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EXCEL - IDEA: XBRL DOCUMENT - PMC SIERRA INCFinancial_Report.xls

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

 

 

 

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

 

for the quarterly period ended March 28, 2015   

  

or  

 

 

 

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

 

For the transition period from              to              

  

Commission File Number 0-19084

 

 

 

PMC-Sierra, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

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

  

1380 Bordeaux Drive

Sunnyvale, CA 94089

(408) 239-8000

 

 

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No  

 

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

 

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

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  

  

As of April 29, 2015, the registrant had 197,891,832  shares of Common Stock, $0.001 par value, outstanding.

 

 

 

 

    


 

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

Item 1.

Financial Statements

 

 

- Condensed Consolidated Statements of Operations

 

- Condensed Consolidated Statements of Comprehensive Income (Loss)

 

- Condensed Consolidated Balance Sheets

 

- Condensed Consolidated Statements of Cash Flows

 

- Notes to the Condensed Consolidated Financial Statements

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

16 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22 

Item 4.

Controls and Procedures

23 

PART II—OTHER INFORMATION 

 

Item 1.

Legal Proceedings

24 

Item 1A.

Risk Factors

24 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33 

Item 3.

Defaults Upon Senior Securities

33 

Item 4.

Mine Safety Disclosures

33 

Item 5.

Other Information

33 

Item 6.

Exhibits

34 

Signatures 

35 

 

 

 

 

   

2


 

Part IFINANCIAL INFORMATION

Item 1Financial Statements (Unaudited)

  

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 28,

 

March 29,

 

 

 

2015

 

2014 

 

Net revenues

 

$

133,071 

 

$

126,468 

 

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

 

 

39,980 

 

 

37,564 

 

Gross profit

 

 

93,091 

 

 

88,904 

 

Research and development, net

 

 

48,866 

 

 

50,148 

 

Selling, general and administrative

 

 

30,051 

 

 

29,340 

 

Amortization of purchased intangible assets

 

 

9,317 

 

 

12,329 

 

Income (loss) from operations

 

 

4,857 

 

 

(2,913)

 

Other income (expense):

 

 

 

 

 

 

 

Foreign exchange gain

 

 

2,594 

 

 

532 

 

Interest and other financial income, net

 

 

164 

 

 

 

Gain on investment securities and other investments

 

 

32 

 

 

29 

 

Amortization of debt issuance costs

 

 

(51)

 

 

(51)

 

Amortization of discount on short-term and long-term obligation

 

 

(210)

 

 

 —

 

Income (loss) before provision for income taxes

 

 

7,386 

 

 

(2,394)

 

Provision for income taxes

 

 

(2,731)

 

 

(1,847)

 

Net income (loss)

 

$

4,655 

 

$

(4,241)

 

Net income (loss) per common share - basic and diluted

 

$

0.02 

 

$

(0.02)

 

Shares used in per share calculation - basic

 

 

200,249 

 

 

195,188 

 

Shares used in per share calculation - diluted

 

 

205,688 

 

 

195,188 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

 

 

 

 

 

 

   

  

3


 

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

 

 

 

 

 

Three Months Ended

 

March 28,

 

March 29,

 

2015

 

2014

Net income (loss)

$

4,655 

 

$

(4,241)

Other comprehensive income (loss):

 

 

 

 

 

Change in fair value of derivatives, net of tax of $nil and $57

 

(334)

 

 

(163)

Change in fair value of investment securities, net of tax of $nil and ($6)

 

504 

 

 

16 

Other comprehensive income (loss)

 

170 

 

 

(147)

Comprehensive income (loss)

$

4,825 

 

$

(4,388)

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

  

 

 

 

   

 

4


 

    

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

 

 

 

 

 

 

 

March 28,

 

December 27,

 

 

2015

 

2014

 

ASSETS:

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

64,548 

 

$

112,570 

 

Short-term investments

 

45,580 

 

 

45,885 

 

Accounts receivable, net of allowance for doubtful accounts
   of $795 (2014 - $795)

 

62,156 

 

 

55,414 

 

Inventories, net

 

35,685 

 

 

37,949 

 

Prepaid expenses and other current assets

 

14,348 

 

 

16,473 

 

Income taxes receivable

 

1,966 

 

 

1,968 

 

Prepaid income tax expenses

 

 —

 

 

51 

 

Deferred income tax assets

 

5,255 

 

 

5,442 

 

Total current assets

 

229,538 

 

 

275,752 

 

Investment securities

 

120,052 

 

 

107,509 

 

Investments and other assets

 

7,332 

 

 

7,683 

 

Prepaid income tax expenses

 

93 

 

 

42 

 

Property and equipment, net

 

37,370 

 

 

37,311 

 

Goodwill

 

283,239 

 

 

283,239 

 

Intangible assets, net

 

133,344 

 

 

143,680 

 

Deferred income tax assets

 

13,123 

 

 

13,412 

 

Income taxes receivable

 

465 

 

 

457 

 

 

$

824,556 

 

$

869,085 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

20,357 

 

$

23,360 

 

Accrued liabilities

 

53,788 

 

 

74,135 

 

