Supplemental Financial Information

3 Months Ended

Mar. 30, 2012

Supplemental Financial Information [Abstract]

5. Supplemental Financial Information

Inventories

Inventories consist of the following (in thousands):


	Successor
	March 30, 2012		September 30, 2011
Work-in-process	$	4,314	$	7,973
Finished goods		2,272		4,720

Total inventories	$	6,586	$	12,693

Net inventory includes a step-up to fair value recorded in connection with the Merger of $0.6 million and $1.2 million, as of March 30, 2012 and September 30, 2011, respectively. Work-in-process consists of completed wafers, probed die, and product in assembly and product in test which has not been completed as of the balance sheet date.

Goodwill and Purchased Intangible Assets

Intangible assets consist of the following (in thousands):


	Successor
	March 30, 2012															September 30, 2011
	Weighted Average Life (yrs)		Gross Carrying Amount		Transfers			Accumulated Amortization			Impairment			Book Value		Gross Carrying Amount		Transfers			Accumulated Amortization			Impairment			Book Value
Intangible assets subject to amortization:
Customer relationships		7.0	$	31,172	$	—		$	(8,323	)	$	(15,449	)	$	7,400	$	50,300	$	—		$	(4,682	)	$	(19,128	)	$	26,490
Backlog		0.5		4,200		—			(4,200	)		—		$	—		4,200		—			(4,200	)		—			—
Patents		8.3		2,900		—			(332	)		—		$	2,568		2,900		—			(158	)		—			2,742
R&D assets		3.8		892		2,376			(242	)		—		$	3,026		—		892			(54	)		—			838
Non-compete agreement		1.0		100		—			(95	)		—			5		100		—			(45	)		—			55

			$	39,264	$	2,376		$	(13,192	)	$	(15,449	)	$	12,999	$	57,500	$	892		$	(9,139	)	$	(19,128	)	$	30,125

Intangible assets not subject to amortization:
In-process research and development				26,850		(2,376	)					(6,812	)		17,662		46,000		(892	)					(18,258	)		26,850
Trade name and trademarks				11,450		—						(1,090	)		10,360		15,100		—						(3,650	)		11,450

			$	38,300	$	(2,376	)				$	(7,902	)	$	28,022	$	61,100	$	(892	)				$	(21,908	)	$	38,300

Intangible assets are amortized over their estimated useful lives either on a straight-line or accelerated basis that reflects the pattern in which the economic benefits of the intangible assets are expected to be realized. Useful lives range from approximately six months to eight years, with no residual value. During the Successor fiscal quarter and six fiscal months ended March 30, 2012 the Company recognized intangible amortization expense of $2.0 million and $4.1 million, respectively. During the Predecessor fiscal quarter and six fiscal months ended April 1, 2011 the Company recognized intangible amortization expense of $0.3 and $0.6 million, respectively.

Intangible assets are amortized over a weighted-average remaining period of approximately 5.9 years. Annual amortization expense is expected to be as follows as of March 30, 2012 (in thousands):


	Fiscal Year
	2012		2013		2014		2015		2016		Thereafter
Amortization expense	$	2,525	$	2,882	$	2,449	$	1,738	$	1,391	$	2,014

Acquired IPR&D intangible assets consist of projects in the Company’s audio, imaging and video product lines. All of the projects were in the development phase and were incomplete at the Merger date. If the IPR&D projects reach technological feasibility they will be amortized over their remaining estimated useful lives, typically the period over which shipments are forecast to occur, or, if they do not reach technological feasibility their cost will be charged to expense. In the second fiscal quarter ended March 30, 2012, one imaging project reached technological feasibility and was transferred to R&D assets. The fair value of the project was determined to be $1.9 million, amortizable over the life of the product, which is estimated to be approximately five years. The remaining IPR&D projects have yet to reach technological feasibility.

During the second quarter of fiscal 2012, the Company determined that indicators of impairment existed based on two factors: (1) its operating results for the fiscal quarter ended March 30, 2012 and (2) decreases in sales forecasts for future periods. As a result of these indicators of impairment, the Company tested its amortizable intangible assets by comparing the sum of the undiscounted cash flows related to customer relationship, patent and R&D intangible assets to their respective carrying values as of March 30, 2012. The sum of undiscounted cash flows related to the customer relationships intangible asset was less than its carrying value. As a result the Company recorded an impairment charge of $15.4 million which represented the difference between its fair value and its carrying value as of March 30, 2012. The sum of undiscounted cash flows related to the patent and R&D intangible assets was greater than their carrying value as of March 30, 2012. As a result, the Company did not record any impairment charge on the patent and R&D intangible assets as of March 30, 2012.

