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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-20150926xex321.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002 - PMC SIERRA INCpmcs-20150926xex311.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002 - PMC SIERRA INCpmcs-20150926xex312.htm
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (CHIEF FINANCIAL OFFICER) - PMC SIERRA INCpmcs-20150926xex322.htm

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

 

 

 

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

 

for the quarterly period ended September 26, 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 November 2, 2015, the registrant had 198,759,058 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 Income (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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24 

Item 4.

Controls and Procedures

25

PART II—OTHER INFORMATION 

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

37 

Signatures 

38

 

 

 

 

   

2


 

Part IFINANCIAL INFORMATION

Item 1Financial Statements (Unaudited)

  

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 26,

 

September 27,

 

September 26,

 

September 27,

 

 

2015

 

2014 

 

2015

 

2014 

Net revenues

 

$

133,574 

 

$

135,462 

 

$

391,412 

 

$

388,752 

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

 

 

37,999 

 

 

40,306 

 

 

116,413 

 

 

114,694 

Gross profit

 

 

95,575 

 

 

95,156 

 

 

274,999 

 

 

274,058 

Research and development, net

 

 

47,277 

 

 

48,441 

 

 

151,976 

 

 

147,977 

Selling, general and administrative

 

 

28,050 

 

 

29,265 

 

 

88,589 

 

 

87,596 

Amortization of purchased intangible assets

 

 

9,172 

 

 

9,948 

 

 

27,758 

 

 

32,225 

Income from operations

 

 

11,076 

 

 

7,502 

 

 

6,676 

 

 

6,260 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange gain

 

 

2,412 

 

 

899 

 

 

4,058 

 

 

642 

Interest and other financial income, net

 

 

108 

 

 

198 

 

 

589 

 

 

321 

Gain on investment securities and other investments

 

 

70 

 

 

12 

 

 

127 

 

 

87 

Amortization of debt issuance costs

 

 

(51)

 

 

(51)

 

 

(153)

 

 

(153)

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

 

 

(170)

 

 

 —

 

 

(560)

 

 

 —

Income before income taxes

 

 

13,445 

 

 

8,560 

 

 

10,737 

 

 

7,157 

Provision for income taxes

 

 

(6,727)

 

 

(3,087)

 

 

(7,943)

 

 

(9,405)

Net income (loss)

 

$

6,718 

 

$

5,473 

 

$

2,794 

 

$

(2,248)

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

 

$

0.03 

 

$

0.03 

 

$

0.01 

 

$

(0.01)

Shares used in per share calculation - basic

 

 

194,562 

 

 

197,613 

 

 

196,848 

 

 

196,305 

Shares used in per share calculation - diluted

 

 

196,865 

 

 

200,744 

 

 

201,018 

 

 

196,305 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

   

  

3


 

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 26,

 

September 27,

 

September 26,

 

September 27,

 

2015

 

2014

 

2015

 

2014

Net income (loss)

$

6,718 

 

$

5,473 

 

$

2,794 

 

$

(2,248)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives, net of tax of nil, $227, nil, and $41

 

(2,707)

 

 

(745)

 

 

(687)

 

 

(217)

Change in fair value of investment securities, net of tax of nil, $47, nil, and $13

 

(13)

 

 

(134)

 

 

229 

 

 

(37)

Other comprehensive loss

 

(2,720)

 

 

(879)

 

 

(458)

 

 

(254)

Comprehensive income (loss)

$

3,998 

 

$

4,594 

 

$

2,336 

 

$

(2,502)

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

 

 

 

   

 

4


 

    

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

 

 

 

 

 

 

September 26,

 

December 27,

 

 

2015

 

2014

 

ASSETS:

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

73,130 

 

$

112,570 

 

Short-term investments

 

42,347 

 

 

45,885 

 

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

 

62,269 

 

 

55,414 

 

Inventories, net

 

32,846 

 

 

37,949 

 

Prepaid expenses and other current assets

 

12,020 

 

 

16,473 

 

Income taxes receivable

 

1,147 

 

 

1,968 

 

Prepaid income taxes

 

 —

 

 

51 

 

Deferred income tax assets

 

5,211 

 

 

5,442 

 

Total current assets

 

228,970 

 

 

275,752 

 

Investment securities

 

134,400 

 

 

107,509 

 

Investments and other assets

 

6,328 

 

 

7,683 

 

Prepaid income taxes

 

93 

 

 

42 

 

Property and equipment, net

 

37,871 

 

 

