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EXCEL - IDEA: XBRL DOCUMENT - PMC SIERRA INCFinancial_Report.xls
EX-31.1 - EX-31.1 - PMC SIERRA INCpmcs-20140927ex311f79526.htm
EX-32.1 - EX-32.1 - PMC SIERRA INCpmcs-20140927ex3210d37bb.htm
EX-31.2 - EX-31.2 - PMC SIERRA INCpmcs-20140927ex3125d234a.htm
EX-32.2 - EX-32.2 - PMC SIERRA INCpmcs-20140927ex322fa7db1.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 September 27, 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 November 3, 2014, the registrant had 198,037,197 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 Income (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

19 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26 

Item 4.

Controls and Procedures

27 

PART II—OTHER INFORMATION 

 

Item 1.

Legal Proceedings

28 

Item 1A.

Risk Factors

28 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37 

Item 3.

Defaults Upon Senior Securities

37 

Item 4.

Mine Safety Disclosures

37 

Item 5.

Other Information

37 

Item 6.

Exhibits

38 

Signatures 

39 

 

 

 

 

   

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

 

Nine Months Ended

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

2014

 

2013 

 

2014

 

2013

Net revenues

 

$

135,462 

 

$

128,411 

 

$

388,752 

 

$

381,156 

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

 

 

40,306 

 

 

36,840 

 

 

114,694 

 

 

111,864 

Gross profit

 

 

95,156 

 

 

91,571 

 

 

274,058 

 

 

269,292 

Research and development

 

 

48,441 

 

 

50,733 

 

 

147,977 

 

 

157,038 

Selling, general and administrative

 

 

29,265 

 

 

26,383 

 

 

87,596 

 

 

85,002 

Amortization of purchased intangible assets

 

 

9,948 

 

 

13,138 

 

 

32,225 

 

 

34,698 

Income (loss) from operations

 

 

7,502 

 

 

1,317 

 

 

6,260 

 

 

(7,446)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange gain (loss)

 

 

899 

 

 

(1,898)

 

 

642 

 

 

1,680 

Interest income, net

 

 

198 

 

 

230 

 

 

321 

 

 

824 

Gain on investment securities and other investments

 

 

12 

 

 

1,762 

 

 

87 

 

 

1,776 

Amortization of debt issue costs

 

 

(51)

 

 

(30)

 

 

(153)

 

 

(30)

Income (loss) before provision for income taxes

 

 

8,560 

 

 

1,381 

 

 

7,157 

 

 

(3,196)

Provision for income taxes

 

 

(3,087)

 

 

(4,613)

 

 

(9,405)

 

 

(13,379)

Net income (loss)

 

$

5,473 

 

$

(3,232)

 

$

(2,248)

 

$

(16,575)

Net income (loss) per common share - basic

 

$

0.03 

 

$

(0.02)

 

$

(0.01)

 

$

(0.08)

Net income (loss) per common share - diluted

 

$

0.03 

 

$

(0.02)

 

$

(0.01)

 

$

(0.08)

Shares used in per share calculation - basic

 

 

197,613 

 

 

205,377 

 

 

196,305 

 

 

204,638 

Shares used in per share calculation - diluted

 

 

200,744 

 

 

205,377 

 

 

196,305 

 

 

204,638 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

 

 

 

 

 

 

   

  

3


 

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

2014

 

2013

 

2014

 

2013

Net income (loss)

$

5,473 

 

$

(3,232)

 

$

(2,248)

 

$

(16,575)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of tax of $227, ($214), $41 and $48

 

(745)

 

 

637 

 

 

(217)

 

 

(311)

Change in fair value of investment securities, net of tax of $47, ($71), $13 and $153

 

(134)

 

 

202 

 

 

(37)

 

 

(246)

Other comprehensive income (loss)

 

(879)

 

 

839 

 

 

(254)

 

 

(557)

Comprehensive income (loss)

$

4,594 

 

$

(2,393)

 

$

(2,502)

 

$

(17,132)

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

  

 

 

 

   

 

4


 

    

