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| PMCS > SEC Filings for PMCS > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates", "believes", "plans", "expects", "future", "intends", "may", "should", "estimates", "predicts", "potential", "continue", "becoming", "transitioning" and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income and expenses, restructuring activities, cash commitments, our expectation regarding our amortization of purchased intangible assets, our plans to continue to find further operational efficiencies and as to our expectation regarding distribution from certain investments.
Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management's 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. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described under "Item 1A. Risk Factors" and elsewhere in this Quarterly Report and our other filings with the SEC.
OVERVIEW
Our current revenues are generated by a portfolio of more than 350 products, which we have designed and developed or acquired. Our diverse product portfolio services a number of key end markets: (i) the Enterprise Infrastructure market which includes our products and solutions that enable the high-speed interconnection of servers, switches and storage devices that comprise these systems so that large quantities of data can be stored, managed and moved securely, as well as microprocessor-based System-on-Chip ("SOC") products for laser printers and enterprise networking; (ii) the Wide Area Network ("WAN") Infrastructure market whereby our wireline and wireless products are used in networking equipment such as multi-service switches, edge routers and optical transport platforms that gather and process signals in different protocols, and then transmit them to the next destination as quickly and efficiently as possible; and (iii) Access Infrastructure market which aggregates data traffic from enterprises and homes and transmits it to the central offices in the metropolitan area of the network primarily through passive optical networks.
We invest a substantial amount every year in the research and development of new semiconductor devices. We determine the amount to invest in the development of new semiconductors based on our assessment of the future market opportunities for those components, and the estimated return on investment. To compete globally we must invest in businesses and technologies that are both growing in demand and are cost competitive in the geographic markets that we serve. Going forward, we plan to continue to focus on finding innovative solutions to our customers' needs while finding further operational efficiencies.
Results of Operations
Second Quarter of 2009 and 2008
Net revenues
($ millions) Second Quarter 2009 2008 Change Net revenues $ 123.2 $ 139.8 (12 )%
Net revenues for the second quarter of 2009 were $123.2 million compared to $139.8 million for the same period in 2008, a decrease of $16.6 million or 12%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based System-On-Chip ("SOC") products decreased by 26%. Net revenues generated from the Wide Area Network ("WAN") Infrastructure market, which is served by our wireline and wireless infrastructure products, increased by 6%. Net revenues generated from the Access Infrastructure market which is served by our Passive Optical Networking ("PON") and remote radio head products decreased by 7%.
The decline in net revenues in our Enterprise Infrastructure market noted above was mainly due to the working down of inventories by our customers and slower end market demand in the enterprise markets that we serve. These factors were partially offset by an increase in our storage business primarily due to the production ramp of our 6Gig SAS-2 RAID (Redundant Array of Independent Disks)-on-Chip device during the second quarter of 2009.
We experienced growth in the WAN Infrastructure market mainly due to growth in China attributable to the increasing demand by our Chinese Original Equipment Manufacturer ("OEM") customers who supply carriers building out third generation ("3G") wireless networks in China, as well as the increasing demand for aggregation and metro transport equipment which is required to handle the increasing levels of data traffic in that market. There were lower levels of WAN Infrastructure activity in North America, Europe and the Rest of Asia in the second quarter of 2009 due to consumption of excess inventory and a decline in capital spending on equipment by carriers in those end markets.
The decline in sales to the Access Infrastructure market is mainly due to lower net revenues in Korea as PON deployment slowed and inventories in this region continued to be worked down during the second quarter of 2009. As a partial offset to this decline in net revenues, we experienced an increase in net revenues in China due to an increase in deployment of Ethernet Passive Optical Networks ("EPON") Fibre-To-The-Home ("FTTH") services by a Chinese carrier customer. Net revenues generated in the Access Infrastructure market in Japan were flat quarter over quarter.
Gross profit
($ millions) Second Quarter
2009 2008 Change
Gross profit $ 83.8 $ 90.8 (8 )%
Percentage of net revenues 68 % 65 %
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Total gross profit decreased $7.0 million in the second quarter of 2009 compared to the same period in 2008 and gross profit as a percentage of net revenues increased by 3% to 68% from 65% in the second quarters of 2009 as compared to 2008.