Credit facility

 

10,000 

 

 

 —

 

Income taxes payable

 

1,109 

 

 

1,062 

 

Liability for unrecognized tax benefit

 

14,820 

 

 

16,076 

 

Deferred income tax liabilities

 

7,644 

 

 

7,644 

 

Deferred income

 

3,944 

 

 

4,530 

 

Total current liabilities

 

111,662 

 

 

126,807 

 

Long-term obligations

 

25,008 

 

 

36,305 

 

Deferred income tax liabilities

 

54,209 

 

 

53,493 

 

Liability for unrecognized tax benefit

 

25,768 

 

 

25,244 

 

PMC special shares convertible into 205 (2014 - 278) shares
   of common stock

 

480 

 

 

745 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, par value $.001: 900,000 shares authorized; 
   197,726 shares issued and outstanding (2014 - 199,518)

 

198 

 

 

200 

 

Additional paid in capital

 

1,603,388 

 

 

1,595,609 

 

Accumulated other comprehensive loss

 

(2,185)

 

 

(2,355)

 

Accumulated deficit

 

(993,972)

 

 

(966,963)

 

Total stockholders' equity

 

607,429 

 

 

626,491 

 

 

$

824,556 

 

$

869,085 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

  

  

  

  

   

   

5


 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

 

 

 

Three Months Ended

 

March 28,

 

March 29,

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

$

4,655 

 

$

(4,241)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

14,988 

 

 

17,911 

Stock-based compensation

 

6,693 

 

 

6,191 

Unrealized foreign exchange gain, net

 

(4,495)

 

 

(1,725)

Net amortization of premiums and accrued interest on investments

 

256 

 

 

275 

Asset impairments

 

 —

 

 

770 

Gain on investment securities and other

 

(32)

 

 

(29)

Accretion of discount on short-term and long-term obligations

 

210 

 

 

 —

Amortization of debt issuance costs

 

51 

 

 

51 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(6,741)

 

 

(546)

Inventories, net

 

2,264 

 

 

864 

Prepaid expenses and other current assets

 

834 

 

 

2,324 

Accounts payable and accrued liabilities

 

(12,726)

 

 

(11,689)

Deferred taxes and income taxes payable

 

2,664 

 

 

2,374 

Deferred income

 

(586)

 

 

(1,921)

Net cash provided by operating activities

 

8,035 

 

 

10,609 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(4,414)

 

 

(3,732)

Purchase of intangible assets

 

(441)

 

 

(481)

Redemption of short-term investments

 

7,926 

 

 

1,800 

Disposals of investment securities and other investments

 

15,429 

 

 

14,064 

Purchases of investment securities and other investments

 

(35,329)

 

 

(17,790)

Net cash used in investing activities

 

(16,829)

 

 

(6,139)

Cash flows from financing activities:

 

 

 

 

 

Installment payment in connection with previous business acquisition

 

(18,000)

 

 

 —

Proceeds from credit facility

 

30,000 

 

 

30,000 

Repayment of credit facility

 

(20,000)

 

 

(55,000)

Proceeds from issuance of common stock

 

26,759 

 

 

9,348 

Repurchases of common stock

 

(57,222)

 

 

(11,496)

Net cash used in financing activities

 

(38,463)

 

 

(27,148)

Effect of exchange rate changes on cash and cash equivalents

 

(765)

 

 

(432)

Net decrease in cash and cash equivalents

 

(48,022)

 

 

(23,110)

Cash and cash equivalents, beginning of the period

 

112,570 

 

 

100,038 

Cash and cash equivalents, end of the period

$

64,548 

 

$

76,928 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

101 

 

$

198 

Cash (payments) refunds received for income taxes, net

 

(69)

 

 

654 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

6


 

 

   

  

PMC-Sierra, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  

NOTE 1.  Summary of Significant Accounting Policies  

  

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

 

Basis of presentation. The accompanying interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and United States Generally Accepted Accounting Principles (“GAAP”).  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules or regulations.  These interim condensed consolidated financial statements are unaudited, but reflect all adjustments which are normal and recurring in nature and are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented.  These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Companys Annual Report on Form 10-K for the year ended December 27, 2014 filed with the SEC on February 24, 2015.  The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods.  Fiscal 2015 will consist of 52 weeks and will end on Saturday, December 26, 2015.  Fiscal 2014 consisted of 52 weeks and ended on Saturday, December 27, 2014.  The first quarter of each of 2015 and 2014 consisted of 13 weeks.  The Company’s reporting currency is the United States (“U.S.”) dollar and presented in thousands unless otherwise stated.

 

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

 

Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  This ASU requires retrospective adoption and will be effective for us beginning in our first quarter of 2017.  Early adoption is permitted.  The Company is currently evaluating the effect of the adoption of this ASU on our consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective.  As currently issued, the new standard is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The standard allows for either full retrospective or modified retrospective adoption method. The Company is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method or determined the effect of the standard on its ongoing financial reporting.

