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EXCEL - IDEA: XBRL DOCUMENT - TEKELEC | Financial_Report.xls |
EX-32.1 - EX-32.1 - TEKELEC | g24618exv32w1.htm |
EX-31.2 - EX-31.2 - TEKELEC | g24618exv31w2.htm |
EX-31.1 - EX-31.1 - TEKELEC | g24618exv31w1.htm |
EX-10.1 - EX-10.1 - TEKELEC | g24618exv10w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-15135
(Exact name of registrant as specified in its charter)
California | 95-2746131 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
5200 Paramount Parkway
Morrisville, North Carolina 27560
(Address and zip code of principal executive offices)
Morrisville, North Carolina 27560
(Address and zip code of principal executive offices)
(919) 460-5500
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 28, 2010, there were 68,585,311 shares of the registrants common stock, without par
value, outstanding.
TEKELEC
TABLE OF CONTENTS
FORM 10-Q
TABLE OF CONTENTS
FORM 10-Q
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TEKELEC
Unaudited
Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Thousands, except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 222,715 | $ | 277,259 | ||||
Trading securities, at fair value |
| 81,788 | ||||||
Put right, at fair value |
| 11,069 | ||||||
Accounts receivable, net |
141,940 | 157,369 | ||||||
Inventories |
26,454 | 23,353 | ||||||
Income taxes receivable |
| 1,617 | ||||||
Deferred income taxes, current |
25,678 | 66,758 | ||||||
Deferred costs and prepaid commissions |
42,573 | 56,645 | ||||||
Prepaid expenses |
6,916 | 7,007 | ||||||
Other current assets |
4,064 | 1,943 | ||||||
Total current assets |
470,340 | 684,808 | ||||||
Property and equipment, net |
37,842 | 35,267 | ||||||
Deferred income tax assets, net, noncurrent |
59,342 | 39,153 | ||||||
Other assets |
1,480 | 1,661 | ||||||
Goodwill |
136,143 | 42,102 | ||||||
Intangible assets, net |
100,306 | 31,017 | ||||||
Total assets |
$ | 805,453 | $ | 834,008 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 18,102 | $ | 28,114 | ||||
Accrued expenses |
14,554 | 25,372 | ||||||
Accrued compensation and related expenses |
22,072 | 40,980 | ||||||
Current portion of deferred revenues |
117,403 | 149,065 | ||||||
Income taxes payable, current |
1,116 | | ||||||
Total current liabilities |
173,247 | 243,531 | ||||||
Deferred income tax liabilities, noncurrent |
6,114 | 5,477 | ||||||
Long-term portion of deferred revenues |
6,058 | 5,590 | ||||||
Other long-term liabilities |
5,517 | 4,863 | ||||||
Total liabilities |
190,936 | 259,461 | ||||||
Commitments and Contingencies (Note 10) |
||||||||
Shareholders equity: |
||||||||
Common stock, without par value, 200,000,000 shares authorized;
68,583,068 and 67,382,600 shares issued and outstanding, respectively |
348,801 | 330,909 | ||||||
Retained earnings |
264,826 | 241,820 | ||||||
Accumulated other comprehensive income |
890 | 1,818 | ||||||
Total shareholders equity |
614,517 | 574,547 | ||||||
Total liabilities and shareholders equity |
$ | 805,453 | $ | 834,008 | ||||
See notes to unaudited condensed consolidated financial statements.
2
Table of Contents
TEKELEC
Unaudited
Condensed Consolidated Statements of Operations
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Thousands, except per share data) | ||||||||||||||||
Revenues |
$ | 108,305 | $ | 114,914 | $ | 333,803 | $ | 345,755 | ||||||||
Cost of sales: |
||||||||||||||||
Cost of goods sold |
40,773 | 37,064 | 115,963 | 113,777 | ||||||||||||
Amortization of intangible assets |
7,594 | 1,567 | 13,094 | 4,599 | ||||||||||||
Total cost of sales |
48,367 | 38,631 | 129,057 | 118,376 | ||||||||||||
Gross profit |
59,938 | 76,283 | 204,746 | 227,379 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
24,094 | 24,200 | 68,666 | 75,603 | ||||||||||||
Sales and marketing |
20,192 | 17,168 | 55,858 | 51,574 | ||||||||||||
General and administrative |
13,219 | 13,148 | 39,176 | 40,288 | ||||||||||||
Amortization of intangible assets |
1,613 | 327 | 2,864 | 960 | ||||||||||||
Acquisition-related expenses |
407 | | 2,891 | | ||||||||||||
Total operating expenses |
59,525 | 54,843 | 169,455 | 168,425 | ||||||||||||
Income from operations |
413 | 21,440 | 35,291 | 58,954 | ||||||||||||
Other expense, net |
(1,073 | ) | (10,666 | ) | (2,932 | ) | (13,287 | ) | ||||||||
Income (loss) from operations before provision for
(benefit from) income taxes |
(660 | ) | 10,774 | 32,359 | 45,667 | |||||||||||
Provision for (benefit from) income taxes |
(526 | ) | 1,373 | 9,353 | 14,148 | |||||||||||
Net income (loss) |
$ | (134 | ) | $ | 9,401 | $ | 23,006 | $ | 31,519 | |||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | | $ | 0.14 | $ | 0.34 | $ | 0.47 | ||||||||
Diluted |
| 0.14 | 0.33 | 0.47 | ||||||||||||
Weighted average number of shares outstanding: |
||||||||||||||||
Basic |
68,526 | 67,215 | 68,179 | 66,748 | ||||||||||||
Diluted |
68,526 | 68,022 | 68,856 | 67,465 |
See notes to unaudited condensed consolidated financial statements.
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Table of Contents
TEKELEC
Unaudited
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Thousands) | ||||||||||||||||
Net income (loss) |
$ | (134 | ) | $ | 9,401 | $ | 23,006 | $ | 31,519 | |||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation adjustments |
9,501 | 1,951 | (928 | ) | 2,382 | |||||||||||
Comprehensive income |
$ | 9,367 | $ | 11,352 | $ | 22,078 | $ | 33,901 | ||||||||
See notes to unaudited condensed consolidated financial statements.
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TEKELEC
Unaudited
Condensed Consolidated Statements of Cash Flows
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(Thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 23,006 | $ | 31,519 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Impairment of investment in privately-held company |
| 13,587 | ||||||
Gain on investments carried at fair value, net |
(118 | ) | (1,723 | ) | ||||
Provision for doubtful accounts and sales returns |
1,934 | 1,494 | ||||||
Provision for warranty |
(1,305 | ) | 5,000 | |||||
Inventory write downs |
3,164 | 4,738 | ||||||
Loss on disposal of fixed assets |
51 | 64 | ||||||
Depreciation |
12,383 | 13,966 | ||||||
Amortization of intangible assets |
15,958 | 5,559 | ||||||
Amortization, other |
612 | 562 | ||||||
Deferred income taxes |
6,925 | 4,559 | ||||||
Stock-based compensation |
9,914 | 10,275 | ||||||
Excess tax benefits from stock-based compensation |
(872 | ) | (778 | ) | ||||
Changes in operating assets and liabilities, net of effect of acquisitions: |
||||||||
Accounts receivable |
20,112 | 60,322 | ||||||
Inventories |
(5,660 | ) | (10,593 | ) | ||||
Deferred costs |
15,889 | 7,272 | ||||||
Prepaid expenses |
56 | 1,017 | ||||||
Other current assets |
545 | (284 | ) | |||||
Accounts payable |
(16,461 | ) | (2,859 | ) | ||||
Accrued expenses |
(10,118 | ) | (11,963 | ) | ||||
Accrued compensation and related expenses |
(20,062 | ) | (7,503 | ) | ||||
Deferred revenues |
(39,079 | ) | (69,498 | ) | ||||
Income taxes receivable |
1,617 | (1,725 | ) | |||||
Income taxes payable |
1,711 | (6,080 | ) | |||||
Total adjustments |
(2,804 | ) | 15,409 | |||||
Net cash provided by operating activities continuing operations |
20,202 | 46,928 | ||||||
Net cash used in operating activities discontinued operations |
| (184 | ) | |||||
Net cash provided by operating activities |
20,202 | 46,744 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sales and maturities of investments |
92,975 | 16,622 | ||||||
Acquisition of Camiant and Blueslice, net of cash acquired |
(161,953 | ) | | |||||
Purchases of property and equipment |
(14,060 | ) | (14,563 | ) | ||||
Net cash provided by (used in) investing activities |
(83,038 | ) | 2,059 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from issuances of common stock |
10,892 | 9,707 | ||||||
Payments of net share-settled payroll taxes related to equity awards |
(2,914 | ) | (2,121 | ) | ||||
Excess tax benefits from stock-based compensation |
872 | 778 | ||||||
Net cash provided by financing activities |
8,850 | 8,364 | ||||||
Effect of exchange rate changes on cash |
(558 | ) | (58 | ) | ||||
Net change in cash and cash equivalents |
(54,544 | ) | 57,109 | |||||
Cash and cash equivalents, beginning of period |
277,259 | 209,441 | ||||||
Cash and cash equivalents, end of period |
$ | 222,715 | $ | 266,550 | ||||
See notes to unaudited condensed consolidated financial statements.
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Note 1 Basis of Presentation and Changes in Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Tekelec and our wholly owned subsidiaries. All significant intercompany accounts and transactions
have been eliminated. The accompanying unaudited condensed consolidated financial statements have
been prepared on substantially the same basis as the audited consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2009. Certain
information and footnote disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles in the United States have been condensed
or omitted pursuant to the instructions for Form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of our consolidated financial condition and consolidated results of operations.
The results of operations for the current interim period are not necessarily indicative of results
for the current year. Certain prior period amounts have been reclassified in order to conform to
the current periods presentation.
We operate under a thirteen-week calendar quarter. For financial statement presentation
purposes, the reporting periods are referred to as ended on the last calendar day of the quarter.
The accompanying unaudited condensed consolidated financial statements for the three and nine
months ended September 30, 2010 and 2009 are for the thirteen and thirty-nine weeks ended October
1, 2010 and October 2, 2009, respectively.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended December 31, 2009 and the
notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2009.
Revenue Recognition for Arrangements with Multiple Deliverables
In September 2009, the Financial Accounting Standards Board (FASB) amended the accounting
standards for revenue recognition to remove tangible products containing software components and
non-software components that function together to deliver the products essential functionality
from the scope of industry-specific software revenue recognition guidance. As a result, these
arrangements are accounted for in accordance with the new, non-software guidance for arrangements
with multiple deliverables.
The FASB also amended the accounting standards for revenue recognition for arrangements with
multiple deliverables. The new authoritative guidance for arrangements with multiple deliverables
requires that arrangement consideration be allocated at the inception of an arrangement to all
deliverables using the relative selling price method. It also establishes a selling price
hierarchy for determining the selling price of a deliverable, which includes: (i) vendor-specific
objective evidence (VSOE) if available; (ii) third-party evidence (TPE) if vendor-specific
objective evidence is not available; and (iii) best estimated selling price (BESP) if neither
vendor-specific nor third-party evidence is available. The new guidance eliminates the residual
method of allocation for multiple-deliverable revenue arrangements which we used historically when
we applied the software revenue recognition guidance to our multiple element arrangements.
