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EX-32.2 - EX-32.2 - PMC SIERRA INCpmcs-20140628ex3223c389e.htm
EX-32.1 - EX-32.1 - PMC SIERRA INCpmcs-20140628ex32132a581.htm

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended June 28, 2014   

  

or  

 

 

 

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 0-19084

 

 

 

PMC-Sierra, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

A Delaware Corporation - I.R.S. NO. 94-2925073

  

1380 Bordeaux Drive

Sunnyvale, CA 94089

(408) 239-8000

 

 

  

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     No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     No  

 

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 the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:   

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

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     No  

  

As of August 4, 2014, the registrant had 195,653,978 shares of Common Stock, $0.001 par value, outstanding.

 

 

 

 

    


 

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

Item 1.

Financial Statements

 

 

- Condensed Consolidated Statements of Operations

 

- Condensed Consolidated Statements of Comprehensive Loss

 

- Condensed Consolidated Balance Sheets

 

- Condensed Consolidated Statements of Cash Flows

 

- Notes to the Condensed Consolidated Financial Statements

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

16 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23 

Item 4.

Controls and Procedures

24 

PART II—OTHER INFORMATION 

 

Item 1.

Legal Proceedings

25 

Item 1A.

Risk Factors

25 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34 

Item 3.

Defaults Upon Senior Securities

34 

Item 4.

Mine Safety Disclosures

34 

Item 5.

Other Information

34 

Item 6.

Exhibits

35 

Signatures 

36 

 

 

 

 

   

2


 

Part IFINANCIAL INFORMATION

Item 1Financial Statements (Unaudited)

  

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

 

2014

 

2013 

 

2014

 

2013

Net revenues

 

$

126,822 

 

$

127,584 

 

$

253,290 

 

$

252,745 

Cost of revenues (excluding amortization of purchased intangible
  assets below)

 

 

36,824 

 

 

37,637 

 

 

74,388 

 

 

75,024 

Gross profit

 

 

89,998 

 

 

89,947 

 

 

178,902 

 

 

177,721 

Research and development

 

 

49,388 

 

 

51,681 

 

 

99,536 

 

 

106,305 

Selling, general and administrative

 

 

28,991 

 

 

30,277 

 

 

58,331 

 

 

58,619 

Amortization of purchased intangible assets

 

 

9,948 

 

 

10,776 

 

 

22,277 

 

 

21,560 

Income (loss) from operations

 

 

1,671 

 

 

(2,787)

 

 

(1,242)

 

 

(8,763)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange (loss) gain

 

 

(789)

 

 

2,213 

 

 

(257)

 

 

3,578 

Interest income, net

 

 

114 

 

 

330 

 

 

123 

 

 

594 

Gain on investment securities and other investments

 

 

46 

 

 

30 

 

 

75 

 

 

14 

Amortization of debt issue costs

 

 

(51)

 

 

 —

 

 

(102)

 

 

 —

Income (loss) before provision for income taxes

 

 

991 

 

 

(214)

 

 

(1,403)

 

 

(4,577)

Provision for income taxes

 

 

(4,471)

 

 

(4,602)

 

 

(6,318)

 

 

(8,766)

Net loss

 

$

(3,480)

 

$

(4,816)

 

$

(7,721)

 

$

(13,343)

Net loss per common share - basic and diluted

 

$

(0.02)

 

$

(0.02)

 

$

(0.04)

 

$

(0.07)

Shares used in per share calculation - basic and diluted

 

 

196,114 

 

 

203,307 

 

 

195,651 

 

 

204,269 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

 

 

 

 

 

 

   

  

3


 

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

2014

 

2013

 

2014

 

2013

Net loss

$

(3,480)

 

$

(4,816)

 

$

(7,721)

 

$

(13,343)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of tax of ($243), $110, ($185) and $165

 

691 

 

 

(546)

 

 

528 

 

 

(948)

Change in fair value of investment securities, net of tax of ($28), $206, ($34) and $223

 

81 

 

 

(406)

 

 

97 

 

 

(448)

Other comprehensive income (loss)

 

772 

 

 

(952)

 

 

625 

 

 

(1,396)

Comprehensive loss

$

(2,708)

 

$

(5,768)

 

$

(7,096)

 

$

(14,739)

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

  

 

 

 

   

 

4


 

    

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

 

 

 

 

 

 

 

June 28,

 

December 28,

 

 

2014

 

2013

 

ASSETS:

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

86,588 

 

$

100,038 

 

Short-term investments

 

21,018 

 

 

10,894 

 

Accounts receivable, net of allowance for doubtful accounts
   of $876 (2013 - $1,036)

 

58,362 

 

 

56,112 

 

Inventories, net

 

31,385 

 

 

31,074 

 

Prepaid expenses and other current assets

 

16,499 

 

 

19,855 

 

Income taxes receivable

 

3,770 

 

 

2,640 

 

Prepaid tax expenses

 

3,848 

 

 

5,695 

 

Deferred tax assets

 

2,778 

 

 

43,131 

 

Total current assets

 

224,248 

 

 

269,439 

 

Investment securities

 

105,996 

 

 

103,391 

 

Investments and other assets

 

10,434 

 

 

10,750 

 

Prepaid tax expenses

 

93 

 

 

93 

 

Property and equipment, net

 

38,678 

 

 

39,149 

 

Goodwill

 

278,849 

 

 

278,849 

 

Intangible assets, net

 

121,982 

 

 

146,974 

 

Deferred tax assets

 

1,250 

 

 

1,306 

 

 

$

781,530 

 

$

849,951 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

18,807 

 

$

23,173 

 

Accrued liabilities

 

