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MINDSPEED TECHNOLOGIES, INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
This information should be read in conjunction with our unaudited consolidated
condensed financial statements and the notes thereto included in this Quarterly
Report on Form 10-Q and our audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K for our fiscal
year ended September 30, 2011.
Overview
Mindspeed Technologies, Inc. designs, develops and sells semiconductor solutions
for communications applications in the wireline and wireless network
infrastructure equipment, which includes metropolitan and wide area networks
(WAN) (fixed and mobile), broadband access networks (fixed and mobile) and
enterprise networks. We have organized our solutions for these interrelated and
rapidly converging networks into three product families: communications
convergence processing, high-performance analog and WAN communications. Our
communications convergence processing products include ultra-low-power,
multi-core digital signal processor (DSP) system-on-chip (SoC) products for the
fixed and mobile (3G/4G) carrier infrastructure and residential and enterprise
platforms. Our high-performance analog products include high-density crosspoint
switches, optical drivers, equalization and signal-conditioning solutions that
solve difficult switching, timing and synchronization challenges in
next-generation optical networking, enterprise storage and broadcast video
transmission applications. Our WAN communications portfolio helps optimize
today's circuit-switched networks that furnish much of the Internet's underlying
long-distance infrastructure.
Our products are sold to original equipment manufacturers (OEMs) for use in a
variety of network infrastructure equipment, including:
• Communications Convergence Processing - triple-play access gateways for
Voice-over-Internet Protocol (VoIP) and data processing platforms;
broadband customer premises equipment (CPE) gateways and other equipment
that carriers use to deliver voice, data and video services to residential
subscribers; Internet Protocol (IP) private branch exchange (PBX)
equipment and security appliances used in the enterprise and 3G/4G mobile
base stations in the carrier infrastructure;
• High-Performance Analog - next-generation fiber access network equipment
(including passive optical networking, or PON, systems); switching and
signal conditioning products supporting fiber-to-the-premise, optical
transport networks (OTN), storage and server systems and broadcast video, inclusive of routers and other systems that are driving the migration to
3G high-definition (HD) transmission; and
• WAN Communications - circuit-switched networking equipment that implements
asynchronous transfer mode (ATM) and T1/E1 and T3/E3 communications
protocols.
Our customers include Alcatel-Lucent, Cisco Systems, Inc., Huawei Technologies
Co. Ltd., Hitachi Ltd., LM Ericsson Telephone Company, Mitsubishi Electric
Corporation, Nokia Siemens Networks and Zhongxing Telecom Equipment Corp.
Trends and Factors Affecting Our Business
Our products are components of network infrastructure equipment. As a result, we
rely on network infrastructure OEMs to select our products from among
alternative offerings to be designed into their equipment. These "design wins"
are an integral part of the long sales cycle for our products. Our customers may
need six months or longer to test and evaluate our products and an additional
six months or more to begin volume production of equipment that incorporates our
products. We believe our close relationships with leading network infrastructure
OEMs facilitate early adoption of our products during development of their
products, enhance our ability to obtain design wins and encourage adoption of
our technology by the industry. We believe our diverse portfolio of
semiconductor solutions has us well positioned to capitalize on some of the most
significant trends in telecommunications and enterprise spending, including:
next generation network convergence; VoIP/fiber access deployment in developing
and developed markets; 3G/4G wireless infrastructure build-out; the adoption of
higher speed interconnectivity solutions; and the migration of broadcast video
to HD.
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We market and sell our semiconductor products directly to network infrastructure
OEMs. We also sell our products indirectly through electronic component
distributors and third-party electronic manufacturing service providers, who
manufacture products incorporating our semiconductor solutions for OEMs. Sales
to distributors accounted for approximately 63% of our revenue for the first six
months of fiscal 2012. Our revenue is well diversified globally, with 83% of the
revenue in the first six months of fiscal 2012 coming from outside of the
Americas. We believe a substantial portion of the products we sell to OEMs and
third-party manufacturing service providers in the Asia-Pacific region is
ultimately shipped to end markets in the Americas and Europe. Approximately 35%
of our revenue for the first six months of fiscal 2012 was derived from
customers in China.
We have significant research, development, engineering and product design
capabilities. Our success depends to a substantial degree upon our ability to
develop and introduce in a timely fashion new products and enhancements to our
existing products that meet changing customer requirements and emerging industry
standards. We have made, and plan to make, substantial investments in research
and development and to participate in the formulation of industry standards. We
spent approximately $32.7 million on research and development in the first six
months of fiscal 2012. We seek to maximize our return on our research and
development spending by focusing our research and development investment in what
we believe are key growth markets, including communications convergence
processor applications such as CPE processors for high-bandwidth multiservice
access applications, high-performance analog applications such as optical
networking and broadcast-video transmission, and wireless infrastructure
solutions for small base stations. We have developed and maintain a broad
intellectual property portfolio, and we may periodically enter into strategic
arrangements to leverage our portfolio by licensing or selling our intellectual
property.