We elected to early adopt, as permitted, the new authoritative guidance on January 1, 2010, on
a prospective basis for applicable transactions originating or materially modified after January 1,
2010. As substantially all of our telecommunications products include both tangible products and
software elements that function together to deliver the tangible products essential functionality,
the existing software revenue recognition guidance no longer applies to the majority of our
transactions. The adoption of the new non-software revenue recognition guidance did not have a
material impact on the timing, pattern, or amount of revenue recognized in the third quarter and
first nine months of 2010, primarily due to (i) a portion of the revenue for the third quarter and
first nine months of 2010 being derived from the backlog of orders which were received prior to
January 1, 2010 and therefore did not fall under the new non-software revenue recognition guidance,
and (ii) the new non-software revenue recognition guidance not differing significantly from the
software revenue recognition guidance when applied to acceptance based arrangements and
arrangements that are received and fulfilled within the same quarter. Based on currently available
information, we anticipate that the impact of adopting this guidance on revenue recognition will
not be
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material for our 2010 results. However, this assessment may change because such impacts
depend in part on terms and conditions of arrangements in effect in those future periods.
The new guidance does not generally change the units of accounting for our revenue
transactions as most of our products and services qualify as separate units of accounting.
Substantially all of our revenues are derived from sales or licensing of our (i) telecommunications
products, (ii) professional services including installation, training, and consulting services, and
(iii) warranty-related support, comprised of telephone support, repair and return of defective
products, and product updates. Our customers generally purchase a combination of our products and
services as part of a multiple deliverable arrangement, and many of our arrangements have both
software and non-software components that function together to deliver the products essential
functionality. Our arrangements generally do not include any provisions for cancellation,
termination, or refunds that would significantly impact recognized revenue.
For substantially all of our arrangements, we defer warranty and professional services
revenue, and recognize revenue for all products in an arrangement when persuasive evidence of an
arrangement exists and delivery of the product has occurred, provided the fee is fixed or
determinable, and collection is deemed probable as discussed in more detail below. In instances
where final acceptance of the product is based on customer specific criteria, revenue is deferred
until the earlier of the receipt of customer acceptance or the expiration of the acceptance period.
Warranty revenue is recognized ratably over the term of the standard warranty based on the number
of days of warranty coverage during each period. Professional services revenue is typically
recognized upon completion of the services for fixed-fee service arrangements, as these services
are relatively short-term in nature (typically several weeks, or in limited cases, several months).
For service arrangements that are billed on a time and materials basis, we recognize revenue as
the services are performed.
For transactions entered into prior to January 1, 2010 and not materially modified after that
date, we recognize revenue based on the existing software revenue recognition guidance,
historically referred to as SOP 97-2 Software Revenue Recognition (SOP 97-2). Under this
guidance, the entire fee from the arrangement is required to be allocated to each respective
element based on its relative selling price using VSOE. Sales of our products generally include at
least a year of warranty coverage. Since we do not sell our products separately from this warranty
coverage, and we rarely sell our products on a standalone basis, we are unable to establish VSOE
for our telecommunications products. Accordingly, we utilize the residual method to allocate
revenue to each of the elements of an arrangement. Under the residual method, we allocate the
total fee in an arrangement first to the undelivered elements (typically professional services and
warranty services) based on VSOE of those elements, and the remaining, or residual, portion of
the fee to the delivered elements (typically the product or products).
For transactions entered into after January 1, 2010, we recognize revenue based on the new
non-software revenue recognition guidance. We allocate consideration to each deliverable in an
arrangement based on its relative selling price. We follow a hierarchy to allocate the selling
price based on VSOE, then TPE and finally BESP. Because we rarely sell our products on a
stand-alone basis or without warranty coverage as discussed above, we are not able to establish
VSOE for our telecommunications products. Additionally, we generally expect that we will not be
able to establish TPE due to the nature of our products and the markets in which we compete.
Accordingly, we expect the selling price of our proprietary hardware and software products to be
based on our BESP. For third party off the shelf hardware products, we utilize TPE, as there is a
well established market price for these products. We have established VSOE for our services and
maintenance offerings and, therefore, we utilize VSOE for these elements.
We recognize revenue from our extended maintenance contracts under the existing revenue
recognition guidance as these arrangements are considered post contract support or PCS as defined
by that guidance. There would be no difference in the timing or amount of our maintenance revenues
if they were recognized under other authoritative revenue guidance.
Since the adoption of the new guidance, we have primarily used the same information used to
set pricing strategy to determine BESP. We have corroborated the BESP with our historical sales
prices, the anticipated margin on the deliverable, the selling price and profit margin for similar
deliverables and the characteristics of the varying geographical markets in which the deliverables
are sold. We plan to analyze the selling prices used in our allocation of arrangement
consideration at least semi-annually. Selling prices will be analyzed more frequently if a
significant change in our business necessitates a more timely analysis.
Each deliverable within our multiple deliverable revenue arrangements is accounted for as
a separate unit of accounting under the new guidance if both of the following criteria are met: (i)
the delivered item or items have
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value to the customer on a standalone basis; and (ii) for an
arrangement that includes a general right of return relative to the delivered item(s), delivery or
performance of the undelivered item(s) is considered probable and substantially in our control. We
consider a deliverable to have standalone value if the item is sold separately by us or another
vendor or if the item could be resold by the customer. Further, our revenue arrangements generally
do not include a general right of return relative to delivered products. Deliverables not
meeting these criteria are combined with a deliverable that does meet that criterion. The
appropriate allocation of arrangement consideration and recognition of revenue is then determined
for the combined unit of accounting.
The following table shows the total revenue for the three and nine months ended September 30,
2010 recognized according to the software and the new non-software revenue recognition guidance (in
thousands):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, 2010 | September 30, 2010 | |||||||
New non-software revenue recognition rules(1) |
$ | 36,376 | $ | 111,904 | ||||
Existing software revenue recognition rules |
71,929 | 221,899 | ||||||
Total |
$ | 108,305 | $ | 333,803 | ||||
(1) | For the reasons discussed above, the timing of the revenue recognized for the three and nine months ending September 30, 2010 would not have been materially different if we had recorded it under the existing software revenue guidance. |
The following table shows the total deferred revenue as of September 30, 2010 accounted for
according to the software and the new non-software revenue recognition guidance (in thousands):
September 30, | ||||
2010 | ||||
New non-software revenue recognition rules |
$ | 20,736 | ||
Existing software revenue recognition rules |
102,725 | |||
Total |
$ | 123,461 | ||
Recent Accounting Pronouncements
Fair Value Measurements and Disclosures. In January 2010, the FASB issued Accounting
Standards Update 2010-06 Improving Disclosures about Fair Value Measurements. This Update amends
the authoritative guidance for fair value measurements and disclosures by adding new disclosure
requirements with respect to transfers in and out of Levels 1 and 2 fair value measurements, as
well as by requiring gross basis disclosures for purchases, sales, issuances, and settlements
included in the reconciliation of Level 3 fair value measurements. This Update also amends the
authoritative guidance by providing clarifications to existing disclosure requirements. The new
disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements which are effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years. Early adoption is permitted.
We adopted this new guidance, including the guidance related to the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements, on January 1, 2010. The adoption of this guidance did not have a material impact on
our financial position or results of operations.
Disclosure Requirements related to Financing Receivables and Allowance for Credit Losses. In
July 2010, the FASB issued Accounting Standard Update No. 2010-10 Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses, which updates the
authoritative guidance for receivables. The new disclosures will require disaggregated information
related to financing receivables and will include for each class of financing receivables, among
other things: a roll forward for the allowance for credit losses, credit quality information,
impaired loan information, modification information, and non-accrual and past-due information. The
disclosures as of the end of a reporting period are effective for interim and annual reporting
periods ending on or after December 15, 2010. The disclosures about activity that occurs during a
reporting period are effective for interim and annual reporting periods beginning on or after
December 15, 2010. Accordingly, we will implement the guidance for period-end disclosures
effective as of the end of our fourth quarter of 2010, with the guidance for
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period activity disclosures to be implemented during our first quarter of 2011. We believe the
adoption of this update will primarily result in increased disclosures, but will not have a
material impact on our financial position or results of operations.
Note 2 Acquisitions
In the second quarter of 2010 we completed the acquisition of Camiant, Inc. (Camiant) and
Blueslice Networks, Inc. (Blueslice) for cash consideration of $127.0 million and $35.0 million,
respectively, for an aggregate of $162.0 million. We have included the results of operation of
these acquisitions in our consolidated results from the date of acquisition. Expenses associated
with these acquisitions consist primarily of legal, employee related and other professional fees
and totaled $0.4 million and $2.9 million during the three and nine months ended September 30,
2010, respectively. These costs were expensed as incurred and are recorded separately in the
accompanying unaudited consolidated statement of operations under the heading Acquisition-related
expenses.
Acquisition of Camiant
On May 7, 2010, we completed the acquisition of Camiant, a provider of real time policy
control solutions, through a merger with our newly formed wholly-owned subsidiary after which
Camiant was the surviving entity. Camiants multimedia policy solutions allow service providers
to leverage and monetize their network investments by enabling them to allocate network resources
and create services for subscriber preferences in such areas as quality of service and bandwidth
utilization. The products are designed to enable service providers to dynamically manage their
networks, prioritize traffic, and prevent network disruptions.
Under the terms of the merger, we acquired 100% of Camiants stock, vested stock options and
warrants for total cash consideration of $128.9 million, of which $12.5 million was placed into
escrow with a third party escrow agent for fifteen months for the satisfaction of potential
indemnification claims we have the right to make under the merger agreement. Total cash
consideration, net of $2.0 million of cash acquired from Camiant, was $127.0 million.
The fair values of the assets acquired and liabilities assumed were determined primarily using
the income approach, which determines the fair value for the asset based on the present value of
cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate
of return that reflects the relative risk of achieving the cash flow and the time value of money.
Projected cash flows for each asset considered multiple factors, including current revenue from
existing customers; analysis of expected revenue and attrition trends; reasonable contract renewal
assumptions from the perspective of a marketplace participant; expected profit margins giving
consideration to marketplace synergies; and required returns to contributory assets.
The transaction resulted in recording identifiable intangible assets and goodwill at a fair
value of $144.2 million as follows (in thousands):
Total consideration |
$ | 128,933 | ||
Less: Camiant tangible net assets acquired |
(11,882 | ) | ||
Add: Deferred tax liability |
27,121 | |||
Total fair value of Camiant intangible assets and goodwill |
$ | 144,172 | ||
The acquisition resulted in the recognition of a deferred tax liability of approximately $27.1
million related to accounting and tax basis differences in the acquired intangible assets.
Additionally, in determining the purchase price allocation, liabilities were recorded for existing
uncertain tax positions in the aggregate amount of $2.5 million and will be added to our annual
tabular reconciliation.
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The tangible assets and liabilities acquired were as follows (in thousands):
Cash and investments |
$ | 1,959 | ||
Accounts receivable(1) |
1,862 | |||
Inventories |
350 | |||
Prepaid expenses |
330 | |||
Deferred tax asset |
16,651 | |||
Deferred costs |
655 | |||
Property and equipment, net |
979 | |||
Other long term assets |
22 | |||
Total tangible assets |
22,808 | |||
Accounts payable and accrued expenses |
(6,682 | ) | ||
Deferred revenue |
(4,244 | ) | ||
Total liabilities |
(10,926 | ) | ||
Net tangible assets |
$ | 11,882 | ||
(1) | The gross contractual amount of accounts receivable was $2.3 million with the estimated fair value being $1.9 million. |
The remaining purchase price was allocated among the Camiant intangible assets and goodwill
acquired based on their estimated fair values determined as discussed above and was as follows (in
thousands):
Amortizable intangible assets |
$ | 69,190 | ||
In-process research and development |
2,180 | |||
Goodwill |
72,802 | |||
Total fair value of Camiant intangible assets and goodwill |
$ | 144,172 | ||
This purchase price allocation is preliminary as we are in the process of gathering certain
information that may affect the value of the acquired tax attributes of Camiant, which would
require an adjustment with the offset recorded in goodwill. We expect to finalize these matters in
2010.
Based on the purchase price allocation, $2.2 million of the purchase price represented
research and development activities (IPR&D) that had not yet reached technological feasibility.