37,311 

 

Goodwill

 

283,239 

 

 

283,239 

 

Intangible assets, net

 

116,945 

 

 

143,680 

 

Deferred income tax assets

 

13,218 

 

 

13,412 

 

Income taxes receivable

 

440 

 

 

457 

 

 

$

821,504 

 

$

869,085 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

18,261 

 

$

23,360 

 

Accrued liabilities

 

55,172 

 

 

74,135 

 

Credit facility

 

30,000 

 

 

 —

 

Income taxes payable

 

626 

 

 

1,062 

 

Liability for unrecognized tax benefit

 

14,001 

 

 

16,076 

 

Deferred income tax liabilities

 

7,677 

 

 

7,644 

 

Deferred income

 

4,515 

 

 

4,530 

 

Total current liabilities

 

130,252 

 

 

126,807 

 

Long-term obligations

 

28,396 

 

 

36,305 

 

Deferred income tax liabilities

 

56,182 

 

 

53,493 

 

Liability for unrecognized tax benefit

 

27,107 

 

 

25,244 

 

PMC special shares convertible into 203 (2014 - 278) shares
   of common stock

 

475 

 

 

745 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, par value $0.001: 900,000 shares authorized;
   195,642 shares issued and outstanding (2014 - 199,518)

 

196 

 

 

200 

 

Additional paid in capital

 

1,599,345 

 

 

1,595,609 

 

Accumulated other comprehensive loss

 

(2,813)

 

 

(2,355)

 

Accumulated deficit

 

(1,017,636)

 

 

(966,963)

 

Total stockholders' equity

 

579,092 

 

 

626,491 

 

 

$

821,504 

 

$

869,085 

 

 

 

 

 

 

 

 

See notes to the interim condensed consolidated financial statements.

 

  

  

   

5


 

 

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

 

 

Nine Months Ended

 

September 26,

 

September 27,

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

$

2,794 

 

$

(2,248)

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

 

 

 

 

 

Depreciation and amortization

 

45,166 

 

 

48,739 

Stock-based compensation

 

17,994 

 

 

16,334 

Unrealized foreign exchange gain, net

 

(8,179)

 

 

(2,372)

Net amortization of premiums and accrued interest on investments

 

587 

 

 

628 

Asset impairments

 

252 

 

 

770 

Gain on disposal of property and equipment

 

(63)

 

 

 —

Gain on investment securities and other investments

 

(64)

 

 

(86)

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

 

560 

 

 

 —

Amortization of debt issuance costs

 

153 

 

 

153 

Gain on exit of lease agreement

 

(696)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(6,855)

 

 

(934)

Inventories, net

 

5,103 

 

 

(3,514)

Prepaid expenses and other current assets

 

2,306 

 

 

4,072 

Accounts payable and accrued liabilities

 

(9,732)

 

 

(6,699)

Deferred taxes and income taxes payable

 

7,480 

 

 

8,608 

Deferred income

 

(15)

 

 

(1,980)

Net cash provided by operating activities

 

56,791 

 

 

61,471 

Cash flows from investing activities:

 

 

 

 

 

Cash paid in connection with business acquisition

 

 —

 

 

(10,000)

Purchases of property and equipment

 

(13,724)

 

 

(11,175)

Purchase of intangible assets

 

(4,072)

 

 

(1,167)

Redemption of short-term investments

 

28,131 

 

 

4,920 

Disposals of investment securities and other investments

 

40,446 

 

 

37,936 

Purchases of investment securities and other investments

 

(92,577)

 

 

(67,727)

Net cash used in investing activities

 

(41,796)

 

 

(47,213)

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

 

(72,000)

 

 

(60,000)

Proceeds from issuance of common stock

 

36,982 

 

 

17,924 

Repurchases of common stock

 

(102,108)

 

 

(11,496)

Net cash used in financing activities

 

(53,126)

 

 

(23,572)

Effect of exchange rate changes on cash and cash equivalents

 

(1,309)

 

 

(784)

Net decrease in cash and cash equivalents

 

(39,440)

 

 

(10,098)

Cash and cash equivalents, beginning of the period

 

112,570 

 

 

100,038 

Cash and cash equivalents, end of the period

$

73,130 

 

$

89,940 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

(483)

 

$

(276)

Cash payments made for income taxes, net of refunds received

$

(827)

 

$

(747)

 

 

 

 

 

 

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 third 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 deferred 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.

