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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 29, 2012
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from: to
Commission File Number 0-19084
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 94-2925073 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1380 Bordeaux Drive
Sunnyvale, CA 94089
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 239-8000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of exchange on which registered | |
| Common Stock, $0.001 Par Value Preferred Stock Purchase Rights |
NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
The aggregate market value of the voting stock held by nonaffiliates of the registrant, based upon the closing sale price of the Common Stock on July 1, 2012 as reported by the NASDAQ Global Select Market, was approximately $0.7 billion. Shares of Common Stock held by each executive officer and director and by each person known to the registrant who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 22, 2013, the registrant had 202,956,952 shares of Common Stock, $0.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant’s 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K Report. Such Proxy Statement was filed with the Securities and Exchange Commission on March 15, 2013.
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EXPLANATORY NOTE
This Form 10-K/A includes restated financial information for the 2012, 2011 and 2010 fiscal years, and for the quarterly periods of 2012 and 2011, correcting errors in the Company’s accounting for income taxes. On October 28, 2013, PMC-Sierra, Inc. (the “Company” or “PMC”) filed a Current Report on Form 8-K with a press release announcing that the Company and its independent auditors were continuing to review the misapplication of accounting principles related to income tax benefits associated primarily with stock option deductions in excess of the expense recognized in the financial statements. On October 31, 2013, the Audit Committee of the Board of Directors, following discussions with the Company’s former independent registered chartered accountants, determined that, on the basis of the errors arising from that misapplication, the Company’s balance sheet as of December 31, 2011 and statement of operations for the year ended December 31, 2011 (the “2011 Financial Statements”) should no longer be relied upon. Primarily to correct that misapplication, the 2011 Financial Statements have been restated herein, together with the historical consolidated financial statements for fiscal 2012 and 2010.
The Company’s Form 10-Q for its first quarter of fiscal 2013, filed on May 8, 2013, included restated financial information for fiscal years 2012, 2011 and 2010 and certain interim periods therein. That filing described corrections to the Company’s recording of tax expense from the intercompany sale of IP that should be recognized over the life of the assets sold, and to reduce tax expense for the quarter ended April 1, 2012 to give benefit to foreign tax credit carry-forwards not previously recognized. Since total tax expense was reduced, the amount of benefit related to excess stock option deductions was reduced by the same amount. The restated information from that filing is superseded by the financial information presented herein.
Disclosures related to this matter are included in Part II, Item 9A, under “Controls and Procedures”, which describes a material weakness with respect to the Company’s internal control over financial reporting for income taxes, and management’s conclusion that the Company’s internal control over financial reporting was not effective as of December 29, 2012. Corresponding changes were also made in Part II, Item 6, under “Selected Financial Data”; Part II, Item 7 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and Part II, Item 8, under “Financial Statements and Supplementary Data” (see Notes 2, 6e, 15, 17, and 19) and Part IV, and Item 15. With the exception of the items listed above, this Form 10-K/A does not reflect events occurring after the original filing date of the Form 10-K.
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Unless the context requires otherwise, “PMC-Sierra”, “PMC”, “the Company”, “us”, “our” or “we”, mean PMC-Sierra, Inc. together with our subsidiary companies.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) and the portions of our Proxy Statement incorporated by reference into this Annual Report contain forward-looking statements. We often 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.
These forward-looking statements apply only as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements made herein or elsewhere, whether as a result of new information, future events or otherwise. Our actual results could differ materially and adversely from those anticipated in forward-looking statements, including without limitation the risks described under “Item IA. Risk Factors” and elsewhere in this Annual Report and our other filings with the SEC. Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Such forward-looking statements include statements as to, among other topics:
| • | business strategy; |
| • | business outlook; |
| • | sales, marketing and distribution; |
| • | wafer fabrication capacity; |
| • | competition and pricing; |
| • | critical accounting policies and estimates; |
| • | customer product inventory levels, needs and order levels; |
| • | demand for communications network infrastructure equipment; |
| • | net revenues; |
| • | gross profit; |
| • | research and development expenses; |
| • | selling, general and administrative expenses; |
| • | other income (expense), including interest income (expense); |
| • | foreign exchange rates; |
| • | taxation rates and tax provision; |
| • | sources of liquidity and liquidity sufficiency; |
| • | capital resources; |
| • | capital expenditures; |
| • | restructuring activities, expenses and associated annualized savings; |
| • | cash commitments; |
| • | purchase commitments; |
| • | use of cash; |
| • | expectation regarding our amortization of purchased intangible assets; and |
| • | expectations regarding distribution from certain investments. |
This Annual Report should be read in conjunction with our periodic filings made with the SEC subsequent to the date of the original filing, including any amendments to those filings, as well as any current reports filed on Form 8-K subsequent to the date of the original filing.
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| ITEM 1. | BUSINESS. |
OVERVIEW
PMC-Sierra, Inc. is a semiconductor innovator transforming networks that connect, move and store digital content. The Company designs, develops, markets and supports semiconductor solutions by integrating its mixed-signal, software and systems expertise through a network of offices in North America, Europe and Asia.
We have approximately 700 different semiconductor devices that are sold to leading equipment and design manufacturers, who in turn supply their equipment principally to service providers, carriers and enterprises globally. We provide semiconductor solutions for our customers by leveraging our intellectual property, design expertise and systems knowledge across a broad range of applications and industry protocols. PMC’s portfolio of semiconductor devices is used in various applications of communications network infrastructure equipment. 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.
PMC was incorporated in the state of California in 1983 and reincorporated in the state of Delaware in 1997. Our Common Stock trades on the NASDAQ Global Select Market under the symbol “PMCS”. Our fiscal year ended on the last Sunday of the calendar year in 2010 and 2011. Starting fiscal year 2012 and onwards, our fiscal year will be ending on the last Saturday of the calendar year. Fiscal year 2012 consisted of 52 weeks. Fiscal year 2011 consisted of 53 weeks, and fiscal year 2010 consisted of 52 weeks.
INDUSTRY OVERVIEW
A transformation of the network is taking place due to the rapid growth in video traffic and more capable mobile devices, which continues to drive increasing demand for bandwidth and more efficient networks. At the same time, communication service providers are seeking ways to increase their revenues by bundling and delivering a range of services to their customers in a cost-effective manner. Applications such as social media, Video-on-Demand, Internet Protocol Television, videoconferencing, and data-intensive mobile smartphones and tablets are causing traffic levels to increase significantly. A 2013 study issued by Cisco Systems Inc., forecasts that worldwide mobile data traffic will increase 13-fold from 2012 to 2017. At the same time, mobile network connection speeds will increase 7-fold, and the average mobile network connection will exceed 4 megabits per second in 2017. This demand is resulting in carriers and enterprises having to upgrade and improve their network infrastructure and storage management capabilities. Enterprises, governments, corporations, small offices and home offices are expanding their networks to better capture, store and access large quantities of data and video, efficiently and securely.
We operate in one reportable segment—semiconductor solutions for communications network infrastructure. Our semiconductor devices enable networking equipment primarily in the following three end market segments: Storage, Optical and Mobile networks described in the overview of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Storage market segment is made up of enterprise storage equipment manufacturers and covers two broad areas: server storage, and stand-alone external storage systems. The Optical market segment refers to infrastructure suppliers of transport and access networks that use optical transport protocol and/or physical optical medium. The Mobile market segment is mainly infrastructure equipment suppliers, including base station and backhaul equipment, supporting the wireless transmission of content from and to mobile hand devices.
OUR BUSINESS STRATEGY
Our mission is to be the semiconductor innovator transforming networks that connect, move and store digital content. We achieve this by integrating our mixed-signal, software, and systems expertise to deliver industry-leading products with best-in-class quality, service, and technical support. The semiconductor solutions we develop are based on our in-depth knowledge of network applications, system requirements and networking protocols, as well as high-speed mixed-signal and system-on-chip design expertise. To realize our mission while expanding our business profitably, our business strategy can be summarized as follows:
| 1. | Leverage our mixed signal and system on chip expertise to be the leading supplier of silicon solutions for Storage, Optical, and Mobile networks; |
| 2. | Deliver best in class performance and integration to lead the server and storage system market segments; |
| 3. | Build on our position as the leading telecom silicon provider to enable the most integrated Optical Transport Network (“OTN”) and Passive Optical Network (“PON”) solutions in the metro and access networks; and |
| 4. | Enable a seamless transition to packet based backhaul with our multi-service network processor platform. |
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OUR PRODUCTS AND MARKET SEGMENTS THAT WE SERVE
Our portfolio of semiconductor devices are used in various applications of communications network infrastructure equipment and enable the transporting and storing of large quantities of digital data, in a secure manner.
Our semiconductor devices enable networking equipment primarily in three market segments: Storage, Optical and Mobile networks. In 2012, the storage network represented 67% of total revenues, the optical network represented 19% of total revenues, and the mobile network represented 14% of total revenues.
Storage
Our Storage products are supplied directly to Original Equipment Manufacturers (“OEMs”) and channel customers. Our products and solutions for the Storage market segment enable high-speed communications between the servers, switches and storage devices that comprise these systems thus allowing large quantities of data to be stored, managed and moved securely. As storage demand continues to grow, managing the data becomes more critical for the operation of the entire company or service provider. Our focus in this area is in developing communication devices and controllers for high-performance storage systems in the Storage Area Network and Network Attached Storage markets, including 12 Gbps SAS/SATA and 8Gbps Fibre Channel controllers and expanders for this market segment. In 2010, PMC acquired Adaptec’s channel business, offering server adapter products with high-performance Solid State Drive (“SSD”) caching capability that are used to configure, manage and monitor storage volumes. We also include printer Application-specific Integrated Circuits (“ASICs”) in this market segment as they are most aligned with our Enterprise storage customers. Our Printer ASIC products provide integrated solutions for laser printers, that are used by enterprises and small businesses. Currently, the Storage market segment represents 67% of our net revenues.
| Storage products and/or applications incorporating PMC’s semiconductor solutions |
PMC Products | Examples of OEMs(1) | ||
| Storage Area Networks | RAID-on-Chip (RoC) | Dell | ||
| Server Attached Storage | Controllers | EMC | ||
| SSD Cache Performance | Expanders | Huawei-Symantec | ||
| Enterprise Networking | Loop Switches | HP | ||
| Data Center | Physical Layer Products | Hitachi | ||
| High Speed Laser and Multi-Function Printers | MIPs Processors | IBM | ||
| NetApp |
| (1) | Examples in the order listed refer to Dell Inc., EMC Corp., Chengdu Huawei-Symantec Technologies Co., Hewlett-Packard Company, Hitachi, Ltd., International Business Machines Corporation, NetApp, Inc. |
Optical
Our Optical products include our Wide Area Network communication products focused on Metro and access networks, including Optical Transport Network (“OTN”), Synchronous Optical Networks (“SONET”), Asynchronous Transfer Mode (“ATM”) and Fiber to the Home. Our Metro products are used in equipment such as edge routers, multi-service provisioning platforms, and optical transport platforms where signals are gathered, processed and transmitted to the next destination as quickly and efficiently as possible in the metro area network. Next-generation networking equipment can handle multi-protocol, multi-service traffic and enable voice, video and data to be moved at high speeds over the network. For high-capacity data communication over fiber optic systems, the standard used is SONET in North America and parts of Asia, and is Synchronous Digital Hierarchy (“SDH”) in the rest of the world. In addition to using SONET/SDH to increase the bandwidth or capacity of their networks, many service providers are starting to implement packet-based transport equipment using a standard called OTN. OTN equipment is starting to be deployed in the metro and access portions of the network. Currently, the Optical market segment represents 19% of our net revenues.
| Optical products and/or applications incorporating PMC’s semiconductor solutions |
PMC Products |
Examples of OEMs(1) | ||
| Optical Transport Network |
Meta Family | Alcatel-Lucent | ||
| — P-OTP/P-OTS |
HyPHY Family | Ciena | ||
| — ROADM/DWDM |
Ethernet (Framers, Mappers, MAC) | Cisco | ||
| Carrier/Ethernet/Switch/Routers | SONET/SDH Framers | FiberHome | ||
| Multi-service switches |
Cross Connects | Huawei | ||
| — MSPP/MSTP/ADM |
T1/E1 Mappers/Framers | Juniper | ||
| Passive Optical Network |
DS-3/E3 Mappers/Framers | Nokia Siemens | ||
| — EPON & 10G-EPON |
Tellabs | |||
| — GPON & XG-PON |
ZTE |
| (1) | Examples in the order listed refer to Alcatel-Lucent, S.A., Ciena Corp., Cisco Systems, Inc., Fiberhome Telecommunication Technologies Co., Ltd., Huawei Technology Co. Ltd., Juniper Networks, Inc., Nokia Corporation, Tellabs Inc., and ZTE Corporation. |
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Mobile
Our Mobile products include Winpath processors, T1/E1 and SERDES devices sold into Mobile access markets and include devices that are used in 2G, 3G and 4G wireless base stations and mobile backhaul equipment. Our highly integrated network processors are optimized for fiber and microwave backhaul, and cell site aggregation networks. PMC initiated new efforts within the remote radio head developing product that takes advantage of our mixed signal expertise and intellectual property for integrated solution that lowers power and offers smaller size. Currently, the Mobile market segment represents 14% of our net revenues.
| Mobile products and/or applications incorporating PMC’s semiconductor solutions |
PMC Products | Examples of OEMs(1) | ||
| Mobile Backhaul | WinPath Processors | Alcatel-Lucent | ||
| 3GPP Wireless Base Stations | UFE Family | Cisco | ||
| Remote Radio Heads | Combiner/Serializers | Ericsson | ||
| Transceivers/Framers | Huawei | |||
| Radio devices | Nokia Siemens | |||
| Tellabs | ||||
| ZTE |
| (1) | Examples in the order listed refer to Alcatel-Lucent, S.A., Cisco Systems, Inc., Telefonaktiebolaget LM Ericsson, Huawei Technology Co. Ltd., Nokia Corporation, Tellabs Inc., and ZTE Corporation. |
SALES, MARKETING AND DISTRIBUTION
Our sales and marketing strategy is to have our products designed into our customers’ equipment by developing superior products for which we provide best-in-class service and technical support. Our marketing team is focused on developing new products and solutions that meet the needs of our customers, including OEMs and original design manufacturers. We are often involved in the early stages of design concerning our customers’ plans for new equipment. This helps us determine if our existing products can be used in their new equipment or if new devices need to be developed for the application. To assist us in our planning process, we are in regular contact with our key customers to discuss industry trends, emerging standards and ways in which we can assist in their new product requirements.
Our sales team is focused on selling and supporting our chips and chipsets for equipment providers who are in turn selling their products to service providers, enterprises, or consumers. To better match our available sales resources to market opportunities, we also focus our sales and support efforts on targeted customers.
We sell our products to end customers directly and through distributors and independent manufacturers’ representatives. In 2012, approximately 31% of our orders were shipped through distributors, approximately 47% were sent by us directly to contract manufacturers selected by OEMs, and the balance was sent directly to our OEM customers.
In 2012, our largest distributor was Avnet Inc. (“Avnet”), which sold our products worldwide (excluding Japan, Israel, and Taiwan). In 2012, sales shipped through Avnet represented 15% of our total net revenues. Our second largest distributor is Macnica Inc. Sales shipped through this distributor in 2012 represented 12% of our total net revenues.
In 2012, we had two end customers, Hewlett-Packard Company and EMC Corp., which each accounted for more than 10% of our net revenues.
Our sales outside of the United States, based on customer billing location, accounted for 86%, 83% and 85% of total revenue in 2012, 2011 and 2010, respectively. Our sales to customers in Asia, including Japan and China, were 78%, 73% and 77% of total revenues in 2012, 2011 and 2010, respectively.
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MANUFACTURING
PMC-Sierra is a fabless company, meaning that we do not own or operate foundries for the production of the silicon wafers from which our products are made. Instead, we work with independent merchant foundries and chip assemblers for the manufacture of our products. We believe our fabless approach to manufacturing provides us with the benefit of superior manufacturing capability, scalability, as well as the flexibility to move wafer manufacture, assembly and test of our products to the vendors that offer the best technology and service at a competitive price.
Our lead-time, or the time required to manufacture our devices, is typically 12 to 18 weeks. Based on this lead-time, our team of production planners initiates purchase orders with our wafer suppliers and with our chip assemblers for the assembly and test of our parts so that, to the best of our ability, our products are available to meet customer demand.
Wafer Fabrication
We manufacture our products at independent foundries using standard Complementary Metal Oxide Semiconductor process techniques. We have in the past purchased silicon wafers from which we manufacture our products from Globalfoundries Inc., Taiwan Semiconductor Manufacturing Corporation (“TSMC”), Texas Instruments Incorporated and United Microelectronics Corporation (“UMC”). These independent foundries produce the wafers for our networking semiconductor products ranging in sizes from 0.18 micron to 40 nanometer. By using independent foundries to fabricate our wafers, we are better able to concentrate our resources on designing, developing and testing of new products. In addition, we avoid the fixed costs associated with owning and operating fabrication and chip assembly facilities and the costs associated with updating these facilities to manage constantly evolving process technologies.
We have existing supply agreements with UMC and TSMC. Generally, terms include but are not limited to, supply terms without minimum unit volume requirements for PMC, indemnification and warranty provisions, quality assurances and termination conditions.
Assembly and Test
Once our wafers are fabricated, they must be probed or inspected, to identify which individual units, referred to as die, were properly manufactured. Most wafers that we purchase are sent directly to an outside assembly house where the die are individually cut and packaged into semiconductor devices. The individual devices are then run through various electrical, mechanical and visual tests before customer delivery. PMC outsources all of its wafer probe, assembly and final testing to independent subcontractors.
Quality Assurance
The industries that we serve require high quality, reliable semiconductors for incorporation into their equipment. We pre-qualify each vendor, foundry, assembly and test subcontractor. Wafers supplied by outside foundries must meet our incoming quality and test standards. The testing function is performed predominantly by independent Asian and U.S. companies.
Since the acquisition of the Channel Storage business from Adaptec, PMC has significant business in manufacturing and selling Printed Circuit Board based products. These products are assembled and tested by an independent contract manufacturer before shipping to a distribution center. The design, materials, production test and packaging are specified by PMC and the manufacturing subcontractors are qualified and regularly audited by PMC.
RESEARCH AND DEVELOPMENT
Our research and development efforts are market and customer focused and can involve the development of both hardware and software. These devices and reference designs are targeted for use in enterprise, storage and service provider markets. Increasingly, our OEM customers that serve these end markets are demanding complete solutions with software support and complex feature sets, and we are developing products to fill this need.
From time to time we announce new products to the public once development of the product is substantially completed and there are no longer significant technical risks and costs to be incurred. As we have a portfolio of approximately 700 products, we do not consider any individual new product or group of products released in a year to be material, beyond our continuing development of a portfolio of products that meet our customers’ needs.
At the end of fiscal 2012, we had design centers in the United States (California, Pennsylvania, Texas, Oregon and Colorado), Canada (British Columbia, Alberta, Saskatchewan and Quebec), Israel (Herzliya), China (Shanghai), Germany (Ismaning and Neckarsulm) and India (Bangalore).
Our research and development spending was $220.9 million in 2012, $227.1 million in 2011, and $187.5 million in 2010.
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BACKLOG
Our sales originate from customer purchase orders. However, our customers frequently revise order quantities and shipment schedules to reflect changes in their requirements. As of December 29, 2012, our backlog of products scheduled for shipment within three months totaled approximately $89 million. Unless our customers cancel or defer to a subsequent year with respect to a portion of this backlog, we expect this entire backlog to be filled in 2013. As of December 31, 2011, our backlog of products scheduled for shipment within three months totaled approximately $85 million.
Our backlog includes our backlog of shipments to direct customers, minor distributors and a portion of shipments by our major distributor to end customers. Our customers may cancel or defer backlog orders. Accordingly, we believe that our backlog at any given time is not a meaningful indicator of future long-term revenues. Backlog may not be comparable between companies.
COMPETITION
We typically face competition at the customer design stage when our customers are determining which semiconductor components to use in their equipment designs.
Most of our customers choose a particular semiconductor component primarily based on whether the component:
| • | meets the functional requirements; |
| • | interfaces easily with other components in the product; |
| • | meets power usage requirements; |
| • | is priced competitively; and |
| • | is commercially available on a timely basis. |
OEMs also consider the quality of the supplier when determining which component to include in a design. Many of our customers will consider the breadth and depth of the supplier’s technology, as using one supplier for a broad range of technologies can often simplify and accelerate the design of next generation equipment. OEMs will also consider a supplier’s design execution reputation, as many OEMs design their next generation equipment concurrently with the semiconductor component design. OEMs also consider whether a supplier has been pre-qualified, as this ensures that components made by that supplier will meet the OEM’s quality standards.
We compete against established peer-group semiconductor companies that focus on the communications and storage semiconductor business. These companies include the following: Altera Corp., Applied Micro Circuits Corp.; Broadcom Corp.; Cortina Systems, Inc.; Emulex Corp.; Exar Corp.; Infineon Technologies AG; Intel Corp.; Texas Instrument Inc; LSI Corp.; Maxim Integrated Products, Inc.; Marvell Technology Group Ltd.; Mindspeed Technologies, Inc.; QLogic Corp.; Vitesse Semiconductor; and Xilinx, Inc. Many of these companies are well financed, have significant communications semiconductor technology assets and established sales channels, and depend on the market in which we participate for the bulk of their revenues.
It is possible for additional competitors to enter the market with new products, some of which may also have greater financial and other resources than we do.
LICENSES, PATENTS AND TRADEMARKS
We rely in part on patents to protect our intellectual property and have a total of 597 U.S. and 80 foreign patents for circuit designs and other innovations used in the design and architecture of our products. In addition, we have 95 patent applications pending in the U.S. Patent and Trademark office. Our patents typically expire 20 years from the patent application date, with our existing patents expiring between 2013 and 2032.
We do not consider our business to be materially dependent upon any one patent. We believe that a strong portfolio of patents combined with other factors such as our ability to innovate, technological expertise and the experience of our personnel are important to compete effectively in our industry. Our patent portfolio also provides the flexibility to negotiate or cross license intellectual property with other semiconductor companies to broaden the features in our products.
We also rely on mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements, and licensing arrangements to protect our intellectual property.
PMC, PMC-Sierra and our logo are registered trademarks and service marks. Any other trademarks used in this Annual Report are owned by other entities. We own other trademarks and service marks not appearing in this Annual Report.
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EMPLOYEES
As of December 29, 2012, we had 1,546 employees, including 969 in Research and Development, 109 in Production and Quality Assurance, 307 in Sales and Marketing and 161 in Administration. During 2012, we decreased our number of employees by 18 employees. Our employees are not represented by a collective bargaining agreement and we have never experienced any related work stoppage.
ADDITIONAL INFORMATION AND SEC REPORTS
Our principal executive offices are located at 1380 Bordeaux Drive, Sunnyvale, CA 94089. Our internet webpage is located at pmcs.com; however, the information accessed on or through our webpage is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our webpage after we electronically file or furnish such material with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100F Street, NE., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
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| ITEM 1A. | RISK FACTORS. |
Our company is subject to a number of risks. Some of these risks are common in the fabless semiconductor industry, some are the same or similar to those disclosed in previous SEC filings, and some may be present in the future. You should carefully consider all of these risks and the other information in this report before investing in PMC. The fact that certain risks are endemic to the industry does not lessen the significance of the risk.
As a result of the following risks, our business, financial condition, operating results and/or liquidity could be materially adversely affected. This could cause the trading price of our securities to decline, and you may lose part or all of your investment.
Our global business is subject to a number of economic risks.
We conduct business throughout the world, including in Asia, North America, Europe and the Middle East. Instability in the global credit markets, including the recent European economic and financial turmoil related to sovereign debt issues in certain countries, the instability in the geopolitical environment in many parts of the world and other disruptions, such as changes in energy costs, may continue to put pressure on global economic conditions. The world has recently experienced a global macroeconomic downturn. To the extent global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, business, operating results, and financial condition may be materially adversely impacted.
Additionally, given the greater credit restrictions that are being invoked by lenders around the world, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access such capital markets, which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future.
Our operating results may be impacted by rapid changes in demand due to the following:
| • | variations in our turns business; |
| • | short order lead time; |
| • | customer inventory levels; |
| • | production schedules; and |
| • | fluctuations in demand. |
As a result, there could be significant variability in the demand for our products, and our past operating results may not be indicative of our future operating results.
Fluctuation in demand is dependent on, among other things the size of the markets for our products, the rate at which such markets develop, and the level of capital spending by end customers. We cannot assure you of the rate, or extent to which, capital spending by end customers will grow, if at all.
Our revenues and profits may fluctuate because of factors that are beyond our control. As a result, we may fail to meet the expectations of securities analysts and investors, which could cause our stock price to decline.
Our ability to project revenues is limited because a significant portion of our quarterly revenues may be derived from orders placed and shipped in the same quarter, which we call our “turns business.” Our turns business varies widely from quarter to quarter. Our customers may delay product orders and reduce delivery lead-time expectations, which may reduce our ability to project revenues beyond the current quarter. While we regularly evaluate end users’ and contract manufacturers’ inventory levels of our products to assess the impact of their inventories on our projected turns business, we do not have complete information on their inventories. This could cause our projections of a quarter’s turns business to be inaccurate, leading to lower or higher revenues than projected.
We may fail to meet our forecasts if our customers cancel or delay the purchase of our products or if we are unable to meet their demand.
We rely on customer forecasts in order to estimate the appropriate levels of inventory to build and to project our future revenues. Many of our customers have numerous product lines, numerous component requirements for each product, sizeable and complex supplier structures, and typically engage contract manufacturers for additional manufacturing capacity. This complex supply chain creates several variables that make it difficult to accurately forecast our customers’ demand and accurately monitor their inventory levels of our products. If customer forecasts are not accurate, we may build too much inventory, potentially leaving us with excess and obsolete inventory, which would reduce our profit margins and adversely affect our operating results. Conversely, we may build too little inventory to meet customer demand causing us to miss revenue-generating opportunities. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to the failure of anticipated orders to materialize, could result in our holding excess or obsolete inventory, which could in turn result in write-downs of inventory. This difficulty may be compounded when we sell to OEMs indirectly through distributors and other resellers or contract manufacturers, or both, as our forecasts of demand are then based on estimates provided by multiple parties.
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Our customers often shift buying patterns as they manage inventory levels, market different products, or change production schedules. This makes forecasting their production requirements difficult and can lead to an inventory surplus or shortage of certain components. In addition, our products vary in terms of the profit margins they generate. If our customers purchase a greater proportion of our lower margin parts in a particular period, it would adversely impact our results of operations.
Further, our distributors provide us with periodic reports of their backlog to end customers, sales to end customers and quantities of our products that they have on hand. If the data that is provided to us is inaccurate, it could lead to inaccurate forecasting of our revenues or errors in our reported revenues, gross profit and net income.
While backlog is our best estimate of our next quarter’s expectations of revenues, it is industry practice to allow customers to cancel, change or defer orders with limited advance notice prior to shipment. As such, backlog may be an unreliable indicator of future revenue levels. Because a significant portion of our operating expenses is fixed, even a small revenue shortfall can have a disproportionately negative effect on our operating results.
We rely on a few customers for a major portion of our sales, any one of which could materially impact our revenues should they change their ordering pattern. The loss of a key customer could materially impact our results of operations.
We depend on a limited number of customers for large portions of our net revenues. In 2012 and 2011, we had two end customers that accounted for more than 10% of our net revenues, namely, HP and EMC. In 2010, we had one end customer that accounted for more than 10% of our net revenues, namely HP.
In 2012, 2011 and 2010, our top ten customers accounted for more than 60% of our net revenues. We do not have long-term volume purchase commitments from any of our major customers. We sell our products solely on the basis of purchase orders. Those customers could decide to cease purchasing products with little or no notice and without significant penalties. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, delays in manufacturing their own product offerings into which our products are incorporated, and natural disasters. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.
The loss of a key customer, or a reduction in our sales to any major customer or our inability to attract new significant customers could materially and adversely affect our business, financial condition or results of operations. In addition, if we fail to win new product designs from our major customers, our business and results of operations may be harmed.
We use indirect channels of product distribution, in many locations across the world, over which we have limited control.
We generate a portion of our sales through third-party distribution and reseller agreements. Termination of a distributor agreement either by us or a distributor, could result in a temporary or permanent loss of revenue, if we cannot establish an alternative distributor to manage this portion of our business, or we are unable to service the related end customers directly. Further, if we terminate a distributor agreement, we may be required to repurchase unsold inventory held by the distributor. We maintain a reserve for estimated returns. If actual returns exceed our estimate, there may be an adverse effect on our operating results. Our distributors are located all over the world and are of various sizes and financial profiles. Lower sales, lower earnings, debt downgrades, the inability to access capital markets and higher interest rates could potentially affect our distributors’ operations.
If the demand for our customers’ products declines, demand for our products will be similarly affected and our revenues, gross margins and operating performance will be adversely affected.
Our customers are subject to their own business cycles, most of which are unpredictable in commencement, depth and duration. We cannot accurately predict the continued demand of our customers’ products and the demands of our customers for our products. In the past, networking customers have reduced capital spending without notice, adversely affecting our revenues. As a result of this uncertainty, our past operating results may not be indicative of our future operating results. It is possible that, in future periods, our results may be below the expectations of public market analysts and investors. This could cause the market price of our common stock to decline.
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Changes in the political and economic climate in the countries in which we do business may adversely affect our operating results.
We earn a substantial proportion of our revenues in Asia. We conduct an increasing portion of our research and development and manufacturing activities outside North America. We procure substantially all of our wafers from Taiwan and use assemblers and testers throughout Asia.
Given the depth of our sales and operations in Asia, we face risks that could negatively impact our results of operations, including economic sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers or regulations, uncertain protection for intellectual property rights and generally longer receivable collection periods. In addition, fluctuations in foreign currency exchange rates could adversely affect the revenues, net income, earnings per share and cash flow of our operations in affected markets. Similarly, fluctuations in exchange rates may affect demand for our products in foreign markets or our cost competitiveness and may adversely affect our profitability.
Our results of operations continue to be influenced by our sales to customers in Asia. Government agencies in this region have broad discretion and authority over many aspects of the telecommunications and information technology industry. Accordingly, their decisions may impact our ability to do business in this region, and significant changes in this region’s political and economic conditions and governmental policies could have a substantial negative impact on our business.