IPR&D is considered an indefinite lived intangible asset until the completion or abandonment of the
associated research and development efforts. Prior to completion or abandonment, we will not
record amortization but will test for impairment in accordance with the authoritative guidance for
intangibles and goodwill. Upon completion or abandonment, we will determine the useful life of the
assets and record amortization expense over this useful life. During the third quarter of 2010, the
completion of the underlying development was achieved with respect to certain projects previously
categorized as IPR&D with indefinite lives. This resulted in a transfer of $1.7 million from IPR&D
with indefinite lives acquired in this transaction to purchased technology.
The identifiable amortizable intangible assets created as a result of the acquisition will be
amortized over the greater of the straight line method or a manner that better reflects the
utilization of their economic benefit (e.g., the estimated customer attrition rates).
Estimated | ||||||||
Asset | Weighted | |||||||
Amount | Average Life | |||||||
(in thousands) | in Years | |||||||
Existing technology |
$ | 44,000 | 5 | |||||
Customer relationships |
13,000 | 5 | ||||||
Contract backlog |
6,900 | 1.5 | ||||||
Non-compete agreements |
4,090 | 2 | ||||||
Trademarks and trade names |
1,200 | 3 | ||||||
$ | 69,190 | 4.4 | ||||||
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As noted above, the primary asset acquired from Camiant was the core technology used in
the policy management solution. In addition, we obtained the significant expertise of Camiants
management and technical employees. These factors contributed to a purchase price in excess of
fair market value of Camiants net tangible and intangible assets acquired, and, as a result, we
have recorded goodwill in the amount of $72.8 million in connection with this transaction. The
goodwill and the identifiable amortizable intangible assets are not deductible for income tax
purposes.
Acquisition of Blueslice
On May 5, 2010 we completed the acquisition of all issued and outstanding shares of capital
stock of Blueslice, a provider of next generation subscriber data management solutions, through a
share purchase agreement with Tekelec Canada Inc., our wholly-owned subsidiary, and the various
owners of all of the issued and outstanding shares of capital stock of Blueslice. The aggregate
purchase price of $35.0 million consisted of (i) aggregate cash of approximately $33.5 million paid
to Blueslice stockholders and/or their designees, and (ii) the payment of indebtedness of Blueslice
in the amount of $1.5 million. Upon the closing of the transaction, $5.0 million of this
consideration was placed in escrow with a third party escrow agent for fifteen months for the
satisfaction of potential indemnification claims we have the right to make under the share purchase
agreement. Blueslices solution centralizes cross-domain subscriber information in a back-end
database, supporting multiple front-end applications, including our next-generation Home Location
Register, Home Subscriber Server, SIP Application Server, and AAA Server.
The fair values of the assets acquired and liabilities assumed were determined primarily using
the income approach, which determines the fair value for the asset based on the present value of
cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate
of return that reflects the relative risk of achieving the cash flow and the time value of money.
Projected cash flows for each asset considered multiple factors, including current revenue from
existing customers; analysis of expected revenue and attrition trends; reasonable contract renewal
assumptions from the perspective of a marketplace participant; expected profit margins giving
consideration to marketplace synergies; and required returns to contributory assets.
The transaction resulted in recording intangible assets and goodwill at a fair value of $36.8
million as follows (in thousands):
Total consideration |
$ | 34,979 | ||
Less: Blueslice tangible net assets acquired |
(2,331 | ) | ||
Add: Deferred tax liability |
4,105 | |||
Total fair value of Blueslice intangible assets and goodwill |
$ | 36,753 | ||
The acquisition resulted in the recognition of a deferred tax liability of approximately $4.1
million related to accounting and tax basis differences in the acquired intangible assets.
Additionally, in determining the purchase price allocation, liabilities were recorded for existing
uncertain tax positions in the amount of $4.0 million and will be added to our annual tabular
reconciliation.
The tangible assets and liabilities acquired were as follows (in thousands):
Accounts receivable(1) |
$ | 1,425 | ||
Inventories |
14 | |||
Prepaid expenses and other current assets |
2,525 | |||
Deferred tax asset |
194 | |||
Deferred costs |
276 | |||
Other current assets |
52 | |||
Property and equipment, net |
86 | |||
Other long term assets |
9 | |||
Total tangible assets |
4,581 | |||
Accounts payable and accrued expenses |
(845 | ) | ||
Deferred revenue |
(1,405 | ) | ||
Total liabilities |
(2,250 | ) | ||
Net tangible assets |
$ | 2,331 | ||
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(1) | The gross contractual amount of accounts receivable was $1.5 million with the estimated fair value being $1.4 million. |
The remaining purchase price was allocated among the Blueslice identifiable intangible assets
and goodwill acquired based on their estimated fair values determined as discussed above and was as
follows (in thousands):
Amortizable intangible assets |
$ | 13,930 | ||
In-process research and development |
730 | |||
Goodwill |
22,093 | |||
Total fair value of Blueslice intangible assets and goodwill |
$ | 36,753 | ||
Based on the purchase price allocation, $0.7 million of the purchase price represented
research and development activities (IPR&D) that had not yet reached technological feasibility at
the date of acquisition and, therefore was considered an indefinite lived intangible asset
accounted for as discussed above. During the third quarter of 2010, the completion of the
underlying development was achieved with respect to certain IPR&D projects previously categorized
as IPR&D with indefinite lives. This resulted in a transfer of $0.3 million from IPR&D with
indefinite lives acquired in this transaction to purchased technology.
The identifiable amortizable intangible assets created as a result of the acquisition will be
amortized over the greater of the straight line method or a manner that better reflects the
utilization of their economic benefit (e.g., the estimated customer attrition rates).
Estimated | ||||||||
Asset | Weighted | |||||||
Amount | Average Life | |||||||
(in thousands) | in Years | |||||||
Existing technology |
$ | 11,900 | 5 | |||||
Customer relationships |
1,100 | 5 | ||||||
Contract backlog |
600 | 1 | ||||||
Non-compete agreements |
290 | 2 | ||||||
Trademarks and trade names |
40 | 3 | ||||||
$ | 13,930 | 4.8 | ||||||
As noted above, the primary asset acquired from Blueslice was the core technology used in
the subscriber data management solution. In addition, we obtained the significant expertise of
Blueslices technical employees, which we believe we will be able to leverage in maximizing the
benefit of the acquired technology and in assisting us with the development of new technologies.
These factors contributed to a purchase price in excess of the fair market value of Blueslices net
tangible and intangible assets acquired, and, as a result, we have recorded goodwill in the amount
of $22.1 million in connection with this transaction. The goodwill and the identifiable
amortizable intangible assets are not deductible for income tax purposes.
Select Pro-Forma Financial Information
The following represents our unaudited condensed pro-forma financial results as if the
acquisitions of Camiant and Blueslice had occurred as of the beginning of the earliest period
presented. Unaudited condensed pro-forma results are based upon accounting estimates and judgments
that we believe are reasonable. The condensed pro-forma results are not necessarily indicative of
the actual results of our operations had the acquisitions occurred at the beginning of the periods
presented, nor does it purport to represent the results of operations for future periods. For
example, included in these pro-forma results is the estimated impact of intangible asset
amortization and other acquisition-related expenses on the three and nine months ended September
30, 2009 periods. Based on the estimated useful lives of certain intangible assets and how the
acquisition-related
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expenses are estimated to be incurred, pro-forma amounts presented in the table below for the three
and nine months ended September 30, 2010 include less expense related to these items than our
actual results for the same periods.
Three Months | Nine Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Revenues |
$ | 108,305 | $ | 119,159 | $ | 342,269 | $ | 358,971 | ||||||||
Net Income |
$ | 2,456 | $ | 3,589 | $ | 22,415 | $ | 17,743 | ||||||||
Basic earnings per share |
$ | 0.04 | $ | 0.05 | $ | 0.33 | $ | 0.27 | ||||||||
Diluted earnings per share |
$ | 0.04 | $ | 0.05 | $ | 0.33 | $ | 0.26 |
Our actual operating results for the three and nine months ended September 30, 2010
included revenues and net loss from the acquired businesses as follows (in thousands):
Three Months Ended September 30, 2010 | ||||||||||||
Camiant | Blueslice | Total | ||||||||||
Revenues |
$ | 5,794 | $ | 374 | $ | 6,168 | ||||||
Net loss |
$ | (6,102 | ) | $ | (2,698 | ) | $ | (8,799 | ) |
Nine Months Ended September 30, 2010 | ||||||||||||
Camiant | Blueslice | Total | ||||||||||
Revenues |
$ | 6,689 | $ | 762 | $ | 7,451 | ||||||
Net loss |
$ | (9,596 | ) | $ | (4,320 | ) | $ | (13,916 | ) |
Included in our actual operating results for the three and nine months ended September
30, 2010 is $5.1 million and $8.3 million, respectively, of after tax amortization related to
acquired intangible assets.
Cash and Stock-Based Compensation Expense Related to Acquisitions
In connection with the acquisition of Camiant, we assumed unvested options to purchase
Camiants stock, which were converted into the right to receive an aggregate cash amount of $5.2
million. These rights will vest quarterly according to the original terms and vesting schedules of
the options, and contingent upon individual employees continued employment with us. Payments will
be made quarterly in arrears until such time as the rights are fully vested. The majority of the
rights will vest by the end of 2014.
In connection with the acquisition of Blueslice, we (i) entered into agreements with certain
Blueslice employees under which we agreed to pay an aggregate cash amount of $1.5 million based on
each employees completion of individual integration milestones, and (ii) granted,
performance-based restricted stock units, with an estimated fair value at the date of the grant of
approximately $2.0 million, to certain Blueslice employees. The performance-based restricted stock
units will be earned based on an individual employees achievement of individual integration
milestones, and thereafter will vest in four equal annual installments based on an individual
employees continued employment with us.
The liability related to the above cash compensation arrangements is recorded under the
Accrued compensation and related expenses heading in the accompanying unaudited condensed
consolidated balance sheet.
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The following table shows the cash and equity compensation expense recognized in the three and
nine months ended September 30, 2010 related to the agreements discussed above (in thousands):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, 2010 | September 30, 2010 | |||||||
Camiant cash compensation expense in lieu of unvested options |
$ | 1,045 | $ | 1,650 | ||||
Blueslice cash compensation expense |
954 | 1,445 | ||||||
Blueslice stock-based compensation expense |
348 | 482 | ||||||
$ | 2,347 | $ | 3,577 | |||||
We may be required to recognize future compensation expense pursuant to the above
agreements of up to $5.1 million.
Note 3 Restructuring and Other Costs
The following table provides a summary of our restructuring activities and the remaining
obligations as of September 30, 2010 (in thousands):
Severance | ||||
Costs and | ||||
Related | ||||
Benefits | ||||
Restructuring obligations, December 31, 2009 |
$ | 3,107 | ||
Cash payments |
(1,536 | ) | ||
Effect of exchange rate changes |
(92 | ) | ||
Restructuring obligations, September 30, 2010 |
$ | 1,479 | ||
Restructuring obligations are included in Accrued expenses in the accompanying
unaudited condensed consolidated balance sheets. We anticipate settling our remaining severance
obligations during 2010. This is based on our current best estimate, which could change if actual
activity differs from what is currently expected.