58,313 

 

 

64,257 

 

Credit facility

 

 —

 

 

30,000 

 

Income taxes payable

 

2,199 

 

 

632 

 

Liability for unrecognized tax benefit

 

21,451 

 

 

54,127 

 

Deferred income taxes

 

 

 

71 

 

Deferred income

 

5,189 

 

 

7,481 

 

Total current liabilities

 

105,968 

 

 

179,741 

 

Long-term obligations

 

14,996 

 

 

11,108 

 

Deferred income taxes

 

48,942 

 

 

43,143 

 

Liability for unrecognized tax benefit

 

18,616 

 

 

27,947 

 

PMC special shares convertible into 1,016 (2013 - 1,019) shares
   of common stock

 

1,180 

 

 

1,188 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, par value $.001: 900,000 shares authorized;
   195,546 shares issued and outstanding (2013 - 194,415)

 

196 

 

 

195 

 

Additional paid in capital

 

1,566,299 

 

 

1,550,190 

 

Accumulated other comprehensive income (loss)

 

99 

 

 

(526)

 

Accumulated deficit

 

(974,766)

 

 

(963,035)

 

Total stockholders' equity

 

591,828 

 

 

586,824 

 

 

$

781,530 

 

$

849,951 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

  

  

  

  

   

   

5


 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

 

 

 

Six Months Ended

 

June 28,

 

June 29

 

2014

 

2013

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(7,721)

 

$

(13,343)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

33,278 

 

 

33,185 

Stock-based compensation

 

11,106 

 

 

13,587 

Unrealized foreign exchange loss (gain), net

 

996 

 

 

(3,775)

Net amortization of premiums and accrued interest of investments

 

390 

 

 

595 

Asset impairments

 

770 

 

 

 —

Gain on investment securities and other

 

(74)

 

 

(4)

Excess tax benefits from stock option transactions

 

 —

 

 

(632)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(2,275)

 

 

4,970 

Inventories, net

 

(311)

 

 

(7,032)

Prepaid expenses and other current assets

 

3,275 

 

 

610 

Accounts payable and accrued liabilities

 

(4,889)

 

 

6,328 

Deferred taxes and income taxes payable

 

6,763 

 

 

3,429 

Deferred income

 

(2,292)

 

 

(1,200)

Net cash provided by operating activities

 

39,016 

 

 

36,718 

Cash flows from investing activities:

 

 

 

 

 

Investment in long term deposits

 

 —

 

 

(1,127)

Purchases of property and equipment

 

(8,054)

 

 

(7,500)

Purchase of intangible assets

 

(733)

 

 

(2,048)

Redemption of short-term investments

 

3,535 

 

 

7,966 

Sales of investment securities and other investments

 

25,538 

 

 

38,297 

Purchases of investment securities and other investments

 

(41,966)

 

 

(154,385)

Net cash used in investing activities

 

(21,680)

 

 

(118,797)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from credit facility

 

30,000 

 

 

 —

Repayment of credit facility

 

(60,000)

 

 

 —

Proceeds from issuance of common stock

 

10,615 

 

 

16,452 

Repurchases of common stock

 

(11,496)

 

 

(5,509)

Excess tax benefits from stock option transactions

 

 —

 

 

632 

Net cash (used in) provided by financing activities

 

(30,881)

 

 

11,575 

Effect of exchange rate changes on cash and cash equivalents

 

95 

 

 

(786)

Net decrease in cash and cash equivalents

 

(13,450)

 

 

(71,290)

Cash and cash equivalents, beginning of the period

 

100,038 

 

 

169,970 

Cash and cash equivalents, end of the period

$

86,588 

 

$

98,680 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

206 

 

$

 —

Cash payments for income taxes, net

 

272 

 

 

379 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

6


 

 

   

  

PMC-Sierra, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  

NOTE 1.  Summary of Significant Accounting Policies  

  

Description of business.  PMC-Sierra, Inc. (the “Company” or “PMC”) is a fabless semiconductor and software solution innovator transforming networks that connect, move and store Big Data. The Company designs, develops, markets and supports semiconductor, embedded software, and board level solutions by integrating its mixed-signal, software and systems expertise through a network of offices in North America, Europe and Asia. Building on a track record of technology leadership, the Company is driving innovation across storage, optical and mobile networks.  PMCs highly integrated solutions increase performance and enable next generation services to accelerate the network transformation.

 

Basis of presentation. The accompanying interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and United States Generally Accepted Accounting Principles (“GAAP”).  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules or regulations.  These interim condensed consolidated financial statements are unaudited, but reflect all adjustments which are normal and recurring in nature and are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented.  These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Companys Annual Report on Form 10-K for the year ended December 28, 2013 filed with the SEC on February 26, 2014.  The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods.  Fiscal 2014 will consist of 52 weeks and will end on Saturday, December 27, 2014.  Fiscal 2013 consisted of 52 weeks and ended on Saturday, December 28, 2013.  The second quarter of each of 2014 and 2013 consisted of 13 weeks.  The Company’s reporting currency is the U.S. dollar and presented in thousands unless otherwise stated.

 

Subsequent to filing the Company’s Quarterly Reports on Form 10-Q in fiscal year 2013, the unaudited comparative condensed consolidated financial information for the first, second and third quarters of 2013 was restated as disclosed in Item 9B in the Company’s Annual Report on Form 10-K for the year ended December 28, 2013, filed with the SEC on February 26, 2014. The unaudited comparative financial information for the three and six months ended June 29, 2013 presented herein reflects such restatements, which were to correct certain errors related to accounting for income taxes and capitalization of inventory-related overhead costs. 

