PMC Reports Third Quarter 2015 Results

PMC-Sierra, Inc. (PMC®) (Nasdaq:PMCS), the semiconductor and software solutions innovator transforming networks that connect, move and store big data, today reported results for the third quarter ended September 26, 2015.

Net revenues in the third quarter of 2015 totaled $133.6 million, an increase of 7.1 percent compared to $124.8 million in the second quarter of 2015, and a decrease of 1.4 percent from $135.5 million in the third quarter of 2014.

GAAP net income in the third quarter of 2015 totaled $6.7 million or $0.03 per diluted share, compared to GAAP net loss in the second quarter of 2015 of $8.6 million or $0.04 per share, and to GAAP net income in the third quarter of 2014 of $5.5 million or $0.03 per diluted share. GAAP operating margin in the third quarter of 2015 was 8.3 percent, compared to GAAP operating margin in the third quarter of 2014 of 5.5 percent.

Non-GAAP net income in the third quarter of 2015 totaled $26.2 million or $0.13 per diluted share, compared to non-GAAP net income in the second quarter of 2015 of $18.0 million or $0.09 per diluted share, and to non-GAAP net income in the third quarter of 2014 of $22.5 million or $0.11 per diluted share. Non-GAAP operating margin in the third quarter of 2015 was 20.5 percent, compared to non-GAAP operating margin in the second quarter of 2015 of 15.3 percent, and to non-GAAP operating margin in the third quarter of 2014 of 17.3 percent.

In the third quarter of 2015, storage product revenues reached a quarterly record of $97.6 million, or 73 percent of revenues, an increase of 12 percent compared to storage product revenues of $87.0 million in the second quarter of 2015. Optical product revenues in the third quarter of 2015 totaled $23.5 million, or 18 percent of revenues, a decrease of 7 percent compared to optical product revenues of $25.2 million in the second quarter of 2015. Mobile product revenues in the third quarter of 2015 totaled $12.5 million, or 9 percent of revenues, which was flat compared to mobile product revenues of $12.6 million in the second quarter of 2015.

For a full reconciliation of each non-GAAP item used herein to the most directly comparable GAAP financial measure, please refer to the schedule included with this release. The Company believes the additional non-GAAP measures are useful to investors for the purpose of financial analysis. Management uses the non-GAAP measures internally to evaluate its in-period operating performance before gains, losses and other charges that are considered by management to be outside of the Company's core operating results. In addition, the measures are used to plan for the Company's future periods. However, non-GAAP measures are neither stated in accordance with, nor are they a substitute for, GAAP measures.

THIRD QUARTER AND RECENT HIGHLIGHTS

The Company announced the following:
  • On Oct. 5, Skyworks Solutions, Inc. and PMC announced a definitive agreement under which Skyworks will acquire PMC for $10.50 per share in an all-cash transaction valued at approximately $2 billion.
  • On Oct. 20, PMC announced it received an unsolicited proposal from Microsemi Corporation (NASDAQ: MSCC) to acquire all of the outstanding shares of PMC common stock in a cash and stock transaction. Under the terms of Microsemi's proposal, PMC stockholders would receive $8.75 in cash and 0.0736 of a share of Microsemi common stock for each share of PMC common stock held at the close of the transaction. Based on the closing stock price of the Microsemi common stock on October 19, 2015, the Microsemi proposal was valued at $11.35 per share of PMC common stock.
  • On Oct. 22, PMC announced the META-240G, a multi-rate framer for routers that supports Ethernet and OTN protocols. Extending OTN to the router enables a single management layer between optical transport and routing networks, resulting in lower operating costs and improved service availability for network operators. META-240G provides ultra-low latency OTN encryption for secure cloud connectivity, and it consumes 50 percent less power per port than the previous generation, enabling router line card capacities of 1Tbps and higher.
  • On Aug. 18, PMC announced that its Switchtec™ PSX PCIe® Storage Switches would be an industry partner solution in the Intel® Rack Scale Architecture demonstration at the Intel Developer Forum, "Your Datacenter and Software Defined Infrastructure" zone, August 18-20, 2015. The flexibility of PMC's Switchtec PCIe switching architecture enables spec-compliant dynamic partitioning that is non-disruptive to I/O through an integrated, firmware-defined control plane. This creates a scalable performance storage tier capable of dynamically mapping any drive from a pool of NVMe™ SSDs to any one of multiple servers connected via Switchtec technology.
  • On Aug. 12, Derek Dicker, vice president of PMC's Performance Solutions Group, presented a keynote, "Breaking Down the Barriers to PCIe® Adoption," at Flash Memory Summit 2015. PMC storage experts also discussed the latest trends in PCIe, NVMe and error correction that are shaping next-generation SSDs in forum sessions during the conference.
  • On Aug. 11, PMC and Mellanox® Technologies, Ltd. announced the companies would showcase two breakthrough NVMe™ solutions at Flash Memory Summit, August 12-13, 2015. The companies announced a solution for peer-to-peer transactions between RDMA-capable NICs and NVRAM drives to accelerate critical data center applications by enabling direct memory transactions to persistent memory across a low-latency fabric. PMC and Mellanox also demonstrated NVMe over RDMA leveraging PMC's Flashtec™ NVRAM Drive's NVMe interface and Mellanox's ConnectX-3 Pro network card.
  • On Aug. 8, PMC announced the industry's first PCIe storage switches and the world's fastest SSD controllers. SSDs designed with PMC's second-generation Flashtec NVMe Controllers can deliver one million IOPS and greater than 20TB of flash capacity. Systems connecting a pool of these high-performance, low-latency drives require a new class of PCIe switching solutions with robust storage features. PMC Switchtec™ PSX PCIe Storage Switches enable PCIe-SSD-based systems to scale, with the resiliency, programmability and advanced diagnostics needed for mass deployment. Together, Switchtec PCIe storage switches and Flashtec PCIe controllers provide an end-to-end solution to reliably scale the next-generation performance tier of storage.