Note 4 Other Income and Expense
The components of Other expense, net were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest income |
$ | 28 | $ | 282 | $ | 297 | $ | 916 | ||||||||
Interest expense |
(64 | ) | (67 | ) | (185 | ) | (179 | ) | ||||||||
Impairment of investment in privately held company |
| (10,829 | ) | | (13,587 | ) | ||||||||||
Gain on investments carried at fair value, net |
| 288 | 118 | 1,723 | ||||||||||||
Foreign currency loss, net |
(790 | ) | (628 | ) | (2,230 | ) | (1,332 | ) | ||||||||
Other, net |
(247 | ) | 288 | (932 | ) | (828 | ) | |||||||||
Total other expense, net |
$ | (1,073 | ) | $ | (10,666 | ) | $ | (2,932 | ) | $ | (13,287 | ) | ||||
Note 5 Fair Value of Financial Instruments
Recurring Measurements
We measure certain financial assets and liabilities at fair value on a recurring basis. The
fair value of our cash, cash equivalents, accounts receivable and accounts payable approximate
their respective carrying amounts
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based on the liquidity and short-term nature of these instruments. The following table sets
forth our financial instruments carried at fair value as of September 30, 2010 and December 31,
2009 (in thousands):
Financial Instruments | ||||||||
Carried at Fair Value | ||||||||
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets: |
||||||||
Cash and cash equivalents |
$ | 222,715 | $ | 277,259 | ||||
Trading securities |
| 81,788 | ||||||
Put right |
| 11,069 | ||||||
Total assets |
$ | 222,715 | $ | 370,116 | ||||
The fair value of our financial instruments as of September 30, 2010 is based on quoted
prices in active markets for identical items and falls under Level 1 of the fair value hierarchy as
defined in the authoritative guidance.
During the three months ended September 30, 2010, none of our financial assets fell into the
Level 3 category of the fair value hierarchy. The following tables set forth a summary of changes
in the fair value of our Level 3 financial assets for the nine months ended September 30, 2010 (in
thousands):
Level 3 | ||||||||
Financial Assets | ||||||||
Auction Rate | Put | |||||||
Securities | Right | |||||||
Balance, December 31, 2009 |
$ | 81,788 | $ | 11,069 | ||||
Transfers to Level 3 |
| | ||||||
Purchases and receipts |
| | ||||||
Redemptions |
(92,975 | ) | | |||||
Realized gain on sales |
| | ||||||
Gains (losses) on securities held at period end or redeemed (1) |
11,187 | (11,069 | ) | |||||
Balance, September 30, 2010 |
$ | | $ | | ||||
(1) | Included in Other expense, net in the accompanying unaudited consolidated condensed statements of operations. |
Trading Securities and Put Right
As of December 31, 2009, we held $81.8 million of Auction Rate Securities (ARS) recorded at
fair value, which represented a decline of $11.2 million below our cost basis, and an associated
UBS Put right (the Put right), recorded at an estimated fair value of $11.1 million. Prior to
and throughout the second quarter of 2010, issuers called certain securities which reduced the
investment in our ARS portfolio. On June 30, 2010, we exercised our Put right requiring UBS to
purchase the remaining balance of our ARS portfolio at par value plus accrued interest. As a
result of the issuer calls and our exercise of the Put right, we received cash proceeds of $79.6
million during the second quarter of 2010, resulting in the liquidation of our ARS portfolio.
Derivative Instruments
Our derivative instruments, which consist primarily of foreign currency forward contracts, are
recognized as assets or liabilities at fair value. These forward contracts are not formally
designated as hedges. The fair value of these contracts is based on market prices for comparable
contracts. Our foreign currency forward contracts are structured to expire on the last day of each
quarter, and we immediately enter into new contracts if necessary. Therefore, our derivative
instruments outstanding at period end are outstanding less than one full day when the reporting
period ends. Because of the short duration of these contracts, their fair value was not
significant as of September 30, 2010 and December 31, 2009.
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Nonrecurring Measurements
We measure certain assets, accounted for under the cost method (such as our former investments
in privately held companies), at fair value on a nonrecurring basis. These assets are recognized
at fair value when they are deemed to be other than temporarily impaired.
During the second and third quarters of 2009, we recorded impairment charges of $2.8 million
and $10.8 million, respectively, related to our investment in a privately held company. These
charges, which are included in Other expense, net, represented the difference between our $15.0
million cost basis in this investment and its then estimated fair value of $1.4 million as of
September 30, 2009, as we deemed the decline in the value of this asset to be other-than-temporary.
In the fourth quarter of 2009, we sold our investment for its adjusted carrying value of $1.4
million.
We measure the fair value of our nonfinancial assets and liabilities, including but not
limited to, intangible assets, goodwill and restructuring obligations accounted for under the
authoritative guidance for exit or disposal cost obligations. We perform our annual impairment
test for goodwill on October 1st of each fiscal year and more frequently upon the
occurrence of certain events in accordance with the provisions of the authoritative guidance for
intangible assets and goodwill. As of the end of the third quarter of 2010, the results of our
annual impairment test did not indicate the goodwill was impaired, nor were there any other known
triggering events that would indicate a potential impairment of the goodwill. Nothing has come to
our attention that would require us to perform an impairment test of our intangible assets during
the first nine months of 2010. Accordingly, as of September 30, 2010, we do not have any required
non-recurring measurement disclosures for these nonfinancial assets.
Note 6 Derivative Instruments and Hedging Activities
We operate internationally and thus are exposed to potential adverse changes in currency
exchange rates. We use derivative instruments (principally forward contracts to exchange foreign
currency) as a means of reducing our exposure to foreign currency rate changes on receivables and
other net monetary assets denominated in foreign currencies. The foreign currency forward
contracts require us to exchange currencies at rates agreed upon at the contracts inception. In
addition to these foreign exchange contracts, certain of our customer contracts contain provisions
that require our customers to assume the foreign currency exchange risk related to the applicable
transactions. The objective of these contracts is to reduce or eliminate, and efficiently manage,
the economic impact of currency exchange rate movements on our operating results as effectively as
possible. These contracts reduce the exposure to fluctuations in exchange rate movements because
the gains and losses associated with foreign currency balances and transactions are generally
offset with the gains and losses on the related contracts.
Derivative instruments are recognized as either assets or liabilities and are measured at fair
value. The accounting for changes in the fair value of a derivative instrument depends on the
intended use of the derivative instrument and the resulting designation. We do not designate our
foreign currency exchange contracts as accounting hedges as defined by authoritative guidance for
derivatives and hedging, and, accordingly, we adjust these contracts to fair value through
operations (i.e., included in Other income (expense), net). We do not hold or issue financial
instruments for speculative or trading purposes.
We continually monitor our exposure to fluctuations in foreign currency exchange rates. As we
have expanded internationally, an increasing proportion of our revenues, costs and operating
expenses are denominated in foreign currencies, resulting in an increase in our foreign currency
exchange rate exposure. We enter into multiple forward contracts throughout a given month to
mitigate our changing exposure to foreign currency exchange rate fluctuations principally related
to receivables generated from sales denominated in foreign currencies and our remeasurements of
international subsidiaries. Our exposure fluctuates as we generate new sales in foreign currencies
and as existing receivables related to sales in foreign currencies are collected. Additionally, our
exposure related to remeasurements of our subsidiaries financial statements fluctuates with the
underlying activity in those entities. Our foreign currency forward contracts generally will have
terms of one month or less and typically mature on the last day of any given period. We then
immediately enter into new foreign currency forward contracts, if necessary.
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The following table shows the notional contract values in local currency and U.S. Dollars
of the foreign exchange forward contracts outstanding as of September 30, 2010, grouped by the
underlying foreign currency:
Contracts Outstanding as of September 30, 2010 | ||||||||||||
In Local Currency | In US Dollars | |||||||||||
Euros (EUR) (contracts to buy EUR/sell US$) |
(EUR) | (35,125,000 | ) | $ | (48,440,888 | ) | ||||||
Indian rupees (INR) (contracts to sell INR/buy US$) |
(INR) | 312,419,000 | 6,971,556 | |||||||||
Canadian dollars (CAD) (contracts to sell CAD/buy US$) |
(CAD) | 423,000 | 414,421 | |||||||||
Singapore dollars (SGD) (contracts to buy SGD/sell US$) |
(SGD) | (505,000 | ) | (385,202 | ) | |||||||
Malaysian ringgits (MYR) (contracts to sell MYR/buy US$) |
(MYR) | 5,763,000 | 1,858,912 | |||||||||
Australian dollars (AUD) (contracts to sell AUD/buy US$) |
(AUD) | 106,000 | 102,990 | |||||||||
British pound (GBP) (contracts to sell GBP/buy US$) |
(GBP) | 116,000 | 184,127 | |||||||||
Brazilian reais (BRL) (contracts to sell BRL/buy US$) |
(BRL) | 9,634,000 | 5,459,942 | |||||||||
Taiwan dollars (TWD) (contracts to sell TWD/buy US$) |
(TWD) | 287,000 | 9,199 | |||||||||
Total |
$ | (33,824,943 | ) | |||||||||
The following tables show the average notional contract value in the underlying currency
and U.S. Dollars of foreign exchange forward contracts outstanding during the three and nine months
ended September 30, 2010, grouped by the underlying foreign currency:
Average Contracts Outstanding | ||||||||||||
during the three months ended September 30, 2010 | ||||||||||||
In Local Currency | In US Dollars | |||||||||||
Euros (EUR) (contracts to buy EUR/sell US$) |
(EUR) | (30,069,319 | ) | $ | (38,376,450 | ) | ||||||
Indian rupees (INR) (contracts to sell INR/buy US$) |
(INR) | 423,764,066 | 9,011,228 | |||||||||
British pound (GBP) (contracts to sell GBP/buy US$) |
(GBP) | 36,626 | 56,917 | |||||||||
Singapore dollars (SGD) (contracts to sell SGD/buy US$) |
(SGD) | 323,000 | 236,251 | |||||||||
Malaysian ringgits (MYR) (contracts to sell MYR/buy US$) |
(MYR) | 5,751,769 | 1,800,710 | |||||||||
Australian dollars (AUD) (contracts to sell AUD/buy US$) |
(AUD) | 436,462 | 380,953 | |||||||||
Canadian dollars (CAD) (contracts to sell CAD/buy US$) |
(CAD) | 1,503,604 | 1,431,100 | |||||||||
Brazilian reais (BRL) (contracts to sell BRL/buy US$) |
(BRL) | 6,245,297 | 3,516,861 | |||||||||
Total |
$ | (21,942,430 | ) | |||||||||
Average Contracts Outstanding | ||||||||||||
during the nine months ended September 30, 2010 | ||||||||||||
In Local Currency | In US Dollars | |||||||||||
Euros (EUR) (contracts to buy EUR/sell US$) |
(EUR) | (27,098,719 | ) | $ | (35,824,317 | ) | ||||||
Indian rupees (INR) (contracts to sell INR/buy US$) |
(INR) | 417,429,416 | 8,991,454 | |||||||||
British pound (GBP) (contracts to sell GBP/buy US$) |
(GBP) | 136,248 | 207,895 | |||||||||
Singapore dollars (SGD) (contracts to sell SGD/buy US$) |
(SGD) | 330,788 | 238,217 | |||||||||
Malaysian ringgits (MYR) (contracts to sell MYR/buy US$) |
(MYR) | 5,831,828 | 1,772,470 | |||||||||
Australian dollars (AUD) (contracts to sell AUD/buy US$) |
(AUD) | 457,135 | 406,943 | |||||||||
Canadian dollars (CAD) (contracts to sell CAD/buy US$) |
(CAD) | 1,050,901 | 996,429 | |||||||||
Brazilian reais (BRL) (contracts to sell BRL/buy US$) |
(BRL) | 8,343,518 | 4,602,243 | |||||||||
Total |
$ | (18,608,666 | ) | |||||||||
As of September 30, 2010, all of our derivative instruments are maintained with Wells
Fargo Bank and potentially subject us to a concentration of credit risk, which may result in credit
related losses in the event of the banks nonperformance. We mitigate this risk by monitoring
Wells Fargos credit ratings published by major rating firms (Fitch, Standard & Poors, and
Moodys). In addition, we monitor Wells Fargos Credit Default Swap spread on a quarterly basis to
assess the banks default risk relative to its peers.
