Attached files

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EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (CHIEF EXECUTIVE OFFICER) - PMC SIERRA INCpmcs-20150627xex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002 - PMC SIERRA INCpmcs-20150627xex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002 - PMC SIERRA INCpmcs-20150627xex311.htm
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (CHIEF FINANCIAL OFFICER) - PMC SIERRA INCpmcs-20150627xex322.htm
EX-10.1 - AMENDMENT TO CREDIT AGREEMENT EXECUTED AND DELIVERED AS OF SEPTEMBER 3, 2014 BY AND AMONG PMC-SIERRA, INC., A DELAWARE CORPORATION, PMC-SIERRA US, INC., A DELAWARE CORPORATION, BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT, AND THE LENDERS PARTY THERETO. - PMC SIERRA INCpmcs-20150627ex101208fab.htm

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

 

 

 

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

 

for the quarterly period ended June 27, 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 July 29, 2015, the registrant had 193,417,198 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

3

 

- Condensed Consolidated Statements of Comprehensive Loss

4

 

- Condensed Consolidated Balance Sheets

5

 

- Condensed Consolidated Statements of Cash Flows

6

 

- Notes to the Condensed Consolidated Financial Statements

7

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23 

Item 4.

Controls and Procedures

24

PART II—OTHER INFORMATION 

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

34

Item 6.

Exhibits

35

Signatures 

36

 

 

 

 

   

2


 

Part IFINANCIAL INFORMATION

Item 1Financial Statements (Unaudited)

  

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 27,

 

June 28,

 

June 27,

 

June 28,

 

 

2015

 

2014 

 

2015

 

2014 

Net revenues

 

$

124,767 

 

$

126,822 

 

$

257,838 

 

$

253,290 

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

 

 

38,434 

 

 

36,824 

 

 

78,414 

 

 

74,388 

Gross profit

 

 

86,333 

 

 

89,998 

 

 

179,424 

 

 

178,902 

Research and development, net

 

 

55,833 

 

 

49,388 

 

 

104,699 

 

 

99,536 

Selling, general and administrative

 

 

30,488 

 

 

28,991 

 

 

60,539 

 

 

58,331 

Amortization of purchased intangible assets

 

 

9,269 

 

 

9,948 

 

 

18,586 

 

 

22,277 

(Loss) Income from operations

 

 

(9,257)

 

 

1,671 

 

 

(4,400)

 

 

(1,242)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange (loss) gain

 

 

(948)

 

 

(789)

 

 

1,646 

 

 

(257)

Interest and other financial income, net

 

 

317 

 

 

114 

 

 

481 

 

 

123 

Gain on investment securities and other investments

 

 

25 

 

 

46 

 

 

57 

 

 

75 

Amortization of debt issuance costs

 

 

(51)

 

 

(51)

 

 

(102)

 

 

(102)

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

 

 

(180)

 

 

 —

 

 

(390)

 

 

 —

(Loss) income before income taxes

 

 

(10,094)

 

 

991 

 

 

(2,708)

 

 

(1,403)

Benefit from (provision for) income taxes

 

 

1,515 

 

 

(4,471)

 

 

(1,216)

 

 

(6,318)

Net loss

 

$

(8,579)

 

$

(3,480)

 

$

(3,924)

 

$

(7,721)

Net loss per common share - basic and diluted

 

$

(0.04)

 

$

(0.02)

 

$

(0.02)

 

$

(0.04)

Shares used in per share calculation - basic and diluted

 

 

195,732 

 

 

196,114 

 

 

197,991 

 

 

195,651 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

 

 

 

 

 

 

   

  

3


 

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 27,

 

June 28,

 

June 27,

 

June 28,

 

2015

 

2014

 

2015

 

2014

Net loss

$

(8,579)

 

$

(3,480)

 

$

(3,924)

 

$

(7,721)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

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

 

2,354 

 

 

691 

 

 

2,020 

 

 

528 

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

 

(262)

 

 

