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| PMCS > SEC Filings for PMCS > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 and liquidity sufficiency, sources of liquidity, capital expenditures, interest income and expenses, restructuring activities, cash commitments, purchase commitments, use of cash, our expectation regarding our amortization of purchased intangible assets 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 Security Exchange Commission ("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; and (ii) the Wide Area Network ("WAN") Infrastructure market whereby our wireline, wireless and Passive Optical Networking ("PON") devices are used in access and transport equipment such as routers, optical transport platforms and wireless base stations that aggregate and process signals in different protocols from enterprises and homes, and then transmit them to the next destination.
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
Third Quarter of 2009 and 2008
Net revenues
($ millions) Third Quarter 2009 2008 Change Net revenues $ 130.9 $ 139.4 (6 )%
Net revenues for the third quarter of 2009 were $130.9 million compared to $139.4 million for the same period in 2008, a decrease of $8.5 million or 6%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based System-On-Chip ("SOC") products, increased by 16%. Net revenues generated from the Wide Area Network ("WAN") Infrastructure market, which is served by our wireline and wireless infrastructure products, decreased by 24%.
The growth in net revenues in our Enterprise Infrastructure market noted above was mainly driven by a ramp in production of the 6Gig SAS ("Serial Attached SCSI") -2 RAID ("Redundant Array of Independent Disks")-on-Chip device at Hewlett-Packard ("HP"). We also experienced an increase in sales in our 3Gig and 6Gig SAS expander products. These increases were offset by decreased net revenues in our other enterprise storage markets, microprocessor business, laser printers and enterprise networking mainly due to the working down of inventories by our customers and the effects of the general economic slowdown on enterprise spending.
We experienced decline in the WAN Infrastructure market mainly due to consumption of excess inventory in the third quarter of 2009 and lower levels of capital spending on equipment by carriers in those end markets. As a partial offset to this decline in net revenues, we experienced some increased activity in China and Korea due to increased deployment of Ethernet Passive Optical Networks ("EPON") Fibre-To-The-Home ("FTTH") services.
Gross profit
($ millions) Third Quarter
2009 2008 Change
Gross profit $ 86.4 $ 92.0 (6 )%
Percentage of net revenues 66 % 66 %
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Total gross profit decreased $5.6 million in the third quarter of 2009 compared to the same period in 2008 and gross profit as a percentage of net revenues remained consistent in the third quarter of 2009 as compared to the same period in 2008.
During the third quarter of 2009, we had a 1% decrease in gross margin as a percentage of net revenues due to having customer funded application-specific integrated circuit ("ASIC") mask sets at zero margin, which we did not have in the third quarter of 2008. This was offset by an increase of 1% attributable to product mix, as well as the cost reductions achieved during the third quarter of 2009 as compared to the same period in 2008.
Other costs and expenses
($ millions) Third Quarter
2009 2008 Change
Research and development $ 35.8 $ 39.7 (10 )%
Percentage of net revenues 27 % 28 %
Selling, general and administrative 19.7 23.6 (17 )%
Percentage of net revenues 15 % 17 %
Amortization of purchased intangible assets 9.8 9.8 - %
Percentage of net revenues 7 % 7 %
Restructuring costs and other charges 0.2 (0.3 ) 167 %
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 $3.9 million or 10% in the third quarter of 2009 as compared to the third quarter of 2008. Payroll-related costs decreased by $3.3 million mainly due to the effect of foreign exchange rates on the payroll-related costs in our foreign operations. This decrease was partially offset by an increase in headcount. Total material costs, including outside consultant services, wafer and photomask costs increased by $1.6 million, mainly due to the additional costs related to the RAID R&D programs. Our infrastructure related expenses decreased by $1.1 million, mainly due to the decrease in depreciation expenditures. We also received a $0.7 million research and development related government grant in a foreign jurisdiction in the third quarter of 2009 and there was no such grant in 2008. The remaining decrease in expense of $0.4 million is due to the decrease in other expenses mainly due to the decrease in training and travel expenditures due to cost reduction activities.