As discussed above, our foreign currency forward contracts are structured to expire on the
last day of the accounting period, and we immediately enter into new contracts if necessary.
Therefore, our derivative
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instruments outstanding at period end are outstanding less than one full day when the reporting
period ends, and, accordingly, their fair value was not significant as of September 30, 2010 and
December 31, 2009.
The tables below provide a summary of the effect of derivative instruments on the unaudited
condensed consolidated statements of operations for the three and nine months ended September 30,
2010 and 2009 (in thousands):
Amount of Gain or (Loss) | ||||||||||||
Recognized in Results | ||||||||||||
Location of Gain or (Loss) | of Operations | |||||||||||
Derivatives Not Designated | Recognized in Results | Three months ended September 30, | ||||||||||
as Hedging Instruments | of Operations | 2010 | 2009 | |||||||||
Foreign currency forward contracts |
Other expense, net | $ | 2,568 | $ | (986 | ) |
Amount of Loss | ||||||||||||
Recognized in Results | ||||||||||||
Location of Loss | of Operations | |||||||||||
Derivatives Not Designated | Recognized in Results | Nine months ended September 30, | ||||||||||
as Hedging Instruments | of Operations | 2010 | 2009 | |||||||||
Foreign currency forward contracts |
Other expense, net | $ | (2,498 | ) | $ | (814 | ) |
The above gains or losses on the derivative instruments include the cost of entering into
the contracts (i.e. forward points), and are generally offset or partially offset by a
corresponding foreign currency gain or loss on the underlying hedged transaction (e.g., customer
accounts receivable). The gain or loss on both the derivative instrument and the corresponding
hedged transaction are reflected in Other expense, net in the accompanying unaudited condensed
consolidated statements of operations.
Note 7 Financial Statement Details
Accounts Receivable, net
Accounts receivable, net consists of the following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Accounts receivable |
$ | 151,584 | $ | 165,572 | ||||
Less: Allowance for doubtful accounts and sales returns |
9,644 | 8,203 | ||||||
$ | 141,940 | $ | 157,369 | |||||
Inventories
Inventories consist of the following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 22,253 | $ | 16,367 | ||||
Work in process |
2 | 132 | ||||||
Finished goods |
4,199 | 6,854 | ||||||
Total inventories |
$ | 26,454 | $ | 23,353 | ||||
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Warranty liability reserve
An analysis of changes in the liability for product warranty costs for the three and nine
months ended September 30, 2010 is as follows (in thousands):
Balance at June 30, 2010 |
$ | 2,862 | ||
Provision, net |
(958 | ) | ||
Expenditures |
(140 | ) | ||
Balance at September 30, 2010 |
$ | 1,764 | ||
Balance at December 31, 2009 |
$ | 3,592 | ||
Provision, net |
(1,305 | ) | ||
Expenditures |
(523 | ) | ||
Balance at September 30, 2010 |
$ | 1,764 | ||
During the first nine months of 2009, we incurred a $5.0 million warranty charge related
to a specific product issue. Based on actual results in resolving the issue, we have subsequently
updated our estimates and have reduced the warranty accrual in 2010 by approximately $1.3 million,
with the majority of this reduction occurring in the third quarter of 2010.
Note 8 Intangible Assets and Goodwill
Intangible Assets
The following table represents the details of intangible assets (in thousands):
Accumulated | ||||||||||||
September 30, 2010 | Gross | Amortization | Net | |||||||||
Intangible assets with finite lives: |
||||||||||||
Purchased technology |
$ | 100,630 | $ | (25,130 | ) | $ | 75,500 | |||||
Customer relationships |
18,800 | (2,812 | ) | 15,988 | ||||||||
Contract backlog |
7,500 | (3,916 | ) | 3,584 | ||||||||
Non-compete agreements |
4,380 | (868 | ) | 3,512 | ||||||||
Trademarks and trade names |
1,240 | (164 | ) | 1,076 | ||||||||
Gross intangible assets with finite lives |
132,550 | (32,890 | ) | 99,660 | ||||||||
Effect of exchange rate changes |
(20 | ) | (234 | ) | (254 | ) | ||||||
Total intangible assets with finite lives |
132,530 | (33,124 | ) | 99,406 | ||||||||
IPR&D, with indefinite lives |
900 | | 900 | |||||||||
Total intangible assets |
$ | 133,430 | $ | (33,124 | ) | $ | 100,306 | |||||
Accumulated | ||||||||||||
December 31, 2009 | Gross | Amortization | Net | |||||||||
Intangible assets with finite lives: |
||||||||||||
Purchased technology |
$ | 42,490 | $ | (15,933 | ) | $ | 26,557 | |||||
Customer relationships |
5,730 | (2,009 | ) | 3,721 | ||||||||
Gross intangible assets with finite lives |
48,220 | (17,942 | ) | 30,278 | ||||||||
Effect of exchange rate changes |
1,079 | (340 | ) | 739 | ||||||||
Total intangible assets with finite lives |
49,299 | (18,282 | ) | 31,017 | ||||||||
Total intangible assets |
$ | 49,299 | $ | (18,282 | ) | $ | 31,017 | |||||
Under recently revised accounting guidance for business combinations, IPR&D is
capitalized at fair value as an intangible asset with an indefinite life and assessed for
impairment until completion of the underlying development. Upon the completion of the underlying
development, the capitalized IPR&D asset will be amortized
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over its estimated useful life. Prior
to the adoption of the revised accounting guidance, IPR&D was expensed upon acquisition.
During the third quarter of 2010, the completion of the underlying development was achieved
with respect to
certain IPR&D projects previously categorized as IPR&D with indefinite lives, and $2.0 million
was transferred from IPR&D with indefinite lives to purchased technology with an estimated useful
life of five years.
The estimated future amortization expense of purchased intangible assets with finite lives as
of September 30, 2010 is as follows:
For the Years Ending December 31, | ||||
2010 (remaining three months) |
$ | 7,731 | ||
2011 |
30,111 | |||
2012 |
22,140 | |||
2013 |
16,784 | |||
2014 |
16,335 | |||
Thereafter |
6,305 | |||
Total |
$ | 99,406 | ||
Goodwill
As required by the authoritative guidance for intangibles and goodwill, we do not amortize our
goodwill balances, but instead test our goodwill for impairment annually on October 1st
and more frequently upon the occurrence of certain events in accordance with the provisions of the
authoritative guidance for intangibles and goodwill. As of the end of the third quarter of 2010,
the results of our annual impairment test did not indicate the goodwill was impaired, nor were
there any other known triggering events that would indicate a potential impairment of the goodwill.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2010
are as follows (in thousands):
Balance at December 31, 2009 |
$ | 42,102 | ||
Addition due to the acquisition of Camiant |
72,802 | |||
Addition due to the acquisition of Blueslice |
22,093 | |||
Effect of exchange rate changes |
(854 | ) | ||
Balance at September 30, 2010 |
$ | 136,143 | ||
Note 9 Income Taxes
As part of the process of preparing our unaudited condensed consolidated financial statements,
we are required to estimate our full-year income and the related income tax expense in each
jurisdiction in which we operate. Changes in the geographical mix or estimated level of annual
pretax income can impact our effective tax rate or income taxes as a percentage of pretax income
(the Effective Rate). This process involves estimating our current tax liabilities in each
jurisdiction in which we operate, including the impact, if any, of additional taxes resulting from
tax examinations, as well as making judgments regarding the recoverability of deferred tax assets.
Tax liabilities can involve complex issues and may require an extended period to resolve. To
the extent that the recovery of deferred tax assets does not reach the threshold of more likely
than not based on our estimate of future taxable income in each jurisdiction, a valuation
allowance is established. While we have considered future taxable income and the existence of
prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in
the event we were to determine that we would not be able to realize all or part of our net deferred
tax assets in the future, we would charge to income tax expense an adjustment resulting from the
establishment of a valuation allowance in the period in which such a determination was made.
We conduct business globally, and as a result, one or more of our subsidiaries file income tax
returns in various domestic and foreign jurisdictions. In the normal course of business we are
subject to examination by taxing authorities throughout the world. During 2008, the Internal
Revenue Service (IRS) completed an
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examination of tax years 2004 through 2006; therefore, our
U.S. federal income tax returns for tax years prior to 2007 are generally no longer subject to
adjustment. For our U.S. state tax returns, we are generally no longer subject to examination of
tax years prior to 2007 in our primary state tax jurisdictions. Our foreign income tax returns are
generally no longer subject to examination for tax periods 2003 and prior.
With respect to tax years that remain open to federal, state and foreign examination, we
believe that we have made adequate provision in the accompanying unaudited condensed consolidated
financial statements for any potential adjustments the IRS or other taxing authority may propose
with respect to income tax returns filed. We may, however, receive an assessment related to an
audit of our U.S. federal, state or foreign income tax returns that exceeds amounts provided for by
us. In the event of such an assessment, there exists the possibility of a
material adverse impact on our results of operations for the period in which the matter is
ultimately resolved or an unfavorable outcome is determined to be more likely than not to occur.
For the three and nine months ended September 30, 2010 our effective tax rate was 80% and 29%,
respectively. The effective rate for the three months ended September 30, 2010 differs from the
statutory rate of 35% primarily due to (i) a higher percentage of our projected income for the full
year being derived from international locations with lower tax rates than the U.S., (ii) the
cumulative effect of reducing our full year estimated effective tax rate as a result of the shift
of income to lower tax jurisdictions discussed in item (i), offset by (iii) $0.3 million related to
accounting for stock-based compensation under the authoritative guidance. While the impact in
terms of absolute dollars of shifting additional income to jurisdictions with lower tax rates was
insignificant, due to the low amount of taxable income this shift had a disproportional impact on
our overall effective tax rate, resulting in the unusually high effective tax rate of 80% during
the third quarter of 2010.
For the nine months ended September 30, 2010, the effective rate differs from the statutory
rate of 35% primarily due to the international impact and discrete items discussed above as well as
a discrete tax benefit of $1.0 million recognized as the result of certain amended state tax
filings, offset by tax expense resulting from nondeductible expenses related to our acquisitions of
Camiant and Blueslice and incurred during the second quarter of 2010.
For the three and nine months ended September 30, 2009, our effective tax rates were 13% and
31% respectively. The effective tax rate for the three months ended September 30, 2009 of 13%
differs from the statutory tax rate of 35% primarily due to (i) recognition of a discrete tax
benefit of $0.9 million resulting from the filing of our 2008 federal income tax return and (ii)
the discrete reversal of a valuation allowance of $1.0 million as a result of a previously
unrealized capital loss resulting from the impairment of our investment in a privately held company
in the second quarter of 2009.
The effective tax rate for the nine months ended September 30, 2009 of 31% differs from the
statutory tax rate of 35% primarily due to the items discussed above with respect to the three
months ended September 30, 2009, as well as the recognition of certain previously unrecognized tax
benefits of approximately $0.9 million associated with the settlement of two state examinations for
tax years 2004 through 2006 during the first quarter of 2009.
As a result of the acquisitions of Camiant and Blueslice, during the second quarter,
liabilities were established in the amount of $6.5 million related to existing uncertain tax
positions. These liabilities were recorded through purchase accounting and therefore impacted the
level of goodwill recorded as a result of the transactions. These liabilities will be reflected in
our annual tabular reconciliation for fiscal year 2010.
We no longer have a pool of windfall tax benefits as defined by the authoritative guidance
for stock-based compensation. As a result, future cancellations or exercises that result in a tax
deduction that is less than the related deferred tax asset recognized under the authoritative
guidance will negatively impact our effective tax rate and increase its volatility, resulting in a
reduction of our earnings. The authoritative guidance for stock compensation requires that the
impact of such events be recorded as discrete items in the quarter in which the event occurs.
