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[posting]23153149[/posting] CNXT > SEC Filings for CNXT > Form 10-Q on 9-Aug-2006 All Recent SEC Filings Show all filings for CONEXANT SYSTEMS INC | Request a Trial to NEW EDGAR Online Pro Form 10-Q for CONEXANT SYSTEMS INC -------------------------------------------------------------------------------- 9-Aug-2006 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 condensed consolidated financial statements and the notes thereto included in this Quarterly Report, 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 the fiscal year ended September 30, 2005. Overview We design, develop and sell semiconductor system solutions for use in broadband communications, enterprise networks and digital home networks worldwide. Our expertise in mixed-signal processing, digital signal processing and standards-based communications protocol implementation allows us to deliver semiconductor devices and integrated systems for client, or end-customer, personal communications access products. These products include PCs and PC peripheral products, television set-top boxes, residential gateways, game consoles, point-of-sale (POS) terminals, multi-function peripherals (MFPs) and other types of consumer and enterprise products. These communications access end-products connect to audio, video, voice and data services over broadband wireline communications networks, including digital subscriber line (DSL), cable and Ethernet, over dial-up Internet connections, over wireless local area networks and over direct broadcast satellite, terrestrial and fixed wireless systems. We also design, develop and sell semiconductor system solutions used in telecommunications company central office equipment, primarily in DSL access multiplexers. We organize our product lines to address four primary communications end-markets. First, our broadband access products include a comprehensive portfolio of DSL products designed for customer premises equipment and central office applications in addition to products designed for emerging passive optical network applications. Second, our broadband media processing products include a variety of broadcast audio and video decoder and encoder devices as well as front-end communications components that enable the capture, display, storage, playback and transfer of audio and video content in digital home and small office products such as PCs, television set-top boxes, gaming consoles, personal video recorders and digital versatile disk (DVD) applications. Third, our universal and voice access products include a broad portfolio of analog modem chipsets and software for desktop and notebook PC applications as well as embedded equipment applications, including fax machines, MFPs, POS terminals, television set-top boxes, gaming consoles and Internet terminals. This product area also includes our voice-over-Internet protocol (VoIP) products designed to accommodate the transmission of voice traffic within broadband IP packet-based networks. And fourth, our wireless networking products include various combinations of radio frequency transceivers, analog base-band integrated circuits, and digital base-band and medium or media access controller (MAC) chips that comply with the various configurations of the 802.11 wireless local area networking (WLAN) standard. We market and sell our semiconductor products and system solutions directly to leading original equipment manufacturers (OEMs) of communication electronics products, and indirectly through electronic components distributors. We also sell our products to third-party electronic manufacturing service providers, who manufacture products incorporating our semiconductor products for OEMs. Sales to distributors and other resellers accounted for approximately 35% of net revenues in the first nine months of fiscal 2006, as compared to 28% for the similar period of fiscal 2005. For the three months ended June 30, 2005 and the nine months ended June 30, 2006 and 2005, no customer accounted for 10% or more of net revenues. There was one customer that accounted for 10% of net revenues for the three months ended June 30, 2006. Our top 20 customers accounted for approximately 66% and 65% of net revenues for the first nine months of fiscal 2006 and 2005, respectively. Revenues derived from customers located in the Asia-Pacific region, the Americas, and Europe (including the Middle East and Africa) were 82%, 11%, and 7%, respectively, of our net revenues for the first nine months of fiscal 2006 and were 79%, 13%, and 8%, respectively, of our net revenues for the first nine months of fiscal 2005. We believe a portion of the products we sell to OEMs and third-party manufacturing service providers in the Asia-Pacific region are ultimately shipped to end-markets in the Americas and