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Applied Micro Circuits Corp. Reports Operating Results (10-Q)

January 30, 2009 | About:

Applied Micro Circuits Corp. (AMCC) filed Quarterly Report for the period ended 2008-12-31.

Applied Micro Circuits Corporation is a global leader in network and embedded PowerPC processing optical transport and storage solutions. The Company's products enable the development of converged IP-based networks offering high-speed secure data high-definition video and high-quality voice for carrier metropolitan access and enterprise applications. AMCC provides networking equipment vendors with industry-leading network and communications processing Ethernet SONET and switch fabric solutions. AMCC is also the leading vendor of high-port count SATA RAID controllers enabling low-cost high-performance high-capacity storage. AMCC's corporate headquarters are located in Sunnyvale California. Sales and engineering offices are located throughout the world. Applied Micro Circuits Corp. has a market cap of $278.7 million; its shares were traded at around $4.4 with a P/E ratio of 18.7 and P/S ratio of 1.13.

Highlight of Business Operations:

In calendar 2006, our strategic direction changed in such a way that certain valuable patents were no longer core to our strategic direction. We reported our non-focus revenues separately and began to analyze our patent portfolio in detail. These patents relate to non-core products, foundry and other items that are not relevant to our long-term strategic product road maps. As a result, we embarked on a program to monetize this intellectual property. In July, 2008, we entered into a Patent Purchase Agreement (the Agreement) with QUALCOMM Incorporated (Qualcomm). Pursuant to the Agreement, we agreed to sell a series of our patents, patent applications and associated rights related to certain technologies in consideration for an aggregate purchase price of $33.0 million. The purchase price will be paid over three years in equal quarterly payments of $3.0 million each beginning in the three months ended September 30, 2008. Due to the nature of the payment terms, related revenue will be recorded as the payments are received beginning in the quarter ended September 30, 2008. Under the Agreement, we and our affiliates have retained a worldwide and non-exclusive right to manufacture and sell existing AMCC products that utilize technology covered by the patents. The Agreement includes customary representations, warranties and covenants by us. Prior to the due date of the final payment, Qualcomm is permitted to withhold a portion of the total purchase price in the event we breach the representations, warranties or covenants that we made under the Agreement. We hope to achieve a sustainable long-term revenue stream from our program to monetize our non-core intellectual property in the next three-to-five years.

Goodwill Impairment Charge. During the three months ended December 31, 2008, we assessed goodwill for impairment since we observed there were indicators of impairment. The notable indicators were a significant downward revision to our forecasts, a sustained decline in our market capitalization below book value, depressed market conditions and industry trends. These market conditions continuously change and it is difficult to project how long this current economic downturn may last. As a result of these market conditions, our planned product introductions were not expected to ramp as quickly as previously expected in fiscal 2008 or during fiscal 2009, causing our near-term and longer-term forecasts to decrease, and it will take some time to ramp back up to our previous levels. Additionally, the deterioration of market values has had an unfavorable impact on our valuations which are part of the goodwill impairment tests. As required by SFAS 144, we verified our long-lived assets were not impaired as of the time of the goodwill impairment. Upon completion of the impairment test, we determined that additional impairment analysis was required by SFAS 142 because the estimated carrying value of each of the three reporting units exceeded their estimated fair value. The second step of the goodwill impairment test compared the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. Since the carrying amount of the reporting unit's goodwill exceeded the implied fair value of that goodwill, we recorded an impairment charge of $264.1 million. The reporting units impaired were Process, Transport and Store in the amounts of $101.5 million, $121.5 million and $41.1 million, respectively.

Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete inventories. We determine excess and obsolete inventories based on an estimate of the future demand for our products within a specified time horizon, generally 12 months. The estimates we use for future demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our demand forecast is greater than our actual demand we may be required to take additional excess inventory charges, which would decrease gross margin and net operating results. For example, as of December 31, 2008, reducing our future demand estimate to six months could decrease our current inventory valuation by approximately $10.5 million or increasing our future demand forecast to 18 months could increase our current inventory valuation by approximately $0.2 million.

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