Acquisition and Divestitures

9 Months Ended

Jul. 03, 2016

Business Combinations [Abstract]

Acquisition and divestitures

On January 15, 2016 (the "Acquisition Date"), we acquired all outstanding shares of PMC-Sierra, Inc. (“PMC”), for $2.0 billion in cash and the issuance of approximately 16.0 million shares of Microsemi common stock and the assumption of certain PMC restricted stock units. The acquisition has provided Microsemi with a leading position in high performance and scalable storage solutions, while also adding a complementary portfolio of high-value communications products.

A summary of the consideration for PMC is as follows:

Cash consideration	$	1,983.2
Share consideration	476.2
Assumption of equity awards	15.7
Accrued cash consideration	0.3
Total consideration	$	2,475.4

We recorded PMC's tangible and intangible assets and liabilities based on their estimated fair values as of the Acquisition Date and allocated the remaining purchase consideration to goodwill. The preliminary allocation is as follows:

Cash and cash equivalents	$	313.0
Accounts receivable	53.3
Inventories	98.2
Other current assets	15.8
Property and equipment	38.0
Other assets	19.7
Identifiable intangible assets	741.6
Goodwill	1,435.0
Deferred income taxes, net	(39.3		)
Current liabilities	(139.4		)
Other non-current liabilities	(60.5		)
Total consideration	$	2,475.4

As of the Acquisition Date, the gross contractual amount of acquired accounts receivable of $53.3 million was expected to be fully collected.

The valuation of identifiable intangible assets and their estimated useful lives are as follows:

	Asset Amount		Weighted Average Useful Life (Years)
Completed technology	$	447.0	6
In-process research and development	241.0
Customer relationships	46.0		9
Other	7.6		1
	$	741.6

Valuation methodology

The fair value of completed technology and in-process research and development ("IPR&D") was estimated by performing a discounted cash flow analysis using the multiperiod excess earnings approach. This method includes discounting the projected cash flows associated with each technology over its expected life. Projected cash flows attributable to the completed technology and IPR&D were discounted to their present value at a rate commensurate with the perceived risk. IPR&D consists of four main projects with expected completion dates of between six months and two years. Following a release date, expected useful lives are between five and eight years.

The valuation of customer relationships was based on the distributor method, taking into account the profit margin a market participant distributor would obtain in selling PMC products. The useful lives of customer relationships are estimated based upon customer turnover data and management estimates. Other identifiable intangible assets consisted of backlog, valued using the distributor method, and trade name, valued using a relief from royalty method.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following: 

• Historical performance including sales and profitability.

• Business prospects and industry expectations.

• Estimated economic life of asset.

• Development of new technologies.

• Acquisition of new customers.

• Attrition of existing customers.

• Obsolescence of technology over time.

Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. We determined that goodwill and identifiable intangible assets related to the PMC acquisition are not deductible.

The factors that contributed to a purchase price resulting in the recognition of goodwill include:

• Our belief the merger will create a more diverse semiconductor company with expansive offerings which will enable us to expand our product offerings.

• Our belief we are committed to improving cost structures in accordance with our operational and restructuring plans which should result in a realization of cost savings and an improvement of overall efficiencies. 

The purchase price allocation described above is preliminary, primarily with respect to tax contingency matters. A final determination of fair values of assets acquired and liabilities assumed relating to the transaction could differ from the preliminary purchase price allocation. We utilize the straight line method of amortization for completed technology, customer relationships and trade name.

Supplemental pro forma data (unaudited)

The supplemental pro forma data presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the transaction had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions we believe are reasonable under the circumstances.

The following supplemental pro forma data summarizes the results of operations for the periods presented, as if we completed the acquisition noted above as of the first day of 2015. The supplemental pro forma data reports actual operating results, adjusted to include the pro forma effect and timing of the impact in amortization expense of identified intangible assets, incremental interest expense and the related tax effects of the acquisition. In accordance with the pro forma acquisition date we recorded, in the 2015 supplemental pro forma data, cost of goods sold from manufacturing profit in acquired inventory of $66.2 million, PMC-related restructuring costs of $46.7 million and acquisition-related costs of $38.1 million, with a corresponding reduction in the 2016 supplemental proforma data.

Net sales related to products from the acquisition of PMC contributed approximately 20% to 25% of net sales for the nine months ended July 3, 2016. Post-acquisition net sales and earnings on a standalone basis are generally impracticable to determine as, on the acquisition date, we implemented a plan developed prior to the completion of the acquisition and began to immediately integrate the acquisition into existing operations, engineering groups, sales distribution networks and management structure. 

Supplemental pro forma data is as follows:

	Nine Months Ended
	July 3, 2016		June 28, 2015
Net sales	$	1,354.4	$	1,311.5
Net income (loss)	46.9		(170.0		)
Earnings (loss) per share
Basic	$	0.42	$	(1.52	)
Diluted	$	0.41	$	(1.52	)

Divestitures

On April 28, 2016, we divested our Remote Radio Head business to MaxLinear, Inc. for $21.0 million in cash. The Remote Radio Head business was operated as a non-strategic component of the enterprise storage and communications solution business. On May 2, 2016, we divested our membership interest in Microsemi LLC - RF Integrated Solutions ("RF LLC") to Mercury Systems, Inc. for $300.0 million in cash. RF LLC operated a non-strategic component of a board level systems and packaging business. These transactions resulted in a gain on divestiture of $125.5 million.

Acquisition and Divestiture Costs

During the nine months ended July 3, 2016, we incurred $31.2 million in acquisition and divestiture costs related to the acquisition of PMC and divestitures of our Remote Radio Head business and RF LLC. These costs were recorded in selling, general and administrative expense.