jurisdictions in which we operate which subjects us to potential increases in our tax liabilities.The Internal Revenue Service completed their examination of the federal tax returns for fiscal 2010 and 2011 during fiscal 2014, and the Company made additional tax payments of approximately $208,000 including interest charges for the two years that were examined.
In addition, in fiscal 2013 we began implementation of an operating structure to more efficiently align the Company's transaction flows with the Company's geographic business operations. As a result we formed new legal entities and realigned existing ones, completed an intercompany transfer of intellectual property rights, inventory and fixed assets across different tax jurisdictions, and implemented intercompany intellectual property licensing agreements between our U.S. and foreign entities. These changes may result in unanticipated changes to our tax rates and tax payments. All of these factors could have an adverse effect on our financial condition and results of operations.
We are subject to taxation in the United States and in foreign jurisdictions in which we do business, including China. We believe that we have adequately estimated and reserved for our income tax liability. However, our effective tax rates may not be as low as we anticipate. Our business operations, including our transfer pricing for transactions among our various business entities operating in different tax jurisdictions, may be audited at any time by the U.S., Chinese or other foreign tax authorities.
A number of factors may adversely impact our future effective tax rates, such as:
A change in our effective tax rate due to any of these factors may adversely impact our future results from operations. Also, changes in tax laws could have a material adverse effect on our ability to utilize cash in a tax efficient manner.
A relatively small number of key customers have accounted for a significant portion of our net revenues in each of the past several fiscal years. In general we expect this to continue for the foreseeable future. We had two direct customers who each accounted for more than 10% of net revenues during the three months ended September 27, 2014 and September 28, 2013. As a percentage of net revenues, sales to our top five direct customers during the three months ended September 27, 2014 and September 28, 2013 totaled 52% and 47%, respectively.
We do not have long-term sales agreements with any of our customers. Our customers are not subject to minimum purchase requirements, may reduce or delay orders periodically due to excess inventory and may discontinue purchasing our products at any time. Our distributors typically offer competing products in addition to ours. For the three months ended September 27, 2014 and September 28, 2013, sales to our domestic and international distributors were approximately 66% and 67% of net revenues, respectively. Distributors therefore continue to account for a significant portion of our sales. The loss of one or more significant customers, or the decision by a significant distributor to carry additional product lines of our competitors could decrease our revenues.
Selling through distributor channels increases the complexity of our business, requiring us to, among other matters:
· manage the level of inventory at each distributor;
· provide for credits, return rights and price protection;
· estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and
· monitor the financial condition and creditworthiness of our distributors.
Any failure to manage these challenges, or the occurrence of an unforeseen change in the supply-demand dynamic, could cause us to inaccurately forecast sales and carry excess or insufficient inventory, thereby adversely affecting our operating results and cash flows. For further detail on credits, return rights and price protection, see Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies – Revenue Recognition.
Because we sell products in foreign markets and have operations outside of the United States, we face foreign business, political, economic and currency risks that could seriously harm us. Almost all of our wafer suppliers and assembly subcontractors are located in Southeast Asia, as are our FCP manufacturing facilities, which exposes us to the problems associated with international operations.
Risks associated with international business operations include the following:
·
disruptions or delays in shipments;
·
changes in economic conditions in the countries where these subcontractors are located;
·
currency fluctuations;
·
changes in political conditions;
·
potentially reduced protection for intellectual property;
·
foreign governmental regulatory requirements and unexpected changes in them;
·
the burdens of complying with a variety of foreign laws;
·
import and export controls;
·
delays resulting from difficulty in obtaining export licenses for technology;
·
changes in tax laws, tariffs and other barriers, and freight rates; and
·
compliance with Generally Accepted Accounting Principles in the United States (“U. S. GAAP”).