 

 

7


 

 

NOTE 2. Business Combinations  

 

Acquisition of RAID Software License

 

On September 4, 2014 (“Effective Date”), PMC completed a transaction agreement with Hewlett-Packard Company (“HP”) to license core HP Smart Array (“RAID”) software, firmware and management technology (the “Transaction”) for total acquisition consideration of $52 million, accounted for using the acquisition method. With this technology, as well as with certain key employees who worked for HP as lead RAID software development engineers and who were transferred to PMC, PMC can provide more system value to new and existing enterprise, Hyperscale data center and channel customers.

 

The $52 million total acquisition consideration is payable in installments.  An initial payment of $10 million was made on the Effective Date and $18 million was paid on January 10, 2015.  The remaining $24 million is payable in two installments of $12 million each on January 10, 2016 and January 10, 2017.  Such installment payments are classified as financing activities in our condensed consolidated statement of cash flows.

 

Other Agreement with HP

 

Upon the closing of the Transaction, the Company also entered into an agreement with HP related to services and non-recurring engineering (“NRE”) which provides the framework for the development of future generations of RAID software for HP for a period of approximately two years from the Effective Date. During this period, HP will make cost reimbursement payments to the Company totaling $25 million, which are receivable in installments through April 2016. The Company received $3.3 million of the $25 million total cost reimbursement payments from HP in the first quarter of 2015 ($7.3 million since the Effective Date). Payments to the Company in accordance with this agreement are recorded as a reduction of research and development expense.

     

NOTE 3.  Derivative Instruments  

  

The Company generates revenues in U.S. dollars but incurs a portion of its operating expenses in foreign currencies, primarily the Canadian dollar.  To minimize the short-term impact of foreign currency fluctuations on the Companys operating expenses, the Company purchases forward currency contracts.    The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The changes in the fair values of the effective portions of designated cash flow hedges are recorded in Accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portion of cash flow hedges are adjusted to fair value through earnings. The Company de-designates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive income (loss) are reclassified immediately into earnings and any subsequent changes in the fair value of such derivative instruments are immediately recorded in earnings. The fair value of our derivative instruments are included in prepaid expenses and other assets or accrued liabilities.

  

The Company did not recognize any net gains or losses related to the de-designation of discontinued cash flow hedges during the three months ended March 28, 2015.  As at March 28, 2015 the Company had 151 forward currency contracts outstanding (March 29, 2014 - 24), all with maturities of less than 12 months, which qualified and were designated as cash flow hedges.  As of March 28, 2015, the U.S. dollar notional amount of these contracts was $39.2 million (March 29, 2014 - $22.5 million), and the contracts had an aggregate fair value loss of $0.3 million and $0.2 million for the three months ended March 28, 2015 and March 29, 2014, respectively. These were recorded in Accumulated Other Comprehensive Income (Loss), net of taxes of $nil (March 29, 2014 - $0.1 million).

   

NOTE 4.  Fair Value Measurements   

 

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

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

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

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

8


 

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

 

In the first quarter of 2015, the Company reviewed and evaluated the observable market pricing data and volume of trading activity used in determining Level 1 and Level 2 assets and classified $13.8 million of investments as Level 2 that were reported as Level 1 at December 27, 2014.  The Company also classified $10.1 million of investments as Level 1 that were reported as Level 2 at December 27, 2014.  The Company’s derivative instruments are classified as Level 2 as of March 28, 2015 and December 27, 2014, as they are not actively traded and are valued using pricing models that use observable market inputs.  There were no Level 3 assets or liabilities at March 28, 2015 or December 27, 2014.

 

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

  

Financial assets measured on a recurring basis as at March 28, 2015 and December 27, 2014, are summarized below:  

 

 

 

 

 

 

 

 

Fair value,

 

March 28, 2015

(in thousands)

Level 1

 

Level 2

Assets:

 

 

 

 

 

Money market funds 

$

4,035 

 

$

 —

Corporate bonds and notes

 

90,114 

 

 

21,607 

U.S. treasury and government agency notes 

 

40,553 

 

 

1,946 

Foreign government and agency notes

 

51 

 

 

11,130 

U.S. state and municipal securities

 

 —

 

 

231 

Total assets

$

134,753 

 

$

34,914 

 

 

 

 

 

 

 

Fair value,

 

December 27, 2014

(in thousands)

Level 1

 

Level 2

Assets:

 

 

 

 

 

Money market funds

$

8,729 

 

$

 —

Corporate bonds and notes

 

88,401 

 

 

17,030 

U.S. treasury and government agency notes

 

38,283 

 

 

1,387 

Foreign government and agency notes

 

537 

 

 

7,525 

U.S. state and municipal securities

 

 —

 

 

231 

Total assets

$

135,950 

 

$

26,173 

 

 

 

 

 

 

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

 

Financial liabilities measured on a recurring basis are summarized below:  

 

 

 

 

 

Fair value,

 

March 28, 2015

(in thousands)

Level 2

Current liabilities:

 

 

Forward currency contracts

$

2,241 

 

 

 

 

Fair value,

 

December 27, 2014

(in thousands)

Level 2

Current liabilities:

 

 

Forward currency contracts

$

1,907 

 

 

 

These are included in Accrued liabilities.