81 

 

 

242 

 

 

97 

Other comprehensive income

 

2,092 

 

 

772 

 

 

2,262 

 

 

625 

Comprehensive loss

$

(6,487)

 

$

(2,708)

 

$

(1,662)

 

$

(7,096)

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

 

 

   

 

4


 

    

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

 

 

 

 

 

 

 

June 27,

 

December 27,

 

 

2015

 

2014

 

ASSETS:

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

64,864 

 

$

112,570 

 

Short-term investments

 

45,386 

 

 

45,885 

 

Accounts receivable, net of allowance for doubtful accounts
   of $735 (2014 - $795)

 

58,141 

 

 

55,414 

 

Inventories, net

 

36,165 

 

 

37,949 

 

Prepaid expenses and other current assets

 

14,097 

 

 

16,473 

 

Income taxes receivable

 

1,554 

 

 

1,968 

 

Prepaid income taxes

 

 —

 

 

51 

 

Deferred income tax assets

 

5,008 

 

 

5,442 

 

Total current assets

 

225,215 

 

 

275,752 

 

Investment securities

 

131,508 

 

 

107,509 

 

Investments and other assets

 

7,629 

 

 

7,683 

 

Prepaid income taxes

 

93 

 

 

42 

 

Property and equipment, net

 

37,413 

 

 

37,311 

 

Goodwill

 

283,239 

 

 

283,239 

 

Intangible assets, net

 

125,808 

 

 

143,680 

 

Deferred income tax assets

 

13,186 

 

 

13,412 

 

Income taxes receivable

 

459 

 

 

457 

 

 

$

824,550 

 

$

869,085 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

18,848 

 

$

23,360 

 

Accrued liabilities

 

71,108 

 

 

74,135 

 

Credit facility

 

37,000 

 

 

 —

 

Income taxes payable

 

44 

 

 

1,062 

 

Liability for unrecognized tax benefit

 

15,153 

 

 

16,076 

 

Deferred income tax liabilities

 

7,646 

 

 

7,644 

 

Deferred income

 

4,371 

 

 

4,530 

 

Total current liabilities

 

154,170 

 

 

126,807 

 

Long-term obligations

 

24,718 

 

 

36,305 

 

Deferred income tax liabilities

 

53,028 

 

 

53,493 

 

Liability for unrecognized tax benefit

 

26,036 

 

 

25,244 

 

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

 

480 

 

 

745 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, par value $0.001:  900,000 shares authorized;
   193,311 shares issued and outstanding (2014 - 199,518)

 

193 

 

 

200 

 

Additional paid in capital

 

1,590,372 

 

 

1,595,609 

 

Accumulated other comprehensive loss

 

(93)

 

 

(2,355)

 

Accumulated deficit

 

(1,024,354)

 

 

(966,963)

 

Total stockholders' equity

 

566,118 

 

 

626,491 

 

 

$

824,550 

 

$

869,085 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

  

  

  

  

   

 

5


 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

 

 

 

Six Months Ended

 

June 27,

 

June 28,

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(3,924)

 

$

(7,721)

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

 

 

 

 

 

Depreciation and amortization

 

30,058 

 

 

33,278 

Stock-based compensation

 

12,804 

 

 

11,106 

Unrealized foreign exchange gain, net

 

(4,398)

 

 

(1,264)

Net amortization of premiums and accrued interest on investments

 

390 

 

 

390 

Asset impairments

 

252 

 

 

770 

Gain on investment securities and other investments

 

(57)

 

 

(74)

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

 

390 

 

 

 —

Amortization of debt issuance costs

 

102 

 

 

102 

Gain on exit of lease agreement

 

(696)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(2,727)

 

 

(2,249)

Inventories, net

 

1,784 

 

 

(311)

Prepaid expenses and other current assets

 

1,055 

 

 

3,068 

Accounts payable and accrued liabilities

 

5,163 

 

 

(2,234)

Deferred taxes and income taxes payable

 

