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MSPD > SEC Filings for MSPD > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for MINDSPEED TECHNOLOGIES, INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MINDSPEED TECHNOLOGIES, INC


7-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 28, 2012.

Overview

Mindspeed Technologies, Inc. designs, develops and sells semiconductor solutions for communications applications in wireline and wireless network infrastructure equipment, which includes broadband access networks (fixed and mobile), enterprise and metropolitan and wide area networks (WAN) (fixed and mobile). In previous fiscal years, we had organized our solutions for these interrelated and rapidly converging networks into three product lines: communications convergence processing, high-performance analog and WAN communications. As previously reported, communications convergence processing included small cell wireless equipment. Beginning in fiscal 2013, to better align with our investment focus and provide greater transparency into the execution of our growth business, we started reporting small cell wireless infrastructure revenues as a standalone category. We also combined the communications convergence processing, excluding small cell wireless infrastructure revenues, and WAN businesses into communications processors. High-performance analog remained unchanged. Therefore, our three product lines are wireless infrastructure, communications processors and high-performance analog. Our wireless infrastructure products include ultra-low-power, multi-core digital signal processor (DSP) system-on-chip (SoC) products for the mobile (3G/4G) carrier infrastructure, including residential and enterprise platforms. Our communications processors products include ultra-low-power, multi-core DSP SoC products for the fixed and mobile carrier infrastructure platforms and WAN communication products that help optimize today's circuit-switched networks that furnish much of the Internet's underlying long-distance infrastructure. 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 products are sold to original equipment manufacturers (OEMs) for use in a variety of network infrastructure equipment, including:

Wireless Infrastructure - 3G/4G long-term evolution (LTE) wireless small cell base stations in the carrier infrastructure, including residential and enterprise;

Communications Processors - 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 circuit-switched networking equipment that implements asynchronous transfer mode (ATM) and T1/E1 and T3/E3 communications protocols; and

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.

Our customers include Alcatel-Lucent SA, Cisco Systems, Inc., Huawei Technologies Co. Ltd., Ericsson Telephone Company, Mitsubishi Electric Corporation, Nokia Siemens Networks and Zhongxing Telecom Equipment Corp., among others.

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


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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 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. Based on a recent review of target markets addressed by our wireless infrastructure reporting unit, we believe that the pace and timing of deployments within that market will be pushed out beyond our previously forecasted plans. As a result of these changes in our assessment of the reporting unit's near-term prospects, we recognized related goodwill and asset impairment charges totaling $33.4 million in the second quarter of fiscal 2013.

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 networking solutions for OEMs. Sales to distributors accounted for approximately 69% of our net revenue in our third fiscal quarter and 67% of our net revenue for the first nine months of fiscal 2013. We generated approximately 76% of our net revenue in our fiscal third quarter and 77% of our net revenue for the first nine months of fiscal 2013 from outside of the Americas. We believe a 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. We generated approximately 33% of our net revenue in our third fiscal quarter and 30% of our net revenue for the first nine months of fiscal 2013 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 $15.2 million in our third fiscal quarter and approximately $46.9 million in the first nine months of fiscal 2013 on research and development. 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 wireless infrastructure solutions for small cell base station processing, communications processors for high-bandwidth multiservice access applications, and high-performance analog applications such as optical networking and broadcast-video transmission. 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.

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. 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.

Our ability to achieve revenue growth will depend on increased demand for network infrastructure equipment and enterprise equipment that incorporate 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 and enterprise 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 telecommunication 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


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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.

On April 30, 2013, we issued a press release announcing that we have engaged Morgan Stanley & Co. LLC to assist us in evaluating various strategic alternatives available to our company. The strategic review will require the expenditure of significant time and resources by our company and management team. The strategic review could also distract our executives, employees, and board of directors from other matters relating to the operation of our businesses and affect our ability to attract and retain new executives or key employees. In addition, our announcement of the strategic review may have created and may continue to create uncertainty among current and potential employees, suppliers and customers. In particular, these suppliers and customers could question our commitment to continuing particular product lines or markets or operating as an independent business. As a result of these factors, the announcement could potentially undermine our business and have a material adverse effect on our results of operations, liquidity or financial condition. In addition, the announcement and subsequent developments could cause increased volatility in our stock price.