 

 

 

There were no assets or liabilities measured and recorded at fair value on a non-recurring basis as of March 28, 2015 and December 27, 2014.

 

9


 

NOTE 5.  Stock-Based Compensation  

 

The Company has two stock-based compensation plans.  Neither of the Companys stock-based awards under these plans are classified as liabilities.  The Company recorded stock-based compensation expense for the three months ended March 28, 2015 and March 29, 2014 as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 28,

 

March 29,

 

(in thousands)

2015

 

2014

 

Cost of revenues

$

271 

 

$

241 

 

Research and development

 

2,844 

 

 

2,647 

 

Selling, general and administrative

 

3,578 

 

 

3,303 

 

Total

$

6,693 

 

$

6,191 

 

 

 

 

 

 

 

 

 

The Company received cash of $26.8 million related to the issuance of stock-based awards during the three months ended March 28, 2015 (March 29, 2014 - $9.3 million).

 

Equity Award Plans

  

The Company issues its equity awards under the provisions of its equity plans. Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the grant date. The options generally expire within 10 years and vest over four years.

Activity under the option plans during the three months ended March 28, 2015 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of options

 

Weighted average exercise price per share

 

 

Weighted average remaining contractual term (years)

 

 

Aggregate intrinsic value

Outstanding, December 27, 2014

 

18,316,720 

 

$

7.53 

 

 

4.41 

 

$

32,598,999 

Granted

 

30,000 

 

$

8.88 

 

 

 

 

 

 —

Exercised

 

(3,123,174)

 

$

6.82 

 

 

 

 

 

 —

Forfeited

 

(3,802)

 

$

6.83 

 

 

 

 

 

 —

Expired

 

(282,241)

 

$

10.51 

 

 

 

 

 

 —

Outstanding, March 28, 2015

 

14,937,503 

 

$

7.63 

 

 

4.49 

 

$

27,621,695 

Vested and expected to vest, March 28, 2015

 

14,753,970 

 

$

7.64 

 

 

4.43 

 

$

27,155,342 

Exercisable, March 28, 2015

 

13,222,348 

 

$

7.76 

 

 

3.97 

 

$

22,969,577 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of the Companys common stock for the options that were in-the-money at March 28, 2015.  Total forfeitures recorded amounted to $0.3 million and $0.8 million during the three months ended March 28, 2015, and March 29, 2014, respectively.

  

The fair value of the Companys stock option awards granted to employees is estimated using a lattice-binomial valuation model.  This model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.   The model requires the input of highly subjective assumptions including the expected stock price volatility and expected life.

  

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

  

10


 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 28,

 

March 29,

 

 

 

 

2015

 

2014

 

 

Expected life (years)

 

5.89 

 

N/A

 

 

Expected volatility

 

31% 

 

N/A

 

 

Risk-free interest rate

 

1.6% 

 

N/A

 

 

 

 

 

 

 

 

 

The weighted average grant-date fair value per stock options granted during the three months ended March 28, 2015 was $2.81.  No stock options were granted during the three months ended March 29, 2014. The total intrinsic value of stock options exercised during the three months ended March 28, 2015 was $7.6 million (March 29, 2014 - $1.2 million).  

  

As of March 28, 2015, there was $3.0 million of total unrecognized compensation costs related to unvested stock options granted under the plans, which is expected to be recognized over an average period of 2.5 years.   

  

Restricted Stock Units  

  

The Company has various stock award plans that allow for the issuance of Restricted Stock Units (“RSUs”) to employees and directors.    

 

On February 25, 2015, the Company made its annual grant of RSU awards to Executives based on the second performance-based program tied to Non-GAAP operating income targets for 2015-2017. The total fair value of these 2015 grants was estimated at $3.8 million and will be recognized as compensation expense over the award’s vesting terms, with 34% vesting on February 25, 2016, 33% on February 25, 2017 and 33% vesting on February 25, 2018.

 

A summary of RSU activity during the three months ended March 28, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Units

 

Weighted Average Remaining Contractual Term (years)

 

 

Aggregate intrinsic value

Unvested units at December 27, 2014

 

7,368,529 

 

 

1.73 

 

$

67,200,984 

Awarded

 

413,108 

 

 

 

 

 

 —

Released

 

(190,951)

 

 

 

 

 

 —

Forfeited

 

(137,262)

 

 

 

 

 

 —

Unvested units at March 28, 2015

 

7,453,424 

 

 

1.55 

 

$

69,242,309 

Restricted Stock Units expected to vest at March 28, 2015

 

6,541,680 

 

 

1.45 

 

$

60,772,202 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The intrinsic value of RSUs vested during the three months ended March 28, 2015 was $1.8 million. As of March 28, 2015, total unrecognized compensation expense, adjusted for estimated forfeitures, related to unvested RSUs was $36.4 million, which is expected to be recognized over the next 2.5 years.  