Europe. -------------------------------------------------------------------------------- Table of Contents Results of Operations Net Revenues Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 Net revenues $ 251,635 $ 197,464 $ 724,924 $ 507,823 Net revenues increased 27% in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005. This increase was driven by a 22% increase in unit volume shipments. The unit volume shipments increased in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005 as a result of increased demand for our broadband media products as satellite set-top box design wins began to ramp into production and, to a lesser extent, for our broadband access central office products due to market share gains. Net revenues increased 43% in the first nine months of fiscal 2006 compared to the first nine months of fiscal 2005. This increase was driven by a 46% increase in unit volume shipments, which more than offset a 2% decrease in ASPs. The unit volume shipments increased in the first nine months of fiscal 2006 compared to the first nine months of fiscal 2005 as a result of (i) the approximate $60.0 million channel inventory reduction at our distributors and estimated $10.0 million inventory reduction at our direct customers in the first nine months of fiscal 2005 (discussed below) and (ii) increased demand for our broadband media products as satellite set-top box design wins began to ramp into production and, to a lesser extent, for our broadband access central office products due to market share gains. During fiscal 2004, we experienced lower than expected end customer demand which resulted in excess channel inventory build up at our direct customers, distributors and resellers. During the first half of fiscal 2005, we reduced channel inventory at our distributors by approximately $60.0 million, and we believe that there was an approximate $10.0 million reduction of channel inventory at our direct customers. Gross Margin Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 Gross margin $ 131,537 $ 75,034 $ 333,500 $ 142,162 Percent of net revenues 52 % 38 % 46 % 28 % Gross margin represents net revenues less cost of goods sold. As a fabless semiconductor company, we use third parties for wafer production and assembly and test services. Our cost of goods sold consists predominantly of purchased finished wafers, assembly and test services, royalties, amortization of production photo mask costs, other intellectual property costs, labor and overhead associated with product procurement, and non-cash stock-based compensation charges for procurement personnel. Our gross margin percentage for the third quarter of fiscal 2006 was 52% compared with 38% for the third quarter of fiscal 2005. During the third quarter of fiscal 2006, we recorded a $17.5 million gain related to the cancellation of a wafer supply and services agreement with Jazz Semiconductor, Inc., which was recorded as a reduction of cost of sales. Excluding this gain, the impact of changes to revenue reserves that we maintain to estimate customer pricing adjustments, and the impact of changes to our inventory reserves, our gross margin percentage for the third quarter of fiscal 2006 would have been 44%, compared to 39% for the third quarter of fiscal 2005. The higher gross margin percentage in the third quarter of fiscal 2006 can be attributed to the benefits of our product cost-reduction initiatives, as well as more stable product pricing. Our gross margin percentage for the first nine months of fiscal 2006 was 46% compared with 28% for the first nine months of fiscal 2005. Excluding the $17.5 million gain on the cancellation of the wafer supply and services agreement with Jazz, the impact of changes to revenue reserves that we maintain to estimate customer pricing adjustments, and the impact of changes to our inventory reserves, our gross margin percentage for the first nine -------------------------------------------------------------------------------- Table of Contents months of fiscal 2006 would have been 43%, compared to 39% for the first nine months of fiscal 2005. The higher gross margin percentage in the first nine months of fiscal 2006 can be attributed to the benefits of our product cost-reduction initiatives, as well as more stable product pricing. We assess the recoverability of our inventories on a quarterly basis through a review of inventory levels in relation to foreseeable demand, generally over the following twelve months. Foreseeable demand is based upon available information, including sales backlog and forecasts, product marketing plans and product life cycle information. When the inventory on hand exceeds the foreseeable demand, we write down the value of those inventories which, at the time of our review, we expect to be unable to sell. The amount of the inventory write-down is the excess of historical cost over estimated realizable value. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management. In the event that actual demand is lower than originally projected, additional inventory write-downs may be required. Similarly, in the event that actual demand exceeds original projections, gross margins may be favorably impacted in future periods. During the three months ended June 30, 2006 and 2005, we recorded $4.9 million and $2.1 million, respectively, of inventory charges for excess and obsolete (E&O) inventory. During the nine months ended June 30, 2006 and 2005, we recorded $12.1 million and $31.3 million, respectively, of inventory charges for E&O inventory. Activity in our E&O inventory reserves for the three and nine months ended June 30, 2006 and 2005 was as follows: Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 E&O reserves at beginning of period $ 39,793 $ 53,302 $ 44,833 $ 23,319 Additions 4,949 2,131 12,123 31,296 Release upon sales of product (2,175 ) (1,298 ) (8,826 ) (2,299 ) Scrap (2,503 ) (3,460 ) (5,345 ) (5,502 ) Standards adjustments and other (1,168 ) (864 ) (3,889 ) 2,997 E&O reserves at end of period $ 38,896 $ 49,811 $ 38,896 $ 49,811 We have created an action plan at a product line level to scrap approximately 15% of the remaining E&O inventory during the fourth quarter of fiscal 2006, and we are still in the process of evaluating the remaining reserved products. It is possible that some of these reserved products will be sold, which will benefit our gross margin in the period sold. Our products are used by communications electronics OEMs that have designed our products into communications equipment. For many of our products, we gain these design wins through a lengthy sales cycle, which often includes providing technical support to the OEM customer. Moreover, once a customer has designed a particular supplier's components into a product, substituting another supplier's components often requires substantial design changes which involve significant cost, time, effort and risk. In the event of the loss of business from existing OEM customers, we may be unable to secure new customers for our existing products without first achieving new design wins. When the quantities of inventory on hand exceed foreseeable demand from existing OEM customers into whose products our products have been designed, we generally will be unable to sell our excess inventories to others, and the estimated realizable value of such inventories to us is generally zero. On a quarterly basis, we also assess the net realizable value of our inventories. When the estimated average selling price, plus costs to sell our inventory falls below our inventory cost, we adjust our inventory to its current estimated market value. During the three months ended June 30, 2006, we recorded $0.3 million of inventory charges to adjust certain products to their estimated market value. During the nine months ended June 30, 2006 and 2005, we recorded $3.6 million and $18.9 million, respectively, of inventory charges to adjust certain wireless networking products to their estimated market value. Increases to this inventory reserve may be required based upon actual average selling prices and changes to our current estimates, which would impact our gross margin percentage in future periods. Activity in our lower of cost or market (LCM) inventory reserves for the three and nine months ended June 30, 2006 and 2005 was as follows: -------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 LCM reserves at beginning of period $ 6,228 $ 11,093 $ 6,739 $ - Additions 288 - 3,609 18,854 Release upon sales of product (1,526 ) (1,488 ) (5,312 ) (5,370 ) Standards adjustments and other - (2,588 ) (46 ) (6,467 ) LCM reserves at end of period $ 4,990 $ 7,017 $ 4,990 $ 7,017 Research and Development Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 Research and development $ 70,096 $ 66,282 $ 199,286 $ 209,362 Percent of net revenues 28 % 34 % 27 % 41 % Our research and development (R&D) expenses consist principally of direct personnel costs to develop new communications and semiconductor products, allocated direct costs of the R&D function, photo mask and other costs for pre-production evaluation and testing of new devices and design and test tool costs. Our R&D expenses also include the costs for design automation advanced package development and non-cash stock-based compensation charges for R&D personnel. R&D expense increased $3.8 million in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005 primarily due to a $4.4 million increase in non-cash stock-based compensation expense due to our adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment," in the first quarter of fiscal 2006. This increase was partially offset by $0.9 million of credits relating to property tax settlements. R&D expense