Laws and regulations to which we are subject, as well as customer requirements in the area of environmental protection and social responsibility, could impose substantial costs on us and may adversely affect our business.
Our business is subject to or may be impacted by various environmental protection and social responsibility legal and customer requirements. For example, we are subject to the European Union Directive on the Restriction of the use of certain Hazardous Substances in Electrical & Electronic Equipment (RoHS) and the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) Regulation in the European Union. Such regulations could require us to redesign our products in order to comply with their requirements and require the development and/or maintenance of compliance administration systems. Redesigned products could be more costly to manufacture or require more costly or less efficient raw materials. If we cannot develop compliant products on a timely basis or properly administer our compliance programs, our revenues could decline due to lower sales. In addition, under certain environmental laws, we could be held responsible, without regard to fault, for costs relating to any contamination at our current or past facilities and at third-party waste-disposal sites. We could also be held liable for consequences arising out of human exposure to such substances or other environmental damage.
Recently there has been increased focus on environmental protection and social responsibility initiatives. We may choose or be required to implement various standards due to the adoption of rules or regulations that result from these initiatives, such as with respect to the use of conflict minerals, which are certain minerals that originate in the Democratic Republic of the Congo or adjoining countries. Our customers may also require us to implement environmental or social responsibility procedures or standards before they will continue to do business with us or order new products from us. Our adoption of these procedures or standards could be costly, and our failure to adopt these standards or procedures could result in the loss of business or fines or other costs.
The conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act could result in additional costs and liabilities.
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC established new disclosure and reporting requirements for those companies who use “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries in their products, whether or not these products are manufactured by third parties. These new requirements could affect the sourcing and availability of minerals used in the manufacture of our semiconductor products. There will also be costs associated with complying with the disclosure requirements, including for due diligence in regard to the sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities.
The loss of key personnel could delay us from designing new products.
To succeed, we must retain and hire technical personnel highly skilled at design and test functions needed to develop high-speed networking products. The competition for such employees is intense.
We do not have employment agreements in place with many of our key personnel. As employee incentives, we issue common stock options and restricted stock grants that are subject to time vesting, and, in the case of options, have exercise prices at the market value on the grant date. As our stock price varies substantially, the equity awards to employees are effective as retention incentives only if they have economic value.
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Our revenues may decline if we do not maintain a competitive portfolio of products or if we fail to secure design wins.
We are experiencing significantly greater competition in the markets in which we participate. We are expanding into market segments, such as the Storage, Optical, and Mobile market segments, which have established incumbents with substantial financial and technological resources. We expect more intense competition than that which we have traditionally faced as some of these incumbents derive a majority of their earnings from these markets.
We typically face competition at the design stage, where customers evaluate alternative design approaches requiring integrated circuits. We often compete in bid selection processes to achieve design wins. These selection processes can be lengthy and can require us to invest significant effort and incur significant design and development expenditures. We may not win competitive selection processes, and even if we do win such processes, we may not generate the expected level of revenue despite incurring significant design and development expenditures. Because the life cycles of our customers’ products can last several years and changing suppliers involves significant cost, time, effort and risk, our failure to win a competitive bid can result in our foregoing revenue from a given customer’s product line for the life of that product.
The markets for our products are intensely competitive and subject to rapid technological advancement in design tools, wafer manufacturing techniques, process tools and alternate networking technologies. We may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner. Our customers may substitute use of our products in their next generation equipment with those of current or future competitors, reducing our future revenues. With the shortening product life and design-in cycles in many of our customers’ products, our competitors may have more opportunities to supplant our products in next generation systems.
Our customers are increasingly price conscious, as semiconductors sourced from third party suppliers comprise a greater portion of the total materials cost in networking equipment. We continue to experience aggressive price competition from competitors that wish to enter into the market segments in which we participate. These circumstances may make some of our products less competitive, and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition.
Over the next few years, we expect additional competitors, some of which may also have greater financial and other resources, to enter these markets with new products. These companies, individually or collectively, could represent future competition for many design wins and subsequent product sales.
Design wins do not translate into near-term revenues and the timing of revenues from newly designed products is often uncertain.
From time to time, we announce new products and design wins for existing and new products. While some industry analysts may use design wins as a metric for future revenues, many design wins have not, and will not, generate any revenues for us, as customer projects are cancelled or unsuccessful in their end market. In the event a design win generates revenues, the amount of revenues will vary greatly from one design win to another. In addition, most revenue-generating design wins do not translate into near-term revenues. Most revenue-generating design wins take more than two years to generate meaningful revenues.
Product quality problems could result in reduced revenues and claims against us.
We produce highly complex products that incorporate leading-edge technology. Despite our testing efforts and those of our subcontractors, defects may be found in existing or new products. Because our product warranties against materials and workmanship defects and non-conformance to our specifications are for varying lengths of time we may incur significant warranty, support and repair or replacement costs. The resolution of any defects could also divert the attention of our engineering personnel from other product development efforts. If the costs for customer or warranty claims increase significantly compared with our historical experience, our revenue, gross margins and net income may be adversely affected.
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Since many of the products we develop do not reach full production sales volumes for a number of years, we may incorrectly anticipate market demand and develop products that achieve little or no market acceptance.
Our products generally take between 12 and 24 months from initial conceptualization to development of a viable prototype, and another three to 18 months to be designed into our customers’ equipment and sold in production quantities. We sell products whose characteristics include evolving industry standards, short product life spans and new manufacturing and design technologies. As a result, we develop products many years before volume production and may inaccurately anticipate our customers’ needs. From initial product design-in to volume production, many factors, such as unacceptable manufacturing yields on prototypes or our customers’ redefinition of their products, can affect the timing and/or delivery of our products. Our products may become obsolete during these delays, resulting in our inability to recoup our initial investments in product development.
We may be unsuccessful in transitioning the design of our new products to new manufacturing processes.
Many of our new products are designed to take advantage of new manufacturing processes offering smaller device geometries as they become available, since smaller geometries can provide a product with improved features such as lower power requirements, increased performance, more functionality and lower cost. We believe that the transition of our products to, and introduction of new products using, smaller device geometries is critical for us to remain competitive. We could experience difficulties in migrating to future smaller device geometries or manufacturing processes, which would result in the delay of the production of our products. Our products may become obsolete during these delays, or allow competitors’ parts to be chosen by customers during the design process.
The final determination of our income tax liability may be materially different from our income tax provision.
We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, if our effective tax rate should change as a result of changes in federal, international or state and local tax laws, or if we were to change the locations where we operate, there could be a material effect on our income tax provision and results of operations in the period or periods in which that determination is made, and potentially to future periods as well.
The ultimate resolution of outstanding tax matters could be for amounts in excess of our reserves established. Such events could have a material adverse effect on our liquidity or cash flows in the quarter in which an adjustment is recorded or the tax payment is due.
If foreign exchange rates fluctuate significantly, our profitability may decline.
We are exposed to foreign currency rate fluctuations because a significant part of our development, test, and selling and administrative costs are incurred in foreign currencies. The U.S. dollar has fluctuated significantly compared to other foreign currencies and this trend may continue. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we enter into foreign currency forward contracts. The contracts reduce, but do not eliminate, the impact of foreign currency exchange rate movements. In addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our contracts do not extend beyond a 12-month maturity.
We regularly limit our exposure to foreign exchange rate fluctuations from our foreign net asset or liability positions. We recorded a net $1.5 million foreign exchange loss on the revaluation of our income tax liability in the 2012 because of the fluctuations in the U.S. dollar against certain foreign currencies. A five percent shift in the foreign exchange rates between the U.S. and Canadian dollar would cause an approximately $3.3 million impact to our pre-tax net income.
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We are exposed to the credit risk of some of our customers.
Many of our customers employ contract manufacturers to produce their products and manage their inventories. Many of these contract manufacturers represent greater credit risk than our OEM customers, who do not guarantee our credit receivables related to their contract manufacturers.
In addition, a significant portion of our sales flow through our distribution channel. This generally represents a higher credit risk. Should these companies encounter financial difficulties, our revenues could decrease, and collection of our significant accounts receivables with these companies or other customers could be jeopardized.
Our business strategy contemplates acquisition of other products, technologies or businesses, which could adversely affect our operating performance.
Acquiring products, intellectual property, technologies and businesses from third parties is a core part of our business strategy. That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with integrating acquired businesses into our existing business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise outside our existing business, diversion of management time and resources, possible divestitures, inventory write-offs and other charges. We also may be forced to replace key personnel who may leave our company as a result of an acquisition. We cannot be certain that we will find suitable acquisition candidates or that we will be able to meet these challenges successfully. Acquisitions could also result in customer dissatisfaction, performance problems with the acquired company, investment, or technology, the assumption of contingent liabilities, or other unanticipated events or circumstances, any of which could harm our business. Consequently, we might not be successful in integrating any acquired businesses, products or technologies and may not achieve anticipated revenues and cost benefits.
An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or issue additional equity. If we are not able to obtain financing, then we may not be in a position to consummate acquisitions. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have an equal or a senior interest in our company.
From time to time, we license, or acquire, technology from third parties to incorporate into our products. Incorporating technology into our products may be more costly or more difficult than expected, or require additional management attention to achieve the desired functionality. The complexity of our products could result in unforeseen or undetected defects or bugs, which could adversely affect the market acceptance of new products and damage our reputation with current or prospective customers.
Our current product roadmap will, in part, be dependent on successful acquisition and integration of intellectual property cores developed by third parties. If we experience difficulties in obtaining or integrating intellectual property from these third parties, it could delay or prevent the development of our products in the future.
Although our customers, our suppliers and we rigorously test our products, our highly complex products may contain defects or bugs. We have in the past experienced, and may in the future experience, defects and bugs in our products. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to buy our products. This could materially and adversely affect our ability to retain existing customers or attract new customers. In addition, these defects or bugs could interrupt or delay sales to our customers.
We may have to invest significant capital and other resources to alleviate problems with our products. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. Moreover, we would likely lose or experience a delay in, market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers.
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Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry or are unable to continue operations. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.
Our business may be adversely affected if our customers or suppliers cannot obtain sufficient supplies of other components needed in their product offerings to meet their production projections and target quantities.
Some of our products are used by customers in conjunction with a number of other components, such as transceivers, microcontrollers and digital signal processors. If, for any reason, our customers experience a shortage of any component, their ability to produce the forecasted quantity of their product offerings may be affected adversely and our product sales would decline until the shortage is remedied.
Moreover, if any of our suppliers experience capacity constraints or component shortages, encounters financial difficulties, or experiences any other major disruption of its operations, we may need to qualify an alternate supplier, which may take an extended period of time and could result in delays in product shipments. These delays could cause our customers to seek alternate semiconductor companies to provide them with products previously purchased from us. Such a situation could harm our operating results, cash flow and financial condition.
We rely on limited sources of wafer fabrication, the loss of which could delay and limit our product shipments.
We do not own or operate a wafer fabrication facility. In the 2012, three outside wafer foundries supplied more than 95% of our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves, thus we may not have access to adequate capacity or certain process technologies. We also have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, we may have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough or at an acceptable cost, to satisfy our production requirements.
Some companies that supply our customers are similarly dependent on a limited number of suppliers to produce their products. These other companies’ products may be designed into the same networking equipment into which our products are designed. Our order levels could be reduced materially if these companies are unable to access sufficient production capacity to produce in volumes demanded by our customers because our customers may be forced to slow down or halt production on the equipment into which our products are designed.
We depend on third parties for the assembly and testing of our semiconductor products, which could delay and limit our product shipments.
We depend on third parties in Asia for the assembly and testing of our semiconductor products. In addition, subcontractors in Asia assemble all of our semiconductor products into a variety of packages. Raw material shortages, political, economic and social instability, assembly and testing house service disruptions, currency fluctuations, or other circumstances in the region could force us to seek additional or alternative sources of supply, assembly or testing. This could lead to supply constraints or product delivery delays that, in turn, may result in the loss of revenues. At times, capacity in the assembly industry has become scarce and lead times have lengthened. This capacity shortage may become more severe, which could in turn adversely affect our revenues. We have less control over delivery schedules, assembly processes, testing processes, quality assurances, raw material supplies and costs than competitors that do not outsource these tasks.
Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our components. Any problems that we may encounter with the delivery, quality or cost of our products could damage our customer relationships and materially and adversely affect our results of operations. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products. However, even if we use these new subcontractors, we will continue to be subject to all of the risks described above.
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If we are unable to maintain effective internal controls, our stock price could be adversely affected.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (the Act). Our controls necessary for continued compliance with the Act may not operate effectively at all times and may result in a material weakness disclosure. The identification of material weaknesses in internal control, if any, could indicate a lack of proper controls to generate accurate financial statements and could cause investors to lose confidence and our stock price to drop.
Our business is vulnerable to interruption by earthquake, flooding, fire, power loss, telecommunications failure, terrorist activity and other events beyond our control.
We do not have sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business. We are vulnerable to a major earthquake and other calamities. We have operations in seismically active regions in California, Japan and British Columbia, Canada, and we rely on third-party suppliers, including wafer fabrication and testing facilities, in seismically active regions in Asia, which have recently experienced natural disasters. To the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in periods in which we and our contract manufacturers are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected if such matters occur and are not remediated within the same quarter.
We are unable to predict the effects of any such events, but the effects could be seriously harmful to our business.
Hostilities in the Middle East and India may have a significant impact on our Israeli and Indian subsidiaries’ ability to conduct their business.
We have operations, which are primarily research and development facilities, located in Israel and India which employ approximately 220 and 100 people, respectively. A catastrophic event, such as a terrorist attack or the outbreak of hostilities that results in the destruction or disruption of any of our critical business or information technology systems in Israel or India could harm our ability to conduct normal business operations and therefore negatively impact our operating results.
On an on-going basis, some of our Israeli employees are periodically called into active military duty. In the event of severe hostilities breaking out, a significant number of our Israeli employees may be called into active military duty, resulting in delays in various aspects of production, including product development schedules.
From time to time, we become defendants in legal proceedings about which we are unable to assess our exposure and which could become significant liabilities upon judgment.
We become defendants in legal proceedings from time to time. Companies in our industry have been subject to claims related to patent infringement and product liability, as well as contract and personal claims. We may not be able to accurately assess the risk related to these suits and we may be unable to accurately assess our level of exposure. An infringement or product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend and could divert the efforts of our technical and management personnel. These proceedings may result in material charges to our operating results in the future if our exposure is material and if our ability to assess our exposure becomes clearer.
If we cannot protect our proprietary technology, we may not be able to prevent competitors from copying or misappropriating our technology and selling similar products, which would harm our business.
To compete effectively, we must protect our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We hold numerous patents and have a number of pending patent applications. However, our portfolio of patents evolves as new patents are issued and older patents expire and the expiration of patents could have a negative effect on our ability to prevent competitors from duplicating certain of our products.
We might not succeed in obtaining patents from any of our pending applications. Even if we are awarded patents, they may not provide any meaningful protection or commercial advantage to us, as they may not be of sufficient scope or strength, or may not be issued in all countries where our products can be sold. In addition, our competitors may be able to design around our patents.
To protect our product technology, documentation and other proprietary information, we enter into confidentiality agreements with our employees, customers, consultants and strategic partners. We require our employees to acknowledge their obligation to maintain confidentiality with respect to PMC’s products. Despite these efforts, we cannot guarantee that these parties will maintain the
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confidentiality of our proprietary information in the course of future employment or working with other business partners. We develop, manufacture and sell our products in Asia and other countries that may not protect our intellectual property rights to the same extent as the laws of the United States. This makes piracy of our technology and products more likely. Steps we take to protect our proprietary information may not be adequate to prevent theft of our technology. We may not be able to prevent our competitors from independently developing technologies that are similar to or better than ours.
Our products employ technology that may infringe on the intellectual property and the proprietary rights of third parties, which may expose us to litigation and prevent us from selling our products.
Vigorous protection and pursuit of intellectual property rights or positions characterize the semiconductor industry. This often results in expensive and lengthy litigation. We, and our customers or suppliers, may be accused of infringing patents or other intellectual property rights owned by third parties in the future. An adverse result in any litigation against us or a customer or supplier could force us to pay substantial damages, stop manufacturing, using and selling the infringing products, spend significant resources to develop non-infringing technology, discontinue using certain processes or obtain licenses to the infringing technology. In addition, we may not be able to develop non-infringing technology or find appropriate licenses on reasonable terms or at all. Although some of our suppliers have agreed to indemnify us against certain intellectual property infringement claims or other losses relating to their products, these contractual indemnification rights may not cover the full extent of losses we incur as a result of these suppliers’ products.
Patent disputes in the semiconductor industry are often settled through cross-licensing arrangements. Our portfolio of patents may not have the breadth to enable us to settle an alleged patent infringement claim through a cross-licensing arrangement. We may therefore be more exposed to third party claims than some of our larger competitors and customers.
The majority of our customers are required to obtain licenses from and pay royalties to third parties for the sale of systems incorporating our semiconductor devices. Customers may also make claims against us in connection with infringement claims made against them that relate to our products or components included in our products, even where we obtain the components from a supplier. For example, we have been notified by two customers of patent infringement claims by BIAX Corporation, allegedly involving components that we obtain from a supplier and use in our products. While we have not incurred any losses from these claims to date or been made a party to the related litigation, we are currently reviewing these claims and our indemnification obligations and rights as well as supporting our customers’ efforts to defend these claims against them. We are incurring costs associated with this work and responding to BIAX Corporation’s subpoena. Further, there can be no assurance that we will not incur future losses in connection with such claims or, if we incur any losses, that we will be fully indemnified against such losses by the supplier.
Furthermore, we may initiate claims or litigation against third parties for infringing our proprietary rights or to establish the validity of our proprietary rights. This could consume significant resources and divert the efforts of our technical and management personnel, regardless of the litigation’s outcome.
We may be subject to intellectual property theft or misuse, which could result in third-party claims and harm our business and results of operations.
We regularly face attempts by others to gain unauthorized access through the Internet to our information technology systems, such as when such parties masquerade as authorized users or surreptitiously introduce software. We might become a target of computer hackers who create viruses to sabotage or otherwise attack our products and services. Hackers might attempt to penetrate our network security and gain access to our network and our data centers, misappropriate our or our customers’ proprietary information, including personally identifiable information, or cause interruptions of our internal systems and services. We seek to detect and investigate these security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our products; the value of our investment in R&D, product development, and marketing could be reduced; and third parties might assert against us or our customers claims related to resulting losses of confidential or proprietary information or end-user data, or system reliability. Our business could be subject to significant disruption, and we could suffer monetary and other losses, including the cost of product recalls and returns and reputational harm, in the event of such incidents and claims.
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Securities we issue to fund our operations could dilute your ownership.
We may decide to raise additional funds through public or private debt or equity financing. If we raise funds by issuing equity securities, the percentage ownership of current stockholders will be reduced and the new equity securities may have priority rights to your investment. We may not obtain sufficient financing on terms that are favorable to you or us. We may delay, limit or eliminate some or all of our proposed operations if adequate funds are not available.
Our stock price has been and may continue to be volatile.
We expect that the price of our common stock will continue to fluctuate significantly, as it has in the past. In particular, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis.
Securities class action litigation has often been instituted against a company following periods of volatility and decline in the market price of their securities. If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of our management’s attention and resources and have a material adverse effect on our business, financial condition and operating results. In addition, we could incur substantial punitive and other damages relating to such litigation.
Provisions in Delaware law and our charter documents may delay or prevent another entity from acquiring us without the consent of our Board of Directors.
Our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.
Although we believe these provisions of our charter documents and Delaware law will provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some stockholders.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
| ITEM 2. | PROPERTIES. |
During 2012, we leased properties in 36 locations worldwide. During the year, we increased our total leased area from approximately 472,000 square feet to approximately 549,000 square feet. Approximately 5% of the space we leased was excess at December 31, 2012 and 26% of the excess space had been subleased.
We lease approximately 62,000 square feet in Sunnyvale, California, to house our U.S. design, engineering, sales and marketing operations.
Our Canadian operations are primarily located in Burnaby, British Columbia where we lease approximately 149,000 square feet of office space. This location supports a significant portion of our product development, manufacturing, marketing, sales and testing activities.
In addition to the two major sites in Sunnyvale and Burnaby, during 2012 we also operated fifteen additional research and development centers: three in Canada, six in the U.S., one in Bangalore, India, two in Israel, two in Germany, and one in Shanghai, China.
At the end of 2012, we also had 19 sales/operations offices located in Europe, Asia, and North America.
| ITEM 3. | LEGAL PROCEEDINGS. |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Stock Price Information
Our Common Stock trades on the NASDAQ Global Select Market under the symbol PMCS. The following table sets forth, for the periods indicated, the high and low closing sale prices for our Common Stock as reported by the NASDAQ Global Select Market:
| Fiscal 2012 |
High | Low | ||||||
| First Quarter |
$ | 7.29 | $ | 5.49 | ||||
| Second Quarter |
7.69 | 5.98 | ||||||
| Third Quarter |
6.37 | 5.32 | ||||||
| Fourth Quarter |
5.64 | 4.69 | ||||||
| Fiscal 2011 |
High | Low | ||||||
| First Quarter |
$ | 9.16 | $ | 7.36 | ||||
| Second Quarter |
8.09 | 6.98 | ||||||
| Third Quarter |
7.79 | 5.38 | ||||||
| Fourth Quarter |
6.83 | 4.98 | ||||||
To maintain consistency, the information provided above is based on the last day of the calendar quarter rather than the last day of the fiscal quarter.
Stockholders
As of February 22, 2013, there were 723 holders of record of our Common Stock.
Dividends
We have never paid cash dividends on our Common Stock. We currently intend to retain earnings, if any, for use in our business or to fund acquisitions and do not anticipate paying any cash dividends in the foreseeable future.
Stock Performance Graph
The following graph shows a comparison of cumulative total stockholder returns for PMC, the line-of-business index for semiconductors and related devices (SIC code 3674) furnished by Research Data Group, Inc., and the S&P 500 Index. In addition, we have included the Russell 3000 Index, a broad equity market index in which we are included. We have determined that the companies included in the Russell 3000 Index more closely match our company characteristics than the companies included in the S&P 500 Index, as the Russell 3000 Index includes companies in the semiconductor industry and related industries with similar size and median market capitalization. The graph assumes the investment of $100 on December 31, 2006. The performance shown is not necessarily indicative of future performance.
21
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SOURCE: RESEARCH DATA GROUP, INC
22
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Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Programs
On November 10, 2011, the Board of Directors of the Company authorized a share repurchase plan for fiscal year 2012. Under the authorization, the Company could repurchase up to $40,000,000 of shares of the Company’s common stock in 2012.
On March 13, 2012, the Board of Directors of the Company announced the authorization of another share repurchase program for up to $275 million of its common stock. In connection with this program, on May 2, 2012, the Company entered into an Accelerated Share Buyback agreement (“ASB agreement”) with Goldman, Sachs & Co. to repurchase an aggregate of $160 million of PMC common stock, which was completed on October 5, 2012 with the final delivery of shares.
The following table represents a month-to-month summary of the stock purchase activity pursuant to these share repurchase program in the fourth quarter of fiscal year 2012:
| Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
|||||||||||||
| October 1, 2012 to October 27, 2012 (1) |
6,336,766 | $ | 5.81 | 6,336,766 | $ | — | ||||||||||
| October 28, 2012 to November 24, 2012 |
— | $ | — | — | $ | — | ||||||||||
| November 26, 2012 to December 29, 2012 |
— | $ | — | — | $ | — | ||||||||||
|
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|
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| 6,336,766 | $ | 5.81 | 6,336,766 | |||||||||||||
|
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|
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| (1) | Includes 4,600,778 shares of Common Stock repurchased pursuant to the Accelerated Share Buyback agreement. See “Stock Repurchase Program” within Item 8. Financial Statements and Supplementary Data the Notes to the Consolidated Financial Statements, Note 13. Stockholders’ Equity. |
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ITEM 6.
The following tables set forth data from our consolidated financial statements for each of the last five fiscal years.
| Year Ended (in thousands, except for per share data) |
||||||||||||||||||||
| December 29, | December 31, | December 26, | December 27, | December 28, | ||||||||||||||||
| 2012(1) | 2011(2) | 2010(3) | 2009(4) | 2008(5) | ||||||||||||||||
| (As Restated)* | (As Restated)* | (As Restated)* | (As Restated)* | (As Restated)* | ||||||||||||||||
| STATEMENT OF OPERATIONS DATA: |
||||||||||||||||||||
| Net revenues |
$ | 530,997 | $ | 654,304 | $ | 635,082 | $ | 496,139 | $ | 525,075 | ||||||||||
| Cost of revenues |
157,918 | 211,630 | 204,518 | 165,231 | 181,642 | |||||||||||||||
| Gross profit |
373,079 | 442,674 | 430,564 | 330,908 | 343,433 | |||||||||||||||
| Research and development |
220,927 | 227,106 | 187,467 | 149,184 | 157,642 | |||||||||||||||
| Selling, general and administrative |
112,479 | 118,601 | 104,117 | 84,942 | 93,532 | |||||||||||||||
| Amortization of purchased intangible assets |
45,321 | 44,182 | 29,932 | 39,344 | 39,344 | |||||||||||||||
| Impairment of goodwill and purchased intangible assets |
274,637 | — | — | — | — | |||||||||||||||
| Restructuring costs and other charges |
— | — | 403 | 888 | 824 | |||||||||||||||
|
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|
|
|
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|
|
|||||||||||
| (Loss) income from operations |
(280,285 | ) | 52,785 | 108,645 | 56,550 | 52,091 | ||||||||||||||
| Revaluation of liability for contingent consideration |
— | 29,376 | — | — | — | |||||||||||||||
| Asset impairment |
— | — | — | — | (4,300 | ) | ||||||||||||||
| Loss on investment securities |
— | — | — | — | (11,790 | ) | ||||||||||||||
| Gain (loss) on investment securities and other |
1,523 | 845 | 3,978 | (367 | ) | 400 | ||||||||||||||
| Amortization of debt issue costs and gain on extinguishment of debt |
(167 | ) | (200 | ) | (200 | ) | (200 | ) | 14,568 | |||||||||||
| Foreign exchange (loss) gain |
(1,512 | ) | 344 | (2,360 | ) | (2,371 | ) | 8,068 | ||||||||||||
| Interest expense, net |
(1,586 | ) | (2,267 | ) | (1,248 | ) | (2,511 | ) | (757 | ) | ||||||||||
| Gain on investment in Wintegra, Inc. |
— | — | 4,509 | — | — | |||||||||||||||
| (Provision for) recovery of income taxes |
(45,991 | ) | (9,897 | ) | (37,064 | ) | (9,089 | ) | 69,165 | |||||||||||
|
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| Net (loss) income |
$ | (328,018 | ) | $ | 70,986 | $ | 76,260 | $ | 42,012 | $ | 127,445 | |||||||||
|
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| Net (loss) income per share—basic |
$ | (1.51 | ) | $ | 0.30 | $ | 0.33 | $ | 0.19 | $ | 0.57 | |||||||||
| Net (loss) income per share—diluted |
$ | (1.51 | ) | $ | 0.30 | $ | 0.32 | $ | 0.18 | $ | 0.57 | |||||||||
| Shares used in per share calculation—basic |
216,593 | 233,210 | 231,427 | 226,225 | 221,659 | |||||||||||||||
| Shares used in per share calculation—diluted |
216,593 | 235,184 | 234,787 | 229,567 | 223,687 | |||||||||||||||
| As at | ||||||||||||||||||||
| December 29, | December 31, | December 26, | December 27, | December 28, | ||||||||||||||||
| 2012(1) | 2011(2) | 2010(3) | 2009(4) | 2008(5) | ||||||||||||||||
| (As Restated)* | (As Restated)* | (As Restated)* | (As Restated)* | (As Restated)* | ||||||||||||||||
| (in thousands) |
||||||||||||||||||||
| BALANCE SHEET DATA: |
||||||||||||||||||||
| Working capital |
$ | 175,946 | $ | 213,780 | $ | 107,955 | $ | 229,547 | $ | 284,316 | ||||||||||
| Cash and cash equivalents |
169,970 | 182,571 | 203,089 | 192,841 | 97,839 | |||||||||||||||
| Short-term investments |
11,431 | 104,391 | 98,758 | 67,928 | 209,685 | |||||||||||||||
| Long-term investment securities |
91,778 | 226,619 | 281,678 | 192,636 | — | |||||||||||||||
| Total assets |
894,773 | 1,415,411 | 1,546,317 | 1,146,807 | 969,965 | |||||||||||||||
| Short-term loan |
— | — | 180,991 | — | — | |||||||||||||||
| Convertible notes |
— | 65,122 | 61,605 | 58,356 | 55,357 | |||||||||||||||
| Long-term obligations |
17,233 | 1,284 | 8,940 | 6,211 | 503 | |||||||||||||||
| Stockholders’ equity |
635,928 | 1,106,467 | 1,028,705 | 901,341 | 778,447 | |||||||||||||||
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There were no cash dividends issued during the years ended December 29, 2012, December 31, 2011, December 26, 2010, December 27, 2009, and December 28, 2008.