We are dependent upon third parties for the development, manufacturing, assembly
and testing of our products. Our ability to bring new products to market, to
fulfill orders and to achieve long-term revenue growth is dependent upon our
ability to obtain sufficient external manufacturing capacity, including wafer
fabrication capacity. Periods of upturn in the semiconductor industry may be
characterized by rapid increases in demand and a shortage of capacity for wafer
fabrication and assembly and test services. In such periods, we may experience
longer lead times or indeterminate delivery schedules, which may adversely
affect our ability to fulfill orders for our products. During periods of
capacity shortages for manufacturing, assembly and testing services, our primary
foundries and other suppliers may devote their limited capacity to fulfill the
requirements of their other customers that are larger than we are, or who have
superior contractual rights to enforce manufacture of their products, including
to the exclusion of producing our products. The foundries and other suppliers on
whom we rely may experience financial difficulties or suffer disruptions in
their operations due to causes beyond our control, including deteriorations in
general economic conditions, labor strikes, work stoppages, electrical power
outages, fire, earthquake, flooding or other natural disasters. We may also
incur increased manufacturing costs, including costs of finding acceptable
alternative foundries or assembly and test service providers.
Our ability to achieve revenue growth will depend on increased demand for
network infrastructure equipment that incorporates our products, which in turn
depends primarily on the level of capital spending by communications service
providers, the level of which may decrease due to general economic conditions
and uncertainty, over which we have no control. We believe the market for
network infrastructure equipment in general, and for communications
semiconductors, in particular, offers attractive long-term growth prospects due
to increasing demand for network capacity, the continued upgrading and expansion
of existing networks and the build-out of communication networks in developing
countries. However, the semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change, rapid product
obsolescence and price erosion, evolving technical standards, short product life
cycles and wide fluctuations in product supply and demand. In addition, there
has been an increasing trend toward industry consolidation, particularly among
major network equipment and telecommunications companies. Consolidation in the
industry has generally led to pricing pressure and loss of market share. These
factors have caused substantial fluctuations in our revenue and our results of
operations in the past, and we may experience cyclical fluctuations in our
business in the future. In order to achieve sustained profitability and positive
cash flows from operations, we may need to further reduce operating expenses
and/or increase our revenue. We have completed a series of cost reduction
actions, which have improved our operating cost structure, and we will continue
to perform additional actions, when necessary.
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Critical Accounting Policies and Estimates
The accounting policies that have the greatest impact on our financial condition
and results of operations and that require the most judgment are those relating
to revenue recognition, inventories, stock-based compensation, deferred income
taxes and uncertain tax positions, and impairment of long-lived assets. These
policies are described in further detail in our Annual Report on Form 10-K for
the fiscal year ended September 30, 2011. There have been no significant changes
in our critical accounting policies and estimates during the fiscal quarters
ended December 30, 2011 and March 30, 2012 as compared to what was previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2011, other than the addition of the following policies due to the
acquisition of picoChip Inc. and its wholly owned subsidiaries on February 6,
2012.
Business Combinations - The purchase price of an acquisition is allocated to the
underlying assets acquired and liabilities assumed based upon their estimated
fair values at the date of acquisition. To the extent the purchase price exceeds
the fair value of the net identifiable tangible and intangible assets acquired
and liabilities assumed, such excess is allocated to goodwill. We determine the
estimated fair values after review and consideration of relevant information,
including discounted cash flows, quoted market prices and estimates made by
management. Accordingly, these can be affected by contract performance and other
factors over time, which may cause final amounts to differ materially from
original estimates. We adjust the preliminary purchase price allocation, as
necessary, up to periods of one year after the acquisition closing date as we
obtain more information regarding asset valuations and liabilities assumed. We
refer to this preliminary purchase price allocation period as the measurement
period. Goodwill acquired in business combinations is assigned to the reporting
unit expected to benefit from the combination as of the acquisition
date. Acquisition related costs are recognized separately from the acquisition
and are expensed as incurred.
Goodwill and Other Long-Lived Assets - Goodwill is recorded as the difference,
if any, between the aggregate consideration paid for an acquisition and the fair
value of the acquired net tangible and intangible assets. Other long-lived
assets include the acquired intangible assets of developed technology, customer
relationships and in-process research and development, or IPR&D. We currently
amortize our acquired intangible assets with definitive lives over periods
ranging from one to twelve years using a method that reflects the pattern in
which the economic benefits of the intangible asset are consumed or otherwise
used or, if that pattern cannot be reliably determined, using a straight-line
amortization method. We capitalize IPR&D projects acquired as part of a business
combination. On completion of each project, IPR&D assets are reclassified to
developed technology and will be amortized over their estimated useful lives.
Impairment of Goodwill and Other Long-Lived Assets - We will evaluate goodwill
on an annual basis beginning in the fourth quarter of fiscal 2012 or more
frequently if we believe indicators of impairment exist. We will first assess
qualitative factors to determine whether it is more likely than not that the
fair value of our reporting unit is less than its carrying amount. If we
conclude that it is more likely than not that the fair value of our reporting
unit is less than its carrying amount, we will conduct a two step goodwill
impairment test. The first step of the impairment test involves comparing the
fair values of our reporting unit with its carrying values. We determine the
fair values of our reporting unit using the income valuation approach, as well
as other generally accepted valuation methodologies. If the carrying amount of
our reporting unit exceeds its fair value, we will perform the second step of
the goodwill impairment test. The second step of the goodwill impairment test
involves comparing the implied fair value of our reporting unit's goodwill with
the carrying value of that goodwill. The amount, by which the carrying value of
the goodwill exceeds its implied fair value, if any, will be recognized as an
impairment loss.
During development, IPR&D is not subject to amortization and is tested for
impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test consists of a
comparison of the fair value to its carrying amount. If the carrying value
exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess. Once an IPR&D project is complete, it becomes a definite lived
intangible asset and is evaluated for impairment in accordance with our policy
for long-lived assets.