decreased $10.1 million in the first nine months of fiscal 2006 compared to the first nine months of fiscal 2005 primarily as a result of our restructuring efforts which streamlined R&D projects and shifted resources to lower cost regions. Also contributing to the decrease in R&D expense was $4.3 million of credits relating to property tax settlements. These decreases were partially offset by an $11.0 million increase in non-cash stock-based compensation expense due to our adoption of SFAS No. 123(R) in the first quarter of fiscal 2006. Selling, General and Administrative Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 Selling, general and administrative $ 27,037 $ 31,081 $ 101,958 $ 89,449 Percent of net revenues 11 % 16 % 14 % 18 % Our selling, general and administrative (SG&A) expenses include personnel costs, sales representative commissions, advertising and other marketing costs. Our SG&A expenses also include costs of corporate functions including legal, accounting, treasury, human resources, customer service, sales, marketing, field application engineering, allocated indirect costs of the SG&A function and other services, and non-cash stock-based compensation charges for SG&A personnel. SG&A expense decreased $4.0 million in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005. This decrease is primarily attributable to a $5.6 million decrease in legal fees mainly due to the settlement of our intellectual property litigation with Texas Instruments and $0.9 million of credits related to property tax settlements. These decreases were partially offset by a $2.8 million increase in non-cash stock-based compensation expense due to our adoption of SFAS No. 123(R) in the first quarter of fiscal 2006. SG&A expense increased $12.5 million in the first nine months of fiscal 2006 compared to the first nine months of fiscal 2005. This increase is primarily attributable to a $16.8 million increase in non-cash stock-based compensation expense due to our adoption of SFAS No. 123(R) in the first quarter of fiscal 2006 and a $1.8 million increase in -------------------------------------------------------------------------------- Table of Contents legal fees mainly related to the trial and ultimate settlement of our intellectual property litigation with Texas Instruments. These increases were partially offset by $3.9 million of credits related to property tax settlements. Amortization of Intangible Assets Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 Amortization of intangible assets $ 7,520 $ 7,969 $ 23,185 $ 24,402 Amortization of intangible assets consists of amortization expense for intangible assets acquired in various business combinations. Our intangible assets are being amortized over a weighted-average period of approximately five years. The decrease in amortization expense for the third quarter of fiscal 2006 compared to the second quarter of fiscal 2005 and the first nine months of fiscal 2006 compared to the first nine months of fiscal 2005 is attributable to several intangible assets becoming fully amortized during fiscal 2005 and 2006. Special Charges Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 Litigation charge $ 30,000 $ - $ 70,000 $ - Restructuring charges 2,610 6,731 2,394 24,470 Integration charges (credits) - 1,649 (400 ) 6,760 Asset impairments - 29 85 3,492 Other special charges - - 300 6,540 $ 32,610 $ 8,409 $ 72,379 $ 41,262 Special charges for the third quarter of fiscal 2006 consisted of a $30.0 million charge related to the settlement of our litigation with Texas Instruments, Inc. (see Part II, Item I, "Legal Proceedings," for a discussion of the TI litigation settlement) and $2.6 million of restructuring charges mainly related to our fiscal 2006 restructuring action. Special charges for the first nine months of fiscal 2006 consisted primarily of a $70.0 million charge related the settlement of our litigation with Texas Instruments and $2.4 million of restructuring charges. The restructuring charges were comprised of $3.4 million for employee severance and other termination benefit costs and $0.4 million of facilities closure costs related to our fiscal 2006 restructuring action and $1.0 million of facilities related charges resulting from the accretion of rent expense related to our fiscal 2005 restructuring action, partially offset by a $2.5 million net reduction of the accrual relating to our fiscal 2005 restructuring action due to a revised estimate of the remaining employee severance and termination benefit costs to be paid. Special charges for the third quarter of fiscal 2005 included $6.7 million of restructuring charges, consisting of $5.9 million for employee severance and termination benefit costs and $0.8 of facilities charges related to our fiscal 2005 restructuring action, and $1.6 million of integration charges related