The Company tested its indefinite-lived intangible assets for impairment by comparing the fair value of the indefinite-lived intangible assets to their carrying amounts. The fair value of the IPR&D intangible asset was determined based on a discounted cash flow model using the revised sales forecast for each project that continued to be classified as IPR&D as of March 30, 2012. Based on this, the Company determined that the fair value of the IPR&D intangible asset was less than the carrying amount of the IPR&D intangible asset as of March 30, 2012, resulting in an impairment charge of $6.0 million.

An IPR&D project completed in the fiscal quarter ended March 30, 2012 had a fair value of $1.9 million compared with the historical carrying value of the project in IPR&D of $2.8 million as of March 30, 2012. This resulted in an impairment charge of $0.9 million. The fair value of the trade name and trademarks intangible asset, based on a discounted cash flow model using the revised sales forecast was less than the carrying amount of trade name and trademarks which resulted in an impairment charge of $1.1 million.

As a result of these indicators of impairment described above, the Company recorded a goodwill impairment charge of $31.5 million in the fiscal quarter ended March 30, 2012 representing the excess of goodwill over the implied fair value of goodwill calculated as of March 30, 2012.

There was no change in the carrying amount of goodwill during the Predecessor fiscal quarter ended April 1, 2011.

Mindspeed Warrant

The Company has a warrant to purchase approximately 6.1 million shares of Mindspeed common stock. The warrant expires in June 2013. The Company accounts for the Mindspeed warrant as a derivative instrument, and changes in the fair value of the warrant are included in other expense, net in each period presented. The warrant was valued at March 30, 2012 and September 30, 2011 with the Black-Scholes-Merton valuation model using the following inputs:


	Successor
	March 30, 2012			September 30, 2011
Exercise price	$	16.74		$	16.74
Fair market value of Mindspeed stock	$	6.37		$	5.20
Expected life (years)		1.25			1.75
Expected volatility		53	%		64	%
Risk-free rate		0.23	%		0.22	%
Dividend yield		—			—

Expected volatility is based on historical volatility of Mindspeed common stock. The risk free interest rate is based on the U.S. Treasury bill yield in effect at the time of grant for periods corresponding with the expected life of the warrant. The expected life is the remaining life of the warrant. The valuation of this derivative instrument is subjective, and the valuation model requires the input of highly subjective assumptions, including the expected stock price volatility. Changes in these assumptions can materially affect the fair value estimate. The Company could, at any point in time, ultimately realize amounts significantly different than the carrying value.

At March 30, 2012 and September 30, 2011, the aggregate fair value of the Mindspeed warrant included on the accompanying consolidated balance sheets was $0.8 million and $1.7 million, respectively. The aggregate fair value of the warrant is reflected as a long-term asset on the accompanying consolidated balance sheets because the Company does not intend to liquidate any portion of the warrant in the next twelve months.

Debt


	March 30, 2012		September 30, 2011
Long-term debt:
11.25% senior secured notes due March 2015, including premium of $15,800 and $18,121	$	190,800	$	193,121