 

Employee Stock Purchase Plan

 

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

 

11


 

During the three months ended March 28, 2015, 909,832 shares were issued under the 2011 Plan at a weighted average price of $6.00 per share.  As of March 28, 2015, 3,470,376 shares were available for future issuance under the 2011 Plan compared to 4,380,208 as at December 27, 2014. The valuation inputs utilized to determine the grant date fair value per ESPP award granted were as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 28,

 

March 29,

 

 

 

 

2015

 

2014

 

 

Expected life (years)

 

0.5 

 

0.5 

 

 

Expected volatility

 

34% 

 

33% 

 

 

Risk-free interest rate

 

0.07% 

 

0.10% 

 

 

 

The weighted average grant date fair value per ESPP award granted during the first three months of 2015 was $2.24.  The total intrinsic value of ESPP shares issued during the first three months of 2015 was $2.8 million.  

 

As of March 28, 2015, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $1.2 million which is expected to be recognized over the next four months.

 

NOTE 6.  Balance Sheet Items

  

a.

Inventories.

 

Inventories (net of reserves of $7.5 million and $7.8 million at March 28, 2015 and December 27, 2014, respectively) were as follows:

 

 

 

 

 

 

 

 

March 28,

 

December 27,

(in thousands)

2015

 

2014

Work-in-progress

$

16,838 

 

$

17,438 

Finished goods

 

18,847 

 

 

20,511 

 

$

35,685 

 

$

37,949 

 

 

 

 

 

 

b.

Product warranties.

  

The Company provides a limited warranty on most of its standard products and accrues for the estimated cost at the time of shipment.  The Company estimates its warranty costs based on historical failure rates and related repair or replacement costs and periodically reassess these estimates as actual warranty activities occur.  The changes in the Companys accrued warranty obligations from December 27, 2014 to March 28, 2015, and from December 28, 2013 to March 29, 2014 were as follows:  

 

 

 

 

 

 

 

 

Three Months Ended

 

March 28,

 

March 29,

(in thousands)

2015

 

2014

Balance, beginning of the period

$

1,756 

 

$

2,163 

Accrual for new warranties issued

 

246 

 

 

124 

Reduction for payments and product replacements

 

(134)

 

 

(195)

Adjustments related to revisions and changes in estimate of warranty accrual

 

 —

 

 

(88)

Balance, end of the period

$

1,868 

 

$

2,004 

 

 

 

 

 

 

 

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

 

 

 

12


 

NOTE 7.  Investment Securities  

 

The Companys available for sale investments, by investment type, consists of the following at March 28, 2015 and December 27, 2014: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 28, 2015

(in thousands)

Amortized Cost

 

Gross Unrealized Gains*

 

Gross Unrealized Losses

 

Fair Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

4,035 

 

 

 —

 

$

 —

 

$

4,035 

Total cash equivalents

 

4,035 

 

 

 —

 

 

 —

 

 

4,035 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

42,724 

 

 

469 

 

 

(3)

 

 

43,190 

US treasury and government agency notes

 

1,520 

 

 

86 

 

 

 —

 

 

1,606 

Foreign government and agency notes

 

500 

 

 

53 

 

 

 —

 

 

553 

US states and municipal securities

 

230 

 

 

 

 

 —

 

 

231 

Total short-term investments

 

44,974 

 

 

609 

 

 

(3)

 

 

45,580 

Long-term investment securities:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

68,434 

 

 

132 

 

 

(35)

 

 

68,531 

US treasury and government agency notes

 

40,815 

 

 

86 

 

 

(8)

 

 

40,893 

Foreign government and agency notes

 

10,632 

 

 

 

 

(8)

 

 

10,628 

Total long-term investment securities

 

119,881 

 

 

222 

 

 

(51)

 

 

120,052 

Total

$

168,890 

 

$

831 

 

$

(54)

 

$

169,667 

 

 

 

 

 

 

 

 

 

 

 

 

*Gross unrealized gains include accrued interest on investments of $0.6 million which are included in the Consolidated Statement of Operations.  The remainder of the gross unrealized gains and losses are included in the Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

 

 

 

 

 

 

 

 

 

 

 

 

 

December 27, 2014

(in thousands)

Amortized Cost

 

Gross Unrealized Gains*

 

Gross Unrealized Losses

 

Fair Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

8,729 

 

$

 —

 

$

 —

 

$

8,729 

Total cash equivalents

 

8,729 

 

 

 —

 

 

 —

 

 

8,729 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

43,777 

 

 

498 

 

 

(16)

 

 

44,259 

US treasury and government agency notes

 

1,010 

 

 

79 

 

 

 —

 

 

1,089 

Foreign government and agency notes

 

501 

 

 

36 

 

 

 —

 

 

537 

Total short-term investments

 

45,288 

 

 

613 

 

 

(16)

 

 

45,885 

Long-term investment securities:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

61,357 

 

 

28 

 

 

(213)

 

 

61,172 

US treasury and government agency notes

 

38,650 

 

 

 

 

(76)

 

 

38,581 

Foreign government and agency notes

 

7,563 

 

 

 

 

(39)

 

 

7,525 

US states and municipal securities

 

230 

 

 

 

 

 —

 

 

231 

Total long-term investment securities

 

107,800 

 

 

37 

 

 

(328)

 

 

107,509 

Total

$

161,817 

 

$

650 

 

$

(344)

 

$

162,123 

 

 

 

 

 

 

 

 

 

 

 

 

*Gross unrealized gains include accrued interest on investments of $0.6 million which are included in the Consolidated Statement of Operations.  The remainder of the gross unrealized gains and losses are included in the Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

 

  

13


 

As of March 28, 2015 and December 27, 2014, the fair value of certain of the Companys available-for-sale securities was less than their cost basis.  Management reviews various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition, near-term prospects of the issuer of the investment security, the magnitude of the unrealized loss compared to the cost of the investment, length of time the investment has been in a loss position and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value.  As of March 28, 2015, the Company determined that all the unrealized losses are temporary in nature and recorded them as a component of Accumulated other comprehensive income (loss).

