $611.5 million (53.7% of net sales) for 2014 and increased $54.3 million between 2014 and 2013 from $557.2 million (57.1% of net sales) for 2013. In 2014, we recorded $7.9 million in inventory write-offs from restructuring activities, as discussed further in "Results of Operations". We also recorded expense from manufacturing profit in acquired inventory totaling $22.0 million in 2015, primarily from our acquisition of Vitesse and $16.7 million in 2014 from our acquisition of Symmetricom. Absent these charges, gross margins were 56.7% in 2015, 55.9% in 2014 and 57.1% in 2013. Between 2013 and 2014, overall gross margins were impacted by lower margin products related to the acquisition of Symmetricom, Inc. and offset by cost optimization programs including supplier price negotiations, the transfer of manufacturing to lower cost and more efficient facilities and reductions in personnel. Continuation of these cost optimization programs yielded favorable margin improvements between 2014 and 2015.
As discussed further in "Results of Operations", during 2015, we recorded net provisions for employee severance of $10.0 million, net provisions for contract termination costs of $1.4 million and provisions for other associated costs for restructuring of $3.9 million.
For 2015 and 2014, we recorded an income tax provision of $12.3 million and $0.8 million, respectively. The difference in our effective tax rates from the U.S. statutory rate of 35% primarily reflects the impact of the mix of domestic and international pre-tax income, valuation allowance and credits. Our tax provision for the twelve months ended September 27, 2015 was the combined calculated tax expenses/benefits for various jurisdictions. During 2015 and

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2014 there was an overall increase in the valuation allowance of $31.6 million and $8.9 million, respectively. During 2015 this increase is primarily related to continued losses in various jurisdictions and an increase due to deferred tax assets of Vitesse that were not more likely that not realizable as of the acquisition date. During 2014 this increase is primarily related to continued losses in various jurisdictions, which is partially offset by a reduction in Microsemi valuation allowance as a result of net deferred tax liabilities of companies acquired during 2014.
Uncertain macroeconomic conditions worldwide subject us to certain risks (see Part I, 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.").
Undue reliance should not be placed on our backlog or book-to-bill ratios or changes to these amounts. We determine bookings substantially based on orders that are scheduled for delivery within 12 months. However, lead times for the release of purchase orders depend, in part, upon the scheduling practices of individual customers, and delivery times of new or non-standard products can be affected by scheduling factors and other manufacturing considerations. The rate of booking new orders can vary significantly from month to month. Customers frequently change their delivery schedules or cancel orders. (see Part I, Item 1A, Risk Factors, "We may not make the sales that are suggested by our order rates, backlog or book-to-bill ratio, and our book-to-bill ratio may be affected by product mix.")
Approximately 27% of total net sales in 2015 were in the Defense & Security end market and while we service defense markets outside of the United States, sales in this end market correlate to direct sales to U.S. government agencies, customers whose principal sales are to the U.S. government agencies or to subcontractors whose material sales are to the U.S. government agencies. Future sales are subject to the uncertainties of governmental appropriations and national defense policies and priorities, including lingering impacts of sequestration under the Budget Control Act of 2011, constraints of the budgetary process and timing and potential changes in these policies and priorities. Additionally, the long-term outlook for the fiscal position of the U.S. federal government is also uncertain, as illustrated by the 2013 budget negotiations and the shutdown of non-essential U.S. federal government services in October 2013 (see Part I, Item 1A, Risk Factors, "Reliance on government contracts for a portion of our sales could have a material adverse effect on results of operations.")
Markets
Our products include discretes and ICs, modules, and subsystem solutions that enhance customer designs by improving performance, security, reliability and power consumption. The principal end markets we serve include:
Aerospace – Microsemi’s high-performance solutions are used by the majority of commercial airliners manufactured today, including the latest advanced models such as the Boeing 787 Dreamliner, Airbus A350 and Airbus A380. Microsemi's high-reliability products are used in most satellites and in a wide range of commercial and military avionics systems. Microsemi’s product offering for aerospace include radiation hardened and radiation tolerant solutions for the satellite market to which it supplies all of the top manufacturers.
Communications – Microsemi is a key supplier to top-tier companies focused on wired and wireless communications products. These products are deployed in applications ranging from the central office to the enterprise and the home, and to a broad array of wired and wireless networked devices. Microsemi boasts the largest and most complete timing product offering, as well as the industry's only end to end timing product portfolio. Microsemi also pioneered the concept and development of PoE technology and offers ICs and system solutions (midspans) based on this increasingly popular power transmission solution.
Defense & Security – Microsemi’s solutions are used by all Tier 1 prime contractors in a variety of homeland and offshore security applications. Microsemi's defense and security solutions are also used in products such as unmanned aerial vehicles, smart munitions, radar applications, next-generation body scanners, and radio and guidance systems.
Industrial – Microsemi delivers secure and highly reliable solutions for applications including industrial controls, machine-to-machine (M2M) communications, energy exploration and drilling, semiconductor capital equipment and alternative energy platforms. Microsemi is also a leading supplier of ultra-low power wireless solutions

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used in medical devices including implantable defibrillators and pacemakers, MRI machines, and portable medical equipment.
Recent Product Introductions
Microsemi marketed a number of recently introduced products, including:
An enhanced Quantum™ Rubidium Miniature Atomic Clock (MAC) SA.3X family, which is one of the industry's smallest, lightest and highest-performing MACs and is based on Microsemi's exclusive coherent population trapping (CPT) technology;
RTG4™ high-speed signal processing radiation-tolerant FPGA family featuring reprogrammable flash technology offering complete immunity to radiation-induced configuration upsets in the harshest radiation environments, without requiring configuration scrubbing (unlike SRAM FPGA technology);
Five new RF power transistors within its family of RF power transistors based on gallium nitride (GaN) high electron mobility transistor (HEMT) on silicon carbide (SiC) technology that deliver outstanding performance in terms of size, weight, power and efficiency in a wide range of avionics, radar, and industrial, scientific and medical (ISM) applications;
Two single-chip silicon monolithic series-shunt elements designed with minimal parasitic inductance that are ideal replacements for the conventional shunt mounted chip and series mounted beam lead PIN diode normally used in the manufacture of broadband microwave switches;
A new series of broadband coaxial limiters providing unprecedented CW power which are ideal for receiver protection in ECM, EW, radar and test equipment applications;
A high power broadband GaN amplifier that delivers 100 W of saturated output power over the 6 to 18 GHz frequency range offered in a compact 10" x 8.25" x 6" rack mount configuration designed for land mobile electronic warfare applications;
An enhanced TimeProvider® 2700 Precision Time Protocol (PTP) grandmaster (GM) clock with double the PTP client capacity that provides synchronization to LTE Networks and provides simultaneous hardware time stamping support of up to 128 PTP clients, resulting in a significant cost benefit using a single GM clock;
A new member of its SparX-IV enterprise Ethernet switch product family, VSC7449, offering significantly higher switching capacity and competitive port configurations which is designed for managed small and medium-sized enterprises (SMEs) and enterprise switch platforms, including Wi-Fi access and aggregation, as well as industrial Internet of Things (IoT) applications;
 A new Timberwolf™ audio processor designed specifically for camera system-on-chips (SoCs) designed with AcuEdge™ Acoustic Technology featuring a set of complex, fully integrated algorithms that allow users to extract intelligible information from the audio environment in which they are communicating; and
Automotive-grade FPGAs and SoC FPGAs that have achieved AEC-Q100 grade 2 qualification, an industry standard specification that outlines the criterion for electronics components to ensure that end systems meet automotive reliability levels, which are the only devices in the industry to offer advanced security and high reliability features critical for automotive applications.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The 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 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 we believe could have the most significant effect on our reported results and require subjective or complex judgments is contained in Note 1 to our consolidated financial statements.