Safe Harbor Statement

This release contains or refers to forward-looking statements that involve risks and uncertainties. The Company's SEC filings, including the Company's most recent reports on Form 10-K and Form 10-Q, describe the risks associated with the Company's business, including PMC's limited revenue visibility due to variable customer demands, market segment growth or decline, orders with short delivery lead times, customer concentration, changes in inventory, and other items such as tax rates, foreign exchange rates and volatility in global financial markets. Please also see the Company's Current Reports on Form 8-K filed on October 6 and October 20, 2015, together with the accompanying exhibits, for important information about the announcements described above regarding Skyworks and Microsemi, including risks and uncertainties regarding the subjects of those announcements.

About PMC

PMC (Nasdaq:PMCS) is the semiconductor and software solutions innovator transforming networks that connect, move and store big data. 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. For more information, visit www.pmcs.com. Follow PMC on Facebook, Twitter, LinkedIn and RSS.

© Copyright PMC-Sierra, Inc. 2015. All rights reserved. PMC and PMC-SIERRA are registered trademarks of PMC-Sierra, Inc. in the United States and other countries, PMCS, Flashtec and Switchtec are trademarks of PMC-Sierra, Inc. PMC disclaims any ownership rights in other product and company names mentioned herein. PMC is the corporate brand of PMC-Sierra, Inc.
 
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
                     
Three Months Ended Nine Months Ended
September 26, June 27, September 27, September 26, September 27,
2015 2015 2014 2015 2014
 
Net revenues $ 133,574 $ 124,767 $ 135,462 $ 391,412 $ 388,752
Cost of revenues   37,999     38,434     40,306   $ 116,413     114,694  
Gross profit 95,575 86,333 95,156 274,999 274,058
 
 
Research and development, net 47,277 55,833 48,441 151,976 147,977
Selling, general and administrative 28,050 30,488 29,265 88,589 87,596
Amortization of purchased intangible assets   9,172     9,269     9,948     27,758     32,225  
Income (loss) from operations 11,076 (9,257 ) 7,502 6,676 6,260
 
Other income (expense):

 
Gain on investment securities and other investments 70 25 12 127 87
Amortization of debt issuance costs (51 ) (51 ) (51 ) (153 ) (153 )
Accretion of discount on short-term and long-term obligation (170 ) (180 ) - (560 ) -
Foreign exchange gain (loss) 2,412 (948 ) 899 4,058 642
Interest and other financial income, net   108     317     198     589     321  
Income (loss) before (provision for) benefit from income taxes 13,445 (10,094 ) 8,560 10,737 7,157
(Provision for) benefit from income taxes   (6,727 )   1,515     (3,087 )   (7,943 )   (9,405 )
Net income (loss) $ 6,718   $ (8,579 ) $ 5,473   $ 2,794   $ (2,248 )
 