 

In July 2015, the FASB issued ASU 2015-11, Inventory - Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. We are currently evaluating the impact that this guidance will have on our financial statements and disclosure.

 

 

 

 

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 third quarter of 2015 ($9.8 million in the first nine months of 2015 and $13.8 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 nine months ended September 26, 2015.  As at September 26, 2015 the Company had 79 forward currency contracts outstanding (September 27, 2014 - 84), all with maturities of less than 15 months, which qualified and were designated as cash flow hedges.  As of September 26, 2015, the U.S. dollar notional amount of these contracts was $48.3 million (September 27, 2014 - $35.5 million), and the contracts had an aggregate fair value loss of $2.7 million and $0.7 million for the three months ended September 26, 2015 and September 27, 2014, respectively (aggregate fair value loss of 0.7 million and $0.2 million for the nine months ended September 26, 2015 and September 27, 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 third 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 $9.5 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 September 26, 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 September 26, 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 September 26, 2015 and December 27, 2014, are summarized below:  

 

 

 

 

 

 

 

Fair value,

 

September 26, 2015

(in thousands)

Level 1

 

Level 2

Assets:

 

 

 

 

 

Money market funds 

$

4,040 

 

$

 —

Corporate bonds and notes

 

97,434 

 

 

21,224 

U.S. treasury and government agency notes 

 

46,835 

 

 

 —

Foreign government and agency notes

 

1,509 

 

 

9,514 

U.S. state and municipal securities

 

151 

 

 

80 

Total assets

$

149,969 

 

$

30,818 

 

 

 

 

 

 

 

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,

 

September 26, 2015

(in thousands)

Level 2

Current liabilities:

 

 

Forward currency contracts

$

2,744 

 

 

 

 

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 September 26, 2015.

 

 

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 nine months ended September 26, 2015 and September 27, 2014 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 26,

 

September 27,

 

September 26,

 

September 27,

(in thousands)

2015

 

2014

 

2015

 

2014

Cost of revenues

$

266 

 

$

226 

 

$

803 

 

$

681 

Research and development, net

 

2,266 

 

 

1,990 

 

 

7,510 

 

 

6,540 

Selling, general and administrative

 

2,658 

 

 

3,012 

 

 

9,681 

 

 

9,113 

Total

$

5,190 

 

$

5,228 

 

$

17,994 

 

$

16,334 

 

 

 

 

 

 

 

 

 

 

 

 

 The Company received cash of $37.0 million related to the issuance of common stock during the nine months ended September 26, 2015 (September 27, 2014 - $17.9 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 nine months ended September 26, 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

 

847,892 

 

$

6.73 

 

 

 

 

 

 

Exercised

 

(4,017,595)

 

$

6.66 

 

 

 

 

 

 

Forfeited

 

(136,344)

 

$

6.55 

 

 

 

 

 

 

Expired

 

(1,025,118)

 

$

9.48 

 

 

 

 

 

 

Outstanding, September 26, 2015

 

13,985,555 

 

$

7.60 

 

 

4.27 

 

$

2,734,065 

Vested and expected to vest, September 26, 2015

 

13,731,955 

 

$

7.62 

 

 

4.18 

 

$

2,722,645 

Exercisable, September 26, 2015

 

12,046,856 

 

$

7.75 

 

 

3.53 

 

$

2,509,015 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of the Companys common stock for the options that were in-the-money at September 26, 2015.  Total forfeitures recorded amounted to $0.7 million and $1.8 million during the nine months ended September 26, 2015, and September 27, 2014, respectively.

10


 

  

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 based on historical activity 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:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 26,

 

September 27,

 

 

 

2015

 

2014

Expected life (years)

 

 

5.9 

 

5.8 

Expected volatility

 

 

30% 

 

33% 

Risk-free interest rate

 

 

1.8% 

 

1.8% 

 

 

 

 

 

 

The weighted average grant-date fair value per stock options granted during the nine months ended September 26, 2015 was $2.11 (September 27, 2014 - $2.29). The total intrinsic value of stock options exercised during the nine months ended September 26, 2015 was $9.6 million (September 27, 2014 - $2.3 million).

  

As of September 26, 2015, there was $3.5 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 2.9 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. On August 25, 2015, the Company made its annual grant of RSU awards to Executives. The performance metric applicable to the RSUs granted under the first program remain based on the degree of achievement of Total Shareholder Return (“TSR”) relative to Global Industry Classification Standards (“GICS’) Semiconductor Companies (8-Digit) for the Performance Period (July 1,  2015 - June 30, 2017). The total estimated $1.5 million fair value of these 2015 awards will be recognized as compensation expense over the award’s vesting terms, with 50% vesting on August 25, 2017 and 50% vesting on August 25, 2018.