 

Estimates. The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Estimates are used for, but not limited to, stock-based compensation, purchase accounting assumptions including those used to calculate the fair value of intangible assets and goodwill, the valuation of investments, accounting for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, revenue recognition, sales returns, warranty costs, income taxes including uncertain tax positions, accounting for employee benefit plans, and contingencies.  Actual results could differ materially from these estimates.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accountings Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  The new standard is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The standard allows for either full retrospective or modified retrospective adoption method. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period. The standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition.  As such, the performance target should not be reflected in estimating the grant date fair value of the award.  This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the service has been rendered.  The new standard is effective for annual periods beginning after December 15, 2015, including interim periods within that reporting period.  Early application is permitted.  We are currently evaluating the effect that ASU 2014-12 will have on our consolidated financial statements and related disclosures.

7


 

 

During the first quarter of 2014, the Company adopted FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists.  The new guidance requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.  Accordingly, we adopted these presentation requirements on a prospective basis at the beginning of our first quarter of 2014.  Upon adoption, $44 million of deferred tax assets of a foreign subsidiary were netted against the related liability for unrecognized tax benefits on our Condensed Consolidated Balance Sheet. The netting of deferred tax assets and liabilities with unrecognized tax benefits had no impact on the Company’s Condensed Consolidated Statements of Operations.

 

   

NOTE 2. Business Combinations  

 

Acquisition of Integrated Device Technology, Inc’s Enterprise Flash Controller Business

 

On July 12, 2013, PMC completed the acquisition of Integrated Device Technology, Inc.’s (“IDT”), Enterprise Flash Controller and PCI Express Switch businesses, including the world’s first NVM Express (NVMe) flash controller for total purchase consideration of approximately $96 million which was accounted for using the acquisition method.    With the addition of these controllers to our storage network products, PMC is positioned for leadership in the rapidly growing market for enterprise flash controllers. 

      

 

NOTE 3.  Derivative Instruments  

  

The Company generates revenues in U.S. dollars but incurs a portion of its operating expenses in foreign currencies, primarily the Canadian dollar.  To minimize the short-term impact of foreign currency fluctuations on the Companys operating expenses, the Company purchases forward currency contracts.

  

As at June 28, 2014, the Company had 14 forward currency contracts (December 28, 2013 - 27) outstanding, all with maturities of less than 12 months, which qualified and were designated as cash flow hedges.  As of June 28, 2014, the U.S. dollar notional amount of these contracts was $13.0 million (December 28, 2013 - $27.7 million) and the contracts had an aggregate fair value gain of $0.5 million (June 29, 2013 – fair value loss of $0.9 million), which was recorded in Accumulated other comprehensive loss net of taxes of $0.2 million for the six months ended June 28, 2014 and June 29, 2013.

 

   

NOTE 4.  Fair Value Measurements   

 

ASC Topic 820 specifies a hierarchy of valuation techniques which requires an entity to maximize the use of observable inputs that may be used to measure fair value.  The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Inputs are based on quoted market prices for identical assets and liabilities in active markets at the measurement date.

Level 2: Inputs include similar quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Pricing inputs include significant inputs that are generally not observable in the marketplace. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The Company’s valuation techniques used to measure the fair value of money market funds and other financial instruments were derived from quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.

 

In the second quarter of 2014, the Company reviewed and evaluated the observable market pricing data and volume of trading activity used in determining Level 1 and Level 2 assets and classified $18.3 million of investments as Level 2 that were reported as Level 1 at December 28, 2013. The Company’s derivative instruments are classified as Level 2 as of June 28, 2014, as they are not actively traded and are valued using pricing models that use observable market inputs.  There were no Level 3 assets or liabilities existed as of June 28, 2014.

8


 

 

Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis  

  

Financial assets measured on a recurring basis as at June 28, 2014 and December 28, 2013, are summarized below:  

 

 

 

 

 

 

 

 

 

Fair value,

 

June 28 2014

(in thousands)

Level 1

 

Level 2

Assets:

 

 

 

 

 

Money market funds 

$

12,393 

 

$

 —

Corporate bonds and notes

 

66,321 

 

 

22,345 

United States (“US”) treasury and government agency notes 

 

34,792 

 

 

567 

Foreign government and agency notes

 

252 

 

 

2,304 

US state and municipal securities

 

 —

 

 

433 

Forward currency contracts

 

 —

 

 

102 

Total assets

$

113,758 

 

$

25,751 

 

 

 

 

 

 

 

Fair value,

 

December 28, 2013

(in thousands)

Level 1

 

Level 2

Assets:

 

 

 

 

 

Money market funds

$

14,629 

 

$

 —

Corporate bonds and notes

 

79,653 

 

 

3,166 

US treasury and government agency notes

 

28,985 

 

 

 —

Foreign government and agency notes

 

2,048 

 

 

 —

US state and municipal securities

 

433 

 

 

 —

Total assets

$

125,748 

 

$

3,166 

 

 

 

 

 

 

These assets are included in Cash and cash equivalents, Short-term investments, and Long-term investment securities.  See Note 7. Investment Securities.

 

Financial liabilities measured on a recurring basis are summarized below:  

 

 

 

 

 

Fair value,

 

June 28, 2014

(in thousands)

Level 2

Current liabilities:

 

 

Forward currency contracts

$

 —

 

 

 

 

Fair value,

 

December 28, 2013

(in thousands)

Level 2

Current liabilities:

 

 

Forward currency contracts

$

612 

 

 

 

These are included in Accrued liabilities.

 

 

 

 

 

 

There were no assets or liabilities measured and recorded at fair value on a non-recurring basis as of June 28, 2014.

