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 6-Aug-2014All Recent SEC Filings

Show all filings for PMC SIERRA INC

Form 10-Q for PMC SIERRA INC


6-Aug-2014

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 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 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 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. 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 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.

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, with certain comparatives restated as disclosed in Item 9B in the Company's Annual Report on Form 10-K for the year ended December 28, 2013, filed with the SEC on February 26, 2014. The unaudited comparative financial information for the three and six months ended June 29, 2013 presented herein reflects such restatements, which were to correct certain errors related to accounting for income taxes and capitalization of inventory-related overhead costs.


Table of Contents

Results of Operations

Second quarter of 2014 and 2013

Net revenues

Second Quarter
($ millions) 2014 2013 Change Net revenues $ 126.8 $ 127.6 (1)%

Overall net revenues for the second quarter of 2014 were $126.8 million, a decrease of $0.8 million compared to the second quarter of 2013, mainly due to lower sales volumes. This 1% decrease in the current period compared to the same period of 2013 was mainly attributable to lower sales volumes of our Optical division driven by our Fiber-to-the-Home ("FTTH") products. This was partially offset by higher sales volumes of our Optical Transport Network ("OTN") and Wintegra product families.

Storage represented 65% of our net revenues in the second quarter of 2014 and 2013. Storage net revenues remained consistent at $83.0 million compared to the same quarter in 2013. Increase in sales volumes in our Flash Controller products was offset by lower sales volumes from some of our Datacenter customers. On a sequential basis, Storage net revenues were lower by 5% on lower sales volumes due to strong sales in the first quarter of our Flash Controller products tied to a major data center deployment, combined with inventory consumption at one of our large customers due to their slower than expected first quarter.

Optical represented 20% of our net revenues in the second quarter of 2014 compared to 21% in the same period of 2013. Optical net revenues decreased by 5% compared to the same quarter in 2013 mainly due to lower sales volumes from our FTTH products. This was partially offset by higher volume of sales from our OTN and Legacy metro aggregation transport products. On a sequential basis, Optical net revenues increased by 6% mainly due to our OTN sales volumes growth and higher sales volumes of our SONET products driven mostly out of deployment of networks India and Russia. This was partially offset by lower sales volumes of our FTTH products.

Mobile represented 15% our net revenues for the second quarter of 2014 compared to 14% in the same period of 2013. Mobile net revenues increased by 3% compared to the second quarter of 2013 mainly due to higher sales volumes of our WinPath family of processors. On a sequential basis, Mobile revenues increased by $3.1 million or 20% due mainly to higher sales volumes of our WinPath family of processors due to broad-based strength in mobile backhaul for 3G and 4G deployments.

Gross profit

                             Second Quarter
($ millions)                 2014      2013     Change
Gross profit               $  90.0    $ 89.9       0%
Percentage of net revenues     71%       71%

Our gross profit increased slightly by $0.1 million in the second quarter of 2014 compared to the same period in 2013. Gross profit as a percentage of net revenues remained consistent at 71% in the second quarter of 2014 and 2013.

Operating expenses

                                              Second Quarter
($ millions)                                  2014      2013     Change
Research and development                    $  49.4    $ 51.7      (4)%
Percentage of net revenues                      39%       41%
Selling, general and administrative         $  29.0    $ 30.3      (4)%
Percentage of net revenues                      23%       24%
Amortization of purchased intangible assets $   9.9    $ 10.8      (8)%
Percentage of net revenues                       8%        8%

Research and Development and Selling, General and Administrative Expenses

Our research and development ("R&D") expenses decreased $2.3 million, or 4% compared to the same period last year. This was primarily the result of the decrease in payroll related costs due to lower headcount and lower tape-out related costs incurred in the second quarter of 2014 compared to the same quarter of 2013. On a sequential basis, R&D expenses were $0.8 million lower in the second quarter of 2014 compared to the first quarter of 2014. This was mainly due to lower payroll related costs due to lower headcount slightly offset by increased vacation expense and bonus accrual.