Regulatory, geopolitical and other factors could seriously harm our business or require us to modify our current business practices. We are subject to general geopolitical risks in connection with our international operations, such as political and economic instability and changes in diplomatic and trade relationships. Although most of our products are sold in U.S. dollars, we incur a significant amount of certain types of expenses, such as payroll, utilities, capital equipment purchases and taxes in local currencies. The impact of currency exchange rate movements could harm our results and financial condition. In addition, changes in tariff and import regulations and in U.S. and non-U.S. monetary policies could harm our results and financial condition by increasing our expenses and reducing our revenue. Varying tax rates in different jurisdictions could harm our results of operations and financial condition by increasing our overall tax rate.
In the three months ended September 27, 2014, we generated approximately 91%, 6% and 3% of our net revenues from sales in Asia, the United States and the rest of the world, respectively. In the three months ended September 28, 2013, we generated approximately 92%, 6% and 2% of our net revenues from sales in Asia, the United States and the rest of the world, respectively. We expect that foreign sales will continue to represent by far the majority of net revenues. This will require significant management attention and financial resources and further subject us to international operating risks.
We have subsidiaries located in Asia. We manufacture some of our FCPs in Taiwan as well as in the Jinan Development Zone in the Shandong Province of the PRC. The development of the Jinan facility depended upon various tax concessions, tax rebates and other support from the local governmental entity. There can be no assurance that the local governmental entity will not change their position regarding such tax and other support and such a change might adversely affect the profitability of this facility. In addition, there can be no assurance we will be able to assemble and maintain sufficient management resources in our Asia subsidiaries, including a sales force knowledgeable about our target markets and an accounting staff with sufficient U. S. GAAP accounting expertise.
We are expanding our presence in China with manufacturing and research and development activities. We will be subject to increased risks relating to foreign currency exchange rate fluctuations that could have a material adverse effect on our business, financial condition and operating results. The value of the Chinese
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renminbi against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions. Significant future appreciation of the renminbi could increase our component and other raw material costs as well as our labor costs, and could adversely affect our financial results. To the extent that we need to convert United States dollars into renminbi for our operations, appreciation of renminbi against the United States dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our renminbi into United States dollars for other business purposes and the United States dollar appreciates against the renminbi, the United States dollar equivalent of the renminbi we convert would be reduced. The Chinese government now measures the exchange rate of the renminbi against a number of currencies, rather than just the United States dollar. Fluctuations in the renminbi exchange rate could increase and could adversely affect our ability to operate our business.
In addition, there is a potential risk of conflict and further instability in the relationship between Taiwan and the PRC. Conflict or instability could disrupt the operations of one of our principal wafer suppliers, several of our assembly subcontractors located in Taiwan, and our FCP manufacturing operations in Taiwan and the PRC.
Our operations and financial results could be severely harmed by natural disasters.
Our headquarters and some of our major suppliers' manufacturing facilities are located near major earthquake faults. In particular, our Asian operations and most of our third party service providers involved in the manufacturing of our products are located within relative close proximity. Therefore, any disaster that strikes within or close to that geographic area could be extremely disruptive to our business and could materially and adversely affect our operating results and financial condition.
One of the foundries we use is located in Taiwan, which has suffered severe earthquakes in the past. Taiwan is also exposed to typhoons and tsunamis, which can affect not only foundries we rely upon but also our PSE-TW subsidiary. In March 2011, an earthquake and tsunami occurred off the northeast coast of Japan which disrupted the global supply chain for core materials manufactured in Japan that are incorporated in our products and manufacturing equipment. Thailand experienced floods in the quarter ended December 31, 2011, which interrupted the industry’s supply chain for storage products and impacted our sales as well. If a major earthquake, typhoon, tsunami or other natural disaster were to affect our operations or those of our suppliers, our product supply could be interrupted, which would seriously harm our business. Natural disasters could also affect the operations of the distributors and contract manufacturers we sell to, as well as the operations of our end use customers, which would adversely affect our operations and financial results. Natural disasters anywhere in the world may potentially adversely affect us by harming or causing interruptions to our supply chain or the supply chains of our suppliers, direct customers or end use customers.
System security risks, data protection or privacy breaches and cyber-attacks could disrupt our internal operations and harm the reputation of the Company.