 

 

9


 

 

NOTE 5.  Stock-Based Compensation  

 

The Company has two stock-based compensation programs, which are described below.  Neither of the Companys stock-based awards under these plans are classified as liabilities.  The Company did not capitalize any stock-based compensation cost, and recorded compensation expense for the three and six months ended June 28, 2014 and June 29, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 28,

 

June 29,

 

June 28,

 

June 29,

(in thousands)

2014

 

2013

 

2014

 

2013

Cost of revenues

$

214 

 

$

208 

 

$

455 

 

$

453 

Research and development

 

1,903 

 

 

2,396 

 

 

4,550 

 

 

5,700 

Selling, general and administrative

 

2,798 

 

 

3,601 

 

 

6,101 

 

 

7,434 

Total

$

4,915 

 

$

6,205 

 

$

11,106 

 

$

13,587 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company received cash of $10.6 million and $16.5 million related to the issuance of stock-based awards during the six months ended June 28, 2014 and June 29, 2013, respectively

 

Equity Award Plans

  

The Company issues its common stock under the provisions of the 2008 Equity Plan (the “2008 Plan”). Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock at the grant date. The options generally expire within 10 years and vest over four years.

 

The 2008 Plan was approved by stockholders at the 2008 Annual Meeting.  The 2008 Plan became effective on January 1, 2009 (the “Effective Date”).  It is a successor to the 1994 Incentive Stock Plan (the “1994 Plan”) and the 2001 Stock Option Plan (the “2001 Plan”).  Up to 30,000,000 shares of our common stock have been initially reserved for issuance under the 2008 Plan.  At the 2012 Annual Meeting, stockholders approved an increase in shares reserved for issuance under the 2008 plan by 9,500,000 shares, which shares were registered on May 14, 2012 on Form S-8, bringing the total number of authorized and registered shares available under the 2008 Plan to 39,500,000.  To the extent that a share that is subject to an award that counts as 1.6 shares against the 2008 Plan’s share reserve is added back into the 2008 Plan upon expiration or termination of the award or repurchase or forfeiture of the shares, the number of shares of common stock available for issuance under the 2008 Plan will be credited with 1.6 shares.  The implementation of the 2008 Plan did not affect any options or restricted stock units outstanding under the 1994 Plan or the 2001 Plan on the Effective Date.  To the extent that any of those options or restricted stock units subsequently terminate unexercised or prior to issuance of shares thereunder, the number of shares of common stock subject to those terminated awards will be added to the share reserve available for issuance under the 2008 Plan, up to an additional 15,000,000 shares. No additional shares may be issued under the 1994 Plan or the 2001 Plan. 

 

Activity under the option plans during the six months ended June 28, 2014 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of options

 

Weighted average exercise price per share

 

 

Weighted average remaining contractual term (years)

 

 

Aggregate intrinsic value

Outstanding, December 28, 2013

 

23,555,472 

 

$

8.01 

 

 

 

 

$

6,834,586 

Granted and Assumed

 

 —

 

$

 —

 

 

 

 

 

 

Exercised

 

(906,251)

 

$

5.48 

 

 

 

 

 

 

Forfeited

 

(143,677)

 

$

7.31 

 

 

 

 

 

 

Expired

 

(2,114,447)

 

$

15.09 

 

 

 

 

 

 

Outstanding, June 28, 2014

 

20,391,097 

 

$

7.49 

 

 

4.55 

 

$

14,527,730 

Vested and expected to vest, June 28, 2014

 

20,179,533 

 

$

7.51 

 

 

4.52 

 

$

14,286,265 

Exercisable, June 28, 2014

 

18,088,568 

 

$

7.62 

 

 

4.12 

 

$

12,091,158 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of the Companys common stock for the options that were in-the-money at June 28, 2014.  Total forfeitures recorded amounted to $1.4 million and $1.3 million during each of the six months ended June 28, 2014, and June 29, 2013, respectively.

  

The fair value of the Companys stock option awards granted to employees is estimated using a lattice-binomial valuation model.  This model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its

10


 

contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.   The model requires the input of highly subjective assumptions including the expected stock price volatility and expected life.

  

The Companys estimates of expected volatilities are based on a weighted historical and market-based implied volatility.  The Company uses historical data to estimate option exercises and employee terminations within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.  The expected term of options granted is derived from the output of the stock option valuation model and represents the period of time that granted options are expected to be outstanding.  The risk-free rate for periods within the expected life of the stock option is based on the U.S. Treasury yield curve in effect at the time of the grant.  

  

The Company did not grant any stock options during the six months ended June 28, 2014 and June 29, 2013, respectively. The total intrinsic value of stock options exercised during the six months ended June 28, 2014 and June 29, 2013 was $1.6 million and $2.2 million, respectively.   

  

As of June 28, 2014, there was $4.5 million of total unrecognized compensation costs related to unvested stock options granted under the plans, which is expected to be recognized over an average period of 2.0 years.   

  

Restricted Stock Units  

  

On February 1, 2007, the Company amended its stock award plans to allow for the issuance of Restricted Stock Units (“RSUs”) to employees and members of the Board of Directors.  The first grant of RSUs occurred on May 25, 2007.  The grants vest over varying terms, up to a maximum of four years from the date of grant.  The first grant of Performance RSUs occurred on August 27, 2012 to the CEO. The performance goal applicable to these Performance RSUs granted in 2012 were based on the degree of achievement of the Company’s 2012 revenue with vesting terms over three years. Performance RSUs were also granted on August 26, 2013 to the CEO and Executive Direct reports. The performance metric applicable to the RSUs granted in 2013 are based on the degree of achievement of Total Shareholder Return (“TSR”) relative to Global Industry Classification Standards (“GICS”) Semiconductor Companies (8-Digit) for the Performance Period (July 1,  2013 - June 30, 2015). The total estimated $1.7 million fair value of these 2013 grants will be recognized as compensation expense over the grant’s vesting terms, with fifty percent vesting on August 25, 2015 and fifty percent vesting on August 25, 2016.

