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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 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)

 

 

 

Delaware

  

94-2925073

(State or other jurisdiction of incorporation or organization)

  

(I.R.S. Employer Identification No.)

 

1380 Bordeaux Drive

Sunnyvale, CA 94089

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 239-8000

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

  

Title of each class

 

Name of exchange on which registered

  

  

Common Stock, $0.001 Par Value

Preferred Stock Purchase Rights

 

NASDAQ Global Select Market

  

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 Exchange Act Rule 12b-2).    Yes      No  

The aggregate market value of the voting stock held by nonaffiliates of the registrant, based upon the closing sale price of the Common Stock on June 28, 2014 as reported by the NASDAQ Global Select Market, was approximately $0.6 billion.

As of February 19, 2015, the registrant had 202,358,110 shares of Common Stock, $0.001 par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant’s 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K Report. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 27, 2014.

 

 

 


 

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I 

Item 1.

Business

Item 1A.

Risk Factors

10 

Item 1B.

Unresolved Staff Comments

18 

Item 2.

Properties

19 

Item 3.

Legal Proceedings

19 

Item 4.

Mine Safety Disclosures

19 

PART II 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20 

Item 6.

Selected Financial Data

23 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

33 

Item 8.

Financial Statements and Supplementary Data

36 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

72 

Item 9A.

Controls and Procedures

72 

Item 9B.

Other Information

74 

PART III 

Item 10.

Directors, Executive Officers and Corporate Governance

74 

Item 11.

Executive Compensation

74 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

74 

Item 13.

Certain Relationships and Related Transactions and Director Independence

75 

Item 14.

Principal Accountant Fees and Services

75 

PART IV 

Item 15.

Exhibits and Financial Statement Schedules

75 

 

SIGNATURES

79 

 

Unless the context requires otherwise, “PMC-Sierra”, “PMC”, “the Company”, “us”, “our” or “we”, mean PMC-Sierra, Inc. together with our subsidiary companies.

 

2


 

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Annual Report”) and the portions of our Proxy Statement incorporated by reference into this Annual Report contain forward-looking statements. We often use words such as “anticipates”, “believes”, “plans”, “expects”, “future”, “intends”, “may”, “should”, “estimates”, “predicts”, “potential”, “continue”, “becoming”, “transitioning” and similar expressions to identify such forward-looking statements.

These forward-looking statements apply only as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements made herein or elsewhere, whether as a result of new information, future events or otherwise. Our actual results could differ materially and adversely from those anticipated in forward-looking statements, including without limitation the risks described under “Item IA. Risk Factors” and elsewhere in this Annual Report and our other filings with the SEC. Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Such forward-looking statements include statements as to, among other topics:

·

business strategy;

·

business outlook;

·

sales, marketing and distribution;

·

wafer fabrication capacity;

·

competition and pricing;

·

critical accounting policies and estimates;

·

customer product inventory levels, needs and order levels;

·

demand for communications network infrastructure equipment;

·

net revenues;

·

gross profit;

·

research and development expenses;

·

selling, general and administrative expenses;

·

other income (expense), including interest income (expense);

·

foreign exchange rates;

·

taxation rates and tax provision;

·

sources of liquidity and liquidity sufficiency;

·

capital resources;

·

capital expenditures;

·

restructuring activities, expenses and associated annualized savings;

·

cash commitments;

·

purchase commitments;

·

use of cash;

·

expectation regarding our amortization of purchased intangible assets; and

·

expectations regarding distribution from certain investments.

This Annual Report should be read in conjunction with our periodic filings made with the SEC subsequent to the date of the original filing, including any amendments to those filings, as well as any current reports filed on Form 8-K subsequent to the date of the original filing.

 

3


 

 

PART I

ITEM 1.      BUSINESS.

OVERVIEW

PMC-Sierra, Inc. (the “Company” or “PMC”) is a 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.

We have approximately 700 different semiconductor devices that are sold to leading equipment and design manufacturers, who in turn supply their equipment principally to enterprises, Cloud Data Centers and carriers worldwide. We provide solutions for our customers by leveraging our intellectual property, design expertise and systems knowledge across a broad range of applications and industry protocols. PMC’s portfolio of semiconductor devices is used in various applications of storage and communications network infrastructure equipment. 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.

PMC was incorporated in the state of California in 1983 and reincorporated in the state of Delaware in 1997. Our Common Stock trades on the NASDAQ Global Select Market under the symbol “PMCS”.  Our fiscal year ended on the last Saturday of the calendar year.  Fiscal years 2014, 2013 and 2012 consisted of 52 weeks each.

INDUSTRY OVERVIEW

Mobile and Internet traffic is growing at an unprecedented rate, driven by the continued rise of mobile broadband, Data Center-based cloud services and Internet-based video content.  Cisco predicts that by the end of 2016, global Internet IP traffic will pass the zettabyte (1000 exabytes) threshold and will reach 1.6 zettabytes per year by 2018 and mobile data traffic will have grown to nearly 15.9 exabytes per month by 2018. This bandwidth growth in conjunction with industry wide momentum behind cloud-based service delivery is placing an incredible strain on mobile, metro optical and enterprise Data Center networks in order to meet the needs of new applications such as social media, cloud-storage and video-streaming to name a few.  This insatiable demand for real-time access to high bandwidth digital content is driving traditional service providers and Data Center operators to upgrade and improve their network infrastructure and storage management capabilities to better connect, move and store Big Data efficiently and securely.

We operate in one reportable segment—semiconductor solutions for communications network infrastructure. Our semiconductor devices enable networking equipment primarily in the following three end market segments: Storage, Optical and Mobile networks described in the overview of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  The Storage market segment is made up of enterprise storage equipment manufacturers and covers two broad areas: server storage, and stand-alone external storage systems. The Optical market segment refers to infrastructure suppliers of transport and access networks that use optical transport protocol and/or physical optical medium.  The Mobile market segment is mainly infrastructure equipment suppliers, including base station and backhaul equipment, supporting the wireless transmission of content from and to mobile hand devices.

OUR BUSINESS STRATEGY

Our mission is to be the semiconductor and software solution innovator transforming networks that connect, move and store Big Data.  We achieve this by integrating our mixed-signal, software, and systems expertise to deliver industry-leading products with best-in-class quality, service, and technical support. The semiconductor solutions we develop are based on our in-depth knowledge of network applications, system requirements and networking protocols, as well as high-speed mixed-signal and system-on-chip design expertise. To realize our mission while expanding our business profitably, our business strategy can be summarized as follows:

1.

Leverage our mixed signal, software and systems expertise to be the leading supplier of silicon and embedded software solutions for Storage, Optical, and Mobile networks;

2.

Deliver best-in-class performance and integration to lead the server and storage system market segments, for both Enterprise and Cloud Data Centers;

3.

Build on our position as the leading telecom silicon provider to enable the most integrated Optical Transport Network (“OTN”) and Passive Optical Network (“PON”) solutions in the metro and access networks; and

4.

Enable mobile broadband via 4G LTE by providing a seamless transition to packet based backhaul with our multi-service network processor platform and integrated Radio solutions to allow our customers to leverage available spectrum.

4


 

OUR PRODUCTS AND MARKET SEGMENTS THAT WE SERVE

Our portfolio of semiconductor devices are used in various applications of communications network infrastructure equipment and enable the transporting and storing of large quantities of digital data in a secure manner.

Our semiconductor devices enable networking equipment primarily in three market segments: Storage, Optical and Mobile networks. In 2014, the storage network represented 70% of total revenues, the optical network represented 18% of total revenues, and the mobile network represented 12% of total revenues.

Storage

Our Storage products are supplied directly to Original Equipment Manufacturers (“OEMs”), data center and channel customers. Our products and solutions for the Storage market segment enable high-speed communications between the servers, switches and storage devices that comprise these systems thus allowing large quantities of data to be stored, managed and moved securely. As storage demand continues to grow, managing the data becomes more critical for the operation of the entire company or service provider. Our focus in this area is in developing controllers and switches for high-performance storage systems in Cloud and Enterprise Data Center applications.  Our solutions range from chip level offerings to full board solutions and applications software (e.g., RAID stack). We also include printer Application-specific Integrated Circuits (“ASICs”) and Microprocessors for Enterprise Networking in this market segment as they are most aligned with our Enterprise storage customers. In 2013, PMC acquired Integrated Device Technology, Inc.’s (“IDT”) Enterprise Flash Controller business and certain PCI express (“PCIe”) switch assets.  The acquisition accelerates the Company’s product offering in the Enterprise Flash Controller and PCI Express Switch businesses, including the world’s first NVM Express (“NVMe”) flash controller. In 2014, PMC executed an agreement with Hewlett-Packard Company (“HP”) to license core HP Smart Array software, firmware and management technology.  PMC will leverage this technology to provide more system value to new and existing server storage and data center customers.  In addition, this transaction positions PMC as the supplier of key storage solution components across HP ProLiant Gen9 and beyond (see Item 8 – Financial Statements and Supplemental Data, Note 2 – Business Combinations).  During the fiscal year ended December 27, 2014, the Storage market segment represented 70% of our net revenues.

 

 

 

 

 

 

 

 

 

 

 

Storage products and/or applications incorporating
PMC’s semiconductor solutions

  

PMC Products

  

Examples of OEMs(1)

Storage Area Networks

  

Protocol Controllers

  

Dell

Server Attached Storage

  

RAID-on-Chip (RoC)

  

HP

Solid State Drives (SSD)

  

Flash Controllers

  

Samsung

Data Center

  

Host Bus Adapter (HBA) and Serial Attached SCSI (Small Computer System Interface) Expanders

  

Dell

High Speed Laser and Multi-Function Printers

 

MIPs Processors

 

HP

 

 

 

 


(1)

Examples in the order listed refer to Dell Inc., Hewlett-Packard Company, and Samsung Electronics Co. Ltd.

5


 

Optical

Our Optical products include our Wide Area Network communication products focused on Metro and access networks, including Optical Transport Networks (“OTN”), Synchronous Optical Networks (“SONET”), Asynchronous Transfer Mode (“ATM”) and Fiber to the Home. Carriers are now starting to migrate their metro networks from SONET/Synchronous Digital Hierarchy (“SDH”) to packet-based networks based on OTN standards. OTN equipment is starting to be deployed in the metro and access portions of the network. PMC’s OTN product family is on track to put us in a lead position in this emerging network technology.  During the fiscal year ended December 27, 2014, the Optical market segment represented 18% of our net revenues.