 

Contractual maturities as of March 28, 2015 of the Company’s investment securities do not exceed three years.  The majority of the contractual maturities are two to three years, and the balance has maturities of one year or less.

 

NOTE 8. Credit Facility

 

As of March 28, 2015, the Company had an available revolving line of credit with a bank under which the Company may borrow up to $100 million, of which $10 million was drawn (December 27, 2014 - $nil). The Company may request, from time to time, and subject to customary conditions, including receipt of commitments, that the revolving credit facility be increased by an aggregate amount not to exceed $150 million.  Interest payments are based on LIBOR plus margins, where margins ranges from 1.75% to 2.25% per annum based on the Company’s leverage ratio.  The revolving credit facility is available for general corporate purposes. The credit facility is collateralized by substantially all of the Company’s personal property. The Company’s obligations under the credit facility are jointly and severally guaranteed by material wholly-owned domestic subsidiaries of the Company.

 

On April 27, 2015, the Company repaid the $10 million outstanding balance as of March 28, 2015.

 

NOTE 9.  Income Taxes  

  

The Company recorded a provision for income taxes of $2.7 million and $1.8 million for the three months ended March 28, 2015 and March 29, 2014, respectively.

 

The Company’s effective tax rate was 37% and (77%) for the three months ended March 28, 2015 and March 29, 2014, respectively.  For each of the first quarters of 2015 and 2014, the difference between the Company’s effective tax rate and the 35% federal statutory rate results primarily from changes in accruals related to unrecognized tax benefits and non-deductible amortization of intangible assets, partially offset by foreign earnings eligible for tax rates lower than the federal statutory rate.  In addition, for the three months ended March 29, 2014, the Company’s tax rate was negative due to a recorded tax expense on pretax loss.

 

As of March 28, 2015 and December 27, 2014, the Company’s liability for unrecognized tax benefits on a world-wide consolidated basis was $40.6 million and $41.3 million, respectively. The ultimate recognition of an amount different from this estimate would affect the Company’s effective tax rate.

 

NOTE 10.  Net Income (Loss) Per Share  

  

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 28,

 

March 29,

 

 

(in thousands, except per share amounts)

2015

 

2014

 

 

Numerator:

 

 

 

 

 

 

 

Net income (loss)

$

4,655 

 

$

(4,241)

 

 

Denominator:

 

 

 

 

 

 

 

Basic weighted average common shares outstanding (1)

 

200,249 

 

 

195,188 

 

 

Dilutive effect of employee stock options and awards

 

5,439 

 

 

 —

 

 

Diluted weighted average common shares outstanding (1)

 

205,688 

 

 

195,188 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share

$

0.02 

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

(1)

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

  

In the three months ended March 29, 2014, the Company had approximately 3.1 million of stock options and Restricted Stock Units that were not included in the diluted net loss per share because they would have been anti-dilutive.

 

14


 

NOTE 11.  Stock Repurchase Program

 

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 increased the total remaining repurchase authorization to $102.1 million, including the $27.1 million that remained available for repurchases under the $275 million 2012 share repurchase authorization as of December 27, 2014. For the three months ended March 28, 2015 and March 29, 2014, the Company repurchased 6.1 million and 1.4 million shares for a total cash cost of $57.2 million and $8.9 million, respectively. The repurchased shares were retired immediately.  Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.  As of March 28, 2015, the Company had completed $385.1 million of the total announced $430.0 million stock repurchase programs since 2011.

 

 

 

15


 

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

  

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

  

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

 

OVERVIEW

   

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

  

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

  

1.

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

2.

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

3.

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

 

 

 

16


 

Results of Operations

  

First quarters of 2015 and 2014   

 

Net revenues

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

($ millions)

2015

 

2014

 

Change

Net revenues

$

133.1 

 

$

126.5 

 

5% 

 

  

Overall net revenues for the first quarter of 2015 were $133.1 million, an increase of $6.6 million, or 5% compared to the first quarter of 2014, mainly due to higher sales volumes of our Storage network products driven by an increase in sales of our Serial Attached SCSI (“SAS”) products.  This was partially offset by lower sales volumes of our Optical and Mobile network products.

 

 Storage represented 73% of our net revenues in the first quarter of 2015 compared to 69% in the same period of 2014. Storage net revenues increased by $9.5 million compared to the same quarter in 2014 mainly due to an increase in sales volume of our SAS products.  On a sequential basis, Storage net revenues were lower by $1.9 million due to seasonal declines in the storage end markets, partially offset by an increase on sales volumes from SAS products related to the transition from 6G to 12G SAS interconnect products by our customers.