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Revenue Recognition, Sales Returns and Allowances
We primarily recognize revenue from customers, including distributors, when title and risk of loss have passed to the customer provided that: 1) evidence of an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. For substantially all sales, revenue is recognized, net of estimated returns and discounts, at the time the product is shipped. 
We enter into distribution agreements that permit rights to limited stock rotations, returns, price protection, and volume purchase and other discounts. We provide an estimated allowance for these rights and record a corresponding reduction in revenue. Our estimated allowance is based on several factors including past history and notification from customers of pending activity. Actual activity under such rights have been within management’s expectations.
We also derive a portion of our revenue from fixed-price contracts. Revenue for these contracts is recorded under a percentage of completion method, which is based on the ratio of total costs incurred to date to estimated total costs at completion. Gross profit expected to be realized on fixed-price contracts is based on periodic estimates of total revenues and costs for each contract. Losses on contracts are accrued when estimated total costs are expected to exceed total revenues. Occasionally, we will enter into contracts on a cost plus fee basis. We recognize revenue based on reimbursements for actual expenses plus the contractually agreed upon fee with the customer. 
Restructuring Charges
We recognize a liability for restructuring costs when the liability is incurred. The restructuring accruals are based upon management estimates at the time they are recorded and can change depending upon changes in facts and circumstances subsequent to the date the original liability is recorded. The main components of our restructuring charges are workforce reductions and elimination of excess facilities. Workforce-related charges are accrued when it is determined a liability exists, which is generally when individuals have been notified of their expected termination dates and expected severance payments or when formal severance plans exist, when the severance payments are probable and reasonably estimable. The elimination of excess facilities results in charges for lease termination fees, future contractual commitments to pay lease charges net of estimated sublease income, facility remediation costs and moving costs to remove property and equipment from the facilities. We recognize charges for elimination of excess facilities when we have vacated the premises or ceased use a functionally separate portion of the facility.
Stock-Based Compensation
Compensation expense for stock options and stock appreciation rights was calculated based on the service period of the grant and the grant date or assumption date fair value using the Black-Scholes pricing model. All stock appreciation rights we have granted or assumed are stock-settled. Stock options and stock appreciation rights are granted at exercise prices equal to the closing price of our common stock on the date of grant. Assumed stock options and stock appreciation rights are granted at exercise prices determined in accordance with the acquisition agreement. Expected life and forfeiture rates were estimated based primarily on historical data that were stratified between members of the Board of Directors, executive employees and all other recipients. Expected volatility was estimated based on historical volatility using equally weighted daily price observations over a period approximately equal to the expected life of each option. The risk free interest rate is based on the implied yield currently available on U.S. Treasury securities with an equivalent remaining term. No dividends are expected to be paid.
Compensation expense for restricted shares was calculated based on the service period of the grant and the closing price of our common stock on the date of grant. Restricted shares are subject to forfeiture if a participant does not meet length of service requirements. Restricted stock awards granted to employees typically vest over a three year period and awards granted to non-employee directors vest in accordance with our director compensation policy.
Compensation expense for performance stock units was calculated based upon expected achievement of the performance metrics specified in the grant and the closing price of our common stock on the date of grant, or when a grant contains a market condition, the grant date fair value using a Monte Carlo simulation. The Monte Carlo simulation incorporates estimates of the potential outcomes of the market condition on the grant date fair value of each award.
Accounting For Income Taxes
We account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered

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or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some or all of the deferred tax assets will not be realized. We recognize uncertain tax positions when they meet a more-likely-than-not threshold. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. 
We file U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Fiscal years 2007 to 2014 generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2011 to 2014 tax years generally remain subject to examination by tax authorities. We establish liabilities for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, international tax issues and certain tax credits. We are currently undergoing an Internal Revenue Service examination as well as certain state examinations. There have been no significant proposed adjustments to date. As of September 27, 2015, the IRS has raised questions primarily related to transfer pricing. Management believes the Company's position is appropriate and an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company would be required to adjust its provision for income tax in the period such resolution occurs. While the Company believes its reported results are accurate, any significant adjustments could have a material adverse effect on the Company's results of operations, cash flows and financial position if not resolved within expectations.
Segment Information
We use the management approach for segment disclosure, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. We manage our business on the basis of one reportable segment, as a manufacturer of semiconductors in different geographic areas, including the United States, Europe and Asia.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The accounts receivable amount shown in the balance sheet are trade accounts receivable balances at the respective dates, net of allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based in part on our historical write-off experience and specific review of account balances due. Past due balances are reviewed individually for collectability. All other balances are reviewed on a pooled basis by the age of the receivable. Account balances are charged off against the allowance when we determine it is probable the receivable will not be recovered. We review our allowance for doubtful accounts quarterly. We do not have any off-balance-sheet credit exposure related to our customers. To date, our allowance for doubtful accounts has generally been within management’s estimates. 
Inventories
Inventories are stated at the lower of cost, as determined using the first-in, first-out method, or market. Costs include materials, labor and manufacturing overhead. We evaluate the carrying value of our inventories taking into account such factors as historical and anticipated future sales compared with quantities on hand and the price we expect to obtain for our products in their respective markets. We also evaluate the composition of our inventories to identify any slow-moving, excess or obsolete products. Additionally, inventory write-downs are made based upon such judgments for any inventories that are identified as having a net realizable value less than their cost, which is further reduced by related selling expenses. The net realizable value of our inventories for ongoing operations has generally been within management’s estimates. We have recorded inventory write-downs for discontinued product lines that did not meet gross margin targets, products that are being migrated to newer generations, products that service the large capital spending end markets for which demand has declined, and products related to facility closures. 
Fair Value of Financial Assets and Liabilities
Accounting Standards Codification ("ASC") 825 permits entities to elect the fair value option for certain financial assets and financial liabilities. For financial assets or financial liabilities for which an entity elects the fair value option, ASC 825 requires the entity record the financial asset or financial liability at fair value rather than at historical cost with changes in fair value recorded in the income statement. ASC 825-25 requires upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred.