1,382 

 

 

6,447 

Deferred income

 

(159)

 

 

(2,292)

Net cash provided by operating activities

 

41,419 

 

 

39,016 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(8,850)

 

 

(8,054)

Purchase of intangible assets

 

(3,845)

 

 

(733)

Redemption of short-term investments

 

13,466 

 

 

3,535 

Disposals of investment securities and other investments

 

29,973 

 

 

25,538 

Purchases of investment securities and other investments

 

(67,515)

 

 

(41,966)

Net cash used in investing activities

 

(36,771)

 

 

(21,680)

Cash flows from financing activities:

 

 

 

 

 

Installment payment in connection with previous business acquisition

 

(18,000)

 

 

 —

Proceeds from credit facility

 

102,000 

 

 

30,000 

Repayment of credit facility

 

(65,000)

 

 

(60,000)

Proceeds from issuance of common stock

 

31,342 

 

 

10,615 

Repurchases of common stock

 

(102,108)

 

 

(11,496)

Net cash used in financing activities

 

(51,766)

 

 

(30,881)

Effect of exchange rate changes on cash and cash equivalents

 

(588)

 

 

95 

Net decrease in cash and cash equivalents

 

(47,706)

 

 

(13,450)

Cash and cash equivalents, beginning of the period

 

112,570 

 

 

100,038 

Cash and cash equivalents, end of the period

$

64,864 

 

$

86,588 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

(251)

 

$

(206)

Cash (payments) refunds (made) received for income taxes, net

$

(352)

 

$

272 

 

 

 

 

 

 

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 second 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, restructuring 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. ASU 2015-13 is not expected to have a material impact on the Company’s condensed consolidated financial statements.

 

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. The standard allows for either full retrospective or modified retrospective adoption method. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017.  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, adoption date, 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 $3.25 million of the $25 million total cost reimbursement payments from HP in the second quarter of 2015 ($6.5 million in the first six months of 2015 and $10.5 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 six months ended June 27, 2015.  As at June 27, 2015 the Company had 122 forward currency contracts outstanding (June 28, 2014 - 14), all with maturities of less than 12 months, which qualified and were designated as cash flow hedges.  As of June 27, 2015, the U.S. dollar notional amount of these contracts was $55.0 million (June 28, 2014 - $13.0 million), and the contracts had an aggregate fair value gain of $2.4 million and $0.7 million for the three months ended June 27, 2015 and June 28, 2014, respectively (aggregate fair value gain of $2.0 million and $0.5 million for the six months ended June 27, 2015 and June 28, 2014, respectively).  These were recorded in Accumulated other comprehensive loss, net of taxes.

   

8


 

NOTE 4.  Fair Value Measurements   

 

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

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

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

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

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

 

In the second quarter of 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 $13.7 million of investments as Level 2 that were reported as Level 1 at December 27, 2014.  The Company also classified $8.9 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 June 27, 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 June 27, 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 June 27, 2015 and December 27, 2014, are summarized below:  

 

 

 

 

 

 

 

Fair value,

 

June 27, 2015

(in thousands)

Level 1

 

Level 2

Assets:

 

 

 

 

 

Money market funds 

$

3,465 

 

$

 —

Corporate bonds and notes

 

92,929 

 

 

27,262 

U.S. treasury and government agency notes 

 

44,188 

 

 

1,339 

Foreign government and agency notes

 

 —

 

 

10,944 

U.S. state and municipal securities

 

 —

 

 

232 

Forward currency contracts

 

 —

 

 

157 

Total assets

$

140,582 

 

$

39,934 

 

 

 

 

 

 

 

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.

 

9


 

Financial liabilities measured on a recurring basis are summarized below:  

 

 

 

 

 

Fair value,

 

June 27, 2015

(in thousands)

Level 2

Current liabilities:

 

 

Forward currency contracts

$

45 

 

 

 

 

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 June 27, 2015 and December 27, 2014.