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 inventories, stock-based compensation, revenue recognition, deferred income taxes and uncertain tax positions, business combinations, goodwill and other long-lived assets, and impairment of goodwill and other long-lived assets. These policies are described in further detail in our Annual Report on Form 10-K for the fiscal year ended September 28, 2012. There have been no significant changes in our critical accounting policies and estimates during the first nine months ended June 28, 2013 as compared to what was previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 28, 2012.

Recent Accounting Pronouncements

In February 2013, the FASB issued accounting guidance which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and to present significant amounts reclassified out of accumulated other comprehensive income by respective line items of net income if the amount reclassified is required to be reclassified to net income in its entirety. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. The provisions of this guidance will be effective for us in our first quarter of fiscal 2014 and should be applied prospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated condensed financial statements.

Results of Operations

Net Revenue by Product Line

The following table summarizes fiscal quarter net revenue by our product lines:



                                                        Three Months Ended
                                       June 28,      % of Net       June 29,      % of Net              Change
                                         2013         Revenue         2012         Revenue          $             %
                                                             (in thousands, except percentages)
High-performance analog                $  15,276            43 %    $  16,845            48 %    $ (1,569 )       -9.3 %
Communications processors                 17,654            50 %       14,583            41 %       3,071         21.1 %
Wireless infrastructure                    2,649             7 %        4,023            11 %      (1,374 )      -34.2 %

Total net product revenue                 35,579           100 %       35,451           100 %         128          0.4 %
Intellectual property                         -              0 %           -              0 %          -

Net revenue                            $  35,579           100 %    $  35,451           100 %    $    128          0.4 %


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Net revenue from high-performance analog products decreased in the third quarter of fiscal 2013 when compared to the third quarter of fiscal 2012 due to decreased shipments of our physical media device chipsets and crosspoint products. Net revenue from wireless infrastructure products decreased in the third quarter of fiscal 2013 when compared to the third quarter of fiscal 2012 due to decreased shipments of our products for the 3G market. Net revenue from our communications processors products increased in the third quarter of fiscal 2013 when compared to the third quarter of fiscal 2012 due to increased shipments in all three communications processors product lines.

The following table summarizes fiscal year-to-date net revenue by our product lines:

                                                       Nine Months Ended
                                      June 28,      % of Net       June 29,      % of Net              Change
                                        2013         Revenue         2012         Revenue          $             %
                                                            (in thousands, except percentages)
High-performance analog               $  50,150            43 %    $  46,846            45 %    $  3,304          7.1 %
Communications processors                49,417            43 %       50,797            48 %      (1,380 )       -2.7 %
Wireless infrastructure                   9,791             8 %        6,508             6 %       3,283         50.4 %

Total net product revenue               109,358            94 %      104,151            99 %       5,207          5.0 %
Intellectual property                     6,000             6 %          591             1 %       5,409        915.2 %

Net revenue                           $ 115,358           100 %    $ 104,742           100 %    $ 10,616         10.1 %

Net revenue from high-performance analog products increased in the first nine months of fiscal 2013 when compared to the first nine months of fiscal 2012 due to increased demand for crosspoint switches, SDI chipsets, and optical physical media devices. Net revenue from wireless infrastructure products also increased in the first nine months of fiscal 2013 when compared to the first nine months of fiscal 2012 due to increased shipments of our SoC products for small cell base stations, as well as increased sales of 3G/HSPA products driven by the acquisition of picoChip in February of 2012. These increases were partially offset by a decrease in sales in communications processors products. Net revenue from our communications processors products decreased in the first nine months of fiscal 2013 when compared to the first nine months of fiscal 2012, despite the increase in demand for Ethernet products for wide area networks. The decline is due to a slowdown in the infrastructure voice market, as well as a decrease 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.

We sold $6.0 million in intellectual property during the first nine months of fiscal 2013 compared to $591,000 in intellectual property sales in the first nine months of fiscal 2012. 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.

The demand environment in the markets in which we participate is dynamic and certain customers increase or accelerate product orders to earn financial incentives near quarter end, while other customers request product shipments in the quarter that exceed our available supply. The impact of increased or accelerated product orders to net revenue was $2.9 million for the three and nine months ended June 28, 2013 and $4.0 million for the three and nine months ended June 29, 2012. The impact of increased or accelerated product orders to net revenue was partially offset by the impact of customer requests exceeding our available supply by $1.9 million for the three and nine months ended June 28, 2013 and $2.3 million for the three and nine months ended June 29, 2012.