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Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate their carrying value may not be recoverable from the undiscounted estimated future cash flows expected to result from their use. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the factors we consider include: 
Significant decrease in the market value of an asset.
Significant changes in the extent or manner for which the asset is being used or in its physical condition including manufacturing plant closures.
A significant change, delay or departure in our business strategy related to the asset.
Significant negative changes in the business climate, industry or economic conditions.
Current period operating losses or negative cash flow combined with a history of similar losses or a forecast indicates continuing losses associated with the use of an asset.
If events or circumstances indicate the carrying amount of a long-lived asset or asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying value, an impairment loss equal to the excess of the carrying value of the assets within the asset group over their fair value is recorded. The appropriate asset group is determined based on the lowest level of largely independent cash inflows and outflows for the related assets. Depending on the nature of the primary assets in the asset group, fair value is estimated using one of several approaches including replacement cost, appraised values, market quotes or estimated expected future cash flows using a discount rate commensurate with the risk involved.
Goodwill and Intangible Assets
We account for goodwill on an impairment-only approach and amortize intangible assets with definite useful lives over the benefit period, which approximates straight-line expense over the respective useful lives. We assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset such as goodwill is impaired as the basis for determining whether a quantitative impairment test is required. We assess definite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be fully recoverable. Whenever we determine there has been an impairment of goodwill or other intangible assets with indefinite lives, we will record an impairment charge against earnings. We operate as one reporting unit and an impairment charge would equal the excess of the carrying value of goodwill in our one reporting unit over its then fair value. The identification of intangible assets and determination of the fair value and useful lives are subjective in nature and often involve the use of significant estimates and assumptions. The judgments made in determining the estimated useful lives assigned to each class of assets can significantly affect net income. We completed our most recent qualitative analysis during the fourth quarter of 2015 and noted no significant factors existed during the fiscal year to indicate it was more likely than not the fair value of the reporting unit is less than its carrying amount.
RESULTS OF OPERATIONS
Net sales increased $107.3 million or 9%, to $1.25 billion for 2015 from $1.14 billion for 2014. Net sales related to products from the acquisition of Vitesse contributed approximately 3% of net sales for 2015, primarily in the Communications end market. Net sales increased $162.4 million or 17% between 2014 and 2013, from $975.9 million for 2013, with sales in each of our end markets benefiting from our acquisition of Symmetricom. For 2014, we estimated between 10% to 15% of net sales were derived from products acquired in the Symmetricom acquisition.
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 as follows (amounts in millions): 
 
2015
 
2014
 
2013
Aerospace
$
191.4

 
$
169.6

 
$
187.0

Communications
451.7

 
407.6

 
278.1

Defense & Security
335.8

 
302.7

 
306.3

Industrial
266.7

 
258.4

 
204.5

Total
$
1,245.6

 
$
1,138.3

 
$
975.9

 

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Net sales in the Aerospace end market increased $21.8 million to $191.4 million in 2015 from $169.6 million in 2014 and decreased $17.4 million between 2014 and 2013 from $187.0 million in 2013. We believe we are benefiting from significant content growth on newer aircrafts such as the Boeing 787, Airbus A350 and A380 and our differentiated highly-reliable and secure FPGA technology will contribute to growth in this end market. While we have noted irregular order rates, in 2015, we benefited from increased sales in commercial air, as well as satellite and space applications. We are optimistic about the long-term fundamentals of our Aerospace end market and forecast slight improvements in the satellite and space market in 2016.
Net sales in the Communications end market increased $44.1 million to $451.7 million in 2015 from $407.6 million in 2014 and increased $129.5 million between 2014 and 2013 from $278.1 million in 2013. This end market benefited from increased contributions of broadband gateway applications, voice circuits, as well as the acquisitions of Vitesse in 2015 and Symmetricom in 2014, and to a lesser extent, from the acquisition of Centellax, Inc. in 2014. In the first quarter of 2014, a U.S. government agency terminated a contract for convenience pursuant to the terms of the contract. We recorded net sales of $25.0 million in 2014 and $8.4 million in 2013 related to this contract. During the first half of 2013, PoE, power management, RF and voice circuit products were especially impacted by macroeconomic factors, further impacting 2013 results. While we have noted some softening of contributions from timing and synchronization products as capital expenditures at carriers declined, we expect growth in the capital expenditures of carriers for the upcoming quarter. We expect long-term growth in this end market, driven by continued strength from our timing and synchronization products, and gateway and enterprise communications applications. We believe we have the broadest portfolio of timing products which allows us to better anticipate and serve our customers' needs while improving our market share. While growth in China LTE and capital expenditures at carriers is slower than expected for the most recent fiscal year, we believe our design win activity will enable us to outpace industry growth in this end market.
The Defense & Security end market increased $33.1 million between 2015 and 2014 with net sales of $335.8 million in 2015 and $302.7 million in 2014, primarily reflecting an improving defense market. This end market remained stable between 2014 and 2013. Prior year sales were impacted by the rescheduling of orders and industry weakness surrounding the U.S. federal government shutdown. We note a solidifying defense budget with an improving defense environment, growing foreign military sales and normalization of channel inventories. We believe that procurement plans that emphasize command, control, communications, computers, intelligence, surveillance and reconnaissance equates to growing electronic content.
Net sales in the Industrial end market increased $8.3 million to $266.7 million in 2015 from $258.4 million in 2014 and increased $53.9 million between 2014 and 2013 from $204.5 million in 2013. In the near term, this end market has been impacted by the decline in oil prices which has affected products used in energy exploration applications but has benefited from increased shipments of ultra-low power radios in medical applications, as well as from broad-based strength for our power products in the plasma and semiconductor capital equipment markets. During 2014 and 2013, bookings were steady for medical, semiconductor capital equipment, industrial lasers, MRI and other broad-based industrial applications while bookings for solar applications increased. We continue to forecast a healthy Industrial market based on the strength of our ultra-low power RF products and several emerging market opportunities.
Net sales by geographic area based on a customer's ship-to location are as follows (amounts in millions):
 