| * | See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 19. Error Corrections. |
| (1) | Results for the year ended December 29, 2012 include $0.9 million stock-based compensation expense, $0.1 million asset impairment, and $0.1 million termination costs included in Cost of revenues; $11.6 million stock-based compensation, $2.2 million acquisition-related costs, $2.7 million termination costs, and $1 million asset impairment included in Research and development expenses; $13.9 million stock-based compensation, $2.4 million lease exit costs, $1.6 million acquisition-related costs, $1.1 million termination costs, and $0.3 million asset impairment included in Selling, general and administrative expense; $1.5 million foreign exchange loss on foreign tax liabilities included in Foreign exchange (loss) gain; $3.2 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $46 million provision for income taxes, including $47.2 million income tax provision related to an intercompany dividend net of $11.1 million related to the U.S. Federal and State tax credits required to be recognized in advance of their utilization, $20.5 million income tax provision relating to intercompany transactions, $19.4 million deferred tax recovery on stock option related loss carry-forwards recognized in equity, $4.9 million unrecognized tax benefits, $4 million deferred tax recovery related to non-deductible intangible asset amortization and impairment, $0.5 million income tax recovery for adjustments relating to prior periods, $1.3 million recovery of income taxes relating to income from operating results, $0.9 million net tax recovery relating to foreign exchange translation of a foreign subsidiary, and $0.5 million income tax recovery related to tax deductible items above. |
| (2) | Results for the year ended December 31, 2011 include $0.9 million stock-based compensation expense and $9.1 million acquisition-related costs included in Cost of revenues; $11.6 million stock-based compensation, $3 million asset impairment, and $0.2 million acquisition-related costs included in Research and development expenses; $14.5 million stock-based compensation, $3.5 million acquisition-related costs, and $2.8 million lease exit costs included in Selling, general and administrative expense; $0.5 million recovery of impairment on investment securities and other, included in Gain (loss) on investment securities and other; $0.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange (loss) gain; $3.5 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes, $1.2 million accretion of liability for contingent consideration and $0.3 million interest expense related to short-term loan included in Interest expense, net; and $9.9 million provision for income taxes, including $9.8 million deferred income tax recovery for adjustments relating to prior periods, $12.8 million income tax provision relating to inter-company transactions, $3.2 million income tax provision relating to income from operating results, $1 million income tax recovery related to foreign tax credits, $6.6 million of stock option related loss carry-forwards recognized in equity, $0.5 million net tax recovery related to foreign exchange translation of a foreign subsidiary, $1.5 million net provision relating to unrecognized tax benefits, $0.2 million income tax recovery related to stock-based compensation, and $2.7 million deferred tax recovery related to non-deductible intangible asset amortization. |
| (3) | Results for the year ended December 26, 2010 include $0.8 million stock-based compensation expense and $1 million acquisition-related costs included in Cost of revenues; $9 million stock-based compensation and $4.9 million asset impairment included in Research and development expenses; $12.1 million stock-based compensation and $6.9 million acquisition related costs included in Selling, general and administrative expense; $3.8 million recovery of impairment on investment securities included in Gain (loss) on investment securities and other; $1.8 million foreign exchange loss on foreign tax liabilities included in Foreign exchange (loss) gain; $3.2 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes, and $1.1 million interest expense related to short-term loan included in Interest expense, net; and $37.1 million net income tax provision, including $19.9 million sheltered by the benefit of stock option related loss carry-forwards recognized in equity, $7.8 million income tax provision relating to income from operating results, $14.2 million provision for income taxes relating to inter-company transactions, $5.5 million income tax provision for adjustments relating to prior periods, $4.1 million net tax recovery relating to foreign exchange translation of a foreign subsidiary, $5.3 million net recovery relating to unrecognized tax benefits, $0.6 million deferred tax recovery related to non-deductible intangible asset amortization, and $0.3 million tax recovery related to stock-based compensation. |
| (4) | Results for the year ended December 27, 2009 include $0.8 million stock-based compensation expense included in Cost of revenues; $8.7 million stock-based compensation expense and $1 million termination costs included in Research and development expenses; $12 million stock-based compensation expense and $0.6 million termination costs included in Selling, general and administrative expenses; $0.5 million loss on subleased facilities included in Gain (loss) on investment securities and other; $2.7 million foreign exchange loss on foreign tax liabilities included in Foreign exchange (loss) gain; $3 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $9.1 million provision for income tax which includes $32.7 million income tax provision on stock option related loss carry-forwards recognized in equity, $23.8 million tax recovery relating to inter-company transactions, $6.5 million net tax recovery relating to foreign exchange translation of a foreign subsidiary, $4.8 million income tax provision relating to income from operating results, $1.5 million tax provision based on completed filings and assessments received from tax authorities, $2.5 million relating to unrecognized tax benefits and $2.1 million deferred tax recovery related to non-deductible intangible asset amortization. |
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| (5) | Results for the year ended December 28, 2008 include $1.1 million stock-based compensation expense included in Cost of revenues; $11.2 million stock-based compensation expense included in Research and development expenses; $12.5 million stock based compensation expense included in Selling, general and administrative expenses; $11.8 million loss on investments, $4.3 million asset impairment, and $0.4 million recovery on investments included in Gain (loss) on investment securities and other; $8.2 million foreign exchange gain on foreign tax liabilities included in Foreign exchange (loss) gain; $5.6 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $69.2 million net income tax recovery including $98 million net adjustment to the accrual for unrecognized tax benefits, $22.1 million income tax provision relating to income from operating results, $8.2 million tax expense relating to foreign exchange translation of a foreign subsidiary, $3 million tax recovery based on completed tax filings and assessments, $3.1 million arrears interest relating to unrecognized tax benefits, $2.3 million tax provision relating to the tax effect on an intercompany dividend, $1.4 million deferred tax recovery related to the asset impairment related to the termination of a supplier contract, $2 million deferred tax recovery related to non-deductible intangible asset amortization, $0.8 million income tax provision on stock option related carry-forwards recognized in equity, and $1.3 million deferred tax recovery related to the impairment of investment securities. |
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Quarterly Comparisons
| Quarterly Data | ||||||||||||||||||||||||||||||||
| (in thousands except for per share data) | ||||||||||||||||||||||||||||||||
| Year Ended December 29, 2012 | Year Ended December 31, 2011 | |||||||||||||||||||||||||||||||
| Fourth(1) | Third(2) | Second(3) | First(4) | Fourth(5) | Third(6) | Second(7) | First(8) | |||||||||||||||||||||||||
| (As Restated) |
(As Restated) |
(As Restated) |
(As Restated) |
(As Restated) |
(As Restated) |
(As Restated) |
(As Restated) |
|||||||||||||||||||||||||
| STATEMENT OF OPERATIONS DATA: |
||||||||||||||||||||||||||||||||
| Net revenues |
$ | 129,418 | $ | 131,723 | $ | 137,762 | $ | 132,094 | $ | 152,553 | $ | 173,299 | $ | 171,018 | $ | 157,434 | ||||||||||||||||
| Cost of revenues |
36,663 | 38,990 | 41,253 | 41,012 | 47,166 | 52,640 | 52,663 | 59,161 | ||||||||||||||||||||||||
| Gross profit |
92,755 | 92,733 | 96,509 | 91,082 | 105,387 | 120,659 | 118,355 | 98,273 | ||||||||||||||||||||||||
| Research and development |
49,553 | 55,604 | 56,699 | 59,071 | 56,517 | 59,669 | 56,421 | 54,499 | ||||||||||||||||||||||||
| Selling, general and administrative |
26,432 | 27,786 | 29,290 | 28,971 | 27,045 | 29,981 | 29,366 | 32,209 | ||||||||||||||||||||||||
| Amortization of purchased intangible assets |
10,784 | 11,624 | 11,626 | 11,287 | 11,099 | 11,031 | 11,031 | 11,021 | ||||||||||||||||||||||||
| Impairment of goodwill and purchased intangible assets |
— | 274,637 | — | — | — | — | — | — | ||||||||||||||||||||||||
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| Income (loss) from operations |
5,986 | (276,918 | ) | (1,106 | ) | (8,247 | ) | 10,726 | 19,978 | 21,537 | 544 | |||||||||||||||||||||
| Revaluation of liability for contingent consideration |
— | — | — | — | — | 29,376 | — | — | ||||||||||||||||||||||||
| Gain on investment securities and other |
777 | 180 | 527 | 39 | 286 | 222 | 167 | 170 | ||||||||||||||||||||||||
| Amortization of debt issue costs |
(17 | ) | (50 | ) | (50 | ) | (50 | ) | (50 | ) | (50 | ) | (50 | ) | (50 | ) | ||||||||||||||||
| Foreign exchange gain (loss) |
439 | (2,454 | ) | 1,608 | (1,105 | ) | (1,194 | ) | 3,635 | (623 | ) | (1,474 | ) | |||||||||||||||||||
| Interest expense, net |
(47 | ) | (797 | ) | (563 | ) | (179 | ) | (295 | ) | (477 | ) | (571 | ) | (924 | ) | ||||||||||||||||
| Recovery of (provision for) income taxes |
3,799 | 5,515 | (65 | ) | (55,240 | ) | 13,656 | (10,539 | ) | (2,867 | ) | (10,147 | ) | |||||||||||||||||||
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| Net income (loss) |
$ | 10,937 | $ | (274,524 | ) | $ | 351 | $ | (64,782 | ) | $ | 23,129 | $ | 42,145 | $ | 17,593 | $ | (11,881 | ) | |||||||||||||
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| Net income (loss) per share—basic |
$ | 0.05 | $ | (1.31 | ) | $ | 0.00 | $ | (0.28 | ) | $ | 0.10 | $ | 0.18 | $ | 0.07 | $ | (0.05 | ) | |||||||||||||
| Net income (loss) per share—diluted |
$ | 0.05 | $ | (1.31 | ) | $ | 0.00 | $ | (0.28 | ) | $ | 0.10 | $ | 0.18 | $ | 0.07 | $ | (0.05 | ) | |||||||||||||
| Shares used in per share calculation—basic |
202,400 | 209,512 | 222,316 | 232,142 | 231,199 | 232,590 | 234,993 | 234,058 | ||||||||||||||||||||||||
| Shares used in per share calculation—diluted |
202,900 | 209,512 | 222,316 | 232,142 | 232,028 | 233,647 | 237,506 | 234,058 | ||||||||||||||||||||||||
| (1) | Results include $0.2 million stock-based compensation expense, and $0.1 million termination costs included in Cost of revenues; $2.9 million stock-based compensation expense, $0.5 million asset impairment, $0.3 million termination costs, and $0.3 million acquisition-related costs included in Research and development expense; $3.2 million stock-based compensation expense, $0.2 million termination costs, $0.1 million lease exit recoveries included in Selling, general and administrative; $0.9 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $0.4 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $3.8 million recovery of income taxes, including $4 million income tax recovery related to an intercompany dividend, $2.9 million income tax provision for adjustments relating to prior periods, $0.7 million recovery relating to unrecognized tax benefits, $0.8 million deferred tax recovery related to non-deductible intangible asset amortization and impairment, $0.4 million income tax recovery relating to foreign exchange translation of a foreign subsidiary, $0.2 million income tax recovery related to tax deductible items above, and $0.1 million recovery of income taxes relating to income from operating results. |
| (2) | Results include $0.2 million stock-based compensation expense and $0.1 million asset impairment included in Cost of revenues; $2.9 million stock-based compensation expense, $0.8 million acquisition-related costs, $0.7 million termination costs, and $0.5 million asset impairment included in Research and development expense; $3 million stock-based compensation, $1.8 million lease exit costs, $0.7 million termination costs, $0.3 million asset impairment, and $0.3 million acquisition-related costs included in Selling, general and administrative; $2.1 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $1 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $5.6 million recovery of income taxes, including, $1.8 million income tax recovery related to an intercompany dividend, $2.8 million income tax recovery for adjustments relating to prior periods, $1.1 million income tax provision relating to intercompany transactions, $1.5 million deferred tax recovery related to non-deductible intangible asset amortization and impairment, $0.8 million relating to unrecognized tax benefits, $0.5 million income tax recovery relating to foreign exchange translation of a foreign subsidiary, and $0.8 million recovery of income taxes relating to income from operating results. |
27
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| (3) | Results include $0.3 million stock-based compensation expense included in Cost of revenues; $2.9 million stock-based compensation, $0.5 million acquisition-related costs, and $0.2 million termination costs included in Research and development expense; $4.2 million stock-based compensation, $0.5 million acquisition-related costs, $0.3 million lease exit costs, and $0.1 million termination costs included in Selling, general and administrative; $1.1 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $0.9 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $0.07 million income tax provision, including $28.5 million benefit of certain U.S. Federal and State tax credits required to be recognized in advance of their utilization, $2.6 million unrecognized tax benefits, $27.9 million income tax provision relating to intercompany transactions, $0.9 million income tax recovery for adjustments relating to prior periods, $0.8 million deferred tax recovery related to non-deductible intangible asset amortization, $0.2 million reduction of stock option related loss carry-forwards recognized in equity, $0.3 million income tax provision relating to foreign exchange translation of a foreign subsidiary, and $0.4 million recovery of income taxes relating to income from operating results. |
| (4) | Results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.8 million stock-based compensation, $1.5 million termination costs, and $0.6 million acquisition-related costs included in Research and development expense; $3.5 million stock-based compensation expense, $0.8 million acquisition-related costs, $0.4 million lease exit costs, and $0.1 million termination costs included in Selling, general and administrative; $1.3 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $0.9 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $55.2 million provision for income taxes, including $85.4 million income tax provision related to an intercompany dividend, $8.5 million recovery of income taxes relating to intercompany transactions, $2.2 million unrecognized tax benefits, $0.8 million deferred tax recovery related to non-deductible intangible asset amortization, $0.2 million net tax recovery relating to foreign exchange translation of a foreign subsidiary, $22.7 million reduction of stock option related loss carry-forwards recognized in equity, and $0.2 million income tax recovery for adjustments relating to prior periods. |
| (5) | Results include $0.2 million stock-based compensation expense included in Cost of revenues; $3 million stock-based compensation and $0.2 million recoveries of acquisition-related costs included in Research and development expense; $3.5 million stock-based compensation expense, $0.8 million acquisition-related costs, and $0.6 million recovery of lease exit costs included in Selling, general and administrative; $0.5 million recovery of impairment on investment securities included in Gain on investment securities and other; $1.4 million foreign loss on foreign tax liabilities included in Foreign exchange gain (loss); $0.9 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; $13.7 million recovery of income taxes, including $10.2 million income tax recovery for adjustment relating to prior periods, $4 million reduction of stock option related loss carry-forwards recognized in equity, $2.7 million recovery of unrecognized tax benefits, $1 million income tax recovery related to foreign tax credits, $0.6 million net tax recovery relating to foreign exchange translation of a foreign subsidiary, $7.3 million provision for income taxes relating to intercompany transactions, and $2.5 million deferred tax recovery related to non-deductible intangible asset amortization. |
| (6) | Results include $0.2 million stock-based compensation expense included in Cost of revenues; $3 million stock-based compensation, $3 million asset impairment, and $0.1 million acquisition-related costs included in Research and development expense; $3.7 million stock-based compensation expense, and $0.5 million acquisition-related costs included in Selling, general and administrative; $3.2 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $0.9 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes, and $0.4 million accretion of liability for contingent consideration included in Interest expense, net; and $10.5 million provision for income taxes, including $2.7 million income tax provision relating to inter-company transactions, $0.9 million income tax provision relating to income from operating results; $0.8 million net tax expense relating to foreign exchange translation of a foreign subsidiary, $5.1 million stock option related loss carry-forwards recognized in equity, $1.3 million relating to unrecognized tax benefits, $0.2 million income tax recovery for adjustments relating to prior periods, and $0.1 million income tax recovery related to stock-based compensation. |
| (7) | Results include $0.3 million stock-based compensation expense included in Cost of revenues; $2.9 million stock-based compensation expense, and $0.1 million acquisition-related costs included in Research and development expense; $3.9 million stock-based compensation, and $1.1 million acquisition-related costs included in Selling and administrative expense; $0.3 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $0.9 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes, and $0.3 million accretion of liability for contingent consideration included in Interest (expense) income, net; and $2.9 million provision for income taxes including $0.4 million recovery of income taxes relating to inter-company transactions, $1.2 million net tax expense relating to foreign exchange translation of a foreign subsidiary, $1 million income tax provision relating to income from operating results, $0.5 million reduction of tax from stock option related loss carry-forwards recognized in equity, $1.4 million unrecognized tax benefits, $0.5 million income tax provision for adjustments relating to prior periods, and $0.3 million income tax recovery related to stock-based compensation. |
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| (8) | Results include $0.2 million stock-based compensation expense, and $9.1 million acquisition-related costs included in Cost of revenues; $2.7 million stock-based compensation expense, and $0.2 million acquisition-related costs included in Research and development expense; $3.4 million stock-based compensation expense, $1.2 million acquisition-related costs, and $3.4 million lease exit costs included in Selling, general and administrative expenses; $1 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $0.9 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes, $0.5 million accretion of liability for contingent consideration, and $0.3 million interest related to short-term loan, included in Interest expense, net; and $10.1 million provision for income taxes including $6 million tax provision from stock option related loss carry-forwards recognized in equity, $3 million income tax provision relating to inter-company transactions, $1.9 million net tax recovery relating to foreign exchange translation of a foreign subsidiary, $1.4 million income tax provision relating to income from operating results, and $1.6 million unrecognized tax benefits. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report.
OVERVIEW
PMC-Sierra is a semiconductor innovator transforming networks that connect, move and store digital content. We generate revenues from the sale of semiconductor solutions that we have designed and developed or acquired. Almost all of our revenues in any given year come from the sale of semiconductors that are developed prior to that year. For example, 99% of our revenues in 2012 came from products developed or acquired in 2011 and earlier. After an individual product is released for production and announced it may take several years before that product generates any significant revenues.
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, Optical and Mobile networks.
| 1. | Our Storage products enable high-speed communication servers, switches and storage devices to store, manage and move large quantities of data securely; |
| 2. | Our Optical 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 products are used in wireless base stations, mobile backhaul, and aggregation equipment. |
We invest a substantial amount every year for the research and development of new semiconductor solutions. We determine the amount to invest in each semiconductor development 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 technologies, products and businesses 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 meet our customers’ needs while maintaining our operational efficiencies.
We expect our microprocessor solutions to continue to ship into the laser printer market as well as the enterprise networking market.
Changes to Previously Reported Fiscal 2012, 2011, and 2010 Annual Results
The fiscal 2012, 2011, and 2010 consolidated financial information has been updated within this Management’s Discussion and Analysis of Financial Condition and Results of Operations to reflect the effects of the restatement as more fully described in Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 19. Error Corrections within this Annual Report. The table below details the restatements of specific line items in the 2012 Consolidated Balance Sheet and Statement of Operations as at and for the year ended December 29, 2012 compared to amounts previously reported in our first quarter 2013 Form 10-Q, filed on May 8, 2013:
| As of | ||||||||||||||||||||||||
| December 29, 2012 | December 31, 2011 | |||||||||||||||||||||||
| As Previously | As Previously | As Previously | As Previously | |||||||||||||||||||||
| (in thousands) |
As Restated | Reported in 10-Q* |
Reported in 10-K** |
As Restated | Reported in 10-Q* |
Reported in 10-K** |
||||||||||||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS |
||||||||||||||||||||||||
| Non-current assets: |
||||||||||||||||||||||||
| Prepaid tax expenses |
$ | 19,152 | $ | 11,851 | $ | 25,077 | $ | 34,318 | $ | 18,293 | $ | 27,898 | ||||||||||||
| Goodwill |
252,419 | 252,419 | 252,419 | 519,454 | 520,899 | 520,899 | ||||||||||||||||||
| Non-current liabilities |
||||||||||||||||||||||||
| Deferred tax and other long-term tax liabilities |
$ | 41,936 | $ | 44,849 | $ | 44,849 | $ | 38,943 | $ | 40,663 | $ | 40,663 | ||||||||||||
| Liability for unrecognized tax benefits—non-current |
$ | 34,957 | $ | 29,236 | $ | 38,915 | $ | 33,020 | $ | 26,929 | $ | 38,460 | ||||||||||||
| Equity: |
||||||||||||||||||||||||
| Common stock and additional paid in capital |
$ | 1,553,137 | $ | 1,527,710 | $ | 1,527,084 | $ | 1,623,236 | $ | 1,587,587 | $ | 1,577,792 | ||||||||||||
| Accumulated deficit |
$ | (917,825 | ) | $ | (896,891 | ) | $ | (892,718 | ) | $ | (515,623 | ) | $ | (490,183 | ) | $ | (482,314 | ) | ||||||
| Year ended | ||||||||||||||||||||||||||||||||||||
| December 29, 2012 | December 31, 2011 | December 26, 2010 | ||||||||||||||||||||||||||||||||||
| As Previously |
As Previously |
As Previously |
As Previously |
As Previously |
As Previously |
|||||||||||||||||||||||||||||||
| (in thousands, except for per share |
As Restated | Reported in 10-Q* |
Reported in 10-K** |
As Restated | Reported in 10-Q* |
Reported in 10-K** |
As Restated | Reported in 10-Q* |
Reported in 10-K** |
|||||||||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
||||||||||||||||||||||||||||||||||||
| Impairment of goodwill and purchased intangible assets |
$ | 274,637 | $ | 276,082 | $ | 276,082 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Provision for income taxes |
$ | (45,991 | ) | $ | (49,052 | ) | $ | (52,748 | ) | $ | (9,897 | ) | $ | 183 | $ | (720 | ) | $ | (37,064 | ) | $ | (33,507 | ) | $ | (23,940 | ) | ||||||||||
| Net (loss) income |
$ | (328,018 | ) | $ | (332,524 | ) | $ | (336,220 | ) | $ | 70,986 | $ | 81,066 | $ | 80,163 | $ | 76,260 | $ | 79,817 | $ | 89,384 | |||||||||||||||
| Net (loss) income per common share—basic |
$ | (1.51 | ) | $ | (1.54 | ) | $ | (1.55 | ) | $ | 0.30 | $ | 0.35 | $ | 0.34 | $ | 0.33 | $ | 0.34 | $ | 0.39 | |||||||||||||||
| Net (loss) income per common share—diluted |
$ | (1.51 | ) | $ | (1.54 | ) | $ | (1.55 | ) | $ | 0.30 | $ | 0.34 | $ | 0.34 | $ | 0.32 | $ | 0.34 | $ | 0.38 | |||||||||||||||
| * | As previously reported in our March 30, 2013 Form 10-Q |
| ** | As previously reported in our December 29, 2012 Form 10-K |
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RESULTS OF OPERATIONS
NET REVENUES
| (in millions) |
2012 | Change | 2011 | Change | 2010 | |||||||||||||||
| Net revenues |
$ | 531.0 | (19 | )% | $ | 654.3 | 3 | % | $ | 635.1 | ||||||||||
Overall net revenues for 2012 decreased by $123.3 million, or 19% compared to net revenues for 2011. This 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 67% of our net revenues in 2012, compared to 60% in 2011. Storage net revenues decreased by 10% year-over-year mainly due to the macro-economic uncertainty noted above.
Optical represented 19% of our net revenues in 2012, compared to 25% in 2011. Optical net revenues decreased by 37% year-over-year mainly due to the overall macro-economic uncertainty noted above, lower carrier spending and delayed investment by carriers in packet-based technologies to address growth in video and mobile data. This led to a substantial drop in legacy volumes from SONET and ATM but no corresponding increase in new OTN technology revenue.
Mobile represented 14% of our net revenues in 2012, compared to 15% in 2011. Mobile net revenues decreased by 25% year-over-year due mainly to the factors above.
Overall net revenues for 2011 increased by $19.2 million, or 3% compared to net revenues for 2010. On a year-over-year basis, net revenues generated from our product offerings in Storage, Optical and Mobile increased (decreased) by 11%, (23%), and 34%, respectively.
Storage represented 60% of our net revenues in 2011 compared to 55% of our net revenues in 2010. Storage net revenues increased by 11% in 2011 compared to 2010. This increase was primarily due to higher volumes of our SAS devices shipped with the continued production ramp of our 6G SAS products and as customers continue to migrate from 3G to 6G platforms. Also, in 2011, we had a full year of revenues from our Channel Storage business that we purchased from Adaptec, Inc. (“Adaptec”) mid-year in 2010. These increases were partially offset by declines in volumes of our Fibre Channel and laser printer products in 2011, compared to 2010.
Optical represented 25% of our net revenues in 2011 compared to 33% of our net revenues in 2010. Optical net revenues decreased by 23% in 2011 compared to 2010. This was reflective of end market weakness during 2011 in the areas of metro and access. We also experienced a reduction of sales volumes from legacy SONET, ATM and microprocessor products compared to 2010. This decrease was partially offset by growth in OTN sales volumes.
Mobile represented 15% of our net revenues in 2011 compared to 12% of our net revenues in 2010. Mobile net revenues increased by 34% in 2011 compared to 2010. This increase was mainly due to our acquisition of Wintegra, Inc. (“Wintegra”) in November 2010 and was partially offset by a decline in volumes of our legacy wireless products.
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GROSS PROFIT
| (in millions) |
2012 | Change | 2011 | Change | 2010 | |||||||||||||||
| Gross profit |
$ | 373.1 | (16 | )% | $ | 442.7 | 3 | % | $ | 430.6 | ||||||||||
| Percentage of net revenues |
70 | % | 68 | % | 68 | % | ||||||||||||||
Gross profit for 2012 decreased by $69.6 million over 2011. Gross profit as a percentage of net revenues increased 2% to 70% in 2012 from 68% in 2011. 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% in 2011 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 2012 through cost saving initiatives.
Gross profit for 2011 increased by $12.1 million over 2010. Gross profit as a percentage of net revenues was 68% in 2011 and 2010. As noted above, without the fair value adjustment related to the acquisition in Wintegra, the gross profit as a percentage of net revenues would have been 69% in 2011. The underlying increase is gross profit is primarily due to product mix.
OTHER COSTS AND EXPENSES
| ($ millions) |
2012 | Change | 2011 | Change | 2010 | |||||||||||||||
| Research and development |
$ | 220.9 | (3 | )% | $ | 227.1 | 21 | % | $ | 187.5 | ||||||||||
| Percentage of net revenues |
42 | % | 35 | % | 30 | % | ||||||||||||||
| Selling, general and administrative |
$ | 112.5 | (5 | )% | $ | 118.6 | 14 | % | $ | 104.1 | ||||||||||
| Percentage of net revenues |
21 | % | 18 | % | 16 | % | ||||||||||||||
| Amortization of purchased intangible assets |
$ | 45.3 | 2 | % | $ | 44.2 | 48 | % | $ | 29.9 | ||||||||||
| Percentage of net revenues |
9 | % | 7 | % | 5 | % | ||||||||||||||
| Impairment of goodwill and purchased intangible assets |
$ | 274.6 | 100 | % | $ | — | — | % | $ | — | ||||||||||
| Percentage of net revenues |
52 | % | — | % | — | % | ||||||||||||||
| Restructuring costs and other charges |
$ | — | — | % | $ | — | (100 | )% | $ | 0.4 | ||||||||||
| Percentage of net revenues |
— | % | — | % | — | % | ||||||||||||||
Research and Development Expenses
Our Research and Development (“R&D”) expenses were $220.9 million in 2012. This was $6.2 million, or 3%, lower compared to 2011. This was primarily the result of lower outside services costs due to the timing of projects and continued expense control, partially offset by higher payroll-related costs associated with planned hiring (although bonuses were lower) and some increased acquisition related costs.
Our R&D expenses were $227.1 million in 2011. This was $39.6 million, or 21%, higher compared to 2010. Payroll costs increased by $27.5 million due primarily to the completion of planned hiring and other payroll related costs from our acquisitions of the Channel Storage business and Wintegra in 2010. Office and facilities related costs also increased by $3.7 million as a result of our acquisitions of the Channel Storage business and Wintegra in 2010. Also, there was an increase of $8.4 million in R&D expense due to higher tape-out and other project-related costs.
Selling, General and Administrative Expenses
Our selling, general and administrative (“SG&A”) expenses were $112.5 million in 2012. This was $6.1 million, or 5%, lower compared to 2011, mainly due to lower payroll-related costs, including lower commissions due to lower net revenues, and lower acquisition-related costs.
Our SG&A expenses increased by $14.5 million in 2011, or 14%, compared to 2010. The increase is primarily due to payroll-related costs, including from our acquisitions of the Channel Storage business and Wintegra in 2010. In addition, we recognized lease exit costs of $2.8 million in 2011.
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Amortization of Purchased Intangible Assets
Amortization expense for acquired intangible assets increased by $1.1 million, or 2%, in 2012 compared to 2011. This was attributable to commencing amortization of core technology assets acquired in minor business combinations at the end of 2011 and in 2012.
Amortization expense for acquired intangible increased by $14.3 million, or 48%, in 2011 compared to 2010. This increase was the result of increased amortization related to the intangible assets identified in the purchase price allocation for our acquisitions of the Channel Storage business from Adaptec, and Wintegra, in the amount of $1.1 million and $20 million, respectively. This increase was partially offset by a $6.8 million decrease resulting from intangibles related to the acquisition of Passave, Inc. becoming fully amortized early in the second quarter of 2010.
Impairment of goodwill and purchased intangible assets
During 2012, we recognized $274.6 million in impairment of goodwill and purchased intangible assets related to the 2006 acquisition of Passave and 2010 acquisition of Wintegra. See within Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 18. Impairment of Goodwill and Long-Lived Assets.
Restructuring Costs and Other Charges
We incurred restructuring costs and other charges in 2010 of $0.4 million. All past restructuring plans were complete as at December 31, 2011. There were no restructuring costs and other charges in 2011 and 2012.
For details on restructuring plans, please see within Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 6. Supplemental Financial Information.
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OTHER INCOME AND EXPENSES
| ($ millions) |
2012 | Change | 2011 | Change | 2010 | |||||||||||||||
| Revaluation of liability for contingent consideration |
$ | — | (100 | )% | $ | 29.4 | 100 | % | $ | — | ||||||||||
| Gain on investment securities and other |
$ | 1.5 | 88 | % | $ | 0.8 | (80 | )% | $ | 4.0 | ||||||||||
| Amortization of debt issue costs |
$ | (0.2 | ) | — | % | $ | (0.2 | ) | — | % | $ | (0.2 | ) | |||||||
| Foreign exchange (loss) gain |
$ | (1.5 | ) | (600 | )% | $ | 0.3 | (113 | )% | $ | (2.4 | ) | ||||||||
| Interest expense, net |
$ | (1.6 | ) | (30 | )% | $ | (2.3 | ) | 92 | % | $ | (1.2 | ) | |||||||
| Gain on investment in Wintegra, Inc. |
$ | — | — | % | $ | — | (100 | )% | $ | 4.5 | ||||||||||
| (Provision for) recovery of income taxes |
$ | (46.0 | ) | 365 | % | $ | (9.9 | ) | (73 | )% | $ | (37.1 | ) | |||||||
Revaluation of liability for contingent consideration
During 2011, we recognized a revaluation of liability for contingent consideration related to our acquisition of Wintegra. We recognized a fair value adjustment relating to the liability based on the updated assessment during the third quarter of 2011 of Wintegra’s 2011 revenues, which were below earn-out levels due to delayed platform deployment from key suppliers in China and Europe. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 2. Business Combinations. There is no other liability for contingent consideration.