 

 

 

 

 

 

 

 

 

 

 

Optical products and/or applications incorporating
PMC’s semiconductor solutions

  

PMC Products

  

Examples of OEMs(1)

Optical Transport Network

  

 

  

 

— P-OTP/P-OTS

  

OTN Switching Processors

  

Alcatel-Lucent, Ciena, Coriant, Huawei

— ROADM/DWDM

 

OTN Switching Processors

  

Alcatel-Lucent, Ciena, Coriant, Huawei

Carrier/Ethernet/Switch/Routers

  

Ethernet Framers, Mappers, MAC

  

Cisco, Juniper, Alcatel-Lucent

Multi-service switches

  

 

  

Huawei

— MSPP/MSTP/ADM

  

SONET/SDH Framers, Cross Connects, T1/E1 Mappers/Framers

  

Ciena, Cisco, FiberHome, ZTE

Passive Optical Network

  

 

 

 

— EPON & 10G-EPON;  GPON & XG-PON

 

EPON/GPON ONU and OLT Processors

 

Fujitsu, Sumitomo, Mitsubishi

 

 

 

 

 

 

 

 

 

 


(1)

Examples in the order listed refer to Alcatel-Lucent, S.A., Ciena Corp., Coriant, Huawei Technology Co. Ltd., Cisco Systems, Inc., Juniper Networks, Inc., Fiberhome Telecommunication Technologies Co. Ltd., ZTE Corporation,  Fujitsu LTD., Sumitomo Electric Lightwave Corp., and Mitsubishi Corporation.

Mobile

Our Mobile products include WinPath network processors, T1/E1framers and mappers, and Radio Frequency Integrated Circuit (“RFIC”) devices sold into Mobile access markets and include devices that are used in 2G, 3G and 4G wireless base stations and mobile backhaul equipment.  Our highly integrated network processors are optimized for fiber and microwave backhaul, and cell site aggregation networks. PMC initiated new efforts within the remote radio head developing product that takes advantage of our mixed signal expertise and intellectual property for integrated solution that lowers power and offers smaller size. During the fiscal year ended December 27, 2014, the Mobile market segment represented 12% of our net revenues.

 

 

 

 

 

 

Mobile products and/or applications incorporating
PMC’s semiconductor solutions

  

PMC Products

  

Examples of OEMs(1)

Mobile Backhaul

  

WinPath Network Processors

  

Alcatel-Lucent, Cisco

3GPP Wireless Base Stations

 

TEMUX and UFE framer products 

 

Alcatel-Lucent, Cisco

Remote Radio Heads

  

Combiner/Serializers

  

Nokia Siemens, Ericsson, ZTE, Huawei, Alcatel-Lucent

 

  

Radio RF devices, Transceivers/Framers, Clocking devices

  

Nokia Siemens, Ericsson, ZTE, Huawei, Alcatel-Lucent


(1)

Examples in the order listed refer to Alcatel-Lucent, S.A., Cisco Systems, Inc.,  Nokia Corporation, Ericsson, ZTE Corporation, Ciena Corp., and Huawei Technology Co. Ltd.

6


 

SALES, MARKETING AND DISTRIBUTION

Our sales and marketing strategy is to have our products designed into our customers’ equipment by developing superior products for which we provide best-in-class service and technical support. Our marketing team is focused on developing new products and solutions that meet the needs of our customers, including OEMs and original design manufacturers. We are often involved in the early stages of design concerning our customers’ plans for new equipment. This helps us determine if our existing products can be used in their new equipment or if new devices or software need to be developed for the application. To assist us in our planning process, we are in regular contact with our key customers to discuss industry trends, emerging standards and ways in which we can assist in their new product requirements.

Our sales team is focused on selling and supporting our chips and chipsets for equipment providers who are in turn selling their products to service providers, enterprises, or consumers. To better match our available sales resources to market opportunities, we also focus our sales and support efforts on targeted customers.

We sell our products to end customers directly and through distributors and independent contract manufacturers’ representatives. In 2014, approximately 33% of our orders were shipped through distributors, approximately 47% were shipped by us directly to contract manufacturers selected by OEMs, and the balance was shipped directly to our OEM customers.

In 2014, our largest distributor was Avnet Inc. (“Avnet”) which sold our products into North America, South America, Europe, Africa, and Asia.  In 2014, sales shipped through Avnet represented 11% of our total net revenues. Our second largest distributor in 2014 was Macnica Inc. (“Macnica”).  Sales shipped through Macnica in 2014 represented 10% of our total net revenues. In 2014, we amended our distributor agreement with Avnet to restrict the distribution territories to Europe, Africa and Asia.  Avnet is authorized to sell existing inventory of PMC products to its customers in the decommissioned territories (United States, Canada, Mexico and South America) until the earlier of such time as the inventory is depleted or March 31, 2015.

In 2014, we had two end customers, Hewlett-Packard Company and EMC Corp., which each accounted for more than 10% of our net revenues.

Our sales outside of the United States, based on customer billing location, accounted for 81%, 89% and 86% of total revenue in 2014, 2013 and 2012, respectively. Our sales to customers in Asia, including Japan and China, were 74%, 78% and 78% of total revenues in 2014, 2013 and 2012, respectively.

MANUFACTURING

PMC-Sierra is a fabless company, meaning that we do not own or operate foundries for the production of the silicon wafers from which our products are made. Instead, we work with independent merchant foundries and chip assemblers for the manufacture of our products. We believe our fabless approach to manufacturing provides us with the benefit of superior manufacturing capability, scalability, as well as the flexibility to move wafer manufacture, assembly and testing of our products to the vendors that offer the best technology and service at a competitive price.

Our lead-time, or the time required to manufacture our devices, is typically 12 to 18 weeks. Based on this lead-time, our team of production planners initiates purchase orders with our wafer suppliers and with our chip assemblers for the assembly and testing of our parts so that, to the best of our ability, our products are available to meet customer demand.

Wafer Fabrication

We manufacture our products at independent foundries using standard Complementary Metal Oxide Semiconductor process techniques. We have in the past purchased silicon wafers from which we manufacture our products from Globalfoundries Inc., Taiwan Semiconductor Manufacturing Corporation (“TSMC”), Texas Instruments Incorporated and United Microelectronics Corporation (“UMC”). These independent foundries produce the wafers for our networking semiconductor products ranging in sizes from 0.18 microns to 28 nanometers. By using independent foundries to fabricate our wafers, we are better able to concentrate our resources on designing, developing and testing new products. In addition, we avoid the fixed costs associated with owning and operating fabrication and chip assembly facilities and the costs associated with updating these facilities to manage constantly evolving process technologies.

We have existing supply agreements with UMC and TSMC. Generally, terms include but are not limited to, supply terms without minimum unit volume requirements for PMC, indemnification and warranty provisions, quality assurances and termination conditions.

7


 

Assembly and Test

Once our wafers are fabricated, they must be probed or inspected to identify which individual units, referred to as die, were properly manufactured. Most wafers that we purchase are sent directly to an outside assembly house where the die are individually cut and packaged into semiconductor devices. The individual devices are then run through various electrical, mechanical and visual tests before customer delivery. PMC outsources all of its wafer probe, assembly and final testing to independent subcontractors.

Quality Assurance

The industries that we serve require high quality, reliable semiconductors for incorporation into their equipment. We pre-qualify each vendor, foundry, assembly and test subcontractor. Wafers supplied by outside foundries must meet our incoming quality and test standards. The testing function is performed predominantly by independent Asian and U.S. companies.

PMC also manufactures and sells Printed Circuit Board-based products. These products are assembled and tested by an independent contract manufacturer before shipping to a distribution center. The design, materials, production test and packaging are specified by PMC and the manufacturing subcontractors are qualified and regularly audited by PMC.

RESEARCH AND DEVELOPMENT

Our research and development efforts are market and customer focused and can involve the development of both hardware and software. These devices and reference designs are targeted for use in enterprise, storage and service provider markets. Increasingly, our OEM customers that serve these end markets are demanding complete solutions with software support and complex feature sets, and we are developing products to fill this need.

From time to time we announce new products to the public once development of the product is substantially completed and there are no longer significant technical risks and costs to be incurred. As we have a portfolio of approximately 700 products, we do not consider any individual new product or group of products released in a year to be material, beyond our continuing development of a portfolio of products that meet our customers’ needs.

At the end of 2014, we had design centers in the United States (California, Pennsylvania, Texas, Oregon, Colorado and New Jersey), Canada (British Columbia, Alberta, Saskatchewan and Quebec), Israel (Herzliya), China (Shanghai), Germany (Ismaning and Neckarsulm) and India (Bangalore).

Our research and development spending was $198.9 million in 2014, $211.0 million in 2013, and $220.9 million in 2012.

BACKLOG

Our sales originate from customer purchase orders. However, our customers frequently revise order quantities and shipment schedules to reflect changes in their requirements. As of December 27, 2014, our backlog of products scheduled for shipment within three months totaled approximately $97 million. Unless our customers cancel or defer to a subsequent quarter with respect to a portion of this backlog, we expect this entire backlog to be filled in the first quarter of 2015. As of December 28, 2013, our backlog of products scheduled for shipment within three months totaled approximately $87 million.

Our backlog includes our backlog of shipments to direct customers, minor distributors and a portion of shipments by our major distributor to end customers. Our customers may cancel or defer backlog orders. Accordingly, we believe that our backlog at any given time is not a meaningful indicator of future long-term revenues. Backlog may not be comparable between companies.

COMPETITION

We typically face competition at the customer design stage when our customers are determining which semiconductor components to use in their equipment designs.

Most of our customers choose a particular semiconductor component primarily based on whether the component:

·

meets the functional requirements;

·

interfaces easily with other components in the product;

·

meets power usage requirements;

·

is priced competitively; and

·

is commercially available on a timely basis.

8


 

OEMs also consider the quality of the supplier when determining which component to include in a design. Many of our customers will consider the breadth and depth of the supplier’s technology, as using one supplier for a broad range of technologies can often simplify and accelerate the design of next generation equipment. OEMs will also consider a supplier’s design execution reputation, as many OEMs design their next generation equipment concurrently with the semiconductor component design. OEMs also consider whether a supplier has been pre-qualified, as this ensures that components made by that supplier will meet the OEM’s quality standards.

We compete against established peer-group semiconductor companies that focus on the communications and storage semiconductor business. These companies include the following: Altera Corp., Analog Devices Inc.; Applied Micro Circuits Corp.; Avago Technologies Limited; Broadcom Corp.; Emulex Corp.; Exar Corp.; InPhi Corp.; Intel Corp.; Marvell Technology Group Ltd.; Maxim Integrated Products, Inc.; QLogic Corp.; Texas Instrument Inc; and Xilinx, Inc. Many of these companies are well financed, have significant communications semiconductor technology assets and established sales channels, and depend on the market in which we participate for the bulk of their revenues.

It is possible for additional competitors to enter the market with new products, some of which may also have greater financial and other resources than we do.

LICENSES, PATENTS AND TRADEMARKS

We rely in part on patents to protect our intellectual property and have a total of 688 U.S. and 20 foreign patents for circuit designs and other innovations used in the design and architecture of our products. In addition, we have 128 patent applications pending in the U.S. Patent and Trademark office and 4 patent applications pending in foreign countries. Our patents typically expire 20 years from the patent application date, with our existing patents expiring between 2015 and 2035.

We believe that a strong portfolio of patents combined with other factors such as our ability to innovate, technological expertise and the experience of our personnel are important to compete effectively in our industry. Our patent portfolio also provides the flexibility to negotiate or cross license intellectual property with other semiconductor companies to broaden the features in our products. We do not consider our business to be materially dependent upon any one patent.

We also rely on mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements, and licensing arrangements to protect our intellectual property.

PMC, PMC-Sierra and our logo are registered trademarks and service marks. Any other trademarks used in this Annual Report are owned by other entities. We own other trademarks and service marks not appearing in this Annual Report.