 

 

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 and six months ended June 27, 2015 and June 28, 2014 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 27,

 

June 28,

 

June 27,

 

June 28,

(in thousands)

2015

 

2014

 

2015

 

2014

Cost of revenues

$

266 

 

$

214 

 

$

537 

 

$

455 

Research and development, net

 

2,400 

 

 

1,903 

 

 

5,244 

 

 

4,550 

Selling, general and administrative

 

3,445 

 

 

2,798 

 

 

7,023 

 

 

6,101 

Total

$

6,111 

 

$

4,915 

 

$

12,804 

 

$

11,106 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company received cash of $31.3 million related to the issuance of stock-based awards during the six months ended June 27, 2015 (June 28, 2014 - $10.6 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 six months ended June 27, 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

 

(3,848,159)

 

$

6.73 

 

 

 

 

 

 —

Forfeited

 

(126,839)

 

$

6.55 

 

 

 

 

 

 —

Expired

 

(313,441)

 

$

10.46 

 

 

 

 

 

 —

Outstanding, June 27, 2015

 

14,058,281 

 

$

7.70 

 

 

4.16 

 

$

20,210,660 

Vested and expected to vest, June 27, 2015

 

13,921,444 

 

$

7.71 

 

 

4.05 

 

$

19,930,285 

Exercisable, June 27, 2015

 

12,660,615 

 

$

7.82 

 

 

3.69 

 

$

17,076,637 

 

 

 

 

 

 

 

 

 

 

 

 

10


 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of the Companys common stock for the options that were in-the-money at June 27, 2015.  Total forfeitures recorded amounted to $0.5 million and $1.4 million during the six months ended June 27, 2015, and June 28, 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.  

  

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:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 27,

 

June 28,

 

 

 

2015

 

2014

Expected life (years)

 

 

5.9 

 

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 six months ended June 27, 2015 was $2.81.  No stock options were granted during the three months ended June 27, 2015 and six months ended June 28, 2014. The total intrinsic value of stock options exercised during the six months ended June 27, 2015 was $9.3 million (June 28, 2014 - $1.6 million).

  

As of June 27, 2015, there was $2.5 million of total unrecognized compensation costs related to unvested stock options granted under the plans, which is expected to be recognized over an average period of 2.4 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 six months ended June 27, 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

 

659,694 

 

 

 -

 

 

 —

Released

 

(609,901)

 

 

 -

 

 

 —

Forfeited

 

(453,677)

 

 

 -

 

 

 —

Unvested units at June 27, 2015

 

6,964,645 

 

 

1.40 

 

$

61,637,108 

Restricted Stock Units expected to vest at June 27, 2015

 

6,193,026 

 

 

1.31 

 

$

54,808,280 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


 

The intrinsic value of RSUs vested during the six months ended June 27, 2015 was $5.3 million. As of June 27, 2015, total unrecognized compensation expense, adjusted for estimated forfeitures, related to unvested RSUs was $32.9 million, which is expected to be recognized over the next 2.4 years.  

 

Employee Stock Purchase Plan (“ESPP”)

 

The Company’s 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.  Up to 12,000,000 shares of our Common Stock have been initially reserved for issuance under the 2011 Plan.   At the Company’s 2015 annual stockholders meeting, the stockholders approved an increase of 7,000,000 shares of Common Stock to the 2011 Plan.

 

During the six months ended June 27, 2015, 909,832 shares were issued under the 2011 Plan at a weighted average price of $6.00 per share.  As of June 27, 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:

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 27,

 

June 28,

 

 

 

2015

 

2014

Expected life (years)

 

 

0.5 

 

0.5 

Expected volatility

 

 

34% 

 

35% 

Risk-free interest rate

 

 

0.1% 

 

0.1% 

 

The weighted average grant date fair value per ESPP award granted during the first six months of 2015 was $2.24.  The total intrinsic value of ESPP shares issued during the first six months of 2015 was $2.8 million.   No ESPP awards were granted during the three months ended June 27, 2015 and June 28, 2014.