to the merger with GlobespanVirata. Special charges for the first nine months of fiscal 2005 were comprised of $24.5 million of restructuring charges, consisting of $19.4 million for employee severance and termination benefit costs and $5.1 of facilities charges related to our fiscal 2005 restructuring action, $6.8 million of integration charges related to the merger with GlobespanVirata, asset impairment charges of $3.5 million primarily associated with leasehold improvements in facilities that were vacated as part of our restructuring activities, and $6.5 million of other special charges consisting of $3.2 million for the settlements of legal matters, $2.3 million of stock option and warrant modification charges, and $1.0 million of other special charges. -------------------------------------------------------------------------------- Table of Contents Interest Expense Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 Interest expense $ 10,426 $ 8,396 $ 29,280 $ 25,290 Interest expense is primarily related to our convertible subordinated notes and, beginning in the first quarter of fiscal 2006, to borrowings under a short-term credit facility. Interest expense increased in the three and nine months ended June 30, 2006 compared to the three and nine months ended June 30, 2005 as a result of the short-term credit facility we established in November 2005. The increase in interest expense as a result of the $250.0 million principal amount of 4.00% convertible subordinated notes issued in March 2006 and May 2006 has been substantially offset by a decrease in interest expense as a result of the retirement of the $130.0 million principal amount of 5.25% convertible subordinated notes and the $66.8 million principal amount of 4.25% convertible subordinated notes in May 2006, as well as the repurchase of $58.5 million principal amount of 4.00% convertible subordinated notes due February 2007. Other Expense (Income), Net Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, (in thousands) 2006 2005 2006 2005 Investment and interest income $ (4,518 ) $ (2,182 ) $ (14,415 ) $ (3,956 ) Decrease in fair value of the Mindspeed warrant 35,131 16,085 3,800 14,804 Impairment loss of Skyworks shares 18,456 - 18,456 - Losses of equity method investments 648 2,127 3,303 8,587 Realized gains on sales of equity securities - (31,198 ) (4,414 ) (42,310 ) Other 190 (442 ) (307 ) (492 ) $ 49,907 $ (15,610 ) $ 6,423 $ (23,367 ) Other expense (income), net for the third quarter of fiscal 2006 consisted mainly of a $35.1 million decrease in the fair value of the Mindspeed warrant, which resulted primarily from a decrease in the fair value of Mindspeed's common stock during the period, and an $18.5 million charge for the impairment of our Skyworks shares, partially offset by $4.5 million of investment and interest income. Other expense (income), net for the first nine months of fiscal 2006 was primarily comprised of the $18.5 million charge for the impairment of our Skyworks shares, a $3.8 million decrease in the fair value of the Mindspeed warrant, and $3.3 million of losses from our equity method investments, partially offset by $14.4 million of investment and interest income and $4.4 million of gains on sales of equity securities. Other expense (income), net for the third quarter of fiscal 2005 consisted of $31.2 million in gains on sales of equity securities, primarily our investment in SiRF Technologies Holdings, Inc., and $2.2 million of investment and interest income, partially offset by a $16.1 million decrease in the fair value of the Mindspeed warrant and $2.1 million of losses from our equity method investments. Other expense (income), net for the first nine months of fiscal 2005 consisted of $42.3 million in gains on sales of equity securities, primarily our investment in SiRF Technologies Holdings, Inc., and $4.0 million of investment and interest income, partially offset by a $14.8 million decrease in the fair value of the Mindspeed warrant and $8.6 million of losses from our equity method investments. Provision for Income Taxes We recorded income tax expense of $1.0 million and $0.7 million for the third quarter of fiscal 2006 and 2005, respectively, and $2.5 million and $1.8 million for the first nine months of fiscal 2006 and 2005, respectively, primarily reflecting income taxes imposed on our foreign subsidiaries. No U.S. Federal income tax expense was recorded for any of these periods as all of our Federal and the majority of our state income taxes are offset by fully reserved deferred . . . |
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| aus der Diskussion: | Conexant nach dem Tal der Tränen auf dem Weg zur Besserung |
| Autor (Datum des Eintrages): | grafbibi (10.08.06 10:39:32) |
| Beitrag: | 46 von 54 (ID:23381591) |
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