Gain on investment securities and other
We recorded a gain on sale of investment securities of $1.5 million, $0.8 million, $4 million, related to the disposition of investment securities in 2012, 2011 and 2010, respectively. We also recognized recoveries of prior impairments of our investments in the Reserve Funds of $0.5 million and $3.8 million in each of 2011 and 2010, based on distributions received from the Reserve Funds. See Critical Accounting Policies and Estimates—Investments in Cash Equivalents, Short-Term Investments and Long-Term Investment Securities.
Amortization of debt issue costs
We recorded amortization of debt issue costs of $0.2 million in each of 2012, 2011 and 2010, relating to our senior convertible notes.
Foreign exchange (loss) 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.
We recognized a net foreign exchange loss of $1.5 million in 2012, a net foreign exchange gain of $0.3 million in 2011 and a net foreign exchange loss of $2.4 million in 2010. This was primarily due to foreign exchange gain and loss on the revaluation of our net foreign denominated assets and liabilities. This was partly driven by the United States Dollar depreciating by approximately 1% during 2012 compared to depreciating by approximately 1% during 2011, and depreciating by approximately 4% during 2010, against currencies applicable to our foreign operations.
Interest expense, net
Net interest expense for 2012, 2011, and 2010, was $1.6 million, $2.3 million, and $1.2 million, respectively.
In 2012, the decrease in net interest expense of $0.7 million, compared to 2011 was primarily due to less interest expense as a result of retiring our senior convertible notes in October 2012, and no accretion of the liability for contingent consideration in 2012 compared to 2011, partially offset by lower investment yields on lower cash balances in 2012.
In 2011, the increase in net interest expense of $1.1 million, compared to 2010, was due to lower investment yields and lower cash balances. In addition, we recognized $1.2 million of interest expense related to the accretion of the liability for contingent consideration in 2011, which was offset by the decline of $0.8 million interest on our short-term loan related to our acquisition of Wintegra in 2011 compared to 2010.
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Gain on investment in Wintegra, Inc.
On November 18, 2010 we acquired Wintegra. Prior to the acquisition date, we owned 2.6% of the outstanding shares in Wintegra. Upon acquiring the remaining equity interests of Wintegra, we recorded a gain on the step-acquisition on this pre-existing investment of $4.5 million.
Provision for income taxes
See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 15. Income Taxes.
BUSINESS OUTLOOK
We expect our revenues for the first quarter of 2013 to be approximately $123 million to $132 million. A number of factors such as volatile macroeconomic conditions could impact the achievement of our revenue outlook.
We anticipate our first quarter 2013 gross margin percentage to be in the range of 71%-72%, minus approximately 0.2% related to stock-based compensation expense. As in past quarters this could vary depending on the volumes of products sold, since many of our costs are fixed. Margins will also vary depending on the mix of products sold.
We expect our first quarter 2013 operating expenses to be approximately $75 million to $77 million plus stock-based compensation expense of approximately $6 million to $7 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 $0.3 million in the first quarter of 2013.
The GAAP provision for income taxes is not available on a forward looking basis without unreasonable effort.
LIQUIDITY AND 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, manage our capital structure, and finance working capital. The combination of cash, cash equivalents, short-term investments and long-term investment securities at December 29, 2012, December 31, 2011 and December 26, 2010 totaled $273.2 million, $513.6 million and $583.5 million, respectively.
During 2012, we used $200 million to repurchase 33.7 million shares of our common stock under programs authorized by our Board of Directors. We repurchased 26.8 million shares under an Accelerated Stock Buyback agreement for $160 million. We also repurchased 6.9 million shares throughout the year for $40 million under the Employee Equity Stock Buyback Plan.
In October 2012, we repurchased the remaining outstanding Senior Convertible Notes (Notes) at 100% of the outstanding principal amount, or $68.3 million.
In November 2010, we obtained a short-term loan to facilitate the acquisition of Wintegra, the balance of which was $181.0 million as of December 26, 2010. We fully repaid this loan in January 2011.
In the future, we expect our cash on hand and cash generated from operations, together with our short-term investments and long-term investment securities, to be our primary sources of liquidity.
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The composition of our cash, cash equivalents and short-term investments and long-term investment securities, as classified in our Consolidated Balance Sheet at December 29, 2012 and at December 31, 2011 were as follows:
| December 29, 2012 | ||||||||||||||||
| (in thousands) |
Amortized Cost |
Gross Unrealized Gains* |
Gross Unrealized Losses* |
Fair Value | ||||||||||||
| Cash and cash equivalents: |
||||||||||||||||
| Cash |
$ | 119,442 | $ | — | $ | — | $ | 119,442 | ||||||||
| Money market funds |
50,528 | — | — | 50,528 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total cash and cash equivalents |
169,970 | — | — | 169,970 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Short-term investments: |
||||||||||||||||
| Corporate bonds and notes |
9,163 | 522 | — | 9,685 | ||||||||||||
| US States and Municipal securities |
1,720 | 26 | — | 1,746 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total short-term investments |
10,883 | 548 | — | 11,431 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Long-term investment securities: |
||||||||||||||||
| Corporate bonds and notes |
53,567 | 329 | (16 | ) | 53,880 | |||||||||||
| US Treasury and Government Agency notes |
33,830 | 25 | (1 | ) | 33,854 | |||||||||||
| Foreign Government and Agency notes |
4,018 | 26 | — | 4,044 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total long-term investment securities |
91,415 | 380 | (17 | ) | 91,778 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 272,268 | $ | 928 | $ | (17 | ) | $ | 273,179 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Gross unrealized gains include accrued interest on investments of $0.9 million. The remainder of the gross unrealized gains and losses are included in the Consolidated Balance Sheet as Accumulated other comprehensive income (loss). |
| December 31, 2011 | ||||||||||||||||
| (in thousands) |
Amortized Cost |
Gross Unrealized Gains* |
Gross Unrealized Losses* |
Fair Value | ||||||||||||
| Cash and cash equivalents: |
||||||||||||||||
| Cash |
$ | 127,983 | $ | — | $ | — | $ | 127,983 | ||||||||
| Money market funds |
54,588 | — | — | 54,588 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total cash and cash equivalents |
182,571 | — | — | 182,571 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Short-term investments: |
||||||||||||||||
| Corporate bonds and notes |
85,127 | 2,449 | (34 | ) | 87,542 | |||||||||||
| US Treasury and Government Agency notes |
10,009 | 203 | — | 10,212 | ||||||||||||
| Foreign Government and Agency notes |
6,540 | 97 | — | 6,637 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total short-term investments |
101,676 | 2,749 | (34 | ) | 104,391 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Long-term investment securities: |
||||||||||||||||
| Corporate bonds and notes |
166,741 | 688 | (449 | ) | 166,980 | |||||||||||
| US Treasury and Government Agency notes |
52,054 | 123 | (39 | ) | 52,138 | |||||||||||
| Foreign Government and Agency notes |
5,713 | 39 | — | 5,752 | ||||||||||||
| US States and Municipal securities |
1,720 | 29 | — | 1,749 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total long-term investment securities |
226,228 | 879 | (488 | ) | 226,619 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 510,475 | $ | 3,628 | $ | (522 | ) | $ | 513,581 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Gross unrealized gains include accrued interest on investments of $2.4 million. The remainder of the gross unrealized gains and losses are included in the Consolidated Balance Sheet as Accumulated other comprehensive income (loss). |
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The investments in the Reserve Funds, classified as cash and cash equivalents on the Consolidated Balance Sheet were recorded at a value of $nil at December 31, 2011 and relate to shares of the International Fund and the Primary Fund. In 2011, we received $22.6 million from the International Fund and its liquidation was completed. The Primary Fund continues to be in the process of liquidation. We continued to hold shares of the Reserve Primary Fund with an original cost of $0.6 million. Based on information available in 2012, we determined that it would be unlikely to receive any further distributions from the Fund and wrote off the remaining shares of the Primary Fund against existing provisions.
OPERATING ACTIVITIES
Cash generated from operations was $78.8 million in fiscal 2012 (2011—$154 million), less a $20 million payment of withholding taxes related to an intercompany dividend paid to fund our stock buyback programs. Our net loss for the year was $328 million. The primary non-cash adjustments to net loss to arrive at operating cash flow include: $274.6 million impairment of goodwill and purchased intangible assets, $64.5 million in depreciation and amortization, $60.9 million of taxes related to an intercompany dividend, $26.3 million of stock-based compensation, and recognized $14.2 million from excess tax benefits from stock option transactions which have been classified as a cash inflow in financing activities. In addition, partially offsetting these were $32.5 million in working capital changes, driven mainly by:
| 1. | $28.3 million reduction in accounts payables and accrued liabilities, including $20 million for withholding taxes noted above; |
| 2. | $16.4 million reduction in inventory levels at the end of 2012, compared to the same time in 2011. We proactively managed our inventory level in light of the macroeconomic challenges throughout 2012, and were able to increase our inventory turns from 5.7 in 2011 to 6.2 in 2012; |
| 3. | A $12.4 million reduction in deferred income taxes and income taxes payable; and |
| 4. | A $7.9 million reduction in our deferred income balance; The reduction is reflective of our continuing proactive management of our inventory levels in all areas of the channel, including at our distributors, and mirrors our own inventory levels needed to support current market demand. |
INVESTING ACTIVITIES
Cash generated by investing activities was significantly higher in 2012 compared to 2011. In 2012, we redeemed short-term investments and disposed of investment securities to fund our stock buyback programs and redemption of our Senior Convertible notes, whereas we were not undertaking similar programs in 2011. We also used cash $31.2 million to acquire property and equipment (2011 – $12.7 million, 2010—$11.3 million). This increase over the prior two years is primarily due to the implementation of a new ERP system during the year.
Cash used for purchases of intangible assets during the year was in line with 2011 and 2010.
In 2012 and 2011, we spent $15.9 million and $1.7 million, respectively, on acquisitions of businesses. In 2010, we used $200 million to acquire Wintegra and $34.3 million to acquire the Channel Storage Business from Adaptec.
FINANCING ACTIVITIES
During 2012, we used $200 million to repurchase 33.7 million shares of our common stock. In 2011 we used $40 million of cash to repurchase 6.1 million shares of our common stock. We did not have a share buyback program in 2010. During 2012, we redeemed our senior convertible notes at their face values of $68.3 million. We also received $16 million from issuances of common stock, which was similar to 2011 levels and slightly down from $18.6 million in 2010, and recognized $14.2 million from excess tax benefits from stock option transactions.
In connection with the acquisition of Wintegra, we borrowed $220 million in 2010, $40 million of which was repaid in 2010. The remainder was repaid in January 2011.
CONTRACTUAL OBLIGATIONS:
At December 29, 2012, we had the following contractual obligations:
| 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 |
$ | 44,922 | $ | 9,574 | $ | 15,749 | $ | 10,049 | $ | 9,550 | ||||||||||
| Estimated Operating Cost Payments |
18,311 | 3,870 | 6,413 | 4,721 | 3,307 | |||||||||||||||
| Purchase and Other Obligations (1) |
21,618 | 10,122 | 11,496 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 84,851 | $ | 23,566 | $ | 33,658 | $ | 14,770 | $ | 12,857 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
37
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| (1) | Included in the purchase commitments above is $21.6 million in design software tools, which will be paid between 2013 and 2014. This amount includes $17.2 million classified as long-term obligations in our Consolidated Balance Sheet for the year ended December 29, 2012. We have not included open purchase orders for inventory or other expenses issued in the normal course of business in the purchase obligations shown above. We estimate these other commitments to be approximately $25.5 million at December 29, 2012 for inventory and other expenses that will be received in the coming 90 days and that will require settlement 30 days thereafter. |
We expect to spend approximately $17.5 million in 2013 for capital expenditures including purchases of intellectual property. Based on our current operating prospects, we believe that existing sources of liquidity will be sufficient to satisfy our projected operating, working capital, capital expenditure, purchase obligations and debt obligations through the next twelve months.
In addition to the amounts shown in the table above, we have recorded a $86.8 million liability for unrecognized tax benefits as of December 29, 2012, and we are uncertain as to if or when such amounts may be realized.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 29, 2012, we had no material off-balance sheet financing arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
We changed our presentation of other comprehensive income due to the adoption of Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) Topic 220, Presentation of Comprehensive Income, and we adopted FASB, ASB Topic 350, Testing Goodwill for Impairment, which provides a qualitative assessment option for the goodwill impairment test. We did not elect to do the qualitative assessment; therefore the adoption of this standard did not change the way we conduct our goodwill impairment tests. The adoption of these accounting standards did not have a material impact on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our 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 the amounts we report as assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are reasonable in the circumstances. These estimates could change under different assumptions or conditions.
Our significant accounting policies are outlined in the notes to the consolidated financial statements. In management’s opinion the following critical accounting policies require the most significant judgment and involve complex estimation. We also have other policies that we consider to be key accounting policies, such as our policies of revenue recognition, including the deferral of revenues on sales to major distributors; however these policies do not meet the definition of critical accounting estimates as they do not generally require us to make estimates or judgments that are difficult or subjective.
Valuation of Goodwill and Intangible Assets
Purchase price allocations for business acquisitions often require significant judgments, particularly with regards to the determination of value for identifiable assets, liabilities and goodwill. Often third party specialists are used to assist in areas of valuation requiring complex estimation.
We assess long-lived assets for possible impairment in the fourth quarter, or when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we may consider when determining when to conduct an impairment test include: (i) any declines in our forecasted operating results; (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock; (iii) a further significant slowdown in the worldwide economy or the semiconductor industry; or (iv) any failure to meet the performance projections included in our forecasts of future operating results.
We perform a two-step process on an annual basis, or more frequently if necessary, to determine 1) whether the fair value of the relevant reporting unit exceeds the carrying value and 2) the amount of an impairment loss, if any.
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To determine whether impairment exists for long-lived intangible assets, other than goodwill, we first compare the undiscounted cash flows of the assets to their carrying value. If the asset’s carrying value exceeds its estimated undiscounted cash flows, we would write the asset to its estimated fair value based on expected discounted cash flows.
Significant management judgment is required in the forecasts of future operating results and discount rates used in the discounted cash flow method of valuation. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.
During the third quarter of 2012, we recognized $274.6 million in impairment of goodwill and purchased intangible assets related to the 2006 acquisition of Passave, Inc. and the 2010 acquisition of Wintegra. All of the goodwill of Passave was written down by $146.3 million due to weaker quarterly results and future projections than previously expected, driven by slower adoption rates of FTTH technology in markets outside of Asia. All of the goodwill and a portion of the other intangible assets of Wintegra were determined to be impaired by $121.3 million and $7 million, respectively, as a result of the continuing weak carrier spending, more so than previously expected. This impairment charge was included in the Consolidated statement of operations as Impairment of goodwill and purchased intangible assets.
Changes in the estimated fair values of intangible assets in the future could result in significant impairment charges or changes to our expected amortization.
The aggregation of operating segments into one reportable segment requires the management to evaluate whether there are similar expected long-term economic characteristics for each operating segment, and is an area of significant judgment. If the expected long-term economic characteristics were to become dissimilar, then we could be required to re-evaluate the number of reportable segments.
Stock-Based Compensation
Since January 1, 2006, we have recognized compensation expense for all share-based payment awards. Under ASC Topic 718, Compensation—Stock Compensation, we measure the fair value of awards of equity instruments and recognize the cost, net of an estimated forfeiture rate, on a straight-line basis over the period during which services are provided in exchange for the award, generally the vesting period.
Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected volatility of our stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on a weighted historical and market-based implied volatility. In order to determine the expected life of the awards, we use historical data to estimate option exercises and employee terminations; separate groups of employees that have similar historical exercise behavior, such as directors or executives, are considered separately for valuation purposes. The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data and is updated annually.
The assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change and we use different assumptions, our stock-based compensation expense could change significantly in the future. In addition, if our actual forfeiture rate is different from our estimate, our stock-based compensation expense could change significantly in the future.
Income Taxes
PMC has operations in several tax jurisdictions, which subjects us to multiple tax rates that impact our overall effective tax rate. We use estimates and assumptions in allocating income to each tax jurisdiction. Certain foreign jurisdictions have granted economic incentives, which are subject to meeting certain criteria including levels of employment and investment. Accordingly, material changes in business activity that we conduct in foreign jurisdictions or failure to meet the aforementioned criteria could impact our effective tax rates.
We have recorded income tax liabilities based on our interpretation of tax regulations for the countries in which we operate. We believe that the tax return positions we have taken are fully supportable. However, our estimates are subject to review and assessment by the local tax authorities. Our tax expense and related reserve for unrecognized tax benefits reflect amounts that we believe will be adequate if challenged or subject to income tax assessment. Management uses judgment and estimates in determining tax expense for these challenges in accordance with guidance for accounting for uncertainty in income taxes. Currently, our reserve for uncertain tax positions is attributable primarily to uncertainties related to allocation of income among different jurisdictions.
The timing of any such review and final assessment of our liabilities is substantially out of our control and is dependent on the actions by those local tax authorities. Any re-assessment of our tax liabilities may result in adjustments of the income taxes we pay, with a resulting impact on our tax expense, net income and cash flows. We review our reserves quarterly, and we may adjust such reserves because of changes in facts and circumstances, changes in tax regulations, negotiations between tax authorities and associated proposed tax assessments, the resolution of audits and the expiration of statutes of limitations.
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We must also assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a reserve in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable.
Investment in Cash Equivalents, Short-Term Investments and Long-Term Investment Securities
Our cash equivalents, short-term investments and long-term investment securities are comprised of money market funds, United States Treasury and Government Agency notes, Federal Deposit Insurance Corporation (“FDIC”)-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes and corporate bonds and notes with minimum ratings of P-1 or A3 by Moody’s, or A-1 or A- by Standard and Poor’s, or equivalent at the date of purchase. At December 29, 2012, these securities had an estimated fair value of $153.7 million. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 7. Investment Securities for details.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
The following discussion regarding our risk management activities contains “forward-looking statements” that involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements.
Cash, Cash Equivalents, Short-term Investments and Long-term Investment Securities
We regularly maintain a portfolio of short and long-term investments comprised of various types of money market funds, United States Treasury and Government Agency notes, FDIC-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes and corporate bonds and notes. Our investments are made in accordance with an investment policy approved by our Board of Directors. All investments have maturities of 36 months or less. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or A3 by Moody’s, or A-1 or A- by Standard and Poor’s or equivalent at the time of purchase. We classify these securities as available-for-sale and they are carried at fair market value. Our corporate policies prevent us from holding material amounts of asset-backed commercial paper.
Investments in instruments with both fixed and floating rates carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates, or we may suffer losses in principal if we were to sell securities that have declined in market value because of changes in interest rates.
We do not attempt to reduce or eliminate our exposure to interest rate risk through the use of derivative financial instruments.
Based on a sensitivity analysis performed on the financial instruments held at December 29, 2012, the impact to the fair value of our investment portfolio by a shift in the yield curve of plus or minus 100 basis points would result in approximately a decline of $1.7 million or an increase of $0.8 million in portfolio value, respectively. The selected hypothetical change in interest rates does not reflect what could be considered the best or worst case scenarios.
Senior Convertible Notes
In October 2012, the Company retired the remaining 2.25% senior convertible notes at their face value of $68.3 million.
Because we paid fixed interest coupons on these Notes, market interest rate fluctuations did not impact our debt interest payments. However, the fair value of the senior convertible notes fluctuated as a result of changes in the price of our common stock, changes in market interest rates and changes in our credit worthiness.
Our senior convertible notes were not listed on any exchange or included in any automated quotation system but were registered for resale under the Securities Act of 1933. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 10. Senior Convertible Notes for further details.
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Table of Contents
Foreign Currency
Our sales and corresponding receivables are denominated primarily in United States dollars. We generate a significant portion of our revenues from sales to customers located outside the United States including Asia, Europe and Canada. We are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these or other factors.
Through our operations in Canada and elsewhere outside of the United States, we incur research and development, sales, customer support and administrative expenses in various foreign currencies. We are exposed, in the normal course of business, to foreign currency risks on these expenditures, primarily in Canada. In our effort to manage such risks, we have adopted a foreign currency risk management policy intended to reduce the effects of potential short-term fluctuations on our operating results stemming from our exposure to these risks. As part of this risk management, we enter into foreign exchange forward contracts. These forward contracts offset the impact of exchange rate fluctuations on forecasted cash flows or firm commitments. We limit the forward contracts operational period to 12 months or less and we do not enter into foreign exchange forward contracts for trading purposes. Because we do not engage in foreign exchange risk management techniques beyond these periods, our cost structure is subject to long-term changes in foreign exchange rates. In the event that one of the counterparties to our forward currency contracts failed to complete the terms of their contracts, we would purchase foreign currencies at the spot rate as of the date the funds were required. If the counterparties to our foreign forward currency contracts that matured in the fiscal year ended December 29, 2012 had not fulfilled their contractual obligations and we were required to purchase the foreign currencies at the spot market rate on respective settlement dates, our operating income for 2012 would have increased by $0.4 million. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 3. Derivative Instruments for further details.
As at December 29, 2012, we had 73 currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $22.5 million and the contracts had a fair value gain of $0.4 million.
We attempt to limit our exposure to foreign exchange rate fluctuations from our Canadian dollar net asset or liability positions. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates. A 5% shift in the foreign exchange rates between U.S. dollar and the Canadian dollar would impact pre-tax income by approximately $3.3 million. The selected hypothetical change in foreign exchange rates does not reflect what could be considered the best or worst case scenarios.
Other Investments
From time-to-time, our other investments include strategic investments in privately held companies that are carried on our balance sheet at cost, net of write-downs for other than temporary declines in market value. These investments are inherently risky, as they typically are comprised of investments in companies and partnerships that are still in the start-up or development stages. The market for the technologies or products that they have under development is typically in the early stages and may never materialize. We could lose our entire investment in these companies and partnerships or may incur an additional expense if we determine that the value of these assets has been impaired.
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
The chart entitled “Quarterly Data” contained in Item 6 of Part II hereof is hereby incorporated by reference into the Item 8 of Part II of this Form 10-K.
Consolidated Financial Statements Included in Item 8:
| Page | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
| 47 | ||||
| 48 | ||||
| 49 | ||||
| Reports on Internal Control Over Financial Reporting included in Item 9A: |
||||
| Management’s Annual Report on Internal Control over Financial Reporting |
79 | |||
| 81 | ||||
| Schedules for each of the years in the three year period ended December 29, 2012 included in Item 15 (a): |
||||
| 91 | ||||
Schedules not listed above have been omitted because they are not applicable or are not required, or the information required to be set forth therein is included in the financial statements or the notes thereto.
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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Stockholders of PMC-Sierra, Inc.:
We have audited the accompanying consolidated balance sheets of PMC-Sierra, Inc. and subsidiaries (the “Company”) as of December 29, 2012 and December 31, 2011, and the related consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders’ equity for each of the three years in the period ended December 29, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PMC-Sierra, Inc. and subsidiaries at December 29, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 19 to the consolidated financial statements, the 2012, 2011 and 2010 financial statements have been restated to correct for certain tax errors.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 29, 2012, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2013 (November 12, 2013 as to the effects of the material weakness described in Management’s Annual Report on Internal Control over Financial Reporting (Restated)) expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE LLP
Vancouver, Canada
February 28, 2013 (November 12, 2013 as to the effects of the restatement discussed in Note 19)
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PMC-Sierra, Inc.
(in thousands, except par value)
| December 29, 2012 (As Restated - See Note 19) |
December 31, 2011 (As Restated - See Note 19) |
|||||||
| ASSETS: |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 169,970 | $ | 182,571 | ||||
| Short-term investments |
11,431 | 104,391 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $1,614 (2011—$1,952) |
62,143 | 59,213 | ||||||
| Inventories, net |
23,548 | 39,911 | ||||||
| Prepaid expenses and other current assets |
22,125 | 23,411 | ||||||
| Income taxes receivable |
6,630 | 8,027 | ||||||
| Deferred tax assets |
43,630 | 30,725 | ||||||
|
|
|
|
|
|||||
| Total current assets |
339,477 | 448,249 | ||||||
| Investment securities |
91,778 | 226,619 | ||||||
| Investments and other assets |
20,133 | 2,431 | ||||||
| Prepaid tax expenses |
19,152 | 34,318 | ||||||
| Property and equipment, net |
43,146 | 25,364 | ||||||
| Goodwill |
252,419 | 519,454 | ||||||
| Intangible assets, net |
128,668 | 158,482 | ||||||
| Deferred tax assets |
— | 494 | ||||||
|
|
|
|
|
|||||
| $ | 894,773 | $ | 1,415,411 | |||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||
| Current liabilities: |
||||||||
| 2.25% senior convertible notes due October 15, 2025, net |
$ | — | $ | 65,122 | ||||
| Accounts payable |
27,410 | 38,340 | ||||||
| Accrued liabilities |
72,282 | 66,139 | ||||||
| Income taxes payable |
1,450 | — | ||||||
| Liability for unrecognized tax benefit |
51,810 | 46,394 | ||||||
| Deferred income taxes |
2,466 | 2,450 | ||||||
| Deferred income |
8,113 | 16,024 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
163,531 | 234,469 | ||||||
| Long-term obligations |
17,233 | 1,284 | ||||||
| Deferred income taxes |
41,936 | 38,943 | ||||||
| Liability for unrecognized tax benefit |
34,957 | 33,020 | ||||||
| PMC special shares convertible into 1,019 (2011—1,029) shares of common stock |
1,188 | 1,228 | ||||||
| Contingencies (Note 11. Commitments and Contingencies) |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock, par value $.001: 900,000 shares authorized; 200,924 shares issued and outstanding (2011—230,233) |
201 | 230 | ||||||
| Additional paid in capital |
1,552,936 | 1,623,006 | ||||||
| Accumulated other comprehensive income (loss) |
616 | (1,146 | ) | |||||
| Accumulated deficit |
(917,825 | ) | (515,623 | ) | ||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
635,928 | 1,106,467 | ||||||
|
|
|
|
|
|||||
| $ | 894,773 | $ | 1,415,411 | |||||
|
|
|
|
|
|||||
See notes to the consolidated financial statements.
44
Table of Contents
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Year Ended | ||||||||||||
| December 29, 2012 (As Restated - See Note 19) |
December 31, 2011 (As Restated - See Note 19) |
December 26, 2010 (As Restated - See Note 19) |
||||||||||
| Net revenues |
$ | 530,997 | $ | 654,304 | $ | 635,082 | ||||||
| Cost of revenues |
157,918 | 211,630 | 204,518 | |||||||||
|
|
|
|
|
|
|
|||||||
| Gross profit |
373,079 | 442,674 | 430,564 | |||||||||
| Research and development |
220,927 | 227,106 | 187,467 | |||||||||
| Selling, general and administrative |
112,479 | 118,601 | 104,117 | |||||||||
| Amortization of purchased intangible assets |
45,321 | 44,182 | 29,932 | |||||||||
| Impairment of goodwill and purchased intangible assets |
274,637 | — | — | |||||||||
| Restructuring costs and other charges |
— | — | 403 | |||||||||
|
|
|
|
|
|
|
|||||||
| (Loss) income from operations |
(280,285 | ) | 52,785 | 108,645 | ||||||||
| Other (expense) income: |
||||||||||||
| Revaluation of liability for contingent consideration |
— | 29,376 | — | |||||||||
| Gain on investment securities and other |
1,523 | 845 | 3,978 | |||||||||
| Amortization of debt issue costs |
(167 | ) | (200 | ) | (200 | ) | ||||||
| Foreign exchange (loss) gain |
(1,512 | ) | 344 | (2,360 | ) | |||||||
| Interest expense, net |
(1,586 | ) | (2,267 | ) | (1,248 | ) | ||||||
| Gain on investment in Wintegra, Inc. |
— | — | 4,509 | |||||||||
|
|
|
|
|
|
|
|||||||
| (Loss) income before (provision for) recovery of income taxes |
(282,027 | ) | 80,883 | 113,324 | ||||||||
| Provision for income taxes |
(45,991 | ) | (9,897 | ) | (37,064 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net (loss) income |
$ | (328,018 | ) | $ | 70,986 | $ | 76,260 | |||||
|
|
|
|
|
|
|
|||||||
| Net (loss) income per common share—basic |
$ | (1.51 | ) | $ | 0.3 | $ | 0.33 | |||||
| Net (loss) income per common share—diluted |
$ | (1.51 | ) | $ | 0.3 | $ | 0.32 | |||||
| Shares used in per share calculation—basic |
216,593 | 233,210 | 231,427 | |||||||||
| Shares used in per share calculation—diluted |
216,593 | 235,184 | 234,787 | |||||||||
See notes to the consolidated financial statements.
45
Table of Contents
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
| Year Ended | ||||||||||||
| December 29, 2012 (As Restated - See Note 19) |
December 31, 2011 (As Restated - See Note 19) |
December 26, 2010 (As Restated - See Note 19) |
||||||||||
| Net (loss) income |
$ | (328,018 | ) | $ | 70,986 | $ | 76,260 | |||||
| Other comprehensive income (loss): |
||||||||||||
| Change in fair value of derivatives, net of tax of $260, $619, and $138 |
2,065 | (2,688 | ) | 451 | ||||||||
| Change in fair value of investment securities, net of tax of $65, $211 and $164 |
(303 | ) | (530 | ) | 457 | |||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income (loss) |
1,762 | (3,218 | ) | 908 | ||||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive (loss) income |
$ | (326,256 | ) | $ | 67,768 | $ | 77,168 | |||||
|
|
|
|
|
|
|
|||||||
See notes to the consolidated financial statements.