Net income (loss) per common share - basic and diluted $ 0.03 $ (0.04 ) $ 0.03 $ 0.01 $ (0.01 )
 
Shares used in per share calculation - basic 194,562 195,732 197,613 196,848 196,305
Shares used in per share calculation - diluted 196,865 195,732 200,744 201,018 196,305
 

As a supplement to the Company's condensed consolidated financial statements presented in accordance with generally accepted accounting principles ("GAAP"), the Company provides additional non-GAAP measures for cost of revenues, gross profit, gross profit percentage, research and development expense, net, selling, general and administrative expense, amortization of purchased intangible assets, other income (expense), benefit from (provision for) income taxes, operating expenses, operating (loss) income, operating margin, net (loss) income, and net income per share - basic and diluted.

A non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The Company believes that the additional non-GAAP measures are useful to investors for the purpose of financial analysis. Management uses these measures internally to evaluate the Company's in-period operating performance before gains, losses and other charges that are considered by management to be outside of the Company's core operating results. In addition, the measures are used for planning and forecasting of the Company's future periods. However, non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. Other companies may use different non-GAAP measures and presentation of results.
 
PMC-Sierra, Inc.
Adjustments to GAAP Cost of Revenues, Gross Profit, Gross Profit Percentage, Research and Development Expense, net,
Selling, General and Administrative Expense, Amortization of Purchased Intangible Assets
Other Income (Expense), (Provision for) Benefit from Income Taxes, Operating Expenses, Operating Income (Loss),
Net Income (Loss), and Net Income (Loss) Per Share - Basic and Diluted
(in thousands, except for per share amounts)
(unaudited)
                     
Three Months Ended Nine Months Ended
September 26, June 27, September 27, September 26, September 27,
2015 2015 2014 2015 2014
 
 
GAAP cost of revenues $ 37,999 $ 38,434 $ 40,306 $ 116,413 $ 114,694
Stock-based compensation (266 ) (266 ) (226 ) (803 ) (681 )
Termination recoveries (costs) 26 (1,215 ) - (1,189 ) 9
Reversal of accruals   700     -     -     -     -  
Non-GAAP cost of revenues $ 38,459   $ 36,953   $ 40,080   $ 114,421   $ 114,022  
 
GAAP gross profit $ 95,575 $ 86,333 $ 95,156 $ 274,999 $ 274,058
Stock-based compensation 266 266 226 803 681
Termination (recoveries) costs (26 ) 1,215 - 1,189 (9 )
Reversal of accruals   (700 )   -     -     (700 )   -  
Non-GAAP gross profit $ 95,115   $ 87,814   $ 95,382   $ 276,291   $ 274,730  
 
Non-GAAP gross profit % 71.2 % 70.4 % 70.4 % 70.6 % 70.7 %
 
GAAP research and development expense, net $ 47,277 $ 55,833 $ 48,441 $ 151,976 $ 147,977
Stock-based compensation (2,266 ) (2,400 ) (1,990 ) (7,510 ) (6,540 )
Acquisition-related costs (26 ) (162 ) (356 ) (294 ) (1,950 )
Termination recoveries (costs) 87 (7,944 ) 28 (7,819 ) (256 )
Other restructuring costs (740 ) - - (740 ) -
Asset impairments   -     (252 )   -     (252 )   -  
Non-GAAP research and development expense, net $ 44,332   $ 45,075   $ 46,123   $ 135,361   $ 139,231  
 
GAAP selling, general and administrative expense $ 28,050 $ 30,488 $ 29,265 $ 88,589 $ 87,596
Stock-based compensation (2,658 ) (3,445 ) (3,012 ) (9,681 ) (9,113 )
Acquisition-related costs (1,550 ) (34 ) (669 ) (1,755 ) (733 )
Lease exit (costs) recoveries (115 ) 488 (31 ) 384 (177 )
Termination (costs) recoveries (14 ) (3,867 ) 254 (4,388 ) (1,044 )
Other restructuring costs (346 ) - - (346 ) -
Asset impairments - - - - (477 )
Other expenses   -     -     -     -     (58 )
Non-GAAP selling, general and administrative expense $ 23,367   $ 23,630   $ 25,807   $ 72,803   $ 75,994  
 