EMPLOYEES

As of December 27, 2014, we had 1,442 employees, including 882 in Research and Development, 103 in Production and Quality Assurance, 299 in Sales and Marketing and 158 in Administration. Our employees are not represented by a collective bargaining agreement, and we have never experienced any related work stoppage.

ADDITIONAL INFORMATION AND SEC REPORTS

Our principal executive offices are located at 1380 Bordeaux Drive, Sunnyvale, CA 94089. Our website is www.pmcs.com. The information accessed on or through our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our webpage after we electronically file or furnish such material with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

9


 

ITEM 1A.    RISK FACTORS.

Our company is subject to a number of risks.  Some of these risks are common in the fabless semiconductor industry, some are the same or similar to those disclosed in previous SEC filings, and some may be present in the future. You should carefully consider all of these risks and the other information in this report before investing in PMC. The fact that certain risks are endemic to the industry does not lessen the significance of the risk.

As a result of the following risks, our business, financial condition, operating results and/or liquidity could be materially adversely affected. This could cause the trading price of our securities to decline, and you may lose part or all of your investment.

 

Our global business is subject to a number of economic risks.

 

We conduct business throughout the world, including in Asia, North America, Europe and the Middle East.  Instability in the global credit markets, including the recent European economic and financial turmoil related to sovereign debt issues in certain countries, the instability in the geopolitical environment in many parts of the world and other disruptions, such as changes in energy costs, may continue to put pressure on global economic conditions. The world has recently experienced a global macroeconomic downturn. To the extent global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, business, operating results, and financial condition may be materially adversely impacted.

 

Additionally, given the greater credit restrictions that are being invoked by lenders around the world, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access such capital markets, which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future.

 

Our operating results may be impacted by rapid changes in demand due to the following:

variations in our turns business;

short order lead-time;

customer inventory levels;

production schedules; and

fluctuations in demand.

 

As a result, there could be significant variability in the demand for our products, and our past operating results may not be indicative of our future operating results.

 

Fluctuation in demand is dependent on, among other things the size of the markets for our products, the rate at which such markets develop, and the level of capital spending by end customers. We cannot assure you of the rate, or extent to which, capital spending by end customers will grow, if at all.

 

Our revenues and profits may fluctuate because of factors that are beyond our control. As a result, we may fail to meet the expectations of securities analysts and investors, which could cause our stock price to decline.

 

Our ability to project revenues is limited because a significant portion of our quarterly revenues may be derived from orders placed and shipped in the same quarter, which we call our “turns business.” Our turns business varies widely from quarter to quarter. Our customers may delay product orders and reduce delivery lead-time expectations, which may reduce our ability to project revenues beyond the current quarter. While we regularly evaluate end users’ and contract manufacturers’ inventory levels of our products to assess the impact of their inventories on our projected turns business, we do not have complete information on their inventories. This could cause our projections of a quarter’s turns business to be inaccurate, leading to lower or higher revenues than projected.

 

We may fail to meet our forecasts if our customers cancel or delay the purchase of our products or if we are unable to meet their demand.

 

We rely on customer forecasts in order to estimate the appropriate levels of inventory to build and to project our future revenues. Many of our customers have numerous product lines, numerous component requirements for each product, sizeable and complex supplier structures, and typically engage contract manufacturers for additional manufacturing capacity. This complex supply chain creates several variables that make it difficult to accurately forecast our customers’ demand and accurately monitor their inventory levels of our products. If customer forecasts are not accurate, we may build too much inventory, potentially leaving us with excess and obsolete inventory, which would reduce our profit margins and adversely affect our operating results. Conversely, we may build too little inventory to meet customer demand causing us to miss revenue-generating opportunities. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to the failure of anticipated orders to materialize, could result in our holding excess or obsolete inventory, which could in turn result in write-downs of inventory. This difficulty may be compounded when we sell to OEMs indirectly through distributors and other resellers or contract manufacturers, or both, as our forecasts of demand are then based on estimates provided by multiple parties.

 

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Our customers often shift buying patterns as they manage inventory levels, market different products, or change production schedules. This makes forecasting their production requirements difficult and can lead to an inventory surplus or shortage of certain components. In addition, our products vary in terms of the profit margins they generate. If our customers purchase a greater proportion of our lower margin parts in a particular period, it would adversely impact our results of operations.

 

Further, our distributors provide us with periodic reports of their backlog to end customers, sales to end customers and quantities of our products that they have on hand. If the data that is provided to us is inaccurate, it could lead to inaccurate forecasting of our revenues or errors in our reported revenues, gross profit and net income.

 

While backlog is our best estimate of our next quarter’s expectations of revenues, it is industry practice to allow customers to cancel, change or defer orders with limited advance notice prior to shipment. As such, backlog may be an unreliable indicator of future revenue levels. Because a significant portion of our operating expenses is fixed, even a small revenue shortfall can have a disproportionately negative effect on our operating results.

 

We rely on a few customers for a major portion of our sales, any one of which could materially impact our revenues should they change their ordering pattern. The loss of a key customer could materially impact our results of operations.

 

We depend on a limited number of customers for large portions of our net revenues. In 2014, 2013, and 2012, we had two end customers that accounted for more than 10% of our net revenues, namely HP and EMC.

 

In 2014, 2013, and 2012, our top ten customers accounted for more than 60% of our net revenues. We do not have long-term volume purchase commitments from any of our major customers. We sell our products solely on the basis of purchase orders. Those customers could decide to cease purchasing products with little or no notice and without significant penalties. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, delays in manufacturing their own product offerings into which our products are incorporated, and natural disasters. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.

 

The loss of a key customer, or a reduction in our sales to any major customer or our inability to attract new significant customers could materially and adversely affect our business, financial condition or results of operations. In addition, if we fail to win new product designs from our major customers, our business and results of operations may be harmed.

 

We use indirect channels of product distribution in many locations across the world and over which we have limited control.

 

We generate a portion of our sales through third-party distribution and reseller agreements. Termination of a distributor agreement, either by us or a distributor, could result in a temporary or permanent loss of revenue, if we cannot establish an alternative distributor to manage this portion of our business or if we are unable to service the related end customers directly.  Further, if we terminate a distributor agreement, we may be required to repurchase unsold inventory held by the distributor. We maintain a reserve for estimated returns.  If actual returns exceed estimated returns, there may be an adverse effect on our operating results. Our distributors are located all over the world and are of various sizes and financial profiles. Lower sales or earnings, debt downgrades, an inability to access capital markets or higher interest rates could potentially affect our distributors’ operations. 

 

If the demand for our customers’ products declines, demand for our products will be similarly affected and our revenues, gross margins and operating performance will be adversely affected.

 

Our customers are subject to their own business cycles, most of which are unpredictable in commencement, depth and duration. We cannot accurately predict the continued demand of our customers’ products and the demands of our customers for our products. In the past, networking customers have reduced capital spending without notice, which adversely affected our revenues. As a result of this uncertainty, our past operating results may not be indicative of our future operating results and our results may be below the expectations of public market analysts and investors, which could cause the market price of our common stock to decline.

 

Changes in the political and economic climate in the countries in which we do business may adversely affect our operating results.

 

We earn a substantial proportion of our revenues in Asia. We conduct an increasing portion of our research and development and manufacturing activities outside North America. We procure substantially all of our wafers from Taiwan and use assemblers and testers throughout Asia.

 

Given the depth of our sales and operations in Asia, we face risks that could negatively impact our results of operations, including economic sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers or regulations, uncertain protection for intellectual property rights and generally longer receivable collection periods. In addition, fluctuations in foreign currency exchange rates could adversely affect the revenues, net income, earnings per share and cash flow of our operations in

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affected markets. Similarly, fluctuations in exchange rates may affect demand for our products in foreign markets or our cost competitiveness and may adversely affect our profitability.

 

Our results of operations continue to be influenced by our sales to customers in Asia.  Government agencies in this region have broad discretion and authority over many aspects of the telecommunications and information technology industry.  Accordingly, their decisions may impact our ability to do business in this region, and significant changes in this region’s political and economic conditions and governmental policies could have a substantial negative impact on our business.

 

Laws and regulations to which we are subject, as well as customer requirements in the area of environmental protection and social responsibility, could impose substantial costs on us and may adversely affect our business.

 

Our business is subject to or may be impacted by various environmental protection and social responsibility legal and customer requirements. For example, we are subject to the European Union Directive on the Restriction of the use of certain Hazardous Substances in Electrical & Electronic Equipment (RoHS) and the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) Regulation in the European Union. Such regulations could require us to redesign our products in order to ensure compliance and require the development and/or maintenance of compliance administration systems. Redesigned products could be more costly to manufacture or require more costly or less efficient raw materials. If we cannot develop compliant products on a timely basis or properly administer our compliance programs, our revenues could decline due to lower sales. In addition, under certain environmental laws, we could be held responsible, without regard to fault, for costs relating to any contamination at our current or past facilities and at third-party waste-disposal sites. We could also be held liable for consequences arising out of human exposure to such substances or other environmental damage.

 

Recently there has been increased focus on environmental protection and social responsibility initiatives. We may choose or be required to implement various standards due to the adoption of rules or regulations that result from these initiatives. Our customers may also require us to implement environmental or social responsibility procedures or standards before they will continue to do business with us or order new products from us. Our adoption of these procedures or standards could be costly, and our failure to adopt these standards or procedures could result in the loss of business or fines or other costs.

 

The conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act could result in additional costs and liabilities.

 

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC established disclosure and reporting requirements for those companies who use “conflict minerals” mined from the Democratic Republic of the Congo and adjoining countries in their products, whether or not these products are manufactured by third parties.  These requirements could affect the sourcing and availability of minerals used in the manufacture of our semiconductor products.  We also have incurred and will continue to incur costs associated with complying with the disclosure requirements, including identifying the sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities.

 

The loss of key personnel could delay us from designing new products.

 

To succeed, we must retain and hire technical personnel highly skilled at design and test functions needed to develop high-speed networking products. The competition for such employees is intense.

 

We do not have employment agreements in place with many of our key personnel. As employee incentives, we issue common stock options, restricted stock, and performance-based restricted stock which are subject to vesting.  In addition, stock options awards are granted with an exercise prices equal to the closing market price of the Company’s common stock at the grant date. The equity awards to employees are effective as retention incentives only if they have economic value, which at times could be difficult to maintain given the substantial variability in our stock price.

 

Our revenues may decline if we do not maintain a competitive portfolio of products or if we fail to secure design wins.

 

We are experiencing significantly greater competition in the markets in which we participate. We are expanding into market segments, such as the Storage, Optical, and Mobile market segments, which have established incumbents with substantial financial and technological resources. We expect more intense competition than we have traditionally faced as some of these incumbents derive a majority of their earnings from these markets.

 

We typically face competition at the design stage, where customers evaluate alternative design approaches requiring integrated circuits. We often compete in bid selection processes to achieve design wins. These selection processes can be lengthy and require us to invest significant effort and incur significant design and development costs. We may not be successful in competing in bid selection processes or, if successful, we may not generate the expected level of revenue despite incurring significant design and development costs. Because the life cycles of our customers’ products can last several years and changing suppliers involves significant cost, time,

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effort and risk, our failure to win a competitive bid can result in our foregoing revenue from a given customer’s product line for the life of that product.