46
Table of Contents
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended | ||||||||||||
| December 29, 2012 (As Restated - See Note 19) |
December 31, 2011 (As Restated - See Note 19) |
December 26, 2010 (As Restated - See Note 19) |
||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net (loss) income |
$ | (328,018 | ) | $ | 70,986 | $ | 76,260 | |||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||||||
| Depreciation and amortization |
64,535 | 72,544 | 48,147 | |||||||||
| Stock-based compensation |
26,315 | 27,055 | 21,935 | |||||||||
| Unrealized foreign exchange loss (gain), net |
1,747 | (43 | ) | 2,011 | ||||||||
| Net amortization of premiums/discounts and accrued interest of investments |
5,101 | 4,520 | 5,484 | |||||||||
| Asset impairment |
1,759 | 3,589 | — | |||||||||
| Accrued interest on short-term loan |
— | 589 | 991 | |||||||||
| Gain on investment securities and other |
(1,508 | ) | (671 | ) | (3,979 | ) | ||||||
| Gain on investment in Wintegra, Inc. |
— | — | (4,509 | ) | ||||||||
| Impairment of goodwill and purchased intangible assets |
274,637 | — | 4,882 | |||||||||
| Revaluation of liability for contingent consideration |
— | (29,376 | ) | — | ||||||||
| Taxes related to intercompany dividend |
60,940 | — | — | |||||||||
| Excess tax benefits from stock option transactions |
(14,232 | ) | (6,838 | ) | (9,848 | ) | ||||||
| Changes in operating assets and liabilities: |
||||||||||||
| Accounts receivable |
(2,929 | ) | 10,177 | (1,088 | ) | |||||||
| Inventories |
16,363 | 2,210 | (4,730 | ) | ||||||||
| Prepaid expenses and other current assets |
2,635 | 2,824 | 8,587 | |||||||||
| Accounts payable and accrued liabilities |
(28,267 | ) | (9,447 | ) | 10,551 | |||||||
| Deferred income taxes and income taxes receivables/payables |
(12,395 | ) | 9,669 | 15,942 | ||||||||
| Accrued restructuring costs |
— | (1,609 | ) | (2,396 | ) | |||||||
| Deferred income |
(7,911 | ) | (2,202 | ) | 5,239 | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
58,772 | 153,977 | 173,479 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities: |
||||||||||||
| Business acquisition |
(15,900 | ) | (1,669 | ) | (234,035 | ) | ||||||
| Purchases of property and equipment |
(31,229 | ) | (12,702 | ) | (11,340 | ) | ||||||
| Purchase of intangible assets |
(7,438 | ) | (6,116 | ) | (5,678 | ) | ||||||
| Redemption of short-term investments |
26,473 | — | 4,574 | |||||||||
| Disposals of investment securities |
315,310 | 249,789 | 222,261 | |||||||||
| Purchases of investment securities and other investments |
(120,917 | ) | (205,903 | ) | (347,585 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) investing activities |
166,299 | 23,399 | (371,803 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from financing activities: |
||||||||||||
| Repurchase of senior convertible notes |
(68,340 | ) | — | — | ||||||||
| Repurchases of common stock |
(199,999 | ) | (39,999 | ) | — | |||||||
| Proceeds from short-term loan |
— | — | 220,000 | |||||||||
| Repayment of short-term loan |
— | (180,991 | ) | (40,000 | ) | |||||||
| Proceeds from issuance of common stock |
16,000 | 16,764 | 18,595 | |||||||||
| Excess tax benefits from stock option transactions |
14,232 | 6,838 | 9,848 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash (used in) provided by financing activities |
(238,107 | ) | (197,388 | ) | 208,443 | |||||||
|
|
|
|
|
|
|
|||||||
| Effect of exchange rate changes on cash and cash equivalents |
435 | (506 | ) | 129 | ||||||||
| Net (decrease) increase in cash and cash equivalents |
(12,601 | ) | (20,518 | ) | 10,248 | |||||||
| Cash and cash equivalents, beginning of year |
182,571 | 203,089 | 192,841 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents, end of year |
$ | 169,970 | $ | 182,571 | $ | 203,089 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental disclosures of cash flow information: |
||||||||||||
| Cash paid for interest |
$ | 1,554 | $ | 1,538 | $ | 2,243 | ||||||
| Cash (refund received) paid for income taxes, net |
(2,523 | ) | 379 | 16,686 | ||||||||
| Supplemental disclosures of non-cash investing and financing activities: |
||||||||||||
| Conversion of PMC-Sierra special shares into common stock |
40 | 488 | 286 | |||||||||
See notes to the consolidated financial statements.
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Table of Contents
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Shares of Common Stock |
Common Stock |
Additional Paid in Capital (As Restated - See Note 19) |
Accumulated Other Comprehensive Income (Loss) (net of tax) (As Restated - See Note 19) |
Accumulated Deficit (As Restated - See Note 19) |
Total Stockholders’ Equity (As Restated - See Note 19) |
|||||||||||||||||||
| Balance at December 27, 2009 |
227,655 | $ | 247 | $ | 1,548,253 | $ | 1,164 | $ | (648,323 | ) | $ | 901,341 | ||||||||||||
| Net income |
— | — | — | — | 76,260 | 76,260 | ||||||||||||||||||
| Other comprehensive income: |
||||||||||||||||||||||||
| Change in fair value of derivatives, net of tax of $138 |
— | — | — | 451 | — | 451 | ||||||||||||||||||
| Change in fair value of investment securities, net of tax of $164 |
— | — | — | 457 | — | 457 | ||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Comprehensive income |
77,168 | |||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Conversion of special shares into common shares |
200 | 1 | 285 | — | — | 286 | ||||||||||||||||||
| Issuance of common stock under stock benefit plans |
4,153 | 4 | 17,763 | — | — | 17,767 | ||||||||||||||||||
| Stock-based compensation expense |
— | — | 23,018 | — | — | 23,018 | ||||||||||||||||||
| Benefit of stock option related loss carry-forwards |
— | — | 9,125 | — | — | 9,125 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at December 26, 2010 |
232,008 | 252 | 1,598,444 | 2,072 | (572,063 | ) | 1,028,705 | |||||||||||||||||
| Net income |
— | — | — | — | 70,986 | 70,986 | ||||||||||||||||||
| Other comprehensive income: |
||||||||||||||||||||||||
| Change in fair value of derivatives, net of tax of $619 |
— | — | — | (2,688 | ) | — | (2,688 | ) | ||||||||||||||||
| Change in fair value of investment securities, net of tax of $211 |
— | — | — | (530 | ) | — | (530 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Comprehensive income |
67,768 | |||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Conversion of special shares into common shares |
341 | — | 488 | — | — | 488 | ||||||||||||||||||
| Issuance of common stock under stock benefit plans |
3,968 | (16 | ) | 15,772 | — | — | 15,756 | |||||||||||||||||
| Stock-based compensation expense |
— | — | 27,055 | — | — | 27,055 | ||||||||||||||||||
| Benefit of stock option related loss carry-forwards |
— | — | 6,694 | — | — | 6,694 | ||||||||||||||||||
| Repurchases of common stock |
(6,084 | ) | (6 | ) | (25,447 | ) | — | (14,546 | ) | (39,999 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at December 31, 2011 |
230,233 | 230 | 1,623,006 | (1,146 | ) | (515,623 | ) | 1,106,467 | ||||||||||||||||
| Net loss |
— | — | — | — | (328,018 | ) | (328,018 | ) | ||||||||||||||||
| Other comprehensive income: |
||||||||||||||||||||||||
| Change in fair value of derivatives, net of tax of $260 |
— | — | — | 2,065 | — | 2,065 | ||||||||||||||||||
| Change in fair value of investment securities, net of tax of $65 |
— | — | — | (303 | ) | — | (303 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Comprehensive loss |
(326,526 | ) | ||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Issuance of common stock under stock benefit plans |
4,423 | 4 | 15,134 | — | — | 15,138 | ||||||||||||||||||
| Stock-based compensation expense |
— | — | 26,315 | — | — | 26,315 | ||||||||||||||||||
| Benefit of stock option related loss carry-forwards |
— | — | 14,263 | — | — | 14,263 | ||||||||||||||||||
| Repurchases of common stock |
(33,732 | ) | (33 | ) | (125,782 | ) | — | (74,184 | ) | (199,999 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at December 29, 2012 |
200,924 | $ | 201 | $ | 1,552,936 | $ | 616 | $ | (917,825 | ) | $ | 635,928 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
See notes to the consolidated financial statements.
48
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business. PMC-Sierra, Inc. is a semiconductor innovator transforming networks that connect, move and store digital content. Building on a track record of technology leadership, the Company is driving innovation across storage, optical and mobile networks. PMC’s highly integrated solutions increase performance and enable next generation services to accelerate the network transformation.
Basis of presentation. The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and United States Generally Accepted Accounting Principles (“GAAP”). The Company’s 2012 fiscal year consisted of 52 weeks, and fiscal years 2011, and 2010 consisted of 53 and 52 weeks, respectively. The 2012 fiscal year ended on the last Saturday in December, and the 2011 and 2010 fiscal years ended on the last Sunday in December. The Company’s reporting currency is the U.S. dollar. The accompanying consolidated financial statements include the accounts of PMC-Sierra, Inc. and any of its subsidiaries. As at December 29, 2012 and December 31, 2011, all subsidiaries included in these consolidated financial statements were wholly owned by PMC. All inter-company accounts and transactions have been eliminated.
Estimates. The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, stock-based compensation, purchase accounting assumptions including those used to calculate the fair value of intangible assets and goodwill, the valuation of investments, accounting for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, revenue recognition, sales returns, warranty costs, income taxes including uncertain tax positions, restructuring costs, assumptions used to measure the fair value of the debt component of the Company’s senior convertible notes, accounting for employee benefit plans, and contingencies (See Note 11. Commitments and Contingencies). Actual results could differ materially from these estimates.
Cash and cash equivalents, short-term investments and long-term investment securities. Cash equivalents are defined as highly liquid interest-earning instruments with maturities at the date of purchase of three months or less. Short-term investments are investments with original maturities greater than three months, but less than one year. Investments with maturities beyond one year are classified as long-term investment securities.
Management classifies investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments classified as held-to-maturity securities are stated at amortized cost with corresponding premiums or discounts amortized against interest income over the life of the investment. Marketable equity and debt securities not classified as held-to-maturity are classified as available-for-sale and reported at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on these investments, net of any related tax effect are included in equity as a separate component of stockholders’ equity. For debt securities, if an impairment is considered other than temporary, the entire difference between the amortized cost and the fair value is recognized in earnings in the period this determination is made.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount that is expected to be ultimately collected.
Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market (estimated net realizable value). Cost is computed using standard cost, which approximates actual average cost. The Company provides inventory allowances on obsolete inventories and inventories in excess of twelve-month demand for each specific part.
The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Property and equipment, net. Property and equipment is stated at cost, net of write-downs for impairment, and accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from two to five years. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the lease term.
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Table of Contents
Goodwill and Intangible assets. Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter, and when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, ranging from less than 1 year to ten years. Purchased intangible assets with indefinite lives are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired. Developed technology assets are carried at cost, less accumulated amortization, of which amortization is computed over the estimated useful lives of 3 years.
Impairment of long-lived assets. Long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
See Note 18. Impairment of Goodwill and Long-Lived Assets for discussion of the 2012 asset impairment relating to goodwill and purchased intangible assets.
During 2012, the Company recognized other asset impairments totaling $1.8 million related to certain design tools, property and equipment, and intellectual property that were no longer expected to be utilized. During 2011, the Company recognized an asset impairment of $3.6 million related to certain purchased intellectual property that was no longer expected to be leveraged due to adjustments in research and development project initiatives. During 2010, the Company recognized an asset impairment of $4.9 million based on a determination made in the period that certain intangible assets were made redundant by assets acquired with our purchase of the Channel Storage business from Adaptec. Accordingly, the carrying values were written down to zero. These impairment charges were included in the Consolidated Statements of Operations in Research and development expense in the respective periods.
Foreign currency translation. For all foreign operations, the U.S. dollar is used as the functional currency. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars using the exchange rate as of the balance sheet date. Revenues and expenses are translated at average rates of exchange during the year. Gains and losses from foreign currency transactions are reported separately as Foreign exchange gain (loss) under Other income (expense) on the Consolidated Statements of Operations.
Derivatives and Hedging Activities. Fluctuating foreign exchange rates may significantly impact PMC’s net (loss) income and cash flows. The Company periodically hedges forecasted foreign currency transactions related to certain operating expenses. All derivatives are recorded in the balance sheet at fair value. For a derivative designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net (loss) income. For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in net (loss) income when the hedged item affects net (loss) income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in net income (loss). If the derivative used in an economic hedging relationship is not designated in an accounting hedging relationship or if it becomes ineffective, changes in the fair value of the derivative are recognized in net (loss) income. During the years ended December 29, 2012, December 31, 2011 and December 26, 2010, all hedges were designated as cash flow hedges.
Fair value of financial instruments. The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies as prescribed under GAAP, for example the Company used the income approach to value certain investment securities. See Note 7. Investment Securities. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of the Company’s cash equivalents, short-term investments, long-term investment securities, derivative instruments, debt component of its senior convertible notes, and employee post-retirement healthcare benefits are estimated using available market information and appropriate valuation. The fair value of investments in public companies is determined using quoted market prices for those securities. The fair value of investments in private entities is not readily determinable due to the illiquid market for these investments. The fair value of the deposits for wafer fabrication capacity is not readily determinable because the timing of the related future cash flows is not determinable and there is no market for the sale of these deposits. See Note 4. Fair Value Measurements. The Company considers various actuarial assumptions, in determining the value of its employee post-retirement healthcare benefits, including the discount rate, current year health care trend and ultimate trend rates. The Company bases the salary increase assumptions on historical experience and future expectations.
50
Table of Contents
The carrying values of cash, accounts receivable and accounts payable approximate fair value because of their short term to maturities.
In October 2012, the Company retired the remaining 2.25% senior convertible notes at their face value of $68.3 million. The senior convertible notes were not listed on any exchange or included in any automated quotation system but were registered for resale under the Securities Act of 1933.
As of and for the year ended December 29, 2012, the use of derivative financial instruments was not material to the results of operations or the Company’s financial position (see “Derivatives and Hedging Activities” in this Note).
Concentrations of risk. The Company maintains its cash, cash equivalents, short-term investments, and long-term investment securities in investment grade financial instruments with high-quality financial institutions, thereby reducing credit risk concentrations.
At December 29, 2012, there was one distributor that accounted for 12% of accounts receivables, and two other customers that accounted for 17% and 10% of accounts receivables, respectively. At December 31, 2011, there was one distributor that accounted for 21% of accounts receivables, and two other customers that each accounted for 16% and 11% of accounts receivables, respectively. The Company believes that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by the Company’s credit evaluation process, relatively short collection periods and the geographical dispersion of the Company’s sales. The Company does not require collateral security for outstanding amounts.
The Company relies on a limited number of suppliers for wafer fabrication capacity. In 2012 and 2011, there were three outside wafer foundries that supplied more than 95% of our semiconductor wafer requirements.
Revenue recognition. The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. PMC generates revenues from sales made both directly to customers and through distributors.
The Company recognizes revenues on goods shipped directly to customers at the time of shipping, as that is when title passes and all revenue recognition criteria specified above are met.
The Company defers revenues and costs relating to sales to distributors if it grants more than limited rights of return or price credits, such that the level of returns and credits issuable at the time the goods are shipped cannot be reasonably estimated. In these cases, revenue is recognized upon the distributor remitting product resale quantity, price and customer shipment information, as well as confirming period end inventory on hand. The deferred income on shipments to distributors that will ultimately be recognized in the Company’s consolidated statement of operations will be different than the amount shown on the consolidated balance sheet, due to actual price adjustments issued to the distributors when the product is sold to their customers. The Company does not believe that there is any significant exposure related to deferred income based on historical experience and business terms in place.
In cases where agreements with distributors grant only limited rights of return or price credits such that the level of returns or credits issuable at the time the goods are shipped can be reasonably estimated, the Company recognizes revenue at the time of shipment to the distributor.
The Company also maintains inventory or hubbing arrangements with certain of our customers. Pursuant to these arrangements, we deliver products to a customer or a designated third-party warehouse based upon the customers’ projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.
In all cases, sales are recorded, net of estimated returns.
Cost of revenues. Cost of revenues is comprised of the cost of our semiconductor devices, which consists of the cost of purchasing finished silicon wafers manufactured by independent foundries, costs associated with our purchase of assembly, test and quality assurance services, packaging materials for semiconductor products, and in some cases, finished semiconductor devices that are purchased as turnkey products. Also included in cost of revenues is the amortization of purchased technology, royalties paid to vendors for use of their technology, manufacturing overhead, including costs of personnel and equipment associated with manufacturing support, fulfillment costs such as production-related freight and warehousing costs, product warranty costs, provisions for excess and obsolete inventories, and stock-based compensation expense for personnel engaged in manufacturing support.
51
Table of Contents
Research and development expenses. The Company expenses research and development (“R&D”) costs as incurred. R&D costs include payroll and related costs, materials, services and design tools used in product development, depreciation, and other overhead costs including facilities and computer equipment costs. Intellectual property (“IP”) purchased from third parties is capitalized and amortized over the expected useful life of the IP. For the years ended December 29, 2012, December 31, 2011, and December 26, 2010, research and development expenses were $220.9 million, $227.1 million, and $187.5 million, respectively.
Product warranties. The Company provides a limited warranty on most of its standard products and accrues for the expected cost at the time of shipment. The Company estimates its warranty costs based on historical failure rates and related repair or replacement costs.
Other Indemnifications. From time to time, on a limited basis, the Company indemnifies customers, as well as suppliers, contractors, lessors, and others with whom it has contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and use of Company products, the use of their goods and services, the use of facilities, the state of assets that the Company sells and other matters covered by such contracts, normally up to a specified maximum amount. The Company evaluates estimated losses for such indemnifications under GAAP. The Company has no history of indemnification claims for such obligations and has not accrued any liabilities related to such indemnifications in the consolidated financial statements.
Stock-based compensation. The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period.
All share-based payments to employees are recognized in the financial statements based upon their respective grant-date fair values.
During 2012, the Company recognized $26.3 million in stock-based compensation expense or $0.12 per share. No domestic tax benefits were attributed to the tax timing differences arising from stock-based compensation expense because a full valuation allowance was maintained for all domestic deferred tax assets.
See Note 5. Stock-Based Compensation.
Income taxes. Income taxes are reported under GAAP and, accordingly, deferred income taxes are recognized using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Valuation allowances are provided if, after considering available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as provision for income taxes.
The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
See Note 15. Income Taxes.
Business Combinations. The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over the asset’s estimated useful life. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred.
Net income per common share. Basic net income per share is computed using the weighted average number of common shares outstanding during the period. The PMC-Sierra Ltd. Special Shares have been included in the calculation of basic net income per share. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options, shares issuable under our Employee Stock Purchase Plan and common shares issuable on conversion of the Company’s senior convertible notes.
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Segment reporting. The Company has one reportable segment—semiconductor solutions for communications network infrastructure, comprised of the following operating segments: Communications Products, Enterprise Storage Products, Microprocessor Products, and Broadband Wireless Products (see Note 16. Segment Information).
Recent Accounting Pronouncements
The Company changed the presentation of other comprehensive income due to the adoption of Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) Topic 220, Presentation of Comprehensive Income, and the Company adopted FASB, ASC Topic 350, Testing Goodwill for Impairment, which provides a qualitative assessment option for the goodwill impairment test. The Company did not elect to do the qualitative assessment, therefore the adoption of this standard did not change the way the Company conducts its goodwill impairment tests. The adoption of these accounting standards did not have a material impact on the consolidated financial statements.
NOTE 2. BUSINESS COMBINATIONS
Acquisition of Wintegra, Inc.
On November 18, 2010, PMC completed its previously announced acquisition of Wintegra, Inc. (“Wintegra”) a privately held Delaware corporation, pursuant to an amendment to the Agreement and Plan of Merger dated as of October 21, 2010 (“the Merger Agreement”). The Company’s acquisition, pursuant to the Merger Agreement, was effected by merging a wholly owned subsidiary of the Company into Wintegra, with Wintegra continuing on as the surviving corporation and as a direct wholly-owned subsidiary of PMC.
PMC purchased Wintegra to accelerate the Company’s product offering in IP/Ethernet packet-based mobile backhaul equipment and because the acquisition fit strategically with the Company’s overall efforts to accelerate the transition of existing communications equipment to converged, packet-centric solutions. Prior to November 18, 2010, the Company owned 2.6% of the outstanding shares of Wintegra, as a cost investment, with a carrying value of $2 million. The fair value immediately prior to the acquisition date was $6.5 million. Upon acquiring the remaining equity interests of Wintegra, the Company recorded a gain on the step-acquisition on this pre-existing investment of $4.5 million which was included in Other (Expense) Income, net in the Consolidated Statement of Operations.
The fair value of the purchase price consideration as of the acquisition date was, as follows:
| (in thousands) |
||||
| Cash |
$ | 218,064 | ||
| Contingent consideration |
28,194 | |||
| Fair value of replacement equity awards attributable to pre-combination service |
1,083 | |||
|
|
|
|||
| Total purchase price |
$ | 247,341 | ||
|
|
|
|||
Certain key employees entered into Holdback Escrow Agreements, whereby a portion of cash consideration otherwise payable per the Merger Agreement was retained and would be distributed under certain conditions, including continued employment over a two-year period. This post-combination expense has been included in the Consolidated Balance Sheet as current prepaid expenses and was amortized straight-line over the two-year period, which ended during the fourth quarter of 2012. Amortization for the year ended December 29, 2012 was $1.2 million.
Former Wintegra equity holders could have been entitled to receive an additional earn-out payment, which ranged from $nil to $60 million, calculated on the basis of Wintegra’s calendar year 2011 revenue above an agreed threshold as described in the Merger Agreement. The fair value of the earn-out reflected in the purchase price as contingent consideration was determined using a income approach, using probability weighted discounted net present values with a discount rate of 4.75%. At acquisition, the Company recorded a liability for contingent purchased consideration of $28.2 million relating to this earn-out. During the three months ended October 2, 2011, the Company determined that Wintegra’s 2011 revenues would be below earn-out levels and the former Wintegra equity holders would not be eligible to receive this additional earn-out payment. Accordingly, the Company recognized a $29.4 million Revaluation of liability on contingent consideration in the Consolidated Statement of Operations. Since the earn-out requirements were not met, the Company had no obligations in connection with the contingent earn-out consideration and had no liability recorded for this as of December 31, 2011.
Replacement stock options issued in connection with the acquisition were valued at $6.5 million. The fair values of stock options exchanged were determined using a Black-Scholes-Merton valuation model with the following assumptions: weighted average expected life of 5.06 years, weighted average risk-free interest rate of 1.5%, and a weighted average expected volatility of 54%. The fair values of unvested Wintegra stock options will be recorded as operating expenses on a straight-line basis over the remaining vesting periods, while the fair values of vested stock options are included in the purchase price. $1.1 million of this amount was attributed to pre-combination services and accordingly is recorded as purchase consideration, and $5.4 million will be recorded as post-combination compensation expense on a straight-line basis over the remaining vesting period.
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On acquisition, the Company recorded a fair value adjustment related to the inventory acquired in the amount of $9.8 million, which was fully expensed through Cost of revenues by the end of the first quarter of 2011. The Company incurred $3.7 million in acquisition-related costs during 2010 and are included in selling, general and administrative expense. In addition, during 2011, the Company incurred $0.3 million in interest expense related to the short-term loan that the Company obtained to facilitate this acquisition, which is included in Other Income, net, in the Consolidated Statement of Operations.
The total purchase price has been allocated to the fair value of assets and liabilities acquired, and the excess of purchase price over the aggregate fair values was recorded as goodwill. The Company has made correction in the measurement of liabilities and goodwill previously recognized on acquisition. See Note 19. Error Corrections.
The allocation of the purchase price was as follows:
| Current assets (including cash acquired of $17.3 million) |
$ | 41,463 | ||
| Other long-term assets |
1,638 | |||
| Intangible assets |
104,000 | |||
| Goodwill |
121,032 | |||
|
|
|
|||
| Total assets |
$ | 268,133 | ||
|
|
|
|||
| Current liabilities |
$ | 13,442 | ||
| Long-term liabilities |
7,350 | |||
|
|
|
|||
| Total liabilities |
20,792 | |||
|
|
|
|||
| Total purchase consideration |
$ | 247,341 | ||
|
|
|
Intangible assets acquired, and their respective estimated average remaining useful lives over which they are amortized on a straight-line basis, are:
| (in thousands) | Estimated fair value |
Estimated average remaining useful life | ||||
| Existing technology |
$ | 66,300 | 4 years | |||
| Core technology |
12,900 | 5 years | ||||
| Customer relationships |
16,500 | 5 years | ||||
| In-process research and development |
6,000 | 4-5 years | ||||
| Trademarks |
2,300 | 8 years | ||||
|
|
|
|||||
| Total intangible assets |
$ | 104,000 | ||||
|
|
|
|||||
Goodwill
The Company’s primary reasons for the Wintegra acquisition were to accelerate the Company’s product offering in IP/Ethernet packet-based mobile backhaul equipment and to capitalize on the strategic fit between Wintegra’s business and the Company’s overall efforts to accelerate the transition of existing communications equipment to converged, packet-centric solutions. The acquisition also enhanced the Company’s engineering team through the addition of Wintegra’s research and development resources. These factors were the basis for the recognition of goodwill. The goodwill is not deductible for tax purposes. See Note 18. Impairment of Goodwill and Long-Lived Assets.
Purchased Intangible Assets
Existing and core technology represent completed technology that has passed technological feasibility and/or is currently offered for sale to customers. The Company used the income method to value existing and core technology by determining cash flow projections related to the identified projects. The assumptions included information on revenues from existing products and future expected trends for each technology, with an estimated useful life of four to five years. Management applied a discount rate of 16% to value the existing and core technology assets, which took into consideration market rates of return on debt and equity capital and the risk associated with achieving forecasted revenues related to these assets.
Customer relationships represent the fair value of future projected revenue that will be derived from the sale of products to existing customers of the acquired company. The Company used the same method to determine the fair value of this intangible asset as core technology assets and utilized a discount rate of 24%.
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Trademarks represent the value of the revenues associated with the WinPath registered trademark, which the Company will continue to use on products for which it has established revenue streams. The Company used the same method to determine the fair value of trademarks and utilized a discount rate of 18%.
See Note 18. Impairment of Goodwill and Long-Lived Assets.
In-Process Research and Development
The fair value of acquired in-process research and development was determined using the income approach. Under this approach, the expected future cash flows from each project under development are estimated and discounted to their net present values using a risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital, the return on assets, as well as risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates.
These projects progressed as expected, and are now completed.
Acquisition of Channel Storage Business
On June 8, 2010, the Company completed the acquisition of the Channel Storage Business from Adaptec, Inc. (“Adaptec”) pursuant to the terms of the Asset Purchase Agreement dated May 8, 2010 and Amendment to Asset Purchase Agreement dated June 8, 2010 between PMC and Adaptec (together the “Purchase Agreement”). Under the terms of the Purchase Agreement, PMC purchased the Channel Storage business for $34.3 million in cash. The Channel Storage business includes Adaptec’s redundant array of independent disks storage product line, a well-established global value added reseller customer base, board logistics capabilities, and leading SSD cache performance solutions.
The total purchase price has been allocated to the fair values of assets acquired and liabilities assumed as follows:
| (in thousands) |
||||
| Financial assets |
$ | 8,855 | ||
| Inventory and other |
6,214 | |||
| Property and equipment |
892 | |||
| Intangible assets (see below) |
21,300 | |||
| Goodwill |
1,828 | |||
| Financial liabilities |
(4,839 | ) | ||
|
|
|
|||
| Net assets acquired |
$ | 34,250 | ||
|
|
|
|||
Intangible assets acquired, and their respective estimated remaining useful lives over which each they are amortized on a straight-line basis, are:
| (in thousands) |
Estimated fair value |
Estimated average remaining useful life | ||||
| Technology and patents |
$ | 10,100 | 3 to 9 years | |||
| Customer/Distributor relationships |
7,500 | 2 to 6 years | ||||
| Trademarks and other |
3,700 | 6 years | ||||
|
|
|
|||||
| Total intangible assets acquired |
$ | 21,300 | ||||
|
|
|
|||||
During 2010, the Company incurred $0.2 million and $3.2 million in acquisition-related costs which were expensed and recognized as cost of revenues and selling, general and administrative, respectively.
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NOTE 3. DERIVATIVE INSTRUMENTS
The Company generates revenues in U.S. dollars but incurs a portion of its operating expenses in various foreign currencies, primarily the Canadian dollar. To minimize the short-term impact of foreign currency fluctuations on the Company’s operating expenses, the Company uses forward currency contracts.
Forward currency contracts that are used to hedge exposures to variability in forecasted foreign currency cash flows are designated as cash flow hedges. The maturities of these instruments are less than twelve months. For these derivatives, the gain or loss from the effective portion of the hedge is initially reported as a component of other comprehensive income in stockholders’ equity and subsequently reclassified to earnings in the same period in which the hedged transaction affects earnings. As the hedge transactions are incurred, the effective portion of the hedge is recognized into operating income. The gain or loss from the ineffective portion of the hedge is recognized as income or expense immediately.
At December 29, 2012, the Company had 73 currency forward contracts outstanding that qualified and were designated as cash flow hedges. At December 31, 2011, there were 185 such currency forward contracts outstanding. The U.S. dollar notional amount of these contracts was $22.5 million and $73.1 million at December 29, 2012 and December 31, 2011, respectively, and the contracts had a fair value of $0.4 million gain and a fair value of $1.8 million loss in December 29, 2012 and December 31, 2011, respectively. No portion of the hedging instrument’s gain or loss was excluded from the assessment of effectiveness. The ineffective portions of hedges had no significant impact on earnings, nor are they expected to over the next twelve months.
NOTE 4. FAIR VALUE MEASUREMENTS
ASC Topic 820 specifies a hierarchy of valuation techniques which requires an entity to maximize the use of observable inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets are available for identical assets and liabilities. The Company’s Level 1 assets include cash equivalents, short-term investments, and long-term investment securities, which are generally acquired or sold at par value and are actively traded.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 liabilities include forward currency contracts whose value is determined using a pricing model with inputs that are observable in the market or corroborated with observable market data. Level 2 observable inputs were used in estimating interest rates used to determine the fair value (on a non-recurring basis) of the debt component the Company’s senior convertible notes. See Note 1. Summary of Significant Accounting Policies and Note 10. Senior Convertible Notes.
Level 3—Pricing inputs include significant inputs that are generally not observable in the marketplace. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At each balance sheet date, the Company performs an analysis of all applicable instruments and would include in Level 3 all of those whose fair value is based on significant unobservable inputs. Level 3 inputs are used on a recurring basis to measure the fair value of the liability for contingent consideration. See Note 11. Commitments and Contingencies. Level 3 inputs are used on a non-recurring basis to measure the fair value of non-financial assets, including intangible assets, and property and equipment. See Note 1. Summary of Significant Accounting policies.