Table of Contents

Selling, general and administrative ("SG&A") expenses were $1.3 million, or 4% lower in the second quarter of 2014 compared to the same period last year, mainly due to a decrease in acquisition related costs and asset impairments, partially offset by an increase in reduction in force expense. On a sequential basis, SG&A were $0.4 million lower in the second quarter of 2014 compared to the first quarter of 2014. This is mainly due to a decrease in payroll related costs due to lower headcount and a decrease in professional fees, partially offset by increases in vacation expense and bonus accrual and reduction in force expense accrual.

Amortization of purchased intangible assets

Amortization of acquired intangible assets related to developed technology, in-process research and development, customer relationships, and trademarks decreased by $0.9 million in the second quarter of 2014 compared to the same period in 2013 mainly due to certain intangible assets that reached the end of their amortization period during the first quarter of 2014.

Other income (expense) and Provision for income taxes

                                   Second Quarter
($ millions)                       2014      2013     Change
Amortization of debt issue costs $  (0.1)   $     -   (100)%
Foreign exchange (loss) gain     $  (0.8)   $  2.2    (136)%
Interest income, net             $   0.1    $  0.3     (65)%
Provision for income taxes       $  (4.5)   $ (4.6)      2%

Amortization of debt issue costs

In the second quarter of 2014, we amortized $0.1 million of debt issue costs relating to our credit facility obtained during the third quarter of 2013.

Foreign exchange (loss) gain

We recorded a net foreign exchange loss of $0.8 million in the second quarter of 2014 compared to a net foreign exchange gain of $2.2 million in the second quarter of 2013. This was primarily due to foreign exchange revaluation of our foreign denominated assets and liabilities. This was partly driven by the United States Dollar depreciating by approximately 4% during the second quarter of 2014 compared to its appreciation by approximately 4% during the second quarter of 2013, against currencies applicable to our foreign operations.

Interest income (expense), net

Net interest income was $0.1 million in the second quarter of 2014 compared to net interest income of $0.3 million in the second quarter of 2013.

Provision for income taxes

Provision for income taxes was $4.5 million in the second quarter of 2014 compared to provision for income taxes of $4.6 million in the second quarter of 2013, mainly due to changes in the recognition of research credits partially offset by current income taxes and changes in the amortization of prepaid income tax.


Table of Contents

First six months of 2014 and 2013

Net revenues

First Six Months
($ millions) 2014 2013 Change Net revenues $ 253.3 $ 252.7 0%

Net revenues for the first six months of 2014 were $253.3 million compared to $252.7 million for the same period of 2013. This slight increase was mainly attributable to higher sales volumes of our Storage division driven by our Flash controller products and increase in sales volumes of our Mobile division driven by our mobile backhaul products partially offset by lower sales volumes in our Optical division driven by our FTTH products.

Storage represented 67% of our net revenues in the first six months of 2014 compared to 66% in the same period of 2013. Storage net revenues increased by 1% compared to the first six months of 2013 mainly due to increased sales volume of our Flash controller products partially offset by lower volumes of sales to our Datacenter customers.

Optical represented 19% of our net revenues in the first six months of 2014 compared to 20% in the same period of 2013. Optical net revenues decreased by 4% compared to the first six months of 2013 mainly due to lower sales volumes from our FTTH and routing and switching products partially offset by higher volume of sales from our OTN products.

Mobile represented 14% of our net revenues in the first six months of 2014 and 2013. Mobile net revenues increased by 2% compared to the first six months of 2013 mainly due to higher sales volumes of our WinPath family of processors.

Gross profit

                             First Six Months
($ millions)                 2014        2013     Change
Gross profit               $  178.9    $ 177.7       1%
Percentage of net revenues      71%        70%

Total gross profit increased by $1.2 million in the first six months of 2014 compared to the same period in 2013 mainly due to reductions in non-materials costs of goods, primarily as a result of reversal of royalty accrual.

Operating expenses

                                              First Six Months
($ millions)                                  2014        2013     Change
Research and development                    $   99.5    $ 106.3      (6)%
Percentage of net revenues                       39%        42%
Selling, general and administrative         $   58.3    $  58.6      (1)%
Percentage of net revenues                       23%        23%
Amortization of purchased intangible assets $   22.3    $  21.6       3%
Percentage of net revenues                        9%         9%

Research and Development and Selling, General and Administrative Expenses

Our R&D expense decreased by $6.8 million, or 6%, in the first six months of 2014 compared to the same period in 2013. This was primarily the result of the decrease in payroll related costs due to lower headcount and lower tape-out related costs.