2015
 
2014
 
2013
United States
$
610.0

 
$
604.4

 
$
514.6

Europe
189.8

 
163.7

 
142.3

Asia
399.7

 
338.4

 
292.6

Other
46.1

 
31.8

 
26.4

Total
$
1,245.6

 
$
1,138.3

 
$
975.9

 
Gross profit increased $72.8 million between 2015 and 2014, to $684.3 million (54.9% of sales) for 2015 from $611.5 million (53.7% of sales) for 2014 and increased $54.3 million between 2014 and 2013, from $557.2 million (57.1% of sales) for 2013. During 2015 and 2014, we recorded expense from manufacturing profit in acquired inventory of $22.0 million, primarily related to our acquisition of Vitesse and $16.7 million related to our acquisition of Symmetricom, respectively. 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 2014, our evaluation led us to selectively exit product offerings we believe will continue to lag our overall profitability goals. This resulted in an inventory write-off of $7.9 million. We believe for many of these products, market dynamics dictate

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price is the primary differentiator rather than our value-added core competencies of power, reliability, security and performance. Absent these charges, gross margins were 56.7% in 2015, 55.9% in 2014 and 57.1% in 2013. Between 2013 and 2014, overall gross margins were impacted by lower margin products related to the acquisition of Symmetricom, Inc. and offset by cost optimization programs including supplier price negotiations, the transfer of manufacturing to lower cost and more efficient facilities and reductions in personnel. Continuation of these cost optimization programs yielded favorable margin improvements between 2014 and 2015.
Selling, general and administrative expenses increased $8.5 million between 2015 and 2014 to $249.5 million for 2015 from $241.0 million in 2014 and increased $38.5 million between 2014 and 2013 from $202.5 million in 2013. The increase in selling, general and administrative expenses was due to the effects of our acquisition of Vitesse in 2015 and Symmetricom in 2014. We also incurred acquisition-related costs of $6.2 million in 2015 and $2.9 million in 2014.
We continually update our estimates with respect to our performance stock units. Compared to the estimates used in 2012, our updated estimates had the impact of reducing stock-based compensation expense by $4.0 million for 2013. Updated estimates did not have a significant impact to stock-based compensation expense in 2014 or 2015.
Research and development expense increased $8.3 million between 2015 and 2014 to $200.3 million in 2015 from $192.0 million in 2014 and increased $21.4 million between 2014 and 2013 from $170.6 million in 2013. While incremental costs from recent acquisitions contributed to increased research and development expenses, the increases were offset by selectively investing in strategic product roadmaps. 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 process and core architecture development for next generation programmable products, higher power PoE solutions, the continued roadmap development of our industry-leading timing and synchronization products, our silicon germanium (SiGe) RF power amplifier solutions for wireless LAN applications, and the ongoing development of gallium nitride (GaN) and silicon carbide (SiC) power management and RF solutions.
Amortization of intangible assets included in operating expenses for each of the three fiscal years in the period ended September 27, 2015 are as follows (amounts in millions):
 
2015
 
2014
 
2013
Completed technology
$
50.4

 
$
43.9

 
$
39.0

Customer relationships
44.6

 
45.0

 
42.6

Backlog, trade name and other
1.5

 
3.9

 
3.2

 
$
96.5

 
$
92.8

 
$
84.8

The increases in amortization in 2015 and 2014 was primarily due to acquired intangibles related to our acquisitions of Vitesse in 2015 and Symmetricom in 2014, partially offset by intangible assets that reached their amortizable lives.
Restructuring charges amounted to $15.4 million in 2015 compared to $31.5 million in 2014 and $9.9 million in 2013. The variances relate to the timing and announcement of restructuring activities, with the increases over 2013 primarily related to severance and facility shutdown costs and actions following our acquisitions of Vitesse in 2015 and Symmetricom in 2014.
We periodically evaluate our operations and may make further specific determinations to consolidate, close, sell or divest of additional facilities, operations or product lines, which could be announced at any time. We face major technical challenges in regards to transferring component manufacturing between locations. Before a transfer of manufacturing, we must be finished qualifying the new facility appropriately with the U.S. government or certain customers. In addition, to mitigate the potential for manufacturing disruptions following a closure, we typically build inventory to support the transition process. While we generally plan to retain revenues and income of those operations by transferring the manufacturing elsewhere within Microsemi's subsidiaries, our plans may change at any time based on reassessment of the alternatives and consequences. While we hope to benefit overall from increased gross margins and increased capacity utilization rates at remaining operations, the remaining operations will need to bear the corporate administrative and overhead costs, which are charges to income that had been allocated to the discontinued business units. Moreover, delays in effecting our consolidations could result in changes in the timing of realized costs savings and in greater than anticipated costs incurred to achieve our projected longer-range savings.  

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40



The following table reflects the related restructuring activities and the accrued liabilities at the dates below (amounts in millions):
 
 
Employee Severance
 
Contract Termination Costs
 
Other Associated Costs
 
Total
Balance at September 28, 2014
 
$
4.1

 
$
8.2

 
$

 
$
12.3

Assumed from acquisition
 
0.1

 

 

 
0.1

Provisions
 
10.6

 
2.6

 
3.9

 
17.1

Reversal of prior provision
 
(0.6
)
 
(1.1
)
 

 
(1.7
)
Cash expenditures
 
(11.3
)
 
(5.9
)
 
(2.2
)
 
(19.5
)
Other non-cash settlement
 

 
(0.6
)
 
(1.6
)
 