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

 

 

 

 

 

 

 

September 27,

 

December 28,

 

 

2014

 

2013

 

ASSETS:

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

89,940 

 

$

100,038 

 

Short-term investments

 

35,419 

 

 

10,894 

 

Accounts receivable, net of allowance for doubtful accounts
   of $845 (2013 - $1,036)

 

57,013 

 

 

56,112 

 

Inventories, net

 

34,588 

 

 

31,074 

 

Prepaid expenses and other current assets

 

16,304 

 

 

19,855 

 

Income taxes receivable

 

3,673 

 

 

2,640 

 

Prepaid tax expenses

 

2,749 

 

 

5,695 

 

Deferred tax assets

 

3,328 

 

 

43,131 

 

Total current assets

 

243,014 

 

 

269,439 

 

Investment securities

 

103,101 

 

 

103,391 

 

Investments and other assets

 

8,190 

 

 

10,750 

 

Prepaid tax expenses

 

93 

 

 

93 

 

Property and equipment, net

 

38,730 

 

 

39,149 

 

Goodwill

 

283,239 

 

 

278,849 

 

Intangible assets, net

 

155,881 

 

 

146,974 

 

Deferred tax assets

 

1,557 

 

 

1,306 

 

 

$

833,805 

 

$

849,951 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

19,092 

 

$

23,173 

 

Accrued liabilities

 

72,360 

 

 

64,257 

 

Credit facility

 

 —

 

 

30,000 

 

Income taxes payable

 

2,983 

 

 

632 

 

Liability for unrecognized tax benefit

 

21,394 

 

 

54,127 

 

Deferred income taxes

 

 

 

71 

 

Deferred income

 

5,501 

 

 

7,481 

 

Total current liabilities

 

121,339 

 

 

179,741 

 

Long-term obligations

 

35,982 

 

 

11,108 

 

Deferred income taxes

 

49,183 

 

 

43,143 

 

Liability for unrecognized tax benefit

 

18,621 

 

 

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;
   197,749 shares issued and outstanding (2013 - 194,415)

 

198 

 

 

195 

 

Additional paid in capital

 

1,577,375 

 

 

1,550,190 

 

Accumulated other comprehensive loss

 

(780)

 

 

(526)

 

Accumulated deficit

 

(969,293)

 

 

(963,035)

 

Total stockholders' equity

 

607,500 

 

 

586,824 

 

 

$

833,805 

 

$

849,951 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

  

  

  

  

   

   

5


 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 27,

 

September 28

 

2014

 

2013

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(2,248)

 

$

(16,575)

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

 

 

 

 

 

Depreciation and amortization

 

48,739 

 

 

51,731 

Stock-based compensation

 

16,334 

 

 

19,461 

Unrealized foreign exchange gain, net

 

(2,372)

 

 

(6,106)

Net amortization of premiums and accrued interest of investments

 

628 

 

 

1,353 

Asset impairments

 

770 

 

 

 —

Gain on investment securities and other

 

(86)

 

 

(1,767)

Excess tax benefits from stock option transactions

 

 —

 

 

(2,274)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(934)

 

 

1,923 

Inventories, net

 

(3,514)

 

 

(7,110)

Prepaid expenses and other current assets

 

4,225 

 

 

927 

Accounts payable and accrued liabilities

 

(6,699)

 

 

(8,614)

Deferred taxes and income taxes payable

 

8,608 

 

 

11,120 

Deferred income

 

(1,980)

 

 

(915)

Net cash provided by operating activities

 

61,471 

 

 

43,154 

Cash flows from investing activities:

 

 

 

 

 

Cash paid in connection with business acquisition, net of cash acquired

 

(10,000)

 

 

(96,098)

Investment in long term deposits

 

 —

 

 

(1,127)

Purchases of property and equipment

 

(11,175)

 

 

(11,297)

Purchase of intangible assets

 

(1,167)

 

 

(2,048)

Redemption of short-term investments

 

4,920 

 

 

8,466 

Sales of investment securities and other investments

 

37,936 

 

 