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Note 10 Commitments and Contingencies
Indemnities, Commitments and Guarantees
In the normal course of our business, we provide certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to certain transactions.
These indemnities, commitments and guarantees include, among others, intellectual property
indemnities to our customers in connection with the sale of our products and licensing of our
technology, indemnities for liabilities associated with the infringement of other parties
technology based upon our products and technology, guarantees of timely performance of our
obligations, indemnities related to the reliability of our equipment, and indemnities to our
directors and officers to the maximum extent permitted by law. The duration of these indemnities,
commitments and guarantees varies, and, in certain cases, is indefinite. Many of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum potential future
payments that we could be obligated to make. We have not recorded a liability for these
indemnities, commitments or guarantees in the accompanying balance sheets because future payment is
not probable.
From time to time, various claims and litigation are asserted or commenced against us arising
from or related to contractual matters, intellectual property matters, product warranties and
personnel and employment disputes. As to such claims and litigation, we can give no assurance that
we will prevail. However, we currently do not believe that the ultimate outcome of any pending
matters will have a material adverse effect on our consolidated financial position, results of
operations or cash flows.
Note 11 Stock-Based Compensation
Stock-Based Compensation Expense
Total stock-based compensation expense recognized in our unaudited condensed consolidated
statements of operations for the three and nine months ended September 30, 2010 and 2009 is as
follows (in thousands):
Option and | ||||||||||||
SAR Grants | ||||||||||||
and Stock | ||||||||||||
Purchase | ||||||||||||
Income Statement Classifications | Rights | RSUs | Total | |||||||||
Three months ended September 30, 2010 |
||||||||||||
Cost of goods sold |
$ | 70 | $ | 313 | $ | 383 | ||||||
Research and development |
55 | 429 | 484 | |||||||||
Sales and marketing |
110 | 993 | 1,103 | |||||||||
General and administrative |
218 | 783 | 1,001 | |||||||||
Total |
$ | 453 | $ | 2,518 | $ | 2,971 | ||||||
Three months ended September 30, 2009 |
||||||||||||
Cost of goods sold |
$ | 88 | $ | 199 | $ | 287 | ||||||
Research and development |
89 | 262 | 351 | |||||||||
Sales and marketing |
193 | 660 | 853 | |||||||||
General and administrative |
536 | 1,275 | 1,811 | |||||||||
Total |
$ | 906 | $ | 2,396 | $ | 3,302 | ||||||
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Option and | ||||||||||||
SAR Grants | ||||||||||||
and Stock | ||||||||||||
Purchase | ||||||||||||
Income Statement Classifications | Rights | RSUs | Total | |||||||||
Nine months ended September 30, 2010 |
||||||||||||
Cost of goods sold |
$ | 226 | $ | 822 | $ | 1,048 | ||||||
Research and development |
199 | 1,025 | 1,224 | |||||||||
Sales and marketing |
329 | 2,453 | 2,782 | |||||||||
General and administrative |
891 | 3,969 | 4,860 | |||||||||
Total |
$ | 1,645 | $ | 8,269 | $ | 9,914 | ||||||
Nine months ended September 30, 2009 |
||||||||||||
Cost of goods sold |
$ | 312 | $ | 473 | $ | 785 | ||||||
Research and development |
611 | 787 | 1,398 | |||||||||
Sales and marketing |
599 | 1,790 | 2,389 | |||||||||
General and administrative |
1,788 | 3,915 | 5,703 | |||||||||
Total |
$ | 3,310 | $ | 6,965 | $ | 10,275 | ||||||
Stock-based compensation expense was recorded net of estimated forfeitures for the three
and nine months ended September 30, 2010 and 2009 such that expense was recorded only for those
stock-based awards that are expected to vest.
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Note 12 Operating Segment Information
We consider ourselves to be in a single reportable segment under the authoritative guidance
for segment reporting, specifically the development and sale of signaling and session management
telecommunications and related value added applications and services.
Enterprise-Wide Disclosures
The following table sets forth, for the periods indicated, revenues from external customers by
our principal product lines (in thousands):
For the Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Product revenues: |
||||||||
Eagle, number portability, and other session management products |
$ | 62,496 | $ | 64,687 | ||||
Performance management products |
5,213 | 15,729 | ||||||
Total product revenues |
67,709 | 80,416 | ||||||
Warranty revenues |
23,020 | 21,424 | ||||||
Professional and other services revenues |
17,576 | 13,074 | ||||||
Total revenues |
$ | 108,305 | $ | 114,914 | ||||
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Product revenues: |
||||||||
Eagle, number portability, and other session management products |
$ | 196,929 | $ | 207,811 | ||||
Performance management products |
22,208 | 30,793 | ||||||
Total product revenues |
219,137 | 238,604 | ||||||
Warranty revenues |
63,713 | 63,505 | ||||||
Professional and other services revenues |
50,953 | 43,646 | ||||||
Total revenues |
$ | 333,803 | $ | 345,755 | ||||
Revenues from External Customers | ||||||||||||||||
By Geographic Region | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
United States |
$ | 44,638 | $ | 46,596 | $ | 125,261 | $ | 133,999 | ||||||||
International |
63,667 | 68,318 | 208,542 | 211,756 | ||||||||||||
Total revenues from external customers |
$ | 108,305 | $ | 114,914 | $ | 333,803 | $ | 345,755 | ||||||||
For the three months ended September 30, 2010, sales to AT&T and Verizon represented 22%
and 10% of our revenues, respectively. For the nine months ended September 30, 2010, sales to AT&T
represented 17% of our revenues.
For the three months ended September 30, 2009, sales to the Orange Group accounted for 21% of
our revenues, sales to AT&T accounted for 19% of our revenues, and sales to Verizon accounted for
11% of our revenues. For the nine months ended September 30, 2009, sales to AT&T, Orange Group and
Carso Global Telecom accounted for 15%, 12%, and 11% of our revenues, respectively.
For the three and nine months ended September 30, 2010, revenues from India accounted for 14%
and 12%, respectively, of our revenues. For the three and nine months ended September 30, 2009,
revenues from India accounted for 5% and 6%, respectively, of our revenues.
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The following table sets forth, for the periods indicated, our long-lived assets including net
property and equipment, and other assets by geographic region (in thousands):
Long-Lived Assets | ||||||||
By Geographic Region | ||||||||
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
United States |
$ | 31,370 | $ | 29,587 | ||||
Other |
7,952 | 7,341 | ||||||
Total long-lived assets |
$ | 39,322 | $ | 36,928 | ||||
Note 13 Earnings (Loss) Per Share
The following table provides a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per share computations for the three and nine months ended September
30, 2010 and 2009 (in thousands, except per share amounts):
Income from | ||||||||||||
Operations | Shares | Per-Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
For the Three Months Ended September 30, 2010: |
||||||||||||
Basic loss from operations per share |
$ | (134 | ) | 68,526 | $ | | ||||||
Effect of dilutive securities |
| | ||||||||||
Diluted loss from operations per share |
$ | (134 | ) | 68,526 | $ | | ||||||
For the Three Months Ended September 30, 2009: |
||||||||||||
Basic income from operations per share |
$ | 9,401 | 67,215 | $ | 0.14 | |||||||
Effect of dilutive securities |
| 807 | ||||||||||
Diluted income from operations per share |
$ | 9,401 | 68,022 | $ | 0.14 | |||||||
For the Nine Months Ended September 30, 2010: |
||||||||||||
Basic income from operations per share |
$ | 23,006 | 68,179 | $ | 0.34 | |||||||
Effect of dilutive securities |
| 677 | ||||||||||
Diluted income from operations per share |
$ | 23,006 | 68,856 | $ | 0.33 | |||||||
For the Nine Months Ended September 30, 2009: |
||||||||||||
Basic income from operations per share |
$ | 31,519 | 66,748 | $ | 0.47 | |||||||
Effect of dilutive securities |
| 717 | ||||||||||
Diluted income from operations per share |
$ | 31,519 | 67,465 | $ | 0.47 | |||||||
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The computation of diluted earnings (loss) per share excludes unexercised stock options
and share appreciation rights (SARs), and unvested restricted stock units that are anti-dilutive.
The following common stock equivalents were excluded from the earnings (loss) per share
computation, as their inclusion would have been anti-dilutive (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average number of stock options, SARs and RSUs,
calculated using the treasury stock method, that were excluded
due to the exercise/threshold price exceeding the average market
price of our common stock during the period |
4,305 | 4,572 | 3,972 | 5,391 | ||||||||||||
Weighted average number of stock options, SARs and RSUs excluded
due to the reporting of a net loss for the period |
334 | | | | ||||||||||||
Total common stock equivalents excluded from diluted net income (loss)
per share computation |
4,639 | 4,572 | 3,972 | 5,391 | ||||||||||||
There were no transactions subsequent to September 30, 2010, which, had they occurred
prior to the end of our third quarter, would have changed materially the number of shares in the
basic or diluted earnings per share computations.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is designed to provide a better understanding of our unaudited
condensed consolidated financial statements, including a brief discussion of our business and
products, key factors that impacted our performance, and a summary of our operating results. The
following discussion should be read in conjunction with the unaudited condensed consolidated
financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form
10-Q, and the consolidated financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form
10-K for the year ended December 31, 2009. Historical results and percentage relationships among
any amounts in the unaudited condensed consolidated financial statements are not necessarily
indicative of trends in operating results for any future periods.
Overview of Our Business and Products
We are a leading global provider of communication network software and solutions that enable
our customers to effectively and efficiently deliver an array of communications services including
voice, text messaging, and broadband data services. Our customers predominantly include mobile
(wireless) and fixed (wireline) service providers (collectively, service providers), including
many of the largest service providers in the world. Our software and solutions are designed to
enable our customers to optimize their network efficiency, ensure quality of service and quality of
experience, establish network, service and subscriber policies, create unified subscriber
identities, and capture additional revenue opportunities. Our solutions generally provide high
performance capabilities such as high transaction rates, reliability and routing intelligence, and
are designed to enable our customers to address the scalability and complexity issues inherent in
the implementation of all-IP networks. Our solutions are comprised of software elements from our
portfolio of proprietary software that is increasingly integrated with commercially available
hardware, operating systems and database technologies. By taking advantage of advances in
technology, such as multi-core processors, virtualization software and browser-based cloud
computing, our software and solutions deliver significant processing power, flexibility, and
in-memory storage. We believe that our solutions are cost effective for our customers and enable
them to provide value to their subscribers.
We derive our revenues primarily from the sale or license of these network solutions and
software applications and related professional services (for example, installation and training
services) and customer support services, including customer post-warranty services. Payment terms
for contracts with our customers are negotiated with each customer and are based on a variety of
factors, including the customers credit standing and our history with the customer. As we
continue to expand internationally, we expect that our billing and payment terms may lengthen, as a
higher percentage of our billing and/or payment terms may be tied to the achievement of milestones,
such as shipment, installation and customer acceptance.
Our corporate headquarters are located in Morrisville, North Carolina, and we have research
and development facilities, sales offices and customer support facilities located throughout the
world.
Internal Control and Corporate Governance
We consider our internal control over financial reporting a high priority and continually
review all aspects of and make improvements in our internal control. Our executive management is
committed to ensuring that our internal control over financial reporting is complete, effective and
appropriately documented. In the course of our evaluation of our internal control, we seek to
identify material errors or control problems and to confirm that the appropriate corrective
actions, including process improvements, are being undertaken. We also seek to deal with any
control matters in this evaluation, and in each case if a problem is identified, we consider what
revision, improvement or correction to make in accordance with our ongoing procedures. Our
continued objective is to maintain our internal control as a set of dynamic systems that change
(including improvements and corrections) as conditions warrant.