(2.2
)
Balance at September 27, 2015
 
$
2.9

 
$
3.2

 
$
0.1

 
$
6.2

We recorded net provisions for employee severance of $10.0 million for 2015, of which $2.9 million related to actions following our acquisition of Vitesse. Employee severance covered approximately 250 individuals in engineering, manufacturing, administration and sales and is expected to be paid within the next twelve months.
We recorded provisions for contract termination costs of $2.6 million for 2015, primarily for the fair value at the cease-use date of operating lease liabilities for space we have exited. Facilities consisted of manufacturing sites, as well as sales, engineering and administrative space. We recorded a $1.1 million reversal of prior provision related to a facility lease termination that was settled at an amount less than estimated.
We recorded provisions for other associated costs for restructuring of $3.9 million for 2015, which consisted of facility and equipment impairments and facility relocation costs.
Interest expense, net, was $27.3 million in 2015, $27.8 million in 2014 and $30.2 million in 2013. Between 2015 and 2014, the decrease in interest expense was primarily due to a lower average interest rate on our credit facility, which offset an increase in borrowings related to the Vitesse acquisition. The decrease in interest expense between 2014 and 2013 was primarily due to lower term loan balances.
We recorded a provision for income taxes of $12.3 million on pre-tax income of $96.9 million in 2015 compared to a provision for income taxes of $0.8 million on pre-tax income of $23.9 million in 2014, and a provision for income taxes of $12.4 million on pre-tax income of $56.1 million in 2013. For each of these years, the provisions for income taxes were primarily due to the tax provision on profitable entities in foreign jurisdictions, U.S. tax provision relating to amortization of indefinite lived assets for tax purposes, with an offset in 2014 by the release of valuation allowance due to additional deferred tax liabilities acquired through purchase accounting. We had cumulative operating losses for the three years ended in 2015 for our U.S. operations and several foreign operations and accordingly, have provided a full valuation allowance on certain of our U.S. and foreign net deferred tax assets as we have determined it is more likely than not the tax benefits will not be realized in the future.
During 2015 and 2014 we increased the valuation allowance by $31.6 million and $8.9 million, respectively. During 2015 this increase is primarily related to continued losses in various jurisdictions and an increase due to deferred tax assets of Vitesse that were not more likely that not realizable as of the acquisition date. During 2014 this increase is primarily related to continued losses in various jurisdictions, which is partially offset by a reduction in Microsemi valuation allowance as a result of net deferred tax liabilities of companies acquired during 2014.
CAPITAL RESOURCES AND LIQUIDITY
We had $256.4 million and $162.2 million in cash and cash equivalents at September 27, 2015 and September 28, 2014, respectively, and 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 we have the ability to raise cash in the United States through existing and new credit facilities or by settling loans receivable with our foreign subsidiaries. We believe through our cash flows from operations, together with our existing cash and cash equivalents, we will be able to meet our operating and capital requirements for at least the next twelve months.
Our various foreign subsidiaries hold cash and cash equivalents of $113.2 million at September 27, 2015, and as we intend to reinvest certain foreign earnings indefinitely, these balances held outside the United States may not be readily available to meet our domestic cash requirements. We require a substantial amount of cash in the United States for operating requirements, purchases of property and equipment, debt service, and potentially for future acquisitions. If

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we are unable to meet our domestic cash requirements using domestic cash flows from operations, domestic cash and cash equivalents, or by settling loans receivable with our foreign subsidiaries, it may be necessary for us to consider repatriation of earnings we have designated as permanently reinvested. Any repatriation of earnings may require us to record additional income tax expense and remit additional taxes, which could have a material effect on our results of operations, cash flows and financial condition.
Net cash provided by operating activities increased $62.6 million to $269.3 million in 2015 from $206.7 million in 2014. During 2015, 2014 and 2013, net cash provided by operating activities was reduced by restructuring activities resulting in payments of $19.5 million, $25.2 million and $11.3 million, respectively.
A summary of net cash provided by operating activities in 2015, 2014 and 2013 is as follows (amounts in millions): 
 
2015
 
2014
 
2013
Net income
$
84.6

 
$
23.1

 
$
43.7

Depreciation and amortization
132.7

 
125.7

 
113.7

Change in allowance for doubtful accounts
(0.2
)
 
0.1

 
(0.4
)
Amortization of deferred financing cost
1.6

 
1.3

 
3.5

(Gain) loss on disposition or impairment of assets
(1.1
)
 
9.8

 

Deferred income taxes
(8.0
)
 
(21.5
)
 
(9.7
)
Valuation allowance on deferred income taxes
13.3

 
17.6

 
18.8

Charge for stock-based compensation
49.8

 
43.9

 
35.2

Net change in working capital accounts
6.6

 
5.6

 
(37.2
)
Net change in other long term assets and liabilities
(10.0
)
 
0.9

 
(2.6
)
Net cash provided by operating activities
$
269.3

 
$
206.7

 
$
165.0

 
Accounts receivable decreased $4.3 million to $186.9 million at September 27, 2015 from $191.2 million at September 28, 2014. Inventories increased $22.2 million to $227.2 million at September 27, 2015 from $205.0 million at September 28, 2014. Current liabilities increased $40.4 million to $201.6 million at September 27, 2015 from $161.2 million at September 28, 2014. These increases were due primarily to activity related to the Vitesse acquisition in 2015.
Net cash used in investing activities was $403.2 million in 2015 compared to $336.0 million in 2014 and $37.3 million in 2013. Net cash used in investing activities in 2015 consisted of $44.1 million in purchases of property and equipment and net cash consideration of $363.9 million for the acquisition of Vitesse, partially offset by $0.6 million from proceeds from the sales of short term investments and $4.2 million from proceeds from the sale of property. Net cash used in investing activities in 2014 consisted of $39.4 million in purchases of property and equipment and net cash consideration of $337.6 million for the acquisitions of Symmetricom, Centellax, Inc. and Mingoa Ltd., partially offset by $41.0 million from the proceeds from the sales of short term investments. Net cash used in investing activities in 2013 consisted of $37.3 million in purchases of property and equipment.
Net cash provided by (used in) financing activities was $228.1 million in 2015, $35.1 million in 2014 and $(75.6) million in 2013. Net cash provided by financing activities in 2015 consisted of $47.6 million in proceeds from stock awards, borrowings under our Credit Agreement (as defined below) of $425.0 million, offset by principal repayments of $142.7 million on our credit facility, $8.7 million in credit facility issuance costs, $18.1 million in stock settled tax withholdings and $75.0 million for the repurchase of common stock. Net cash provided by financing activities in 2014 primarily consisted of $19.1 million in proceeds from stock awards, and borrowings under our Credit Agreement of $289.5 million, partially offset by principal prepayments of the credit facility of $178.0 million, $1.5 million in stock settled tax withholdings, $1.5 million in credit facility issuance costs, debt extinguishment of $89.5 million recorded in conjunction with Amendment No. 5 to our Credit Agreement, and a $3.0 million payment to terminate a capital lease. Net cash used in financing activities in 2013 primarily consisted of $25.9 million in proceeds from stock awards, offset by $0.6 million in credit facility issuance costs, $0.9 million in stock settled tax withholdings, and principal prepayments on the credit facility of $100.0 million.
Credit Agreement
On March 31, 2015, we entered into Amendment No. 6 to our existing Amended and Restated Credit Agreement dated as of October 13, 2011 (such Amended and Restated Credit Agreement as further amended and supplemented prior