146,340 

Purchases of investment securities and other investments

 

(67,727)

 

 

(172,114)

Net cash used in investing activities

 

(47,213)

 

 

(127,878)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from credit facility

 

30,000 

 

 

 —

Repayment of credit facility

 

(60,000)

 

 

 —

Proceeds from issuance of common stock

 

17,924 

 

 

23,476 

Repurchases of common stock

 

(11,496)

 

 

(22,544)

Payment of debt issuance costs

 

 —

 

 

(928)

Excess tax benefits from stock option transactions

 

 —

 

 

2,274 

Net cash (used in) provided by financing activities

 

(23,572)

 

 

2,278 

Effect of exchange rate changes on cash and cash equivalents

 

(784)

 

 

(505)

Net decrease in cash and cash equivalents

 

(10,098)

 

 

(82,951)

Cash and cash equivalents, beginning of the period

 

100,038 

 

 

169,970 

Cash and cash equivalents, end of the period

$

89,940 

 

$

87,019 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

276 

 

$

 —

Cash payments for income taxes, net

 

747 

 

 

1,432 

 

 

 

 

 

 

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 third 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 nine months ended September 28, 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

 

During the first quarter of 2014, the Company adopted Financial Accountings Standards Board (“FASB”) Accounting Standards Update (“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.

 

In May 2014, the FASB issued 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.

 

7


 

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.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements  Going Concern, or ASU 2014-15, which requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date that the financial statements are issued or within one year after the date that the financial statements are available to be issued, when applicable.  The new standard is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is permitted. Accordingly, we early adopted this standard and it did not have any impact in our consolidated financial statements and disclosures.

 

   

NOTE 2. Business Combinations  

 

Acquisition of RAID Software License

 

On September 4, 2014 (the “Effective Date”), PMC completed a transaction agreement with Hewlett-Packard Company (“HP”) to license core HP Smart Array (“RAID”) software, firmware and management technology (the “Transaction”). With this technology, as well as with certain key employees who worked for HP as lead RAID software development engineers and who were transferred to PMC, PMC can provide more system value to new and existing enterprise, Hyperscale data center and channel customers.

 

Acquisition Consideration

 

The total acquisition consideration for the Transaction is $52 million cash, payable in installments as follows:

 

 

 

 

 

 

 

(in millions)

Effective Date

$

10

January 10, 2015

 

18

January 10, 2016

 

12

January 10, 2017

 

12

 

Payment of the above installments is not subject to any contingencies. Because the installment payments span more than one year, the Company determined the purchase-date fair value of the acquisition consideration by discounting the future payments utilizing an interest rate of 3.0%, which is considered to be representative of the interest rate of a typical market participant. The difference between the total cash installment payments of $52 million and the fair value of $50.5 million as of the Effective Date will be charged to interest expense in 2014-2017. Transaction-related costs of approximately $0.6 million were expensed as incurred in the second and third quarters of 2014 and are included in selling, general and administrative expense.

 

Preliminary Allocation of Acquisition Consideration

 

The Transaction qualifies as a business combination and was accounted for using the acquisition method. The preliminary allocation of the acquisition consideration to the estimated fair value of assets acquired by major class as of the date of the Transaction is disclosed in the table below. There were no liabilities assumed in the Transaction.

 

 

 

 

 

 

 

(in thousands)

Other current assets

$

337 

Equipment

 

873 

Goodwill

 

4,390 

Intangible assets

 

44,900 

Total assets

$

50,500 

 

 

 

Total acquisition consideration (discounted)

$  

50,500 

8


 

 

Acquired Intangible Assets

 

The identified intangible assets acquired were recognized at their fair values and are being amortized on a straight-line basis over their estimated useful lives as follows:

 

 

 

 

 

 

 

 

Estimated fair value
(in thousands)

 

Weighted average useful life

License of existing technologies

$

39,800 

 

7 years

Customer relationship

 

3,800 

 

10 years

RAID license payments

 

1,300 

 

8 years

Total intangible assets

 

44,900 

 

 

 

The license of existing technologies asset includes patents, business processes, tools, and proprietary business methods related to RAID software. In addition to the current products, the licensed technologies can be leveraged to assist and improve existing services and create future generation products. The valuation assumptions included information on revenues from existing products and future expected revenue and technology migration trends for each technology. Management applied an 18% discount rate to value the license of existing technology assets, which took into consideration market rates of return on debt and equity capital and the risk associated with achieving forecasted revenues related to these assets.