Recent Accounting Pronouncements
There have been no accounting pronouncements since the filing of our Annual
Report on Form 10-K for the fiscal year ended September 30, 2011 that we expect
to have a material impact on our consolidated condensed financial statements.
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Results of Operations
Net Revenue by Product Line
The following table summarizes fiscal quarter net revenue by product line:
Three Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Communications convergence processing $ 15,146 43.0 % $ 15,569 40.0 % $ (423 ) -2.7 %
High-performance analog 15,657 45.0 % 14,949 39.0 % 708 4.7 %
WAN communications 4,055 11.0 % 8,035 21.0 % (3,980 ) -49.5 %
Total net product revenue 34,858 99.0 % 38,553 100.0 % (3,695 ) -9.6 %
Intellectual property
501 1.0 % - 0.0 % 501
Net revenue $ 35,359 100.0 % $ 38,553 100.0 % $ (3,194 ) -8.3 %
The decrease in our net revenue for the second quarter of fiscal 2012 compared
to the second quarter of fiscal 2011 was due to lower sales volumes for our
communications convergence processing products and WAN communications products.
These decreases were partially offset by an increase in demand for our
high-performance analog products and an increase in intellectual property
revenue. Net revenue from our communications convergence processing products
decreased in the second quarter of fiscal 2012 when compared to the second
quarter of fiscal 2011 due to a decrease in net revenue from a slowdown in 3G
investments, which resulted in fewer shipments of wireless media gateways used
in terminating calls between the public switch telephone network (PTSN) and
mobile networks. This decrease was partially offset by an increase in shipments
of CPE products, which are used in broadband CPE gateways and other equipment
that service providers are deploying in order to deliver voice, data and video
services to residential subscribers, as well as shipments of small cell base
stations resulting from our acquisition of picoChip, which closed on February 6,
2012. Net revenue from high-performance analog products increased in the second
quarter of fiscal 2012 when compared to the second quarter of fiscal 2011 due to
increased demand for physical media devices, which are primarily used in
equipment for fiber-to-the-premise deployments. This increase was partially
offset by a decrease in demand for crosspoint switches. Net revenue from WAN
communications products decreased in the second quarter of fiscal 2012 compared
to the second quarter of fiscal 2011 due to a slowdown in demand at several
large customers, particularly in legacy ATM-based systems. WAN communications
products represent a legacy business for us, as we have shifted almost all of
our research and development investment into our two growth businesses of
communications convergence processing products and high-performance analog
products. Net revenue from intellectual property licensing and sales increased
in the second quarter of fiscal 2012 compared to the second quarter of fiscal
2011 due to the timing of intellectual property sales and timing of licensing
revenues. We have developed and maintain a broad intellectual property
portfolio, and we may periodically enter into strategic arrangements to leverage
our portfolio by licensing or selling our patents.
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The following table summarizes year-to-date net revenue by product line:
Six Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Communications convergence processing $ 30,135 44.0 % $ 32,194 41.0 % $ (2,059 ) -6.4 %
High-performance analog 30,001 43.0 % 29,053 37.0 % 948 3.3 %
WAN communications 8,564 12.0 % 15,349 19.0 % (6,785 ) -44.2 %
Total net product revenue 68,700 99.0 % 76,596 97.0 % (7,896 ) -10.3 %
Intellectual property 591 1.0 % 2,500 3.0 % (1,909 )
Net revenue $ 69,291 100.0 % $ 79,096 100.0 % $ (9,805 ) -12.4 %
The decrease in our net revenue for the first six months of fiscal 2012 compared
to the first six months of fiscal 2011 was due to lower sales volumes for our
communications convergence processing products, WAN communications products and
intellectual property revenue. These decreases were partially offset by an
increase in demand for our high-performance analog products. Net revenue from
our communications convergence processing products decreased in the first six
months of fiscal 2012 when compared to the first six months of fiscal 2011 due
to a decrease in net revenue from a slowdown in 3G investments, which resulted
in fewer shipments of wireless media gateways used in terminating calls between
the PTSN and mobile networks. This decrease was partially offset by an increase
in shipments of CPE products, which are used in broadband CPE gateways and other
equipment that service providers are deploying in order to deliver voice, data
and video services to residential subscribers, as well as shipments of small
cell base stations resulting from our acquisition of picoChip, which closed on
February 6, 2012. Net revenue from high-performance analog products increased in
the first six months of fiscal 2012 when compared to the first six months of
fiscal 2011 due to increased demand for physical media devices, which are
primarily used in equipment for fiber-to-the-premise deployments. This increase
was partially offset by a decrease in demand for crosspoint switches. Net
revenue from WAN communications products decreased in the first six months of
fiscal 2012 compared to the first six months of fiscal 2011 due to a slowdown in
demand at several large customers, particularly in legacy ATM-based systems. WAN
communications products represent a legacy business for us, as we have shifted
almost all of our research and development investment into our two growth
businesses of communications convergence processing products and
high-performance analog products. Net revenue from intellectual property
licensing and sales decreased in the first six months of fiscal 2012 compared to
the first six months of fiscal 2011 due to the timing of intellectual property
sales. We have developed and maintain a broad intellectual property portfolio,
and we may periodically enter into strategic arrangements to leverage our
portfolio by licensing or selling our patents.