Microsemi Corporation
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to March 31, 2015, the "Existing Credit Agreement"; and as amended by Amendment No. 6, the “Amended Credit Agreement"), with Bank of America, N.A., as administrative agent and collateral agent. Pursuant to the Existing Credit Agreement, certain lenders provided first lien credit facilities, consisting of a term loan facility and a revolving credit facility. Amendment No. 6 provided for, among other things, (1) certain amendments to the provisions relating to incremental credit facilities to (i) permit up to $325.0 million of incremental term loan facilities to be in the form of term A loans, and (ii) permit the incremental revolving commitment capacity to be increased by the amount of all prior voluntary terminations of revolving commitments, (2) an amendment to the definition of "change of control" in the Existing Credit Agreement to remove the "continuing director" prong (clause (b)) from such defined term, and (3) certain amendments related to the acquisition of Vitesse. In connection with Amendment No. 6, Bank of America, N.A., replaced Royal Bank of Canada as administrative agent and as collateral agent under the Amended Credit Agreement.
On April 28, 2015, we entered into an Incremental Joinder Agreement with respect to an incremental term A loan of $325.0 million and incremental revolving commitments of $225.0 million under our Amended Credit Agreement (as supplemented by the Incremental Joinder Agreement, the "Credit Agreement"). The term A loan and incremental revolving commitments each mature in August 2019. Beginning with the quarter ending September 27, 2015, and each quarter thereafter, we are required to make quarterly principal payments of $8.1 million on term A loan borrowings. The incremental term A loan and incremental revolving commitments initially bear interest at an interest rate margin of 2.00% for Eurodollar Rate loans and 1.00% for Base Rate loans, and the incremental revolving commitments are subject to an undrawn commitment fee of 0.35%. The interest rate margins and commitment fee are subject to step-downs based on our Consolidated Leverage Ratio (as defined in the Credit Agreement).
On April 28, 2015, we borrowed $325.0 million of incremental term A loan and $100.0 million under incremental revolving commitments to fund the acquisition of Vitesse, to repay a portion of term B loan principal, and for general corporate purposes.
Our term B loan facility matures in February 2020 and as of September 27, 2015, there are no scheduled principal repayments until the maturity date. The Credit Agreement stipulates an annual principal payment of a percentage of Excess Cash Flow ("ECF") (as defined in the Credit Agreement). The first ECF application date was measured as of the end of fiscal year 2015 and the ECF percentage will be 50% if the Consolidated Leverage Ratio as of the last day of the fiscal year is equal to or greater than 3.00 to 1.00 and 0% otherwise.
Under our Credit Agreement, we may borrow under a "Base Rate" which approximates the prime rate plus an applicable margin or "Eurodollar Rate" which approximates LIBOR plus an applicable margin. For term B loans, Eurodollar Rate loans are also subject to a Eurodollar Floor. At September 27, 2015, the principal amounts outstanding were Eurodollar Rate loans and interest rate information as of September 27, 2015 were as follows (amounts in millions, except percentages):
 
 
Principal Outstanding
 
Base Rate
 
Base Rate Margin
 
Eurodollar Rate Margin
 
Eurodollar Floor
 
Applicable Rate
Revolving and swingline loans
 
$
100.0

 
3.25
%
 
1.00
%
 
2.00
%
 
%
 
2.15
%
Term A loan
 
$
325.0

 
3.25
%
 
1.00
%
 
2.00
%
 
%
 
2.15
%
Term B loan
 
$
573.0

 
3.25
%
 
1.50
%
 
2.50
%
 
0.75
%
 
3.25
%
Debt issuance costs recorded as a reduction to principal outstanding in the consolidated balance sheets were $4.7 million as of September 28, 2014 and $11.7 million as of September 27, 2015. Based on the current term loan balance outstanding, a 10 percent change in interest rates would result in a corresponding change to interest expense of $0.9 million. The fair value of our outstanding loans was $995.9 million at September 27, 2015 and $693.0 million at September 28, 2014. We classify this valuation as a Level 2 fair value measurement.
Our Credit Agreement includes financial covenants requiring a maximum leverage ratio and minimum fixed charge coverage ratio and also contains other customary affirmative and negative covenants and events of default. We were in compliance with our covenants as of September 27, 2015.

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43



Contractual Obligations
The following table summarizes our contractual payment obligations and commitments, excluding liability related to uncertain tax positions, at September 27, 2015 (amounts in millions): 
 
Payments due by period
 
Total
 
Less than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
 
Credit facility
$
998.0

 
$
32.5

 
$
65.0

 
$
900.5

 
$

 
Interest and commitment fee on credit facility
116.9

 
28.2

 
54.8

 
33.9

 

 
Other long-term liabilities
28.1

 
1.5

 
15.5

 
4.0

 
7.1

 
Operating leases
88.3

 
19.8

 
32.2

 
25.7

 
10.6

 
Purchase obligations
47.6

 
34.6

 
12.9

 
0.1

 

 
Total
$
1,278.9

 
$
116.6

 
$
180.4

 
$
964.2

 
$
17.7

 
 
As of September 27, 2015, we recorded $19.8 million in long-term liabilities for accrued taxes related to uncertain tax positions and are not able to reasonably estimate the timing of the long-term payments, or the amount by which our liability will increase or decrease over time; therefore, the liability related to uncertain tax positions has not been included in the contractual obligations table.
Payments of interest on our credit facility in the contractual obligations table assumes we will make the minimum scheduled term loan principal payments and incur interest at the current effective interest rate. Payments of the commitment fee on credit facility assumes our revolving credit facility balance remains at the balance as of September 27, 2015 of $100.0 million.
Off-Balance Sheet Arrangements
As of September 27, 2015, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
RECENTLY ISSUED ACCOUNTING STANDARDS
Please refer to Note 1, "Description of Business and Summary of Significant Accounting Policies" of our notes to consolidated financial statements for a discussion of recently issued accounting standards.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various forms of market risk, which is the potential loss arising from adverse changes in credit risk, foreign currency exchange rates, interest rates or the stock market.  
Foreign Currency Exchange Rates
We conduct a relatively small portion of our business in a number of foreign currencies, principally the European Union Euro, Canadian Dollar, British Pound, Israeli Shekel and Chinese RMB. We may receive some revenues in foreign currencies and purchase some inventory and services in foreign currencies. Accordingly, we are exposed to transaction gains and losses that could result from changes in exchange rates of foreign currencies relative to the U.S. dollar. Because transactions in foreign currencies have represented a relatively small portion of our business, foreign currency fluctuations have not had a material impact historically on our revenues or results of operations. However, there can be no assurance future fluctuations in the value of foreign currencies will not have material adverse effects on our results of operations, cash flows or financial condition. We have not conducted a foreign currency hedging program thus far. We have considered and may continue to consider the adoption of a foreign currency hedging program.
Credit Risk
A significant portion of our sales are or may be derived from U.S. government agencies or customers whose principal sales are to U.S. government agencies which creates concentrations of credit risk. Future sales are subject to the uncertainties of governmental appropriations and national defense policies and priorities, including lingering impacts