 

The customer relationship asset relates primarily to the underlying customer relationship with HP. The preliminary estimated fair value of the customer relationship represents the sum of the present value of the expected cash flows attributable to this customer relationship. The cash flows were determined from the revenue and profit forecasts that are expected to be generated from the customer relationship and were valued by applying a discount rate of 15%.

 

The RAID license payments piece of intangible assets relates to annual RAID software fees receivable from HP to incorporate the Company’s RAID software into HP products not incorporating Company hardware and were valued by applying a discount rate of 15%.  

 

Goodwill

 

The Company’s primary reasons for the Transaction were to expand its relationship with HP and to provide additional opportunities for increased revenue through future sales to customers other than HP. As referenced above, included in the Transaction was an assembled workforce of five key employees which provides the Company with intellectual resources for the development of the next generation of the Company’s RAID software (Smart RAIDTM), as well as operational synergies. These factors were the basis for the recognition of goodwill. Goodwill is expected to be deductible for tax purposes over a period of 15 years. The acquired goodwill was allocated to our Enterprise Storage Products market segment.

 

 Pro forma disclosures

 

The Transaction would not have a significant impact on PMC’s net revenues or net earnings (loss) for the periods where pro forma disclosures would be required. Revenues and related expenses for the third quarter of 2014 from the Effective date were immaterial.

 

Other Agreement

 

Upon the closing of the Transaction, the Company also entered into an agreement with HP related to services and non-recurring engineering (“NRE”) which provides the framework for the development of future generations of RAID software for HP for a period of approximately two years from the Effective Date. During this period, HP will make cost reimbursement payments to the Company totaling $25 million, which are receivable in installments through April 2016. The services and NRE agreement is considered to be a market rate contract for services to be provided in the future, thus not having an impact on the acquisition consideration allocation, and will be accounted for prospectively as such services are delivered and related payments are received.

 

9


 

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 positioned itself 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 and Israeli Shekel.  To minimize the short-term impact of foreign currency fluctuations on the Companys operating expenses, the Company purchases forward currency contracts.

  

As at September 27, 2014, the Company had 84 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 September 27, 2014, the U.S. dollar notional amount of these contracts was $35.5 million (December 28, 2013 - $27.7 million) and the contracts had an aggregate fair value loss of $0.2 million (September 28, 2013 – fair value loss of $0.3 million), which was recorded in Accumulated other comprehensive loss net of taxes of nil for the nine months ended September 27, 2014 and September 28, 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 third 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 $15.5 million of investments as Level 2 that were reported as Level 1 at December 28, 2013.  We also classified $0.3 million of investments as Level 1 that were reported as Level 2 at December 28, 2013.  The Company’s derivative instruments are classified as Level 2 as of September 27, 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 at September 27, 2014.

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

  

Financial assets measured on a recurring basis as at September 27, 2014 and December 28, 2013, are summarized below:  

 

 

 

 

 

 

 

 

 

Fair value,

 

September 27, 2014

(in thousands)

Level 1

 

Level 2

Assets:

 

 

 

 

 

Money market funds 

$

12,166 

 

$

 —

Corporate bonds and notes

 

74,853 

 

 

22,120 

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

 

37,888 

 

 

887 

Foreign government and agency notes

 

 —

 

 

2,540 

US state and municipal securities

 

 —

 

 

231 

Total assets

$

124,907 

 

$

25,778 

 

 

 

 

 

 

 

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,

 

September 27, 2014

(in thousands)

Level 2

Current liabilities:

 

 

Forward currency contracts

$

870 

 

 

 

 

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 September 27, 2014.

