UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 27, 2014

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  ☒    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  ☒

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  ☒    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  ☒    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.   ☒

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  ☒    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  ☒

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 June 28, 2014 as reported by the NASDAQ Global Select Market, was approximately $0.6 billion.

As of February 19, 2015, the registrant had 202,358,110shares of Common Stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant’s 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K Report. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 27, 2014.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	19
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	72
Item 9A.	Controls and Procedures	72
Item 9B.	Other Information	74
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	74
Item 11.	Executive Compensation	74
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	74
Item 13.	Certain Relationships and Related Transactions and Director Independence	75
Item 14.	Principal Accountant Fees and Services	75
PART IV
Item 15.	Exhibits and Financial Statement Schedules	75
	SIGNATURES	79

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-LOOKINGSTATEMENTS

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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PART I

ITEM 1.BUSINESS.

OVERVIEW

PMC-Sierra, Inc. (the “Company” or “PMC”) is a semiconductor and software solution innovator transforming networks that connect, move, and store Big Data. The Company designs, develops, markets and supports semiconductor, embedded software, and board level solutions by integrating its mixed-signal, software and systems expertise through a network of offices in North America, Europe and Asia.

We have approximately 700 different semiconductor devices that are sold to leading equipment and design manufacturers, who in turn supply their equipment principally to enterprises, Cloud Data Centers and carriers worldwide. We provide 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 storage and 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 Saturday of the calendar year.  Fiscal years 2014, 2013 and 2012 consisted of 52 weeks each.

INDUSTRYOVERVIEW

Mobile and Internet traffic is growing at an unprecedented rate, driven by the continued rise of mobile broadband, Data Center-based cloud services and Internet-based video content.  Cisco predicts that by the end of 2016, global Internet IP traffic will pass the zettabyte (1000 exabytes) threshold and will reach 1.6 zettabytes per year by 2018 and mobile data traffic will have grown to nearly 15.9 exabytes per month by 2018. This bandwidth growth in conjunction with industry wide momentum behind cloud-based service delivery is placing an incredible strain on mobile, metro optical and enterprise Data Center networks in order to meet the needs of new applications such as social media, cloud-storage and video-streaming to name a few.  This insatiable demand for real-time access to high bandwidth digital content is driving traditional service providers and Data Center operators to upgrade and improve their network infrastructure and storage management capabilities to better connect, move and store Big Data 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 andMobile 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.

OURBUSINESSSTRATEGY

Our mission is to be the semiconductor and software solution innovator transforming networks that connect, move and store Big Data.  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, software and systems expertise to be the leading supplier of silicon and embedded software solutions for Storage, Optical, and Mobile networks;

2. Deliver best-in-class performance and integration to lead the server and storage system market segments, for both Enterprise and Cloud Data Centers;

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 mobile broadband via 4G LTE by providing a seamless transition to packet based backhaul with our multi-service network processor platform and integrated Radio solutions to allow our customers to leverage available spectrum.

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OURPRODUCTSANDMARKETSEGMENTSTHATWESERVE

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 2014, the storage network represented 70% of total revenues, the optical network represented 18% of total revenues, and the mobile network represented 12% of total revenues.

Storage

Our Storage products are supplied directly to Original Equipment Manufacturers (“OEMs”), data center 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 controllers and switches for high-performance storage systems in Cloud and Enterprise Data Center applications.  Our solutions range from chip level offerings to full board solutions and applications software (e.g., RAID stack). We also include printer Application-specific Integrated Circuits (“ASICs”) and Microprocessors for Enterprise Networking in this market segment as they are most aligned with our Enterprise storage customers. In 2013, PMC acquired Integrated Device Technology, Inc.’s (“IDT”) Enterprise Flash Controller business and certain PCI express (“PCIe”) switch assets.  The acquisition accelerates the Company’s product offering in the Enterprise Flash Controller and PCI Express Switch businesses, including the world’s first NVM Express (“NVMe”) flash controller. In 2014, PMC executed an agreement with Hewlett-Packard Company (“HP”) to license core HP Smart Array software, firmware and management technology.  PMC will leverage this technology to provide more system value to new and existing server storage and data center customers.  In addition, this transaction positions PMC as the supplier of key storage solution components across HP ProLiant Gen9 and beyond (see Item 8 – Financial Statements and Supplemental Data, Note 2 – Business Combinations).  During the fiscal year ended December 27, 2014, the Storage market segment represented 70% of our net revenues.

Storage products and/or applications incorporating PMC’s semiconductor solutions	PMC Products	Examples of OEMs(1)
Storage Area Networks	Protocol Controllers	Dell
Server Attached Storage	RAID-on-Chip (RoC)	HP
Solid State Drives (SSD)	Flash Controllers	Samsung
Data Center	Host Bus Adapter (HBA) and Serial Attached SCSI (Small Computer System Interface) Expanders	Dell
High Speed Laser and Multi-Function Printers	MIPs Processors	HP

(1) Examples in the order listed refer to Dell Inc., Hewlett-Packard Company, and Samsung Electronics Co. Ltd.

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Optical

Our Optical products include our Wide Area Network communication products focused on Metro and access networks, including Optical Transport Networks (“OTN”), Synchronous Optical Networks (“SONET”), Asynchronous Transfer Mode (“ATM”) and Fiber to the Home. Carriers are now starting to migrate their metro networks from SONET/Synchronous Digital Hierarchy (“SDH”) to packet-based networks based on OTN standards. OTN equipment is starting to be deployed in the metro and access portions of the network. PMC’s OTN product family is on track to put us in a lead position in this emerging network technology.  During the fiscal year ended December 27, 2014, the Optical market segment represented 18% of our net revenues.

Optical products and/or applications incorporating PMC’s semiconductor solutions	PMC Products	Examples of OEMs(1)
Optical Transport Network
— P-OTP/P-OTS	OTN Switching Processors	Alcatel-Lucent, Ciena, Coriant, Huawei
— ROADM/DWDM	OTN Switching Processors	Alcatel-Lucent, Ciena, Coriant, Huawei
Carrier/Ethernet/Switch/Routers	Ethernet Framers, Mappers, MAC	Cisco, Juniper, Alcatel-Lucent
Multi-service switches		Huawei
— MSPP/MSTP/ADM	SONET/SDH Framers, Cross Connects, T1/E1 Mappers/Framers	Ciena, Cisco, FiberHome, ZTE
Passive Optical Network
— EPON & 10G-EPON;  GPON & XG-PON	EPON/GPON ONU and OLT Processors	Fujitsu, Sumitomo, Mitsubishi

(1) Examples in the order listed refer to Alcatel-Lucent, S.A., Ciena Corp., Coriant, Huawei Technology Co. Ltd.,Cisco Systems, Inc., Juniper Networks, Inc.,Fiberhome Telecommunication Technologies Co. Ltd., ZTE Corporation,  Fujitsu LTD., Sumitomo Electric Lightwave Corp., and Mitsubishi Corporation.

Mobile

Our Mobile products include WinPath network processors, T1/E1framers and mappers, and Radio Frequency Integrated Circuit (“RFIC”) 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. During the fiscal year ended December 27, 2014, the Mobile market segment represented 12% of our net revenues.

Mobile products and/or applications incorporating PMC’s semiconductor solutions	PMC Products	Examples of OEMs(1)
Mobile Backhaul	WinPath Network Processors	Alcatel-Lucent, Cisco
3GPP Wireless Base Stations	TEMUX and UFE framer products	Alcatel-Lucent, Cisco
Remote Radio Heads	Combiner/Serializers	Nokia Siemens, Ericsson, ZTE, Huawei, Alcatel-Lucent
	Radio RF devices, Transceivers/Framers, Clocking devices	Nokia Siemens, Ericsson, ZTE, Huawei, Alcatel-Lucent

(1) Examples in the order listed refer to Alcatel-Lucent, S.A., Cisco Systems, Inc.,  Nokia Corporation,Ericsson, ZTE Corporation,Ciena Corp., and Huawei Technology Co. Ltd.

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SALES, MARKETINGANDDISTRIBUTION

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 or software 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 contract manufacturers’ representatives. In 2014, approximately 33% of our orders were shipped through distributors, approximately 47% were shipped by us directly to contract manufacturers selected by OEMs, and the balance was shipped directly to our OEM customers.

In 2014, our largest distributor was Avnet Inc. (“Avnet”) which sold our products into North America, South America, Europe, Africa, and Asia.  In 2014, sales shipped through Avnet represented 11% of our total net revenues. Our second largest distributor in 2014 wasMacnica Inc. (“Macnica”).  Sales shipped through Macnica in 2014 represented10% of our total net revenues. In 2014, we amended our distributor agreement with Avnet to restrict the distribution territories to Europe, Africa and Asia.  Avnet is authorized to sell existing inventory of PMC products to its customers in the decommissioned territories (United States, Canada, Mexico and South America) until the earlier of such time as the inventory is depleted or March 31, 2015.

In 2014, 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 81%, 89% and 86% of total revenue in 2014, 2013 and 2012, respectively. Our sales to customers in Asia, including Japan and China, were 74%, 78% and 78% of total revenues in 2014, 2013 and 2012, respectively.

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 testing 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 testing 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 microns to 28 nanometers. By using independent foundries to fabricate our wafers, we are better able to concentrate our resources on designing, developing and testing 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.

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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.

PMC also manufactures and sells 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.

RESEARCHANDDEVELOPMENT

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 2014, we had design centers in the United States (California, Pennsylvania, Texas, Oregon, Colorado and New Jersey), Canada (British Columbia, Alberta, Saskatchewan and Quebec), Israel (Herzliya), China (Shanghai), Germany (Ismaning and Neckarsulm) and India (Bangalore).

Our research and development spending was $198.9 million in 2014, $211.0 million in 2013, and $220.9 million in 2012.

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 27, 2014, our backlog of products scheduled for shipment within three months totaled approximately $97 million. Unless our customers cancel or defer to a subsequent quarter with respect to a portion of this backlog, we expect this entire backlog to be filled in the first quarter of 2015. As of December 28, 2013, our backlog of products scheduled for shipment within three months totaled approximately $87 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.

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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., Analog Devices Inc.; Applied Micro Circuits Corp.; Avago Technologies Limited; Broadcom Corp.; Emulex Corp.; Exar Corp.; InPhi Corp.; Intel Corp.; Marvell Technology Group Ltd.;Maxim Integrated Products, Inc.;QLogic Corp.; Texas Instrument Inc; 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, PATENTSANDTRADEMARKS

We rely in part on patents to protect our intellectual property and have a total of 688 U.S. and 20 foreign patents for circuit designs and other innovations used in the design and architecture of our products. In addition, we have 128 patent applications pending in the U.S. Patent and Trademark office and 4 patent applications pending in foreign countries. Our patents typically expire 20 years from the patent application date, with our existing patents expiring between 2015 and 2035.

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 do not consider our business to be materially dependent upon any one patent.

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.

EMPLOYEES

As of December 27, 2014, we had 1,442 employees, including 882 in Research and Development, 103 in Production and Quality Assurance, 299 in Sales and Marketing and 158 in Administration. Our employees are not represented by a collective bargaining agreement, and we have never experienced any related work stoppage.

ADDITIONALINFORMATIONANDSECREPORTS

Our principal executive offices are located at 1380 Bordeaux Drive, Sunnyvale, CA 94089. Our website is www.pmcs.com. The information accessed on or through our website 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 orfurnish 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 100 F 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 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 2014, 2013, and 2012, we had two end customers that accounted for more than 10% of our net revenues, namely HP and EMC.

In 2014, 2013, and 2012, 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 and 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 if 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 estimated returns, 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 or earnings, debt downgrades, an inability to access capital markets or 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, which adversely affected our revenues. As a result of this uncertainty, our past operating results may not be indicative of our future operating results and our results may be below the expectations of public market analysts and investors, which could cause the market price of our common stock to decline.

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

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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 ensure compliance 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. 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 disclosure and reporting requirements for those companies who use “conflict minerals” mined from the Democratic Republic of the Congo and adjoining countries in their products, whether or not these products are manufactured by third parties.  These requirements could affect the sourcing and availability of minerals used in the manufacture of our semiconductor products.  We also have incurred and will continue to incur costs associated with complying with the disclosure requirements, including identifying 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, restricted stock, and performance-based restricted stock which are subject to vesting.  In addition, stock options awards are granted with an exercise prices equal to the closing market price of the Company’s common stock at the grant date. The equity awards to employees are effective as retention incentives only if they have economic value, which at times could be difficult to maintain given the substantial variability in our stock price.

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 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 require us to invest significant effort and incur significant design and development costs. We may not be successful in competing in bid selection processes or, if successful, we may not generate the expected level of revenue despite incurring significant design and development costs. Because the life cycles of our customers’ products can last several years and changing suppliers involves significant cost, time,

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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 other companies 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 a result of customer projects being cancelled or unsuccessful in their end market. In the event a design win generates revenues, the amount of revenue it produces can vary greatly from other design wins. In addition, most revenue-generating design wins do not translate into near-term revenues often taking 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 cover 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.

Increasingly our customers require warranty protection for periods beyond our standard warranty and for expansive remedies that include direct and indirect damages.  We negotiate these so called “epidemic failure warranty” provisions rigorously and seek liability caps but, nonetheless, this extraordinary warranty exposure may adversely affect our financial results.

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.

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The final determination of our income tax liability may be materially different from our initial 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 income tax returns. 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 in 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 $3.6 million foreign exchange gain on the revaluation of our income tax liability in 2014 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 $1.5 million impact to our pre-tax net income.

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 us 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.

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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 is dependent, in part, 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.

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 necessary to meet their projected production levels.

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, which 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 2014, three outside wafer foundries supplied approximately 98% of our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves.  As a result, 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 products to our customers are similarly dependent on a limited number of suppliers. These other companies’ products may represent important components of networking equipment into which our products are designed. If these companies are unable to produce the volumes demanded by our customers, our customers may be forced to slow down or halt production on the equipment for which our products are designed, which could materially reduce our order levels.

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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.

If we fail to maintain effective internal over financial reporting, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect investor perceptions of us and the value of our common stock.

We are subject to Section 404 of the Sarbanes-Oxley Act of 2002 and, as such, are required to maintain internal control over financial reporting adequate to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As a result, we cannot assure you that a material weakness in our internal control over financial reporting will not be identified in the future. 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. The existence of a material weakness can cause us to fail to timely meet our periodic reporting obligations or result in material misstatements in our consolidated financial statements. Any such failure could adversely affect the results of periodic management control evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting, cause us to incur unforeseen costs, negatively impact our results of operations, or cause the market price of our common stock to decline.

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 our revenue could be adversely affected if such matters occur and are not remediated. 

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, concentrated primarily on research and development, located in Israel and India that employ approximately 100 and 172 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.