 

The markets for our products are intensely competitive and subject to rapid technological advancement in design tools, wafer manufacturing techniques, process tools and alternate networking technologies. We may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner. Our customers may substitute use of our products in their next generation equipment with those of current or future competitors, reducing our future revenues. With the shortening product life and design-in cycles in many of our customers’ products, our competitors may have more opportunities to supplant our products in next generation systems.

 

Our customers are increasingly price conscious, as semiconductors sourced from third party suppliers comprise a greater portion of the total materials cost in networking equipment. We continue to experience aggressive price competition from other companies that wish to enter into the market segments in which we participate. These circumstances may make some of our products less competitive, and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition.

 

Over the next few years, we expect additional competitors, some of which may also have greater financial and other resources, to enter these markets with new products. These companies, individually or collectively, could represent future competition for many design wins and subsequent product sales.

 

Design wins do not translate into near-term revenues and the timing of revenues from newly designed products is often uncertain.

 

From time to time, we announce new products and design wins for existing and new products. While some industry analysts may use design wins as a metric for future revenues, many design wins have not, and will not, generate any revenues for us, as a result of customer projects being cancelled or unsuccessful in their end market. In the event a design win generates revenues, the amount of revenue it produces can vary greatly from other design wins. In addition, most revenue-generating design wins do not translate into near-term revenues often taking more than two years to generate meaningful revenues.

 

Product quality problems could result in reduced revenues and claims against us.

 

We produce highly complex products that incorporate leading-edge technology. Despite our testing efforts and those of our subcontractors, defects may be found in existing or new products. Because our product warranties against materials and workmanship defects and non-conformance to our specifications cover varying lengths of time, we may incur significant warranty, support and repair or replacement costs. The resolution of any defects could also divert the attention of our engineering personnel from other product development efforts. If the costs for customer or warranty claims increase significantly compared with our historical experience, our revenue, gross margins and net income may be adversely affected.

 

Increasingly our customers require warranty protection for periods beyond our standard warranty and for expansive remedies that include direct and indirect damages.  We negotiate these so called “epidemic failure warranty” provisions rigorously and seek liability caps but, nonetheless, this extraordinary warranty exposure may adversely affect our financial results.

 

Since many of the products we develop do not reach full production sales volumes for a number of years, we may incorrectly anticipate market demand and develop products that achieve little or no market acceptance.

 

Our products generally take between 12 and 24 months from initial conceptualization to development of a viable prototype, and another three to 18 months to be designed into our customers’ equipment and sold in production quantities. We sell products whose characteristics include evolving industry standards, short product life spans and new manufacturing and design technologies. As a result, we develop products many years before volume production and may inaccurately anticipate our customers’ needs. From initial product design-in to volume production, many factors, such as unacceptable manufacturing yields on prototypes or our customers’ redefinition of their products, can affect the timing and/or delivery of our products. Our products may become obsolete during these delays, resulting in our inability to recoup our initial investments in product development.

 

We may be unsuccessful in transitioning the design of our new products to new manufacturing processes.

 

Many of our new products are designed to take advantage of new manufacturing processes offering smaller device geometries as they become available, since smaller geometries can provide a product with improved features such as lower power requirements, increased performance, more functionality and lower cost. We believe that the transition of our products to, and introduction of new products using, smaller device geometries is critical for us to remain competitive. We could experience difficulties in migrating to future smaller device geometries or manufacturing processes, which would result in the delay of the production of our products. Our products may become obsolete during these delays, or allow competitors’ parts to be chosen by customers during the design process.

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The final determination of our income tax liability may be materially different from our initial income tax provision.

 

We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file income tax returns. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, if our effective tax rate should change as a result of changes in federal, international or state and local tax laws, or if we were to change the locations where we operate, there could be a material effect on our income tax provision and results of operations in the period or periods in which that determination is made, and potentially in future periods as well.

 

The ultimate resolution of outstanding tax matters could be for amounts in excess of our reserves established. Such events could have a material adverse effect on our liquidity or cash flows in the quarter in which an adjustment is recorded or the tax payment is due.

 

If foreign exchange rates fluctuate significantly, our profitability may decline.

 

We are exposed to foreign currency rate fluctuations because a significant part of our development, test, and selling and administrative costs are incurred in foreign currencies. The U.S. dollar has fluctuated significantly compared to other foreign currencies and this trend may continue. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we enter into foreign currency forward contracts. The contracts reduce, but do not eliminate, the impact of foreign currency exchange rate movements. In addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our contracts do not extend beyond a 12-month maturity.

 

We regularly limit our exposure to foreign exchange rate fluctuations from our foreign net asset or liability positions. We recorded a net $3.6 million foreign exchange gain on the revaluation of our income tax liability in 2014 because of the fluctuations in the U.S. dollar against certain foreign currencies. A five percent shift in the foreign exchange rates between the U.S. and Canadian dollar would cause an approximately $1.5 million impact to our pre-tax net income.

 

We are exposed to the credit risk of some of our customers.

 

Many of our customers employ contract manufacturers to produce their products and manage their inventories. Many of these contract manufacturers represent greater credit risk than our OEM customers, who do not guarantee our credit receivables related to their contract manufacturers.

 

In addition, a significant portion of our sales flow through our distribution channel.  This generally represents a higher credit risk. Should these companies encounter financial difficulties, our revenues could decrease, and collection of our significant accounts receivables with these companies or other customers could be jeopardized.

 

Our business strategy contemplates acquisition of other products, technologies or businesses, which could adversely affect our operating performance.

 

Acquiring products, intellectual property, technologies and businesses from third parties is a core part of our business strategy. That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with integrating acquired businesses into our existing business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise outside our existing business, diversion of management time and resources, possible divestitures, inventory write-offs and other charges. We also may be forced to replace key personnel who may leave us as a result of an acquisition. We cannot be certain that we will find suitable acquisition candidates or that we will be able to meet these challenges successfully. Acquisitions could also result in customer dissatisfaction, performance problems with the acquired company, investment, or technology, the assumption of contingent liabilities, or other unanticipated events or circumstances, any of which could harm our business. Consequently, we might not be successful in integrating any acquired businesses, products or technologies and may not achieve anticipated revenues and cost benefits.

 

An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or issue additional equity. If we are not able to obtain financing, then we may not be in a position to consummate acquisitions. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have an equal or a senior interest in our company.

 

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From time to time, we license, or acquire, technology from third parties to incorporate into our products. Incorporating technology into our products may be more costly or more difficult than expected, or require additional management attention to achieve the desired functionality. The complexity of our products could result in unforeseen or undetected defects or bugs, which could adversely affect the market acceptance of new products and damage our reputation with current or prospective customers.

 

Our current product roadmap is dependent, in part, on successful acquisition and integration of intellectual property cores developed by third parties. If we experience difficulties in obtaining or integrating intellectual property from these third parties, it could delay or prevent the development of our products in the future.

 

Although our customers, our suppliers and we rigorously test our products, our highly complex products may contain defects or bugs. We have in the past experienced, and may in the future experience, defects and bugs in our products. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to buy our products. This could materially and adversely affect our ability to retain existing customers or attract new customers. In addition, these defects or bugs could interrupt or delay sales to our customers.

 

We may have to invest significant capital and other resources to alleviate problems with our products. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. Moreover, we would likely lose or experience a delay in market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers.

 

Industry consolidation may lead to increased competition and may harm our operating results.

 

There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry or are unable to continue operations. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.

 

Our business may be adversely affected if our customers or suppliers cannot obtain sufficient supplies of other components necessary to meet their projected production levels.

 

Some of our products are used by customers in conjunction with a number of other components, such as transceivers, microcontrollers and digital signal processors. If, for any reason, our customers experience a shortage of any component, their ability to produce the forecasted quantity of their product offerings may be affected adversely and our product sales would decline until the shortage is remedied.

 

Moreover, if any of our suppliers experience capacity constraints or component shortages, encounters financial difficulties, or experiences any other major disruption of its operations, we may need to qualify an alternate supplier, which may take an extended period of time and could result in delays in product shipments. These delays could cause our customers to seek alternate semiconductor companies to provide them with products previously purchased from us, which could harm our operating results, cash flow and financial condition.

 

We rely on limited sources of wafer fabrication, the loss of which could delay and limit our product shipments.

 

We do not own or operate a wafer fabrication facility. In 2014, three outside wafer foundries supplied approximately 98% of our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves.  As a result, we may not have access to adequate capacity or certain process technologies. We also have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, we may have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough or at an acceptable cost to satisfy our production requirements.

 

Some companies that supply products to our customers are similarly dependent on a limited number of suppliers. These other companies’ products may represent important components of networking equipment into which our products are designed. If these companies are unable to produce the volumes demanded by our customers, our customers may be forced to slow down or halt production on the equipment for which our products are designed, which could materially reduce our order levels.

 

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We depend on third parties for the assembly and testing of our semiconductor products, which could delay and limit our product shipments.

 

We depend on third parties in Asia for the assembly and testing of our semiconductor products. In addition, subcontractors in Asia assemble all of our semiconductor products into a variety of packages. Raw material shortages, political, economic and social instability, assembly and testing house service disruptions, currency fluctuations, or other circumstances in the region could force us to seek additional or alternative sources of supply, assembly or testing. This could lead to supply constraints or product delivery delays that, in turn, may result in the loss of revenues. At times, capacity in the assembly industry has become scarce and lead times have lengthened. This capacity shortage may become more severe, which could in turn adversely affect our revenues. We have less control over delivery schedules, assembly processes, testing processes, quality assurances, raw material supplies and costs than competitors that do not outsource these tasks.

 

Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our components. Any problems that we may encounter with the delivery, quality or cost of our products could damage our customer relationships and materially and adversely affect our results of operations. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products. However, even if we use these new subcontractors, we will continue to be subject to all of the risks described above.

 

If we fail to maintain effective internal over financial reporting, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect investor perceptions of us and the value of our common stock.

 

We are subject to Section 404 of the Sarbanes-Oxley Act of 2002 and, as such, are required to maintain internal control over financial reporting adequate to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As a result, we cannot assure you that a material weakness in our internal control over financial reporting will not be identified in the future. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The existence of a material weakness can cause us to fail to timely meet our periodic reporting obligations or result in material misstatements in our consolidated financial statements. Any such failure could adversely affect the results of periodic management control evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting, cause us to incur unforeseen costs, negatively impact our results of operations, or cause the market price of our common stock to decline.

 

Our business is vulnerable to interruption by earthquake, flooding, fire, power loss, telecommunications failure, terrorist activity and other events beyond our control.

 

We do not have sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business. We are vulnerable to a major earthquake and other calamities. We have operations in seismically active regions in California, Japan and British Columbia, Canada, and we rely on third-party suppliers, including wafer fabrication and testing facilities, in seismically active regions in Asia, which have recently experienced natural disasters.  To the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in periods in which we and our contract manufacturers are operating at higher levels of capacity, it is possible that our revenue could be adversely affected if such matters occur and are not remediated. 

 

We are unable to predict the effects of any such events, but the effects could be seriously harmful to our business.