 

 

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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 nine months ended September 27, 2014 and September 28, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 27,

 

September 28,

 

September 27,

 

September 28,

(in thousands)

2014

 

2013

 

2014

 

2013

Cost of revenues

$

226 

 

$

190 

 

$

681 

 

$

643 

Research and development

 

1,990 

 

 

2,541 

 

 

6,540 

 

 

8,241 

Selling, general and administrative

 

3,012 

 

 

3,143 

 

 

9,113 

 

 

10,577 

Total

$

5,228 

 

$

5,874 

 

$

16,334 

 

$

19,461 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company received cash of $7.3 million and $17.9 million related to the issuance of stock-based awards during the three and nine months ended September 27, 2014, respectivelyThe Company received cash of $6.8 million and $23.5 million related to the issuance of stock-based awards during the three and nine months ended September 28, 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 nine months ended September 27, 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

 

644,237 

 

$

6.87 

 

 

 

 

 

 

Exercised

 

(1,270,510)

 

$

5.56 

 

 

 

 

 

 

Forfeited

 

(195,410)

 

$

7.33 

 

 

 

 

 

 

Expired

 

(2,470,231)

 

$

14.18 

 

 

 

 

 

 

Outstanding, September 27, 2014

 

20,263,558 

 

$

7.48 

 

 

4.51 

 

$

14,462,690 

Vested and expected to vest, September 27, 2014

 

20,002,407 

 

$

7.50 

 

 

4.45 

 

$

14,189,984 

Exercisable, September 27, 2014

 

17,902,164 

 

$

7.61 

 

 

4.00 

 

$

12,019,020 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 27, 2014.  Total forfeitures recorded amounted to $1.8 million and $2.0 million during each of the nine months ended September 27, 2014, and September 28, 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

12


 

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 fair values of the Company’s stock option awards were calculated for expense recognition using an estimated forfeiture rate, assuming no expected dividends and using the following weighted average assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

September 28,

 

 

September 27,

 

September 28,

 

 

2014

 

2013

 

 

2014

 

2013

Expected life (years)

 

5.75 

 

5.63 

 

 

5.75 

 

5.86 

Expected volatility

 

33% 

 

40% 

 

 

33% 

 

40% 

Risk-free interest rate

 

1.8% 

 

1.6% 

 

 

1.8% 

 

1.6% 

 

 

 

 

 

 

 

 

 

 

The weighted average grant-date fair value per stock options granted during the three and nine months ended September 27, 2014 was $2.29. The weighted average grant-date fair value per stock option granted during the three and nine months ended September 28, 2013 was $2.45 and $2.47, respectively. The total intrinsic value of stock options exercised during the three and nine months ended September 27, 2014 was $0.7 million and $2.3 million, respectively. The total intrinsic value of stock options exercised during the three and nine months ended September 28, 2013 was $0.6 million and $2.8 million respectively.

  

As of September 27, 2014, there was $4.6 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 2.4 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.  In July 2012, the Compensation Committee decided to allocate a portion of equity granted to the CEO as performance equity.  The first grant of Performance RSUs to the CEO occurred on August 27, 2012. 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. On August 26, 2013 Performance RSUs were granted 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.  

 

Effective in August 2014, the Compensation Committee adopted a second performance-based equity program as part of the Company’s equity compensation program applicable to the CEO and his direct reports (“Executive(s)”).  The addition of the second program increases the performance-based equity portion of the annual equity award to our Executives to 50% and reduces the portion previously attributed to options from 50% to 25%.  Time-based RSUs make up the remaining 25% of an Executive’s annual grant.   The performance metric for the new performance-based equity program is based on the Non-GAAP operating income target for each year in the Company’s internal 3-year operating plan treated as three distinct, one-year performance periods.  On August 25, 2014, the Company made its annual grant of RSU awards to Executives. The performance metric applicable to the RSUs granted under the first program remain based on the degree of achievement of TSR relative to GICS Semiconductor Companies (8-Digit) for the Performance Period (July 1,  2014 - June 30, 2016). The total estimated $1.9 million fair value of these 2014 awards will be recognized as compensation expense after the Compensation Committee certifies the number of earned RSUs over the award’s vesting terms, with fifty percent vesting on August 25, 2016 and fifty percent vesting on August 25, 2017. The total fair value of the awards based on the second performance-based program tied to Non-GAAP operating income targets for 2014-2016 was estimated at $2.0 million fair value of these 2014 grants and will be recognized as compensation expense after the Compensation Committee certifies the number of earned RSUs over the award’s vesting terms, with thirty-four percent vesting on February 25, 2015, thirty-three percent vesting on February 25, 2016 and thirty-three  percent vesting on February 25, 2017.