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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 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 use 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  between industry participants 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. Patent disputes brought by non-practicing entities (patent holders who do not manufacture products but only seek to monetize patent rights) cannot be settled through cross-licensing and cannot be avoided through cross-licensing with industry practitioners. We may therefore be more exposed to third party claims than some of our larger competitors and customers.

Customers may make claims against us in connection with infringement claims made against them that are alleged to relate to our products or components included in our products, even where we obtain the components from a supplier. In such cases, we may incur monetary losses due to cost of defense, settlement or damage award and non-monetary losses as a result of diverting valuable internal resources to litigation support.  To the extent that claims against us or our customers relate to third party intellectual property integrated into our products, there is no assurance that we will be fully indemnified by our suppliers against any losses.

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.

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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; reduce the value of our investment in R&D, product development, and marketing; and could motivate third parties to assert against us or our customers claims related to loss of confidential or proprietary information, 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.

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 rights that take priority over 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 may 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.

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ITEM 2.PROPERTIES.

At the end of 2014, we leased properties in 31 locations worldwide. During the year, we increased our total leased area from approximately 548,000 square feet to approximately 562,000 square feet. Approximately 9% of the space we leased was excess at December 27, 2014 and 94% of the excess space had been subleased.

We lease approximately 85,000 square feet in Sunnyvale/San Jose, California, to house our U.S. design, engineering, sales, marketing, and administration operations.

Our Canadian operations are primarily located in Burnaby, British Columbia where we lease approximately 138,000 square feet of office space. This location supports a significant portion of our product development, manufacturing, marketing, sales, administration, and testing activities.

In addition to the two major sites in Sunnyvale/San Jose and Burnaby, at the end of 2014 we also operated 14 additional research and development centers: three in Canada, six in the U.S., one in Bangalore, India, one in Israel, two in Germany, and one in Shanghai, China.

At the end of 2014, we also had 15 sales/operations offices located in Europe, Asia, and North America.

ITEM 3.LEGAL PROCEEDINGS.

None.

ITEM 4.MINE SAFETY DISCLOSURES.

Not applicable.

19

PART II

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 2014	High		Low
First Quarter	$	7.79	$	6.23
Second Quarter		7.76		6.80
Third Quarter		7.99		6.73
Fourth Quarter		9.19		6.57
Fiscal 2013	High		Low
First Quarter	$	6.85	$	5.28
Second Quarter		6.75		5.56
Third Quarter		7.08		6.16
Fourth Quarter		7.01		5.63

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 19, 2015, there were 608 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.

20

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, 2009. The performance shown is not necessarily indicative of future performance.

SOURCE: RESEARCH DATA GROUP, INC

21

Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchase Program

On March 13, 2012, the Board of Directors of the Company announced a 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. 

During 2013, the Company repurchased 13 million shares of PMC common stock for a total of $79 million. The Company acquired these common shares as part of its $275 million stock repurchase program announced on March 13, 2012. 

During 2014, the Company repurchased 1.4 million shares of PMC common stock for a total of $8.9 million. The Company acquired these common shares as part of its $275 million stock repurchase program announced on March 13, 2012.  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.

There was no stock purchase activity in the fourth quarter of 2014.

On February 9, 2015, the Board of Directors of the Company authorized a new share repurchase program for up to $75 million of its common stock.  This new program will increase the total remaining repurchase authorization to $102 million, including the $27 million that remains available for repurchases under the $275 million 2012 share repurchase authorization.

22

ITEM 6.      SELECTED FINANCIAL DATA

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 27,		December 28,		December 29,		December 31,		December 26,
	2014(1)		2013(2)		2012(3)		2011(4)		2010(5)
STATEMENT OF OPERATIONS DATA:
Net revenues	$	525,603	$	508,028	$	530,997	$	654,304	$	635,082
Cost of revenues		155,396		149,213		158,849		211,190		203,646
Gross profit		370,207		358,815		372,148		443,114		431,436
Research and development, net		198,919		211,047		220,927		227,106		187,467
Selling, general and administrative		117,007		112,770		112,479		118,601		104,117
Amortization of purchased intangible assets		43,219		48,245		45,321		44,182		29,932
Impairment of goodwill and purchased intangible assets		—		—		274,637		—		—
Restructuring costs and other charges		—		—		—		—		403
Income (loss) from operations		11,062		(13,247)		(281,216)		53,225		109,517
Revaluation of liability for contingent consideration		—		—		—		29,376		—
Gain on investment securities and other investments		155		1,879		1,523		845		3,978
Amortization of debt issue costs		(204)		(80)		(167)		(200)		(200)
Amortization of discount on long-term obligation		(350)		—		—		—		—
Foreign exchange gain (loss)		3,508		4,043		(1,512)		344		(2,360)
Interest income (expense), net		323		907		(1,586)		(2,267)		(1,248)
Gain on investment in Wintegra, Inc.		—		—		—		—		4,509
Provision for income taxes		(14,412)		(25,756)		(37,301)		(9,897)		(37,064)
Net income (loss)	$	82	$	(32,254)	$	(320,259)	$	71,426	$	77,132
Net income (loss) per share—basic	$	0.00	$	(0.16)	$	(1.48)	$	0.31	$	0.33
Net income (loss) per share—diluted	$	0.00	$	(0.16)	$	(1.48)	$	0.30	$	0.33
Shares used in per share calculation—basic		196,885		203,882		216,593		233,210		231,427
Shares used in per share calculation—diluted		200,145		203,882		216,593		235,184		234,787
	As of
	December 27,		December 28,		December 29,		December 31,		December 26,
	2014(1)		2013(2)		2012(3)		2011(4)		2010(5)
	(in thousands)
BALANCE SHEET DATA:
Working capital	$	148,945	$	89,698	$	187,432	$	216,830	$	110,565
Cash and cash equivalents		112,570		100,038		169,970		182,571		203,089
Short-term investments		45,885		10,894		11,431		104,391		98,758
Long-term investment securities		107,509		103,391		91,778		226,619		281,678
Total assets		869,085		849,951		899,275		1,418,461		1,548,927
Credit facility and short-term loan		—		30,000		—		—		180,991
Convertible notes		—		—		—		65,122		61,605
Long-term obligations		36,305		11,108		22,793		1,284		8,940
Stockholders’ equity		626,491		586,824		648,687		1,109,517		1,031,315

There were no cash dividends issued during the years ended December 27, 2014, December 28, 2013, December 29, 2012, December 31, 2011, and December 26, 2010.

(1) Operating results for the year ended December 27, 2014 include $1.0 million stock-based compensation expense and $0.1 million recoveries of termination costs included in Cost of revenues; $9.4 million stock-based compensation, $2.4 million acquisition-related costs, $0.2 million termination costs, $0.1 million lease exit recoveries and $0.3 million reversal of accruals included in Research and development expenses, net; $12.8 million stock-based compensation, $1.0 million acquisition-related costs, $1.7 million termination costs, and $0.5 million asset impairment included in Selling, general and administrative expense; and $3.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(2) Operating results for the year ended December 28, 2013 include $0.9 million stock-based compensation expense, $0.1 million termination costs, $0.8 million acquisition-related costs, and $2.3 million reversal of accruals included in Cost of revenues; $11.1 million stock-based compensation, $2.8 million acquisition-related costs, $4.1 million termination costs, $0.5 million asset impairment and $2.9 million reversal of accruals included in Research and development expenses, net; $14.3 million stock-based compensation, $1.1 million acquisition-related costs, $1.8 million termination costs, $2.2 million asset impairment 23

and $1.3 million reversal of accruals included in Selling, general and administrative expense; and $4.7 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(3) Operating 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, net; $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 gain (loss); and $3.2 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest income (expense), net.

(4) Operating 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, net; $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 on investment securities and other; $0.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $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 income (expense), net.

(5) Operating 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 on investment securities and other; $1.8 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $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 income (expense), net.

Quarterly Comparisons

	Quarterly Data
	(in thousands except for per share data)
	Year Ended December 27, 2014								Year Ended December 28, 2013
	Fourth(1)		Third(2)		Second(3)		First(4)		Fourth(5)		Third(6)		Second(7)		First(8)
STATEMENT OF OPERATIONS DATA:
Net revenues	$	136,851	$	135,462	$	126,822	$	126,468	$	126,872	$	128,411	$	127,584	$	125,161
Cost of revenues		40,702		40,306		36,824		37,564		37,349		36,840		37,637		37,387
Gross profit		96,149		95,156		89,998		88,904		89,523		91,571		89,947		87,774
Research and development, net		50,942		48,441		49,388		50,148		54,009		50,733		51,681		54,624
Selling, general and administrative		29,411		29,265		28,991		29,340		27,768		26,383		30,277		28,342
Amortization of purchased intangible assets		10,994		9,948		9,948		12,329		13,547		13,138		10,776		10,784
Income (loss) from operations		4,802		7,502		1,671		(2,913)		(5,801)		1,317		(2,787)		(5,976)
Gain (loss) on investment securities and other investments		68		12		46		29		103		1,762		30		(16)
Amortization of debt issue costs		(51)		(51)		(51)		(51)		(50)		(30)		—		—
Amortization of discount on long-term obligation		(350)		—		—		—		—		—		—		—
Foreign exchange gain (loss)		2,866		899		(789)		532		2,363		(1,898)		2,213		1,365
Interest income, net		2		198		114		9		83		230		330		264
Provision for income taxes		(5,007)		(3,087)		(4,471)		(1,847)		(12,377)		(4,613)		(4,602)		(4,164)
Net income (loss)	$	2,330	$	5,473	$	(3,480)	$	(4,241)	$	(15,679)	$	(3,232)	$	(4,816)	$	(8,527)
Net income (loss) per share—basic and diluted	$	0.01	$	0.03	$	(0.02)	$	(0.02)	$	(0.08)	$	(0.02)	$	(0.02)	$	(0.04)
Shares used in per share calculation—basic		198,625		197,613		196,114		195,188		201,615		205,377		205,230		203,307
Shares used in per share calculation—diluted		201,935		200,744		196,114		195,188		201,615		205,377		205,230		203,307

(1) Operating results include $0.3 million stock-based compensation expense included in Cost of revenues; $2.9 million stock-based compensation expense, $0.4 million acquisition-related costs and $0.3 million reversal of accruals included in Research and development expenses, net; $3.7 million stock-based compensation expense, $0.6 million termination and separation costs, and $0.3 million acquisition-related costs included in Selling, general and administrative; $2.7 million foreign exchange gain on 24

foreign tax liabilities included in Foreign exchange gain (loss); $0.4 million amortization of discount on long-term obligations; and $0.1 million interest expense related to credit facility included in Interest income, net.

(2) Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.0 million stock-based compensation expense, $0.4 million acquisition-related costs, and $0.1 million recoveries of termination costs included in Research and development expenses, net; $3.0 million stock-based compensation, $0.7 million acquisition-related costs, and $0.3 million recoveries of termination costs included in Selling, general and administrative; and $1.1 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss).

(3) Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $1.9 million stock-based compensation, $0.8 million acquisition-related costs, and $0.3 million termination costs included in Research and development expenses, net; $2.8  million stock-based compensation and $1.3 million termination costs included in Selling, general and administrative; and $1.0 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(4) Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.6 million stock-based compensation, $0.8 million acquisition-related costs, and $0.1 million recoveries of termination costs included in Research and development expenses, net; $3.3 million stock-based compensation, $0.1 million acquisition-related costs, $0.1 million lease exit costs, and $0.5 million assets impairment included in Selling, general and administrative; and $0.9 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(5) Operating results include $0.3 million stock-based compensation expense, and $0.2 million termination costs included in Cost of revenues; $2.9 million stock-based compensation expense, $0.5 million asset impairment, $2.7 million termination costs, and $1.1 million acquisition-related costs included in Research and development expenses, net; $3.7 million stock-based compensation expense, $1.3 million termination costs, $0.6 million asset impairment, and $1.3 million reversal of accruals included in Selling, general and administrative; $2.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss);  and $0.1 million interest expense related to credit facility included in Interest income, net.

(6) Operating results include $0.2 million stock-based compensation expense, $0.8 million acquisition-related costs, and $2.3 million reversal of accruals included in Cost of revenues; $2.5 million stock-based compensation expense, $1.2 million acquisition-related costs, and $0.2 million termination costs included in Research and development expenses, net; $3.1 million stock-based compensation included in Selling, general and administrative; $1.4 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss);  and $1.8 million gain on disposal of investments.

(7) Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.4 million stock-based compensation, $0.3 million acquisition-related costs, $0.9 million termination costs, and $2.9 million reversal of accruals included in Research and development expenses, net; $3.6 million stock-based compensation, $1 million acquisition-related costs, $1.6 million asset impairment, and $0.3 million termination costs included in Selling, general and administrative; and $2.2 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

(8) Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $3.3 million stock-based compensation, $0.4 million termination costs, and $0.3 million acquisition-related costs included in Research and development expenses, net; $3.8 million stock-based compensation expense and $0.2 million termination costs included in Selling, general and administrative; and $1.3 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss).

25

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 and software solution innovator transforming networks that connect, move and store digital content. We generate revenues from the sale of semiconductor, embedded software and board level solutions that we have designed and developed or acquired. Almost all of our revenues in any given year come from the sale of products that are developed prior to that year. For example, 99% of our revenues in 2014 came from products developed or acquired in 2013 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 end 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 continue to 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.

RESULTSOFOPERATIONS

NETREVENUES

(in millions)	2014		Change		2013		Change		2012
Net revenues	$	525.6		3%	$	508.0		(4)%	$	531.0

Overall net revenues for 2014 increased by $17.6 million compared to net revenues for 2013.  This 3% increase was mainly attributable to higher sales volumes to the Storage market driven by our SAS and Flash controller products, partially offset by lower sales volumes to the Optical market driven by our Fiber-to-the-Home(“FTTH”) products and lower sales volumes to the Mobile market driven by our mobile backhaul products.

Storage represented 70% of our net revenues in 2014, compared to 67% in 2013.  Storage net revenues increased by 3% year-over-year mainly due to an increase in sales volume of our SAS and Flash controller products.

Optical represented 18% of our net revenues in 2014, compared to 19% in 2013.  Optical net revenues decreased by 1% compared to 2014 mainly due to lower sales volumes from our FTTH and legacy products, partially offset by higher volume of sales from our OTN products.

Mobile represented 12% of our net revenues in 2014, compared to 14% in 2013.  Mobile net revenues decreased by 2% compared to 2013 mainly due to lower sales volumes of our WinPath family of processors, partially offset by an increase in sales volumes of our Remote Radio Head products.

Overall net revenues for 2013 decreased by $23.0 million compared to net revenues for 2012.  This 4% decrease was mainly attributable to macro-economic uncertainty and continued cautious enterprise and carrier infrastructure spending in 2013, which primarily impacted sales volumes of each of the Storage, Optical and Mobile market segments, while average selling prices remained relatively stable.