GAAP amortization of purchased intangible assets $ 9,172 $ 9,269 $ 9,948 $ 27,758 $ 32,225
Amortization of purchased intangible assets   (9,172 )   (9,269 )   (9,948 )   (27,758 )   (32,225 )
Non-GAAP amortization of purchased intangible assets $ -   $ -   $ -   $ -   $ -  
 
GAAP other income $ 2,369 $ (837 ) $ 1,058 $ 4,061 $ 897
Foreign exchange loss (gain) on foreign tax liabilities (2,413 ) 487 (1,081 ) (4,105 ) (984 )
Other restructuring costs 12 - - 12 -
Accretion of discount on short-term and long-term obligations   170     180     -     560     -  
Non-GAAP other income (expense) $ 138   $ (170 ) $ (23 ) $ 528   $ (87 )
 
GAAP (provision for) benefit from income taxes $ (6,727 ) $ 1,515 $ (3,087 ) $ (7,943 ) $ (9,405 )
Benefit from (provision for) income taxes   5,327     (2,467 )   2,178     4,376     6,839  
Non-GAAP provision for income taxes $ (1,400 ) $ (952 ) $ (909 ) $ (3,567 ) $ (2,566 )
 
GAAP operating expenses $ 84,499 $ 95,590 $ 87,654 $ 268,323 $ 267,798
Stock-based compensation (4,924 ) (5,845 ) (5,002 ) (17,191 ) (15,653 )
Acquisition-related costs (1,576 ) (196 ) (1,025 ) (2,049 ) (2,683 )
Asset impairments - (252 ) - (252 ) (477 )
Lease exit (costs) recoveries (115 ) 488 (31 ) 384 (177 )
Termination costs 73 (11,811 ) 282 (12,207 ) (1,300 )
Other restructuring costs (1,086 ) - - (1,086 ) -
Amortization of purchased intangible assets (9,172 ) (9,269 ) (9,948 ) (27,758 ) (32,225 )
Other expenses   -     -     -     -     (58 )
Non-GAAP operating expenses $ 67,699   $ 68,705   $ 71,930   $ 208,164   $ 215,225  
 
September 26, June 27, September 27, September 26, September 27,
  2015 2015 2014 2015 2014
 
GAAP operating income (loss) $ 11,076 $ (9,257 ) $ 7,502 $ 6,676 $ 6,260
Stock-based compensation 5,190 6,111 5,228 17,994 16,334
Acquisition-related costs 1,576 196 1,025 2,049 2,683
Asset impairments - 252 - 252 477
Lease exit costs (recoveries) 115 (488 ) 31 (384 ) 177
Termination costs (99 ) 13,026 (282 ) 13,396 1,291
Other restructuring costs 1,086 - - 1,086 -
Amortization of purchased intangible assets 9,172 9,269 9,948 27,758 32,225
Reversal of accruals (700 ) - - (700 ) -
Other expenses   -     -     -     -     58  
Non-GAAP operating income $ 27,416   $ 19,109   $ 23,452   $ 68,127   $ 59,505  
 
Non-GAAP operating margin 20.5 % 15.3 % 17.3 % 17.4 % 15.3 %
 
GAAP net income (loss) $ 6,718 $ (8,579 ) $ 5,473 $ 2,794 $ (2,248 )
Stock-based compensation 5,190 6,111 5,228 17,994 16,334
Acquisition-related costs 1,576 196 1,025 2,049 2,683
Termination costs (99 ) 13,026 (282 ) 13,396 1,291
Other restructuring costs 1,098 - - 1,098 -
Reversal of accruals (700 ) - - (700 ) -
Asset impairments - 252 - 252 477
Lease exit costs (recoveries) 115 (488 ) 31 (384 ) 177
Amortization of purchased intangible assets 9,172 9,269 9,948 27,758 32,225
Other expenses - - - - 58
Foreign exchange (gain) loss on foreign tax liabilities (2,413 ) 487 (1,081 ) (4,105 ) (984 )
Accretion of discount on short-term and long-term obligations 170 180 - 560 -
Benefit from (provision for) income taxes   5,327     (2,467 )   2,178     4,376     6,839  
Non-GAAP net income $ 26,154   $ 17,987   $ 22,520   $ 65,088   $ 56,852  
 