 

 

 

 

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A summary of RSU activity during the nine months ended September 27, 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

 

3,339,559 

 

 

 

 

 

 

Released

 

(1,843,835)

 

 

 

 

 

 

Forfeited

 

(665,806)

 

 

 

 

 

 

Unvested units at September 27, 2014

 

7,008,955 

 

 

1.88 

 

$

52,952,684 

Expected to vest, September 27, 2014

 

5,994,812 

 

 

1.78 

 

$

45,290,807 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The intrinsic value of RSUs vested during the three and nine months ended September 27, 2014 was  $8.5 million and $13.5 million, respectively. As of September 27, 2014, total unrecognized compensation costs, adjusted for estimated forfeitures, related to unvested RSUs was $38.7 million, which is expected to be recognized over the next 2.8 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.   

 

During the nine months ended September 27, 2014, 1,916,727 shares were issued under the 2011 Plan at a weighted average price of $5.66 per share.  As of September 27, 2014, 4,380,208 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:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 27,

 

September 28,

 

 

September 27,

 

September 28,

 

 

2014

 

2013

 

 

2014

 

2013

Expected life (years)

 

0.5 

 

0.5 

 

 

0.5 

 

0.5 

Expected volatility

 

38% 

 

34% 

 

 

35% 

 

35% 

Risk-free interest rate

 

0.1% 

 

0.1% 

 

 

0.1% 

 

0.1% 

 

The weighted average grant date fair value per ESPP award granted during the first nine months of 2014 was $1.74.  The total intrinsic value of ESPP shares issued during the first nine months of 2014 was $2.3 million.   

 

As of September 27, 2014, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $1.3  million which is expected to be recognized over the next four months.

 

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NOTE 6.  Balance Sheet Items

  

a.

Inventories.

 

Inventories (net of reserves of $7.3  million and $6.6 million at September 27, 2014 and December 28, 2013, respectively) were as follows:

 

 

 

 

 

 

 

 

September 27,

 

December 28,

(in thousands)

2014

 

2013

Work-in-progress

$

17,865 

 

$

15,847 

Finished goods

 

16,723 

 

 

15,227 

 

$

34,588 

 

$

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 September 27, 2014, and from December 29, 2012 to September 28, 2013 were as follows:  

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 27,

 

September 28,

(in thousands)

2014

 

2013

Balance, beginning of the period

$

2,163 

 

$

5,981 

Accrual for new warranties issued

 

371 

 

 

402 

Reduction for payments and product replacements

 

(533)

 

 

(868)

Adjustments related to revisions and changes in estimate of warranty accrual

 

(113)

 

 

(3,198)

Balance, end of the period

$

1,888 

 

$

2,317 

 

 

 

 

 

 

 

The Companys accrual for warranty obligations is included in Accrued liabilities in the interim Condensed Consolidated Balance Sheet.  The change in estimate of warranty accrual in the third quarter of 2013 includes a reduction for amounts over accrued in prior periods and amounts do not have a material impact to 2013 or prior periods.