26

Storage represented 67% of our net revenues in 2013 and 2012.  Storage net revenues decreased by 3% year-over-year mainly due to macro-economic uncertainty in 2013 driving continued softness in enterprise spending.  Accordingly, sales volumes of our server and storage products were lower compared to 2012.  This was partially offset by a higher volume of sales to Data Center customers and continued ramp of 6G and 12G SAS products and revenues from our flash controller products as a result of our acquisition of IDT’s enterprise flash controller division in 2013. 

Optical represented 19% of our net revenues in 2013 and 2012.  Optical net revenues decreased by 6% compared to 2012 mainly due to continued weakness in the macro-economic environment in 2013, which drove lower levels of carrier spending.  Sales volumes were down from our Legacy metro aggregation transport and routing and switching products.  This was partially offset by higher volume of sales from our high-capacity system-on-a-chip solutions products.

Mobile represented 14% of our net revenues in 2013 and 2012.  Mobile net revenues decreased by 9% compared to 2012 mainly due to continued weakness in the macro-economic environment in 2013, which drove lower levels of carrier spending.  Accordingly, sales volumes of our mobile backhaul products were lower compared to 2012.

GROSSPROFIT

(in millions)	2014		Change		2013		Change		2012
Gross profit	$	370.2		3%	$	358.8		(4)%	$	372.1
Percentage of net revenues		70%				71%				70%

Gross profit for 2014 increased by $11.4 million over 2013 due to higher volumes.  Gross profit as a percentage of net revenues decreased by 1%, from 71%  in 2013 to 70% in 2014, mainly due to a one time favorable impact of warranty provision releases in 2013.

Gross profit for 2013 decreased by $13.3 million over 2012 due to lower volumes.  Gross profit as a percentage of net revenues was 71% and 70% in 2013 and 2012, respectively.  Our gross margin was favorably impacted during 2013 from warranty provision releases offset by acquisition-related costs and termination costs. The remainder of the change is mainly due to product mix.

OTHERCOSTSANDEXPENSES

($ millions)	2014		Change		2013		Change		2012
Research and development, net	$	198.9		(6)%	$	211.0		(4)%	$	220.9
Percentage of net revenues		38%				42%				42%
Selling, general and administrative	$	117.0		4%	$	112.8		0%	$	112.5
Percentage of net revenues		22%				22%				21%
Amortization of purchased intangible assets	$	43.2		(10)%	$	48.2		6%	$	45.3
Percentage of net revenues		8%				9%				9%
Impairment of goodwill and purchased intangible assets	$	—		—%	$	—		(100)%	$	274.6
Percentage of net revenues		—%				—%				52%

Research and Development Expenses, net

Our Research and Development, net (“R&D”) expenses were $198.9 million in 2014.  This was $12.1 million, or 6%, lower compared to 2013 mainly due to a decrease in payroll-related costs, including termination costs, and lower tape-out related costs. This is partially offset by an increase in obligations associated with our foreign-employee pension liability.Note that the increase in R&D expenses related to the development of the RAID technology licensed from HP in 2014 was largely offset by non-recurring engineering (“NRE”) cost reimbursements (as described in Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 2. Business Combinations)  and therefore did not have a significant impact on our R&D expenses for 2014.

Our R&D expenses, net were $211.0 million in 2013.  This was $9.9 million, or 4%, lower compared to 2012.  This was primarily the result of the decrease in payroll-related costs, including termination costs, lower outside services due to the timing of projects and lower tape-out related costs incurred in 2013.  In addition, R&D expenses in 2013 were favorably impacted by approximately $2.9 million as a result of changes in estimates related to our patent contingency provisions.

27

Selling, General and Administrative Expenses

Our selling, general and administrative (“SG&A”) expenses were $117.0 million in 2014.  This was $4.2 million higher compared to 2013, mainly due to an increase in obligations associated with our foreign-employee pension liability, an increase in expenses associated with certain employee termination and separation costs, and an increase in commission expense. This was partially offset by a decrease in outside services, acquisition-related costs and asset impairments.

Our SG&A expenses were $112.8 million in 2013.   This was $0.3 million higher compared to 2012, mainly due to an increase in asset impairment of $2.2 million and higher payroll related costs of $2.6 million, including termination costs of $1.8 million, partially offset by reversal of accruals of $1.3 million, lower lease and facilities expenses of $1.5 million and certain other decreases including professional fees and lease exit costs.

Amortization of Purchased Intangible Assets

Amortization expense for acquired intangible assets decreased by $5.0 million, or 10%, in 2014 compared to 2013.  This was mainly due to certain intangible assets that reached the end of their amortization period during the first quarter of 2014, partially offset by commencing amortization of intangible assets acquired from HP during the third quarter of 2014.

Amortization expense for acquired intangible assets increased by $2.9 million, or 6%, in 2013 compared to 2012.  This was attributable to amortization of intangible assets acquired from IDT during the third quarter of 2013.

Impairment of goodwill and purchased intangible assets

During the third quarter of 2012, the Company recognized impairment charges of $274.6 million due to weaker quarterly results and lower future projections than previously expected in the former Fiber-to-the-Home (“FTTH”) and Wintegra reporting units, respectively, related to the Company’s 2006 acquisition of Passave and 2010 acquisition of Wintegra.  This was driven by slower adoption rates of FTTH technology in markets outside of Asia and prolonged weak carrier spending due to unfavorable macroeconomic conditions which negatively impacted Wintegra.  These circumstances triggered the Company to perform step one of the impairment test and we determined that the estimated fair values of the reporting units were lower than their respective carrying values.

The Company combined these two reporting units (formerly included in the Fiber-to-the-Home Products and Wireless Infrastructure and Networking Products operating segments) with the Communications Products operating segment, to form the new realigned Communications Business Unit operating segment near the end of 2012.  This organizational realignment was made to capitalize on the many areas of synergy between the former three reporting units, to create an integrated and focused product roadmap, and to further strengthen the scale advantage we have in the area of network communications. 

The impairment loss recorded in 2012 did not have a significant impact on the Company’s operations and/or liquidityin 2013, nor do we expect that it will in the future.  See within Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 17. Impairment of Goodwill and Long-Lived Assets.

OTHERINCOMEANDEXPENSES

($ millions)	2014		Change		2013		Change		2012
Gain on investment securities and other investments	$	0.2		(89)%	$	1.9		27%	$	1.5
Amortization of debt issue costs	$	(0.2)		(100)%	$	(0.1)		(50)%	$	(0.2)
Amortization of discount on long-term obligation	$	(0.4)		(100)%	$	—		—%	$	—
Foreign exchange gain (loss)	$	3.5		13%	$	4.0		(367)%	$	(1.5)
Interest income (expense), net	$	0.3		67%	$	0.9		156%	$	(1.6)
Provision for income taxes	$	(14.4)		44%	$	(25.8)		31%	$	(37.3)

Gain on investment securities and other

We recorded a gain on sale of investment securities and other investments of $0.2 million, $1.9 million,  and $1.5 million, related to the disposition of investment securities and other investments in 2014, 2013, and 2012, respectively.

Amortization of debt issue costs

We recorded amortization of debt issue costs of $0.2 million and $0.1 million in 2014 and 2013, respectively, relating to our credit facility, and $0.2 million in 2012 relating to our senior convertible notes, which were retired in October 2012.

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Amortization of discount on long-term obligation

We recorded amortization of discount on long-term obligation of $0.4 million relating to our long-term obligation from the acquisition of HP RAID software license during the third quarter of 2014 (seeItem 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 2. Business Combinations).

Foreign exchange gain (loss)

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.

We recognized a net foreign exchange gain of $3.5 million and $4.0 million in 2014 and 2013, respectively,  and a net foreign exchange loss of $1.5 million in 2012.  This was primarily due to foreign exchange gain and loss on the remeasurement of our net foreign denominated assets and liabilities.  This was driven by the United States Dollar appreciating overall by approximately 9%and 7% during 2014 and 2013, respectively, compared to depreciating by approximately 1% during 2012, against currencies applicable to our foreign operations.

Interest income (expense), net

Net interest income for 2014 and 2013 was $0.3 million and $0.9 million, respectively, and net interest expense for 2012 was $1.6 million. 

We drew $30 million from our credit facility during each of 2014 and 2013 and repaid the $60 million outstanding balance during the first quarter of 2014. The higher interest expense and credit facility fees incurred contributed to the lower net interest income in 2014 compared to 2013.

We retired our senior convertible notes in October 2012 and we drew $30 million in funds from our credit facility in November 2013.  This resulted in a lower interest expense to offset interest income from cash in banks and short-term investments in 2013 compared to 2012.

Provision for income taxes

On a consolidated basis, the Company recorded a provision for income taxes of $14.4 million, $25.8 million, and $37.3 million for 2014, 2013, and 2012, respectively. The effective tax rates were 99%, (396)%, and (13)% for 2014, 2013 and 2012, respectively.

TheCompany’s 2014 tax rate was higher than the 35% statutory rate primarily due to a $10.6 million tax effect of non-deductible amortization and stock-based compensation expense and a $10.3 million net increase in liability for unrecognized tax benefit.  This was partially offset by a $10.3 million benefit of investment tax credits generated in 2014, and the balance attributable to other less significant items.

The Company’s 2013 tax rate differed from the 35% statutory rate primarily due to $32.5 million increase in valuation allowance on deferred tax assets, $18.1 million tax on intercompany transactions, and $16.1 million non-deductible amortization and stock-based compensation expense.  This was partially offset by $23.3 million tax credits generated in 2013,  $10.2 million tax on profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate, and the balance attributable to other less significant items.

The Company’s 2012 tax rate differed from the 35% statutory rate primarily due to the $104.8 million tax impact of an intercompany dividend, $109.8 million non-deductible amortization and stock-based compensation expense, and $17.6 million effect of stock option related loss carry-forwards recorded in equity.  This was partially offset by a decrease in valuation allowance of $40.3 million, $19.2 million tax credits generated in 2012, and the balance attributable to other less significant items.

SeeItem 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 14.  Income Taxes.

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BUSINESSOUTLOOK

The following is our outlook for the three months ending March 28, 2015 and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure:

(in millions, except for percentages)	Non-GAAP measure	Reconciling items		GAAP Measure
Net revenues	$129.0 - $137.0	N/A	(a)	$129.0 - $137.0
Gross profit %	69.5% - 70.5%	(0.2)%	(b)	69.3% - 70.3%
Operating expenses	$72.0 - $74.0	$15.5 - $16.5	(c)	$87.5 - $90.5
Provision for income taxes	$1.0 - $1.5	$1.1 - $1.6	(d)	$2.1 - $3.1

(a) As in the past, and consistent with business practice in the semiconductor industry, a portion of our revenue is likely to be derived from orders placed and shipped during the same quarter, which we call our “turns business.” Our turns business varies from quarter to quarter.  We expect the turns business percentage from the beginning of the first quarter of 2015 to be approximately 27%.  A number of factors such as volatile macroeconomic conditions could impact achieving our revenue outlook.

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

(c) The referenced amount consists of $6.2 million to $7.2 million of stock-based compensation expense and $9.3 million of amortization of purchased intangible assets.

(d) $1.1 million to $1.6 million income tax provision related to arrears interest relating to unrecognized tax benefits, prepaid tax amortization, tax deductible goodwill and other tax deductible items.

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

LIQUIDITYANDCAPITALRESOURCES

Our principal sources of liquidity are cash from operations, our short-term investments and long-term investment securities. We employ these sources of liquidity to support ongoing business activities, acquire or invest in critical or complementary technologies, purchase capital equipment, repay any short-term indebtedness, and finance working capital. Currently, our primary objective for use of discretionary cash has been to repurchase and retire a portion of our common stock.  The combination of cash, cash equivalents, short-term investments and long-term investment securities at December 27, 2014 and December 28, 2013 totaled $266.0 million and $214.3 million, respectively.

In 2013, we obtained a revolving line of credit with a bank under which the Company may borrow up to $100 million, of which $nil was drawn as of December 27, 2014.  The credit agreement contains customary representations and warranties, affirmative covenants and negative covenants with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including, without limitation, restrictions and limitations on dividends, asset sales, the ability to incur additional debt and additional liens and certain financial covenants.  As of December 27, 2014, the Company was in compliance with these covenants.

In October 2012, we repurchased the remaining outstanding senior convertible notes at 100% of the outstanding principal amount, or $68.3 million.

In the future, we expect our cash on hand and cash generated from operations, together with our short-term investments, long-term investment securities and revolving line of credit, to be our primary sources of liquidity (see Item 8. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 4. Fair Value Measurements).

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OPERATINGACTIVITIES

We generated cash from operations of $90.6 million in 2014 compared to $78.8 million in 2013.  Our positive operating cash flows in 2014 were mainly driven by the favorable impact of non-cash adjustments of $88.7 million, which is comprised of $65.5 million of amortization and depreciation expense (2013 - $71.4 million; 2012 - $64.5 million) and $23.2 million of stock-based compensation (2013 and 2012 - $26.3 million).   In addition, a net decrease in working capital further contributed to our cash generated from operations. 

INVESTINGACTIVITIES

We had a net outflow of cash of $64.1 million from investing activities in 2014 compared to a net cash outflow of $126.7 million in the same period in 2013 (2012 - $166.3 million cash inflow) – a decrease of $62.6 million.  During 2014, we used $106.1 million (2013 - $179.8 million; 2012 - $120.9 million) to purchase investment securities and other investments, which is a typical use for our excess cash, and generated $67.4 million (2013 - $171.2 million; 2012 - $341.8 million) from redemptions and sales of such investments securities.  We also invested $15.4 million through the purchase of property and equipment and intangible assets in 2014 (2013 - $20.8 million; 2012 - $38.7 million).  In addition, on September 4, 2014, the Company made a $10 million first installment payment related to the Company’s acquisition of RAID software license from HP compared to $96.1 million used for the acquisition of IDT’s enterprise flash controller division in 2013 (see Item 8. Financial Statements, the Notes to the Condensed Consolidated Financial Statements, Note 2. Business Combinations).

FINANCINGACTIVITIES

We had a net outflow of cash of $12.3 million from financing activities in 2014 compared to a net cash inflow of $21.2 million in 2013 (2012 - $238.1 million).  During 2014, we borrowed $30.0 million (2013 - $30 million) from our credit facility and repaid $60.0 million.  We also repurchased common stock for $11.5 million in 2014 (2013 - $76.3 million; 2012 - $200 million).  This use of cash noted above was partially offset by $29.2 million in proceeds from employee related stock issuances in 2014 (2013 - $25.2 million; 2012 - $16 million). 