Gross Margin
Gross margin represents net revenue less cost of goods sold. As a fabless
semiconductor company, we use third parties, including Taiwan Semiconductor
Manufacturing Co., Ltd. (TSMC), Amkor Technology, Inc., Unisem, Inc. and
Advanced Semiconductor Engineering, Inc. (ASE), for wafer fabrication and
assembly and test services. Cost of goods sold primarily consisted of: purchased
finished wafers; assembly and test services; royalty and other intellectual
property costs; labor and overhead costs associated with product procurement;
amortization of the cost of mask sets purchased; and sustaining engineering
expenses pertaining to products sold.
The following table presents fiscal quarter gross margin:
Three Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Gross margin $ 20,520 58.0 % $ 24,270 63.0 % $ (3,750 ) -15.5 %
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Gross margin decreased for the second quarter of fiscal 2012 compared to the
second quarter of fiscal 2011 due to a $3.7 million, or 10%, decrease in product
revenue, partially offset by a $501,000 increase in intellectual property
revenue, which had little associated cost. The decrease in our gross margin as a
percent of net revenue for the second quarter of fiscal 2012 compared to the
second quarter of fiscal 2011 was driven primarily by a change in product mix,
as well as the sale of near-zero margin inventory for which a step-up in basis
was recorded with the acquisition of picoChip.
The following table presents fiscal year-to-date gross margin:
Six Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Gross margin $ 40,233 58.0 % $ 50,532 63.9 % $ (10,299 ) -20.4 %
Gross margin decreased for the first six months of fiscal 2012 compared to the
first six months of fiscal 2011 due to both a $7.9 million, or 10%, decrease in
product revenue, and a $1.9 million decrease in intellectual property revenue.
The decrease in our gross margin as a percent of net revenue for the first six
months of fiscal 2012 compared to the first six months of fiscal 2011 was driven
primarily by a change in product mix, as well as a decrease in intellectual
property revenue, which had little associated cost.
Research and Development
Research and development (R&D) expenses consisted primarily of: direct personnel
costs, including stock-based compensation; photomasks; electronic design
automation tools; and pre-production evaluation and test costs.
The following table presents details of fiscal quarter R&D expenses:
Three Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Personnel-related costs $ 10,461 $ 8,655 $ 1,806 20.9 %
Stock-based compensation 1,216 329 887 269.6 %
Design & development costs 3,111 3,277 (166 ) -5.1 %
Facilities 1,698 1,395 303 21.7 %
Depreciation 738 512 226 44.1 %
Other 516 357 159 44.5 %
Research and development $ 17,740 50.0 % $ 14,525 38.0 % $ 3,215 22.1 %
R&D expenses increased for the second quarter of fiscal 2012 compared to the
second quarter of fiscal 2011 primarily due to an increase in personnel-related
costs and stock-based compensation expense. These increases were primarily due
to the effect of merit increases effective in the fourth quarter of fiscal 2011
and bonuses awarded and addition of personnel costs related to the picoChip R&D
employees during the second quarter of fiscal 2012.
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The following table presents details of fiscal year-to-date R&D expenses:
Six Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Personnel-related costs $ 19,426 $ 16,890 $ 2,536 15.0 %
Stock-based compensation 1,886 644 1,242 192.9 %
Design & development costs 6,064 6,527 (463 ) -7.1 %
Facilities 3,061 2,767 294 10.6 %
Depreciation 1,330 904 426 47.1 %
Other 981 716 265 37.0 %
Research and development $ 32,748 47.0 % $ 28,448 36.0 % $ 4,300 15.1 %
R&D expenses increased for the first six months of fiscal 2012 compared to first
six months of fiscal 2011 primarily due to an increase personnel-related costs
and stock-based compensation expense. These increases were primarily due to the
effect of merit increases effective in the fourth quarter of fiscal 2011 and
bonuses awarded and addition of personnel costs related to the picoChip R&D
employees during the second quarter of fiscal 2012.
Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses include personnel costs,
independent sales representative commissions and product marketing, applications
engineering and other marketing costs. Our SG&A expenses also include costs of
corporate functions, including accounting, finance, legal, human resources,
information systems and communications.
The following table presents details of fiscal quarter SG&A expenses:
Three Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Personnel-related costs $ 6,605 $ 6,453 $ 152 2.4 %
Stock-based compensation 2,145 728 1,417 194.6 %
Professional fees & outside services 890 871 19 2.2 %
Facilities 798 862 (64 ) -7.4 %
Depreciation 125 166 (41 ) -24.7 %
Other 2,525 999 1,526 152.8 %
Selling, general and administrative $ 13,088 37.0 % $ 10,079 26.0 % $ 3,009 29.9 %
SG&A expenses increased for the second quarter of fiscal 2012 compared to the
second quarter of fiscal 2011 primarily due to an increase in stock-based
compensation expense and other SG&A. The increase in stock-based compensation
expense was primarily due to an increase in the number of stock awards vesting
in the second quarter of fiscal 2012. The most significant component of the
increase in other SG&A was retention bonuses to picoChip employees.
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The following table presents details of fiscal year-to-date SG&A expenses:
Six Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Personnel-related costs $ 11,680 $ 12,832 $ (1,152 ) -9.0 %
Stock-based compensation 3,712 1,549 2,163 139.6 %
Professional fees & outside services 1,816 1,874 (58 ) -3.1 %
Facilities 1,560 1,684 (124 ) -7.4 %
Depreciation 311 309 2 0.6 %
Other 3,331 2,042 1,289 63.1 %
Selling, general and administrative $ 22,410 32.0 % $ 20,290 26.0 % $ 2,120 10.4 %
SG&A expenses increased for the first six months of fiscal 2012 compared to the
first six months of fiscal 2011 primarily due to an increase in stock-based
compensation expense and other SG&A. The increase in stock-based compensation
expense was primarily due to an increase in the number of stock awards vesting
in the first six months of fiscal 2012. The most significant component of the
increase in other SG&A was retention bonuses to picoChip employees. These
increases were partially offset by a decrease in personnel-related costs mainly
due to a decrease in headcount.