SG&A expenses decreased by $0.3 million, or 1%, in the first six months of 2014 compared to the same period in 2013, mainly due to a decrease in outside services, acquisition-related costs, and asset impairments. This was partially offset by an increase in expenses associated with certain employee termination costs incurred in the second quarter of 2014.

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 $0.7 million in the first six months of 2014 compared to the same period in 2013 mainly


Table of Contents

due to inclusion of amortization of intangible assets acquired from IDT's Enterprise Flash Controller division partially offset by no further amortization on other purchased intangible assets that reached the end of their amortization period.

Other income (expense) and provision for income taxes

                                          First Six Months
($ millions)                               2014       2013     Change
Gain on investment securities and other $     0.1    $     -    100%
Amortization of debt issue costs        $    (0.1)   $     -   (100)%
Foreign exchange (loss) gain            $    (0.3)   $  3.6    (108)%
Interest income, net                    $     0.1    $  0.6     (83)%
Provision for income taxes              $    (6.3)   $ (8.8)     28%

Gain on investment securities and other

We recorded a gain on sale of investment securities and other investments of $0.1 million related to the disposition of investment securities in the first six months of 2014.

Amortization of debt issue costs

In the first six months of 2014, we amortized $0.1 million of debt issue costs relating to our credit facility.

Foreign exchange gain

We recognized a net foreign exchange loss of $0.3 million in the first six months of 2014 compared to a net foreign exchange gain of $3.6 million in the first six months of 2013. This was primarily due to foreign exchange revaluation of our foreign denominated assets and liabilities. This was partly driven by the United States Dollar depreciating by approximately 1% during the first six months of 2014 compared to its appreciation by approximately 6% during the first six months of 2013, against currencies applicable to our foreign operations.

Interest income (expense), net

Net interest income was $0.2 million in the first six months of 2014 compared to net interest income of $0.6 million in the first six months of 2013.

Provision for income taxes

In the first six months of 2014, provision for income taxes was $6.3 million, compared to $8.8 million in the first six months of 2013. This is mainly due to changes in accruals related to unrecognized tax benefits, non-deductible amortization of intangible assets, and the amortization of prepaid taxes.

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 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 in our Annual Report on Form 10-K for the year ended December 28, 2013, which also provides commentary on our most critical accounting estimates. Since our fiscal year ended December 28, 2013, there have been no material changes in our critical accounting policies and estimates.


Table of Contents

Business Outlook

The following is our outlook for the three months ending September 27, 2014 and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure:

(in millions, except for percentages) GAAP Measure Reconciling items Non-GAAP measure

Net revenues                             $130 - $138         N/A       (a)     $130 - $138
Gross profit %                          69.8% - 70.8%       (0.2)%     (b)      70% - 71%
Operating expenses                      $87.5 - $90.5   $14.5 - $15.5  (c)      $73 - $75
Provision for income taxes                $4.5 - $5       $3.5 - $4    (d)          $1

(a) 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 third quarter of 2014 to be approximately 28%. A number of factors such as volatile macroeconomic conditions could impact achieving our revenue outlook.

(b) This percentage relates to stock-based compensation expense. Stock-based compensation expense as a percentage of gross profit can vary depending on the volume of products sold given that many of our costs are fixed. The gross margin percentage will also vary depending on the mix of products sold.

(c) The referenced amount consists of $4.5 million to $5.5 million of stock-based compensation expense and $10 million of amortization of purchased intangible assets.

(d) $1.5 million income tax provision related to prepaid tax amortization, $1.4 million to $1.5 million income tax provision related to tax deductible goodwill and other items, and $0.6 million to $1 million income tax provision related to unrecognized tax benefits.