CONTRACTUALOBLIGATIONS:

At December 27, 2014, 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	$	52,150	$	9,925	$	17,917	$	14,275	$	10,033
Estimated Operating Cost Payments		12,339		3,009		5,095		3,918		317
Purchase and Other Obligations (1)		5,965		5,475		490		—		—
Acquisition Consideration Installment Payments		42,000		18,000		24,000
Total	$	112,454	$	36,409	$	47,502	$	18,193	$	10,350

(1) Included in the Purchase and Other Obligations is $5.3 million for design software tools, which will be paid in 2015.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 $53.7 million at December 27, 2014 for inventory and other expenses that will be received in the first quarter of 2015 and that will require settlement 30 days after receipt.

We expect to spend approximately $21.6 million in 2015 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 long-term obligations through the next twelve months.

In addition to the amounts shown in the table above, we have recorded a $41.3 million liability for unrecognized tax benefits as of December 27, 2014, and we are uncertain as to if or when such amounts may be realized.

OFF-BALANCESHEETARRANGEMENTS

As of December 27, 2014, we had no material off-balance sheet financing arrangements.

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RECENTACCOUNTINGPRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

During the first quarter of 2014, the Company adopted Financial Accountings Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or Tax Credit Carryforward Exists.”  The new guidance requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carryforward.  Accordingly, we adopted these presentation requirements on a prospective basis at the beginning of our first quarter of 2014.  Upon adoption, $44 million of deferred tax assets of a foreign subsidiary were netted against the related liability for unrecognized tax benefits on our Condensed Consolidated Balance Sheet. The netting of deferred tax assets and liabilities with unrecognized tax benefits had no impact on the Company’s Condensed Consolidated Statements of Operations.

New Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, or ASU 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  The new standard is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The standard allows for either full retrospective or modified retrospective adoption method. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

CRITICALACCOUNTINGPOLICIESANDESTIMATES

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 U.S. generally accepted accounting principles. 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. SeeItem 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies.

In management’s opinion the following critical accounting policies require the most significant judgment and involve complex estimation:

· Valuation of Goodwill and Intangible Assets

Purchase price allocations for business acquisitions and subsequent impairment, if any, 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. 

· Segment reporting

The aggregation of operating segments into one reportable segment requires management to evaluate several subjective criteria, including 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

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.

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· Performance Restricted Stock Units (“RSUs”).

The estimation of whether the performance targets will be achieved and/or the performance period required to achieve the targets requires judgment, and to the extent actual results or updated estimates differ from our current estimates, the cumulative effect on the current and prior periods of those changes is recorded in the period estimates are revised. The ultimate number of shares issued and the related compensation expense recognized is based on a comparison of the final performance metrics to the specific targets.

· Income Taxes

PMC has operations in several income tax jurisdictions, which subjects us to multiple jurisdictional income tax rates that impact our overall effective income 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 income tax rates.

We have recorded income tax liabilities based on our interpretation of income tax regulations for the countries in which we operate. We believe that the income tax return positions we have taken are fully supportable. However, our estimates are subject to review and assessment by the local tax authorities. Our income tax expense and related reserve for unrecognized income 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 income tax expense for these challenges in accordance with guidance for accounting for uncertainty in income taxes. Currently, our reserve for uncertain income tax positions is attributable primarily to uncertainties related to allocation of income among different income tax jurisdictions.

The timing of any such review and final assessment of our income tax liabilities is substantially out of our control and is dependent on the actions by those local tax authorities. Any re-assessment of our income tax liabilities may result in adjustments of the income taxes we pay, with a resulting impact on our income 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.

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.  SeeItem 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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.

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Based on a sensitivity analysis performed on the financial instruments held at December 27, 2014, 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 $2.2 million or an increase of $1.9 million in portfolio value, respectively.  The selected hypothetical change in interest rates does not reflect what could be considered the best or worst case scenario.

Credit Facility

As of December 27, 2014, the Company had available a  revolving line of credit under which the Company may borrow up to $100 million, of which $nil was drawn.  Interest payments are based on LIBOR plus margins, where margins range from 1.75% to 2.25% per annum based on the Company’s leverage ratio. SeeItem 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 8.  Credit Facility,for further details.

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. SeeItem 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 10. Senior Convertible Notes,for further details.

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 27, 2014 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 income from operations for 2014 would have increased by $2.2 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 27, 2014, we had 150 foreign currency exchange forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $40.9 million and the contracts had a fair value loss of $1.5 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 $1.5 million.  The selected hypothetical change in foreign exchange rates does not reflect what could be considered the best or worst case scenarios.

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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
Reports of Independent Registered Public Accounting Firms	37
Consolidated Balance Sheets	40
Consolidated Statements of Operations	41
Consolidated Statements of Comprehensive Income (Loss)	42
Consolidated Statements of Cash Flows	43
Consolidated Statements of Stockholders’ Equity	44
Notes to Consolidated Financial Statements	45

36

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

PMC-Sierra, Inc.

We have audited the accompanying consolidated balance sheets of PMC-Sierra Inc., as of December 27, 2014 and December 28, 2013, and the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for the years ended December 27, 2014 and December 28, 2013. Our audits also included the financial statement schedule as of and for the years ended December 27, 2014 and December 28, 2013 listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PMC-Sierra, Inc. at December 27, 2014 and 2013, and the consolidated results of its operations and its cash flows for the years ended December 27, 2014 and December 28, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule as of and for the years ended December 27, 2014 and December 28, 2013, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PMC-Sierra, Inc.’s internal control over financial reporting as of December 27, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California
February 24, 2015

37

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

PMC-Sierra, Inc.

We have audited PMC-Sierra, Inc.’s internal control over financial reporting as of December 27, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). PMC-Sierra, Inc.’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. 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 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 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 our opinion, PMC-Sierra Inc., maintained, in all material respects, effective internal control over financial reporting as of December 27, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2014 consolidated financial statements of PMC-Sierra, Inc., and our report dated February 24, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

February 24, 2015

38

Report of Deloitte LLP, Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of PMC-Sierra, Inc.

We have audited the accompanying consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders' equity of PMC-Sierra, Inc. and subsidiaries (the “Company”) for the year ended December 29, 2012. Our audit also included the financial statement schedule as of and for the year ended December 29, 2012 listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule 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 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 audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year 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 as of and for the year ended December 29, 2012, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte LLP

Vancouver, Canada

February 28, 2013 (November 12, 2013 and February 26, 2014 as to the effects of previously disclosed restatements)

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PMC-Sierra, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	December 27,		December 28,
	2014		2013
ASSETS:
Current assets:
Cash and cash equivalents	$	112,570	$	100,038
Short-term investments		45,885		10,894
Accounts receivable, net of allowance for doubtful accounts of $795 (2013 - $1,036)		55,414		56,112
Inventories, net		37,949		31,074
Prepaid expenses and other current assets		16,473		19,855
Income taxes receivable		1,968		2,640
Prepaid tax expense		51		5,695
Deferred tax assets		5,442		43,131
Total current assets		275,752		269,439
Investment securities		107,509		103,391
Investments and other assets		7,683		10,750
Prepaid tax expenses		42		93
Property and equipment, net		37,311		39,149
Goodwill		283,239		278,849
Intangible assets, net		143,680		146,974
Deferred tax assets		13,412		1,306
Long-term income tax receivable		457		—
	$	869,085	$	849,951
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable	$	23,360	$	23,173
Accrued liabilities		74,135		64,257
Credit facility		—		30,000
Income taxes payable		1,062		632
Liability for unrecognized tax benefit		16,076		54,127
Deferred tax liabilities		7,644		71
Deferred income		4,530		7,481
Total current liabilities		126,807		179,741
Long-term obligations		36,305		11,108
Deferred tax liabilities		53,493		43,143
Liability for unrecognized tax benefit		25,244		27,947
PMC special shares convertible into 278 (2013 - 1,019) shares of common stock		745		1,188
Contingencies (Note 11. Commitments and Contingencies)
Stockholders' equity:
Common stock, par value $.001: 900,000 shares authorized;     199,518 shares issued and outstanding (2013 - 194,415)		200		201
Additional paid in capital		1,595,609		1,550,184
Accumulated other comprehensive loss		(2,355)		(526)
Accumulated deficit		(966,963)		(963,035)
Total stockholders' equity		626,491		586,824
	$	869,085	$	849,951

See notes to the consolidated financial statements.

40

PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Year Ended
	December 27,		December 28,		December 29,
	2014		2013		2012
Net revenues	$	525,603	$	508,028	$	530,997
Cost of revenues (excluding amortization of purchased intangible   assets shown separately below)		155,396		149,213		158,849
Gross profit		370,207		358,815		372,148
Research and development, net		198,919		211,047		220,927
Selling, general and administrative		117,007		112,770		112,479
Amortization of purchased intangible assets		43,219		48,245		45,321
Impairment of goodwill and purchased intangible assets		—		—		274,637
Income (loss) from operations		11,062		(13,247)		(281,216)
Other  income (expense):
Gain on investment securities and other investments		155		1,879		1,523
Amortization of debt issue costs		(204)		(80)		(167)
Amortization of discount on long-term obligation		(350)		—		—
Foreign exchange gain (loss)		3,508		4,043		(1,512)
Interest income (expense), net		323		907		(1,586)
Income (loss) before provision for income taxes		14,494		(6,498)		(282,958)
Provision for income taxes		(14,412)		(25,756)		(37,301)
Net income (loss)	$	82	$	(32,254)	$	(320,259)
Net income (loss) per common share - basic and diluted	$	0.00	$	(0.16)	$	(1.48)
Shares used in per share calculation - basic		196,885		203,882		216,593
Shares used in per share calculation - diluted		200,145		203,882		216,593

See notes to the consolidated financial statements.

41

PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS)

(in thousands)

	Year Ended
	December 27,		December 28,		December 29,
	2014		2013		2012
Net income (loss)	$	82	$	(32,254)	$	(320,259)
Other comprehensive income (loss):
Change in fair value of derivatives, net of tax of  ($159), ($174), and $260		(1,454)		(983)		2,065
Change in fair value of investment securities, net of tax of ($28),  ($124), and ($65)		(375)		(159)		(303)
Other comprehensive  (loss) income		(1,829)		(1,142)		1,762
Comprehensive loss	$	(1,747)	$	(33,396)	$	(318,497)

See notes to the consolidated financial statements.

42

PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended
	December 27,		December 28,		December 29,
	2014		2013		2012
Cash flows from operating activities:
Net income (loss)	$	82	$	(32,254)	$	(320,259)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		65,477		71,432		64,535
Stock-based compensation		23,181		26,264		26,315
Unrealized foreign exchange (loss) gain, net		(5,846)		(2,251)		1,747
Net amortization of premiums and accrued interest on investments		718		1,580		5,101
Asset impairments		770		2,966		1,759
Loss on disposal of property and equipment		4		6		—
Gain on investment securities and other investments		(131)		(1,796)		(1,508)
Accrued interest on short-term loan		350		—		—
Excess tax benefits from stock option transactions		—		(842)		(14,232)
Impairment of goodwill and purchased intangible assets		—		—		274,637
Income taxes related to intercompany dividend		—		—		60,940
Changes in operating assets and liabilities:
Accounts receivable, net		666		6,330		(2,929)
Inventories, net		(6,875)		(3,625)		17,294
Prepaid expenses and other current assets		1,278		1,315		2,635
Accounts payable and accrued liabilities		878		(5,551)		(28,267)
Deferred income taxes and income taxes receivables/payables		12,973		15,900		(21,085)
Deferred income		(2,951)		(632)		(7,911)
Net cash provided by operating activities		90,574		78,842		58,772
Cash flows from investing activities:
Investment in long term deposits		—		(1,127)		—
Cash paid in connection with business acquisition, net of cash acquired		(10,000)		(96,098)		(15,900)
Purchases of property and equipment		(13,945)		(16,851)		(31,229)
Purchase of intangible assets		(1,437)		(3,979)		(7,438)
Redemption of short-term investments		5,670		8,466		26,473
Disposals of investment securities		61,695		162,773		315,310
Purchases of investment securities and other investments		(106,076)		(179,837)		(120,917)
Net cash (used in) provided by investing activities		(64,093)		(126,653)		166,299
Cash flows from financing activities:
Proceeds from credit facility		30,000		30,000		—
Payment of debt issuance costs		—		(928)		—
Repurchase of senior convertible notes		—		—		(68,340)
Repurchases of common stock		(11,496)		(76,335)		(199,999)
Repayment of credit facility		(60,000)		—		—
Proceeds from issuance of common stock		29,175		25,247		16,000
Excess tax benefits from stock option transactions		—		842		14,232
Net cash used in financing activities		(12,321)		(21,174)		(238,107)
Effect of exchange rate changes on cash and cash equivalents		(1,628)		(947)		435
Net increase (decrease) in cash and cash equivalents		12,532		(69,932)		(12,601)
Cash and cash equivalents, beginning of year		100,038		169,970		182,571
Cash and cash equivalents, end of year	$	112,570	$	100,038	$	169,970
Supplemental disclosures of cash flow information:
Cash paid for interest	$	348	$	42	$	1,554
Cash paid for income taxes, net of refunds received		(1,781)		(1,338)		(2,523)
Supplemental disclosures of non-cash investing and financing activities:
Conversion of PMC-Sierra special shares into common stock		10		—		40

See notes to the consolidated financial statements.

43

PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

						Accumulated
						Other
	Shares of			Additional		Comprehensive				Total
	Common	Common		Paid in		Income (Loss)		Accumulated		Stockholders'
	Stock	Stock		Capital		(net of tax)		Deficit		Equity
Balance at December 31, 2011	230,233	$	230	$	1,623,006	$	(1,146)	$	(512,573)	$	1,109,517
Net loss	—		—		—		—		(320,259)		(320,259)
Other comprehensive income	—		—		—		1,762		—		1,762
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
Prior period adjustments	—		—		1,950		—		—		1,950
Repurchases of common stock	(33,732)		(33)		(125,782)		—		(74,184)		(199,999)
Balance at December 29, 2012	200,924		201		1,554,886		616		(907,016)		648,687
Net loss	—		—		—		—		(32,254)		(32,254)
Other comprehensive loss	—		—		—		(1,142)		—		(1,142)
Issuance of common stock under stock benefit plans	6,537		7		23,373		—		—		23,380
Stock-based compensation expense	—		—		26,264		—		—		26,264
Benefit of stock option related loss carry-forwards	—		—		842		—		—		842
Repurchases of common stock	(13,046)		(13)		(55,175)		—		(23,765)		(78,953)
Balance at December 28, 2013	194,415		195		1,550,190		(526)		(963,035)		586,824
Net income	—		—		—		—		82		82
Other comprehensive loss	—		—		—		(1,829)		—		(1,829)
Conversion of special shares into common shares	4		—		10		—		—		10
Cancellations, expirations and adjustments of special shares	—		—		434		—		—		434
Issuance of common stock under stock benefit plans	6,498		6		26,721		—		—		26,727
Stock-based compensation expense	—		—		23,181		—		—		23,181
Repurchases of common stock	(1,399)		(1)		(4,927)		—		(4,010)		(8,938)
Balance at December 27, 2014	199,518	$	200	$	1,595,609	$	(2,355)	$	(966,963)	$	626,491

See notes to the consolidated financial statements.