The Company’s valuation techniques used to measure the fair value of money market funds were derived from quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of all other financial instruments were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
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Table of Contents
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Financial assets measured on a recurring basis as of December 29, 2012 and December 31, 2011, are summarized below:
| Fair value, December 29, 2012 |
||||||||
| (in thousands) |
Level 1 | Level 2 | ||||||
| Assets: |
||||||||
| Corporate bonds and notes (1) |
$ | 63,565 | $ | — | ||||
| Money market funds (1) |
50,528 | — | ||||||
| United States (“US”) treasury and government agency notes (1) |
33,854 | — | ||||||
| Foreign government and agency notes (1) |
4,044 | — | ||||||
| US state and municipal securities (1) |
1,746 | — | ||||||
| Forward currency contracts (2) |
— | 392 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 153,737 | $ | 392 | ||||
|
|
|
|
|
|||||
| (1) | Included in cash and cash equivalents, short-term investments, and long-term investment securities (see Note 7. Investment Securities). |
| (2) | Included in Prepaid expenses and other current assets. |
| Fair value, December 31, 2011 |
||||
| (in thousands) |
Level 1 | |||
| Assets: |
||||
| Corporate bonds and notes (1) |
$ | 254,522 | ||
| Money market funds (1) |
54,588 | |||
| US treasury and government agency notes (1) |
62,350 | |||
| Foreign government and agency notes (1) |
12,389 | |||
| US state and municipal securities (1) |
1,749 | |||
|
|
|
|||
| Total assets |
$ | 385,598 | ||
|
|
|
|||
Financial liabilities measured on a recurring basis are summarized below:
| Fair value, | ||||
| December 29, 2012 | ||||
| (in thousands) |
Level 2 | |||
| Current liabilities: |
||||
| Forward currency contracts (1) |
$ | — | ||
|
|
|
|||
| Fair value, | ||||
| December 31, 2011 | ||||
| (in thousands) |
Level 2 | |||
| Current liabilities: |
||||
| Forward currency contracts (1) |
$ | 1,780 | ||
|
|
|
|||
| (1) | Included in Accrued liabilities. |
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The tables below present reconciliations for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for 2011. There were no level 3 asset or liabilities measured and recorded during 2012.
| Fair Value Measured and Recorded Using Significant Unobservable Inputs (Level 3) |
||||||||||||
| (In thousands) |
Money Market Funds |
Liability for contingent consideration |
Total Gains (losses) |
|||||||||
| Balance as of December 27, 2010 |
$ | 22,444 | $ | 28,194 | ||||||||
| Partial distribution from the Reserve Funds |
(22,444 | ) | — | $ | — | |||||||
| Accretion of liability for contingent consideration |
1,182 | (1,182 | ) | |||||||||
| Fair value adjustment of liability for contingent consideration (See Note 11. Commitments and Contingencies) |
— | (29,376 | ) | $ | 29,376 | |||||||
|
|
|
|
|
|||||||||
| Balance as of December 31, 2011 |
$ | — | $ | — | ||||||||
|
|
|
|
|
|||||||||
The accretion of liability for contingent consideration of $1.2 million was included Interest expense, net, and the fair value adjustment of liability for contingent consideration of $29.4 million, within Other (expense) income in the Consolidated Statement of Operations.
Assets/Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-financial assets, such as prepaid expenses and other current assets, property and equipment, and intangible assets are recorded at fair value only if an impairment charge is recognized. The following table presents the non-financial assets that were remeasured and recorded at fair value on a non-recurring basis during 2011 and 2012 on those assets:
| Total | ||||||||||||||||||||
| Losses for | ||||||||||||||||||||
| Net Carrying Value | Fair Value Measured and Recorded Using | Year Ended | ||||||||||||||||||
| (In thousands) |
As of December 29, 2012 | Level 1 | Level 2 | Level 3 | December 29, 2012 | |||||||||||||||
| Prepaid expenses and other current assets |
$ | — | $ | — | $ | — | $ | — | $ | (979 | ) | |||||||||
| Property and equipment, net |
— | — | — | — | (520 | ) | ||||||||||||||
| Intangible assets |
— | — | — | — | (260 | ) | ||||||||||||||
|
|
|
|||||||||||||||||||
| Total losses for assets held as of December 29, 2012 |
(1,759 | ) | ||||||||||||||||||
|
|
|
|||||||||||||||||||
| Total losses for recorded non-recurring measurement |
$ | (1,759 | ) | |||||||||||||||||
|
|
|
|||||||||||||||||||
| Total | ||||||||||||||||||||
| Losses for | ||||||||||||||||||||
| Net Carrying Value | Fair Value Measured and Recorded Using | Year Ended | ||||||||||||||||||
| (In thousands) |
As of December 31, 2011 | Level 1 | Level 2 | Level 3 | December 31, 2011 | |||||||||||||||
| Intangible assets |
$ | — | $ | — | $ | — | $ | — | $ | (3,589 | ) | |||||||||
|
|
|
|||||||||||||||||||
| Total losses for assets held as of December 31, 2011 |
$ | (3,589 | ) | |||||||||||||||||
|
|
|
|||||||||||||||||||
| Total losses for recorded non-recurring measurement |
$ | (3,589 | ) | |||||||||||||||||
|
|
|
|||||||||||||||||||
The losses recorded during 2012 and 2011, were mainly included in Research and Development expenses in the Consolidated Statements of Operations. See Note 1. Summary of Significant Accounting Policies for details on the asset impairments.
The following liabilities have been measured at fair value on a non-recurring basis, as follows:
| Fair value, | ||||
| December 29, 2012 | ||||
| (in thousands) |
Level 2 | |||
| Current liabilities: |
||||
| 2.25% senior convertible notes due October 15, 2025, net (see Note 10. Senior Convertible Notes) |
$ | — | ||
|
|
|
|||
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Table of Contents
| Fair value, | ||||
| December 31, 2011 | ||||
| (in thousands) |
Level 2 | |||
| Current liabilities: |
||||
| 2.25% senior convertible notes due October 15, 2025, net (see Note 10. Senior Convertible Notes) |
$ | 65,122 | ||
|
|
|
|||
NOTE 5. STOCK-BASED COMPENSATION
At December 29, 2012, the Company has two stock-based compensation programs, which are described below. The Company’s stock-based awards under these plans are classified as equity. The Company did not capitalize any stock-based compensation cost and recorded compensation expense as follows:
Stock-based compensation expense:
| Year Ended | ||||||||||||
| December 29, | December 31, | December 26, | ||||||||||
| (in thousands) |
2012 | 2011 | 2010 | |||||||||
| Cost of revenues |
$ | 875 | $ | 945 | $ | 827 | ||||||
| Research and development |
11,583 | 11,648 | 8,968 | |||||||||
| Selling, general and administrative |
13,857 | 14,462 | 12,140 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 26,315 | $ | 27,055 | $ | 21,935 | ||||||
|
|
|
|
|
|
|
|||||||
The Company received cash of $16 million, $16.8 million and $18.6 million from the exercise of stock-based awards during 2012, 2011 and 2010, respectively. The total intrinsic value of stock awards exercised during 2012 was $12.9 million.
As of December 29, 2012, there was $13.5 million of total unrecognized compensation cost related to unvested stock options granted under the Company’s stock option plans, which is expected to be recognized over a period of 2.3 years. As of December 29, 2012, there was $20.4 million of total unrecognized compensation cost related to unvested Restricted Stock Units (“RSUs”) awarded under the Company’s stock option plans, which is expected to be recognized over a period of 2.7 years.
The Company’s estimates of expected volatilities are based on a weighted historical and market-based implied volatility. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the stock option valuation model and represents the period of time that granted options are expected to be outstanding. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The fair values of the Company’s stock option and Employee Stock Purchase Plan, awards were estimated using the following weighted average assumptions:
Stock Options:
| December 29, | December 31, | December 26, | ||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Expected life (years) |
5.4 | 4.5 | 4.4 | |||||||||
| Expected volatility |
42 | % | 43 | % | 53 | % | ||||||
| Risk-free interest rate |
0.8 | % | 1.9 | % | 2.1 | % | ||||||
Employee Share Purchase Plan:
| December 29, | December 31, | December 26, | ||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Expected life (years) |
0.5 | 0.5 | 0.6 | |||||||||
| Expected volatility |
42 | % | 44 | % | 44 | % | ||||||
| Risk-free interest rate |
0.2 | % | 0.1 | % | 0.2 | % | ||||||
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Stock Option Plans
The Company issues its common stock under the provisions of the 2008 Equity Plan (the “2008 Plan”). Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock at the grant date. The options generally expire within 10 years and vest over four years.
The 2008 Plan was approved by stockholders at the 2008 Annual Meeting. The 2008 Plan became effective on January 1, 2009 (the “Effective Date”). It is a successor to the 1994 Incentive Stock Plan (the “1994 Plan”) and the 2001 Stock Option Plan (the “2001 Plan”). Up to 30,000,000 shares of our common stock have been initially reserved for issuance under the 2008 Plan. At the 2012 Annual Meeting, stockholders approved an increase in shares reserved for issuance under the 2008 plan by 9,500,000 shares which shares were registered on May 14, 2012 on Form S-8 bringing the total number of authorized and registered shares available under the 2008 Plan to 39,500,000. To the extent that a share that is subject to an award that counts as 1.6 shares against the 2008 Plan’s share reserve is added back into the 2008 Plan upon expiration or termination of the award or repurchase or forfeiture of the shares, the number of shares of common stock available for issuance under the 2008 Plan will be credited with 1.6 shares. The implementation of the 2008 Plan did not affect any options or restricted stock units outstanding under the 1994 Plan or the 2001 Plan on the Effective Date. To the extent that any of those options or restricted stock units subsequently terminate unexercised or prior to issuance of shares thereunder, the number of shares of common stock subject to those terminated awards will be added to the share reserve available for issuance under the 2008 Plan, up to an additional 15,000,000 shares. No additional shares may be issued under the 1994 Plan or the 2001 Plan. In 2006, the Company assumed the stock option plans and all outstanding stock options of Passave, Inc. as part of the merger consideration in that business combination. In 2010, the Company assumed the stock option plans and all outstanding stock options of Wintegra as part of that business combination.
Activity under the option plans during the year ended December 29, 2012 was as follows:
| Number of options |
Weighted average exercise price per share |
Weighted average remaining contractual term (years) |
Aggregate intrinsic value at December 29, 2012 |
|||||||||||||
| Outstanding, December 31, 2011 |
29,130,398 | $ | 7.97 | |||||||||||||
| Granted |
1,543,573 | $ | 5.79 | |||||||||||||
| Exercised |
(974,052 | ) | $ | 4.68 | ||||||||||||
| Forfeited |
(1,698,872 | ) | $ | 8.56 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding, December 29, 2012 |
28,001,047 | $ | 7.93 | 5.25 | $ | 2,189,509 | ||||||||||
| Exercisable, December 29, 2012 |
21,807,256 | $ | 8.18 | 4.45 | $ | 1,878,729 | ||||||||||
No adjustment has been recorded for fully vested options that expired during the year ended December 29, 2012. A reversal of $2.6 million was recorded for pre-vesting forfeitures.
The following table summarizes information on options outstanding and exercisable at December 29, 2012:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||
| Remaining | Exercise | Exercise | ||||||||||||||||||
| Options | Contractual | Price per | Options | Price per | ||||||||||||||||
| Range of Exercise Prices | Outstanding | Life (years) | Share | Exercisable | Share | |||||||||||||||
| $0.05 — $5.71 |
5,803,119 | 6.48 | $ | 4.86 | 4,155,079 | $ | 4.69 | |||||||||||||
| $5.72 — $7.18 |
4,078,881 | 3.60 | 6.28 | 3,625,625 | 6.25 | |||||||||||||||
| $7.22 — $7.85 |
5,944,431 | 7.00 | 7.36 | 3,376,839 | 7.42 | |||||||||||||||
| $7.87 — $9.06 |
7,784,349 | 5.45 | 8.45 | 6,271,701 | 8.37 | |||||||||||||||
| $9.07 — $21.50 |
4,390,267 | 2.43 | 13.39 | 4,378,012 | 13.40 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $0.05 — $21.50 |
28,001,047 | 5.25 | $ | 7.93 | 21,807,256 | $ | 8.18 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
The weighted-average estimated fair values of each employee stock option granted during 2012, 2011, and 2010, were $2.16, $2.55, and $3.67, respectively.
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Restricted Stock Units
On February 1, 2007, the Company amended its stock award plans to allow for the issuance of RSUs to employees and directors. The first grant of RSUs occurred on May 25, 2007. The grants vest over varying terms, to a maximum of four years from the date of grant.
A summary of RSU activity during the year ended December 29, 2012 is as follows:
| Restricted Stock Units |
Weighted Average Remaining Contractual Term |
Aggregate intrinsic value at December 29, 2012 |
||||||||||
| Unvested shares at December 31, 2011 |
3,679,683 | — | — | |||||||||
| Awarded |
3,192,400 | — | — | |||||||||
| Released |
(1,213,664 | ) | — | — | ||||||||
| Forfeited |
(300,218 | ) | — | — | ||||||||
|
|
|
|||||||||||
| Unvested shares at December 29, 2012 |
5,358,201 | 1.61 | $ | 27,433,989 | ||||||||
| Restricted Stock Units vested and expected to vest December 29, 2012 |
4,469,266 | 1.55 | $ | 22,882,643 | ||||||||
The weighted-average estimated fair values of each RSU awarded during 2012, 2011, and 2010, were $5.95, $7.09, and $7.94, respectively.
Employee Stock Purchase Plan
In 1991, the Company adopted an Employee Stock Purchase Plan (the “1991 Plan”). The 1991 Plan allows eligible participants to purchase shares of the Company’s common stock through payroll deductions at a purchase price of 85% of the lower of the fair market value of the Company’s stock on the close of the first trading day or last trading day of the six-month purchase period. Under the 1991 Plan, the number of shares authorized to be available for issuance under the plan are increased automatically on January 1 of each year until the expiration of the plan. The increase will be limited to the lesser of (i) 1% of the outstanding shares on January 1 of each year, (ii) 2,000,000 shares (after adjusting for stock dividends), or (iii) an amount to be determined by the Board of Directors. The 2011 Employee Stock Purchase Plan (“2011 Plan”) was approved by stockholders at the 2010 Annual Meeting. The 2011 Plan became effective on February 11, 2011 and replaced the 1991 Plan. 12,000,000 shares of our common stock have been reserved for issuance under the 2011 Plan.
During 2012, 2,374,523 shares were issued under the 2011 Plan at a weighted-average price of $4.90 per share. As of December 29, 2012, 8,453,523 shares were available for future issuance under the 2011 Plan (2011—10,827,657 available for issuance).
The weighted-average estimated fair values of Employee Stock Purchase Plan awards during years 2012, 2011, and 2010, were $1.69, $1.88, and $2.34, respectively.
NOTE 6. SUPPLEMENTAL FINANCIAL INFORMATION
| a. | Cash and cash equivalents and Short-term investments |
At December 29, 2012 and December 31, 2011, cash and cash equivalents included $0.4 million and $0.2 million, respectively deposited with banks as collateral for leased facilities, and $0.8 million and $1.3 million deposited with banks as collateral for hedging transactions, respectively.
At December 29, 2012, short-term investments included $1 million, deposited with banks as collateral for leased facilities. There was no such arrangement at December 31, 2011.
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| b. | Inventories |
Inventories (net of reserves of $7.8 million and $8.3 million at December 29, 2012 and December 31, 2011, respectively) were as follows:
| December 29, | December 31, | |||||||
| (in thousands) |
2012 | 2011 | ||||||
| Work-in-progress |
$ | 9,867 | $ | 20,367 | ||||
| Finished goods |
13,681 | 19,544 | ||||||
|
|
|
|
|
|||||
| $ | 23,548 | $ | 39,911 | |||||
|
|
|
|
|
|||||
The Company decreased inventory reserves by $0.5 million, $1.9 million and $0.8 million in 2012, 2011 and 2010, respectively for inventory that was scrapped during the year.
| c. | Property and equipment |
The components of property and equipment are as follows:
| Accumulated | ||||||||||||
| December 29, 2012 (in thousands) |
Gross | Amortization | Net | |||||||||
| Software |
$ | 35,248 | $ | (23,187 | ) | $ | 12,061 | |||||
| Machinery and equipment |
124,479 | (102,912 | ) | 21,567 | ||||||||
| Leasehold improvements |
18,322 | (9,247 | ) | 9,075 | ||||||||
| Furniture and fixtures |
5,327 | (4,884 | ) | 443 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 183,376 | $ | (140,230 | ) | $ | 43,146 | |||||
|
|
|
|
|
|
|
|||||||
| Accumulated | ||||||||||||
| December 31, 2011 (in thousands) |
Gross | Amortization | Net | |||||||||
| Software |
$ | 53,678 | $ | (50,508 | ) | $ | 3,170 | |||||
| Machinery and equipment |
133,554 | (115,078 | ) | 18,476 | ||||||||
| Leasehold improvements |
13,772 | (10,435 | ) | 3,337 | ||||||||
| Furniture and fixtures |
8,981 | (8,600 | ) | 381 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 209,985 | $ | (184,621 | ) | $ | 25,364 | |||||
|
|
|
|
|
|
|
|||||||
| d. | Intangible assets |
The components of acquired intangible assets are as follows:
| Accumulated | Estimated | |||||||||||||
| December 29, 2012 (in thousands) |
Gross | Amortization | Net | life | ||||||||||
| Core technology |
$ | 151,861 | $ | (120,954 | ) | $ | 30,907 | 5 - 9 years | ||||||
| Customer relationships |
94,906 | (68,086 | ) | 26,820 | 2 - 10 years | |||||||||
| Existing technology |
115,200 | (81,300 | ) | 33,900 | 3 - 7 years | |||||||||
| Trademarks |
9,200 | (2,020 | ) | 7,180 | 6 years - indefinite | |||||||||
| Developed technology assets |
63,951 | (49,743 | ) | 14,208 | 3 years | |||||||||
| Backlog |
400 | (400 | ) | 0 | < 1 year | |||||||||
| In-process research and development |
16,746 | (1,093 | ) | 15,653 | 4-5 years | |||||||||
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 452,264 | $ | (323,596 | ) | $ | 128,668 | |||||||
|
|
|
|
|
|
|
|||||||||
| Accumulated | Estimated | |||||||||||||
| December 31, 2011 (in thousands) |
Gross | Amortization | Net | life | ||||||||||
| Core technology |
$ | 151,861 | $ | (102,874 | ) | $ | 48,987 | 5 - 8 years | ||||||
| Customer relationships |
90,600 | (53,221 | ) | 37,379 | 4 - 10 years | |||||||||
| Existing technology |
115,200 | (63,815 | ) | 51,385 | 3 - 5 years | |||||||||
| Trademarks |
9,200 | (1,182 | ) | 8,018 | 8 years - Indefinite | |||||||||
| Developed technology assets |
52,484 | (45,741 | ) | 6,743 | 3 years | |||||||||
| Backlog |
400 | (400 | ) | 0 | < 1 year | |||||||||
| In-process research and development |
6,000 | (30 | ) | 5,970 | Indefinite | |||||||||
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 425,745 | $ | (267,263 | ) | $ | 158,482 | |||||||
|
|
|
|
|
|
|
|||||||||
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Table of Contents
Estimated future amortization expense for intangible assets (in thousands) is as follows:
| 2013 |
$ | 48,300 | ||
| 2014 |
37,379 | |||
| 2015 |
24,010 | |||
| 2016 |
7,881 | |||
| 2017 |
3,952 | |||
| Thereafter |
3,546 | |||
|
|
|
|||
| $ | 125,068 | |||
|
|
|
| e. | Goodwill |
| Balance | ||||
| (in thousands) | ||||
| Goodwill at December 26, 2010 (As Restated—See Note 19) |
$ | 522,267 | ||
| Goodwill recorded in connection with acquisitions |
(2,813 | ) | ||
|
|
|
|||
| Goodwill at December 31, 2011 (As Restated—See Note 19) |
519,454 | |||
| Goodwill recorded in connection with acquisitions |
593 | |||
| Impairment loss (As Restated—See Note 19) |
(267,628 | ) | ||
|
|
|
|||
| Goodwill at December 29, 2012 |
$ | 252,419 | ||
|
|
|
|||
The goodwill balance at December 29, 2012 of $252.4 million mainly relates to the Enterprise Storage Products operating segment, which had fair values that substantially exceeded its carrying value when the Company conducted its step 1 goodwill impairment test in 2012. See Note 18. Impairment of Goodwill and Long-Lived Assets for details on the impairment loss of $267.6 million recorded in 2012.
During 2011, the Company recorded a $2.8 million adjustment to the preliminary fair value allocation relating to the acquisition of Wintegra, Inc. to allocate the portion of cash consideration to post-combination expense related to the Holdback Escrow arrangement, see Note 2. Business Combinations.
Prior to 2011, the Company did not have any impairment write-downs of goodwill.
| f. | Accrued liabilities. |
The components of accrued liabilities are as follows:
| December 29, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Accrued compensation and benefits |
$ | 34,791 | $ | 27,386 | ||||
| Other accrued liabilities |
37,491 | 38,753 | ||||||
|
|
|
|
|
|||||
| $ | 72,282 | $ | 66,139 | |||||
|
|
|
|
|
|||||
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Table of Contents
| g. | Product warranties |
The following table summarizes the activity related to the product warranty liability during fiscal 2012, 2011 and 2010:
| Year Ended | ||||||||||||
| December 26, | December 31, | December 26, | ||||||||||
| (in thousands) |
2012 | 2011 | 2010 | |||||||||
| Balance, beginning of the year |
$ | 5,415 | $ | 5,457 | $ | 6,097 | ||||||
| Accrual for new warranties issued |
2,530 | 1,863 | 1,698 | |||||||||
| Reduction for payments and product replacements |
(328 | ) | (290 | ) | (1,244 | ) | ||||||
| Adjustments related to changes in estimate of warranty accrual |
(1,636 | ) | (1,615 | ) | (1,094 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance, end of the year |
$ | 5,981 | $ | 5,415 | $ | 5,457 | ||||||
|
|
|
|
|
|
|
|||||||
| h. | Restructuring and Other Costs |
The activity related to excess facility accruals under the Company’s restructuring plans during 2011 and 2010 were as follows:
Excess facility costs
| (in thousands) |
2007 | 2006 | 2005 | 2001 | Total | |||||||||||||||
| Balance at December 27, 2009 |
$ | 526 | $ | 94 | $ | 2,344 | $ | 1,030 | $ | 3,994 | ||||||||||
| Reversals and adjustments |
(14 | ) | (19 | ) | (2 | ) | 6 | (29 | ) | |||||||||||
| New charges |
10 | (14 | ) | 252 | 184 | 432 | ||||||||||||||
| Cash payments |
(291 | ) | (61 | ) | (1,451 | ) | (990 | ) | (2,793 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance at December 26, 2010 |
231 | — | 1,143 | 230 | 1,604 | |||||||||||||||
| Cash payments |
(231 | ) | — | (1,143 | ) | (230 | ) | (1,604 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance at December 31, 2011 |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
There was no restructuring related severance cost in 2012, 2011, or 2010.
2007
In the first quarter of 2007, the Company initiated a cost-reduction plan that involved staff reductions of 175 employees at various sites and the closure of design centers in Saskatoon, Saskatchewan and Winnipeg, Manitoba. The Company also vacated excess office space at its Santa Clara facility. PMC continued to lower costs in the fourth quarter of 2007 by reducing headcount by 18 employees primarily at the Burnaby facility.
The Company has completed this plan and incurred $10.6 million in termination and relocation costs, $3.0 million for excess facilities and contract termination costs, and $2.5 million in asset impairment charges. The Company has made payments of $12.8 million in connection with this plan. At December 31, 2011, the Company paid all the remaining excess facilities commitments under this plan.
2006
In 2006, the Company closed its Ottawa development site and reduced operations at its Portland development site to reduce operating expenses resulting in the elimination of approximately 45 positions and a reduction in office space occupied. The charges relating to these actions were $3.0 million in one-time termination benefit and relocation costs, $2.3 million for excess facilities, and $0.3 million for other related costs.
Changes in the accrual summarized in the table above have been as expected and immaterial.
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Table of Contents
2005
In 2005, the Company initiated various restructuring activities aimed at streamlining production and reducing operating expenses. During the year, we terminated 113 employees across all business functions, and reduced facilities occupied. As a result, we recorded charges of $9.3 million for termination benefits, $5.3 million for excess facilities and $0.9 million for the write-down of equipment and software assets whose value was impaired as a result of these plans.
The increase in the accruals in the years presented above was due to not realizing the originally expected amounts of sublease income. At December 31, 2011, the Company paid all the remaining excess facilities commitments under this Plan.
2001
In 2001, the Company implemented restructuring plans aimed at focusing development efforts on key projects and reducing operating costs in response to the severe and prolonged economic downturn in the semiconductor industry. These plans included the termination of 564 employees, the consolidation of excess facilities and curtailment of certain research and development activities.
The Company initially recorded restructuring charges totaling $195.2 million, $16.2 million related to asset write-downs. The majority of the restructuring charge related to lease commitments on its office space in Santa Clara, CA, which was the Company’s headquarters until January, 2011. At December 31, 2011, the Company paid all the remaining excess facilities commitments under this Plan.
The accruals relating to these restructuring plans are recognized as Accrued liabilities in the Consolidated Balance Sheets.
| i. | Interest expense, net |
The components of interest expense, net are as follows:
| Year Ended | ||||||||||||
| December 29, | December 31, | December 26, | ||||||||||
| (in thousands) |
2012 | 2011 | 2010 | |||||||||
| Interest income |
$ | 2,865 | $ | 4,228 | $ | 3,538 | ||||||
| Interest expense on debt |
(4,451 | ) | (6,495 | ) | (4,786 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | (1,586 | ) | $ | (2,267 | ) | $ | (1,248 | ) | ||||
|
|
|
|
|
|
|
|||||||
During 2012, the Company invested $3 million in an early-stage private technology company. This investment is included in Investments and other assets in the Consolidated Balance Sheet and is accounted for at cost.
As of December 29, 2012, the Company did not estimate the fair value of this investment as there were no identified events or changes in circumstance that may have had a significant adverse effect on the fair value of this investee. As this investee is a private business, it was not practicable to estimate its fair value at December 29, 2012.
65
Table of Contents
NOTE 7. INVESTMENT SECURITIES
At December 29, 2012, the Company had investments in securities of $153.7 million (December 31, 2011-$385.6 million) comprised of money market funds, United States Treasury and Government Agency notes, Federal Deposit Insurance Corporation insured corporate notes, United States State and Municipal Securities, foreign government and agency notes, and corporate bonds and notes.
The Company’s available for sale investments, by investment type, as classified on the consolidated balance sheets consist of the following as at December 29, 2012 and December 31, 2011:
| December 29, 2012 | ||||||||||||||||
| (in thousands) |
Amortized Cost | Gross Unrealized Gains* |
Gross Unrealized Losses* |
Fair Value | ||||||||||||
| Cash equivalents: |
||||||||||||||||
| Money market funds |
$ | 50,528 | $ | — | $ | — | $ | 50,528 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total cash equivalents |
50,528 | — | — | 50,528 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Short-term investments: |
||||||||||||||||
| Corporate bonds and notes |
9,163 | 522 | — | 9,685 | ||||||||||||
| US states and municipal securities |
1,720 | 26 | — | 1,746 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total short-term investments |
10,883 | 548 | — | 11,431 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Long-term investment securities: |
||||||||||||||||
| Corporate bonds and notes |
53,567 | 329 | (16 | ) | 53,880 | |||||||||||
| US treasury and government agency notes |
33,830 | 25 | (1 | ) | 33,854 | |||||||||||
| Foreign government and agency notes |
4,018 | 26 | — | 4,044 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total long-term investment securities |
91,415 | 380 | (17 | ) | 91,778 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 152,826 | $ | 928 | $ | (17 | ) | $ | 153,737 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Gross unrealized gains include accrued interest on investments of $0.9 million. The remainder of the gross unrealized gains and losses are included the Consolidated Balance Sheet as Accumulated other comprehensive income (loss). |
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Table of Contents
| December 31, 2011 | ||||||||||||||||
| (in thousands) |
Amortized Cost | Gross Unrealized Gains* |
Gross Unrealized Losses* |
Fair Value | ||||||||||||
| Cash equivalents: |
||||||||||||||||
| Money market funds |
$ | 54,588 | $ | — | $ | — | $ | 54,588 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total cash equivalents |
54,588 | — | — | 54,588 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Short-term investments: |
||||||||||||||||
| Corporate bonds and notes |
85,127 | 2,449 | (34 | ) | 87,542 | |||||||||||
| US treasury and government agency notes |
10,009 | 203 | — | 10,212 | ||||||||||||
| Foreign government and agency notes |
6,540 | 97 | — | 6,637 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total short-term investments |
101,676 | 2,749 | (34 | ) | 104,391 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Long-term investment securities: |
||||||||||||||||
| Corporate bonds and notes |
166,741 | 688 | (449 | ) | 166,980 | |||||||||||
| US treasury and government agency notes |
52,054 | 123 | (39 | ) | 52,138 | |||||||||||
| Foreign government and agency notes |
5,713 | 39 | — | 5,752 | ||||||||||||
| US states and municipal securities |
1,720 | 29 | — | 1,749 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total long-term investment securities |
226,228 | 879 | (488 | ) | 226,619 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 382,492 | $ | 3,628 | $ | (522 | ) | $ | 385,598 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Gross unrealized gains include accrued interest on investments of $2.4 million. The remainder of the gross unrealized gains and losses are included in the Consolidated Balance Sheet as Accumulated other comprehensive income (loss). |
In relation to the unrealized losses summarized in the tables above, as of December 29, 2012 and December 31, 2011, the fair value of certain of the Company’s available-for-sale securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the investment security, the magnitude of the unrealized loss compared to the cost of the investment, length of time the investment has been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. As of December 29, 2012, the Company determined that the unrealized losses are temporary in nature and recorded them as a component of Accumulated other comprehensive income (loss).