  

A summary of RSU activity during the six months ended June 28, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Units

 

Weighted Average Remaining Contractual Term (years)

 

 

Aggregate intrinsic value

Unvested units at December 28, 2013

 

6,179,037 

 

 

 

 

$

39,545,837 

Awarded

 

362,393 

 

 

 

 

 

 

Released

 

(689,382)

 

 

 

 

 

 

Forfeited

 

(487,503)

 

 

 

 

 

 

Unvested units at June 28, 2014

 

5,364,545 

 

 

1.45 

 

$

40,448,669 

Expected to vest, June 28, 2014

 

4,757,443 

 

 

1.35 

 

$

35,871,124 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The intrinsic value of RSUs vested during the six months ended June 28, 2014 was $5.0 million.  As of June 28, 2014, total unrecognized compensation costs, adjusted for estimated forfeitures, related to unvested RSUs was $23.0 million, which is expected to be recognized over the next 2.6 years.  

 

Employee Stock Purchase Plan

 

The 2011 Employee Stock Purchase Plan (the “2011 Plan”) was approved by stockholders at the 2010 Annual Meeting.  The 2011 Plan became effective on February 11, 2011. The 2011 Plan consists of consecutive offering periods, generally of a duration of 6 months, and allows eligible employees to purchase shares of the Companys common stock at the end of each such offering period, generally February and August of any year, at a price per share equal to 85% of the lower of the fair market value of a share of Common Stock on the start date or the fair market value of a share of Common Stock on the exercise date of the offering period.  Employees purchase such shares through payroll deductions which may not exceed 10% of their total cash compensation.  The 2011 Plan imposes certain limitations upon an employees right to acquire Common Stock, including the following: (i) no employee may purchase more than 7,500 shares of Common Stock on any one purchase date and (ii) no employee may be granted rights to purchase more than $25,000 worth of Common Stock for each calendar year that such rights are at any time outstanding.  Up to 12,000,000 shares of our common stock have been initially reserved for issuance under the 2011 Plan.   

11


 

 

During the six months ended June 28, 2014, 1,027,266 shares were issued under the 2011 Plan at a weighted average price of $5.50 per share.  As of June 28, 2014, 5,269,669 shares were available for future issuance under the 2011 Plan compared to 6,296,935 under the 2011 Plan as at December 28, 2013. The valuation inputs utilized to determine the grant date fair value per ESPP award granted were as follows:

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 28,

 

June 29,

 

 

2014

 

2013

Expected life (years)

 

0.5 

 

0.5 

Expected volatility

 

33% 

 

37% 

Risk-free interest rate

 

0.1% 

 

0.1% 

 

 

 

 

 

 

The weighted average grant date fair value per ESPP award granted during the first six months of 2014 was $1.67.  The total intrinsic value of ESPP shares issued during the first six months of 2014 was $1.3 million.   

 

As of June 28, 2014, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $0.4 million which is expected to be recognized over the next month.

 

 

NOTE 6.  Balance Sheet Items

  

a.

Inventories.

 

Inventories (net of reserves of $6.9  million and $6.6 million at June 28, 2014 and December 28, 2013, respectively) were as follows:

 

 

 

 

 

 

 

 

June 28,

 

December 28,

(in thousands)

2014

 

2013

Work-in-progress

$

16,239 

 

$

15,847 

Finished goods

 

15,146 

 

 

15,227 

 

$

31,385 

 

$

31,074 

 

 

 

 

 

 

b.

Product warranties.

  

The Company provides a limited warranty on most of its standard products and accrues for the estimated cost at the time of shipment.  The Company estimates its warranty costs based on historical failure rates and related repair or replacement costs and periodically reassess these estimates as actual warranty activities occur.  The changes in the Companys accrued warranty obligations from December 28, 2013 to June 28, 2014, and from December 29, 2012 to June 29, 2013 were as follows:  

 

 

 

 

 

 

 

 

Six Months Ended

 

June 28,

 

June 29,

(in thousands)

2014

 

2013

Balance, beginning of the period

$

2,163 

 

$

5,981 

Accrual for new warranties issued

 

222 

 

 

177 

Reduction for payments and product replacements

 

(344)

 

 

(221)

Adjustments related to revisions and changes in estimate of warranty accrual

 

(88)

 

 

(807)

Balance, end of the period

$

1,953 

 

$

5,130 

 

 

 

 

 

 

 

The Companys accrual for warranty obligations is included in Accrued liabilities in the interim Condensed Consolidated Balance Sheet.