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business.PMC-Sierra, Inc. (“PMC” or “the Company”) is a semiconductor and software solution 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.

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 2014, 2013 and 2012 fiscal years ended on the last Saturday of the calendar year and each consisted of 52 weeks.  The Company’s reporting currency is the U.S. dollar and presented in thousands unless otherwise stated. The accompanying consolidated financial statements include the accounts of PMC-Sierra, Inc. and all of its subsidiaries. As at December 27, 2014 and December 28, 2013, all subsidiaries included in these consolidated financial statements were wholly owned by PMC. All inter-company accounts and transactions have been eliminated in consolidation.

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 acquisition consideration, the valuation of investments, allowance 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 10. 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 other comprehensive income and 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) and consist of work-in-progress and finished goods.  Inventory costs are determined using standard cost, which approximates actual costs under the weighted average cost method. 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.

45

Goodwill and Intangible assets.  Goodwill and indefinite-life intangible assets are 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. To evaluate the recoverability of goodwill, the Company first assesses qualitative factors to determine whether the existence of events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If the Company determines that it is not more likely than not that the fair value of any of its reporting units is less than its carrying amount, no further assessment is performed.If the Company determines that it is more likely than not that the fair value of any of its reporting units is less than its carrying amount, a quantitative assessment will be performed which 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 recognized over the estimated useful lives of 3 years.

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.

Changesinthe estimated fair values of intangible assets in the future could result in significant impairment charges or changes to our expected amortization.

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 17. Impairment of Goodwill and Long-Lived Assets for discussion of the 2012 asset impairment relating to goodwill and purchased intangible assets.

During 2014, 2013 and 2012, the Company recognized other long-lived asset impairments totaling $0.8 million, $3.0 million and $1.8 million, respectively, related to certain design tools, property and equipment, and intellectual property that were no longer expected to be utilized.  These impairment charges were included in the Consolidated Statements of Operations in Research and development expense, net in the respective periods.

Foreign currency remeasurement.For all foreign operations, the U.S. dollar is the functional currency. Monetary assets and liabilities in foreign currencies are remeasured into U.S. dollars using the exchange rate as of the balance sheet date. Revenues and expenses are remeasured at average rates of exchange during the year. Remeasurement gains/losses are recorded in income (loss) from operations. 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 income (loss) and cash flows. The Company periodically hedges forecasted foreign currency transactions related to certain operating expenses. All derivatives are recorded in the consolidated 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 income (loss). 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 (loss) and are recognized in net income (loss) when the hedged item affects net income (loss). 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 income (loss). During the years ended December 27, 2014, December 28, 2013 and December 29, 2012, all hedges were designated as cash flow hedges.

46

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. 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. 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. 

The carrying values of cash, accounts receivable, accounts payable and credit facility approximate fair value because of their short term nature.

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 27, 2014, the use of derivative financial instruments was not material to the Company’s results of operations or financial position (see Note 3. Derivative Instruments).

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 27, 2014, the Company had one distributor that accounted for 15% of accounts receivables, and two other customers that accounted for 11% and 10% of accounts receivables, respectively.  At December 28, 2013, the Company had one distributor that accounted for 10% of accounts receivables, and two other customers that each accounted for 19% and 8% 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 2014 and 2013, there were three outside wafer foundries that supplied approximately 98% of the Company’s 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 the gross amount of 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.

47

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.

Research and development expenses, net.The Company expenses research and development (“R&D”) costs as incurred, net of non-recurring engineering income of $7.2 million (2013 - $1.9 million, 2012 - $3.9 million). 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 27, 2014, December 28, 2013, and December 29, 2012, research and development expenses were $198.9 million, $211.0 million, and $220.9 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 (see Note 6. Supplemental Financial Information).

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.

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.

During 2014, the Company recognized $23.2 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).

48

Restricted Stock Units (“RSUs”).RSUs are stock awards that are granted to employees entitling the holder to shares of the Company’s common stock as the award vests. RSUs are measured at fair value based on the number of shares granted and the quoted price of our common stock at the date of grant.  We amortize the fair value of RSUs over the vesting term of generally four years on a straight-line basis.  Performance-based RSUs vest upon achievement of certain company-based performance conditions and a requisite service period.  We then assess whether it is probable that the performance targets would be achieved.  If assessed as probable, compensation expense is recorded for these awards over the estimated performance period.  At each reporting period, we reassess the probability of achieving the performance targets and the performance period required to meet those targets.  The estimation of whether the performance targets will be achieved and/or the performance period required to achieve the targets requires judgment, and to the extent actual results or updated estimates differ from our current estimates, the cumulative effect on the current and prior periods of those changes is recorded in the period estimates are revised. The ultimate number of shares issued and the related compensation expense recognized is based on a comparison of the final performance metrics to the specific targets.

Income taxes.Income taxes are reported under GAAP and, accordingly, deferred income taxes are recognized using the 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 against the carrying amount of deferred tax assets 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 14. 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 (see Note 2. Business Combinations).

Net income (loss) per common share.Basic net income (loss) 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 (loss) 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 (see Note 16.  Net Income (Loss) Per Share).

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. The aggregation of operating segments into one reportable segment requires management to evaluate, among other criteria, 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 (see Note 15. Segment Information).

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Recently Adopted Accounting Pronouncements

During the first quarter of 2014, the Company adopted Financial Accountings Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or Tax Credit Carryforward Exists.”  The new guidance requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward.  Accordingly, we adopted these presentation requirements on a prospective basis at the beginning of our first quarter of 2014.  Upon adoption, $44 million of deferred tax assets of a foreign subsidiary were netted against the related liability for unrecognized tax benefits on our Condensed Consolidated Balance Sheet. The netting of deferred tax assets and liabilities with unrecognized tax benefits had no impact on the Company’s Condensed Consolidated Statements of Operations.

New Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  The new standard is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The standard allows for either full retrospective or modified retrospective adoption method. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

NOTE 2. BUSINESS COMBINATIONS

Acquisition of RAID Software License

On September 4, 2014 (the “Effective Date”), PMC completed a transaction agreement with Hewlett-Packard Company (“HP”) to license core HP Smart Array (“RAID”) software, firmware and management technology (the “Transaction”). With this technology, as well as with certain key employees who worked for HP as lead RAID software development engineers and who were transferred to PMC, PMC can provide more system value to new and existing enterprise, Hyperscale data center and channel customers.

Acquisition Consideration

The total acquisition consideration for the Transaction is $52 million cash, payable in four installments as follows:

Effective Date	$	10,000
January 10, 2015		18,000
January 10, 2016		12,000
January 10, 2017		12,000

Payment of the above installments is not subject to any contingencies. Because the installment payments span more than one year, the Company determined the purchase-date fair value of the acquisition consideration by discounting the future payments utilizing an interest rate of 3.0%, which is considered to be representative of the interest rate of a typical market participant. The difference between the total cash installment payments of $52 million and the fair value of $50.5 million as of the Effective Date will be charged to interest expense in 2014-2017. Transaction-related costs of approximately $0.6 million were expensed as incurred in 2014 and are included in selling, general and administrative expense.

Allocation of Acquisition Consideration

The Transaction qualifies as a business combination and was accounted for using the acquisition method. The preliminary allocation of the acquisition consideration to the estimated fair value of assets acquired by major class as of the date of the Transaction is disclosed in the table below. There were no liabilities assumed in the Transaction.

Intangible assets	$	44,900
Equipment		873
Other current assets		337
Goodwill		4,390
Total assets	$	50,500
Total acquisition consideration (discounted)	$	50,500

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Acquired Intangible Assets

The identified intangible assets acquired were recognized at their fair values and are being amortized on a straight-line basis over their estimated useful lives as follows:

		Estimated fair value	Weighted average useful life
License of existing technologies	$	39,800	7 years
Customer relationship		3,800	10 years
RAID license payments		1,300	8 years
Total intangible assets	$	44,900

The license of the existing technologies asset includes patents, business processes, tools, and proprietary business methods related to RAID software. In addition to the current products, the licensed technologies can be leveraged to assist and improve existing services and create future generation products. The valuation assumptions included information on revenues from existing products and future expected revenue and technology migration trends for each technology. Management applied an 18% discount rate to value the license of existing 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.

The customer relationship asset relates primarily to the underlying customer relationship with HP. The preliminary estimated fair value of the customer relationship represents the sum of the present value of the expected cash flows attributable to this customer relationship. The cash flows were determined from the revenue and profit forecasts that are expected to be generated from the customer relationship and were valued by applying a discount rate of 15%.

The RAID license payments component of intangible assets relates to annual RAID software fees receivable from HP to incorporate the Company’s RAID software into HP products not incorporating Company hardware and were valued by applying a discount rate of 15%.  

Goodwill

The Company’s primary reasons for the Transaction were to expand its relationship with HP and to provide additional opportunities for increased revenue through future sales to customers other than HP.  As referenced above, included in the Transaction was an assembled workforce of five key employees which provides the Company with intellectual resources for the development of the next generation of the Company’s RAID software (Smart RAIDTM), as well as operational synergies. These factors were the basis for the recognition of goodwill. Goodwill is expected to be deductible for tax purposes over a period of 15 years. The acquired goodwill was allocated to the Company’s Enterprise Storage Products market segment.

 Pro forma disclosures

The Transaction would not have a significant impact on PMC’s net revenues or net income (loss) for the periods where pro forma disclosures would be required. Revenues and related expenses for 2014 from the Effective date were immaterial.

Other Agreement

Upon the closing of the Transaction, the Company also entered into an agreement with HP related to services and non-recurring engineering (“NRE”) which provides the framework for the development of future generations of RAID software for HP for a period of approximately two years from the Effective Date. During this period, HP will make cost reimbursement payments to the Company totaling $25 million, which are receivable in installments through April 2016. The services and NRE agreement is considered to be a market rate contract for services to be provided in the future, thus not having an impact on the acquisition consideration allocation, and will be accounted for prospectively as such services are delivered and related payments are received.

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Acquisition of Integrated Device Technology, Inc’s Enterprise Flash Controller Business

On July 12, 2013, PMC completed the acquisition of (i) substantially all of the assets used by Integrated Device Technology, Inc., a Delaware corporation (“Seller”), and its subsidiaries, in the business of designing, developing, manufacturing, testing, marketing, supporting, maintaining, distributing, provisioning and selling non-volatile memory (flash) controllers and (ii) all technology and intellectual property rights owned by Seller or any of its subsidiaries and used exclusively in, or developed exclusively for use in, (a) switching circuits having the primary function of flexible routing of data from/to multiple switch interface ports, where all switch interface ports conform to the PCIe protocol, or (b) circuits having the primary function of executing all of the capturing, re-timing, re-generating and re-transmitting PCIe signals to help extend the physical reach of the signals in a system (the “Acquisition”), pursuant to the Asset Purchase Agreement with Seller and Integrated Device Technology (Malaysia) Sdn. Bhd., a wholly-owned subsidiary of Seller (“Selling Subsidiary” and, together with PMC, PMC’s subsidiaries and Seller, the “Parties”) dated May 29, 2013.  The Parties also entered into a license agreement, effective upon the closing of the Acquisition, whereby Seller and Selling Subsidiary will license certain intellectual property rights and technology to PMC, and PMC will license back to Seller and Selling Subsidiary certain of the intellectual property rights and technology acquired by PMC in the Acquisition. Upon the closing of the Acquisition, the Parties also entered into (a) a transition services agreement and (b) a supply agreement, whereby Seller and Selling Subsidiary provide services to PMC at the option of PMC.

PMC’s completion of the Acquisition accelerates the Company’s product offering in the Enterprise Flash Controller and PCI Express Switch businesses, including the world’s first NVM Express (NVMe) flash controller.

Acquisition consideration

The total fair value of consideration paid for the Acquisition was approximately $96,098 in cash funded by PMC’s available working capital.

Acquisition-related costs of approximately $3.2 million were expensed as incurred in 2013 and are included in selling, general and administrative expense.

Allocations of acquisition consideration

The purchase of the IDT assets was accounted for using the acquisition method, and the allocation of fair value of consideration paid to the estimated fair value of related assets acquired and liabilities assumed as of the date of the Acquisition in the table below reflect various estimates and analyses, including work performed by third-party valuation specialists.

Current assets	$	2,423
Intangible assets		67,400
Goodwill		26,430
Total assets		96,253
Assumed liabilities		155
Total acquisition consideration	$	96,098

The amortizable intangible assets are being amortized on a straight line basis over their estimated useful lives as follows:

	Estimated		Weighted average
	fair value		useful life
Order backlog	$	100	<  1 year
Existing technology		700	2 years
Customer relationships		3,400	7 years
Core technology		63,200	7 years
Total intangible assets	$	67,400

Acquired Intangible Assets

The existing and core technologies include patents, business processes and tools, and proprietary business methods. In addition to the current products, the acquired developed technologies can be leveraged to assist and improve existing services and create future generation products.  The valuation assumptions included information on revenues from existing products and future expected trends for each technology, with an estimated useful life of between two and seven years.  Management applied discount rates of 14% and 16% respectively 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.

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Customer relationships assets relate primarily to underlying customer relationships. The preliminary estimated fair value of the customer relationships represents the sum of the present value of the expected cash flows attributable to those customer relationships. The cash flows were determined from the revenue and profit forecasts associated with growth opportunities that are expected to be generated from these customer relationships. The Company used the same method to determine the fair value of this intangible asset as the developed technologies and utilized a discount rate of 16%.

Goodwill

The Company’s primary reasons for the Acquisition was to accelerate the Company’s time-to-market with early product leadership and a robust design win pipeline, including wins spanning tier one Data Center, original equipment manufacturer (OEM), and solid-state drive (SSD) customers.  The Acquisition also enhanced the Company’s engineering team through the addition of research and development resources.  These factors were the basis for the recognition of goodwill. The goodwill is expected to be deductible for tax purposes over 15 years.  The acquired goodwill was allocated to our Enterprise Storage Products market segment.

Proforma disclosures

The results of operations of the Acquisition have been included in PMC’s consolidated results of operations since the acquisition date.The Acquisition did not have a significant impact on PMC’s net revenues or net income (loss) for the periods where pro forma disclosures would be required.  Net revenues for 2013 from the Acquisition date were $4.9 million and increased our net loss for the same period was $2.0 million.  Included in net loss was $4.6 million related to amortization of purchased intangible assets, $0.8 million of fair value adjustments on acquired inventory, and $1.5 million of payroll accruals.

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 27, 2014, the Company had 150 foreign currency forward exchange contracts outstanding that qualified and were designated as cash flow hedges. At December 28, 2013, there were 27 such currency forward contracts outstanding. The U.S. dollar notional amount of these contracts was $40.9 million and $27.7 million at December 27, 2014 and December 28, 2013, respectively, and the contracts had a fair value of $1.5 million loss and a fair value of $0.6 million loss in December 27, 2014 and December 28, 2013, 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.  The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Inputs are based on quoted market prices for identical assets and liabilities in active markets at the measurement date.