The investments in the Reserve Funds, classified as cash and cash equivalents on the Consolidated Balance Sheet, were recorded at a fair value of $nil at December 31, 2011 and relate to shares of the Reserve International Liquidity Fund, Ltd. (the “International Fund”) and the Reserve Primary Fund (the “Primary Fund”, together the “Reserve Funds”). The Reserve Funds were AAA-rated money market funds which announced redemption delays and suspended trading in September 2008, during the severe disruption in financial markets. The Company assessed the fair value of its money market funds, including by consideration of Level 2 and Level 3 inputs (see Note 4. Fair Value Measurements) for the Reserve Funds and their underlying securities. Based on this assessment, the Company recorded an impairment of the Reserve Funds of $11.8 million during the third quarter of 2008, incorporating the Reserve Funds’ valuation at zero for debt securities of Lehman Brothers held, and a net asset value of $0.97 per share as communicated by the Primary Fund. In 2008, the Company reclassified its investment in shares of the Reserve Funds from Level 1 to Level 3 of the fair value hierarchy due to the inherent subjectivity and significant judgment related to the fair value of the shares of the Reserve Funds and their underlying securities. Accordingly, the Company changed the valuation method from a market approach to an income approach. In addition, in 2008, due to the status of the Reserve Funds, the Company reclassified a portion of these shares from cash and cash equivalents to short-term investments and long-term investment securities, based on the maturity dates of the underlying securities in the Reserve Funds.
As at December 26, 2010, all of the underlying Lehman Brothers investments held in the Reserve Funds had matured or were sold, and remaining securities were held only in overnight notes.
During 2010, the Primary Fund entered into liquidation proceedings which were supervised by the U.S. Securities and Exchange Commission, and the Company received partial distributions of its holdings. During the fourth quarter of 2010, the U.S. District Court for the Southern District of New York entered into final judgment accepting a proposed settlement agreement with respect to the
67
Table of Contents
International Fund. Shortly after the Company’s 2010 year end, that judgment became final. As a result, the Company recognized a recovery of impairment on investments of $3.8 million in the 2010 consolidated statement of operations, based on the partial distributions received from these settlements. The courts set aside certain amounts of cash held by the Reserve Funds for legal and administrative costs, and if the cash is not all consumed, the Company could potentially receive a further distribution.
In 2011, we received $22.6 million from the International Fund and its liquidation was completed. The Primary Fund continues to be in the process of liquidation. The Company continued to hold shares of the Reserve Primary Fund with an original cost of $0.6 million. Based on information available in 2012, the Company determined that it would be unlikely to receive any further distributions from the Fund and wrote off the remaining shares of the Primary Fund against existing provisions.
NOTE 8. LINES OF CREDIT
At December 29, 2012, the Company does not maintain any lines of credit.
At December 31, 2011, the Company had cancelled its revolving line of credit with a bank related to a terminated lease. At December 26, 2010, the Company had available a revolving line of credit with a bank under which the Company was able to borrow up to $0.7 million with interest at the bank’s alternate base rate (annual rate of 3.75%) as long as the Company maintained eligible investments with the bank in an amount equal to its drawings.
NOTE 9. SHORT-TERM LOAN
On November 18, 2010, the Company, PMC-Sierra US Inc., a Delaware wholly owned subsidiary of the Company (the “Borrower”), and Bank of America, N.A., as the Lender, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides the Borrower with a term loan of $220 million (the “Credit Facility”), which was borrowed on November 18, 2010. The Credit Facility was used to finance, in part, the acquisition of Wintegra by the Company. During 2010, the Company repaid principal of $40 million. As a result, the balance as at December 26, 2010 was $181.0 million, including accrued interest.
The interest rate set forth in the Credit Agreement for the loan made under the Credit Facility was the base rate (the higher of the prime rate announced by the Lender or the federal funds effective rate plus 0.50%), plus 1.50%.
The loan had a maturity date of January 17, 2011 but was fully repaid as of January 10, 2011.
NOTE 10. SENIOR CONVERTIBLE NOTES
2.25% Senior Convertible Notes
On October 26, 2005, the Company issued $225 million aggregate principal amount of 2.25% senior convertible notes due 2025 (the “Notes”).
The Notes rank equal in right of payment with the Company’s other unsecured senior indebtedness and mature on October 15, 2025 unless earlier redeemed by the Company at its option, or converted or put to the Company at the option of the holders. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2006. The Company may redeem all or a portion of the Notes at par on and after October 20, 2012. The holders may require that the Company to repurchase all or a portion of the Notes on October 15 of each of 2012, 2015 and 2020.
Holders may convert the Notes into the right to receive the conversion value (i) when the Company’s stock price exceeds 120% of the approximately $8.80 per share initial conversion price for a specified period, (ii) in certain change in control transactions, and (iii) when the trading price of the Notes does not exceed a minimum price level. For each $1,000 principal amount of Notes, the conversion value represents the amount equal to 113.6687 shares multiplied by the per share price of the Company’s common stock at the time of conversion. If the conversion value exceeds $1,000 per $1,000 in principal of Notes, the Company will pay $1,000 in cash and may pay the amount exceeding $1,000 in cash, stock or a combination of cash and stock, at the Company’s election.
The Company entered into a Registration Rights Agreement with the holders of the Notes, under which the Company is required to keep the shelf registration statement effective until the earlier of (i) the sale pursuant to the shelf registration statement of all of the Notes and/or shares of common stock issuable upon conversion of the Notes, and (ii) the expiration of the holding period applicable to such securities held by non-affiliates under Rule 144 under the Securities Act, or any successor provision, subject to certain permitted exceptions.
The Company was required to pay liquidated damages, subject to some limitations, to the holders of the Notes if the Company fails to comply with its obligations to register the Notes and the common stock issuable upon conversion of the Notes or the registration statement does not become effective within the specified time periods. In no event will liquidated damages accrue after the second anniversary of the date of issuance of the Notes or at a rate exceeding 0.50% of the issue price of the Notes. The Company had no other liabilities or monetary damages with respect to any registration default. If the holder has converted some or all of its Notes into common stock, the holder will not be entitled to receive any liquidated damages with respect to such common stock or the principal amount of the Notes converted.
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As of December 31, 2011, the carrying amount of the equity component was $35.2 million (December 26, 2010- $35.2 million), and the carrying amount of the debt component was $65.1 million (December 26, 2010—$61.6 million), which represents the principal amount of $68.3 million (December 26, 2010—$68.3 million) net of the unamortized discount of $3.2 million (December 26, 2010—$6.7 million). The balance of deferred debt issue costs as at December 31, 2011 is $0.2 million (December 26, 2010—$0.4 million). Since the holders may require the Company to repurchase the Notes on October 15, 2012, the Company reclassified the debt to short-term liabilities in the fourth quarter of 2011.
In October 2012, the Company retired the remaining 2.25% senior convertible notes at their face value of $68.3 million, resulting in no impact to the Consolidated Statements of Operations.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities under operating lease agreements, which expire at various dates through March 1, 2025.
Rent expense including operating costs for 2012, 2011 and 2010 was $10.5 million, $12.9 million, and $11.9 million, respectively. Excluded from rent expense for 2012, 2011 and 2010 was additional rent and operating costs of $0.2 million, $0.9 million and $2.7 million, respectively, related to excess facilities, which were previously accrued.
Minimum future rental payments under operating leases are as follows:
| (in thousands) |
$ | |||
| 2013 |
9,574 | |||
| 2014 |
8,693 | |||
| 2015 |
7,056 | |||
| 2016 |
5,945 | |||
| 2017 |
4,104 | |||
| Thereafter |
9,550 | |||
|
|
|
|||
| Total minimum future rental payments under operating leases |
$ | 44,922 | ||
|
|
|
|||
Supply Agreements
The Company has existing supply agreements with UMC and TSMC. The terms include but are not limited to, supply terms without minimum unit volume requirements for PMC, indemnification and warranty provisions, quality assurances and termination conditions.
Contingencies
In the normal course of business, the Company receives and makes inquiries with regard to possible patent infringements. Where deemed advisable, the Company may seek or extend licenses or negotiate settlements. The Company estimates the outcomes of such negotiations based on the facts and circumstances at any point in time. Management does not believe that such licenses or settlements will, individually or in the aggregate, have a material effect on the Company’s financial position, results of operations or cash flows.
Contingent consideration
The terms of our November 2010 acquisition of Wintegra, provide for potential additional earn-out based purchase consideration ranging from nil to $60 million, calculated on the basis of Wintegra’s 2011 revenue as described in the Agreement and Plan of Merger dated as of October 21, 2010. At acquisition, the Company recorded a liability for contingent purchase consideration of $28.2 million as part of the acquisition of Wintegra, which reflected the estimated fair value of the potential earn-out payment, calculated by applying the income approach. During the three months ended October 2, 2011, the Company determined that Wintegra’s 2011 revenues would be below earn-out levels, and the former Wintegra equity holders would not be eligible to receive this additional earn-out payment. Accordingly, the Company recognized a $29.4 million Revaluation of liability on contingent consideration on the Consolidated Statement of Operations. Since the earn-out requirements were not met, the Company had no obligations in connection with the contingent earn-out consideration and had no liabilities recorded as of December 31, 2011.
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NOTE 12. SPECIAL SHARES
At December 29, 2012 and December 31, 2011, the Company maintained a reserve of 1,019,000 and 1,029,000 shares, respectively, of PMC common stock to be issued to holders of PMC-Sierra, Ltd. (“LTD”) special shares.
The special shares of LTD, the Company’s principal Canadian subsidiary, are redeemable or exchangeable for PMC common stock. Special shares do not vote on matters presented to the Company’s stockholders, but in all other respects represent the economic and functional equivalent of PMC common stock for which they can be redeemed or exchanged at the option of the holders. The special shares have class voting rights with respect to transactions that affect the rights of the special shares as a class and for certain extraordinary corporate transactions involving LTD. If LTD files for bankruptcy, is liquidated or dissolved, the special shares receive as a preference the number of shares of PMC common stock issuable on conversion plus a nominal amount per share plus unpaid dividends, or at the holder’s option convert into LTD ordinary shares, which are the functional equivalent of voting common stock. If the Company files for bankruptcy, is liquidated, or dissolved, special shares of LTD receive the cash equivalent of the value of PMC common stock into which the special shares could be converted, plus unpaid dividends, or at the holder’s option convert into LTD ordinary shares. If the Company materially breaches its obligations to special shareholders of LTD (primarily to permit conversion of special shares into PMC common stock), the special shareholders may convert their shares into LTD ordinary shares.
These special shares of LTD are classified outside of stockholders’ equity until such shares are exchanged for PMC common stock. Upon exchange, amounts will be transferred from the LTD special shares account to the Company’s common stock and additional paid-in capital on the consolidated balance sheet.
NOTE 13. STOCKHOLDERS’ EQUITY
Authorized Capital Stock of PMC
At December 29, 2012 and December 31, 2011, the Company had an authorized capital of 905,000,000 shares, 900,000,000 of which are designated “Common Stock”, $0.001 par value, and 5,000,000 of which are designated “Preferred Stock”, $0.001 par value.
Stockholders’ Rights Plan
The Company adopted a stockholders’ rights plan in 2001, pursuant to which the Company declared a dividend of one share purchase right for each outstanding share of common stock. If certain events occur, including if an investor tenders for or acquires more than 15% of the Company’s outstanding common stock, stockholders (other than the acquirer) may exercise their rights and receive $650 worth of our common stock in exchange for $325 per right, or the Company may, at the Company’s option, issue one share of common stock in exchange for each right, or the Company may redeem the rights for $0.001 per right. This stockholders’ rights plan expired, pursuant to its terms, on May 25, 2011.
Stock Repurchase Program
On May 2, 2012, the Company entered into an Accelerated Stock Buyback agreement (“ASB agreement”) with Goldman, Sachs & Co. (“Goldman”) to repurchase an aggregate of $160 million of PMC common stock. The Company acquired these common shares as part of its $275 million stock repurchase program announced on March 13, 2012. The aggregate number of shares ultimately purchased was determined based on the weighted-average share price of our common shares over a specified period of time. The contract was settled on October 5, 2012. The total shares repurchased and cancelled under this ASB agreement was 26,829,309 common shares at a price of $5.96. The repurchased shares were retired immediately upon delivery. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.
On November 10, 2011, the Board of Directors of the Company authorized a share repurchase plan for fiscal year 2012. Under this authorization, the Company may repurchase common stock to offset dilution from employee equity grants and stock purchases, at an aggregate cost not exceeding $40 million. As of December 29, 2012, the Company completed its 2012 repurchase program and repurchased 6,902,625 shares for approximately $40 million in cash. The repurchased shares were retired immediately. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.
On May 5, 2011, the Board of Directors of the Company authorized a share repurchase plan for fiscal year 2011. Under this authorization, the Company may repurchase common stock to offset dilution from employee equity grants and stock purchases, at an aggregate cost not exceeding $40 million. As of December 31, 2011, the Company completed its 2011 repurchase program and repurchased 6,083,263 shares for approximately $40 million in cash. The repurchased shares were retired immediately. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.
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NOTE 14. EMPLOYEE BENEFIT PLANS
Post-Retirement Health Care Benefits
Our unfunded post-retirement benefit plan, which was assumed in connection with the acquisition of the Storage Semiconductor Business provides retiree medical benefits to eligible United States employees who meet certain age and service requirements upon retirement from the Company. These benefits are provided from the date of retirement until the employee qualifies for Medicare coverage. The amount of the retiree medical benefit obligation assumed by the Company was $1.1 million at the time of the acquisition.
At December 29, 2012 and December 31, 2011, the accumulated post-retirement benefit obligation was $1.3 million, with no unrecognized gain/loss or unrecognized prior service cost in both periods. The net period benefit expense was $1.4 million during 2011. The net period benefit expense in 2010 was $0.1 million. No distributions were made from the plan during the period. The Company includes accrued benefit costs for its post-retirement program in Accrued liabilities on the Company’s Consolidated Balance Sheet.
The health care accumulated post-retirement benefit obligations were determined at December 29, 2012 using a discount rate of 3.3% and a current year health care trend of 8.7% decreasing to an ultimate trend rate of 4.7% in 2027. The health care accumulated post-retirement benefit obligations were determined at December 31, 2011 using a discount rate of 4% and a current year health care trend of 9% decreasing to an ultimate trend rate of 4.7% in 2027.
Employee Retirement Savings Plans
The Company sponsors a 401(k) retirement plan for its employees in the United States and similar plans for its employees in Canada and other countries. Employees can contribute a percentage of their annual compensation to the plans, limited to maximum annual amounts set by local taxation authorities. The Company contributed $3.9 million $3.8 million and $3.1 million, and, to the plans in fiscal years 2012, 2011 and 2010, respectively.
Israeli Severance Plans
The Company’s has two types of severance agreements with employees in Israel, which are under Israeli labour laws. Under the first agreement, the Company’s liability for severance pay is calculated pursuant to Israeli severance pay law. Severance is based on the most recent salary of the employee multiplied by the number of years of employment. The severance pay liability of the Company to these employees reflects the undiscounted amount of the liability. The liability is partly covered by insurance policies and by regular deposits to severance pay funds. The Company records changes in the severance liability in the Consolidated Statements of Operations, net of gains and losses related to amounts in the severance pay funds.
Under the second type of severance agreement, the Company’s agreements with employees in Israel which are under Section 14 of the Severance Pay Law, 1963. Under this agreement, the Company satisfies its full obligation by contributing one month of the employee’s salary for each year of service into a fund managed by a third party. Neither the obligation, nor the amounts deposited on behalf of the employee for such obligation are recorded on the Consolidated Balance Sheet, as the Company is legally released from the obligation to the employees once the amounts have been deposited.
Severance expenses for 2012, 2011 and 2010, were $1.8 million, $2.0 million, and $1.2 million, respectively. The amount of the liability, net of the amounts funded under the first type of agreement noted above are included within Accrued liabilities on the Consolidated Balance Sheet in the amounts of $0.3 million, and $0.5 million, for the years ended December 29, 2012 and December 31, 2011, respectively. As at December 29, 2012, the amount of the net liability is comprised of $4.2 million for statutory severance pay liability, less $3.9 million in amounts funded. As at December 31, 2011, the amount of the net liability is comprised of $5.0 million for statutory severance pay liability, less $4.5 million of cumulative funding by the Company.
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NOTE 15. INCOME TAXES
For financial reporting purposes, income before income taxes includes the following components:
| Year Ended | ||||||||||||||||||||||||
| December 29, 2012 | December 31, 2011 | December 26, 2010 | ||||||||||||||||||||||
| Previously | As restated | Previously | As restated | Previously | As restated | |||||||||||||||||||
| (in thousands) |
reported | (See Note 19) | reported | (See Note 19) | reported | (See Note 19) | ||||||||||||||||||
| Domestic |
$ | (303,209 | ) | $ | (301,764 | ) | $ | 29,637 | $ | 29,637 | $ | 33,001 | $ | 33,001 | ||||||||||
| Foreign |
19,737 | 19,737 | 51,246 | 51,246 | 80,323 | 80,323 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | (283,472 | ) | $ | (282,027 | ) | $ | 80,883 | $ | 80,883 | $ | 113,324 | $ | 113,324 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The provision for income taxes consists of the following components:
| Year Ended | ||||||||||||||||||||||||
| December 29, 2012 | December 31, 2011 | December 26, 2010 | ||||||||||||||||||||||
| Previously | As restated | Previously | As restated | Previously | As restated | |||||||||||||||||||
| (in thousands) |
reported | (See Note 19) | reported | (See Note 19) | reported | (See Note 19) | ||||||||||||||||||
| Current: |
||||||||||||||||||||||||
| Domestic |
$ | 49,449 | 43,883 | $ | 629 | $ | 10,081 | $ | 13,036 | $ | 26,160 | |||||||||||||
| Foreign |
11,743 | 11,743 | 13,390 | 13,390 | 28,615 | 28,615 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 61,192 | 55,626 | 14,019 | 23,471 | 41,651 | 54,775 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Deferred: |
||||||||||||||||||||||||
| Domestic |
6,023 | 6,023 | 4,114 | 4,114 | 5,822 | 5,822 | ||||||||||||||||||
| Foreign |
(14,467 | ) | (15,658 | ) | (17,413 | ) | (17,688 | ) | (23,533 | ) | (23,533 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (8,444 | ) | (9,635 | ) | (13,299 | ) | (13,574 | ) | (17,711 | ) | (17,711 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Provision for (recovery of) income taxes |
$ | 52,748 | 45,991 | $ | 720 | $ | 9,897 | $ | 23,940 | $ | 37,064 | |||||||||||||
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Reconciliation between the Company’s effective tax rate and the U.S. Federal statutory rate is as follows:
| Year Ended | ||||||||||||||||||||||||
| December 29, 2012 | December 31, 2011 | December 26, 2010 | ||||||||||||||||||||||
| (in thousands) |
Previously reported |
As restated (See Note 19) |
Previously reported |
As restated (See Note 19) |
Previously reported |
As restated (See Note 19) |
||||||||||||||||||
| Loss (income) before provision for (recovery of) income taxes |
$ | (283,472 | ) | $ | (282,027 | ) | $ | 80,883 | $ | 80,883 | $ | 113,324 | $ | 113,324 | ||||||||||
| Federal statutory tax rate |
35 | % | 35 | % | 35 | % | 35 | % | 35 | % | 35 | % | ||||||||||||
| Income taxes at U.S. Federal statutory rate |
(99,215 | ) | (98,709 | ) | 28,309 | 28,309 | 39,663 | 39,663 | ||||||||||||||||
| Tax on intercompany transactions |
92,408 | 104,757 | 26,561 | 33,914 | 8,625 | 24,213 | ||||||||||||||||||
| Change in liability for unrecognized tax benefit |
5,842 | 7,691 | 6,119 | 5,083 | 10,184 | 6,350 | ||||||||||||||||||
| Non-deductible intangible asset amortization and impairment of goodwill and purchased intangible assets |
107,676 | 107,170 | 3,819 | 3,819 | 8,205 | 8,205 | ||||||||||||||||||
| Non-deductible stock-based compensation |
5,370 | 5,370 | 5,234 | 5,234 | 3,969 | 3,969 | ||||||||||||||||||
| Non-deductible items and other |
6,701 | 6,701 | (6,521 | ) | (6,521 | ) | (394 | ) | (394 | ) | ||||||||||||||
| Utilization of stock option related loss carry-forwards recorded in equity |
27,624 | 15,672 | 3,223 | 2,055 | 13,407 | 13,632 | ||||||||||||||||||
| State taxes |
— | — | — | 2,947 | — | 1,146 | ||||||||||||||||||
| Adjustment of prior year taxes and tax credits |
(1,811 | ) | (9,624 | ) | (27,236 | ) | (25,879 | ) | (5,095 | ) | (5,095 | ) | ||||||||||||
| Investment tax credits, net |
(19,194 | ) | (19,194 | ) | (18,455 | ) | (18,455 | ) | (14,416 | ) | (14,416 | ) | ||||||||||||
| Foreign and other rate differential |
(33,533 | ) | (33,533 | ) | (25,301 | ) | (25,301 | ) | (31,114 | ) | (31,114 | ) | ||||||||||||
| Change in valuation allowance |
(39,120 | ) | (40,310 | ) | 4,968 | 4,692 | (9,094 | ) | (9,095 | ) | ||||||||||||||
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|
|
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|
|
|
|
|
|
|||||||||||||
| Provision for (recovery of) income taxes |
$ | 52,748 | $ | 45,991 | $ | 720 | $ | 9,897 | $ | 23,940 | $ | 37,064 | ||||||||||||
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On a consolidated basis, the Company recorded a provision for income taxes of $46 million, a provision for income taxes of $9.9 million and a provision for income taxes of $37.1 million for 2012, 2011, and 2010, respectively. The effective tax rates were negative 16% for 2012 and positive 11% and 33% for 2011 and 2010, respectively.
The difference between our effective tax rates and the 35% US federal statutory rate in each of 2012, 2011, and 2010, resulted primarily from foreign earnings eligible for tax rates lower than the federal statutory rate due to economic incentives subject to certain criteria granted by foreign jurisdictions and extending to approximately 2020, investment tax credits earned, changes in valuation allowance, and adjustments for prior years taxes and tax credits, partially offset by non-deductible intangible asset amortization and impairment of goodwill and purchased intangible assets, the effect of inter-company transactions, utilization of stock option related loss carryforwards recorded in equity, changes in accruals related to the unrecognized tax benefit liabilities, and permanent differences arising from stock-based compensation and other items.
The 2012 income tax provision of $46 million consisted primarily of a reduction in tax expense of $98.7 million of income taxes at the federal statutory rate, a reduction in tax expense of $9.6 million relating to adjustment of prior years’ taxes and tax credits, a reduction in tax expense of $19.2 million relating to investment tax credits, a benefit of $33.5 million due to foreign and other rate differential, a reduction in tax expense of $33.6 million relating to change in valuation allowance and other non-deductible permanent differences, $104.8 million of tax expense arising from an inter-company dividend made in preparation for funding the Company’s share repurchase programs (including $20 million withholding taxes) and other intercompany transactions, $25 million tax expense on an inter-company sale of certain assets, $107.2 million relating to non-deductible intangible asset amortization, $7.7 million relating to change in liability for unrecognized tax benefits, $5.4 million relating to non-deductible stock-based compensation and $15.7 million relating to utilization of stock option related loss carry-forwards recorded in equity. See Note 19. Error Corrections.
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The 2011 income tax provision of $9.9 million consisted of tax at expense of $28.3 million at the US statutory rate offset by a foreign rate differential decrease in tax expense of $25.3 million, $18.5 million decrease in tax expense relating to net investment tax credits, recovery for $25.9 million related to adjustments to prior period estimates and a foreign subsidiary’s tax audit settlement, $2.1 million tax expense from stock option related loss carryforwards recognized in equity, $5.1 million tax expense relating to unrecognized tax benefits (including associated interest), $3.8 million increase in deferred tax expense arising from amortization of acquisition-related intangibles, $33.9 million tax expense on an inter-company sale of certain assets, $5.2 million tax expense on non-deductible stock-based compensation and $1.1 million of other tax expense related items.
The 2010 income tax provision of $37.1 million consisted of tax at expense of $39.7 million at the US statutory rate offset by a foreign rate differential decrease in tax expense of $31.1 million, $14.4 million decrease in tax expense relating to net investment tax credits, recovery for $5.1 million related to adjustments to prior period estimates, a reduction in tax expense of $9.1 million relating to change in valuation allowance, $13.6 million tax expense from stock option related loss carryforwards recognized in equity, $6.4 million tax expense relating to unrecognized tax benefits (including associated interest), $8.2 million increase in deferred tax expense arising from amortization of acquisition-related intangibles, $24.2 million tax expense on an inter-company sale of certain assets, $4 million tax expense on non-deductible stock-based compensation and $0.8 million of other tax expense related items.
The consolidated financial statements for the 2012, 2011 and 2010 include the tax effects associated with the sale of certain assets between our wholly-owned subsidiaries. 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 prepaid tax expenses were recorded in the years ended December 29, 2012, December 31, 2011 and December 26, 2010. The balance in long-term prepaid expenses as at December 29, 2012 and December 31, 2011, to be recognized in future years was $19.2 million and $34.3 million, respectively.
The provisions related to the tax accounting for stock-based compensation prohibit the recognition of a deferred tax asset for an excess benefit that has not yet been realized. As a result, the Company will only recognize an excess benefit from stock-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available have been utilized. In addition, the Company continued to elect to account for the indirect benefits of stock-based compensation such as the research and development tax credit through the consolidated statement of operations.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| Year Ended | ||||||||||||||||
| December 29, 2012 | December 31, 2011 | |||||||||||||||
| (in thousands) |
Previously reported |
As restated (See Note 19) |
Previously reported |
As restated (See Note 19) |
||||||||||||
| Deferred taxes: |
||||||||||||||||
| Net operating loss carryforwards |
$ | 102,152 | 5,604 | $ | 104,522 | $ | 755 | |||||||||
| Capital loss |
1,102 | 1,167 | 1,670 | 1,740 | ||||||||||||
| Credit carryforwards |
60,772 | 55,504 | 69,038 | 34,659 | ||||||||||||
| Reserves and accrued expenses |
21,637 | 10,036 | 27,221 | 18,497 | ||||||||||||
| Intangible assets |
2,736 | (1 | ) | 2,740 | — | |||||||||||
| Depreciation and amortization |
(506 | ) | 29,091 | 1,150 | 25,799 | |||||||||||
| Restructuring and other charges |
— | — | 1,680 | 1,680 | ||||||||||||
| State tax loss carryforwards |
9,193 | 12,863 | 9,513 | 13,208 | ||||||||||||
| Deferred income |
1,210 | 1,282 | 4,101 | 4,347 | ||||||||||||
| Other |
— | (469 | ) | — | 658 | |||||||||||
| Unrealized loss on investment |
(169 | ) | (167 | ) | 29 | 29 | ||||||||||
| Stock-based compensation |
— | 12,251 | — | 11,459 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total deferred tax assets |
198,127 | 127,161 | 221,664 | 112,831 | ||||||||||||
| Valuation allowance |
(146,658 | ) | (65,310 | ) | (185,776 | ) | (67,341 | ) | ||||||||
| Federal impact of state deferreds |
— | (4,989 | ) | — | (5,746 | ) | ||||||||||
| Acquired intangible assets and goodwill |
(46,338 | ) | (48,818 | ) | (43,039 | ) | (45,175 | ) | ||||||||
| Depreciation |
(9,542 | ) | (9,542 | ) | (4,269 | ) | (4,269 | ) | ||||||||
| Capitalized technology & other |
726 | 726 | (474 | ) | (474 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total net deferred tax liability |
$ | (3,685 | ) | (772 | ) | $ | (11,894 | ) | $ | (10,174 | ) | |||||
|
|
|
|
|
|
|
|
|
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In the table reflecting significant components of the Company’s deferred tax assets and liabilities, the Company had previously presented the total available amounts of its tax attributes, including the amounts relating to excess tax benefits. The disclosures above have been adjusted to exclude the amounts relating to excess tax benefits from the amounts of net operating loss carryforwards, state tax loss carryforwards and credit carryforwards.
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At December 29, 2012, the Company has statutory tax losses as follows: gross $179 million of federal domestic and foreign tax loss carryforwards, which expire through 2027; and gross $212 million of U.S. state tax loss carry-forwards, which expire through 2029, of which $3.6 million, $31 million, 49.5 million, $37.4 million, and $41.3 million expire in fiscal years 2013, 2014, 2015, 2016 and 2017, respectively, and the remainder expire in the years following. The utilization of a portion of these loss carry-forwards may be subject to annual limitations under federal and state income tax legislation. Substantially all of the Company’s loss carry-forwards relate to the Company’s domestic operations for which no tax benefit has been recorded. The tax benefits relating to approximately $120 million of the federal net operating loss carryforwards and $111 million of the state net operating loss carryforwards will be credited to additional paid-in-capital when recognized.
At December 29, 2012, the Company has statutory tax credits as follows: $4.5 million of federal domestic alternative minimum tax credits which do not expire; $15.5 million of U.S. state research and development credits which do not expire; $37 million of foreign tax credits which expire through 2022; and $64.3 million of federal and foreign research and development credits, of which $0.7 million expires in 2013 and the remainder expires in years beyond 2017. The tax benefits relating to approximately $47.9 million of the federal credits will be credited to additional paid-in-capital when recognized.
The Company intends to indefinitely reinvest undistributed earnings of foreign subsidiaries. Accordingly, the Company has not recorded a deferred tax liability on these earnings. If such undistributed earnings were repatriated, the Company would not incur U.S. federal and state taxes due to available carry-forward losses and credits, however, approximately $84 million would be recorded as a deferred tax liability with a corresponding amount of deferred tax assets also recognized.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in millions):
| Year Ended | ||||||||||||||||||||||||
| December 29, 2012 | December 31, 2011 | December 26, 2010 | ||||||||||||||||||||||
| (in thousands) |
Previously reported |
As restated (See Note 19) |
Previously reported |
As restated (See Note 19) |
Previously reported |
As restated (See Note 19) |
||||||||||||||||||
| Gross unrecognized benefit at beginning of the year |
$ | 73.5 | 103.6 | $ | 68.6 | $ | 97.6 | $ | 49.1 | $ | 84.5 | |||||||||||||
| Increase in tax positions for prior years |
— | (21.3 | ) | — | — | 1.5 | 1.5 | |||||||||||||||||
| Increase in tax positions for current year |
2.8 | 4.8 | 6.7 | 7.8 | 16.0 | 9.6 | ||||||||||||||||||
| Lapse in statute of limitations |
(1.1 | ) | (1.1 | ) | (1.2 | ) | (1.2 | ) | — | — | ||||||||||||||
| Effect on foreign currency gain (loss) on translation |
1.5 | 1.5 | (0.6 | ) | (0.6 | ) | 2.0 | 2.0 | ||||||||||||||||
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| Ending balance before interest accrual |
$ | 76.7 | 87.5 | $ | 73.5 | $ | 103.6 | $ | 68.6 | $ | 97.6 | |||||||||||||
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The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $87.5 million at December 29, 2012 (2011—$103.6 million, 2010—$97.6 million). The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. During 2012, the Company had accrued interest and penalties related to unrecognized tax benefits of $3.9 million (2011—$3 million, 2010—$2.8 million).