The above non-GAAP information is provided as a supplement to the Company's condensed consolidated financial statements presented in accordance with generally accepted accounting principles ("GAAP"). A non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The Company believes that the additional non-GAAP measures are useful to investors for the purpose of financial analysis. Management uses these measures internally to evaluate the Company's in-period operating performance before gains, losses and other charges that are considered by management to be outside of the Company's core operating results. In addition, the measures are used for planning and forecasting of the Company's future periods. However, non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. Other companies may use different non-GAAP measures and presentation of results.

Liquidity & Capital Resources

Our principal sources of liquidity are cash from operations, our 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, cash equivalents, short-term investments and long-term investment securities at June 28, 2014 and December 28, 2013 totaled $213.6 million and $214.3 million, respectively.

In 2013, we obtained a revolving line of credit with a bank under which the Company may borrow up to $100 million, of which $nil was drawn and remained outstanding as at June 28, 2014. The credit agreement contains customary representations and warranties, affirmative covenants and negative covenants with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including, without limitation, restrictions and limitations on dividends, asset sales, the ability to incur additional debt and additional liens and certain financial covenants. As of June 28, 2014, the Company was in compliance with these covenants.

In the future, we expect our cash on hand and cash generated from operations, together with our short-term investments, long-term investment securities and revolving line of credit, to be our primary sources of liquidity (see Item 1. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 4. Fair Value Measurements).


Table of Contents

Operating Activities

We generated cash from operations of $39.0 million in the first six months of 2014 compared to $36.7 million in the first six months of 2013. Our positive operating cash flows in the first six months of 2014 was mainly driven by our net loss of $7.7 million, offset by favorable non-cash adjustments of $33.3 million of amortization and depreciation expense and $11.1 million of stock based compensation. This was partially offset by net a decrease in working capital related to the timing of settlement of accounts payable and accrued liabilities and an increase in accounts receivable due to delayed payments from two major customers partially offset by a decrease in deferred taxes and income taxes payable.

Investing Activities

We had a net outflow of cash of $21.7 million from investing activities in the first six months of 2014 compared to a net cash outflow of $118.8 million in the same period in 2013. During the first six months of 2014, we used $42.0 million to purchase investment securities, which is a typical use for our excess cash, and generated $29.1 million from redemptions and sales of such investments securities. We also invested $8.8 million through the purchase of property and equipment and intangible assets in the first six months of 2014.

Financing Activities

We had a net outflow of cash of $30.9 million from financing activities in the first six months of 2014 compared to a net cash inflow of $11.6 million in the first six months of 2013. During the first six months of 2014, we borrowed $30.0 million from our credit facility and repaid $60.0 million compared to $nil during the first six months of 2013. We also repurchased common stock for $11.5 million in the first six months of 2014 compared to $5.5 million in the first six months of 2013. This was partially offset by $10.6 million proceeds from employee related stock issuances in the first six months of 2014 compared to $16.4 million during the first six months of 2013.

Contractual Obligations



As of June 28, 2014, we had cash commitments comprised of the following:




                                                            Payments due in:
                                                 Less than                               More than
(in thousands)                         Total       1 year     1-3 years    3-5 years      5 years
Operating Lease Obligations:
Minimum Rental Payments              $ 34,024    $   8,735    $  12,781    $   9,483    $    3,025
Estimated Operating Cost Payments      15,162        3,783        6,177        4,337           865
Purchase and Other Obligations          7,602        4,293        3,309             -             -
Total                                $ 56,788    $  16,811    $  22,267    $  13,820    $    3,890

In addition to the amounts shown in the table above, we have $40.0 million recorded as a liability for unrecognized tax benefits as of June 28, 2014 (see Note 1. Summary of Significant Accounting Policies), and we are uncertain as to the ultimate amount and timing of settlement of these potential liabilities.

Purchase obligations, as noted in the above table, are comprised of commitments to purchase design tools and software for use in product development and other long term purchase obligations. Excluded from these purchase obligations are commitments for inventory or other expenses entered into in the normal course of business. We estimate these other commitments to be approximately $46.3 million at June 28, 2014 for inventory and other expenses that will be received within 90 days and that will require settlement 30 days thereafter.

Also, in addition to the amounts shown in the table above, we expect to use approximately $8.4 million of cash in the remainder of 2014 for purchases of property and equipment and intellectual property.

We continue to expect that our cash from operations, short-term investments, . . .

  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.