11.25% senior secured notes due 2015 — In March 2010, the Company issued $175.0 million aggregate principal amount of senior secured notes due 2015 (“senior notes”) that mature on March 15, 2015. The senior notes were sold at 99.06% of the principal amount, resulting in gross proceeds of approximately $173.4 million and a discount of $1.6 million. Deferred debt offering expenses were approximately $4.9 million. The unamortized balance of $3.8 million was eliminated as of the Merger date. The senior notes have not been registered under the Securities Act of 1933, as amended, and may not be sold in the United States absent registration or an applicable exemption from registration requirements. The senior notes accrue interest at a rate of 11.25% per annum payable semiannually on March 15 and September 15 of each year, commencing on September 15, 2010. The obligations under the senior notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis, by all of the Company’s domestic subsidiaries (excluding Conexant CF, LLC, the Company’s receivables financing subsidiary). In addition, the senior notes and the note guarantees are secured by liens on substantially all of the Company’s and the guarantors’ tangible and intangible property, subject to certain exceptions and permitted liens. On or after March 15, 2013, the Company may redeem all or a part of the senior notes at a price of 105.625% of the principal amount of the senior notes during the remainder of 2013 and 100.00% of the principal amount of the senior notes thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date. In addition, at any time prior to March 15, 2013, the Company may, on one or more occasions, redeem all or a part of the senior notes at any time at a redemption price equal to 100% of the principal amount of the senior notes redeemed, plus a “make-whole” premium, plus accrued and unpaid interest, if any, to the applicable redemption date. Beginning on January 1, 2011 until March 15, 2013, the Company may also redeem up to 35% of the original aggregate principal amount of the senior notes, using the proceeds of certain qualified equity offerings, at a redemption price of 111.25% of the principal amount thereof, plus accrued and unpaid interest, if any, to the applicable redemption date. In addition, certain asset dispositions would constitute triggering events that may require the Company to use the proceeds from those sales to make an offer to repurchase the senior notes at a repurchase price equal to 100% of the principal amount of the senior notes repurchased, plus accrued and unpaid interest, if any, to the applicable repurchase date if such proceeds are not otherwise invested in the Company’s business within a specific period of time. The senior notes and the note guarantees rank senior to all of the Company’s and the guarantors’ existing and future subordinated indebtedness, including the convertible notes, but they are structurally subordinated to all existing and future indebtedness and other liabilities (including non-trade payables) of the Company’s non-guarantor subsidiaries.

As a result of the Merger, the Company was required to make a change of control offer (the “Offer”) on May 27, 2011, to repurchase the senior notes at a repurchase price equal to 101% of the principal amount of the senior notes repurchased, plus accrued and unpaid interest, if any, to the applicable repurchase date. If all holders of the senior notes had accepted the Offer, the Company would have been obligated to repurchase the senior notes for an aggregate of $176.75 million plus accrued and unpaid interest. The Offer expired on June 29, 2011 and was not extended by the Company. No senior notes were tendered by their holders pursuant to the Offer. At the date of the Merger, the senior notes were valued at 111.50% of par or $195.1 million resulting in a premium of $20.1 million. Interest expense on the senior notes for the Successor fiscal quarter and six fiscal months ended March 30, 2012 was $3.8 million and $7.6 million, respectively, which includes $1.2 million and $2.3 million, respectively, of premium amortization. Interest expense on the senior notes in the Predecessor fiscal quarter and six fiscal months ended April 1, 2011 was $5.2 million and $10.5 million, respectively, which included $0.1 million and $0.2 million, respectively, of discount amortization.

4.00% convertible subordinated notes due March 2026 — In March 2006, the Company issued $200.0 million principal amount of convertible notes (the “convertible notes”) and, in May 2006, the initial purchaser of the convertible notes exercised its option to purchase an additional $50.0 million principal amount of the convertible notes. Total proceeds to the Company from these issuances, net of issuance costs, were $243.6 million. The convertible notes were general unsecured obligations of the Company. Interest on the convertible notes was payable in arrears semiannually on March 1 and September 1 of each year, beginning on September 1, 2006. The convertible notes were convertible, at the option of the holder upon satisfaction of certain conditions, into shares of the Company’s common stock at a conversion price of $49.20 per share, subject to adjustment for certain events. Upon conversion, the Company had the right to deliver cash in lieu of common stock or a combination of cash and common stock. Beginning on March 1, 2011, the convertible notes could be redeemed at the Company’s option at a price equal to 100% of the principal amount, plus any accrued and unpaid interest. Holders could require the Company to repurchase, for cash, all or part of their convertible notes on March 1, 2011, March 1, 2016 and March 1, 2021 at a price of 100% of the principal amount, plus any accrued and unpaid interest. The Company redeemed the remaining $l1.2 million of convertible notes with cash when they matured on March 1, 2011. Interest expense on the convertible notes for the Predecessor fiscal quarter and six fiscal months ended April 1, 2011 was $0.2 million and $0.4 million, respectively, which included $0.1 million and $0.2 million, respectively, of debt discount amortization. The Company has no remaining obligations under the convertible notes.

Accounts Receivable Financing Facility — Effective on the date of the Merger, the Company’s credit facility with a bank was terminated. No amounts were due under the facility at the termination date.

CONEXANT SYSTEMS INC 10-Q