Our selling, general and administrative, or SG&A expenses decreased by $3.9 million, or 17% in the third quarter of 2009 as compared to the third quarter of 2008. Payroll-related costs decreased by $2.5 million mainly due to the effect of foreign exchange rates on the payroll-related costs in our foreign operations and headcount reductions. The other expenditures including infrastructure related expenses, training and travel decreased by $1.4 million mainly due to 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 third quarter of 2009 was $4.7 million and $5.1 million, respectively. Amortization from the Storage Semiconductor Business and Passave in the third 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 Nine Months of 2009 and 2008." The activity related to excess facility and severance accruals under our restructuring plans during the third quarter of 2009, by year of plan, were as follows:
Excess facility costs
(in thousands) 2007 2006 2005 2001 Total
Balance at June 28, 2009 $ 673 $ 126 $ 2,779 $ 1,441 $ 5,019
Reversals and adjustments - 2 - 30 32
New charges - - 175 - 175
Cash payments (74 ) (38 ) (343 ) (206 ) (661 )
Balance at September 27, 2009 $ 599 $ 90 $ 2,611 $ 1,265 $ 4,565
Severance costs
(in thousands) 2007
Balance at June 28, 2009 $ 4
Cash payments (4 )
Balance at September 27, 2009 $ -
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Other income (expense) and Recovery of (provision for) income taxes
($ in millions) Third Quarter
2008
2009 As adjusted Change
Foreign exchange gain (loss) $ (1.1 ) $ 0.9 (222 )%
Percentage of net revenues (1 )% 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 $ (0.5 ) $ 0.2 (350 )%
Percentage of net revenues - % - %
Recovery on investments, net $ - $ 0.4 (100 )%
Percentage of net revenues - % - %
Loss on investment securities $ - $ (11.8 ) 100 %
Percentage of net revenues - % (8 )%
Recovery of (provision for) income taxes $ 8.6 $ (4.3 ) 300 %
Percentage of net revenues 7 % (3 )%
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Foreign exchange gain (loss)
We have significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian Dollar relative to the United States Dollar have been hedged in accordance with our general practice of hedging approximately three quarters in advance.
Our net foreign exchange loss was $1.1 million in the third quarter of 2009, which was primarily due to 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 the foreign exchange rate fluctuations 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 third quarter of 2009 compared to appreciating 3% during the third 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 third quarter of 2009, we recognized related deferred debt issue costs of $0.1 million.
Interest income (expense), net
Net interest income decreased by $0.7 million in the third quarter of 2009 compared to the third quarter of 2008 due mainly to lower investment yields and this was partially offset by the reduction in interest expense relating to the accretion of the discount related to the senior convertible notes.
Recovery on investments, net
In the third quarter of 2008, we received $0.4 million as recovery on a previously booked investment loss related to our past investment in a private company.
Loss on investments
Included in the results of the third quarter of 2008 is an impairment of $11.8 million in the fair values of our investments in money market funds held by the Reserve International Liquidity Fund Ltd. (the "International Fund") and the Reserve Primary Fund (the "Primary Fund", together the "Reserve Fund"). For additional information, see Critical Accounting Estimates - Investment in Cash Equivalents, Short-Term Investments and Long-Term Investment Securities and Liquidity & Capital Resources included in this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Recovery of (provision for) income taxes
We recorded recovery of income taxes of $8.6 million and a provision for income taxes of $4.3 million for the third quarter of 2009 and 2008, respectively. During the three months ended September 27, 2009, we experienced a decrease in our provision for income taxes due to the product and income mix across our subsidiaries and the effects of foreign exchange translation of a foreign subsidiary when comparing to the same period in 2008. The majority of the reduction in the provision for income taxes was due to the effect of the foreign exchange translation of a foreign subsidiary in the third quarter of 2009 compared to the same period in 2008.
The financial statements for the nine months ended September 27, 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 $22.8 million recorded as long-term prepaid expenses as at September 27, 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 third quarter of 2009 resulting from these transactions was $0.9 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 $124.1 million that were previously included in the liability for unrecognized tax benefits.
First Nine Months of 2009 and 2008
Net revenues
($ millions) First Nine Months 2009 2008 Change Net revenues $ 356.6 $ 404.2 (12 )%
Net revenues for the first nine months of 2009 were $356.6 million compared to $404.2 million for the same period in 2008, a decrease of $47.6 million or 12%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based SOC products, decreased by 15%. Net revenues generated from the WAN Infrastructure market, which is served by our wireline and wireless infrastructure products, decreased by 9%.
The decline in net revenues noted above in the Enterprise Infrastructure market was mainly due to the working down of inventories by our customers and the effects of the general economic slowdown on enterprise spending. This decline was partially offset by an increase in sales of our 6Gig SAS-2 RAID-on-Chip device, which began shipping in production volumes in the second quarter of 2009. In addition, we experienced increased net revenues due to the increased demand for our 3Gig SAS and 6Gig SAS expander products.
We experienced a decline in the WAN infrastructure market mainly due to consumption of excess inventory in the first nine months of 2009 and lower levels of capital spending by carriers in those end markets. As a partial offset to this decline in net revenues, we experienced come increased activity in China due to an increase in demand by our Chinese OEM customers who supply carriers building out 3G wireless networks in China, as well as the increasing demand for aggregation and metro transport equipment that is required to handle the increasing levels of data traffic in that market.