Level 2: Inputs include similar 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.

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.

The Company’s valuation techniques used to measure the fair value of money market funds and other financial instruments 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, all of which have counterparties with high credit ratings, 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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In 2014, the Company reviewed and evaluated the observable market pricing data and volume of trading activity used in determining Level 1 and Level 2 assets and reclassified $7.3 million of investments as Level 2 that were reported as Level 1 at December 28, 2013.  The Company also reclassified $2.1million of investments as Level 1 that were reported as Level 2 at December 28, 2013.  The Company’s derivative instruments are classified as Level 2 as of December 27, 2014, as they are not actively traded and are valued using pricing models that use observable market inputs.  There were no Level 3 assets or liabilities at December 27, 2014.

Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis

Financial assets measured on a recurring basis as of December 27, 2014 and December 28, 2013, are summarized below:

	Fair value,
	December 27, 2014
(in thousands)	Level 1		Level 2
Assets:
Money market funds (1)	$	8,729	$	—
Corporate bonds and notes (1)		88,401		17,030
United States (“US”) treasury and government agency notes (1)		38,283		1,387
Foreign government and agency notes (1)		537		7,525
US state and municipal securities (1)		—		231
Total assets	$	135,950	$	26,173

(1) Included in cash and cash equivalents, short-term investments, and long-term investment securities (see Note 7. Investment Securities).

	Fair value,
	December 28, 2013
(in thousands)	Level 1		Level 2
Assets:
Money market funds (1)	$	14,629	$	—
Corporate bonds and notes (1)		79,653		3,166
US treasury and government agency notes (1)		28,985		—
Foreign government and agency notes (1)		2,048		—
US state and municipal securities (1)		433		—
Total assets	$	125,748	$	3,166

Financial liabilities measured on a recurring basis are summarized below:

	Fair value,
	December 27, 2014
(in thousands)	Level 2
Current liabilities:
Forward currency contracts (1)	$	1,907

	Fair value,
	December 28, 2013
(in thousands)	Level 2
Current liabilities:
Forward currency contracts (1)	$	612

(1) Included in Accrued liabilities.

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Assets/Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis

The Company measures the fair value of its indebtedness carried at amortized cost only for the purposes of disclosing such amounts.  As of December 28, 2013, the carrying value of $30.0 million outstanding drawdown on the Company’s line of credit approximated its fair value, given the short-term nature of this borrowing and a lack of significant interest rate changes since the borrowing occurred.

The Company’s 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.  During 2014, 2013 and 2012, charges of $0.8 million, $3.0 million and $1.8 million, respectively, were recorded to fully write off certain assets that became impaired during those years. As their resulting carrying value was $nil, no further fair value measurements were necessary.  The losses recorded during 2014, 2013 and 2012 were mainly included in Research and Development expenses, net in the Consolidated Statements of Operations.  See Note 1. Summary of Significant Accounting Policies for details on the asset impairments.

NOTE 5. STOCK-BASED COMPENSATION

At December 27, 2014, 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 27,		December 28,		December 29,
(in thousands)	2014		2013		2012
Cost of revenues	$	966	$	899	$	875
Research and development		9,420		11,095		11,583
Selling, general and administrative		12,795		14,270		13,857
Total	$	23,181	$	26,264	$	26,315

The Company received cash of $29.2 million, $25.2 million and $16.0 million from the exercise of stock-based awards during 2014, 2013 and 2012, respectively. The total intrinsic value of stock awards exercised during 2014 was $21.9 million.

As of December 27, 2014, there was $3.8 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options granted under the Company’s stock option plans, which is expected to be recognized over a period of 2.4 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.

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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 27,	December 28,	December 29,
	2014	2013	2012
Expected life (years)	5.8	5.9	5.4
Expected volatility	32%	40%	42%
Risk-free interest rate	1.8%	1.6%	0.8%
Forfeiture rate	9.5%	8.5%	12.1%

Employee Stock Purchase Plan:

	December 27,	December 28,	December 29,
	2014	2013	2012
Expected life (years)	0.5	0.5	0.5
Expected volatility	35%	35%	42%
Risk-free interest rate	0.5%	0.1%	0.2%
Forfeiture rate	9.5%	8.5%	12.1%

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.

Activity under the option plans during the year ended December 27, 2014 was as follows:

				Weighted average
		Weighted average		remaining	Aggregate intrinsic
	Number of	exercise price per		contractual term	value at December 27,
	options	share		(years)	2014
Outstanding, December 28, 2013	23,555,472	$	8.01	4.88	$	6,834,586
Granted	745,237	$	7.07		$	1,530,333
Exercised	(2,941,897)	$	6.23		$	5,042,000
Forfeited	(3,042,092)	$	13.05		$	—
Outstanding, December 27, 2014	18,316,720	$	7.53	4.41	$	32,598,999
Exercisable, December 27, 2014	16,305,889	$	7.65	3.92	$	27,467,565

No adjustment has been recorded for fully vested options that expired during the year ended December 27, 2014. A reversal of $2.3 million was recorded for pre-vesting forfeitures during the year ended December 27, 2014.

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The following table summarizes information on options outstanding and exercisable at December 27, 2014:

	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   –  $6.08	3,758,742	5.23	$	5.15	3,257,572	$	5.09
$6.09   –  $7.22	5,235,527	6.16		6.85	3,856,794		6.87
$7.24   –  $8.06	4,138,072	2.99		7.87	4,109,945		7.87
$8.15   –  $10.97	5,133,779	3.22		9.66	5,030,978		9.69
$11.32 –  $12.43	50,600	1.08		11.79	50,600		11.79
$0.05   –  $12.43	18,316,720	4.41	$	7.53	16,305,889	$	7.65

The weighted-average estimated fair values of each employee stock options granted during 2014, 2013, and 2012, were $2.33, $2.47, and $2.16, respectively.

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.  On May 10, 2012, PMC stockholders approved the business criteria on which performance goals may be based so that awards granted may constitute performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).  On August 27, 2012 the Compensation Committee awarded the CEO the first performance RSU grant with a performance goal of the revenue target in the Company’s 2012 internal operating plan.  On January 22, 2013, the Compensation Committee certified the degree of achievement of the Company’s 2012 revenue target and the number of earned RSUs to be released to the CEO; 50% of the earned RSUs were released on May 25, 2013, 25% of the earned RSUs were released on May 25, 2014 and 25% of the earned RSUs will be released on May 25, 2015. The total estimated $0.2 million fair value of this 2012 grant based on the achievement of performance against target was and will be recognized as compensation expense over the grant’s vesting terms, with 50% vesting on May 25, 2013, 25% vesting on May 25, 2014, and 25% vesting on May 25, 2015.

On August 26, 2013, performance RSUs were granted to the CEO and other Executives (“Executive(s)”) with a performance goal of the degree of achievement of Total Shareholder Return (“TSR”) relative to Global Industry Classification Standards (“GICS”) Semiconductor Companies (8-Digit) for the performance period (July 1,  2013 - June 30, 2015). Performance against the performance goal is anticipated to be reviewed on or about August 25, 2015 and earned RSUs will release 50% upon certification and 50% on August 25, 2016.  The total estimated $1.7 million fair value of these 2013 grants was and will be recognized as compensation expense over the grant’s vesting terms, with 50% vesting on August 25, 2015 and 50% vesting on August 25, 2016.

In June 2014, the Compensation Committee adopted a second performance-based equity program as part of the Company’s equity compensation program applicable to the Executives.  The addition of the second program increases the performance-based equity portion as a percentage of the annual equity award to our Executives as follows:

			Executives
	CEO		other than CEO
	2014	2013	2014	2013
Options	25%	50%	25%	25%
Time-based RSUs	25%	25%	25%	50%
Performance RSUs	50%	25%	50%	25%

The performance goal of the new performance-based equity program is based on either revenue or Non-GAAP operating income target for each year in the Company’s internal 3-year operating plan treated as three distinct, one-year performance periods.

On August 25, 2014, the Company made its annual grant of RSU awards to Executives. The goal of the performance-based RSU award under one program is the degree of achievement of TSR relative to GICS Semiconductor Companies (8-Digit) for the performance period (July 1, 2014 - June 30, 2016). The total estimated $1.9 million fair value of these 2014 awards was and will be recognized as compensation expense over the award’s vesting terms, with 50% vesting on August 25, 2016 and 50% vesting on August 25, 2017. The goal of the performance-based RSU award under the second program is based on revenue or the Non-GAAP operating income target for each year in the Company’s internal 2014-2016 operating plan. The total fair value of the awards under the

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second program’s performance target estimated at $2.0 million was and will be recognized as compensation expense over the award’s vesting and certification terms:  for the first tranche (34% of the total grant) the 2014 performance against target will be certified on or about February 25, 2015 at which time earned shares will vest and release; for the second tranche (33% of the total grant) the 2015 performance against target will be certified on or about February 25, 2016 at which time earned shares will vest and release; and  for the third tranche (33% of the total grant) the 2016 performance against target will be certified on or about February 25, 2017 at which time earned shares will vest and release.

A summary of RSU activity during the year ended December 27, 2014 is as follows:

		Weighted Average
	Restricted	Remaining	Aggregate
	Stock Units	Contractual Term	intrinsic value
Unvested units at December 28, 2013	6,179,037	1.74	$	39,545,837
Awarded	4,063,220	—	$	—
Released	(1,985,007)	—	$	—
Forfeited	(888,721)	—	$	—
Unvested units at December 27, 2014	7,368,529	1.73	$	67,200,984
Restricted Stock Units expected to vest December 27, 2014	6,396,998	1.63	$	58,340,617

The weighted-average estimated fair values of each RSU award during 2014, 2013, and 2012 were $7.49,  $6.45, and $5.95, respectively. The intrinsic value of RSUs vested during year ended December 27, 2014 was $14.6 million. As of December 27, 2014, total unrecognized compensation costs, adjusted for estimated forfeitures, related to unvested RSUs was $38.5 million, which is expected to be recognized over the next 2.71 years.

Employee Stock Purchase Plan

The 2011 Employee Stock Purchase Plan (the “2011 Plan”) was approved by stockholders at the 2010 Annual Meeting.  The 2011 Plan became effective on February 11, 2011. The 2011 Plan consists of consecutive offering periods, generally of a duration of 6 months, and allows eligible employees to purchase shares of the Company’s common stock at the end of each such offering period, generally February and August of any year, at a price per share equal to 85% of the lower of the fair market value of a share of Common Stock on the start date or the fair market value of a share of Common Stock on the exercise date of the offering period.  Employees purchase such shares through payroll deductions which may not exceed 10% of their total cash compensation.  The 2011 Plan imposes certain limitations upon an employee’s right to acquire Common Stock, including the following: (i) no employee may purchase more than 7,500 shares of Common Stock on any one purchase date and (ii) no employee may be granted rights to purchase more than $25,000 worth of Common Stock for each calendar year that such rights are at any time outstanding.  Up to 12,000,000 shares of our Common Stock have been initially reserved for issuance under the 2011 Plan.

During 2014, 1,916,727 shares were issued under the 2011 Plan at a weighted-average price of $5.66 per share. As of December 27, 2014, 4,380,208 shares were available for future issuance under the 2011 Plan (2013 - 6,296,935 shares available for issuance).

The weighted-average estimated fair values of Employee Stock Purchase Plan awards during years 2014, 2013, and 2012 were $1.74, $1.61, and $1.69, respectively.

NOTE 6. SUPPLEMENTAL FINANCIAL INFORMATION

a. Cash and cash equivalents and Short-term investments

At December 27, 2014 and December 28, 2013, short-term investments included $1 million, deposited with banks as collateral for leased facilities.

b. Inventories

Inventories (net of reserves of $7.8 million and $6.6 million at December 27, 2014 and December 28, 2013, respectively) were as follows:

	December 27,		December 28,
(in thousands)	2014		2013
Work-in-progress	$	17,438	$	15,847
Finished goods		20,511		15,227
	$	37,949	$	31,074

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The Company decreased inventory reserves by $0.7 million, $1.8 million and $0.5 million in 2014, 2013 and 2012, respectively for inventory that was scrapped during the year.

c. Property and equipment

The components of property and equipment are as follows:

			Accumulated
December 27, 2014 (in thousands)	Gross		Amortization		Net
Software	$	39,508	$	(28,263)	$	11,245
Machinery and equipment		140,555		(120,478)		20,077
Leasehold improvements		20,008		(14,588)		5,420
Furniture and fixtures		5,127		(4,558)		569
Total	$	205,198	$	(167,887)	$	37,311

			Accumulated
December 28, 2013 (in thousands)	Gross		Amortization		Net
Software	$	37,136	$	(25,640)	$	11,496
Machinery and equipment		132,109		(111,308)		20,801
Leasehold improvements		19,654		(13,326)		6,328
Furniture and fixtures		5,568		(5,044)		524
Total	$	194,467	$	(155,318)	$	39,149

d. Intangible assets

The components of acquired intangible assets are as follows:

			Accumulated				Estimated
December 27, 2014 (in thousands)	Gross		Amortization		Net		life
Core technology	$	246,961	$	(189,014)	$	57,947	5 - 9 years
Customer relationships		102,106		(85,455)		16,651	2 - 10 years
Existing technology		109,700		(65,859)		43,841	3 - 7 years
Trademarks		24,600		(19,095)		5,505	6 years - indefinite
Developed technology assets		70,240		(61,854)		8,386	3 years
In-process research and development*		16,746		(5,396)		11,350	4-5 years
Total	$	570,353	$	(426,673)	$	143,680

			Accumulated				Estimated
December 28, 2013 (in thousands)	Gross		Amortization		Net		life
Core technology	$	245,661	$	(173,772)	$	71,889	5 - 9 years
Customer relationships		98,306		(76,591)		21,715	2 - 10 years
Existing technology		69,900		(50,126)		19,774	3 - 7 years
Trademarks		9,200		(2,857)		6,343	6 years - indefinite
Developed technology assets		68,802		(55,442)		13,360	3 years
In-process research and development*		16,746		(2,853)		13,893	4-5 years
Total	$	508,615	$	(361,641)	$	146,974

*        Table above reflects original classification upon acquisition. The majority of this in-process research and development was subsequently completed during 2013 and accordingly is being amortized.