 

A summary of RSU activity during the nine months ended September 26, 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

 

3,492,249 

 

 

 -

 

 

 —

Released

 

(2,242,344)

 

 

 -

 

 

 —

Forfeited

 

(712,317)

 

 

 -

 

 

 —

Unvested units at September 26, 2015

 

7,906,117 

 

 

1.83 

 

$

50,361,965 

Restricted Stock Units expected to vest at September 26, 2015

 

6,784,932 

 

 

1.73 

 

$

43,220,018 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


 

The intrinsic value of RSUs vested during the nine months ended September 26, 2015 was $14.9 million. As of September 26, 2015, total unrecognized compensation expense, adjusted for estimated forfeitures, related to unvested RSUs was $41.0 million, which is expected to be recognized over the next 2.8 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 nine months ended September 26, 2015, 1,727,159 shares were issued under the 2011 Plan at a weighted average price of $5.91 per share.  As of September 26, 2015, 2,653,049 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:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 26,

 

September 27,

 

 

 

2015

 

2014

Expected life (years)

 

 

0.5 

 

0.5 

Expected volatility

 

 

34% 

 

35% 

Risk-free interest rate

 

 

0.2% 

 

0.1% 

 

The weighted average grant date fair value per ESPP award granted during the first nine months of 2015 was $1.93.  The total intrinsic value of ESPP shares issued during the first nine months of 2015 was $3.7 million.   As of September 26, 2015, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $1.1 million which is expected to be recognized over the next four months.

 

NOTE 6.  Balance Sheet Items

  

a.

Inventories.

 

Inventories (net of reserves of $7.2 million and $7.8 million at September 26, 2015 and December 27, 2014, respectively) were as follows:

 

 

 

 

 

 

 

 

 

September 26,

 

December 27,

(in thousands)

2015

 

2014

Work-in-progress

$

15,655 

 

$

17,438 

Finished goods

 

17,191 

 

 

20,511 

 

$

32,846 

 

$

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 September 26, 2015, and from December 28, 2013 to September 27, 2014 were as follows:  

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 26,

 

September 27,

(in thousands)

2015

 

2014

Balance, beginning of the period

$

1,756 

 

$

2,163 

Accrual for new warranties issued

 

512 

 

 

371 

Reduction for payments and product replacements

 

(372)

 

 

(533)

Adjustments related to revisions and changes in estimate of warranty accrual

 

(700)

 

 

(113)

Balance, end of the period

$

1,196 

 

$

1,888 

 

 

 

 

 

 

During the three months ended September 26, 2015, the Company revised its estimate of the warranty provision necessary for certain product failure obligations resulting in a reduction in warranty accrual of approximately $0.7 million as the risk of product

12


 

failures associated with this provision was determined to be no longer probable.    The Companys accrual for warranty obligations is included in Accrued liabilities in the interim Condensed Consolidated Balance Sheet. 

 

c.

2015 Restructuring costs

 

During the second quarter of 2015, the Company began implementing a restructuring plan to reduce spending across the organization.  This has involved 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 the fourth quarter 2016.

 

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

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 26,

 

September 26,

(in thousands)

2015

 

2015

Employee severance and related compensation benefits (recoveries) expense:

 

 

 

 

 

Cost of revenues

$

(6)

 

$

1,158 

Research and development, net

 

(80)

 

 

7,864 

Selling, general and administrative

 

16 

 

 

3,993 

 

 

(70)

 

 

13,015 

Site closures and asset impairments

 

1,165 

 

 

1,165 

Total restructuring costs

$

1,095 

 

$

14,180 

 

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

 

 

 

 

 

 

 

 

 

 

(in thousands)

Employee severance & related  benefits compensation

 

Site closures & assets impairment

 

Total

Accrued restructuring balance as of December 27, 2014

$

 —

 

$

 —

 

$

 —

Additional accruals

 

13,488 

 

 

1,165 

 

 

14,653 

Cash payments

 

(6,127)

 

 

(154)

 

 

(6,281)

Adjustments and non-cash charges

 

(921)

 

 

(792)

 

 

(1,713)

Accrued restructuring balance as of September 26, 2015

$

6,440 

 

$

219 

 

$

6,659 

 

The accrued restructuring costs are expected to be settled and paid by end of the second quarter 2016 and were recorded in Accrued liabilities in the Company’s Condensed and Consolidated Balance Sheet.