 

 

 

12


 

NOTE 7.  Investment Securities  

 

The Companys available for sale investments, by investment type, consists of the following at June 28, 2014 and December 28, 2013: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 28, 2014

(in thousands)

Amortized Cost

 

Gross Unrealized Gains*

 

Gross Unrealized Losses*

 

Fair Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

12,393 

 

$

 —

 

$

 —

 

$

12,393 

Total cash equivalents

 

12,393 

 

 

 —

 

 

 —

 

 

12,393 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

19,305 

 

 

427 

 

 

 —

 

 

19,732 

US treasury and government agency notes

 

501 

 

 

66 

 

 

 —

 

 

567 

Foreign government and agency notes

 

502 

 

 

15 

 

 

 —

 

 

517 

US states and municipal securities

 

200 

 

 

 

 

 —

 

 

202 

Total short-term investments

 

20,508 

 

 

510 

 

 

 —

 

 

21,018 

Long-term investment securities:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

68,766 

 

 

186 

 

 

(18)

 

 

68,934 

US treasury and government agency notes

 

34,752 

 

 

46 

 

 

(6)

 

 

34,792 

Foreign government and agency notes

 

2,037 

 

 

 

 

(2)

 

 

2,039 

US states and municipal securities

 

230 

 

 

 

 

 —

 

 

231 

Total long-term investment securities

 

105,785 

 

 

237 

 

 

(26)

 

 

105,996 

Total

$

138,686 

 

$

747 

 

$

(26)

 

$

139,407 

 

 

 

 

 

 

 

 

 

 

 

 

*Gross unrealized gains include accrued interest on investments of $0.5 million which are included in the Consolidated Statement of Operations.  The remainder of the gross unrealized gains and losses are included in the Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

 

 

 

 

 

 

 

 

 

 

 

 

 

December 28, 2013

(in thousands)

Amortized Cost

 

Gross Unrealized Gains*

 

Gross Unrealized Losses*

 

Fair Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

14,629 

 

$

 —

 

$

 —

 

$

14,629 

Total cash equivalents

 

14,629 

 

 

 —

 

 

 —

 

 

14,629 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

7,735 

 

 

416 

 

 

(2)

 

 

8,149 

US treasury and government agency notes

 

2,499 

 

 

44 

 

 

 —

 

 

2,543 

Foreign government and agency notes

 

 —

 

 

 —

 

 

 —

 

 

 —

US states and municipal securities

 

200 

 

 

 

 

 —

 

 

202 

Total short-term investments

 

10,434 

 

 

462 

 

 

(2)

 

 

10,894 

Long-term investment securities:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

74,583 

 

 

121 

 

 

(34)

 

 

74,670 

US treasury and government agency notes

 

26,421 

 

 

30 

 

 

(9)

 

 

26,442 

Foreign government and agency notes

 

2,049 

 

 

 

 

(2)

 

 

2,048 

US states and municipal securities

 

230 

 

 

 

 

 —

 

 

231 

Total long-term investment securities

 

103,283 

 

 

153 

 

 

(45)

 

 

103,391 

Total

$

128,346 

 

$

615 

 

$

(47)

 

$

128,914 

 

 

 

 

 

 

 

 

 

 

 

 

*Gross unrealized gains include accrued interest on investments of $0.5 million which are included in the Consolidated Statement of Operations.  The remainder of the gross unrealized gains and losses are included in the Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

 

  

 

As of June 28, 2014 and December 28, 2013, the fair value of certain of the Companys available-for-sale securities was less than their cost basis.  Management reviews various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition, near-term prospects of the

13


 

issuer of the investment security, the magnitude of the unrealized loss compared to the cost of the investment, length of time the investment has been in a loss position and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value.  As of June 28, 2014, the Company determined that all the unrealized losses are temporary in nature and recorded them as a component of Accumulated other comprehensive income (loss).

 

Contractual maturities as of June 28, 2014 of the Company’s investment securities do not exceed three years.  The majority of the contractual maturities are two to three years, and the balance has maturities of one year or less.

 

 

NOTE 8. Credit Facility

 

As of June 28, 2014, the Company had an available revolving line of credit with a bank under which the Company may borrow up to $100 million, of which $nil was drawn (December 28, 2013 - $30 million). The Company may request, from time to time, and subject to customary conditions, including receipt of commitments, that the revolving credit facility be increased by an aggregate amount not to exceed $150 million.  Interest payments are based on LIBOR plus margins, where margins ranges from 1.75% to 2.25% per annum based on the Company’s leverage ratio.  The revolving credit facility is available for general corporate purposes. The credit facility is collateralized by substantially all of the Company’s personal property. The Company’s obligations under the credit facility are jointly and severally guaranteed by material wholly-owned domestic subsidiaries of the Company.

 

 

NOTE 9.  Income Taxes  

  

The Company recorded a provision for income taxes of $4.5 million and $6.3 million for the three and six months ended June 28, 2014, respectively, and a provision for income taxes of $4.6 million and $8.8 million for the three and six months ended June 29, 2013, respectively.

 

The Company’s effective tax rate was 321% and (2,150%) for the three months ended June 28, 2014 and June 29, 2013, respectively.  For each of the second quarters of 2014 and 2013, the difference between the Company’s effective tax rate and the 35% federal statutory rate results primarily from changes in valuation allowance, non-deductible amortization of intangible assets, the amortization of prepaid taxes, losses that are not benefitted for tax and changes in accruals related to unrecognized tax benefits, partially offset by foreign eligible tax rates lower than the federal statutory rate.

 

The Company’s effective tax rate was (631%) and (192%) for the six months ended June 28, 2014 and June 29, 2013, respectively.  For each of the two quarters of 2014 and 2013, the difference between the Company’s effective tax rate and the 35% federal statutory rate results primarily from changes in valuation allowance, non-deductible amortization of intangible assets, the amortization of prepaid taxes, losses that are not benefitted for tax and changes in accruals related to unrecognized tax benefits, partially offset by foreign eligible tax rates lower than the federal statutory rate.  

 

As at June 28, 2014, the Company’s liability for unrecognized tax benefits on a world-wide consolidated basis was $40.1 million. The ultimate recognition of an amount different from this estimate would affect the Company’s effective tax rate.