Gross profit as a percentage of net revenues increased by three percent. The increase is mainly attributable to product mix, as well as, cost reductions achieved during the second quarter of 2009.
Other costs and expenses
($ millions) Second Quarter
2009 2008 Change
Research and development $ 36.4 $ 40.0 (9 )%
Percentage of net revenues 30 % 29 %
Selling, general and administrative 22.2 24.2 (8 )%
Percentage of net revenues 18 % 17 %
Amortization of purchased intangible assets 9.8 9.8 - %
Percentage of net revenues 8 % 7 %
Restructuring costs and other charges 0.3 0.2 50 %
Percentage of net revenues - % - %
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Research and Development and Selling, General and Administrative Expenses
Our research and development, or R&D expenses decreased by $3.6 million or 9% in the second quarter of 2009 as compared to the second quarter of 2008. The main reason for the decrease is the reduction in payroll-related costs due to headcount reductions.
Our selling, general and administrative, or SG&A expenses decreased by $2.0 million or 8% in the second quarter of 2009 as compared to the second quarter of 2008 due to decreases in payroll-related costs in connection with headcount reductions.
Amortization of purchased intangible assets
In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago, and of Passave, Inc., respectively. Amortization of
intangible assets acquired from the Storage Semiconductor Business and Passave in the second quarter of 2009 was $4.7 million and $5.1 million, respectively. Amortization from the Storage Semiconductor Business and Passave in the second quarter of 2008 was $4.7 million and $5.1 million, respectively.
Restructuring costs and other charges
Please refer to the full description of our various restructuring activities and plans in this Management's Discussion and Analysis under "First Six Months of 2009 and 2008". The activity related to excess facility and severance accruals, under our restructuring plans during the second quarter of 2009, by year of plan, were as follows:
Excess facility costs
(in thousands) 2007 2006 2005 2001 Total
Balance at March 29, 2009 $ 716 $ 110 $ 2,961 $ 1,605 $ 5,392
Reversals and adjustments 31 6 - 68 105
New charges - 62 160 - 222
Cash payments (74 ) (52 ) (342 ) (232 ) (700 )
Balance at June 28, 2009 $ 673 $ 126 $ 2,779 $ 1,441 $ 5,019
Severance costs
(in thousands) 2007
Balance at March 29, 2009 $ 4
Cash payments (4 )
Balance at June 28, 2009 $ -
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Other income (expense) and Recovery of (provision for) income taxes
Second Quarter
2008
(in millions) 2009 Restated Change
Foreign exchange loss $ (2.9 ) $ (1.1 ) (164 )%
Percentage of net revenues (2 )% (1 )%
Gain on repurchase of senior convertible notes, net
and amortization of debt issue costs $ (0.1 ) $ (0.1 ) - %
Percentage of net revenues - % - %
Interest income (expense), net $ (0.8 ) $ 0.1 (900 )%
Percentage of net revenues (1 )% - %
Recovery of (provision for) income taxes $ (3.4 ) $ 120.4 (103 )%
Percentage of net revenues (3 )% 86 %
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Foreign exchange loss
We have significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian Dollar relative to the United States Dollar have been hedged in accordance with our general practice of hedging approximately three quarters in advance.
Our net foreign exchange loss was $2.9 million in the second quarter of 2009, which was primarily due to a foreign exchange loss on the revaluation of our net foreign tax liability. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). The revaluation of this foreign tax liability was required because of depreciation of other currencies against the United States Dollar. The foreign exchange rate between the United States Dollar and the currencies of countries where we have significant tax liabilities depreciated 6% during the second quarter of 2009 compared to depreciating 2% during the second quarter of 2008.
Gain on repurchase of senior convertible notes, net and amortization of debt issue costs
In connection with our senior convertible notes in the second quarter of 2009 and the second quarter of 2008, we recognized related deferred debt issue costs of $0.1 million.
Interest income (expense), net
Net interest income decreased by $0.9 million in the second quarter of 2009 compared to the second quarter of 2008 due mainly to lower investment yields and additional interest expense relating to the accretion of the discount related to the senior convertible notes.