Acquisition-Related Costs
Acquisition-related costs totaled $2.3 million for the three months ended
March 30, 2012 and $3.1 million for the six months ended March 30, 2012.
Acquisition-related costs consisted primarily of professional fees incurred as a
result of our acquisition of picoChip, which was completed on February 6, 2012.
There were no acquisition-related costs incurred in the corresponding fiscal
2011 periods.
Restructuring Charges
We have, and may in the future, commit to restructuring plans to help manage our
costs or to help implement strategic initiatives, among other reasons.
Restructuring charges totaled $1.3 million in the three and six months ended
March 30, 2012. Restructuring charges consisted of reversals totaling $18,000 in
the three and six months ended April 1, 2011.
Second Quarter of Fiscal 2012 Restructuring Plan - In the second quarter of
fiscal 2012, we committed to the implementation of a restructuring plan to
realize synergies in connection with our acquisition of picoChip, which was
completed on February 6, 2012. The plan consisted primarily of a targeted
headcount reduction in connection with our acquisition of picoChip. The
restructuring plan is expected to be substantially completed during the third
quarter of fiscal 2012. We incurred $1.3 million in charges in the second
quarter of fiscal 2012 related to severance costs for affected employees.
Activity and liability balances related to our second quarter of fiscal 2012
restructuring plan were as follows:
Workforce
Reductions
(in thousands)
Charges to costs and expenses $ 1,320
Cash payments (530 )
Restructuring balance, March 30, 2012 $ 790
The remaining accrued restructuring balance principally represents employee
severance costs. We expect to pay these remaining obligations through the third
quarter of fiscal 2012.
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Fourth Quarter of Fiscal 2011 Restructuring Plan - In the fourth quarter of
fiscal 2011, we implemented a restructuring plan, which consisted primarily of a
targeted headcount reduction in the SG&A functions and wide area networking
(WAN) business unit. We incurred $1.1 million of charges related to severance
costs for the affected employees during the fourth quarter of fiscal 2011. The
restructuring plan was substantially completed during the fourth quarter of
fiscal 2011.
Activity and liability balances related to our fourth quarter of fiscal 2011
restructuring plan from September 30, 2011 through March 30, 2012 were as
follows:
Workforce
Reductions
(in thousands)
Restructuring balance, September 30, 2011 $ 902
Cash payments (812 )
Non-cash credits (13 )
Restructuring balance, March 30, 2012 $ 77
The remaining accrued restructuring balance principally represents employee
severance costs. We expect to pay these remaining obligations through the fourth
quarter of fiscal 2012.
Fourth Quarter of Fiscal 2010 Restructuring Plan - In the fourth quarter of
fiscal 2010, we implemented a restructuring plan, which consisted primarily of a
targeted headcount reduction in our WAN product family and SG&A functions. The
restructuring plan was substantially completed during the fourth quarter of
fiscal 2010. Of the $1.3 million in charges incurred during the fourth quarter
of fiscal 2010, $966,000 related to severance costs for affected employees and
$311,000 related to abandoned technology.
Activity and liability balances related to our fourth quarter of fiscal 2010
restructuring plan from September 30, 2011 through March 30, 2012 were as
follows:
Workforce
Reductions
(in thousands)
Restructuring balance, September 30, 2011 $ 42
Cash payments (7 )
Non-cash credits (35 )
Restructuring balance, March 30, 2012 $ -
During the second quarter of fiscal 2012, any amounts left to be paid under this
plan were paid and any remaining accrued amount was reversed.
Interest Expense
The following tables present details of fiscal quarter and fiscal year-to-date
interest expense:
Three Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Interest expense $ (571 ) 2.0 % $ (399 ) 1.0 % $ 172 43.1 %
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Six Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Interest expense $ (959 ) -1.0 % $ (797 ) -1.0 % $ (162 ) 20.3 %
Interest expense primarily consisted of interest on our convertible senior notes
in periods prior to the second quarter of fiscal 2012. In the second quarter of
2012, interest expense consisted of interest on our loan and security agreement
in addition to interest on our convertible senior notes.
Other Income, Net
Other income, net, principally consisted of interest income, income from
reimbursable foreign R&D incentives, foreign exchange gains and losses and other
non-operating gains and losses. The following table presents details of fiscal
quarter other income, net:
Three Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Other income, net $ 309 1.0 % $ 109 0.0 % $ 200 183.5 %
The increase in other income, net, in the second quarter of fiscal 2012 compared
to the second quarter of fiscal 2011 reflected an $80,000 increase in
reimbursable foreign research and development credits and a $130,000 increase in
net foreign exchange gains.
The following table presents details of fiscal year-to-date other income, net:
Six Months Ended
March 30, % of Net April 1, % of Net Change
2012 Revenue 2011 Revenue $ %
(in thousands, except percentages)
Other income, net $ 611 1.0 % $ 259 0.0 % $ 352 135.9 %
The increase in other income, net, in the first six months of fiscal 2012
compared to the first six months of fiscal 2011 reflected a $160,000 increase in
reimbursable foreign research and development credits and a $200,000 increase in
net foreign exchange gains.