 

As of June 27, 2015, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $0.4 million which is expected to be recognized in the third quarter of 2015.

 

NOTE 6.  Balance Sheet Items

  

a.

Inventories.

 

Inventories (net of reserves of $7.9 million and $7.8 million at June 27, 2015 and December 27, 2014, respectively) were as follows:

 

 

 

 

 

 

 

 

 

June 27,

 

December 27,

(in thousands)

2015

 

2014

Work-in-progress

$

16,824 

 

$

17,438 

Finished goods

 

19,341 

 

 

20,511 

 

$

36,165 

 

$

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 June 27, 2015, and from December 28, 2013 to June 28, 2014 were as follows:  

 

 

 

 

 

 

 

 

Six Months Ended

 

June 27,

 

June 28,

(in thousands)

2015

 

2014

Balance, beginning of the period

$

1,756 

 

$

2,163 

Accrual for new warranties issued

 

389 

 

 

222 

Reduction for payments and product replacements

 

(271)

 

 

(344)

Adjustments related to revisions and changes in estimate of warranty accrual

 

 —

 

 

(88)

Balance, end of the period

$

1,874 

 

$

1,953 

 

 

 

 

 

 

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

12


 

c.

2015 Restructuring costs

 

During the second quarter of 2015, we implemented a restructuring plan to reduce spending across the organization.  This involves a reduction in force of approximately 200 employees worldwide and other targeted spending reductions.  In connection with this plan, the Company expects to incur charges of approximately $15 million to $16 million, including approximately $13 million to $14 million in charges related to employee severance and related compensation benefits and approximately $2 million in charges related to site closures, asset impairments, and completion costs.   The Company expects to complete activities under its cost reduction plan by end of fourth quarter 2016. 

 

Restructuring costs at the end of each period were as follows:

 

 

 

 

 

Three Months Ended

 

June 27,

(in thousands)

2015

Employee severance and related compensation benefits:

 

 

Cost of revenues

$

1,164 

Research and development, net

 

7,944 

Selling, general and administrative

 

3,977 

 

$

13,085 

 

The following summarizes the restructuring activity for the 2015 restructuring plan:

 

 

 

 

 

 

 

 

June 27,

(in thousands)

2015

Accrued restructuring balance as of December 27, 2014

$

 —

Additional accruals

 

13,085 

Accrued restructuring balance as of June 27, 2015

$

13,085 

 

The accrued employee severance and related compensation benefits are expected to be paid by end of fourth quarter 2015 and were recorded in Accrued liabilities in the Company’s Condensed and Consolidated Balance Sheet.

 

NOTE 7.  Investment Securities  

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 27, 2015

(in thousands)

Amortized Cost

 

Gross Unrealized Gains*

 

Gross Unrealized Losses

 

Fair Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

3,465 

 

 

 —

 

$

 —

 

$

3,465 

Total cash equivalents

 

3,465 

 

 

 —

 

 

 —

 

 

3,465 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

39,970 

 

 

507 

 

 

(6)

 

 

40,471 

US treasury and government agency notes

 

3,028 

 

 

106 

 

 

 —

 

 

3,134 

Foreign government and agency notes

 

1,509 

 

 

43 

 

 

(3)

 

 

1,549 

US states and municipal securities

 

230 

 

 

 

 

 —

 

 

232 

Total short-term investments

 

44,737 

 

 

658 

 

 

(9)

 

 

45,386 

Long-term investment securities:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

79,801 

 

 

51 

 

 

(132)

 

 

79,720 

US treasury and government agency notes

 

42,356 

 

 

59 

 

 

(22)

 

 

42,393 

Foreign government and agency notes

 

9,410 

 

 

 

 

(17)

 

 

9,395 

Total long-term investment securities

 

131,567 

 

 

112 

 

 

(171)

 

 

131,508 

Total

$

179,769 

 

$

770 

 

$

(180)

 

$

180,359 

 

 

 

 

 

 

 

 

 

 

 

 

13


 

*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).

