Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PMCS > SEC Filings for PMCS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for PMC SIERRA INC

Form 10-Q for PMC SIERRA INC


8-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S 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 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 Security 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 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.

OVERVIEW

PMC is a semiconductor innovator transforming networks that connect, move and store digital content. 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. PMC's 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 communication servers, switches and storage devices to store, manage and move large quantities of data securely;

2. Our Optical network products are used in optical transport platforms, multi-services 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, mobile backhaul, and aggregation equipment.

The following discussion of the financial condition and results of our operations should be read in conjunction with the interim condensed consolidated financial statements and notes thereto included in this Form 10-Q.

Update to the Interim Condensed Consolidated Financial Statements Included in Earnings Press Release for the Third Quarter Ended September 30, 2012 Dated October 29, 2012

On October 29, 2012, the Company filed an 8-K Current Report containing the Press Release announcing the Company's Third Quarter Financial Results. Subsequent to October 29, 2012 and prior to the filing of this Form 10-Q, the Company determined that as at September 30, 2012, certain investments totaling $68 million were more appropriately classified in short-term investments and long-term investment securities than cash and cash equivalents. As a result, the Condensed Consolidated Balance Sheet as at September 30, 2012 and Statement of Cash Flows for the nine months ended


Table of Contents

September 30, 2012 in this Form 10-Q, have been adjusted compared to the Press Release as follows: on the Condensed Consolidated Balance Sheet within total assets, cash and cash equivalents decreased by $68 million; and short-term investments and long-term investment securities increased by $23.5 million and $44.5 million, respectively. On the Condensed Consolidated Statement of Cash Flows, total Net cash provided by (used in) investing activities decreased by $68 million. These investment securities were in fact sold and converted into cash subsequent to September 30, 2012.

Results of Operations

Third Quarter of 2012 and 2011

Net revenues

Third Quarter ($ millions) 2012 2011 Change Net revenues $ 131.7 $ 173.3 (24 )%

Overall net revenues for the third quarter of 2012 were $131.7 million, a decrease of $41.6 million compared to the third quarter of 2011, mainly due to lower product volumes. This 24% year-over-year decrease was mainly attributable to macro-economic uncertainty, which has our customers delaying investments in network infrastructure and has impacted each of the Storage, Optical and Mobile market segments.

Storage represented 68% of our net revenues in the third quarter of 2012 compared to 61% in the same period of 2011. Storage net revenues decreased by 15% compared to the same quarter in 2011 due mainly to the factors described above.

Optical represented 20% of our net revenues in the third quarter of 2012 compared to 24% in the same period of 2011. The Optical net revenues decreased by 36% compared to the same quarter in 2011 due mainly to the factors described above.

Mobile represented 12% our net revenues for the third quarter of 2012 compared to 16% in the same period of 2011. The Mobile net revenues decreased by 40% compared to the same quarter in 2011 due mainly to the factors described above.

On a sequential basis, our net revenues were 4% lower than in the second quarter of 2012. The decrease is due mainly to shipping lower volumes of our Optical and Mobile products, including some one time orders of legacy products sold in the second quarter which were not repeated in the third quarter. This was partially offset by shipping higher volumes sold of our Storage products, which was attributable to improvement in our 6Gbps SAS business and resumption of growth in our channel business.

Gross profit

                                             Third Quarter
             ($ millions)                  2012        2011         Change
             Gross profit                 $ 92.7      $ 120.7           (23 )%
             Percentage of net revenues       70 %         70 %

Total gross profit decreased by $28 million in the third quarter of 2012 on lower net revenues compared to the same period in 2011. Gross profit as a percentage of net revenues remained at 70% on a year over year basis as we were able to offset the negative effect on gross margin percentage of fixed costs over the lower net revenues in the first nine months of 2012, through cost saving initiatives.