In addition to striving to maintain an effective system of internal control over financial
reporting, we also strive to follow the highest ethical and professional standards in measuring and
reporting our financial performance. Specifically, we have adopted a code of conduct for all of
our employees and directors that requires a high level of professionalism and ethical behavior. We
believe that our accounting policies are prudent and provide a clear view of our financial
performance. We utilize our internal audit function to help ensure that we follow these accounting
policies and to independently test our internal control. Further, our Disclosure Committee,
composed primarily of senior financial and legal personnel, helps ensure the completeness and
accuracy of the
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reporting of our financial results and our other disclosures. In performing its
duties, the Disclosure Committee consults with and obtains relevant information from key functional
areas such as operations, finance, customer service and sales, including the utilization of an
internal certification process that solicits responses from these functional areas. Prior to the
release of our financial results, key members of our management review our operating results and
significant accounting policies and estimates with our Audit Committee,
which consists solely of independent members of our Board of Directors.
Operating Environment and Key Factors Impacting our Results
Although economic conditions are generally improving around the world, we believe
telecommunication service providers have been and will continue to be cautious in their spending
for the foreseeable future. This is particularly the case in certain emerging markets, as these
markets continue to be disproportionately affected by the current economic conditions.
Despite these weak economic conditions, we continue to see progress with our next-generation
product portfolio, which we define as our performance management, session management applications
on Eagle XG, mobile messaging, policy control, and subscriber data management products. As of
September 30, 2010, year-to-date orders for these products, including orders associated with
products acquired from Camiant and Blueslice, have grown by nearly 50% compared to the same period
in 2009. These next generation products now represent nearly 60% of our sales pipeline. We
recognize that these products have a longer sales cycle and may have a lower opportunity to order
conversion rate than our Eagle 5 products, and our expectations are tempered as a result.
Despite this progress with our next generation product portfolio, the growth in these products
did not offset the decline in our Eagle 5 related products, as orders for this product line
continued to experience year-over-year declines on a quarterly, year-to-date, and trailing twelve
months basis. Accordingly, the weakness in Eagle 5 related product orders more than offset the
growth in our next generation products, resulting in a year-over-year decline in total orders of
14% during the third quarter and 22% on a year-to-date basis. Specifically, our Eagle 5 and other
established products orders are down 34% on a year to date basis, a decline that is at a faster
rate than we expected and have historically experienced. This decline is observed across all
regions, with the majority of the decline occurring within emerging markets, particularly in India,
where orders are down 50% on a year-to-date basis.
In order to understand the trends within our Eagle 5 business, we believe it is important to
understand the varying dynamics across geographical regions, particularly between developed and
emerging markets. Within developed markets, we are also seeing double digit declines in Eagle 5
related orders due to our customers shifting their attention from investments in their 2G and 3G
networks to investments in their next generation networks, such as LTE, along with reduced demand
from the slowing growth of voice and text messaging traffic. While the shift in our customers
focus has accelerated the decline in orders for our Eagle 5 and other established products, it has
resulted in a significant increase in demand for our next generation products as evidenced by the
growth in orders and our pipeline associated with these products. With respect to our Eagle 5
products, we believe customers have and will continue to limit their investments to only meet their
current needs.
With respect to certain emerging markets, such as the Middle East and Africa, we believe the
year-over-year decline in third quarter orders is due in part to the continued cautiousness in
spending resulting from the current economic conditions. In addition, orders in Brazil and India
are down substantially year-over-year through the first nine months of 2010. With respect to
Brazil, we believe the decline is primarily due to timing, as approximately $25.0 million of 2009
orders were accelerated from 2010 into 2009 and we do not expect another similar event to benefit
future orders. With respect to India, our largest emerging market, we continue to be impacted both
directly and indirectly by Indias security regulations. While the Indian government has put a
temporary moratorium on the most restrictive of these regulations, we have only experienced modest
order flow during the third quarter. One of the primary drivers for the continued slower order
flow in India is related to the impact that these regulations are having on the rollout of 3G and
number portability. Specifically, these regulations, among other factors, have resulted in delays
in the implementation dates of 3G and number portability. Once deployed, both 3G and number
portability typically result in a significant increase in signaling within our customers networks.
Given the delayed implementation dates, orders that we had previously expected in 2010 are now
expected to shift to 2011.
We are also continuing to experience a shift in the timing of customer orders, such that a
substantial majority of orders are obtained in the last weeks of the quarter. We anticipate this
trend to continue and, accordingly, we may continue to experience volatility in our quarterly
orders, revenues and earnings going forward.
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In the third quarter of 2010, our revenues declined by 6% from $114.9 million to $108.3
million as compared to the third quarter of 2009, and on a year-to-date basis, our revenues
declined by 3%, from $345.8 million in the first nine months of 2009 to $333.8 million in the first
nine months of 2010. Historically, a substantial portion of our revenues were derived from
existing backlog, and trends in our orders had not been reflected in our revenues in the same
period. However, given the recent declines in our orders and resulting backlog, our revenues are
beginning to be negatively impacted by the recent trend in orders. Our revenues and operating
results may become more sensitive to and more closely follow recent order trends in the future, if
our existing backlog continues to decline as a result of several sequential periods with lower than
anticipated orders.
Foreign currency fluctuations had a negative year-over-year impact on third quarter and
year-to-date 2010 revenues of approximately $3.0 million and $5.0 million, respectively. Including
this impact, our operating results during the third quarter and year-to-date 2010 were negatively
impacted by approximately $1.0 million and $4.0 million, respectively, due to year-over-year
foreign currency fluctuations.
Summary of Operating Results and Key Financial Metrics
The following is a summary of our performance relative to certain key financial metrics for
our operations as of and for the three and nine months ended September 30, 2010 compared to the
three and nine months ended September 30, 2009 (in thousands, except earnings (loss) per share):
Three Months Ended September 30, | Year-Over-Year Change | |||||||||||||||
2010 | 2009 | |||||||||||||||
Orders |
$ | 81,103 | $ | 94,741 | $ | (13,638 | ) | (14 | )% | |||||||
Revenues |
$ | 108,305 | $ | 114,914 | $ | (6,609 | ) | (6 | )% | |||||||
Operating income |
$ | 413 | $ | 21,440 | $ | (21,027 | ) | (98 | )% | |||||||
Diluted earnings (loss) per share |
$ | | $ | 0.14 | $ | (0.14 | ) | (100 | )% | |||||||
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Orders |
$ | 209,895 | $ | 267,396 | $ | (57,501 | ) | (22 | )% | |||||||
Backlog |
$ | 253,623 | $ | 336,654 | $ | (83,031 | ) | (25 | )% | |||||||
Revenues |
$ | 333,803 | $ | 345,755 | $ | (11,952 | ) | (3 | )% | |||||||
Operating income |
$ | 35,291 | $ | 58,954 | $ | (23,663 | ) | (40 | )% | |||||||
Diluted earnings per share |
$ | 0.33 | $ | 0.47 | $ | (0.14 | ) | (30 | )% |
Orders decreased by 14% to $81.1 million in the third quarter of 2010 from $94.7
million in the third quarter of 2009, and decreased by 22% to $209.9 million for the nine months
ended September 30, 2010 from $267.4 million for the same period in 2009. These declines are all
within our Eagle 5 and other established products for the reasons discussed above under Operating
Environment and Key Factors Impacting our Results.
Revenues decreased on a quarter-over-quarter and year-over-year basis, to $108.3
million and $333.8 million in the third quarter and first nine months of 2010, respectively, from
$114.9 million and $345.8 million in the third quarter and first nine months of 2009, respectively.
As mentioned above, our revenues have been negatively impacted by the trend in orders for our
Eagle 5 products. Also contributing to lower revenues in 2010 relative to those in 2009 is a
reduction in performance management revenues, primarily due to the completion of an $8.7 million
performance management project in Europe in the third quarter of 2009. This resulted in the third
quarter results in 2009 being higher than typical trends associated with this product and led to
the resulting year-over-year decline in revenues for this product in 2010. Partially offsetting
these decreases are increases in our policy management and subscriber data management products
revenues following the second quarter 2010 acquisitions of Camiant and Blueslice.
Operating Income decreased by $21.0 million from $21.4 million in the third quarter of
2009 to $0.4 million in the third quarter of 2010, primarily due to a reduction in gross margins of
$16.3 million, and an increase in expense of $8.9 million as a result of acquiring Camiant and
Blueslice in the second quarter of 2010. Partially offsetting these items was a decrease in
incentive compensation as a result of lower orders and operating performance as compared to our
incentive targets for the 2010 period.
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For the nine months ended September 30, 2010, operating income decreased by $23.7 million from
$59.0 million for the nine months ended September 30, 2009 to $35.3 million for the nine months
ended September 30, 2010. The year-over-year net decrease was primarily due to the reasons
discussed above.
Diluted Earnings (Loss) per Share declined from $0.14 per share in the third quarter
of 2009 to $0.00 in the third quarter of 2010, and from $0.47 per share in the nine months ending
September 30, 2009 to $0.33 per share in the first nine months of 2010, primarily due to the
decreases in operating income during the three and nine months ended September 30, 2010 for the
reasons discussed above.
Backlog
decreased by $120.0 million, or 32%, from December 31, 2009 to September 30,
2010, and by $83.0 million, or 25%, from September 30, 2009 to September 30, 2010, primarily due to
lower orders during the first nine months of 2010. Additionally, during the third quarter of 2010,
the negative impact of foreign exchange fluctuations, primarily related to the Euro, resulted in a
$4.1 million decrease in backlog.
Results of Operations
Revenues
As discussed further in Note 1 to the accompanying unaudited condensed consolidated financial
statements and in Recent Accounting Pronouncements below, in the first quarter of 2010 we adopted
new accounting guidance with respect to revenue recognition for arrangements with multiple
deliverables. These new revenue recognition rules only apply to transactions entered into and
pre-existing arrangements materially modified subsequent to adoption. As substantially all of our
telecommunications products include both tangible products and software elements that function
together to deliver the tangible products essential functionality, the existing software revenue
recognition guidance will no longer apply to the majority of our arrangements.
The adoption of the new non-software revenue recognition guidance did not have a material
impact on the timing, pattern, or amount of revenue recognized in the third quarter and first nine
months of 2010, primarily due to (i) a portion of third quarter and nine months 2010 revenue being
derived from the backlog of orders which were received prior to January 1, 2010 and therefore did
not fall under the new non-software revenue recognition guidance, and (ii) the new non-software
revenue recognition guidance not differing significantly from the software revenue recognition
guidance when applied to acceptance based arrangements and arrangements that are received and
fulfilled within the same quarter. In the three and nine months ended September 30, 2010, we
recognized $36.4 million and $111.9 million, respectively, of revenue, under the new non-software
revenue recognition guidance, and we had $20.7 million of deferred revenue under such rules at
September 30, 2010. Our September 30, 2010 backlog included an additional $33.3 million of
unbilled orders recorded under the new guidance. Based on the currently available information, we
anticipate that the effect of adopting this guidance on future periods will not be material.
However, this assessment may change as the impact depends on the substance of arrangements entered
into or materially modified in future periods.
Revenues decreased by 6% to $108.3 million in the third quarter of 2010 from $114.9 million in
the third quarter of 2009. On a year-to-date basis, revenue decreased by 3% to $333.8 million for
the nine months ended September 30, 2010 as compared to $345.8 million for the nine months ended
September 30, 2009. Foreign currency fluctuations had a negative year-over-year impact on third
quarter and year-to-date 2010 revenues of approximately $3.0 million and $5.0 million,
respectively. The following discussion provides a more detailed analysis of changes in revenues by
product line.
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Revenues by Product Line
In order to provide a better understanding of the year-over-year changes and the underlying
trends in our revenues, we have provided a discussion of revenues from each of our product lines.