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44



of sequestration under the Budget Control Act of 2011, constraints of the budgetary process and timing and potential changes in these policies and priorities. Additionally, the long-term outlook for the fiscal position of the U.S. federal government is also uncertain, as illustrated by the 2013 budget negotiations and the shutdown of non-essential U.S. federal government services in October 2013.
We have experienced delays and reduction in appropriations on programs that include our products. Further delays, reductions in or terminations of government contracts or subcontracts, including those caused by any past or future shutdown of the U.S. federal government, could materially and adversely affect our operating results. While we generally function as a subcontractor, further changes in U.S. government procurement regulations and practices, particularly surrounding initiatives to reduce costs, may adversely impact the contracting environment and our operating results.
Generally, the U.S. government and its contractors and subcontractors may terminate their contracts with us at any time, with or without cause. In the first quarter of 2014, the U.S. government terminated for convenience a $75 million contract, for which we received $33.4 million. We have in the past experienced the termination of a contract due to the termination of the underlying government contract. All government contracts are also subject to price renegotiation in accordance with the U.S. Government Renegotiation Act. By reference to such contracts, all of the purchase orders we receive that are related to government contracts are subject to these possible events. In addition, the recent shutdown of non-essential U.S. government services and any future government shutdowns may significantly increase the risk of further contract terminations or renegotiations, and any such termination or renegotiation could have a material adverse impact upon our revenues and results of operations.  
In addition, net sales from international markets represent a significant portion of total net sales. Our net sales to international customers represented 51% of consolidated net sales for 2015 and 47% of consolidated net sales for each of 2014 and 2013. These sales were principally to customers in Europe and Asia. We maintain reserves for potential credit losses and such losses have been within management’s expectations. 
Interest Rates
Under our Credit Agreement, we may borrow under a "Base Rate" which approximates the prime rate plus an applicable margin or "Eurodollar Rate" which approximates LIBOR plus an applicable margin. For term B loans, Eurodollar Rate loans are also subject to a Eurodollar Floor. Incremental revolving commitments total $225.0 million and are subject to an undrawn commitment fee of 0.35%. At September 27, 2015, the principal amounts outstanding were Eurodollar Rate loans and interest rate information as of September 27, 2015 were as follows (dollar amounts in millions):
 
 
Principal Outstanding
 
Base Rate
 
Base Rate Margin
 
Eurodollar Rate Margin
 
Eurodollar Floor
 
Applicable Rate
Revolving and swingline loans
 
$
100.0

 
3.25
%
 
1.00
%
 
2.00
%
 
%
 
2.15
%
Term A loan
 
$
325.0

 
3.25
%
 
1.00
%
 
2.00
%
 
%
 
2.15
%
Term B loan
 
$
573.0

 
3.25
%
 
1.50
%
 
2.50
%
 
0.75
%
 
3.25
%
Our Credit Agreement includes financial covenants requiring a maximum leverage ratio and minimum fixed charge coverage ratio and also contains other customary affirmative and negative covenants and events of default. We were in compliance with our covenants as of September 27, 2015.

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45



ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MICROSEMI CORPORATION AND SUBSIDIARIES 
Index to Consolidated Financial Statements
 
 
Page
1

Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2

Financial Statement Schedule
 
 
 
 
 
Schedule for the fiscal years ended September 27, 2015, September 28, 2014 and September 29, 2013
 
 
 
 
 
 
 
 
 
Financial statement schedules not listed above are either omitted because they are not applicable or the required information is shown in the consolidated financial statements or in the notes thereto.
 

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Report of Independent Registered Public Accounting Firm 
To the Board of Directors and
Stockholders of Microsemi Corporation: 
In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 8(1) present fairly, in all material respects, the financial position of Microsemi Corporation and its subsidiaries at September 27, 2015 and September 28, 2014 and the results of their operations and their cash flows for each of the three years in the period ended September 27, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 8(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 27, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, management has excluded Microsemi Communications, Inc. from its assessment of internal control over financial reporting as of September 27, 2015 because it was acquired by the Company in a purchase business combination during 2015. We have also excluded Microsemi Communications, Inc. from our audit of internal control over financial reporting. Microsemi Communications, Inc. is a wholly-owned subsidiary whose total assets and total revenues represent 2% and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 27, 2015.
/s/ PricewaterhouseCoopers LLP
Irvine, California
November 12, 2015

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47



MICROSEMI CORPORATION 
Consolidated Balance Sheets
(amounts in millions, except par value)
 
September 27,
2015
 
September 28,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
256.4

 
$
162.2

Accounts receivable, net of allowances of $26.0 at September 27, 2015 and $22.2 at September 28, 2014
186.9

 
191.2

Inventories
227.2

 
205.0

Deferred income taxes, net
26.2

 
27.3

Other current assets
39.9

 
32.9

Total current assets
736.6

 
618.6

Property and equipment, net
152.7

 
148.7

Goodwill
1,139.3

 
885.6

Intangible assets, net
357.8

 
351.9

Deferred income taxes, net
26.8

 
23.5

Other assets
36.9

 
28.1

Total assets
$
2,450.1

 
$
2,056.4

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
82.3

 
$
75.5

Accrued liabilities
86.8

 
85.7

Current maturity of credit facility
32.5

 

Total current liabilities
201.6

 
161.2

Credit facility
953.9

 
693.4

Deferred income taxes
41.1

 
39.3

Other long-term liabilities
46.3

 
46.9

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 
 
 
Preferred stock, $1.00 par value; authorized 1 shares; none issued

 

Common stock, $0.20 par value; 250.0 authorized, 95.1 issued and outstanding at September 27, 2015 and 95.6 issued and outstanding at September 28, 2014
19.0

 
19.1

Capital in excess of par value of common stock
808.1

 
799.1

Retained earnings
383.2

 
298.6

Accumulated other comprehensive loss
(3.1
)
 
(1.2
)
Total stockholders’ equity
1,207.2

 
1,115.6

Total liabilities and stockholders' equity
$
2,450.1

 
$
2,056.4

 
The accompanying notes are an integral part of these statements.