Table of Contents

Operating expenses

                                                              Third Quarter
($ millions)                                                2012          2011         Change
Research and development                                   $  55.6       $ 59.7             (7 )%
Percentage of net revenues                                      42 %         34 %

Selling, general and administrative                        $  27.8       $ 30.0             (7 )%
Percentage of net revenues                                      21 %         17 %

Amortization of purchased intangible assets                $  11.6       $ 11.0              5 %
Percentage of net revenues                                       9 %          6 %

Impairment of goodwill and purchased intangible assets     $ 276.1       $   -             100 %
Percentage of net revenues                                     210 %         -  %

Research and Development and Selling, General and Administrative Expenses

Our research and development ("R&D") expenses decreased $4.1 million, or 7% compared to the same period last year. This was primarily the result of the decrease in payroll-related costs associated with reduced benefit costs, impairment charges to intellectual property in the third quarter of 2011 that did not reoccur in 2012, reduced outside services costs due to cost savings efforts, partially offset by an increase in tape-out related costs. On a sequential basis, R&D expenses were $1.1 million lower in the third quarter of 2012 as compared to the second quarter of 2012 mainly due to the reduction of payroll-related costs, which were partially offset by higher product related tape-out costs.

Selling, general and administrative ("SG&A") expenses were $2.2 million, or 7%, lower in the third quarter of 2012 compared to the same period last year, mainly due to the reductions in payroll-related costs. On a sequential basis, these expenses decreased $1.5 million primarily due to reductions in payroll-related costs and professional fees, partially offset by additional lease exit, termination and other costs.

Amortization of purchased intangible assets

Amortization of acquired intangible assets related to developed technology, in-process research and development, customer relationships, and trademarks increased by $0.6 million in the third quarter of 2012 compared to the same period in 2011. The increase was primarily the result of additional intangible asset amortization related to the November 2010 acquisition of Wintegra and 2012 acquisition of certain assets from Maxim Inc. ("Maxim").

Impairment of goodwill and purchased intangible assets

During the third quarter of 2012, we recognized $276.1 million in impairment of goodwill and purchased intangible assets related to the 2006 acquisition of Passave, Inc. ("Passave") and the 2010 acquisition of Wintegra, Inc. ("Wintegra"). See Part I. Financial Information, Item 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies for details.


Table of Contents

Other (expense) income and Recovery of (provision for) income taxes

                                                          Third Quarter
($ millions)                                             2012        2011       Change
Revaluation of liability for contingent consideration   $   -       $ 29.4         (100 )%
Gain on investment securities and other                 $  0.2      $  0.2           -  %
Amortization of debt issue costs                        $ (0.1 )    $ (0.1 )         -  %
Foreign exchange (loss) gain                            $ (2.5 )    $  3.6         (169 )%
Interest expense, net                                   $ (0.8 )    $ (0.5 )        (60 )%
Recovery of (provision for) income taxes                $  7.1      $ (5.4 )        231 %

Revaluation of liability for contingent consideration

See Part I. Financial Information, Item 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 2. Business Combinations for details.

Gain on investment securities and other

We recorded a gain on sale of investment securities of $0.2 million related to the disposition of investment securities in the third quarter of 2012 and 2011.

Amortization of debt issue costs

We recorded amortization of debt issue costs of $0.1 million in the third quarter of 2012 and 2011, relating to our senior convertible notes.

Foreign exchange (loss) gain

We recognized a net foreign exchange loss of $2.5 million in the third quarter of 2012 compared to a net foreign exchange gain of $3.6 million in the third quarter of 2011. This was primarily due to foreign exchange gain and loss on the revaluation of our foreign denominated assets and liabilities. This was partly driven by the United States Dollar depreciating by approximately 3% during the third quarter of 2012 compared to appreciating by approximately 6% during the third quarter of 2011, against currencies applicable to our foreign operations.

Interest expense, net

Net interest expense was $0.8 million in the third quarter of 2012 compared to $0.5 million in the third quarter of 2011.

Recovery of (provision for) income taxes

See Part I. Financial Information, Item 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 10. Income Taxes for details.


Table of Contents

First Nine Months of 2012 and 2011

Net revenues

First Nine Months ($ millions) 2012 2011 Change Net revenues $ 401.6 $ 501.8 (20 )%

Net revenues for the first nine months of 2012 were $401.6 million compared to $501.8 million for the same period of 2011. This 20% year-over-year decrease was mainly attributable to lower volumes shipped. We continued to be affected by macro-economic uncertainty, which has our customers delaying investments in network infrastructure, and has impacted each of the Storage, Optical and Mobile market segments.

Storage represented 65% of our net revenues in the first nine months of 2012 compared to 58% in the same period of 2011. Storage net revenues decreased by 11% year-over-year due mainly to the factors described above.