Income Taxes
Our provision for income taxes for the first three and six months of fiscal 2012
and 2011 principally consisted of income taxes incurred by our foreign
subsidiaries. As a result of our history of operating losses and the uncertainty
of future operating results, we determined that it is more likely than not that
the U.S. federal and state income tax benefits (principally net operating losses
we can carry forward to future years) will not be realized. Based on available
objective evidence, we believe it is more likely than not that our deferred tax
assets will not be realized. Accordingly, we continue to provide a full
valuation allowance against our U.S. federal and state net deferred tax assets
at March 30, 2012. Should sufficient positive objectively verifiable evidence of
the realization of our net deferred tax assets exist at a future date, we would
reverse any remaining valuation allowance to the extent supported by estimates
of future taxable income at that time.
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Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalent
balances and cash generated from product sales.
In order to achieve profitability and positive cash flows from operations, we
may need to further reduce operating expenses and/or increase revenue. We have
recently completed a series of cost reduction actions, which have improved our
operating expense structure and we will continue to perform additional actions,
if necessary. In addition, we may commit to additional restructurings to help
implement strategic initiatives. These restructurings and other cost saving
measures alone may not allow us to achieve profitability. Our ability to
increase current revenue levels to achieve profitability will depend on demand
for network infrastructure equipment that incorporates our products, which in
turn depends primarily on the level of capital spending by communications
service providers and enterprises, the level of which may decrease due to
general economic conditions, and uncertainty, over which we have no control. We
may be unable to increase current revenue levels or sustain past and future
expense reductions in subsequent periods. We may not be able to achieve
sustained profitability.
On February 6, 2012, we completed the acquisition of picoChip. We paid
approximately $26.7 million (less certain deductions) and issued an aggregate of
5.2 million shares of our authorized common stock, par value $0.01 per share, to
the stockholders of picoChip. We may also become obligated to make additional
earnout payments, contingent on the achievement of milestones relating to:
(i) revenue associated with sales of certain picoChip products for the period
beginning on the closing of the acquisition and ending on December 31, 2012; and
(ii) product and business development milestones. The maximum amount payable
upon achievement of the revenue and development milestones is $25.0 million.
Earnout payments, if any, will be paid in the first quarter of calendar 2013,
and we may make earnout payments in the form of cash, stock or any combination
thereof.
We believe that our existing cash balances, along with cash expected to be
generated from product sales will be sufficient to fund our operations, research
and development efforts, anticipated capital expenditures, potential earnout
payments, working capital and other financing requirements, including interest
payments on debt obligations, for the next 12 months. We have no principal
payments on currently outstanding debt due in the next 12 months. We may acquire
our debt securities through privately negotiated transactions, tender offers,
exchange offers (for new debt or other securities), redemptions or otherwise,
upon such terms and at such prices as we may determine appropriate. We will need
to continue a focused program of capital expenditures to meet our research and
development and corporate requirements. We may also consider acquisition
opportunities to extend our technology portfolio and design expertise and to
expand our product offerings. In order to fund capital expenditures, increase
our working capital, re-pay debt or complete any acquisitions, we may seek to
obtain additional debt or equity financing. We may also need to seek to obtain
additional debt or equity financing if we experience downturns or cyclical
fluctuations in our business that are more severe or longer than anticipated or
if we fail to achieve anticipated revenue and expense levels. However, we cannot
assure you that such financing will be available to us on favorable terms, or at
all, particularly in light of recent economic conditions in the capital markets.
The following table presents details of our working capital and cash and cash
equivalents:
March 30, September 30, Change
2012 2011 $ %
(in thousands, except percentages)
Working capital $ 12,473 $ 50,346 $ (37,873 ) -75.2 %
Cash and cash equivalents $ 32,354 $ 45,227 $ (12,873 ) -28.5 %
Cash and cash equivalents decreased as a result of cash used in our operating
and investing activities. The cash used in our operating and investing
activities was partially offset by cash provided by financing activities.
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The following table presents the major components of the consolidated statements
of cash flows:
Six Months Ended
March 30, April 1,
2012 2011
(in thousands) Net cash (used in)/provided by:
Net (loss)/income $ (19,834 ) $ 940
Non-cash operating expenses, net 13,167 6,309
Changes in operating assets and liabilities:
Receivables (7,632 ) 6,442
Inventories 3,779 (2,572 )
Other assets, net 1,001 (223 )
Accounts payable 4,425 1,931
Deferred income on sales to distributors (471 ) 575
Restructuring charges (1,349 ) (491 )
Accrued compensation and benefits (3,656 ) (3,229 )
Accrued expenses and other current liabilities (1,024 ) (213 )
Other liabilities, net (76 ) 33
Net cash (used in)/provided by operating activities (11,670 )
9,502
Net cash used in investing activities (29,771 ) (8,929 )
Net cash provided by financing activities 28,618 691
Effect of foreign exchange rate changes on cash (50 ) (41 )
Net (decrease)/increase in cash and cash equivalents $ (12,873 ) $
1,223
Operating activities used cash for the first six months of fiscal 2012 due to
our net loss and net cash used in changes in operating assets and liabilities,
partially offset by cash provided by net non-cash operating activities.
Significant non-cash operating expenses included stock-based compensation
expense and depreciation and amortization. The changes in operating assets and
liabilities that had a significant impact on cash used in operating activities
included an increase in accounts receivable due to the timing of sales and
collections and a decrease in accrued compensation and benefits mainly due to
the payment of bonuses under our fiscal 2011 cash bonus plan in the first
quarter of fiscal 2012. These cash outflows were partially offset by an increase
in accounts payable due to the timing of payments and a decrease in inventories
due to our focused efforts in decreasing our inventory on hand and increasing
our inventory turns.