 

Hostilities in the Middle East and India may have a significant impact on our Israeli and Indian subsidiaries’ ability to conduct their business.

 

We have operations, concentrated primarily on research and development, located in Israel and India that employ approximately 100 and 172 people, respectively. A catastrophic event, such as a terrorist attack or the outbreak of hostilities that results in the destruction or disruption of any of our critical business or information technology systems in Israel or India could harm our ability to conduct normal business operations and therefore negatively impact our operating results.

 

On an on-going basis, some of our Israeli employees are periodically called into active military duty. In the event of severe hostilities breaking out, a significant number of our Israeli employees may be called into active military duty, resulting in delays in various aspects of production, including product development schedules.

 

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From time to time, we become defendants in legal proceedings about which we are unable to assess our exposure and which could become significant liabilities upon judgment.

 

We become defendants in legal proceedings from time to time. Companies in our industry have been subject to claims related to patent infringement and product liability, as well as contract and personal claims. We may not be able to accurately assess the risk related to these suits and we may be unable to accurately assess our level of exposure. An infringement or product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend and could divert the efforts of our technical and management personnel. These proceedings may result in material charges to our operating results in the future if our exposure is material and if our ability to assess our exposure becomes clearer.

 

If we cannot protect our proprietary technology, we may not be able to prevent competitors from copying or misappropriating our technology and selling similar products, which would harm our business.

 

To compete effectively, we must protect our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We hold numerous patents and have a number of pending patent applications. However, our portfolio of patents evolves as new patents are issued and older patents expire and the expiration of patents could have a negative effect on our ability to prevent competitors from duplicating certain of our products.

 

We might not succeed in obtaining patents from any of our pending applications. Even if we are awarded patents, they may not provide any meaningful protection or commercial advantage to us, as they may not be of sufficient scope or strength, or may not be issued in all countries where our products can be sold. In addition, our competitors may be able to design around our patents.

 

To protect our product technology, documentation and other proprietary information, we enter into confidentiality agreements with our employees, customers, consultants and strategic partners. We require our employees to acknowledge their obligation to maintain confidentiality with respect to PMC’s products. Despite these efforts, we cannot guarantee that these parties will maintain the confidentiality of our proprietary information in the course of future employment or working with other business partners. We develop, manufacture and sell our products in Asia and other countries that may not protect our intellectual property rights to the same extent as the laws of the United States. This makes piracy of our technology and products more likely. Steps we take to protect our proprietary information may not be adequate to prevent theft of our technology. We may not be able to prevent our competitors from independently developing technologies that are similar to or better than ours.

 

Our products employ technology that may infringe on the intellectual property and the proprietary rights of third parties, which may expose us to litigation and prevent us from selling our products.

 

Vigorous protection and pursuit of intellectual property rights or positions characterize the semiconductor industry. This often results in expensive and lengthy litigation. We, and our customers or suppliers, may be accused of infringing patents or other intellectual property rights owned by third parties in the future. An adverse result in any litigation against us or a customer or supplier could force us to pay substantial damages, stop manufacturing, using and selling the infringing products, spend significant resources to develop non-infringing technology, discontinue using certain processes or obtain licenses to use the infringing technology. In addition, we may not be able to develop non-infringing technology or find appropriate licenses on reasonable terms or at all. Although some of our suppliers have agreed to indemnify us against certain intellectual property infringement claims or other losses relating to their products, these contractual indemnification rights may not cover the full extent of losses we incur as a result of these suppliers’ products. 

 

Patent disputes in the semiconductor industry  between industry participants are often settled through cross-licensing arrangements. Our portfolio of patents may not have the breadth to enable us to settle an alleged patent infringement claim through a cross-licensing arrangement. Patent disputes brought by non-practicing entities (patent holders who do not manufacture products but only seek to monetize patent rights) cannot be settled through cross-licensing and cannot be avoided through cross-licensing with industry practitioners. We may therefore be more exposed to third party claims than some of our larger competitors and customers.

 

Customers may make claims against us in connection with infringement claims made against them that are alleged to relate to our products or components included in our products, even where we obtain the components from a supplier. In such cases, we may incur monetary losses due to cost of defense, settlement or damage award and non-monetary losses as a result of diverting valuable internal resources to litigation support.  To the extent that claims against us or our customers relate to third party intellectual property integrated into our products, there is no assurance that we will be fully indemnified by our suppliers against any losses.

 

Furthermore, we may initiate claims or litigation against third parties for infringing our proprietary rights or to establish the validity of our proprietary rights. This could consume significant resources and divert the efforts of our technical and management personnel, regardless of the litigation’s outcome.

 

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We may be subject to intellectual property theft or misuse, which could result in third-party claims and harm our business and results of operations.

 

We regularly face attempts by others to gain unauthorized access through the Internet to our information technology systems, such as when such parties masquerade as authorized users or surreptitiously introduce software. We might become a target of computer hackers who create viruses to sabotage or otherwise attack our products and services. Hackers might attempt to penetrate our network security and gain access to our network and our data centers, misappropriate our or our customers’ proprietary information, including personally identifiable information, or cause interruptions of our internal systems and services. We seek to detect and investigate these security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our products; reduce the value of our investment in R&D, product development, and marketing; and could motivate third parties to assert against us or our customers claims related to loss of confidential or proprietary information, end-user data, or system reliability. Our business could be subject to significant disruption, and we could suffer monetary and other losses, including the cost of product recalls and returns and reputational harm, in the event of such incidents and claims.

 

Securities we issue to fund our operations could dilute your ownership.

 

We may decide to raise additional funds through public or private debt or equity financing. If we raise funds by issuing equity securities, the percentage ownership of current stockholders will be reduced and the new equity securities may have rights that take priority over your investment. We may not obtain sufficient financing on terms that are favorable to you or us. We may delay, limit or eliminate some or all of our proposed operations if adequate funds are not available.

 

Our stock price has been and may continue to be volatile.

 

We expect that the price of our common stock may continue to fluctuate significantly, as it has in the past. In particular, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis.

 

Securities class action litigation has often been instituted against a company following periods of volatility and decline in the market price of their securities. If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of our management’s attention and resources and have a material adverse effect on our business, financial condition and operating results. In addition, we could incur substantial punitive and other damages relating to such litigation.

 

Provisions in Delaware law and our charter documents may delay or prevent another entity from acquiring us without the consent of our Board of Directors.

 

Our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

 

Although we believe these provisions of our charter documents and Delaware law will provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some stockholders. 

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

None.

 

 

 

18


 

ITEM 2.      PROPERTIES.

At the end of 2014, we leased properties in 31 locations worldwide. During the year, we increased our total leased area from approximately 548,000 square feet to approximately 562,000 square feet. Approximately 9% of the space we leased was excess at December 27, 2014 and 94% of the excess space had been subleased.

We lease approximately 85,000 square feet in Sunnyvale/San Jose, California, to house our U.S. design, engineering, sales, marketing, and administration operations.

Our Canadian operations are primarily located in Burnaby, British Columbia where we lease approximately 138,000 square feet of office space. This location supports a significant portion of our product development, manufacturing, marketing, sales, administration, and testing activities.

In addition to the two major sites in Sunnyvale/San Jose and Burnaby, at the end of 2014 we also operated 14 additional research and development centers: three in Canada, six in the U.S., one in Bangalore, India, one in Israel, two in Germany, and one in Shanghai, China.

At the end of 2014, we also had 15 sales/operations offices located in Europe, Asia, and North America.

 

 

ITEM 3.      LEGAL PROCEEDINGS.

None.

 

 

 

ITEM 4.      MINE SAFETY DISCLOSURES.

Not applicable.

19


 

PART II

 

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

Stock Price Information

Our Common Stock trades on the NASDAQ Global Select Market under the symbol PMCS. The following table sets forth, for the periods indicated, the high and low closing sale prices for our Common Stock as reported by the NASDAQ Global Select Market:

 

 

 

 

 

 

 

 

 

Fiscal 2014

 

High

 

Low

First Quarter

 

$

7.79 

 

$

6.23 

Second Quarter

 

 

7.76 

 

 

6.80 

Third Quarter

 

 

7.99 

 

 

6.73 

Fourth Quarter

 

 

9.19 

 

 

6.57 

 

 

 

 

 

 

 

Fiscal 2013

 

High

 

Low

First Quarter

 

$

6.85 

 

$

5.28 

Second Quarter

 

 

6.75 

 

 

5.56 

Third Quarter

 

 

7.08 

 

 

6.16 

Fourth Quarter

 

 

7.01 

 

 

5.63 

 

To maintain consistency, the information provided above is based on the last day of the calendar quarter rather than the last day of the fiscal quarter.

Stockholders

As of February 19, 2015, there were 608 holders of record of our Common Stock.

Dividends

We have never paid cash dividends on our Common Stock. We currently intend to retain earnings, if any, for use in our business or to fund acquisitions and do not anticipate paying any cash dividends in the foreseeable future.

 

20


 

Stock Performance Graph

The following graph shows a comparison of cumulative total stockholder returns for PMC, the line-of-business index for semiconductors and related devices (SIC code 3674) furnished by Research Data Group, Inc., and the S&P 500 Index. In addition, we have included the Russell 3000 Index, a broad equity market index in which we are included. We have determined that the companies included in the Russell 3000 Index more closely match our company characteristics than the companies included in the S&P 500 Index, as the Russell 3000 Index includes companies in the semiconductor industry and related industries with similar size and median market capitalization. The graph assumes the investment of $100 on December 31, 2009. The performance shown is not necessarily indicative of future performance.

 

Picture 1

SOURCE: RESEARCH DATA GROUP, INC 

21


 

Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchase Program

On March 13, 2012, the Board of Directors of the Company announced a share repurchase program for up to $275 million of its common stock.  In connection with this program, on May 2, 2012, the Company entered into an Accelerated Share Buyback agreement (“ASB agreement”) with Goldman, Sachs & Co. to repurchase an aggregate of $160 million of PMC common stock, which was completed on October 5, 2012 with the final delivery of shares. 

During 2013, the Company repurchased 13 million shares of PMC common stock for a total of $79 million. The Company acquired these common shares as part of its $275 million stock repurchase program announced on March 13, 2012. 

During 2014, the Company repurchased 1.4 million shares of PMC common stock for a total of $8.9 million. The Company acquired these common shares as part of its $275 million stock repurchase program announced on March 13, 2012.  The repurchased shares were retired immediately upon delivery. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.

There was no stock purchase activity in the fourth quarter of 2014.

On February 9, 2015, the Board of Directors of the Company authorized a new share repurchase program for up to $75 million of its common stock.  This new program will increase the total remaining repurchase authorization to $102 million, including the $27 million that remains available for repurchases under the $275 million 2012 share repurchase authorization.