Optical represented 21% of our net revenues in the first nine months of 2012 compared to 25% in the same period of 2011. Optical net revenues decreased by 34% year-over-year due mainly to the factors described above.

Mobile represented 14% of our net revenues in the first nine months of 2012 compared to 16% in the same period in 2011. The Mobile net revenues decreased by 32% year-over-year due mainly to the factors described above.

Gross profit

                                          First Nine Months
           ($ millions)                   2012          2011         Change
           Gross profit                 $   280.3      $ 337.3           (17 )%
           Percentage of net revenues          70 %         67 %

Total gross profit decreased by $57 million in the first nine months of 2012 on lower net revenues compared to the same period in 2011. Gross profit as a percentage of net revenues increased 3%. This increase is mainly due to $9 million of expense related to our acquisition of Wintegra in November 2010, specifically, the effect of fair value adjustments related to inventory acquired from Wintegra and sold during the first half of 2011. As a result, gross profit as a percentage of net revenues would have been 69% had it not been for this fair value adjustment. The remainder of the change is mainly due to product mix. We were able to offset the negative effect on gross margin percentage of fixed costs over the lower net revenues in the first nine month of 2012 through cost saving initiatives.

Operating expenses

                                                             First Nine Months
($ millions)                                                2012           2011          Change
Research and development                                  $   171.4       $ 170.6              0 %
Percentage of net revenues                                       43 %          34 %

Selling, general and administrative                       $    86.0       $  91.6             (6 )%
Percentage of net revenues                                       21 %          18 %

Amortization of purchased intangible assets               $    34.5       $  33.1              4 %
Percentage of net revenues                                        9 %           7 %

Impairment of goodwill and purchased intangible assets    $   276.1       $    -             100 %
Percentage of net revenues                                       69 %           0 %


Table of Contents

Research and Development and Selling, General and Administrative Expenses

Our R&D expense increased $0.8 million in the first nine months of 2012 compared to the same period in 2011.

This was primarily the result of higher payroll-related costs associated with planned hiring, higher product related tape-out costs, and termination costs incurred in the first nine months of 2012 partially offset by lower outside services due to the timing of projects.

Selling, general and administrative ("SG&A") expenses was $5.6 million, or 6% lower in the first nine months of 2012 compared to the same period last year, mainly due to the reductions in payroll-related costs, lease exit costs and acquisition-related costs incurred in 2011.

Amortization of purchased intangible assets

Amortization of acquired intangible assets related to developed technology, in-process research and development, customer relationships, and trademarks increased by $1.4 million in the first nine months of 2012 compared to the same period in 2011. The increase was the result of additional intangible asset amortization related to the November 2010 acquisition of Wintegra and March 2012 acquisition of the SAS expander business from Maxim Integrated Products, Inc.

Impairment of goodwill and purchased intangible assets

During the first nine months of 2012, we recognized $276.1 million in impairment of goodwill and purchased intangible assets related to the 2006 acquisition of Passave and 2010 acquisition of Wintegra. See Part I. Financial Information, Item 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies for details.

Other (expense) income and provision for income taxes

                                                             First Nine Months
($ millions)                                                2012           2011         Change
Revaluation of liability for contingent consideration     $      -        $  29.4          (100 )%
Gain on investment securities and other                   $     0.7       $   0.6            17 %
Amortization of debt issue costs                          $    (0.2 )     $  (0.2 )          -  %
Foreign exchange (loss) gain                              $    (2.0 )     $   1.5          (233 )%
Interest expense, net                                     $    (1.5 )     $  (2.0 )          25 %
Provision for income taxes                                $   (53.6 )     $ (15.1 )        (255 )%

Revaluation of liability for contingent consideration

See Part I. Financial Information, Item 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 2. Business Combinations for details.


Table of Contents

Gain on investment securities and other

We recorded a gain on sale of investment securities of $0.7 million and $0.6 million, related to the disposition of investment securities in the first nine months of 2012 and 2011, respectively.

Amortization of debt issue costs

We recorded amortization of debt issue costs of $0.2 million in the first nine months of 2012 and 2011, relating to our senior convertible notes.

Foreign exchange (loss) gain

We recognized a net foreign exchange loss of $2.0 million in the first nine months of 2012 compared to a net foreign exchange gain of $1.5 million in the first nine months of 2011. This was primarily due to foreign exchange gain and loss on the revaluation of our foreign denominated assets and liabilities. This was partly driven by the United States Dollar depreciating by approximately 2% during the first nine months of 2012 compared to appreciating by approximately 4% during the first nine months of 2011, against currencies applicable to our foreign operations.