14


 

  

NOTE 10.  Net Loss Per Share  

  

The following table sets forth the computation of basic and diluted net loss per share:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

June 28

 

June 29,

 

 

June 28

 

June 29,

(in thousands, except per share amounts)

2014

 

2013

 

 

2014

 

2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(3,480)

 

$

(4,816)

 

 

$

(7,721)

 

$

(13,343)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding (1)

 

196,114 

 

 

203,307 

 

 

 

195,651 

 

 

204,269 

Basic and diluted net loss per share

$

(0.02)

 

$

(0.02)

 

 

$

(0.04)

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

PMC-Sierra Ltd. special shares are included in the calculation of basic and diluted weighted average common shares outstanding.

  

In the three and six months ended June 28, 2014, the Company had approximately 3.5 million and 3.3 million of stock options and Restricted Stock Units, respectively  (2.2 million in the three and six months ended June 29, 2013) that were not included in the diluted net loss per share because they would have been anti-dilutive.

 

   

NOTE 11.  Stock Repurchase Program

 

On March 13, 2012, the Company announced a $275 million stock repurchase program. For the three months ended June 28, 2014 and June 29, 2013, the Company repurchased nil and  0.9 million shares, respectively.  Total cash cost was $nil and $5.5 million, respectively.  For the six months ended June 28, 2014 and June 29, 2013, the Company repurchased 1.4 million and  0.9 million shares, respectively.  Total cash cost was approximately $8.9 million and $5.5 million, respectively.  The repurchased shares were retired immediately.  Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.  As of June 28, 2014, the Company had completed $247.9 million of the announced $275 million stock repurchase program.

 

 

15


 

Item 2.   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “could,” “should,” “estimates,” “predicts,” “potential,” “continue,” “becoming,” “transitioning” and similar expressions to identify such forward-looking statements.  Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources and liquidity sufficiency, sources of liquidity, capital expenditures, interest income and expenses, restructuring activities, cash commitments, purchase commitments, use of cash, our expectation regarding our amortization of purchased intangible assets, our expectations regarding our business acquisitions, and our expectation regarding distribution from certain investments. Such statements, particularly in the “Business Outlook” section, are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. (See also “Risk Factors” Part II, Item 1A. and our other filings with the Securities and Exchange Commission (“SEC”)). Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the filing date of this Quarterly Report.  

  

Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date of this Quarterly Report.   We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

OVERVIEW

   

PMC is a fabless semiconductor and software solution innovator transforming networks that connect, move and store Big Data. The Company designs, develops, markets and supports semiconductor, embedded software, and board level solutions by integrating its mixed-signal, software and systems expertise through a network of offices in North America, Europe and Asia.  Building on a track record of technology leadership, we are driving innovation across storage, optical and mobile networks. Our highly integrated solutions increase performance and enable next generation services to accelerate the network transformation.   

  

Our current revenues are generated by a portfolio of approximately 700 products which we have designed and developed or acquired.  PMCs diverse product portfolio enables many different types of communications network infrastructure equipment in three market segments:  Storage, Mobile and Optical networks.    

  

1.

Our Storage network products enable high-speed servers, switches and storage equipment to store, manage and move large quantities of data securely;  

2.

Our Optical network products are used in optical transport platforms, multi-service provisioning platforms, and edge routers where they gather, process and transmit disparate traffic to their next destination in the network; and  

3.

Our Mobile network products are used in wireless base stations, base station radios, mobile backhaul, and aggregation equipment.  

 

The following discussion of the financial condition and results of our operations should be read in conjunction with the interim condensed consolidated financial statements and notes thereto included in this Form 10-Q, with certain comparatives restated as disclosed in Item 9B in the Company’s Annual Report on Form 10-K for the year ended December 28, 2013, filed with the SEC on February 26, 2014. The unaudited comparative financial information for the three and six months ended June 29, 2013 presented herein reflects such restatements, which were to correct certain errors related to accounting for income taxes and capitalization of inventory-related overhead costs. 

 

16


 

Results of Operations

  

Second quarter of 2014 and 2013  

 

Net revenues

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

($ millions)

2014

 

2013

 

Change

Net revenues

$

126.8 

 

$

127.6 

 

(1)%

 

  

Overall net revenues for the second quarter of 2014 were $126.8 million, a decrease of $0.8 million compared to the second quarter of 2013, mainly due to lower sales volumes. This 1% decrease in the current period compared to the same period of 2013 was mainly attributable to lower sales volumes of our Optical division driven by our Fiber-to-the-Home (“FTTH”) products.  This was partially offset by higher sales volumes of our Optical Transport Network (“OTN”) and Wintegra product families.

  

Storage represented 65% of our net revenues in the second quarter of 2014 and 2013. Storage net revenues remained consistent at $83.0 million compared to the same quarter in 2013. Increase in sales volumes in our Flash Controller products was offset by lower sales volumes from some of our Datacenter customers.  On a sequential basis, Storage net revenues were lower by 5% on lower sales volumes due to strong sales in the first quarter of our Flash Controller products tied to a major data center deployment, combined with inventory consumption at one of our large customers due to their slower than expected first quarter.

 

Optical represented 20% of our net revenues in the second quarter of 2014 compared to 21% in the same period of 2013. Optical net revenues decreased by 5% compared to the same quarter in 2013 mainly due to lower sales volumes from our FTTH products.  This was partially offset by higher volume of sales from our OTN and Legacy metro aggregation transport products.  On a sequential basis, Optical net revenues increased by 6% mainly due to our OTN sales volumes growth and higher sales volumes of our SONET products driven mostly out of deployment of networks India and Russia.  This was partially offset by lower sales volumes of our FTTH products.