Gross profit
($ millions) First Nine Months
2009 2008 Change
Gross profit $ 236.0 $ 264.5 (11 )%
Percentage of net revenues 66 % 65 %
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Total gross profit decreased $28.5 million in the first nine months of 2009 compared to the same period in 2008 while gross profit as a percentage of net revenues increased by 1% to 66% from 65% in the first nine months of 2009 as compared to the same period in 2008.
The increase in gross profit as a percentage is attributable to product mix, as well as the cost reductions achieved in the first nine months of 2009 as compared to the first nine months of 2008. This was offset by an approximately 1% decrease mainly due to having customer funded ASIC masks set at zero margin during the first nine months of 2009, which we did not have in the first nine months of 2008.
Other costs and expenses:
($ millions) First Nine Months
2009 2008 Change
Research and development $ 110.8 $ 117.0 (5 )%
Percentage of net revenues 31 % 29 %
Selling, general and administrative 63.9 72.0 (11 )%
Percentage of net revenues 18 % 18 %
Amortization of purchased intangible assets 29.5 29.5 - %
Percentage of net revenues 8 % 7 %
Restructuring costs and other charges 0.8 0.8 - %
Percentage of net revenues - % - %
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Research and development and selling, general and administrative expenses
Our research and development expenses decreased $6.2 million or 5% in the first nine months of 2009 compared to the first nine months of 2008. Payroll costs decreased by $7.8 million mainly due to the effect of foreign exchange rates on payroll-related costs in our foreign operations, which were partially offset by an increase in headcount. Total material costs, including outside consultant services, wafer and photomask costs increased by $2.8 million mainly due to the addition costs related to the RAID R&D programs, which were partially offset by a decrease in costs related to completing less tapeouts during the first nine months of 2009 compared to the same period in 2008. The remaining $1.2 million reduction in expenses relates to the reduction in other expenses including training, travel and infrastructure related expenditures due to cost reduction activities.
Our selling, general and administrative, expenses decreased by $8.1 million, or 11%, in the first nine months of 2009 compared to the first nine months of 2008. Payroll costs decreased by $7.0 million mainly due to the effect of foreign exchange rates on payroll-related costs in our foreign operations and headcount reductions. The remaining $1.1 million reduction in expenses relates to the reduction in other expenses including training, travel, marketing and infrastructure related expenditures due to 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 nine months of 2009 was $14.2 million and $15.3 million, respectively. Amortization from the Storage Semiconductor Business and Passave in the first nine months of 2008 was $14.2 million and $15.3 million, respectively.
Restructuring costs and other charges
The activity related to excess facility and severance accruals, under our restructuring plans during the first nine 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 11 - 114 153 New charges 25 82 625 - 732 Cash payments (284 ) (181 ) (1,062 ) (724 ) (2,251 ) Balance at September 27, 2009 $ 599 $ 90 $ 2,611 $ 1,265 $ 4,565 Severance costs (in thousands) 2007 Balance at December 28, 2008 $ 7 Reversals and adjustments 1 New charges - Cash payments (8 ) Balance at September 27, 2009 $ - |
During the first nine months of 2009, we made payments totaling $2.3 million for severance and excess facility costs incurred in connection with past restructuring plans. In addition, we recorded an additional $0.7 million for excess facilities as original assumptions regarding possible sublease on exited facilities were not realized.
Payments for excess facilities under these restructuring plans may extend to 2011.
Further details regarding each of the restructuring plans noted in the above table are available in our Annual Report on Form 10-K for the year ended December 28, 2008.
Other income (expense) and Recovery of (provision for) income taxes
($ in millions) First Nine Months
2008
2009 As adjusted Change
Foreign exchange gain $ 0.1 $ 3.0 (97 )%
Percentage of net revenues - % 1 %
Gain on repurchase of senior convertible notes,
net and amortization of debt issue costs $ (0.2 ) $ 4.6 (104 )%
Percentage of net revenues - % 1 %
Loss on subleased facilities $ (0.5 ) $ - (100 )%
Percentage of net revenues - % - %
Interest income (expense), net $ (2.1 ) $ 0.6 (450 )%
Percentage of net revenues (1 )% - %
Recovery on investments, net $ - $ 0.4 (100 )%
Percentage of net revenues - % - %
Loss on investment securities $ - $ (11.8 ) 100 %
Percentage of net revenues - % (3 )%
Recovery of (provision for) income taxes $ 3.5 $ 77.4 (95 )%
Percentage of net revenues 1 % 19 %
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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 $0.1 million in the first nine months of 2009, which was primarily due to a $0.3 million foreign exchange loss 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 the fluctuations 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 11% during the first nine months of 2009 compared to appreciating 5% during the first nine months of 2008.
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