 

  

 

As of June 27, 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 June 27, 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 June 27, 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 June 27, 2015, the Company had an available revolving line of credit with a group of banks under which the Company may borrow up to $100 million, of which $37 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 range 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 July 15, 2015, the Company repaid $2 million of the outstanding balance as of June 27, 2015.

 

NOTE 9.  Income Taxes  

  

The Company recorded a benefit from income taxes of $1.5 million and a provision for income taxes of $1.2 million for the three and six months ended June 27, 2015, respectively.  The Company recorded a provision for income taxes of $4.5 million and $6.3 million for the three and six months ended June 28, 2014, respectively.

 

The Company’s effective tax rate was 15% and 451% for the three months ended June 27, 2015 and June 28, 2014, respectively.  For the second quarter of 2015, the difference between the Company’s effective tax rate and the 35% federal statutory

14


 

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.  For the second quarter of 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 and book losses that are not benefited for tax purposes. 

 

The Company’s effective tax rate was (45%) and (450%) for the six months ended June 27, 2015 and June 28, 2014, respectively.  For the first six months of 2015, the difference between the Company’s 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.  For the first six months of 2014, the difference between the Company’s 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 and book losses that are not benefited for tax purposes.

 

 As of June 27, 2015 and December 27, 2014, the Company’s liability for unrecognized tax benefits on a world-wide consolidated basis was $41.2 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 Loss Per Share  

  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

June 27,

 

June 28,

 

 

June 27,

 

June 28,

(in thousands, except per share amounts)

2015

 

2014

 

 

2015

 

2014

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(8,579)

 

$

(3,480)

 

 

$

(3,924)

 

$

(7,721)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding (1)

 

195,732 

 

 

196,114 

 

 

 

197,991 

 

 

195,651 

Basic and diluted net loss per share

$

(0.04)

 

$

(0.02)

 

 

$

(0.02)

 

$

(0.04)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

  

In the three and six months ended June 27, 2015, the Company had approximately 4.8 million and 5.1 million, respectively 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.  In the three and six months ended June 28, 2014, the Company had approximately 3.5 million and 3.3 million, respectively 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.

 

NOTE 11.  Stock Repurchase

 

 On February 9, 2015, the Board of Directors of the Company authorized a share repurchase for up to $75 million of its common stock.  This 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. 

 

On May 21, 2015, the Board of Directors of the Company authorized up to $75 million of its common stock for share repurchases, which is the authorization amount that remained available for repurchases as of June 27, 2015.

 

For the six months ended June 27, 2015 and June 28, 2014, the Company repurchased 11.6 million and 1.4 million shares for a total cash cost of $102.1 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 June 27, 2015, the Company had completed $430.0 million of the total announced $505.0 million stock repurchases 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

  

Second quarters of 2015 and 2014   

 

Net revenues

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

($ millions)

2015

 

2014

 

Change

Net revenues

$

124.8 

 

$

126.8 

 

(2)%

 

  

Overall net revenues for the second quarter of 2015 were $124.8 million, a decrease of $2.0 million, or 2% compared to the second quarter of 2014, mainly due to lower sales volumes of our Mobile network products, partially offset by higher sales volumes of our Storage and Optical network products.

 

 Storage represented 70% of our net revenues in the second quarter of 2015 compared to 65% in the same period of 2014. Storage net revenues increased by $4.1 million compared to the same quarter in 2014 mainly due to an increase in sales volume of our Serial Attached SCSI (“SAS”) products, related to market share gain in the transition from 6G to 12G SAS interconnect products.  On a sequential basis, Storage net revenues were lower by $9.5 million mainly due to lower sales volumes attributable to inventory corrections at three of our large customers and a  weak macroeconomic spending environment.