 

Optical represented 17% of our net revenues in the first quarter of 2015 compared to 19% in the same period of 2014. Optical net revenues decreased by $1.0 million compared to the same quarter in 2014 mainly due to a decrease in sales from our Fiber-to-the-Home (“FTTH”) products due to lower customer demands partially offset by an increase mainly from higher volume of sales from our Optical Transport Network (“OTN”) products due to Long-Term Evolution (“LTE”) deployments in the China and U.S. markets.  On a sequential basis, Optical net revenues decreased by $1.4 million mainly due to a lower volume of sales from our OTN products as a result of a temporary slowdown of LTE base station deployments in the China and U.S. markets.

 

Mobile represented 10% of our net revenues for the first quarter of 2015 compared to 12% in the same period of 2014. Mobile net revenues decreased by $1.8 million compared to the first quarter of 2014 mainly due to lower sales volumes of our WinPath family of processors due design losses, partially offset by an increase in sales volumes of our Remote Radio Head products due to customer production ramps.  On a sequential basis, Mobile revenues decreased by $0.4 million due mainly to a temporary decline in deployments of Remote Radio Head products following a surge in the second half of 2014.

 

Gross profit

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

($ millions)

2015

 

2014

 

Change

Gross profit

$

93.1 

 

$

88.9 

 

5% 

Percentage of net revenues

 

70% 

 

 

70% 

 

 

 

Our gross profit increased by $4.2 million in the first quarter of 2015 mainly due to higher net revenues compared to the same period in 2014.  Gross profit as a percentage of net revenues remained consistent at 70% in the first quarter of 2015 compared to the same period in 2014.

 

Operating expenses

 

 

 

 

 

 

 

 

 

First Quarter

 

 

($ millions)

2015

 

2014

 

Change

Research and development, net

$

48.9 

 

$

50.1 

 

(2)%

Percentage of net revenues

 

37% 

 

 

40% 

 

 

Selling, general and administrative

$

30.1 

 

$

29.3 

 

3% 

Percentage of net revenues

 

23% 

 

 

23% 

 

 

Amortization of purchased intangible assets

$

9.3 

 

$

12.3 

 

(24)%

Percentage of net revenues

 

7% 

 

 

10% 

 

 

  

17


 

Research and Development, net and Selling, General and Administrative Expenses

 

Our research and development, net (“R&D”) expenses decreased $1.2 million, or 2% compared to the same period last year.  This was primarily the result of lower tape-out related activities in the first quarter of 2015 compared to the same quarter of 2014, partially offset by an increase in obligations associated with our foreign-employee pension liability.  On a sequential basis, R&D expenses were $2.0 million lower in the first quarter of 2015 compared to the fourth quarter of 2014.  This was mainly due to lower tape-out related activities partially offset by increases in payroll related costs including annual reset of employee benefits at the beginning of the year.

 

Selling, general and administrative (“SG&A”) expenses were $0.7 million, or 3% higher in the first quarter of 2015 compared to the same period last year, mainly due to an increase in payroll related costs and termination costs, partially offset by the favorable impact of one-time asset impairments and lease exit costs incurred in the first quarter of 2014 not incurred in 2015On a sequential basis, SG&A expenses were $0.7 million higher in the first quarter of 2015 compared to the fourth quarter of 2014.  This is mainly due to an increase in payroll related costs including annual reset of employee benefits at the beginning of the year and termination costs, partially offset by a decrease in professional fees.

  

Amortization of purchased intangible assets

 

Amortization of acquired intangible assets related to license of existing technologies, developed technology, in-process research and development, customer relationships, and trademarks decreased by $3.0 million in the first quarter of 2015 compared to the same period in 2014 mainly due to certain intangible assets that reached the end of their amortization period during 2014, partially offset by amortization of intangible assets acquired from HP during the third quarter of 2014.    

 

Other income (expense) and Provision for income taxes

 

 

 

 

 

 

 

 

 

 

First Quarter

 

 

($ millions)

2015

 

2014

 

Change

Foreign exchange gain

$

2.6 

 

$

0.5 

 

388% 

Financial income, net

$

0.2 

 

$

 —

 

100% 

Gain on investment securities and other investments

$

0.1 

 

$

0.1 

 

-%

Amortization of debt issuance costs

$

(0.1)

 

$

(0.1)

 

-%

Amortization of discount on short-term and long-term obligation

$

(0.2)

 

$

 —

 

100% 

Provision for income taxes

$

(2.7)

 

$

(1.8)

 

48% 

 

 

Foreign exchange gain

  

We recorded a net foreign exchange gain of $2.6 million in the first quarter of 2015 compared to a net foreign exchange gain of $0.5 million in the first quarter of 2014.  This was primarily due to a  foreign exchange revaluation of our foreign denominated assets and liabilities which are primarily denominated in the Canadian dollar and Israeli Shekel driven in part by the U.S. dollar appreciating by approximately 8% during the first quarter of 2015 compared to approximately 3% during the first quarter of 2014, against currencies applicable to our foreign operations.