Recovery of (provision for) income taxes
We recorded a provision for income taxes of $3.4 million and a recovery of $120.4 million for the second quarter of 2009 and 2008, respectively. We had an increase in our provision for income taxes due to the product and income mix across our subsidiaries. The financial statements for the six months ended June 28, 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $23.7 million recorded as long-term prepaid expenses as at June 28, 2009 represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits. The tax expense in the second quarter of 2009 resulting from these transactions was $1.1 million.
During the second quarter of 2008, one of our foreign subsidiaries settled several ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax benefits resulting in the recognition of tax benefits of $124.1 million that were previously included in the liability for unrecognized tax benefits.
First Six Months of 2009 and 2008
Net revenues
First Six Months ($ millions) 2009 2008 Change Net revenues $ 225.8 $ 264.9 (15 )%
Net revenues for the first six months of 2009 were $225.8 million compared to $264.9 million for the same period in 2008, a decrease of $39.1 million or 15%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based SOC products decreased by 29%. Net revenues generated from the WAN Infrastructure market, which is served by our wireline and wireless infrastructure products increased by 11%. Net revenues generated from the Access Infrastructure market which is served by our PON and remote radio head products decreased by 20%.
The decline in net revenues noted above in the Enterprise Infrastructure market was mainly due to the working down of inventories by our customers and the effects of the general economic slowdown on enterprise spending. This decline was partially offset by an increase in sales of our 6Gig SAS-2 RAID-on-Chip device, which began shipping in production volumes in the second quarter of 2009.
We experienced growth in the WAN infrastructure market mainly attributable to the increasing demand by our Chinese OEM customers who supply carriers building out 3G wireless networks in China, as well as the increasing demand for aggregation and metro transport equipment which is required to handle the increasing levels of data traffic in that market. There were lower levels of WAN Infrastructure sales activity in North America, Europe and the Rest of Asia due to lower spending on equipment by carriers in those end markets.
The decline in sales to the Access Infrastructure market is mainly due to the working down of inventories by our customers in the regional markets that we serve.
Gross profit
First Six Months
($ millions) 2009 2008 Change
Gross profit $ 149.6 $ 172.5 (13 )%
Percentage of net revenues 66 % 65 %
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Total gross profit decreased $22.9 million in the first six months of 2009 compared to the same period in 2008 while gross profit as a percentage of net revenues increased by 1% to 66% from 65% in the second quarters of 2009 as compared to 2008.
The increase in gross profit as a percentage is attributable to product mix, as well as the cost reductions achieved in the first six months of 2009 as compared to the first six months of
2008. This was offset by an approximate 1% decrease mainly due to having a customer funded application-specific integrated circuit ("ASIC") mask set at zero margin during the first six months of 2009, which we did not have in the first six months of 2008.
Other costs and expenses:
($ millions) First Six Months
2009 2008 Change
Research and development $ 75.0 $ 77.3 (3 )%
Percentage of net revenues 33 % 29 %
Selling, general and administrative 44.1 48.4 (9 )%
Percentage of net revenues 20 % 18 %
Amortization of purchased intangible assets 19.7 19.7 - %
Percentage of net revenues 9 % 7 %
Restructuring costs and other charges 0.6 1.0 (40 )%
Percentage of net revenues - % - %
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Research and development and selling, general and administrative expenses
Our research and development, expenses decreased $2.3 million or 3% in the first six months of 2009 compared to the first six months of 2008. Payroll costs decreased by $4.6 million due to the headcount reduction. Total material costs, including outside consultant services, wafer and photomask costs increased by $2.3 million related to completing more tapeouts on smaller geometries in the first six months of 2009 than in the same period of 2008. These tapeouts on smaller geometries carry higher costs.
Our selling, general and administrative, expenses decreased by $4.3 million, or 9%, in the first six months of 2009 compared to the first six months of 2008 due to decreases in payroll-related costs in connection with headcount reductions as well as other cost reduction activities.
Amortization of purchased intangible assets
In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago, and of Passave, Inc., respectively. Amortization of intangible assets acquired from the Storage Semiconductor Business and Passave in the first six months of 2009 was $9.5 million and $10.2 million, respectively. Amortization from the Storage Semiconductor Business and Passave in the first six months of 2008 was $9.5 million and $10.2 million, respectively.