 

Optical represented 20% of our net revenues in the second quarter of 2015 and 2014. Optical net revenues increased by $0.2 million compared to the same quarter in 2014 mainly due to an increase in volume of sales from our Optical Transport Network (“OTN”) products due to Long-Term Evolution (“LTE”) deployments in the China and U.S. markets, partially offset by a decline in sales volumes of our legacy SONET and metro aggregation transport products.  On a sequential basis, Optical net revenues increased by $2.6 million mainly due to a higher volume of sales from our OTN products due to strong demand from 100G deployments by our customers in China.  

 

Mobile represented 10% of our net revenues for the second quarter of 2015 compared to 15% in the same period of 2014. Mobile net revenues decreased by $6.4 million compared to the second quarter of 2014 mainly due to lower sales volumes of our WinPath family of processors due to weak infrastructure spending in North America.  On a sequential basis, Mobile revenues decreased by $1.4 million mainly due to lower sales volumes of our WinPath family of processes due to weak infrastructure spending in North America.

 

Gross profit

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

($ millions)

2015

 

2014

 

Change

Gross profit

$

86.3 

 

$

90.0 

 

(4)%

Percentage of net revenues

 

69% 

 

 

71% 

 

 

 

Our gross profit decreased by $3.7 million in the second quarter of 2015 mainly due to lower net revenues compared to the same period in 2014.  Gross profit as a percentage of net revenues decreased by 2% mainly due to a restructuring charge in the second quarter of 2015 of approximately $1.2 million related to employee severance and related compensation benefits, a  change in write-down of inventory of $0.2 million, and lower net revenues.

 

Operating expenses

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

($ millions)

2015

 

2014

 

Change

Research and development, net

$

55.8 

 

$

49.4 

 

13% 

Percentage of net revenues

 

45% 

 

 

39% 

 

 

Selling, general and administrative

$

30.5 

 

$

29.0 

 

5% 

Percentage of net revenues

 

24% 

 

 

23% 

 

 

Amortization of purchased intangible assets

$

9.3 

 

$

9.9 

 

(6)%

Percentage of net revenues

 

7% 

 

 

8% 

 

 

  

17


 

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

 

Our research and development, net (“R&D”) expenses increased in the second quarter of 2015 by $6.4 million, or 13% compared to the same period last year.  This was primarily due to a restructuring charge of approximately $7.9 million related to employee severance and related compensation benefits, partially offset by lower outside services costs and acquisition-related costs.  On a sequential basis, R&D expenses were $6.9 million higher in the second quarter of 2015 compared to the first quarter of 2015.  This was mainly due to the $7.9 million restructuring charge related to employee severance and related compensation benefits, partially offset by lower outside services costs and reduced employee benefits related costs that typically peak in the first quarter of each year.

 

Selling, general and administrative (“SG&A”) expenses were $1.5 million, or 5% higher in the second quarter of 2015 compared to the same period last year, mainly due to a restructuring charge of approximately $4.0 million related to employee severance and related compensation benefits compared to approximately $1.3 million termination costs incurred in the second quarter of 2014, partially offset by the net gain from lease exit activity earned in the second quarter of 2015 not earned in 2014.  On a sequential basis, SG&A expenses were $0.4 million higher in the second quarter of 2015 compared to the first quarter of 2015.  This is mainly due to the $4.0 million restructuring charge related to employee severance and related compensation benefits, partially offset by a decrease in commission expense due to lower sales and  a net gain of $0.4 million from lease exit activity recognized in the second quarter of 2015.

  

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 $0.6 million in the second 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 Benefit from (provision for) income taxes

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

($ millions)

2015

 

2014

 

Change

Foreign exchange loss

$

(0.9)

 

$

(0.8)

 

13% 

Interest and other financial income, net

$

0.3 

 

$

0.1 

 

200% 

Gain on investment securities and other investments

$

0.1 

 

$

0.1 

 

-%

Amortization of debt issuance costs

$

(0.1)

 

$

(0.1)

 

-%

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

$

(0.2)

 

$

 —

 

(100)%

Benefit from (provision for) income taxes