Interest expense, net

Net interest expense decreased by $0.5 million in the first nine months of 2012 compared to first nine months of 2011.

Provision for income taxes

See Part I. Financial Information, Item 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 10. Income Taxes for details.


Table of Contents

Critical Accounting Estimates

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our interim condensed consolidated financial statements, which have been prepared in accordance with 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. For a full discussion of our accounting estimates and assumptions that we have identified as critical in the preparation of our interim condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2011, which also provides commentary on our most critical accounting estimates.

As discussed more fully in our Form 10-K for the year ended December 31, 2011 in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Critical Accounting Policies and Estimates section and Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies, goodwill is reviewed for impairment annually and more frequently if an event occurs or circumstances change that could reduce the fair value below its carrying value. During the third quarter of 2012, we recognized $276.1 million in impairment of goodwill and purchased intangible assets related to the 2006 acquisition of Passave and 2010 acquisition of Wintegra. See Part I. Financial Information, Item 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies for more details on this impairment.

Business Outlook

We expect our net revenues for the fourth quarter of 2012 to be approximately $121.2 million to $131.7 million. As in the past, and consistent with business practice in the semiconductor industry, a portion of our revenue is likely to be derived from orders placed and shipped during the same quarter, which we call our "turns business." Our turns business varies from quarter to quarter. We expect the turns business percentage from the beginning of the fourth quarter of 2012 to be approximately 28%. A number of factors such as volatile macroeconomic conditions could impact achieving our revenue outlook.

We anticipate our fourth quarter 2012 gross margin percentage to be in the range of 70% to 71%, minus approximately 0.2% related to stock-based compensation expense. This could vary depending on the volumes of products sold, since many of our costs are fixed. The gross margin percentage will also vary depending on the mix of products sold.

In the fourth quarter of 2012, we expect operating expenses to be approximately $70 million to $71 million plus stock-based compensation expense of approximately $5.8 million to $6.8 million, and amortization of purchased intangible assets related to our past acquisitions of $10.8 million.

We anticipate that net interest income will be approximately $0.1 million in the fourth quarter of 2012, consisting of income earned from our cash and cash equivalents, short-term investments and long-term investment securities, partially offset by interest expense related to our outstanding senior convertible notes.


Table of Contents

Liquidity & Capital Resources

Our principal sources of liquidity are cash from operations, short-term investments and long-term investment securities. We employ these sources of liquidity to support ongoing business activities, acquire or invest in critical or complementary technologies, purchase capital equipment, repay any short-term indebtedness, and finance working capital. Currently, our primary objective for use of discretionary cash has been to repurchase and retire a portion of our common stock. The combination of cash and cash equivalents, short-term investments, and long-term investment securities at September 30, 2012 totaled $331.9 million and is comprised of the following:

                                                                  September 30, 2012
                                                              Gross            Gross
                                            Amortized       Unrealized       Unrealized
(in thousands)                                 Cost           Gains*          Losses*          Fair Value
Cash and cash equivalents:
Cash                                        $   93,742     $         -      $         -       $     93,742
Money market funds                              17,727               -                -             17,727
Corporate bonds and notes                        1,750               -                -              1,750
US treasury and government agency notes             -                -                -                 -

Total cash and cash equivalents                113,219               -                -            113,219


Short-term investments:
Corporate bonds and notes                       50,791            1,510               -             52,301
US Treasury and Government Agency notes          3,808               16               -              3,824
Foreign Government and Agency notes                 -                -                -                 -
US States and Municipal securities               1,720               26               -              1,746

Total short-term investments                    56,319            1,552               -             57,871


Long-term investment securities:
Corporate bonds and notes                      129,506              923              (21 )         130,408
US Treasury and Government Agency notes         26,906               78               (1 )          26,983
Foreign Government and Agency notes              3,395               60               -              3,455

Total long-term investment securities          159,807            1,061              (22 )         160,846

Total                                       $  329,345     $      2,613     $        (22 )    $    331,936

* Gross unrealized gains include accrued interest on investments of $1.4 million. The remainder of the gross unrealized gains and losses are included in the interim Condensed Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

. . .

  Add PMCS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PMCS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.