Impairment of Long-Lived Assets

During the second quarter of fiscal 2013, in conjunction with the evaluation of goodwill and indefinite-lived intangibles, as discussed below, there were impairment triggering events and circumstances which warranted an evaluation of certain definite-lived intangible assets. These circumstances included lower revenue when compared with projected results, which led to weaker performance than we expected for the second quarter of fiscal 2013. Specifically, the carrying amounts of certain intellectual property licenses and photomasks within our wireless infrastructure reporting unit were determined not to be recoverable and to exceed their fair value. Accordingly, we impaired the entire carrying value of these intellectual property licenses and photomasks and recorded an impairment charge of $2.0 million on intellectual property licenses and $439,000 on photomasks in cost of goods sold on our unaudited consolidated condensed statements of operations. We reviewed our other long-lived assets within our wireless infrastructure reporting unit and did not identify any other impairment.


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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; asset impairments; 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
                   June 28,       % of Net       June 29,       % of Net             Change
                     2013         Revenue          2012         Revenue           $          %
                                         (in thousands, except percentages)

Gross margin $ 21,803 61 % $ 17,265 49 % $ 4,538 26.3 %

The increase in our gross margin as a percent of net revenue for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 was driven primarily by $3.4 million of asset impairments recorded in cost of goods sold in the third quarter of fiscal 2012, which related to the impairment of an intellectual property license and a photomask and $760,000 from the write-up to fair value of acquired inventory related to the picoChip acquisition.

The following table presents fiscal year-to-date gross margin:

                                    Nine Months Ended
                  June 28,       % of Net       June 29,       % of Net             Change
                    2013         Revenue          2012         Revenue           $           %
                                        (in thousands, except percentages)

Gross margin $ 69,873 61 % $ 57,498 55 % $ 12,375 21.5 %

Gross margin increased for the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012 due to a $5.4 million (4.7% of net revenue) increase in intellectual property revenue. The increase in our gross margin as a percent of net revenue for the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012 was driven primarily by a change in product mix, as described above, as well as an increase in intellectual property revenue, which had no associated cost. These increases in gross margin as a percent of net revenue were partially offset by the amortization of acquired intangible assets related to the picoChip acquisition and $2.4 million (2.1% of net revenue) of asset impairments recorded in cost of goods sold, which related to the impairment of intellectual property licenses and photomasks during the second quarter of fiscal 2013, as described above.

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.


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The following table presents details of fiscal quarter R&D expenses:

                                                         Three Months Ended
                                       June 28,       % of Net       June 29,       % of Net              Change
                                         2013         Revenue          2012         Revenue           $             %
                                                              (in thousands, except percentages)
Personnel-related costs                $   9,167                     $  10,880                     $ (1,713 )      -15.7 %
Stock-based compensation                     886                           899                          (13 )       -1.4 %
Design & development costs                 2,275                         3,133                         (858 )      -27.4 %
Facilities                                 1,837                         1,768                           69          3.9 %
Depreciation                                 749                           846                          (97 )      -11.5 %
Other                                        239                           579                         (340 )      -58.7 %

Research and development               $  15,153             43 %    $  18,105             51 %    $ (2,952 )      -16.3 %

R&D expenses decreased for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 due primarily to a decrease in personnel-related costs and a decrease in design and development costs, which both resulted from the restructuring activities that began in late fiscal 2012.

The following table presents details of fiscal year-to-date R&D expenses:

                                                         Nine Months Ended
                                       June 28,       % of Net       June 29,       % of Net              Change
                                         2013         Revenue          2012         Revenue           $             %
                                                              (in thousands, except percentages)
Personnel-related costs                $  28,598                     $  30,296                     $ (1,698 )       -5.6 %
Stock-based compensation                   2,844                         2,785                           59          2.1 %
Design & development costs                 6,590                         9,198                       (2,608 )      -28.4 %
Facilities                                 5,804                         4,781                        1,023         21.4 %
Depreciation                               2,337                         2,177                          160          7.3 %
Other                                        683                         1,616                         (933 )      -57.7 %

Research and development               $  46,856             41 %    $  50,853             49 %    $ (3,997 )       -7.9 %

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