Operating activities generated cash for the first six months of fiscal 2011,
reflecting our net income, net non-cash operating activities and net changes in
operating assets and liabilities. Significant non-cash operating expenses
included stock-based compensation expense and depreciation and amortization. The
significant components of our net changes in operating assets and liabilities
included a decrease in accounts receivable, which was due to both the timing of
sales and the timing of collections. In addition, accounts payable increased due
to the timing of inventory receipts and payments. These cash inflows were
partially offset by an increase in our inventory balance resulting from an
acceleration of our ordering of certain raw materials in an effort to ensure
supply on these items in light of the impact that the Japan natural disaster
could have had on production. In addition, accrued compensation and benefits
decreased mainly due to the fiscal 2010 management bonus that was included in
this balance at the end of fiscal 2010 and paid in early fiscal 2011.
Investing Activities
Investing activities used cash for the first six months of fiscal 2012 due to
payments under license agreements of $7.3 million, the purchase of property,
plant and equipment of $2.3 million and the acquisition of picoChip of $20.1
million.
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Investing activities used cash for the first six months of fiscal 2011 due to
the purchase of property, plant and equipment of $3.9 million and payments under
license agreements of $5.0 million.
Financing Activities
Financing activities provided cash for the first six months of fiscal 2012 due
to $28.5 million in borrowings under our line of credit and term loan and $1.4
million in proceeds from equity compensation programs. These cash inflows were
partially offset by $575,000 in payments made related to shares of our common
stock withheld from, or delivered by, employees in order to satisfy applicable
tax withholding obligations in connection with the vesting of restricted stock
and $281,000 in payments made on capital lease obligations.
Financing activities provided cash for the first six months of fiscal 2011
primarily due to $1.3 million in proceeds from equity compensation programs,
partially offset by $291,000 in payments made related to shares of our common
stock withheld from, or delivered by, employees in order to satisfy applicable
tax withholding obligations in connection with the vesting of restricted stock
and $274,000 in payments made on capital lease obligations.
Revolving Credit Facility and Long-Term Debt
Loan and Security Agreement
As discussed above, in February 2012, we completed the acquisition of picoChip
and paid approximately $26.7 million (less certain deductions) and issued an
aggregate of 5.2 million shares of our authorized common stock, par value $0.01
per share, to the stockholders of picoChip. The cash payment of the initial
purchase price of picoChip was financed in part with bank debt, which was issued
pursuant to a loan and security agreement dated as of February 6, 2012 between
us and Silicon Valley Bank. Borrowings under the loan and security agreement
were also used to pay costs and expenses related to the acquisition and the
closing of the loan and security agreement, and may be used for working capital
and other general corporate purposes.
The loan and security agreement includes: (i) a term loan facility of $15.0
million; and (ii) a revolving credit facility of up to $20.0 million. As of
March 30, 2012, the outstanding balance on the term loan was $15.0 million and
the outstanding balance on the revolving credit facility was $13.5 million. The
obligations under the loan and security agreement are guaranteed by our material
subsidiaries and secured by a security interest in substantially all of our
assets and guarantors' assets, excluding intellectual property.
The principal on the term loan will be payable in quarterly installments
beginning on March 31, 2013 and ending on the maturity date of the term loan,
February 6, 2017. Quarterly principal payments of $375,000 are due for each
quarter during calendar year 2013, $750,000 for each quarter during calendar
year 2014, $1.1 million for each quarter during calendar year 2015 and $1.5
million for each quarter during calendar year 2016. Interest on the term loan
will be paid quarterly beginning in calendar year 2012. The revolving credit
facility also has a maturity date of February 6, 2017. Interest on the revolving
credit facility will be paid quarterly beginning in calendar year 2012.
The total amount available under the revolving credit facility is $20.0 million.
We are eligible to borrow amounts against the revolving credit facility up to
the amount allowable by the borrowing base. The borrowing base is calculated on
a monthly basis and is based on the amount of our eligible accounts receivable.
At March 30, 2012, our outstanding revolving credit facility balance of $13.5
million totalled the entire amount of the eligible borrowing base. To the extent
that the eligible borrowing base is reduced, we are required to pay down the
outstanding revolving credit facility balance to the amount of the eligible
borrowing base. During the next 12 months, we intend to maintain our borrowings
on the revolving credit facility at a minimum of $8.0 million. Consequently, we
have classified $8.0 million of the revolving credit facility as a long-term
liability.
We have the option to choose, with a few exceptions, whether the term loan
facility and revolving credit facility bear interest based on a base rate, which
is the prime rate published in The Wall Street Journal, or a LIBOR rate, which
has a floor of 0.75%. A base rate facility will bear interest ranging from the
base rate plus 1.25% to base rate plus 1.75%. A LIBOR rate facility will bear
interest ranging from LIBOR rate plus 3.25% to LIBOR rate plus 3.75%. Both the
base rate margin and LIBOR margin vary based upon our liquidity ratio. As of
March 30, 2012, the interest rate on both the term loan facility and the
revolving credit facility was 4.25%. Total interest expense incurred on the term
loan facility and revolving credit facility for both the first three and six
months of fiscal 2012 was approximately $165,000.