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Estimated future amortization expense for intangible assets (in thousands) is as follows:

2015	$	41,006
2016		24,753
2017		19,270
2018		18,150
2019		17,419
Thereafter		19,482
	$	140,080

e. Goodwill

	Balance
	(in thousands)
Goodwill at December 29, 2012	$	252,419
Goodwill recorded in connection with acquisitions		26,430
Goodwill at December 28, 2013		278,849
Goodwill recorded in connection with acquisitions		4,390
Goodwill at December 27, 2014	$	283,239

The goodwill balance at December 29, 2012 of $252.4 million mainly relates to the Enterprise Storage Products operating segment, which had a fair value that substantially exceeded its carrying value when the Company conducted its step 1 goodwill impairment test in 2012.  Total accumulated goodwill impairment loss as of December 27, 2014 and December 28, 2013 amounts to $536.6 million. See Note 17. Impairment of Goodwill and Long-Lived Assets for details on the impairment loss of $267.6 million recorded in 2012.

f. Accrued liabilities.

The components of accrued liabilities are as follows:

	December 27,		December 28,
	2014		2013
Accrued compensation and benefits	$	34,519	$	36,708
Other accrued liabilities		39,616		27,549
	$	74,135	$	64,257

g. Product warranties

The following table summarizes the activity related to the product warranty liability during 2014, 2013 and 2012:

	Year Ended
	December 27,		December 28,		December 29,
(in thousands)	2014		2013		2012
Balance, beginning of the year	$	2,163	$	5,981	$	5,415
Accrual for new warranties issued		689		402		2,530
Reduction for payments and product replacements		(983)		(1,022)		(328)
Adjustments related to changes in estimate of warranty accrual		(113)		(3,198)		(1,636)
Balance, end of the year	$	1,756	$	2,163	$	5,981

The change in estimate of warranty accrual recorded during the year ended December 28, 2013 included a reduction for amounts over-accrued in prior periods and for amounts that did not have a material impact on 2013 or prior periods.

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h. Interest expense, net

The components of interest expense, net are as follows:

	Year Ended
	December 27,		December 28,		December 29,
(in thousands)	2014		2013		2012
Interest income	$	1,134	$	1,310	$	2,865
Interest expense on debt		(811)		(403)		(4,451)
	$	323	$	907	$	(1,586)

NOTE 7. INVESTMENT SECURITIES

At December 27, 2014, the Company had investments in securities of $162.1 million (December 28, 2013  -$128.9 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 27, 2014 and December 28, 2013:

	December 27, 2014
			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains*		Losses*		Fair Value
Cash equivalents:
Money market funds	$	8,729	$	—	$	—	$	8,729
Total cash equivalents		8,729		—		—		8,729
Short-term investments:
Corporate bonds and notes		43,777		498		(16)		44,259
US treasury and government agency notes		1,010		79		—		1,089
Foreign government and agency notes		501		36		—		537
Total short-term investments		45,288		613		(16)		45,885
Long-term investment securities:
Corporate bonds and notes		61,357		28		(213)		61,172
US treasury and government agency notes		38,650		7		(76)		38,581
Foreign government and agency notes		7,563		1		(39)		7,525
US states and municipal securities		230		1		—		231
Total long-term investment securities		107,800		37		(328)		107,509
Total	$	161,817	$	650	$	(344)	$	162,123

*        Gross unrealized gains include accrued interest on investments of $0.6 million, which are included in the Consolidated Statement of Operations.  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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	December 28, 2013
			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains*		Losses*		Fair Value
Cash equivalents:
Money market funds	$	14,629	$	—	$	—	$	14,629
Total cash equivalents		14,629		—		—		14,629
Short-term investments:
Corporate bonds and notes		7,735		416		(2)		8,149
US treasury and government agency notes		2,499		44		—		2,543
US states and municipal securities		200		2		—		202
Total short-term investments		10,434		462		(2)		10,894
Long-term investment securities:
Corporate bonds and notes		74,583		121		(34)		74,670
US treasury and government agency notes		26,421		30		(9)		26,442
Foreign government and agency notes		2,049		1		(2)		2,048
US states and municipal securities		230		1		—		231
Total long-term investment securities		103,283		153		(45)		103,391
Total	$	128,346	$	615	$	(47)	$	128,914

*Gross unrealized gains include accrued interest on investments of $0.5 million, which are included in the Consolidated Statement of Operations.  The remainder of the gross unrealized gains and losses are included the Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

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. Contractual maturities as of December 27, 2014 for our investment securities do not exceed 3 years.

In relation to the unrealized losses summarized in the tables above, as of December 27, 2014 and December 28, 2013, 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 27, 2014, the Company determined that the unrealized losses are temporary in nature and recorded them as a component of Accumulated other comprehensive income (loss).

NOTE 8. CREDIT FACILITY

As of December 27, 2014, the Company had an available revolving line of credit with a bank under which the Company may borrow up to $100.0 million, of which $nil was drawn (December 28, 2013 - $30.0 million). The Company may request, from time to time, and subject to customary conditions, including receipt of commitments, that the revolving credit facility be increased by an aggregate amount not to exceed $150.0 million.  Interest payments are based on LIBOR plus margins, where margins ranges from 1.75% to 2.25% per annum based on the Company’s leverage ratio.  The revolving credit facility is available for general corporate purposes. The credit facility is collateralized by substantially all of the Company’s personal property. The Company’s obligations under the credit facility are jointly and severally guaranteed by material wholly-owned domestic subsidiaries of the Company.

The Company may prepay amounts outstanding and terminate commitments under the credit agreement, at any time and in whole or in part, without premium or penalty (other than reimbursement of customary breakage costs in the case of Eurodollar Rate loans).

The credit agreement contains customary representations and warranties, affirmative covenants and negative covenants, with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including, without limitation, restrictions and limitations on dividends, asset sales, the ability to incur additional debt and additional liens and certain financial covenants.  As of December 27, 2014, the Company was in compliance with these covenants.

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The credit agreement also contains customary events of default, including, without limitation, non-payment, breach of representation and warranties, breach of covenants, cross default to other material indebtedness, insolvency events, material judgments, material ERISA events and change of control.  The occurrence of an event of default will, in certain circumstances, increase the applicable rate of interest by 2.0% and could result in the termination of commitments under the revolving credit facility, the declaration that all outstanding loans are due and payable in whole or in part, and the requirement of cash collateral deposits in respect of outstanding letters of credit.

NOTE 9. 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”).

As of December 31, 2011, the carrying amount of the equity component was $35.2 million, and the carrying amount of the debt component was $65.1 million, which represented the principal amount of $68.3 million net of the unamortized discount of $3.2 million.

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 10. 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 for 2014, 2013, and 2012 was  $9.1  million, $9.1 million, and $10.5 million, respectively. Excluded from rent expense for 2014, 2013, and 2012 was additional rent and operating costs of $0.3 million, $0.1 million, and $0.2 million respectively, related to excess facilities, which were previously accrued.

Minimum future rental payments under operating leases are as follows:

(in thousands)
2015	$	9,925
2016		9,672
2017		8,245
2018		7,424
2019		6,852
Thereafter		10,032
Total minimum future rental payments under operating leases	$	52,150

Long-term obligations

Included in the long-term obligations is RAID software license acquisition consideration of $24.0 million, which will be paid in installments between 2016 and 2017 (see Note 2. Business Combinations), $8.9 million of long-term post-retirement health care, severance and pension benefits, and deferred rent liabilities.  

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.

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NOTE 11. SPECIAL SHARES

At December 27, 2014 and December 28, 2013, the Company maintained a reserve of 278,000 and 1,019,000 shares, respectively, of PMC common stock to be issued to holders of PMC-Sierra, Ltd. (“LTD”) special shares.  During 2014, the Company amended its special shares registry to reflect cancellations, expirations, and conversions of LTD special shares, resulting in a reduction of 734,000 special shares outstanding.  The special shares of LTD, the Company’s principal Canadian subsidiary, are redeemable or exchangeable for PMC common stock at certain conversion ratios. 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 thefunctional 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 12. STOCKHOLDERS’ EQUITY

Authorized Capital Stock of PMC

At December 27, 2014 and December 28, 2013, 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.

Stock Repurchase Program

During 2014, the Company repurchased 1.4 million shares of PMC common stock for a total of $8.9 million. The Company acquired these common shares as part of its $275.0 million stock repurchase program announced on March 13, 2012.  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.

During 2013, the Company repurchased 13 million shares of PMC common stock for a total of $79.0 million. The Company acquired these common shares as part of its $275.0 million stock repurchase program announced on March 13, 2012.  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 May 2, 2012, the Company entered into an Accelerated Stock Buyback agreement (“ASB agreement”) with Goldman, Sachs & Co. (“Goldman”) to repurchase an aggregate of $160.0 million of PMC common stock.  The Company acquired these common shares as part of its $275.0 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.

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NOTE 13. EMPLOYEE BENEFIT PLANS

Post-Retirement Health Care and Pension Benefits

The Company sponsors post-retirement health care for the benefit of United States employees and a defined benefit pension plan for the benefit of certain employees of its German subsidiary, all of which are legacy plans of previously acquired companies. 

United States post-retirement health plan

The unfunded post-retirement health care benefits 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.

At December 27, 2014 and December 28, 2013, the accumulated post-retirement benefit obligation was $1.8 million and $1.3 million, respectively, with no unrecognized gain/loss or unrecognized prior service cost in both periods. The net period benefit expense was $0.5 million during 2014 (2013 and 2012 - $nil). No distributions were made from the plan during the period. The Company includes accrued benefit costs for its post-retirement program in Long-term obligations on the Company’s Consolidated Balance Sheet and recognizes changes in the accumulated post-retirement benefit obligation resulting from annual re-measurement in its results of operations.

Reconciliation of post-retirement health care benefit obligation are as follows:

		December 27,		December 28,
	2014		2013
Benefit obligation, beginning of year	$	1,330	$	1,348
Service costs		18		24
Interest cots		55		44
Actuarial loss (gain)		425		(60)
Benefits paid directly by the Company		(60)		(26)
Benefit obligation, end of the year	$	1,768	$	1,330

Assumptions used to determine post-retirement health care benefits are as follows:

	December 27,	December 28,
	2014	2013
Discount rate	3.8%	4.2%
Current year health care trend rate	8.1%	8.4%
Ultimate health care trend rate	4.7%	4.7%
Year of ultimate trend	2027	2027

German defined benefit pension plan

The Company provides defined benefit pension plan covering certain German employees.  As of December 27, 2014 and December 28, 2013, the Company’s unfunded projected benefit obligation was $4.7 million and $3.2 million, respectively, with no unrecognized gain/loss and no unrecognized prior service cost in either period. The Company includes projected benefit obligation in Long-term obligations on the Company’s Consolidated Balance Sheet and recognizes changes in the accumulated projected benefit obligation resulting from annual re-measurement in its results of operations.

Reconciliation of projected benefit obligations are as follows:

		December 27,		December 28,
	2014		2013
Benefit obligation, beginning of year	$	3,171	$	2,589
Service costs		177		144
Interest cots		119		111
Actuarial loss		1,769		(229)
Foreign exchange loss (gain)		(499)		556
Benefit obligation, end of the year	$	4,737	$	3,171

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Assumptions used to determine projected benefit obligations are as follows:

	December 27,	December 28,
	2014	2013
Discount rate	2.2%	3.8%
Pension rate increase	2.0%	3.0%
Salary rate increase	3.0%	3.0%

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 $4.1 million, $4.0 million, and $3.9 million, and, to the plans in fiscal years 2014, 2013, and 2012, respectively.

Israeli Severance Plans

The Company has two types of severance agreements with employees in Israel, which are under Israeli labor laws. Under the first type of severance 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.

Expenses incurred related to the Israeli Severance Plans for 2014, 2013, and 2012 were $1.3 million, $1.6 million, and $1.8 million, respectively. The amount of the liability under the first type of agreement noted above is included within Long-term obligations on the Consolidated Balance Sheet in the amounts of $2.3 million and $3.4 million, as at December 27, 2014 and December 28, 2013, respectively. The total amount of cumulative funding by the Company under the first type of agreement noted above are included within Investments and other assets on the Consolidated Balance Sheet in the amounts of $2.2 million and  $3.2 million, as at December 27, 2014 and December 28, 2013, respectively.

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NOTE 14. INCOME TAXES

For financial reporting purposes, the geographic distribution of income (loss) before income taxes includes the following components:

	Year Ended
	December 27, 2014		December 28, 2013		December 29, 2012
Domestic	$	(926)	$	(30,038)	$	(301,764)
Foreign		15,420		23,540		18,806
	$	14,494	$	(6,498)	$	(282,958)

The provision for income taxes consists of the following components:

	Year Ended
	December 27, 2014		December 28, 2013		December 29, 2012
Current:
Domestic	$	846	$	9,528	$	42,710
State		102		99		(3,630)
Foreign		14,736		13,910		11,743
	$	15,684	$	23,537	$	50,823
Deferred:
Domestic	$	5,055	$	1,361	$	2,856
State		1,482		—		(718)
Foreign		(7,809)		858		(15,660)
	$	(1,272)	$	2,219	$	(13,522)
Provision for income taxes	$	14,412	$	25,756	$	37,301

Reconciliation between the Company’s effective tax rate and the U.S. Federal statutory rate is as follows:

	Year Ended
	December 27, 2014			December 28, 2013		December 29, 2012
Income (loss) before provision for income taxes	$	14,494		$	(6,498)	$	(282,958)
Federal statutory tax rate		35%			35%		35%
Income taxes at U.S. Federal statutory rate		5,073			(2,274)		(99,035)
Tax on intercompany transactions		1,510			18,135		104,757
Change in liability for unrecognized tax benefit		10,255			6,748		938
Non-deductible intangible asset amortization and impairment of goodwill and purchased intangible assets		6,666			10,603		104,421
Non-deductible stock-based compensation		3,892			5,487		5,370
Non-deductible items and other		583			852		6,283
Utilization of stock option related  loss carry-forwards recorded in equity		—			—		17,622
State taxes		132			(1,332)		(50)
True-up of prior year taxes and tax credits		12,016	(1)		(4,230)		(12,259)
Federal credits		(1,232)			(6,344)		(23,689)
Investment tax credits, net		(10,268)			(23,276)		(19,193)
Foreign and other rate differential		(2,812)			(10,208)		(6,599)
Change in valuation allowance		(6,348)	(1)		36,346		(40,311)
Other changes to deferred taxes		(5,055)			(4,751)		(954)
Provision for income taxes	$	14,412		$	25,756	$	37,301

(1) In 2014, the amount included as true-up of prior year taxes and credits in the table above includes $12.8 million adjustments that have been offset with a change in valuation allowance.

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The Company has been granted a tax holiday in Malaysia that has the effect of reducing its net income tax rate to zero in that jurisdiction. The Company’s current income tax holiday was granted based on revenue, investment and staffing criteria targets to be met by PMC International Sdn. Bhd. (Malaysia). The tax holiday was granted in 2009 by the Malaysia Investment Development Authority and is effective through 2019, subject to continued compliance with the tax holiday’s requirements. Tax savings associated with the Malaysia tax holidays were approximately $2.7 million, $3.9 million, and $7.9 million in 2014, 2013, and 2012, respectively.