  

22


 

ITEM 6.      SELECTED FINANCIAL DATA

The following tables set forth data from our consolidated financial statements for each of the last five fiscal years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended  

 

(in thousands, except for per share data)

 

December 27,

 

December 28,

 

December 29,

 

December 31,

 

December 26,

 

2014(1)

 

2013(2)

 

2012(3)

 

2011(4)

 

2010(5)

STATEMENT OF OPERATIONS DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

$

525,603 

 

$

508,028 

 

$

530,997 

 

$

654,304 

 

$

635,082 

Cost of revenues

 

155,396 

 

 

149,213 

 

 

158,849 

 

 

211,190 

 

 

203,646 

Gross profit

 

370,207 

 

 

358,815 

 

 

372,148 

 

 

443,114 

 

 

431,436 

Research and development, net

 

198,919 

 

 

211,047 

 

 

220,927 

 

 

227,106 

 

 

187,467 

Selling, general and administrative

 

117,007 

 

 

112,770 

 

 

112,479 

 

 

118,601 

 

 

104,117 

Amortization of purchased intangible assets

 

43,219 

 

 

48,245 

 

 

45,321 

 

 

44,182 

 

 

29,932 

Impairment of goodwill and purchased intangible assets

 

 —

 

 

 —

 

 

274,637 

 

 

 —

 

 

 —

Restructuring costs and other charges

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

403 

Income (loss) from operations

 

11,062 

 

 

(13,247)

 

 

(281,216)

 

 

53,225 

 

 

109,517 

Revaluation of liability for contingent consideration

 

 —

 

 

 —

 

 

 —

 

 

29,376 

 

 

 —

Gain on investment securities and other investments

 

155 

 

 

1,879 

 

 

1,523 

 

 

845 

 

 

3,978 

Amortization of debt issue costs

 

(204)

 

 

(80)

 

 

(167)

 

 

(200)

 

 

(200)

Amortization of discount on long-term obligation

 

(350)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Foreign exchange gain (loss)

 

3,508 

 

 

4,043 

 

 

(1,512)

 

 

344 

 

 

(2,360)

Interest income (expense), net

 

323 

 

 

907 

 

 

(1,586)

 

 

(2,267)

 

 

(1,248)

Gain on investment in Wintegra, Inc.

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,509 

Provision for income taxes

 

(14,412)

 

 

(25,756)

 

 

(37,301)

 

 

(9,897)

 

 

(37,064)

Net income (loss)

$

82 

 

$

(32,254)

 

$

(320,259)

 

$

71,426 

 

$

77,132 

Net income (loss) per share—basic

$

0.00 

 

$

(0.16)

 

$

(1.48)

 

$

0.31 

 

$

0.33 

Net income (loss) per share—diluted

$

0.00 

 

$

(0.16)

 

$

(1.48)

 

$

0.30 

 

$

0.33 

Shares used in per share calculation—basic

 

196,885 

 

 

203,882 

 

 

216,593 

 

 

233,210 

 

 

231,427 

Shares used in per share calculation—diluted

 

200,145 

 

 

203,882 

 

 

216,593 

 

 

235,184 

 

 

234,787 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  

 

December 27,

 

December 28,

 

December 29,

 

December 31,

 

December 26,

 

2014(1)

 

2013(2)

 

2012(3)

 

2011(4)

 

2010(5)

 

(in thousands)  

BALANCE SHEET DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

$

148,945 

 

$

89,698 

 

$

187,432 

 

$

216,830 

 

$

110,565 

Cash and cash equivalents

 

112,570 

 

 

100,038 

 

 

169,970 

 

 

182,571 

 

 

203,089 

Short-term investments

 

45,885 

 

 

10,894 

 

 

11,431 

 

 

104,391 

 

 

98,758 

Long-term investment securities

 

107,509 

 

 

103,391 

 

 

91,778 

 

 

226,619 

 

 

281,678 

Total assets

 

869,085 

 

 

849,951 

 

 

899,275 

 

 

1,418,461 

 

 

1,548,927 

Credit facility and short-term loan

 

 —

 

 

30,000 

 

 

 —

 

 

 —

 

 

180,991 

Convertible notes

 

 —

 

 

 —

 

 

 —

 

 

65,122 

 

 

61,605 

Long-term obligations

 

36,305 

 

 

11,108 

 

 

22,793 

 

 

1,284 

 

 

8,940 

Stockholders’ equity

 

626,491 

 

 

586,824 

 

 

648,687 

 

 

1,109,517 

 

 

1,031,315 

There were no cash dividends issued during the years ended December 27, 2014, December 28, 2013, December 29, 2012, December 31, 2011, and December 26, 2010.

(1)

Operating results for the year ended December 27, 2014 include $1.0 million stock-based compensation expense and $0.1 million recoveries of termination costs included in Cost of revenues; $9.4 million stock-based compensation, $2.4 million acquisition-related costs, $0.2 million termination costs, $0.1 million lease exit recoveries and $0.3 million reversal of accruals included in Research and development expenses, net; $12.8 million stock-based compensation, $1.0 million acquisition-related costs, $1.7 million termination costs, and $0.5 million asset impairment included in Selling, general and administrative expense; and $3.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(2)

Operating results for the year ended December 28, 2013 include $0.9 million stock-based compensation expense, $0.1 million termination costs, $0.8 million acquisition-related costs, and $2.3 million reversal of accruals included in Cost of revenues; $11.1 million stock-based compensation, $2.8 million acquisition-related costs, $4.1 million termination costs, $0.5 million asset impairment and $2.9 million reversal of accruals included in Research and development expenses, net; $14.3 million stock-based compensation, $1.1 million acquisition-related costs, $1.8 million termination costs, $2.2 million asset impairment

23


 

and $1.3 million reversal of accruals included in Selling, general and administrative expense; and $4.7 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(3)

Operating results for the year ended December 29, 2012 include $0.9 million stock-based compensation expense, $0.1 million asset impairment, and $0.1 million termination costs included in Cost of revenues; $11.6 million stock-based compensation, $2.2 million acquisition-related costs, $2.7 million termination costs, and $1 million asset impairment  included in Research and development expenses, net; $13.9 million stock-based compensation, $2.4 million lease exit costs, $1.6 million acquisition-related costs, $1.1 million termination costs, and $0.3 million asset impairment included in Selling, general and administrative expense; $1.5 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); and $3.2 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest income (expense), net.

(4)

Operating results for the year ended December 31, 2011 include $0.9 million stock-based compensation expense and $9.1 million acquisition-related costs included in Cost of revenues; $11.6 million stock-based compensation, $3 million asset impairment, and $0.2 million acquisition-related costs included in Research and development expenses, net; $14.5 million stock-based compensation, $3.5 million acquisition-related costs, and $2.8 million lease exit costs included in Selling, general and administrative expense; $0.5 million recovery of impairment on investment securities and other, included in Gain on investment securities and other; $0.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $3.5 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes, $1.2 million accretion of liability for contingent consideration; and $0.3 million interest expense related to short-term loan included in Interest income (expense), net.

(5)

Operating results for the year ended December 26, 2010 include $0.8 million stock-based compensation expense and $1 million acquisition-related costs included in Cost of revenues; $9 million stock-based compensation and $4.9 million asset impairment included in Research and development expenses; $12.1 million stock-based compensation and $6.9 million acquisition related costs included in Selling, general and administrative expense; $3.8 million recovery of impairment on investment securities included in Gain on investment securities and other; $1.8 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $3.2 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes, and $1.1 million interest expense related to short-term loan included in Interest income (expense), net.

Quarterly Comparisons

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarterly Data

 

 

(in thousands except for per share data)

 

 

Year Ended December 27, 2014

 

Year Ended December 28, 2013

 

 

Fourth(1)

 

Third(2)

 

Second(3)

 

First(4)

 

Fourth(5)

 

Third(6)

 

Second(7)

 

First(8)

STATEMENT OF OPERATIONS DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

136,851 

 

$

135,462 

 

$

126,822 

 

$

126,468 

 

$

126,872 

 

$

128,411 

 

$

127,584 

 

$

125,161 

Cost of revenues

 

 

40,702 

 

 

40,306 

 

 

36,824 

 

 

37,564 

 

 

37,349 

 

 

36,840 

 

 

37,637 

 

 

37,387 

Gross profit

 

 

96,149 

 

 

95,156 

 

 

89,998 

 

 

88,904 

 

 

89,523 

 

 

91,571 

 

 

89,947 

 

 

87,774 

Research and development, net

 

 

50,942 

 

 

48,441 

 

 

49,388 

 

 

50,148 

 

 

54,009 

 

 

50,733 

 

 

51,681 

 

 

54,624 

Selling, general and administrative

 

 

29,411 

 

 

29,265 

 

 

28,991 

 

 

29,340 

 

 

27,768 

 

 

26,383 

 

 

30,277 

 

 

28,342 

Amortization of purchased intangible assets

 

 

10,994 

 

 

9,948 

 

 

9,948 

 

 

12,329 

 

 

13,547 

 

 

13,138 

 

 

10,776 

 

 

10,784 

Income (loss) from operations

 

 

4,802 

 

 

7,502 

 

 

1,671 

 

 

(2,913)

 

 

(5,801)

 

 

1,317 

 

 

(2,787)

 

 

(5,976)

Gain (loss) on investment securities and other investments

 

 

68 

 

 

12 

 

 

46 

 

 

29 

 

 

103 

 

 

1,762 

 

 

30 

 

 

(16)

Amortization of debt issue costs

 

 

(51)

 

 

(51)

 

 

(51)

 

 

(51)

 

 

(50)

 

 

(30)

 

 

 —

 

 

 —

Amortization of discount on long-term obligation

 

 

(350)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Foreign exchange gain (loss)

 

 

2,866 

 

 

899 

 

 

(789)

 

 

532 

 

 

2,363 

 

 

(1,898)

 

 

2,213 

 

 

1,365 

Interest income, net

 

 

 

 

198 

 

 

114 

 

 

 

 

83 

 

 

230 

 

 

330 

 

 

264 

Provision for income taxes

 

 

(5,007)

 

 

(3,087)

 

 

(4,471)

 

 

(1,847)

 

 

(12,377)

 

 

(4,613)

 

 

(4,602)

 

 

(4,164)

Net income (loss)

 

$

2,330 

 

$

5,473 

 

$

(3,480)

 

$

(4,241)

 

$

(15,679)

 

$

(3,232)

 

$

(4,816)

 

$

(8,527)

Net income (loss) per share—basic and diluted

 

$

0.01 

 

$

0.03 

 

$

(0.02)

 

$

(0.02)

 

$

(0.08)

 

$

(0.02)

 

$

(0.02)

 

$

(0.04)

Shares used in per share calculation—basic

 

 

198,625 

 

 

197,613 

 

 

196,114 

 

 

195,188 

 

 

201,615 

 

 

205,377 

 

 

205,230 

 

 

203,307 

Shares used in per share calculation—diluted

 

 

201,935 

 

 

200,744 

 

 

196,114 

 

 

195,188 

 

 

201,615 

 

 

205,377 

 

 

205,230 

 

 

203,307 

(1)

Operating results include $0.3 million stock-based compensation expense included in Cost of revenues; $2.9 million stock-based compensation expense, $0.4 million acquisition-related costs and $0.3 million reversal of accruals included in Research and development expenses, net; $3.7 million stock-based compensation expense, $0.6 million termination and separation costs, and $0.3 million acquisition-related costs included in Selling, general and administrative; $2.7 million foreign exchange gain on

24


 

foreign tax liabilities included in Foreign exchange gain (loss); $0.4 million amortization of discount on long-term obligations; and $0.1 million interest expense related to credit facility included in Interest income, net.