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The revolving credit facility is subject to an unused line of credit fee. This
fee is payable quarterly in an amount equal to 0.25% - 0.50% of the average
daily unused portion of the credit facility. The unused line fee will vary based
upon our liquidity ratio.
We incurred approximately $378,000 of debt issuance costs related to the loan
and security agreement, which is being amortized to interest expense over the
term of the facility through February 6, 2017 using the effective interest
method. At March 30, 2012, debt issuance costs of approximately $365,000, net of
accumulated amortization, was included in other assets.
6.50% Convertible Senior Notes due 2013
We issued our 6.50% convertible senior notes due in August 2013 pursuant to an
indenture, dated as of August 1, 2008, between us and Wells Fargo Bank, N.A., as
trustee. At maturity, we will be required to repay the outstanding principal
amount of the notes. At March 30, 2012, $15.0 million in aggregate principal
amount of our 6.50% convertible senior notes were outstanding.
The 6.50% convertible senior notes are convertible at the option of the holders,
at any time on or prior to maturity, into shares of our common stock at a
conversion rate equal to approximately $4.74 per share of common stock, which is
subject to adjustment in certain circumstances. Upon conversion of the notes, we
generally have the right to deliver to the holders thereof, at our option:
(i) cash; (ii) shares of our common stock; or (iii) a combination thereof. The
initial conversion price of the notes will be adjusted to reflect stock
dividends, stock splits, issuances of rights to purchase shares of our common
stock, and upon other events. If we undergo certain fundamental changes prior to
maturity of the notes, the holders thereof will have the right, at their option,
to require us to repurchase for cash some or all of their 6.50% convertible
senior notes at a repurchase price equal to 100% of the principal amount of the
notes being repurchased, plus accrued and unpaid interest (including additional
interest, if any) to, but not including, the repurchase date, or convert the
notes into shares of our common stock and, under certain circumstances, receive
additional shares of our common stock in the amount provided in the indenture.
For financial accounting purposes, our contingent obligation to issue additional
shares or make additional cash payment upon conversion following a fundamental
change is an "embedded derivative." At March 30, 2012, the liability under the
fundamental change adjustment has been recorded at its estimated fair value and
is not significant.
If there is an event of default under the 6.50% convertible senior notes, the
principal of and premium, if any, on all the notes and the interest accrued
thereon may be declared immediately due and payable, subject to certain
conditions set forth in the indenture. An event of default under the indenture
will occur if we: (i) are delinquent in making certain payments due under the
notes; (ii) fail to deliver shares of common stock or cash upon conversion of
the notes; (iii) fail to deliver certain required notices under the notes;
(iv) fail, following notice, to cure a breach of a covenant under the notes or
the indenture; (v) incur certain events of default with respect to other
indebtedness; or (vi) are subject to certain bankruptcy proceedings or orders.
If we fail to deliver certain SEC reports to the trustee in a timely manner as
required by the indenture: (x) the interest rate applicable to the notes during
the delinquency will be increased by 0.25% or 0.50%, as applicable (depending on
the duration of the delinquency); and (y) if the required reports are not
delivered to the trustee within 180 days after their due date under the
indenture, a holder of the notes will generally have the right, subject to
certain limitations, to require us to repurchase all or any portion of the notes
then held by such holder.
Contractual Obligations
There have been no material changes in our contractual obligations as of
March 30, 2012, as previously disclosed in our Annual Report on Form 10-K for
the fiscal year ended September 30, 2011, except as discussed below:
Upon the close of the picoChip acquisition, we assumed additional contractual
obligations, including contingent consideration and various operating and
capital leases. The cash payment of the initial purchase price of picoChip
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was financed in part with bank debt, which was issued pursuant to a loan and
security agreement dated as of February 6, 2012 between us and Silicon Valley
Bank. The loan and security agreement includes: (i) a term loan facility of
$15.0 million; and (ii) a revolving credit facility of up to $20.0 million. As
of March 30, 2012, the outstanding balance on the term loan was $15.0 million
and the outstanding balance on the revolving credit facility was $13.5 million.
The principal on the term loan will be payable in quarterly installments
beginning on March 31, 2013 and ending on the maturity date of the term loan,
February 6, 2017. Quarterly principal payments of $375,000 are due for each
quarter during calendar year 2013, $750,000 for each quarter during calendar
year 2014, $1.1 million for each quarter during calendar year 2015 and $1.5
million for each quarter during calendar year 2016. Interest on the term loan
will be paid quarterly beginning in May 2012. The revolving credit facility also
has a maturity date of February 6, 2017. Interest on the revolving credit
facility will be paid quarterly beginning in May 2012.
Off-Balance Sheet Arrangements
We have made guarantees and indemnities, under which we may be required to make
payments to a guaranteed or indemnified party, in relation to certain
transactions. In connection with a June 2003 distribution to stockholders of our
former parent company of all outstanding shares of common stock of Mindspeed, we
generally assumed responsibility for all contingent liabilities and then-current
and future litigation against our former parent company or its subsidiaries
related to our business. In connection with certain facility leases, we have
indemnified our lessors for certain claims arising from the facility or the
lease. We indemnify our directors, officers, employees and agents to the maximum
extent permitted under the laws of the State of Delaware. The duration of the
guarantees and indemnities varies, and in many cases is indefinite. The majority
of our guarantees and indemnities do not provide for any limitation of the
maximum potential future payments we could be obligated to make. We have not
recorded any liability for these guarantees and indemnities in the accompanying
consolidated condensed balance sheets.
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