The consolidated financial statements for the 2014, 2013 and 2012 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 intercompany transactions to be recognized over the estimated life of the related assets. Accordingly prepaid tax expense was recorded in the years ended December 29, 2012, December 31, 2011 and December 26, 2010. The balance in prepaid expense to be recognized in future years was$0.1 million, $5.8 million, and $19.2 million as of December 27, 2014, December 28, 2013, and December 29, 2012, respectively.

The provisions related to the income 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 27, 2014		December 28, 2013
Deferred tax assets:
Net operating loss carryforwards	$	16,609	$	30,549
Credit carryforwards		49,638		88,854
Reserves and accrued expenses		10,088		6,008
Stock-based compensation		11,643		11,688
Other		471		358
Capitalized technology & other		4,637		3,290
Capital loss		—		1,208
Depreciation and amortization		18,721		15,903
Total gross deferred tax assets	$	111,807	$	157,858
Valuation allowance		(86,948)		(92,525)
Deferred tax assets, net of valuation allowance	$	24,859	$	65,333
Deferred tax liabilities:
Deferred income tax on credits		(10,687)		(8,864)
Goodwill amortization		(52,001)		(44,946)
Federal benefits		(4,454)		(10,300)
Total deferred tax (liabilities) assets, net of valuation allowance	$	(42,283)	$	1,223

The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Due to the history of losses the Company has incurred, the Company believes that it is not more likely than not all or a portion of the deferred tax assets held in the U.S., Canada and Israel will be realized.The Company believes it is more likely than not that such assets will be realized to the extent presented on the balance sheet.

In 2014, the Company elected to release all of the valuation allowance related to its PMC-Sierra Israel subsidiary based on two consecutive years of positive earnings, three years of cumulative positive earnings, and the subsidiary’s forecast of continued profitability.  The release of valuation allowance for the Company’s Israel subsidiary resulted in a $6.9 million benefit to the income tax provision in 2014.  For the year ended December 27, 2014, the Company decreased its total valuation allowance by $5.6 million, net.

For the year ended December 28, 2013, the Company increased its valuation allowance by $37.1 million compared to the year ended December 29, 2012.  The increase was primarily due to the release of reserves on federal and state R&D tax credits and the establishment of valuation allowance on foreign excess credits.

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At December 27, 2014, the Company has statutory income tax losses as follows: $134.2 million of gross federal domestic loss carry-forwards, which will begin to expire 2023; and $184.1 million of U.S. state tax loss carry-forwards, $49.5 million of which will expire if not utilized in 2015.  The Company has $46.3 million of gross foreign tax income loss carry-forwards which do not expire. The utilization of a portion of these loss carry-forwards may be subject to annual limitations under federal, state and foreign income tax legislation.  Substantially all of the Company’s domestic loss carry-forwards relate to operations for which no tax benefit has been recorded due to the impact of stock-based compensation.  The income tax benefits relating to approximately $123.9 million of the federal net operating loss carry-forwards and $112.2 million of the state net operating loss carryforwards will be credited to additional paid-in-capital when recognized.

At December 28, 2013, the Company had statutory tax credits as follows: $4.5 million of federal domestic alternative minimum tax credits which do not expire; $15.9 million of U.S. state R&D credits which do not expire; $32.5 million of foreign tax credits which will begin to expire in 2017; and $26.4 million of federal R&D credits, which will begin to expire in 2017, and $75.9 million of foreign research and experimental development credits which will begin to expire in 2029.  The tax benefits relating to approximately $9.0 million of the federal credits will be credited to additional paid-in-capital when recognized.

The Company intends to reinvest its foreign earnings indefinitely.  Accordingly, no U.S. income taxes have been provided for approximately $177.2 million of undistributed earnings and other outside basis differences of foreign subsidiaries.  It is not practicable for the Company to determine the potential income tax impact of remitting these earnings.

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 27, 2014		December 28, 2013		December 29, 2012
Gross unrecognized benefit at beginning of the year	$	82.1	$	91.5	$	106.0
Increase (decrease) in tax positions for prior years		1.7		(9.5)		(19.0)
Increase in tax positions for current year		6.9		4.0		4.3
Lapse in statute of limitations		—		(0.5)		(1.3)
Effect on foreign currency remeasurement (gain) loss		(5.3)		(3.4)		1.5
Ending balance	$	85.4	$	82.1	$	91.5

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $41.3 million at December 27, 2014 (2013 - $43.3 million and 2012 - $37.3 million). The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. During 2014, the Company had accrued interest and penalties related to unrecognized tax benefits of $3.5 million (2013 - $3.3 million and 2012 - $3.9 million).

The Company and its subsidiaries file income tax returns in the U.S. and in various states, local and foreign jurisdictions. The tax years generally remain subject to examination by federal and most state tax authorities due to the ability to adjust net operating losses and credits. In significant foreign jurisdictions, the tax years generally remain subject to examination by their respective tax authorities.

The Company is currently under tax audit by the Canada Revenue Agency for tax years 2007 through 2009 and by the state of Minnesota for tax years 2009 through 2012.  The Company anticipates tax adjustments from the audits but believes that current tax reserves are sufficient to cover any exposures.  It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. We cannot reliably determine either the magnitude or the range of any increase or decreaseat this time.

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NOTE 15. SEGMENT INFORMATION

The Company derives its net revenues from the following operating segments: Communication Products, Enterprise Storage Products, Microprocessor Products, and Broadband Wireless Products.

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 and other long-term assets. Geographic information about long-lived assets is based on the physical location of the assets.

	Year Ended
	December 27,		December 28,		December 29,
(in thousands)	2014		2013		2012
Net revenues
China	$	200,984	$	194,401	$	206,372
Asia, other		80,716		73,164		74,689
Japan		62,254		65,293		70,120
United States		99,672		57,610		73,069
Taiwan		43,946		64,113		62,957
Europe and Middle East		36,144		33,895		40,466
Other foreign		1,887		19,552		3,324
Total	$	525,603	$	508,028	$	530,997

	As of
	December 27,		December 28,
(in thousands)	2014		2013
Long-lived assets
Canada	$	13,541	$	13,113
United States		16,879		17,032
Israel		3,315		4,873
Other		3,576		4,131
Total	$	37,311	$	39,149

	Year Ended
	December 27,		December 28,		December 29,
(in thousands)	2014		2013		2012
Net revenues by product groups*
Storage	$	366,443	$	342,900	$	352,993
Carrier		159,160		165,128		178,004
Net revenues	$	525,603	$	508,028	$	530,997

*        Storage net revenues are comprised of Enterprise Storage Products and laser printer ASIC products of the Microprocessor Products Division. Carrier net revenues are comprised of Communication and Broadband Wireless Products.

During 2014, 2013, and 2012, the Company had two end customers whose purchases represented 10% or more of net revenues. In 2014, those two end customers had purchases that represented 18% and 11% of net revenues, respectively.  In 2013, those two end customers had purchases that represented 16% and 13% of net revenues, respectively. In 2012, those two end customers had purchases that represented 16% and 12% of net revenues, respectively.

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NOTE 16. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share:

	Year Ended
	December 27,		December 28,		December 29,
(in thousands, except per share amounts)	2014		2013		2012
Numerator:
Net income (loss):	$	82	$	(32,254)	$	(320,259)
Denominator:
Basic weighted average common shares outstanding		196,885		203,882		216,593
Dilutive effect of employee stock options and awards		3,260		—		—
Diluted weighted average common shares outstanding		200,145		203,882		216,593
Basic net income (loss) per share	$	0.00	$	(0.16)	$	(1.48)
Diluted net income (loss) per share	$	0.00	$	(0.16)	$	(1.48)

In 2013 and 2012, the Company had approximately 2.0 million and 1.5 million stock-based awards, respectively, that were excluded from the computation of diluted net loss per share because they would be antidilutive.

NOTE 17.  IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS

During fiscal year 2014 and 2013 the Company performed qualitative assessment for its annual goodwill and indefinite-lived intangible assets impairment assessment for each of its reporting units and concluded that there is no impairment.

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 sloweradoption 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.

The fair values of these reporting units in the third quarter of 2012were estimated 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. 

Also, at the end of the third quarter of 2012, the fair values of acquired intangible assets were calculated 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.

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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

Management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K.

Based on this evaluation, our CEO and CFO concluded that, as of December 27, 2014 our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance 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.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives.  In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Previously Reported Material Weakness

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. 

In connection with a restatement of our financial statements in November 2013, filed on Form 10-K/A for the year ended December 29, 2012and our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 at December 28, 2013, management, with the participation of our CEO and CFO, concluded that, because of an identified material weakness in our internal control over financial reporting relating to our accounting for income taxes, our disclosure controls and procedures were not effective at the reasonable assurance level as of December 29, 2012 and December 28, 2013.  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 uncertain tax positions, 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.

Management’s Annual Report on Internal Control over Financial Reporting

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.  Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). 

We have focused on our internal controls over financial reporting for income taxes and haven taken steps to strengthen controls in response to the identified material weakness above.  Significant internal control and process improvements were implemented in our tax accounting processes to enhance effectiveness and sustainability including:

· Quarterly preparation of additional analysis related to the tracking and recognition of deferred tax assets, including excess tax benefits associated with stock option deductions, completed throughout 2014;

· Hired senior level personnel with expertise in the area of tax accounting and reporting and engaged a new team of external advisors to assist with the Company’s preparation and analysis of its income tax accounts;

· Re-designed certain internal controls and related internal controls documentation related to the income tax accounting processes, including increasing the extent of management’s required internal review procedures over material/non-routine transactions impacting income tax accounting in accordance with U.S. GAAP; and

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· Enhanced management oversight and review procedures over income tax and related financial information provided to and advice received from external advisors on a quarterly basis throughout 2014.

Following the implementation of the changes in internal control over financial reporting described above, we conducted extensive evaluation of the effectiveness of the remediated tax accounting and control procedures.  Based on this evaluation, management concluded that the material weakness relating to our accounting for income taxes described above has been remediated, and management concluded that our internal control over financial reporting was effective as of December 27, 2014 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The effectiveness of our internal control over financial reporting as of December 27, 2014 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in its report included in Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting, other than those described above, that occurred during the quarter ended December 27, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B.OTHER INFORMATION.

None.

PART III

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 2015 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 2015 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 2015 Annual Stockholder Meeting.

Equity Compensation Plan Information

The following table provides information as of December 27, 2014 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 be issued upon exercise of outstanding options and vesting of outstanding RSU’s		Weighted-average exercise price of outstanding options	Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders(1)	25,503,271	$	7.57	20,645,386	(2)
Equity compensation plans not approved by security holders(3)	181,978	$	4.97	—
Balance at December 27, 2014	25,685,249	$	7.54	20,645,386	(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 16,265,178 shares available for issuance in the 2008 Plan and 4,380,208 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 74

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.

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 2015 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 2015 Annual Stockholder Meeting.

PART IV

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 in Item 8 of Part II.

2. Financial Statement Schedules

The Financial Statement Schedule required by this item is included on page 96 of this Annual Report on Form 10-K.

3. Exhibits

The exhibits listed under Item 15(b) are filed as part of this Annual Report on Form 10-K.

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(b) Exhibits pursuant to Item 601 of Regulation S-K.

Incorporated by Reference

Exhibit					Filed
Number	Description	Form	Date	Number	herewith
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
2.3	Asset Purchase Agreement by and among PMC-Sierra, Inc., Integrated Device Technology, Inc. and Integrated Device Technology (Malaysia) Sdn. Bhd., dated as of May 29, 2013	8-K	5/29/2013	2.1
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
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 (other than Gregory S. Lang)	8-K	12/19/2014	10.2
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
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

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Exhibit					Filed
Number	Description	Form	Date	Number	herewith
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
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
10.28	Letter Agreement dated January 10, 2013 between PMC-Sierra, Inc. and Relational Investors LLC	8-K	1/10/2013	99.1
10.29	Credit Agreement dated as of August 2, 2013 by and among PMC-Sierra, Inc., a Delaware corporation, PMC-Sierra US, Inc., a Delaware corporation, Bank of America, N.A., as administrative agent, and the lenders party thereto	8-K	8/5/2013	10.1
10.30^	Amended and Restated Executive Employment Agreement by and between PMC-Sierra, Inc. and Gregory S. Lang, effective as of December 16, 2014	8-K	12/19/2014	10.1
11.1	Calculation of earnings per share(1)				X
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 Ernst & Young LLP, Independent Registered Public Accounting Firm				X
23.2	Consent of Deloitte LLP, Independent Registered Public Accounting Firm				X
24.1	Power of Attorney(2)	10-K	2/28/2013	24.1

77

Exhibit					Filed
Number	Description	Form	Date	Number	herewith
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 contract or compensatory plan or arrangement.

(1) Refer to Note 16. Net Income (Loss)Per Share of the consolidated financial statements included in Item 8 of Part II of this Annual Report.

(2) Refer to Signature page of this Annual Report.

78

SIGNATURE

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: February 24, 2015	/s/ Steven J. Geiser
	Steven J. Geiser
	Vice President, Chief Financial Officer and Principal Accounting Officer

79

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gregory S. Lang and Steven J. Geiser, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may or cause to be done by virtue hereof.

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	February 24, 2015
/s/    Steven J. Geiser Steven J. Geiser	Vice President, Chief Financial Officer (and Principal Accounting Officer)	February 24, 2015
/s/    Jonathan J. Judge Jonathan J. Judge	Chairman of the Board of Directors	February 24, 2015
/s/    Richard E. Belluzzo Richard E. Belluzzo	Director	February 24, 2015
/s/    Dr. Michael R. Farese Dr. Michael R. Farese	Director	February 24, 2015
/s/    Michael A. Klayko Michael A. Klayko	Director	February 24, 2015
/s/    Kurt P. Karros Kurt P. Karros	Director	February 24, 2015
/s/    William H. Kurtz William H. Kurtz	Director	February 24, 2015
/s/    Dr. Richard N. Nottenburg Dr. Richard N. Nottenburg	Director	February 24, 2015

*By:	/s/ Gregory S. Lang
Name:	Gregory S. Lang
	Attorney-in-Fact

80

SCHEDULE II—Valuation and Qualifying Accounts

			Charged
			(credited) to
	Balance at		expenses			Recoveries/
	Beginning		or other			(Write-offs),	Balance at
	of year		accounts		net		end of year
Allowance for doubtful accounts
December 27, 2014	$	1,036	$	(259)	$	18	$	795
December 28, 2013	$	1,614	$	(558)	$	(20)	$	1,036
December 29, 2012	$	1,952	$	(19)	$	(319)	$	1,614

81

INDEX TO EXHIBITS

Exhibit
Number	Description
12.1	Statement of Computation of Ratio of Earnings to Fixed Charges
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
23.2	Consent of Deloitte LLP, Independent Registered Public Accounting Firm
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

82