Restructuring costs and other charges
The activity related to excess facility and severance accruals, under our restructuring plans during the first six months of 2009, by year of plan, were as follows:
Excess facility costs
(in thousands) 2007 2006 2005 2001 Total
Balance at December 28, 2008 $ 830 $ 178 $ 3,048 $ 1,875 $ 5,931
Reversals and adjustments 28 9 - 84 121
New charges 25 82 450 - 557
Cash payments (210 ) (143 ) (719 ) (518 ) (1,590 )
Balance at June 28, 2009 $ 673 $ 126 $ 2,779 $ 1,441 $ 5,019
Severance costs
(in thousands) 2007
Balance at December 28, 2008 $ 7
Reversals and adjustments 1
New charges -
Cash payments (8 )
Balance at June 28, 2009 $ -
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During the first six months of 2009, we made payments totaling $1.6 million for severance and excess facility costs incurred in connection with past restructuring plans. In addition, we recorded an additional $0.6 million for excess facilities as original assumptions regarding possible sublease on exited facilities were not realized.
Payments for excess facilities under these restructuring plans may extend to 2011.
Further details regarding each of the restructuring plans noted in the above table are available in our Annual Report on Form 10-K for the year ended December 28, 2008.
Other income (expense) and Recovery of (provision for) income taxes
First Six Months
(in millions) 2009 2008 Change
Foreign exchange gain $ 1.2 $ 2.1 (43 %)
Percentage of net revenues 1 % 1 %
Gain on repurchase of senior convertible notes, net
and amortization of debt issue costs $ (0.1 ) $ 4.7 (102 %)
Percentage of net revenues - % 2 %
Loss on subleased facilities $ (0.5 ) $ - (100 %)
Percentage of net revenues - % - %
Interest income (expense), net $ (1.7 ) $ 0.4 (525 %)
Percentage of net revenues (1 %) - %
Recovery of (provision for) income taxes $ (5.1 ) $ 81.7 (106 %)
Percentage of net revenues (2 %) 31 %
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Foreign exchange gain
We have significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian Dollar relative to the United States Dollar have been hedged in accordance with our general practice of hedging approximately three quarters in advance.
Our net foreign exchange gain was $1.2 million in the first six months of 2009, which was primarily due to a $0.7 million foreign exchange gain on the revaluation of our net foreign tax liabilities. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). The revaluation of this foreign tax liability was required because of depreciation of other currencies against the United States Dollar. The foreign exchange rate between the United States Dollar and the currencies of countries where we have significant tax liabilities depreciated 5% during the first six months of 2009 compared to appreciating 2% during the first six months of 2008.
Gain on repurchase of senior convertible notes, net and amortization of debt issue costs
In connection with our repurchase of $98.0 million principal amount of our senior convertible notes in the first quarter of 2008, we recognized a gain of $4.9 million which is net of the related debt issue costs and transaction costs expensed.
Loss on subleased facilities
We recorded a $0.5 million loss on subleased facilities during the first six months of 2009.
Interest income (expense), net
Net interest income (expensed) decreased by $2.1 million in the first six months of 2009 compared to the first six months of 2008 due mainly to lower investment yields and additional interest expense relating to the accretion of the discount related to the senior convertible notes.
Recovery of (provision for) income taxes
We recorded a provision for income taxes of $5.1 million and recovery of $81.7 million for the first six months of 2009 and 2008, respectively. We had an increase in our provision for income taxes due to the product and income mix across our subsidiaries. The financial statements for the first six months of 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $23.7 million recorded as long-term prepaid expenses as at June 28, 2009 represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits. The tax expense in the first six months of 2009 resulting from these transactions was $2.2 million.
During the first quarter of 2008, one of our foreign subsidiaries received a written communication from a tax authority, resulting in an accrual of $26.5 million, including interest, as part of the liability for unrecognized tax benefits. In the second quarter of 2008, this subsidiary settled several ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax benefits, resulting in the recognition of tax benefits of $124.1 million that were previously included in the liability for unrecognized tax benefits.
Critical Accounting Estimates
General
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect our reported assets, liabilities, revenue and expenses, and related disclosure of our contingent assets and liabilities. Our significant accounting policies are outlined in Note 1. Summary of Significant Accounting Policies to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 28, 2008, which also . . .
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