13


 

 

NOTE 7.  Investment Securities  

 

The Companys available for sale investments, by investment type, consists of the following at September 26, 2015 and December 27, 2014: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 26, 2015

(in thousands)

Amortized Cost

 

Gross Unrealized Gains*

 

Gross Unrealized Losses

 

Fair Value

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

4,040 

 

$

 —

 

$

 —

 

$

4,040 

Total cash equivalents

 

4,040 

 

 

 —

 

 

 —

 

 

4,040 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

32,879 

 

 

958 

 

 

(5)

 

 

33,832 

US treasury and government agency notes

 

5,131 

 

 

92 

 

 

 —

 

 

5,223 

Foreign government and agency notes

 

3,012 

 

 

51 

 

 

(2)

 

 

3,061 

US states and municipal securities

 

230 

 

 

 

 

 —

 

 

231 

Total short-term investments

 

41,252 

 

 

1,102 

 

 

(7)

 

 

42,347 

Long-term investment securities:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

84,866 

 

 

75 

 

 

(115)

 

 

84,826 

US treasury and government agency notes

 

41,508 

 

 

105 

 

 

(1)

 

 

41,612 

Foreign government and agency notes

 

7,962 

 

 

 

 

(4)

 

 

7,962 

Total long-term investment securities

 

134,336 

 

 

184 

 

 

(120)

 

 

134,400 

Total

$

179,628 

 

$

1,286 

 

$

(127)

 

$

180,787 

 

 

 

 

 

 

 

 

 

 

 

 

*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 September 26, 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

14


 

investment has been in a loss position and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value.  As of September 26, 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 September 26, 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 September 26, 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 $30 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 October 14, 2015, subsequent to the third quarter of 2015 balance sheet date, the Company repaid $5 million of the outstanding balance as of September 26, 2015.

 

NOTE 9.  Income Taxes  

  

The Company recorded a provision for income taxes of $6.7 million and $7.9 million for the three and nine months ended September 26, 2015, respectively.  The Company recorded a provision for income taxes of $3.1 million and $9.4 million for the three and nine months ended September 27, 2014, respectively.

 

The Company’s effective tax rate was 50% and 36% for the three months ended September 26, 2015 and September 27, 2014, respectively.  For the third quarter of 2015, 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.  For the third 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, non-deductible amortization of intangible assets, and amortization of prepaid taxes, 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 74% and 131% for the nine months ended September 26, 2015 and September 27, 2014, respectively.  For the first nine 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 nine 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, non-deductible amortization of intangible assets, and amortization of prepaid taxes, 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 September 26, 2015 and December 27, 2014, the Company’s liability for unrecognized tax benefits on a world-wide consolidated basis was $41.1 million and $41.3 million, respectively. The ultimate recognition of an amount different from this estimate would affect the Company’s effective tax rate.

 

15


 

NOTE 10.  Net Income (Loss) Per Share  

  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 26,

 

September 27,

 

 

September 26,

 

September 27,

(in thousands, except per share amounts)

2015

 

2014

 

 

2015

 

2014

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

6,718 

 

$

5,473 

 

 

$

2,794 

 

$

(2,248)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding (1)

 

194,562 

 

 

197,613 

 

 

 

196,848 

 

 

196,305 

Dilutive effect of employee stock options and awards

 

2,303 

 

 

3,131 

 

 

 

4,170 

 

 

 —

Diluted weighted average common shares outstanding (1)

 

196,865 

 

 

200,744 

 

 

 

201,018 

 

 

196,305 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share

$

0.03 

 

$

0.03 

 

 

$

0.01 

 

$

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

  

In the nine months ended September 27, 2014, the Company had approximately 3.3 million of stock options and Restricted Stock Units 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 September 26, 2015.

 

For the nine months ended September 26, 2015 and September 27, 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 September 26, 2015, the Company had completed $430.0 million of the total announced $505.0 million stock repurchases since 2011.

 

NOTE 12.  Subsequent Events

On October 5, 2015, the Company entered into an Agreement and Plan of Merger  with Skyworks Solutions, Inc., a Delaware corporation (“Parent” or “Skyworks”), and Amherst Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), which agreement was later amended and restated by the parties’ entry into the Amended and Restated Agreement and Plan of Merger on October 29, 2015 (as so amended and restated, the “Merger Agreement’) in response to an unsolicited bid from Microsemi Corporation. Under the Merger Agreement, Skyworks has agreed to acquire the Company for $11.60 in cash per share of the Company’s common stock.