(2)

Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.0 million stock-based compensation expense, $0.4 million acquisition-related costs, and $0.1 million recoveries of termination costs included in Research and development expenses, net; $3.0 million stock-based compensation, $0.7 million acquisition-related costs, and $0.3 million recoveries of termination costs included in Selling, general and administrative; and $1.1 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss).

(3)

Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $1.9 million stock-based compensation, $0.8 million acquisition-related costs, and $0.3 million termination costs included in Research and development expenses, net; $2.8  million stock-based compensation and $1.3 million termination costs included in Selling, general and administrative; and $1.0 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(4)

Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.6 million stock-based compensation, $0.8 million acquisition-related costs, and $0.1 million recoveries of termination costs included in Research and development expenses, net; $3.3 million stock-based compensation, $0.1 million acquisition-related costs, $0.1 million lease exit costs, and $0.5 million assets impairment included in Selling, general and administrative; and $0.9 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(5)

Operating results include $0.3 million stock-based compensation expense, and $0.2 million termination costs included in Cost of revenues; $2.9 million stock-based compensation expense, $0.5 million asset impairment, $2.7 million termination costs, and $1.1 million acquisition-related costs included in Research and development expenses, net; $3.7 million stock-based compensation expense, $1.3 million termination costs, $0.6 million asset impairment, and $1.3 million reversal of accruals included in Selling, general and administrative; $2.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss);  and $0.1 million interest expense related to credit facility included in Interest income, net.

(6)

Operating results include $0.2 million stock-based compensation expense, $0.8 million acquisition-related costs, and $2.3 million reversal of accruals included in Cost of revenues; $2.5 million stock-based compensation expense, $1.2 million acquisition-related costs, and $0.2 million termination costs included in Research and development expenses, net; $3.1 million stock-based compensation included in Selling, general and administrative; $1.4 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss);  and $1.8 million gain on disposal of investments.

(7)

Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.4 million stock-based compensation, $0.3 million acquisition-related costs, $0.9 million termination costs, and $2.9 million reversal of accruals included in Research and development expenses, net; $3.6 million stock-based compensation, $1 million acquisition-related costs, $1.6 million asset impairment, and $0.3 million termination costs included in Selling, general and administrative; and $2.2 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(8)

Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $3.3 million stock-based compensation, $0.4 million termination costs, and $0.3 million acquisition-related costs included in Research and development expenses, net; $3.8 million stock-based compensation expense and $0.2 million termination costs included in Selling, general and administrative; and $1.3 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

 

25


 

ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report.

OVERVIEW

PMC-Sierra is a semiconductor and software solution innovator transforming networks that connect, move and store digital content. We generate revenues from the sale of semiconductor, embedded software and board level solutions that we have designed and developed or acquired. Almost all of our revenues in any given year come from the sale of products that are developed prior to that year. For example, 99% of our revenues in 2014 came from products developed or acquired in 2013 and earlier. After an individual product is released for production and announced it may take several years before that product generates any significant revenues.

Our current revenues are generated by a portfolio of approximately 700 products which we have designed and developed, or acquired.

PMC’s diverse product portfolio enables many different types of communications network infrastructure equipment in three end market segments: Storage, Optical and Mobile networks.

1.

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

2.

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

3.

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

We invest a substantial amount every year for the research and development of new semiconductor solutions. We determine the amount to invest in each semiconductor development based on our assessment of the future market opportunities for those components and the estimated return on investment. To compete globally, we must continue to invest in technologies, products and businesses that are both growing in demand and are cost competitive in the geographic markets that we serve. Going forward, we plan to continue to focus on finding innovative solutions to meet our customers’ needs while maintaining our operational efficiencies.

RESULTS OF OPERATIONS

NET REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2014

 

Change

 

2013

 

Change

 

2012

Net revenues

 

$

525.6 

 

 

3% 

 

$

508.0 

 

 

(4)%

 

$

531.0 

Overall net revenues for 2014 increased by $17.6 million compared to net revenues for 2013.  This 3% increase was mainly attributable to higher sales volumes to the Storage market driven by our SAS and Flash controller products, partially offset by lower sales volumes to the Optical market driven by our Fiber-to-the-Home (“FTTH”) products and lower sales volumes to the Mobile market driven by our mobile backhaul products.

Storage represented 70% of our net revenues in 2014, compared to 67% in 2013.  Storage net revenues increased by 3% year-over-year mainly due to an increase in sales volume of our SAS and Flash controller products. 

Optical represented 18% of our net revenues in 2014, compared to 19% in 2013.  Optical net revenues decreased by 1% compared to 2014 mainly due to lower sales volumes from our FTTH and legacy products, partially offset by higher volume of sales from our OTN products.

Mobile represented 12% of our net revenues in 2014, compared to 14% in 2013.  Mobile net revenues decreased by 2% compared to 2013 mainly due to lower sales volumes of our WinPath family of processors, partially offset by an increase in sales volumes of our Remote Radio Head products.

Overall net revenues for 2013 decreased by $23.0 million compared to net revenues for 2012.  This 4% decrease was mainly attributable to macro-economic uncertainty and continued cautious enterprise and carrier infrastructure spending in 2013, which primarily impacted sales volumes of each of the Storage, Optical and Mobile market segments, while average selling prices remained relatively stable.

26


 

Storage represented 67% of our net revenues in 2013 and 2012.  Storage net revenues decreased by 3% year-over-year mainly due to macro-economic uncertainty in 2013 driving continued softness in enterprise spending.  Accordingly, sales volumes of our server and storage products were lower compared to 2012.  This was partially offset by a higher volume of sales to Data Center customers and continued ramp of 6G and 12G SAS products and revenues from our flash controller products as a result of our acquisition of IDT’s enterprise flash controller division in 2013. 

Optical represented 19% of our net revenues in 2013 and 2012.  Optical net revenues decreased by 6% compared to 2012 mainly due to continued weakness in the macro-economic environment in 2013, which drove lower levels of carrier spending.  Sales volumes were down from our Legacy metro aggregation transport and routing and switching products.  This was partially offset by higher volume of sales from our high-capacity system-on-a-chip solutions products.

Mobile represented 14% of our net revenues in 2013 and 2012.  Mobile net revenues decreased by 9% compared to 2012 mainly due to continued weakness in the macro-economic environment in 2013, which drove lower levels of carrier spending.  Accordingly, sales volumes of our mobile backhaul products were lower compared to 2012.

GROSS PROFIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2014

 

Change

 

2013

 

Change

 

2012

Gross profit

 

$

370.2 

 

 

3% 

 

$

358.8 

 

 

(4)%

 

$

372.1 

Percentage of net revenues

 

 

70% 

 

 

 

 

 

71% 

 

 

 

 

 

70% 

Gross profit for 2014 increased by $11.4 million over 2013 due to higher volumes.  Gross profit as a percentage of net revenues decreased by 1%, from 71%  in 2013 to 70% in 2014, mainly due to a one time favorable impact of warranty provision releases in 2013.

Gross profit for 2013 decreased by $13.3 million over 2012 due to lower volumes.  Gross profit as a percentage of net revenues was 71% and 70% in 2013 and 2012, respectively.  Our gross margin was favorably impacted during 2013 from warranty provision releases offset by acquisition-related costs and termination costs. The remainder of the change is mainly due to product mix.

OTHER COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ millions)

 

2014

 

Change

 

2013

 

Change

 

2012

Research and development, net

 

$

198.9 

 

 

(6)%

 

$

211.0 

 

 

(4)%

 

$

220.9 

Percentage of net revenues

 

 

38% 

 

 

 

 

 

42% 

 

 

 

 

 

42% 

Selling, general and administrative

 

$

117.0 

 

 

4% 

 

$

112.8 

 

 

0% 

 

$

112.5 

Percentage of net revenues

 

 

22% 

 

 

 

 

 

22% 

 

 

 

 

 

21% 

Amortization of purchased intangible assets

 

$

43.2 

 

 

(10)%

 

$

48.2 

 

 

6% 

 

$

45.3 

Percentage of net revenues

 

 

8% 

 

 

 

 

 

9% 

 

 

 

 

 

9% 

Impairment of goodwill and purchased intangible assets

 

$

 —

 

 

—%

 

$

 —

 

 

(100)%

 

$

274.6 

Percentage of net revenues

 

 

—%

 

 

 

 

 

—%

 

 

 

 

 

52% 

Research and Development Expenses, net

Our Research and Development, net (“R&D”) expenses were $198.9 million in 2014.  This was $12.1 million, or 6%, lower compared to 2013 mainly due to a decrease in payroll-related costs, including termination costs, and lower tape-out related costs. This is partially offset by an increase in obligations associated with our foreign-employee pension liability.    Note that the increase in R&D expenses related to the development of the RAID technology licensed from HP in 2014 was largely offset by non-recurring engineering (“NRE”) cost reimbursements (as described in Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 2. Business Combinations)  and therefore did not have a significant impact on our R&D expenses for 2014.

Our R&D expenses, net were $211.0 million in 2013.  This was $9.9 million, or 4%, lower compared to 2012.  This was primarily the result of the decrease in payroll-related costs, including termination costs, lower outside services due to the timing of projects and lower tape-out related costs incurred in 2013.  In addition, R&D expenses in 2013 were favorably impacted by approximately $2.9 million as a result of changes in estimates related to our patent contingency provisions.

27


 

Selling, General and Administrative Expenses

Our selling, general and administrative (“SG&A”) expenses were $117.0 million in 2014.  This was $4.2 million higher compared to 2013, mainly due to an increase in obligations associated with our foreign-employee pension liability, an increase in expenses associated with certain employee termination and separation costs, and an increase in commission expense. This was partially offset by a decrease in outside services, acquisition-related costs and asset impairments.

Our SG&A expenses were $112.8 million in 2013.   This was $0.3 million higher compared to 2012, mainly due to an increase in asset impairment of $2.2 million and higher payroll related costs of $2.6 million, including termination costs of $1.8 million, partially offset by reversal of accruals of $1.3 million, lower lease and facilities expenses of $1.5 million and certain other decreases including professional fees and lease exit costs.

Amortization of Purchased Intangible Assets

Amortization expense for acquired intangible assets decreased by $5.0 million, or 10%, in 2014 compared to 2013.  This was mainly due to certain intangible assets that reached the end of their amortization period during the first quarter of 2014, partially offset by commencing amortization of intangible assets acquired from HP during the third quarter of 2014.

Amortization expense for acquired intangible assets increased by $2.9 million, or 6%, in 2013 compared to 2012.  This was attributable to amortization of intangible assets acquired from IDT during the third quarter of 2013.

Impairment of goodwill and purchased intangible assets

During the third quarter of 2012, the Company recognized impairment charges of $274.6 million due to weaker quarterly results and lower future projections than previously expected in the former Fiber-to-the-Home (“FTTH”) and Wintegra reporting units, respectively, related to the Company’s 2006 acquisition of Passave and 2010 acquisition of Wintegra.  This was driven by slower adoption rates of FTTH technology in markets outside of Asia and prolonged weak carrier spending due to unfavorable macroeconomic conditions which negatively impacted Wintegra.  These circumstances triggered the Company to perform step one of the impairment test and we determined that the estimated fair values of the reporting units were lower than their respective carrying values.