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48



MICROSEMI CORPORATION
Consolidated Statements of Operations and Comprehensive Income
For each of the three fiscal years in the period ended September 27, 2015
(amounts in millions, except earnings per share)
 
2015
 
2014
 
2013
Net sales
$
1,245.6

 
$
1,138.3

 
$
975.9

Cost of sales
561.3

 
526.8

 
418.7

Gross profit
684.3

 
611.5

 
557.2

Operating expenses:
 
 
 
 
 
Selling, general and administrative
249.5

 
241.0

 
202.5

Research and development costs
200.3

 
192.0

 
170.6

Amortization of intangible assets
96.5

 
92.8

 
84.8

Restructuring and severance charges
15.4

 
31.5

 
9.9

Total operating expenses
561.7

 
557.3

 
467.8

Operating income
122.6

 
54.2

 
89.4

Other (expenses):
 
 
 
 
 
Interest expense, net
(27.3
)
 
(27.8
)
 
(30.2
)
Other expense, net
1.6

 
(2.5
)
 
(3.1
)
Total other expense
(25.7
)
 
(30.3
)
 
(33.3
)
Income before income taxes
96.9

 
23.9

 
56.1

Provision for income taxes
12.3

 
0.8

 
12.4

Net income
$
84.6

 
$
23.1

 
$
43.7

Earnings per share:
 
 
 
 
 
Basic
$
0.90

 
$
0.25

 
$
0.49

Diluted
$
0.88

 
$
0.24

 
$
0.48

Weighted-average common shares outstanding:
 
 
 
 
 
Basic
94.2

 
92.9

 
89.5

Diluted
95.9

 
94.5

 
91.3

 
 
 
 
 
 
Net income
$
84.6

 
$
23.1

 
$
43.7

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Translation adjustment
(1.6
)
 
(0.5
)
 
0.9

Unrealized actuarial loss on pension benefits
(0.3
)
 
(0.7
)
 
(0.2
)
Other comprehensive income (loss), net of tax
(1.9
)
 
(1.2
)
 
0.7

 
 
 
 
 
 
Total comprehensive income
$
82.7

 
$
21.9

 
$
44.4

 
The accompanying notes are an integral part of these statements.

Microsemi Corporation
49



MICROSEMI CORPORATION
Consolidated Statements of Stockholders' Equity
For each of the three fiscal years in the period ended September 27, 2015
(amounts in millions)
 
Common Stock
 
Capital in
Excess of
Par value of
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shares
 
Amount
 
Balance at September 30, 2012
90.3

 
$
18.1

 
$
678.9

 
$
231.8

 
$
(0.7
)
 
$
928.1

Shares issued pursuant to stock awards
1.9

 
0.4

 
24.9

 

 

 
25.3

Tax withholding on restricted stock awards

 

 
(0.9
)
 

 

 
(0.9
)
Grants and cancellations of restricted stock awards
1.6

 
0.3

 
(0.3
)
 

 

 

Issuance of stock awards related to acquisition

 

 

 

 

 

Stock-based compensation expense

 

 
35.2

 

 

 
35.2

Other comprehensive income, net of tax

 

 

 

 
0.7

 
0.7

Net income

 

 

 
43.7

 

 
43.7

Balance at September 29, 2013
93.8

 
$
18.8

 
$
737.8

 
$
275.5

 
$

 
$
1,032.1

Shares issued pursuant to stock awards
1.5

 
0.2

 
19.0

 

 

 
19.2

Tax withholding on restricted stock awards

 

 
(1.5
)
 

 

 
(1.5
)
Grants and cancellations of restricted stock awards
0.3

 
0.1

 
(0.1
)
 

 

 

Stock-based compensation expense

 

 
43.9

 

 

 
43.9

Other comprehensive income, net of tax

 

 

 

 
(1.2
)
 
(1.2
)
Net income

 

 

 
23.1

 

 
23.1

Balance at September 28, 2014
95.6

 
$
19.1

 
$
799.1

 
$
298.6

 
$
(1.2
)
 
$
1,115.6

Shares issued pursuant to stock awards
2.1

 
0.4

 
48.0

 

 

 
48.4

Tax withholding on restricted stock awards

 

 
(18.1
)
 

 

 
(18.1
)
Grants and cancellations of restricted stock awards
0.1

 

 

 

 

 

Issuance of stock awards related to acquisition

 

 
3.8

 

 

 
3.8

Stock-based compensation expense

 

 
49.8

 

 

 
49.8

Other comprehensive income, net of tax

 

 

 

 
(1.9
)
 
(1.9
)
Repurchase of outstanding common stock
(2.7
)
 
(0.5
)
 
(74.5
)
 

 

 
(75.0
)
Net income

 

 

 
84.6

 

 
84.6

Balance at September 27, 2015
95.1

 
$
19.0

 
$
808.1

 
$
383.2

 
$
(3.1
)
 
$
1,207.2

 
The accompanying notes are an integral part of these statements.

Microsemi Corporation
50



MICROSEMI CORPORATION
Consolidated Statements of Cash Flows
For each of the three fiscal years in the period ended September 27, 2015
(amounts in millions)
 
2015
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
Net income
$
84.6

 
$
23.1

 
$
43.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
132.7

 
125.7

 
113.7

Change in allowance for doubtful accounts
(0.2
)
 
0.1

 
(0.4
)
Amortization of deferred financing cost
1.6

 
1.3

 
3.5

(Gain) loss on disposition or impairment of assets
(1.1
)
 
9.8

 

Deferred income taxes
(8.0
)
 
(21.5
)
 
(9.7
)
Valuation allowance on net deferred income taxes
13.3

 
17.6

 
18.8

Charge for stock-based compensation
49.8

 
43.9

 
35.2

Change in assets and liabilities (net of acquisitions):
 
 
 
 
 
Accounts receivable
13.8

 
5.2

 
(8.5
)
Inventories
11.1

 
10.3

 
(2.9
)
Other current assets
(2.5
)
 
9.2

 
(2.2
)
Other assets
(7.6
)
 
(1.8
)
 
2.4

Accounts payable
(2.9
)
 
(5.5
)
 
(6.4
)
Accrued liabilities
(12.9
)
 
(13.5
)
 
(17.2
)
Other long-term liabilities
(2.4
)
 
2.8

 
(5.0
)
Net cash provided by operating activities
269.3

 
206.7

 
165.0

Cash flows from investing activities:
 
 
 
 
 
Purchases of property and equipment
(44.1
)
 
(39.4
)
 
(37.3
)
Proceeds from the sale of short term investments
0.6

 
41.0

 

Proceeds from the sale of property
4.2

 

 

Payments for acquisitions, net of cash acquired
(363.9
)
 
(337.6
)
 

Net cash used in investing activities
(403.2
)
 
(336.0
)
 
(37.3
)
Cash flows from financing activities:
 
 
 
 
 
Repayments of credit facility and debt
(142.7
)
 
(178.0
)
 
(100.0
)
Payment of credit facility issuance costs
(8.7
)
 
(1.5
)
 
(0.6
)
Proceeds from credit facility
425.0

 
289.5

 
277.5

Extinguishment of debt

 
(89.5
)