Upon the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. In the Merger, each outstanding share of the Company’s common stock (the “ Company Common Stock ”), other than shares of Company Common Stock held in the treasury of the Company, shares of Company Common Stock owned by Parent or any subsidiary of Parent (including Merger Sub) or shares of Common Stock owned by stockholders who have validly exercised their appraisal rights under Delaware law, will be converted into the right to receive $11.60 per share in cash (the “Merger Consideration”) without interest and subject to any required withholding for taxes. Skyworks intends to fund the Merger Consideration with a combination of cash on hand and committed debt financing.

As a result of the Merger, (i) each vested in-the-money stock option and vested restricted stock unit will be cancelled in exchange for the right to receive the Merger Consideration (less any amounts required to be withheld and, in the case of options, the exercise price of such options), and (ii) each unvested stock option, out-of-the money stock option (whether vested or unvested) and unvested restricted stock unit (including unvested performance stock units, with target-level performance deemed achieved) will be assumed by Parent and converted, as applicable, into stock options and restricted stock units of Parent, on the basis of the Merger Consideration, adjusted pursuant to an exchange ratio based on Company and Parent’s relative stock prices prior to the Merger, which converted stock options and restricted stock units shall retain the same vesting terms (except that performance stock units will be subject only to time-based vesting conditions following the Merger).

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Closing Conditions

The obligation of each party to consummate the Merger is subject to the satisfaction or waiver of customary closing conditions set forth in the Merger Agreement, including (i) the approval of the Merger Agreement and the Merger by stockholders of the Company owning at least a majority of the issued and outstanding shares of Company Common Stock, (ii) the expiration or termination of any applicable regulatory waiting periods and/or receipt of regulatory clearance, (iii) the absence of any order or ruling prohibiting the consummation of the Merger and (iv) subject to certain exceptions, the accuracy of the other party’s representations and warranties and compliance with covenants. In addition, the obligation of Parent and Merger Sub to consummate the Merger is also subject to the satisfaction or waiver of the condition that no material adverse effect on the Company shall have occurred since the date of the Merger Agreement. Skyworks’ and the Company’s obligations are not subject to any financing condition.

Representations and Warranties; Covenants

Each of the Company, Parent and Merger Sub has made customary representations and warranties and covenants in the Merger Agreement, including covenants to use their respective reasonable best efforts to secure required regulatory approvals, other than antitrust filings, which are governed by more detailed requirements. In addition, the Company has agreed to other customary covenants, including, among others, covenants to conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and the closing of the Merger, and not to solicit alternative transactions or, subject to certain exceptions, not to enter into discussions concerning, or provide confidential information in connection with, an alternative transaction, and Parent has agreed to other customary covenants, including, among others, covenants to use its reasonable best efforts to consummate the committed debt financing.

Termination and Termination Fees

The Merger Agreement contains certain termination rights for each of the Company and Parent, including, among others, if the Merger is not consummated at or prior to 11:59 p.m. (New York City time) on July 6, 2016, which may be extended by either the Company or Parent until October 5, 2016 if the mutual closing conditions set forth in the Merger Agreement relating to regulatory clearances have not yet been satisfied or waived. Upon termination of the Merger Agreement under specified circumstances, including a termination by the Company to enter into an agreement for an alternative transaction pursuant to a “superior proposal,” the Company has agreed to pay Parent a termination fee of $88.5 million.

 

The Company recorded acquisition-related costs of approximately $1.6 million, primarily for outside legal and financial advisory fees associated with the pending Skyworks acquisition of the Company in the three and nine months ended September 26, 2015.  Those costs were recorded in selling, general and administrative expenses in our unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 26, 2015.

 

The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Amended and Restated Merger Agreement, which is attached as Exhibit 2.1 to the Form 8-K filed by the Company on October 30, 2015 and listed in the Exhibit Table of this filing.  The Company plans to file with the SEC and mail to our stockholders a proxy statement in connection with the Merger.  Additionally, the Company intends to file other relevant materials with the SEC in connection with the Merger. The proxy statement and other relevant materials will contain important information about the Company, Skyworks, the Merger and related matters.  Investors and stockholders are urged to read the proxy statement and the other relevant materials carefully when they become available before making any voting or investment decision with respect to the Merger. 

 

 

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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.  

 

Results of Operations

  

Third quarters of 2015 and 201