 

Financial income, net

  

Financial income, net was $0.2 million in the first quarter of 2015 compared to $nil in the first quarter of 2014. 

Gain on investment securities and other

 

We recorded a gain on sale of investment securities and other investments of $0.1 million related to the disposition of investment securities and other investments in the first quarters of 2015 and 2014.

 

Amortization of debt issuance costs

  

In the first quarters of 2015 and 2014, we amortized $0.2 million of debt issuance costs relating to our credit facility obtained during the third quarter of 2013.

  

Accretion of discount on short-term and long-term obligations

 

In the first quarter of 2015, we recorded accretion of discount on short-term and long-term obligations of $0.2 million relating to our obligation from the acquisition of HP RAID software license during the third quarter of 2014.

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Provision for income taxes

  

In the first quarter of 2015, the provision for income taxes was $2.7 million, or 48% higher than in the first quarter of 2014, mainly due to changes in accruals for unrecognized tax benefits and non-deductible amortization of intangible assets, partially offset by a decrease in the amortization of prepaid taxes.

 

Critical Accounting Estimates

 

General

 

Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our interim condensed consolidated financial statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires us to make estimates and assumptions that affect our reported assets, liabilities, revenue and expenses, and related disclosure of our contingent assets and liabilities.  For a full discussion of our accounting estimates and assumptions that we have identified as critical in the preparation of our interim condensed consolidated financial statements, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Critical Accounting Policies and Estimates section and Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 27, 2014, which also provides commentary on our most critical accounting estimates.  Since our fiscal year ended December 27, 2014, there have been no material changes in our critical accounting policies and estimates.

 

Business Outlook

 

The following is our outlook for the three months ending June 27, 2015 and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions, except for percentages)

 

GAAP Measure

 

Reconciling items

 

Non-GAAP measure

Net revenues

 

$128.0 - $138.0

 

N/A

 

 

$128.0 - $138.0

Gross profit %

 

69.8% - 70.8%

 

0.2%

(a)

 

70.0% - 71.0%

Operating expenses

 

$84.6 - $87.6

 

$14.6 - $15.6

(b)

 

$70.0 - $72.0

Provision for income taxes

 

$2.2 - $3.6

 

$1.0 - $2.0

(c)

 

$1.2 - $1.6

 

(a)

This percentage relates to stock-based compensation expense.  Stock-based compensation expense as a percentage of gross profit can vary depending on the volume of products sold given that many of our costs are fixed.  The gross profit percentage will also vary depending on the mix of products sold.

 

(b)

The referenced amount consists of $5.3 million to $6.3 million of stock-based compensation expense and $9.3 million of amortization of purchased intangible assets.

 

(c)

$1.0 million to $2.0 million of income tax provision relates to interest in arrears relating to unrecognized tax benefits, prepaid tax amortization, tax deductible goodwill and other items. 

 

The above non-GAAP information is provided as a supplement to the Company's condensed consolidated financial statements presented in accordance with 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.

 

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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 March 28, 2015 and December 27, 2014 totaled $220.2 million and $266.0 million, respectively, net of $10.0 million and $nil outstanding on our credit facility as of March 28, 2015 and December 27, 2014, respectively.  On April 27, 2015, we repaid the $10 million outstanding balance on our credit facility as of March 28, 2015.

 

Our credit facility is a revolving line of credit with a bank under which we may borrow up to $100 million.  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 March 28, 2015, the Company was in compliance with these covenants.

 

As of March 28, 2015, the amount of cash and short-term and long-term investments held by our foreign subsidiaries was $223.2 million.  Our intent is and we have the ability to indefinitely reinvest these funds outside the U.S.  If the funds held by our foreign subsidiaries are needed for our operations in the U.S., or are otherwise repatriated into the U.S., we could be required to accrue and pay taxes to repatriate these funds, which could reduce the net funds available to the Company.

 

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 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 4. Fair Value Measurements).

  

Operating Activities

  

We generated cash from operations of $8.0 million in the first quarter of 2015 compared to $10.6 million in the first quarter of 2014.  Our positive operating cash flows in the first quarter of 2015 were mainly driven by the favorable impact of non-cash adjustments of $21.7 million, which are comprised of $15.0 million of amortization and depreciation expense (first quarter of 2014 - $17.9 million) and $6.7 million of stock-based compensation (first quarter of 2014 - $6.2 million), partially offset by a net decrease in working capital due to timing of accounts receivable collections and payment of prior period accruals during the first quarter of 2015. 

 

Investing Activities

  

We had a net outflow of cash of $16.8 million from investing activities in the first quarter of 2015 compared to a net cash outflow of $6.1 million in the same period in 2014. During the first quarter of 2015, we used $35.3 million to purchase investment securities (first quarter of 2014 - $17.8 million), which is a typical use for our excess cash, and generated $23.4 million from redemptions and sales of such investments securities compared to $15.9 million in the first quarter of 2014.  We also invested $4.9 million through the purchase of property and equipment and intangible assets in the first quarter of 2015 compared to $4.2 million in the same period in 2014. 

  

Financing Activitie