Non-GAAP net income per share - basic $ 0.13 $ 0.09 $ 0.11 $ 0.33 $ 0.29
Non-GAAP net income per share - diluted $ 0.13 $ 0.09 $ 0.11 $ 0.32 $ 0.28
 
Shares used to calculate non-GAAP net income per share - basic 194,562 195,732 197,613 196,848 196,305
Shares used to calculate non-GAAP net income per share - diluted 196,865 200,501 200,744 201,018 199,548
 

 
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
         
September 26, December 27,
2015 2014
ASSETS:
Current assets:
Cash and cash equivalents $ 73,130 $ 112,570
Short-term investments   42,347     45,885  
Cash, cash equivalents and short-term investments 115,477 158,455
Accounts receivable, net 62,269 55,414
Inventories, net 32,846 37,949
Prepaid expenses and other current assets 12,020 16,473
Income taxes receivable 1,147 1,968
Prepaid tax expense 5,211 51
Deferred tax assets   -     5,442  
Total current assets 228,970 275,752
 
Investment securities 134,400 107,509
Investments and other assets 6,328 7,683
Prepaid tax expense 93 42
Property and equipment, net 37,871 37,311
Goodwill 283,239 283,239
Intangible assets, net 116,945 143,680
Deferred tax assets 13,218 13,412
Long-term income tax receivable   440     457  
$ 821,504   $ 869,085  
 
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 18,261 $ 23,360
Accrued liabilities 55,172 74,135
Credit facility 30,000 -
Income taxes payable 626 1,062
Liability for unrecognized tax benefit 14,001 16,076
Deferred tax liabilities 7,677 7,644
Deferred income   4,515     4,530  
Total current liabilities 130,252 126,807
 
Long-term obligations 28,396 36,305
Deferred tax liabilities 56,182 53,493
Liability for unrecognized tax benefit 27,107 25,244

PMC special shares convertible into 205 (2014 - 278) shares of common stock
475 745
Stockholders' equity:
Common stock and additional paid in capital 1,599,541 1,595,809
Accumulated other comprehensive loss (2,813 ) (2,355 )
Accumulated deficit   (1,017,636 )   (966,963 )
Total stockholders' equity   579,092     626,491  
$ 821,504   $ 869,085  
 

 
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
         
Nine Months Ended
September 26, September 27,
2015 2014
 
Cash flows from operating activities:
Net income (loss) $ 2,794

$
(2,248 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 45,166 48,739
Stock-based compensation 17,994 16,334
Unrealized foreign exchange gain, net (8,179 ) (2,372 )
Net amortization of premiums and accrued interest of investments 587 628
Asset impairments 252 770
Gain on disposal of property and equipment (63 ) -
Gain on investment securities and other investments (64 ) (86 )
Accretion of discount on short-term and long-term obligations 560 -
Amortization of debt issuance costs 153 153
Gain on lease exit, net (696 ) -
 
Changes in operating assets and liabilities:
Accounts receivable, net (6,855 ) (934 )
Inventories, net 5,103 (3,514 )
Prepaid expenses and other current assets 1,106 4,072
Accounts payable and accrued liabilities (2,106 ) (6,699 )
Deferred taxes and income taxes payable 1,054 8,608
Deferred income   (15 )   (1,980 )
Net cash provided by operating activities   56,791     61,471  
 
Cash flows from investing activities:
Cash paid in connection with business acquisition - (10,000 )
Purchases of property and equipment (13,724 ) (11,175 )
Purchase of intangible assets (4,072 ) (1,167 )
Redemption of short-term investments 28,131 4,920
Disposals of investment securities and other investments 40,446 37,936
Purchases of investment securities and other investments   (92,577 )   (67,727 )
Net cash used in investing activities   (41,796 )   (47,213 )
 
Cash flows from financing activities:
Installment payment in connection with previous business acquisition (18,000 ) -
Proceeds from credit facility 102,000 30,000
Repayment of credit facility (72,000 ) (60,000 )
Proceeds from issuance of common stock 36,982 17,924
Repurchases of common stock   (102,108 )   (11,496 )

Net cash used in financing activities
  (53,126 )   (23,572 )
 
Effect of exchange rate changes on cash and cash equivalents   (1,309 )   (784 )
Net decrease in cash and cash equivalents (39,440 ) (10,098 )
Cash and cash equivalents, beginning of the period   112,570     100,038  
Cash and cash equivalents, end of the period $ 73,130   $ 89,940  

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