 

Mobile represented 15% our net revenues for the second quarter of 2014 compared to 14% in the same period of 2013. Mobile net revenues increased by 3% compared to the second quarter of 2013 mainly due to higher sales volumes of our WinPath family of processors.  On a sequential basis, Mobile revenues increased by $3.1 million or 20% due mainly to higher sales volumes of our WinPath family of processors due to broad-based strength in mobile backhaul for 3G and 4G deployments.

 

Gross profit

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

($ millions)

2014

 

2013

 

Change

Gross profit

$

90.0 

 

$

89.9 

 

0% 

Percentage of net revenues

 

71% 

 

 

71% 

 

 

 

Our gross profit increased slightly by $0.1 million in the second quarter of 2014 compared to the same period in 2013.  Gross profit as a percentage of net revenues remained consistent at 71% in the second quarter of 2014 and 2013.

 

Operating expenses

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

($ millions)

2014

 

2013

 

Change

Research and development

$

49.4 

 

$

51.7 

 

(4)%

Percentage of net revenues

 

39% 

 

 

41% 

 

 

Selling, general and administrative

$

29.0 

 

$

30.3 

 

(4)%

Percentage of net revenues

 

23% 

 

 

24% 

 

 

Amortization of purchased intangible assets

$

9.9 

 

$

10.8 

 

(8)%

Percentage of net revenues

 

8% 

 

 

8% 

 

 

  

Research and Development and Selling, General and Administrative Expenses

 

Our research and development (“R&D”) expenses decreased $2.3 million, or 4% compared to the same period last year.  This was primarily the result of the decrease in payroll related costs due to lower headcount and lower tape-out related costs incurred in the second quarter of 2014 compared to the same quarter of 2013.  On a sequential basis, R&D expenses were $0.8 million lower in the second quarter of 2014 compared to the first quarter of 2014.  This was mainly due to lower payroll related costs due to lower headcount slightly offset by increased vacation expense and bonus accrual.

17


 

 

Selling, general and administrative (“SG&A”) expenses were $1.3 million, or 4% lower in the second quarter of 2014 compared to the same period last year, mainly due to a decrease in acquisition related costs and asset impairments, partially offset by an increase in reduction in force expense.  On a sequential basis, SG&A were $0.4 million lower in the second quarter of 2014 compared to the first quarter of 2014.  This is mainly due to a  decrease in payroll related costs due to lower headcount and a  decrease in professional fees, partially offset by increases in vacation expense and bonus accrual and reduction in force expense accrual.

  

Amortization of purchased intangible assets

 

Amortization of acquired intangible assets related to developed technology, in-process research and development, customer relationships, and trademarks decreased by $0.9 million in the second quarter of 2014 compared to the same period in 2013 mainly due to certain intangible assets that reached the end of their amortization period during the first quarter of 2014.    

 

Other income (expense) and Provision for income taxes

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

($ millions)

2014

 

2013

 

Change

Amortization of debt issue costs

$

(0.1)

 

$

 —

 

(100)%

Foreign exchange (loss) gain

$

(0.8)

 

$

2.2 

 

(136)%

Interest income, net

$

0.1 

 

$

0.3 

 

(65)%

Provision for income taxes

$

(4.5)

 

$

(4.6)

 

2% 

 

 

Amortization of debt issue costs

  

In the second quarter of 2014, we amortized $0.1 million of debt issue costs relating to our credit facility obtained during the third quarter of 2013.

  

Foreign exchange (loss) gain

  

We recorded a net foreign exchange loss of $0.8 million in the second quarter of 2014 compared to a net foreign exchange gain of $2.2 million in the second quarter of 2013.  This was primarily due to foreign exchange revaluation of our foreign denominated assets and liabilities.  This was partly driven by the United States Dollar depreciating by approximately 4% during the  second quarter of 2014 compared to its appreciation by approximately 4% during the second quarter of 2013, against currencies applicable to our foreign operations.

 

Interest income (expense), net

  

Net interest income was $0.1 million in the second quarter of 2014 compared to net interest income of $0.3 million in the second quarter of 2013.  

  

Provision for income taxes

  

Provision for income taxes was $4.5 million in the second quarter of 2014 compared to provision for income taxes of $4.6 million in the second quarter of 2013, mainly due to changes in the recognition of research credits partially offset by current income taxes and changes in the amortization of prepaid income tax.

 

18


 

First six months of 2014 and 2013

 

Net revenues

 

 

 

 

 

 

 

 

 

 

First Six Months

 

 

($ millions)

2014

 

2013

 

Change

Net revenues

$

253.3 

 

$

252.7 

 

0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues for the first six months of 2014 were $253.3 million compared to $252.7 million for the same period of 2013.  This slight increase was mainly attributable to higher sales volumes of our Storage division driven by our Flash controller products and increase in sales volumes of our Mobile division driven by our mobile backhaul products partially offset by lower sales volumes in our Optical division driven by our FTTH products.   

 

Storage represented 67% of our net revenues in the first six months of 2014 compared to 66% in the same period of 2013.    Storage net revenues increased by 1% compared to the first six months of 2013 mainly due to increased sales volume of our Flash controller products partially offset by lower volumes of sales to our Datacenter customers. 

 

Optical represented 19% of our net revenues in the first six months of 2014 compared to 20% in the same period of 2013.  Optical net revenues decreased by 4% compared to the first six months of 2013 mainly due to lower sales volumes from our FTTH and routing and switching products partially offset by higher volume of sales from our OTN products.

 

Mobile represented 14% of our net revenues in the first six months of 2014 and 2013.  Mobile net revenues increased by 2% compared to the first six months of 2013 mainly due to higher sales volumes of our WinPath family of processors. 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

First Six Months