 

 

 

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NOTE 7.  Investment Securities  

 

The Companys available for sale investments, by investment type, consists of the following at September 27, 2014 and December 28, 2013: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 27, 2014

(in thousands)

Amortized Cost

 

Gross Unrealized Gains*

 

Gross Unrealized Losses*

 

Fair Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

12,166 

 

$

 —

 

$

 —

 

$

12,166 

Total cash equivalents

 

12,166 

 

 

 —

 

 

 —

 

 

12,166 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

32,275 

 

 

439 

 

 

(1)

 

 

32,713 

US treasury and government agency notes

 

1,514 

 

 

62 

 

 

 —

 

 

1,576 

Foreign government and agency notes

 

1,123 

 

 

 

 

 —

 

 

1,130 

US states and municipal securities

 

 —

 

 

 —

 

 

 —

 

 

 —

Total short-term investments

 

34,912 

 

 

508 

 

 

(1)

 

 

35,419 

Long-term investment securities:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

64,242 

 

 

95 

 

 

(76)

 

 

64,261 

US treasury and government agency notes

 

37,204 

 

 

20 

 

 

(25)

 

 

37,199 

Foreign government and agency notes

 

1,409 

 

 

 

 

(2)

 

 

1,410 

US states and municipal securities

 

230 

 

 

 

 

 —

 

 

231 

Total long-term investment securities

 

103,085 

 

 

119 

 

 

(103)

 

 

103,101 

Total

$

150,163 

 

$

627 

 

$

(104)

 

$

150,686 

 

 

 

 

 

 

 

 

 

 

 

 

*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 September 27, 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

16


 

of the 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 September 27, 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 September 27, 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 September 27, 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 $3.1 million and $9.4 million for the three and nine months ended September 27, 2014, respectively, and a provision for income taxes of $4.6 million and $13.4 million for the three and nine months ended September 28, 2013, respectively.

 

The Company’s effective tax rate was 36% and 334% for the three months ended September 27, 2014 and September 28, 2013, respectively.  For each of the third 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 accruals related to unrecognized tax benefits, non-deductible amortization of intangible assets, amortization of prepaid taxes, and book losses that are not benefitted for tax purposes, partially offset by earnings eligible for tax rates lower than the federal statutory rate.

 

The Company’s effective tax rate was 131% and (419%) for the nine months ended September 27, 2014 and September 28, 2013, respectively.  For each of the first nine months periods of 2014 and 2013, the difference between the Company’s effective tax rate and the 35% federal statutory rate results primarily from changes in accruals related to unrecognized tax benefits, non-deductible amortization of intangible assets, amortization of prepaid taxes, and book losses that are not benefitted for tax purposes, partially offset by foreign earnings eligible for tax rates lower than the federal statutory rate. 

 

As of September 27, 2014, the Company’s liability for unrecognized tax benefits on a world-wide consolidated basis was $40 million. The ultimate recognition of an amount different from this estimate would affect the Company’s effective tax rate.

17


 

  

NOTE 10.  Net Income (Loss) Per Share  

  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 27

 

September 28,

 

 

September 27

 

September 28,

(in thousands, except per share amounts)

2014

 

2013

 

 

2014

 

2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

5,473 

 

$

(3,232)

 

 

$

(2,248)

 

$

(16,575)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding (1)

 

197,613 

 

 

205,377 

 

 

 

196,305 

 

 

204,638 

Dilutive effect of employee stock options and awards

 

3,131 

 

 

 —

 

 

 

 —

 

 

 —

Diluted weighted average common shares outstanding (1)

 

200,744 

 

 

205,377 

 

 

 

196,305 

 

 

204,638 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

$

0.03 

 

$

(0.02)

 

 

$

(0.01)

 

$

(0.08)

Diluted net income (loss) per share

$

0.03 

 

$

(0.02)

 

 

$

(0.01)

 

$

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

  

In the nine months ended September 27, 2014, the Company had approximately 3.3 million of stock options and Restricted Stock Units (2.1  million in the three and nine months ended September 28, 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 September 27, 2014 and September 28, 2013, the Company repurchased nil and  2.7 million shares, respectively.  Total cash cost was nil and $17.1 million, respectively.  For the nine months ended September 27, 2014 and September 28, 2013, the Company repurchased 1.4 million and  3.6 million shares, respectively.  Total cash cost was approximately $8.9 million and $22.5 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 defic