Breaches of our information technology systems caused by computer viruses, unauthorized access, sabotage, vandalism or terrorism could compromise our information technology networks and result in unauthorized release of our, our customers’ or our suppliers’ confidential or proprietary information, cause a disruption to our manufacturing and other operations, result in release of employee personal data, or cause us to incur increased information technology protection costs, any of which could adversely affect our financial results, stock price and reputation.
RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
Our stock has been and will likely continue to be subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control.
The trading price of our common stock has been, and is likely to continue to be, highly volatile. The securities markets have experienced significant price and volume fluctuations in the past, and the market prices of the securities of semiconductor companies have been especially volatile. This market volatility, as well as general economic, market or political conditions, including the current global economic situation,
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could reduce the market price of our common stock in spite of our operating performance. Our stock price could fluctuate widely in response to factors some of which are not within our control, including:
·
general conditions in the semiconductor and electronic systems industries;
·
actual or anticipated fluctuations in our operating results;
·
changes in expectations as to our future financial performance;
·
announcements of technological innovations or new products by us or our competitors;
·
changes in earnings estimates by analysts; and
·
price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many high technology companies.
Our shareholder rights plan may adversely affect existing shareholders.
On March 6, 2012, we adopted a shareholder rights plan that may have the effect of deterring, delaying, or preventing a change in control that otherwise might be in the best interests of our shareholders. Under the rights plan, we declared a dividend of one preferred share purchase right for each share of our common stock held by shareholders of record as of March 6, 2012. Each right entitles shareholders, after the rights become exercisable, to purchase one one-thousandth of a share of our Series D Junior Participating Preferred Stock.
In general, the rights become exercisable when a person or group acquires 15% or more of our common stock or a tender offer for 15% or more of our common stock is announced or commenced. After such event, our other stockholders may purchase from us additional shares of our common stock at a 50% discount to the then-current market price. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors. The rights should not interfere with any merger or other business combination approved by our Board of Directors since the rights may be redeemed by us at $0.001 per right at any time before any person or group acquire 15% or more of our outstanding common stock. These rights expire in March 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 26, 2012, the Board authorized a share repurchase program for $25 million of our common stock, and on April 24, 2014 the Board authorized an additional $20 million for the share repurchase program. We were authorized to repurchase the shares from time to time in the open market or private transactions, at the discretion of our management. The following table summarizes the stock repurchase activity during the three months ended September 27, 2014.
| Period | | Total
Number of
Shares
Purchased | | Average
Price Paid
per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Maximum $ Value
That May Yet be
Purchased Under
the Plans or
Programs |
| | July, 2014 | | | | 142,676 | | | $ | 8.90 | | | | 142,676 | | | $ | 25,341,792 | |
| | August, 2014 | | | | 31,348 | | | | 9.22 | | | | 31,348 | | | | 25,052,879 | |
| | September, 2014 | | | | 76,523 | | | | 9.72 | | | | 76,523 | | | | 24,308,903 | |
| | | | | | | | | | | | | | | | | | | |
| | Total | | | | 250,547 | | | $ | 9.19 | | | | 250,547 | | | $ | 24,308,903 | |
Current cash balances and the proceeds from stock option exercises and purchases in the stock purchase plan have funded stock repurchases in the past, and we expect to fund future stock repurchases from these same sources.
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Item 6.
Exhibits.
Exhibit
Exhibit
Number
Description
| | |
31.1 | Certification of Alex C. Hui, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Kevin S. Bauer, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Alex C. Hui, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Kevin S. Bauer, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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SIGNATURES
Pursuant to the requirements 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.
Pericom Semiconductor Corporation
(Registrant)
| | | | |
Date: | | October 31, 2014 | By: | /s/ Alex C. Hui |
| | | | Alex C. Hui |
| | | | Chief Executive Officer |
| | | | |
| | | | |
| | | By: | /s/ Kevin S. Bauer |
| | | | Kevin S. Bauer |
| | | | Chief Financial Officer |
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