The Company combined these two reporting units (formerly included in the Fiber-to-the-Home Products and Wireless Infrastructure and Networking Products operating segments) with the Communications Products operating segment, to form the new realigned Communications Business Unit operating segment near the end of 2012.  This organizational realignment was made to capitalize on the many areas of synergy between the former three reporting units, to create an integrated and focused product roadmap, and to further strengthen the scale advantage we have in the area of network communications. 

The impairment loss recorded in 2012 did not have a significant impact on the Company’s operations and/or liquidity in 2013, nor do we expect that it will in the futureSee within Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 17. Impairment of Goodwill and Long-Lived Assets.

OTHER INCOME AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ millions)

 

2014

 

Change

 

2013

 

Change

 

2012

Gain on investment securities and other investments

 

$

0.2 

 

 

(89)%

 

$

1.9 

 

 

27% 

 

$

1.5 

Amortization of debt issue costs

 

$

(0.2)

 

 

(100)%

 

$

(0.1)

 

 

(50)%

 

$

(0.2)

Amortization of discount on long-term obligation

 

$

(0.4)

 

 

(100)%

 

$

 —

 

 

—%

 

$

 —

Foreign exchange gain (loss)

 

$

3.5 

 

 

13% 

 

$

4.0 

 

 

(367)%

 

$

(1.5)

Interest income (expense), net

 

$

0.3 

 

 

67% 

 

$

0.9 

 

 

156% 

 

$

(1.6)

Provision for income taxes

 

$

(14.4)

 

 

44% 

 

$

(25.8)

 

 

31% 

 

$

(37.3)

Gain on investment securities and other

We recorded a gain on sale of investment securities and other investments of $0.2 million, $1.9 million,  and $1.5 million, related to the disposition of investment securities and other investments in 2014, 2013, and 2012, respectively.

Amortization of debt issue costs

We recorded amortization of debt issue costs of $0.2 million and $0.1 million in 2014 and 2013, respectively, relating to our credit facility, and $0.2 million in 2012 relating to our senior convertible notes, which were retired in October 2012.

28


 

Amortization of discount on long-term obligation

We recorded amortization of discount on long-term obligation of $0.4 million relating to our long-term obligation from the acquisition of HP RAID software license during the third quarter of 2014 (see Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 2. Business Combinations).

Foreign exchange gain (loss) 

We have significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian dollar relative to the United States dollar have been hedged in accordance with our general practice of hedging.

We recognized a net foreign exchange gain of $3.5 million and $4.0 million in 2014 and 2013, respectively,  and a net foreign exchange loss of $1.5 million in 2012.  This was primarily due to foreign exchange gain and loss on the remeasurement of our net foreign denominated assets and liabilities.  This was driven by the United States Dollar appreciating overall by approximately 9% and 7% during 2014 and 2013, respectively, compared to depreciating by approximately 1% during 2012, against currencies applicable to our foreign operations.

Interest income (expense), net

Net interest income for 2014 and 2013 was $0.3 million and $0.9 million, respectively, and net interest expense for 2012 was $1.6 million. 

We drew $30 million from our credit facility during each of 2014 and 2013 and repaid the $60 million outstanding balance during the first quarter of 2014. The higher interest expense and credit facility fees incurred contributed to the lower net interest income in 2014 compared to 2013.

We retired our senior convertible notes in October 2012 and we drew $30 million in funds from our credit facility in November 2013.  This resulted in a lower interest expense to offset interest income from cash in banks and short-term investments in 2013 compared to 2012.

Provision for income taxes

On a consolidated basis, the Company recorded a provision for income taxes of $14.4 million, $25.8 million, and $37.3 million for 2014, 2013, and 2012, respectively. The effective tax rates were 99%, (396)%, and (13)% for 2014, 2013 and 2012, respectively.

The Company’s 2014 tax rate was higher than the 35% statutory rate primarily due to a $10.6 million tax effect of non-deductible amortization and stock-based compensation expense and a $10.3 million net increase in liability for unrecognized tax benefit.  This was partially offset by a $10.3 million benefit of investment tax credits generated in 2014, and the balance attributable to other less significant items.

The Company’s 2013 tax rate differed from the 35% statutory rate primarily due to $32.5 million increase in valuation allowance on deferred tax assets, $18.1 million tax on intercompany transactions, and $16.1 million non-deductible amortization and stock-based compensation expense.  This was partially offset by $23.3 million tax credits generated in 2013,  $10.2 million tax on profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate, and the balance attributable to other less significant items.

The Company’s 2012 tax rate differed from the 35% statutory rate primarily due to the $104.8 million tax impact of an intercompany dividend, $109.8 million non-deductible amortization and stock-based compensation expense, and $17.6 million effect of stock option related loss carry-forwards recorded in equity.  This was partially offset by a decrease in valuation allowance of $40.3 million, $19.2 million tax credits generated in 2012, and the balance attributable to other less significant items.

See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 14.  Income Taxes.

29


 

BUSINESS OUTLOOK

The following is our outlook for the three months ending March 28, 2015 and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure:

 

 

 

 

 

 

 

 

 

(in millions, except for percentages)

 

Non-GAAP measure

 

Reconciling items

 

 

GAAP Measure

Net revenues

 

$129.0 - $137.0

 

N/A

(a)

 

$129.0 - $137.0

Gross profit %

 

69.5% - 70.5%

 

(0.2)%

(b)

 

69.3% - 70.3%

Operating expenses

 

$72.0 - $74.0

 

$15.5 - $16.5

(c)

 

$87.5 - $90.5

Provision for income taxes

 

$1.0 - $1.5

 

$1.1 - $1.6

(d)

 

$2.1 - $3.1


(a)

As in the past, and consistent with business practice in the semiconductor industry, a portion of our revenue is likely to be derived from orders placed and shipped during the same quarter, which we call our “turns business.” Our turns business varies from quarter to quarter.  We expect the turns business percentage from the beginning of the first quarter of 2015 to be approximately 27%.  A number of factors such as volatile macroeconomic conditions could impact achieving our revenue outlook.

(b)

This percentage relates to stock-based compensation expense. The gross margin percentage can vary depending on a volume of products sold given certain costs are fixed. The gross margin percentage will also vary depending on the mix of products sold.

(c)

The referenced amount consists of $6.2 million to $7.2 million of stock-based compensation expense and $9.3 million of amortization of purchased intangible assets.

(d)

$1.1 million to $1.6 million income tax provision related to arrears interest relating to unrecognized tax benefits, prepaid tax amortization, tax deductible goodwill and other tax deductible items.

The above non-GAAP information is provided as a supplement to the Company’s condensed consolidated financial statements presented in accordance with U.S. generally accepted accounting principles ("GAAP").  A non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.  The Company believes that the additional non-GAAP measures are useful to investors for the purpose of financial analysis.  Management uses these measures internally to evaluate the Company’s in-period operating performance before gains, losses and other charges that are considered by management to be outside of the Company’s core operating results.  In addition, the measures are used for planning and forecasting of the Company’s future periods.  However, non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures.  Other companies may use different non-GAAP measures and presentation of results.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash from operations, our short-term investments and long-term investment securities. We employ these sources of liquidity to support ongoing business activities, acquire or invest in critical or complementary technologies, purchase capital equipment, repay any short-term indebtedness, and finance working capital. Currently, our primary objective for use of discretionary cash has been to repurchase and retire a portion of our common stock.  The combination of cash, cash equivalents, short-term investments and long-term investment securities at December 27, 2014 and December 28, 2013 totaled $266.0 million and $214.3 million, respectively.

In 2013, we obtained a revolving line of credit with a bank under which the Company may borrow up to $100 million, of which $nil was drawn as of December 27, 2014.  The credit agreement contains customary representations and warranties, affirmative covenants and negative covenants with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including, without limitation, restrictions and limitations on dividends, asset sales, the ability to incur additional debt and additional liens and certain financial covenants.  As of December 27, 2014, the Company was in compliance with these covenants.

In October 2012, we repurchased the remaining outstanding senior convertible notes at 100% of the outstanding principal amount, or $68.3 million.

In the future, we expect our cash on hand and cash generated from operations, together with our short-term investments, long-term investment securities and revolving line of credit, to be our primary sources of liquidity (see Item 8. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 4. Fair Value Measurements).

30


 

OPERATING ACTIVITIES

We generated cash from operations of $90.6 million in 2014 compared to $78.8 million in 2013.  Our positive operating cash flows in 2014 were mainly driven by the favorable impact of non-cash adjustments of $88.7 million, which is comprised of $65.5 million of amortization and depreciation expense (2013 - $71.4 million; 2012 - $64.5 million) and $23.2 million of stock-based compensation (2013 and 2012 - $26.3 million).   In addition, a net decrease in working capital further contributed to our cash generated from operations. 

INVESTING ACTIVITIES

We had a net outflow of cash of $64.1 million from investing activities in 2014 compared to a net cash outflow of $126.7 million in the same period in 2013 (2012 - $166.3 million cash inflow) – a decrease of $62.6 million.  During 2014, we used $106.1 million (2013 - $179.8 million; 2012 - $120.9 million) to purchase investment securities and other investments, which is a typical use for our excess cash, and generated $67.4 million (2013 - $171.2 million; 2012 - $341.8 million) from redemptions and sales of such investments securities.  We also invested $15.4 million through the purchase of property and equipment and intangible assets in 2014 (2013 - $20.8 million; 2012 - $38.7 million).  In addition, on September 4, 2014, the Company made a $10 million first installment payment related to the Company’s acquisition of RAID software license from HP compared to $96.1 million used for the acquisition of IDT’s enterprise flash controller division in 2013 (see Item 8. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 2. Business Combinations).

FINANCING ACTIVITIES

We had a net outflow of cash of $12.3 million from financing activities in 2014 compared to a net cash inflow of $21.2 million in 2013 (2012 - $238.1 million).  During 2014, we borrowed $30.0 million (2013 - $30 million) from our credit facility and repaid $60.0 million.  We also repurchased common stock for $11.5 million in 2014 (2013 - $76.3 million; 2012 - $200 million).  This use of cash noted above was partially offset by $29.2 million in proceeds from employee related stock issuances in 2014 (2013 - $25.2 million; 2012 - $16 million). 

 

CONTRACTUAL OBLIGATIONS:

At December 27, 2014, we had the following contractual obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due in:

 

 

 

 

 

Less than

 

 

 

 

 

 

 

More than

(in thousands)

 

Total

 

1 year

 

1-3 years

 

3-5 years

 

5 years

Operating Lease Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Rental Payments

 

$

52,150 

 

$

9,925 

 

$

17,917 

 

$

14,275 

 

$

10,033 

Estimated Operating Cost Payments

 

 

12,339 

 

 

3,009 

 

 

5,095 

 

 

3,918 

 

 

317 

Purchase and Other Obligations (1)

 

 

5,965 

 

 

5,475 

 

 

490 

 

 

 —

 

 

 —

Acquisition Consideration Installment Payments

 

 

42,000 

 

 

18,000 

 

 

24,000