The Company and its subsidiaries file income tax returns in the U.S. and in various states, local and foreign jurisdictions. The 2007 through 2012 tax years generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2007 through 2012 tax years generally remain subject to examination by their respective tax authorities. The Company does not reasonably estimate that the unrecognized tax benefit will change significantly within the next 12 months.
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NOTE 16. SEGMENT INFORMATION
The Company derives its net revenues from the following operating segments: Communication Products, Enterprise Storage Products, Microprocessor Products, and Broadband Wireless Products.
During 2012, the Fiber-to-the-Home Products, and the Wireless Infrastructure and Networking Products were combined with the Communications Products operating segment. In addition, Channel Storage Products was combined with the Enterprise Storage Products operating segment.
All operating segments noted above have been aggregated into one reportable segment because they have similar long-term economic characteristics, products, production processes, types or classes of customers and methods used to distribute their products. Accordingly, the Company has one reportable segment—semiconductor solutions for communications network infrastructure.
Enterprise-wide information is provided below. Geographic revenue information is based on the location of the customer invoiced. Long-lived assets include property and equipment, goodwill and other intangible assets and other long-term assets. Geographic information about long-lived assets is based on the physical location of the assets.
| Year Ended | ||||||||||||
| (in thousands) |
December 29, 2012 |
December 31, 2011 |
December 26, 2010 |
|||||||||
| Net revenues |
||||||||||||
| China |
$ | 206,372 | $ | 236,186 | $ | 217,148 | ||||||
| Asia, other |
74,689 | 74,832 | 84,230 | |||||||||
| Japan |
70,120 | 85,999 | 95,427 | |||||||||
| United States |
73,069 | 114,224 | 96,207 | |||||||||
| Taiwan |
62,957 | 83,274 | 90,303 | |||||||||
| Europe and Middle East |
40,466 | 51,115 | 45,482 | |||||||||
| Other foreign |
3,324 | 8,674 | 6,285 | |||||||||
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| Total |
$ | 530,997 | $ | 654,304 | $ | 635,082 | ||||||
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| (in thousands) |
December 29, 2012 |
December 31, 2011 |
December 26, 2010 |
|||||||||
| Long-lived assets |
||||||||||||
| Canada |
$ | 12,944 | $ | 12,685 | $ | 12,608 | ||||||
| United States |
36,612 | 7,450 | 7,014 | |||||||||
| Israel |
9,776 | 3,885 | 5,422 | |||||||||
| Other |
4,432 | 3,775 | 2,656 | |||||||||
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| Total |
$ | 63,764 | $ | 27,795 | $ | 27,700 | ||||||
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During 2012 and 2011, the Company had two end customers whose purchases represented 10% or more of net revenues. In 2010, the Company had one end customer whose purchases represented 10% or more of net revenues. In 2012, those two end customers had purchases that represented 20% and 12% of net revenues, respectively. In 2011, those two end customers had purchases that represented 20% and 10% of net revenues, respectively. In 2010, the Company had one end customer whose purchases represented 20% of net revenues.
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NOTE 17. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted net (loss) income per share:
| Year Ended | ||||||||||||
| (in thousands, except per share amounts) |
December 29, 2012 (As Restated) |
December 31, 2011 (As Restated) |
December 26, 2010 (As Restated) |
|||||||||
| Numerator: |
||||||||||||
| Net (loss) income: |
$ | (328,018 | ) | $ | 70,986 | $ | 76,260 | |||||
| Denominator: |
||||||||||||
| Basic weighted average common shares outstanding(1) |
216,593 | 233,210 | 231,427 | |||||||||
| Dilutive effect of employee stock options and awards |
— | 1,974 | 3,360 | |||||||||
| Diluted weighted average common shares outstanding(1) |
216,593 | 235,184 | 234,787 | |||||||||
| Basic net (loss) income per share |
$ | (1.51 | ) | $ | 0.3 | $ | 0.33 | |||||
| Diluted net (loss) income per share |
$ | (1.51 | ) | $ | 0.3 | $ | 0.32 | |||||
| (1) | PMC-Sierra,Ltd. Special Shares are included in the calculation of basic weighted average common shares outstanding. |
In 2012, the Company had approximately 1.5 million stock-based awards that were not included in diluted net loss per share because they would be antidilutive.
NOTE 18. IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS
In 2010 and 2011 the Company performed the first step (“step one”) of its annual quantitative goodwill impairment assessment (“the test”) for each of its reporting units and determined no impairment was indicated as the estimated fair value of each of the reporting units substantially exceeded its respective carrying value.
In the third quarter of 2012, the Company experienced weaker quarterly results and lower future projections than previously expected in its Fiber-to-the-Home (“FTTH”) and Wintegra reporting units. This was driven by slower adoption rates of FTTH technology in markets outside of Asia and prolonged weak carrier spending which negatively impacted Wintegra. These circumstances triggered the Company to perform step one of the impairment test in the third quarter of 2012 and we determined that the estimated fair value of the reporting units was lower than their respective carrying values.
We estimated the fair values of these reporting units using a discounted cash flow model, or income approach. The discounted cash flows for each reporting unit were based on discrete financial forecasts developed by management for planning purposes.
Cash flows beyond the discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit and considered terminal growth rates for other publicly traded companies. Future cash flows were discounted to present value by incorporating appropriate present value techniques.
Specifically, the income approach valuations included the following assumptions, which were similar to those used in 2011:
| 2012 | ||
| Discount rate |
15% | |
| Terminal growth rate |
up to 6% | |
| Tax rate |
0-12% | |
| Risk free rate |
3% | |
| Beta |
1.28 |
Under step one, the Company estimated that the carrying value of these reporting units exceeded the respective fair values. Thus the Company conducted step two of the test by estimating the fair value of the net assets acquired in these acquisitions, and measuring the estimated fair value of each reporting unit against the carrying value of its net assets. The implied goodwill was then compared to the carrying value of goodwill, resulting in a write-down of $146.3 million for FTTH and $121.3 million for Wintegra.
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Also, at the end of the third quarter of 2012, we calculated the fair values of acquired intangible assets using the income approach and determined and recorded impairment charges of $7 million related to purchased intangible assets arising from the acquisition of Wintegra. The main factor contributing to this impairment charge was the reduction of forecasted cash flows as described above.
NOTE 19. ERROR CORRECTIONS
The historical consolidated financial statements for fiscal 2012, 2011, and 2010 have been restated to correct the misapplication of accounting principles related to income tax benefits associated with stock option deductions in excess of the expense recognized in the financial statements. In prior periods impacted by this matter, the Company understated the income tax benefits of its loss carry-forwards that are required to be included in equity, rather than in income tax expense (benefit). These income tax benefits were generated primarily in the 1999 and 2000 years and were utilized to reduce the previously recorded income tax expense throughout the years from 2006 and into the first two quarters of 2013. From 2006 and forward, the Company should have recorded the income tax benefit of utilizing these stock option related loss carry-forwards as an increase to Additional Paid-in Capital, rather than as a reduction of income tax expense. There was no change to the total amount of income tax loss carry-forwards or any other income tax assets available or utilized for tax purposes, nor to the actual amount of income tax payable to the taxing authorities as a result of this matter, in any period. In connection with restating our historical financial statements, the Company also made certain other corrections for the timing of recognition of amounts related to amended tax return filings and certain tax credits, and recognition of a foreign subsidiary’s deferred tax assets, not previously recognized. The foreign subsidiary was acquired in 2010 and the deferred tax assets should have been recognized as part of the acquisition accounting, and therefore resulted in a corresponding adjustment to goodwill.
The tables below illustrate the effects on the Consolidated Balance Sheets and Statements of Operations:
| As of | ||||||||||||||||||||||||
| December 29, 2012 | December 31, 2011 | |||||||||||||||||||||||
| (in thousands) |
As Restated | As Previously Reported in 10-Q* |
As Previously Reported in 10-K** |
As Restated | As Previously Reported in 10-Q* |
As Previously Reported in 10-K** |
||||||||||||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS |
||||||||||||||||||||||||
| Non-current assets: |
||||||||||||||||||||||||
| Prepaid tax expenses |
$ | 19,152 | $ | 11,851 | $ | 25,077 | $ | 34,318 | $ | 18,293 | $ | 27,898 | ||||||||||||
| Goodwill |
252,419 | 252,419 | 252,419 | 519,454 | 520,899 | 520,899 | ||||||||||||||||||
| Non-current liabilities |
||||||||||||||||||||||||
| Deferred tax and other long-term tax liabilities |
$ | 41,936 | $ | 44,849 | $ | 44,849 | $ | 38,943 | $ | 40,663 | $ | 40,663 | ||||||||||||
| Liability for unrecognized tax benefits—non-current |
$ | 34,957 | $ | 29,236 | $ | 38,915 | $ | 33,020 | $ | 26,929 | $ | 38,460 | ||||||||||||
| Equity: |
||||||||||||||||||||||||
| Common stock and additional paid in capital |
$ | 1,553,137 | $ | 1,527,710 | $ | 1,527,084 | $ | 1,623,236 | $ | 1,587,587 | $ | 1,577,792 | ||||||||||||
| Accumulated deficit |
$ | (917,825 | ) | $ | (896,891 | ) | $ | (892,718 | ) | $ | (515,623 | ) | $ | (490,183 | ) | $ | (482,314 | ) | ||||||
| Year ended | ||||||||||||||||||||||||||||||||||||
| December 29, 2012 | December 31, 2011 | December 26, 2010 | ||||||||||||||||||||||||||||||||||
| (in thousands, except for per share |
As Restated | As Previously Reported in 10-Q* |
As Previously Reported in 10-K** |
As Restated | As Previously Reported in 10-Q* |
As Previously Reported in 10-K** |
As Restated | As Previously Reported in 10-Q* |
As Previously Reported in 10-K** |
|||||||||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
||||||||||||||||||||||||||||||||||||
| Impairment of goodwill and purchased intangible assets |
$ | 274,637 | $ | 276,082 | $ | 276,082 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Provision for income taxes |
$ | (45,991 | ) | $ | (49,052 | ) | $ | (52,748 | ) | $ | (9,897 | ) | $ | 183 | $ | (720 | ) | $ | (37,064 | ) | $ | (33,507 | ) | $ | (23,940 | ) | ||||||||||
| Net (loss) income |
$ | (328,018 | ) | $ | (332,524 | ) | $ | (336,220 | ) | $ | 70,986 | $ | 81,066 | $ | 80,163 | $ | 76,260 | $ | 79,817 | $ | 89,384 | |||||||||||||||
| Net (loss) income per common share—basic |
$ | (1.51 | ) | $ | (1.54 | ) | $ | (1.55 | ) | $ | 0.3 | $ | 0.35 | $ | 0.34 | $ | 0.33 | $ | 0.34 | $ | 0.39 | |||||||||||||||
| Net (loss) income per common share—diluted |
$ | (1.51 | ) | $ | (1.54 | ) | $ | (1.55 | ) | $ | 0.3 | $ | 0.34 | $ | 0.34 | $ | 0.32 | $ | 0.34 | $ | 0.38 | |||||||||||||||
| * | As previously reported in our March 30, 2013 Form 10-Q |
| ** | As previously reported in our December 29, 2012 Form 10-K |
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management, with participation by our CEO and CFO, has designed our disclosure controls and procedures to provide reasonable assurance of achieving desired objectives. As required by SEC Rule 13a-15(b), in connection with filing the Original Form 10-K on February 22, 2013, management conducted an evaluation, with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of December 29, 2012, the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 29, 2012.
Subsequent to the evaluation of our disclosure controls and procedures as of December 29, 2012, in connection with the restatement discussed in Note 19 to the consolidated financial statements included in Item 8 of this report and the filing of this Amendment, management, with the participation of our CEO and CFO, re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 29, 2012, and our CEO and CFO concluded that, because of the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of December 29, 2012.
Management’s Annual Report on Internal Control over Financial Reporting (Restated)
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d -15(f) of the Securities Exchange Act of 1934 as amended). Our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the filing of the original 2012 Form 10-K, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 29, 2012 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based upon that evaluation, management concluded that our internal control over financial reporting was effective as of December 29, 2012.
Subsequent to the evaluation of the effectiveness of our internal control over financial reporting as of December 29, 2012, in connection with the restatement discussed in Note 19 to the consolidated financial statements included in Item 8 of this report and the filing of this Amendment, management re-evaluated the effectiveness of our internal control over financial reporting and, based on the criteria established in Internal Control—Integrated Framework issued by the COSO, determined that the material weakness described below existed as of December 29, 2012. Accordingly, as a result of this material weakness, management concluded that our internal control over financial reporting was not effective as of December 29, 2012. As a result, management has restated its Annual Report on Internal Control over Financial Reporting.
In connection with our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified a material weakness in our internal control over financial reporting relating to our accounting for income taxes as of December 29, 2012. The Company did not maintain effective controls over the application and monitoring of its accounting for income taxes. Specifically, the Company did not have controls designed and in place to ensure the accuracy and completeness of financial information provided by third-party tax advisors used in accounting for income taxes and the determination of deferred income tax assets and liabilities and the related income tax provision and the review and evaluation of the application of generally accepted accounting principles relating to specific complex areas of accounting for income taxes.
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In prior periods impacted by this matter, the Company understated the income tax benefits of its loss carry-forwards that are required to be included in equity, rather than in income tax expense (benefit). These income tax benefits were generated primarily in the 1999 and 2000 years and were utilized to reduce the previously recorded income tax expense throughout the years from 2006 and into the first two quarters of 2013. From 2006 and forward, the Company should have recorded the income tax benefit of utilizing these stock option related loss carry-forwards as an increase to Additional Paid-in Capital, rather than as a reduction of income tax expense.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have determined that further improvements are required in our tax accounting processes before we can consider the material weakness remediated.
Management’s Remediation Initiatives
As of the date of this Amendment, new and enhanced controls have been designed and implemented. These controls include:
| • | Quarterly preparation of additional analysis related to the tracking of excess tax benefits associated with stock options deductions; |
| • | Enhanced oversight and review procedures over financial information provided to and advice received from external advisors on a quarterly basis; and |
| • | Enhanced internal documentation and review procedures over material/non-routine transactions impacting GAAP tax accounting, as they arise. |
We believe that the action described above will remediate the material weakness we have identified and strengthen our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Stockholders of PMC-Sierra, Inc.:
We have audited the internal control over financial reporting of PMC-Sierra, Inc. and subsidiaries (the “Company”) as of December 29, 2012 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Restated). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our report dated February 28, 2013, we expressed an unqualified opinion on internal control over financial reporting. As described in the following paragraph, a material weakness was subsequently identified as a result of the restatement of the previously issued financial statements. Accordingly, management has revised its assessment about the effectiveness of the Company’s internal control over financial reporting and our present opinion on the effectiveness of the Company’s internal control over financial reporting as of December 29, 2012, as expressed herein, is different from that expressed in our previous report.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s financial statements will not be prevented or detected and corrected on a timely basis. The following material weakness has been identified and included in management’s assessment: the Company did not have controls designed and in place to ensure the accuracy and completeness of financial information provided by third party tax advisors used in accounting for income taxes and the determination of deferred income tax assets and liabilities and the related income tax provision and the review and evaluation of the application of generally accepted accounting principles relating to specific complex areas of accounting for income taxes.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 29, 2012 of the Company and this report does not affect our report on such financial statements and financial statement schedules.
In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 29, 2012, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 29, 2012 of the Company and our report dated February 28, 2013 (November 12, 2013 as to the effects of the restatement discussed in Note 19) expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the restatement.
/s/ DELOITTE LLP
Vancouver, Canada
February 28, 2013 (November 12, 2013 as to the effects of the material weakness described in Management’s Annual Report on Internal Control over Financial Reporting (Restated))
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| ITEM 9B. | OTHER INFORMATION. |
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The information concerning our directors and executive officers required by this Item is incorporated by reference from the information set forth in the sections entitled “Election of Directors”, “Code of Business Conduct and Ethics”, “Executive Officers”, and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2013 Annual Stockholder Meeting.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information required by this Item is incorporated by reference from the information set forth in the sections entitled “Director Compensation,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in our Proxy Statement for the 2013 Annual Stockholder Meeting.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information concerning security ownership of certain beneficial owners that is required by this Item is incorporated by reference from the information set forth in the section entitled “Common Stock Ownership of Certain Beneficial Owners and Management” in our Proxy Statement for the 2013 Annual Stockholder Meeting.
Equity Compensation Plan Information
The following table provides information as of December 29, 2012 with respect to the shares of our common stock that may be issued under our existing equity compensation plans.
| Plan Category |
Number of Securities to beissued upon exercise of outstanding options and vestingof outstanding RSU’s |
Weighted-average exercise price of outstanding options |
Number of securities remaining available for future issuance underequity compensation plans |
|||||||||
| Equity compensation plans approved by security holders(1) |
31,480,044 | $ | 7.65 | 30,416,476 | (2) | |||||||
| Equity compensation plans not approved by security holders(3) |
1,879,204 | $ | 11.95 | — | ||||||||
|
|
|
|||||||||||
| Balance at December 29, 2012 |
33,359,248 | $ | 7.94 | 30,416,476 | (4) | |||||||
|
|
|
|||||||||||
| (1) | Consists of the 1994 Incentive Stock Plan (the “1994 Plan”), the 2008 Equity Plan (the “2008 Plan”) and the 2011 Employee Stock Purchase Plan (“2011 Plan”). |
| (2) | Includes 21,963,342 shares available for issuance in the 2008 Plan and 8,453,134 shares available for issuance in the 2011 Plan. |
| (3) | Consists of the 2001 Stock Option Plan (the “2001 Plan”), which was created to replace a number of stock option plans assumed by us in connection with mergers and acquisitions we completed prior to 2001. The number of options that may be granted under the 2001 Plan equals (i) the number of shares reserved under the assumed stock option plans that were not subject to outstanding or exercised options plus (ii) the number of options that were outstanding at the time the plans were assumed but that have subsequently been cancelled plus (iii) 10 million shares that were added to the plan in 2003. This also includes Passave Inc. 2003 Israeli Option Plan (the “2003 Plan”) and the Passave, Inc. 2005 U.S. Stock Incentive Plan (the “2005 Plan”), which were assumed through the Passave acquisition, as well as, the Wintegra, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) which was assumed through the Wintegra acquisition. |
| (4) | On April 30, 2008 the security holders of PMC Sierra approved the 2008 Plan. The effective date for the 2008 Plan was January 1, 2009. The 2008 Plan replaced the 1994 Plan and the 2001 Plan, and no further awards shall be made under either the 1994 Plan or the 2001 Plan. On May 6, 2010 the security holders of PMC Sierra approved the 2011 Plan. The effective date for the 2011 Plan was February 11, 2011. The 2011 Plan replaced the 1991 Employee Stock Purchase (the “1991 Plan”), and no further awards shall be made under the 1991 Plan. |
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. |
The information required by this Item is incorporated by reference from the information set forth in the section entitled “Executive Compensation Change of Control and Severance Agreements” in our Proxy Statement for the 2013 Annual Stockholder Meeting.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The information required by this Item is incorporated by reference from our Proxy Statement for the 2013 Annual Stockholder Meeting.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
| (a) | 1. Consolidated Financial Statements |
The financial statements (including the notes thereto) listed in the accompanying index to financial statements and financial statement schedules are filed within this Annual Report on Form 10-K/A in Item 8 of Part II.
| 2. | Financial Statement Schedules |
Financial Statement Schedules required by this item are listed on page 84 of this Annual Report on Form 10-K/A.
| 3. | Exhibits |
The exhibits listed under Item 15(b) are filed as part of this Annual Report on Form 10-K/A.
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| (b) | Exhibits pursuant to Item 601 of Regulation S-K. |
| Incorporated
Exhibit |
Description |
Form |
Date |
Number | Filed | |||||||
| 2.1 | Agreement and Plan of Merger by and among PMC-Sierra, Inc., Rosewood Acquisition Corp., Wintegra Inc. and Concord (k.t.) Venture Management Ltd., as Stockholders’ Agent, dated as of October 21, 2010 | 8-K | 10/26/2010 | 2.1 | ||||||||
| 2.2 | Amendment, dated as of November 18, 2010, to the Agreement and Plan of Merger by and among PMC-Sierra, Inc., Rosewood Acquisition Corp., Wintegra, Inc. and Concord (k.t.) Venture Management Ltd., as Stockholders’ Agent, dated as of October 21, 2010 | 8-K | 11/19/2010 | 2.2 | ||||||||
| 3.1 | Amended and Restated Certificate of Incorporation of PMC-Sierra, Inc., as amended on May 5, 2011 | 10-K | 2/28/2012 | 3.1 | ||||||||
| 3.2 | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of the Registrant | S-3 | 11/8/2001 | 3.2 | ||||||||
| 3.3 | Amended and Restated Bylaws of the Registrant | 8-K | 5/9/2011 | 3.2 | ||||||||
| 4.1 | Specimen of Common Stock Certificate of the Registrant | S-3 | 8/27/1997 | 4.4 | ||||||||
| 4.2 | Exchange Agreement dated September 2, 1994 by and between the Registrant and PMC-Sierra, Ltd. | 8-K | 2/19/1994 | 2.1 | ||||||||
| 4.3 | Amendment to Exchange Agreement effective August 9, 1995 | 8-K | 9/6/1995 | 2.1 | ||||||||
| 4.4 | Terms of PMC-Sierra, Ltd. Special Shares | S-3 | 9/19/1995 | 4.3 | ||||||||
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| 4.6 | Purchase and Sale Agreement dated October 28, 2005, between PMC-Sierra, Inc. and Avago Technologies Pte. Limited | 8-K | 11/3/2005 | 2.1 | ||||||||
| 4.7 | Indenture Agreement dated October 26, 2005, between the Company and U.S. Bank National Association, as trustee | 8-K | 10/26/2005 | 4.1 | ||||||||
| 4.8 | Agreement and Plan of Merger dated April 4, 2006, between PMC-Sierra, Inc. and Passave Inc. | 8-K | 4/4/2006 | 2.1 | ||||||||
| 10.1^ | 1991 Employee Stock Purchase Plan, as amended | 10-K | 3/1/2007 | 10.1 | ||||||||
| 10.2^ | 1994 Incentive Stock Plan, as amended | 10-K | 3/1/2007 | 10.2 | ||||||||
| 10.3^ | 2001 Stock Option Plan, as amended | 10-K | 3/1/2007 | 10.3 | ||||||||
| 10.4^ | 2008 Equity Plan | S-8 | 8/12/2008 | 4.2 | ||||||||
| 10.5^ | Form of Indemnification Agreement between the Registrant and its directors and officers, as amended and restated | 10-K | 3/28/2003 | 10.4 | ||||||||
| 10.6^ | Form of Change of Control Agreement by and between the Registrant and the executive officers | 10-K | 2/24/2010 | 10.6 | ||||||||
| 10.7 | Form of Amended and Restated Change of Control Agreement by and between the Registrant and the executive officers | 10-K | 2/28/2013 | 10.7 | ||||||||
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| 10.8 | Offer of Employment/Position by and between the Registrant and Steven J. Geiser | 10-K | 2/28/2013 | 10.8 | ||||||||
| 10.9 | Separation Agreement, dated as of August 7, 2012, by and between the Registrant and Michael W. Zellner | 10-Q | 8/9/2012 | 10.2 | ||||||||
| 10.10 | Amendment 1 to the Separation Agreement by and between the Registrant and Michael W. Zellner, dated November 5, 2012 | 10-Q | 11/8/2012 | 10.1 | ||||||||
| 10.11 | Net Building Lease dated May 15, 1996 by and between PMC-Sierra, Ltd. And Pilot Pacific Developments Inc. | 10-K | 4/14/1997 | 99.A4 | ||||||||
| 10.12 | First Amendment to Building Lease Agreements between WHTS Freedom Circle Partners, LLC and the Registrant | 10-Q | 11/14/2001 | 10.46 | ||||||||
| 10.13 | Building Lease Agreement between Kanata Research Park Corporation and PMC-Sierra, Ltd. | 10-K | 4/2/2001 | 10.44 | ||||||||
| 10.14 | Building Lease Agreement between Transwestern—Robinson I, LLC and PMC-Sierra US, Inc. | 10-K | 4/2/2001 | 10.45 | ||||||||
| 10.15* | Forecast and Option Agreement by and among the Registrant, PMC-Sierra, Ltd., and Taiwan Semiconductor Manufacturing Corporation. | 10-K | 3/20/2000 | 10.31 | ||||||||
| 10.16 | Sixth Amendment to Building Lease Agreement between PMC-Sierra, Ltd. and Production Court Property Holdings Inc. | 10-Q | 11/10/2003 | 10.1 | ||||||||
| 10.17 | Amendment for Purchase and Sale of Real Property between WHTS Freedom Circle Partners II, L.L.C. and PMC-Sierra, Inc. | 10-Q | 11/10/2003 | 10.2 | ||||||||
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| 10.18 | Amendment for Purchase and Sale of Real Property between PMC-Sierra, Inc. and WB Mission Towers, L.L.C. | 10-Q | 11/10/2003 | 10.3 | ||||||||
| 10.19 | Director Compensation—Equity Acceleration upon Change of Control | 10-Q | 8/6/2009 | 10.1 | ||||||||
| 10.20 | United States District Court of Northern District of California San Jose Division—In re PMC-Sierra, Inc. Derivative Litigation—Master File No. C-06-05330-RS—Stipulation of Settlement | 8-K | 1/26/2010 | 99.2 | ||||||||
| 10.21 | Office Lease | 10-Q | 11/4/2010 | 10.1 | ||||||||
| 10.22 | Credit Agreement dated as of November 18, 2010 by and among PMC-Sierra US, Inc. a Delaware corporation, PMC-Sierra, Inc., a Delaware corporation, and Bank of America, N.A. | 8-K | 11/19/2010 | 10.1 | ||||||||
| 10.23 | 2011 Employee Stock Purchase Plan | Def 14A | 3/10/2010 | — | ||||||||
| 10.24 | Amended and Restated Executive Employment Agreement | 10-K | 2/28/2012 | 10.22 | ||||||||
| 10.25 | Second Amended and Restated Executive Employment Agreement | 10-K | 2/28/2013 | 10.25 | ||||||||
| 10.26 | Master and Supplemental Confirmation For Collared Accelerated Stock Buyback between Goldman, Sachs & Co. and the Registrant dated May 2, 2012 | 10-Q | 8/9/2012 | 10.1 | ||||||||
| 10.27 | PMC-Sierra, Inc. Restricted Stock Unit Agreement (Performance-Based Vesting Award) between PMC-Sierra, Inc. and Gregory S. Lang | 8-K | 8/27/2012 | 10.1 | ||||||||
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| 12.1 | Statement of Computation of Ratio of Earnings to Fixed Charges | X | ||||||||||
| 21.1 | Subsidiaries of the Registrant | 10-K | 2/28/2013 | 21.1 | ||||||||
| 23.1 | Consent of Deloitte LLP, Independent Registered Chartered Accountants | X | ||||||||||
| 24.1 | Power of Attorney | 10-K | 2/28/2013 | 24.1 | ||||||||
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| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) | X | ||||||||
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) | X | ||||||||
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) (furnished, not filed) | X | ||||||||
| 32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) (furnished, not filed) | X | ||||||||
| 101.INS | XBRL Instance Document | X | ||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||
| * | Confidential portions of this exhibit have been omitted and filed separately with the Commission. |
| ^ | Indicates management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10K. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PMC-SIERRA, INC. | ||||
| (Registrant) | ||||
| Date: November 12, 2013 | /s/ Steven J. Geiser | |||
| Steven J. Geiser | ||||
| Vice President, Chief Financial Officer and Principal Accounting Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name |
Title |
Date | ||
| /s/ Gregory S. Lang Gregory S. Lang |
President, Chief Executive Officer (Principal Executive Officer) and Director | November 12, 2013 | ||
| /s/ Steven J. Geiser Steven J. Geiser |
Vice President, Chief Financial Officer (and Principal Accounting Officer) | November 12, 2013 | ||
| /s/ * Jonathan J. Judge |
Chairman of the Board of Directors | November 12, 2013 | ||
| /s/ * Richard E. Belluzzo |
Director | November 12, 2013 | ||
| /s/ * James V. Diller |
Director | November 12, 2013 | ||
| /s/ * Dr. Michael R. Farese |
Director | November 12, 2013 | ||
| /s/ * Michael A. Klayko |
Director | November 12, 2013 | ||
| /s/ * William H. Kurtz |
Director | November 12, 2013 | ||
| /s/ * Dr. Richard N. Nottenburg |
Director | November 12, 2013 |
| *By: | /s/ Gregory S. Lang | |
| Name: | Gregory S. Lang | |
| Attorney-in-Fact |
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SCHEDULE II—Valuation and Qualifying Accounts
| Charged to | ||||||||||||||||
| Balance at | expenses | |||||||||||||||
| Beginning | or other | Balance at | ||||||||||||||
| of year | accounts | Write-offs | end of year | |||||||||||||
| Allowance for doubtful accounts |
||||||||||||||||
| December 29, 2012 |
$ | 1,952 | $ | (19 | ) | $ | (319 | ) | $ | 1,614 | ||||||
| December 31, 2011 |
$ | 1,888 | $ | 64 | $ | — | $ | 1,952 | ||||||||
| December 26, 2010 |
$ | 1,259 | $ | 629 | $ | — | $ | 1,888 | ||||||||
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INDEX TO EXHIBITS
| Exhibit |
Description | |
| 12.1 | Statement of Computation of Ratio of Earnings to Fixed Charges | |
| 23.1 | Consent of Deloitte LLP, Independent Registered Chartered Accountants | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) | |
| 32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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