Revenues from each of our product lines for the three and nine months ended September, 30 2010 and
2009 are as follows (in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Product revenues: |
||||||||||||||||
Eagle, number portability, and other session management products |
$ | 62,496 | $ | 64,687 | $ | (2,191 | ) | (3 | )% | |||||||
Performance management products |
5,213 | 15,729 | (10,516 | ) | (67 | )% | ||||||||||
Total product revenues |
67,709 | 80,416 | (12,707 | ) | (16 | )% | ||||||||||
Warranty revenues |
23,020 | 21,424 | 1,596 | 7 | % | |||||||||||
Professional and other services revenues |
17,576 | 13,074 | 4,502 | 34 | % | |||||||||||
Total revenues |
$ | 108,305 | $ | 114,914 | $ | (6,609 | ) | (6 | )% | |||||||
For the Nine Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Product revenues: |
||||||||||||||||
Eagle, number portability, and other session management products |
$ | 196,929 | $ | 207,811 | $ | (10,882 | ) | (5 | )% | |||||||
Performance management products |
22,208 | 30,793 | (8,585 | ) | (28 | )% | ||||||||||
Total product revenues |
219,137 | 238,604 | (19,467 | ) | (8 | )% | ||||||||||
Warranty revenues |
63,713 | 63,505 | 208 | 0 | % | |||||||||||
Professional and other services revenues |
50,953 | 43,646 | 7,307 | 17 | % | |||||||||||
Total revenues |
$ | 333,803 | $ | 345,755 | $ | (11,952 | ) | (3 | )% | |||||||
Product Revenues
Our product revenues decreased by $12.7 million, or 16%, in the third quarter of 2010
compared to the third quarter of 2009 primarily due to the decrease of $10.5 million in our
performance management product revenues. In the third quarter of 2009 we completed one large
performance management project in Europe that resulted in $8.7 million of revenues. This
resulted in the third quarter results in 2009 being higher than typical trends associated with
this product and led to the resulting year-over-year decline in revenues for this product in
2010. In addition, the decline in Eagle 5 related session management revenues outpaced the
increase of our next generation session and policy management revenues.
Product revenues for the first nine months of 2010 decreased by $19.5 million, or 8%, as
compared to the same period in 2009, primarily due to the decrease in performance management
and Eagle 5 revenues discussed above. The decline in Eagle 5 revenues was related to the
declining orders and backlog as discussed above under Summary of Operating Results and Key
Financial Metrics. From a product mix perspective, we continue to expect year-over-year
growth in orders and revenues from our next generation products. Also, with the addition of
policy management and subscriber data management products to our portfolio in the second
quarter of 2010, we expect our next generation products to represent an increasing percentage
of our overall orders and revenues. While we continue to gain traction with our next
generation portfolio, we continue to expect a decline in orders and revenues from our Eagle 5
product line.
Worldwide, our product revenues have been impacted by a variety of factors in addition to
those discussed above, including: (i) industry consolidation resulting in a delay and/or
decline in our customer orders; (ii) competitive pricing pressure, particularly with respect to
our Eagle 5 product line; (iii) the pricing of our SIGTRAN-based products, which are typically
priced at a significantly lower price per equivalent link or unit of throughput than our
traditional SS7-based products, resulting in reductions in our order value and revenues; (iv)
the ability to sell our next generation products, such as performance management, Eagle XG,
policy management, subscriber data management, and mobile messaging, to our existing customer
base and (v) the amount of signaling traffic generated on our customers networks, impacting
our volume of orders. We derive the majority of our product revenues from wireless operators,
and wireless networks generate
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significantly more signaling traffic than wireline networks. As
a result, these networks require significantly more signaling infrastructure than wireline
networks. Signaling traffic on our wireless customers networks may be impacted by several
factors, including growth in the number of subscribers, the number of calls made per
subscriber, roaming and the use of additional features, such as text messaging.
Warranty Revenues
Warranty revenues include revenues from (i) our standard warranty coverage, which is
typically provided at no charge for the first year but is allocated a portion of the arrangement
fee in accordance with the authoritative guidance for revenue recognition and (ii) our extended
warranty offerings. After the first year warranty, our customers typically purchase warranty
services for periods of up to a year in advance, which we reflect in deferred revenues. We
recognize the revenue associated with our warranty services ratably over the term of the
warranty arrangement based on the number of days the contract is outstanding during the period.
Warranty revenues increased by 7% in the third quarter of 2010 as compared to the third
quarter of 2009. This increase was primarily due to the increase in our extended warranty
revenues resulting primarily from (i) the timing of order renewals, and (ii) the expansion of
the maintenance base as a result of our recent acquisitions of Camiant and Blueslice. Partially
offsetting the above increase was a decrease in our standard warranty revenues, principally due
to the timing of revenue recognition related to the initial warranty term that accompanied the
product sale.
On a year-to-date basis, warranty revenues were effectively flat in the first nine months
of 2010 as compared to the same period of 2009 as increases in our extended warranty revenues
resulting from our increased customer base were offset by decreases attributable to pricing
pressure of our Eagle 5 related warranty revenues.
The timing of recognition of our warranty revenues may be impacted by, among other
factors: (i) delays in receiving purchase orders from our customers; (ii) the inability to
recognize any revenue, including revenue associated with first year warranty, until the
delivery of all product deliverables associated with an order is complete; and (iii) the
receipt of cash payments from the customer in cases where the customer is deemed a credit risk.
Professional and Other Services Revenues
Professional and other services revenues primarily consist of installation services,
database migration and training services. Substantially all of our professional service
arrangements are billed on a fixed-fee basis. We typically recognize the revenue related to
our fixed-fee service arrangements upon completion of the services, as these services are
relatively short-term in nature (typically several weeks, or in limited cases, several months).
Our professional and other services are typically initiated and provided to the customer
within a three to nine month period after the shipment of the product, with the timing
depending on, among other factors, the customers schedule and site availability.
Professional and other services revenues for the third quarter of 2010 increased by $4.5
million, or 34%, as compared to the third quarter of 2009, primarily due to an increase in
service revenues associated with recently completed product implementations in India. The
majority of these ongoing services were related to previous deployments of our Eagle 5 and
number portability products.
On a year-to-date basis, professional and other services revenues increased by $7.3
million, or 17%, in 2010 as compared to the same period of 2009. The increase is primarily
attributable to the recognition of revenue for a number of initial system projects in the U.S.
and India across our product portfolio.
Regardless of the mix of products purchased, new customers require a greater amount of
installation, training and other professional services at the initial stages of deployment of
our products. As our customers gain more knowledge of our products, the follow-on orders
generally do not require the same levels of services and training, as our customers tend to
either: (i) perform the services themselves; (ii) require limited services, such as
installation only; or (iii) require no services, and, in particular, no database migration or
training services.
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Cost of Sales
In order to better understand our cost structure, we analyze and present our costs and
expenses in the categories discussed below:
Cost of goods sold
Cost of goods sold includes: (i) materials, labor, and overhead costs incurred internally and
paid to contract manufacturers to produce our products; (ii) personnel and other costs incurred to
install our products; and (iii) customer service costs to provide continuing support to our
customers under our warranty offerings. Cost of goods sold in dollars and as a percentage of
revenues for the three and nine months ended September 30, 2010 and 2009 were as follows (in
thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Cost of good sold |
$ | 40,773 | $ | 37,064 | $ | 3,709 | 10 | % | ||||||||
Revenues |
108,305 | 114,914 | (6,609 | ) | (6 | )% | ||||||||||
Cost of good sold as a percentage of revenues |
38 | % | 32 | % |
For the Nine Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Cost of good sold |
$ | 115,963 | $ | 113,777 | $ | 2,186 | 2 | % | ||||||||
Revenues |
333,803 | 345,755 | (11,952 | ) | (3 | )% | ||||||||||
Cost of good sold as a percentage of revenues |
35 | % | 33 | % |
Cost of goods sold increased in both absolute dollars and as a percentage of revenues in the
three months ended September 30, 2010 as compared to the same period in 2009 primarily due to (i) a
shift in revenue mix to a higher percentage of services revenues which have a lower gross margin
than product related revenues, and (ii) a shift to a higher percentage of initial systems.
Further, during 2010, a higher percentage of our total revenues was derived from emerging markets,
particularly India, which is typically at lower gross margins than our corporate average.
Partially offsetting these increases was lower incentive compensation resulting from lower orders
and operating performance as compared to our incentive targets during the 2010 period, and a
reduction in our warranty accrual of $1.0 million due to updated estimates of our warranty
liability.
For the nine months ended September 30, 2010 our cost of goods sold increased by $2.2 million
in terms of absolute dollars and increased by 2% as a percentage of revenues as compared to the
same period in 2009. As mentioned earlier, a higher percentage of our revenues in 2010 are from
services, which have a lower gross margin than product related revenues. In addition, our revenue
mix has shifted from the U.S. to regions that have lower margins such as India. Offsetting these
increases in cost is a net year-over-year reduction in cost of goods sold of $6.3 million related
to warranty related charges. Specifically, our cost of goods sold during the first nine months of
2009 included a $5.0 million warranty charge related to our performance management solution.
During 2010, we have continued to update our estimates and have reduced the warranty accrual by
approximately $1.3 million, with the majority of this reduction occurring in the third quarter of
2010 as discussed above.
As we continue to expand our international presence, our cost of goods sold as a percentage of
revenues may be negatively impacted as the result of our decision to develop new sales channels and
customer relationships in new markets, and also due to price competition. Further, many of our
next generation products are initial system sales, which are typically at lower gross margins than
our corporate average. However, as we seed these products in our installed base, the follow-on
orders in many cases are expected to be software only and therefore at margins above our corporate
average. In addition, changes in the following factors may also affect margins: product mix;
competition; customer discounts; supply and demand conditions in the electronic components
industry; internal and outsourced manufacturing capabilities and efficiencies; foreign currency
fluctuations; pricing pressure as we expand internationally; government regulations and policy such
as security considerations, tariffs, and local content; and general economic conditions.
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Amortization of Intangible Assets
Amortization of intangible assets for the three and nine months ended September 30, 2010 and
2009 was as follows (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Amortization of intangible assets related to: |
||||||||||||||||
Camiant |
$ | 5,233 | $ | | $ | 7,187 | $ | | ||||||||
mBalance |
1,103 | 962 | 2,893 | 2,806 | ||||||||||||
Steleus |
483 | 483 | 1,447 | 1,447 | ||||||||||||
Blueslice |
653 | | 1,209 | | ||||||||||||
iptelorg |
111 | 122 | 339 | 346 | ||||||||||||
Other |
11 | | 19 | | ||||||||||||
Total |
$ | 7,594 | $ | 1,567 | $ | 13,094 | $ | 4,599 | ||||||||
The increase in amortization for the three and nine months ended September 30, 2010 is
primarily due to the amortization associated with Camiant and Blueslice intangibles acquired in
May, 2010.
Research and Development Expenses
Research and development expenses include costs associated with the development of new
products, enhancements of existing products and quality assurance activities. These costs consist
primarily of employee salaries and benefits, occupancy costs, consulting costs and the cost of
development equipment and supplies. The following sets forth our research and development expenses
in dollars and as a percentage of revenues for the three and nine months ended September 30, 2010
and 2009 (in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Research and development |
$ | 24,094 | $ | 24,200 | $ | (106 | ) | (0) | % | |||||||
Percentage of revenues |
22 | % | 21 | % | ||||||||||||
For the Nine Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Research and development |
$ | 68,666 | $ | 75,603 | $ | (6,937 | ) | (9) | % | |||||||
Percentage of revenues |
21 | % | 22 | % |
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The following is a summary of the year-over-year fluctuations in our research and
development expenses during the three and nine months ended September 30, 2010 as compared to the
three and nine months ended September 30, 2009 (in thousands):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 to 2010 | 2009 to 2010 | |||||||
Increase (decrease) in: |
||||||||
Salaries, benefits and incentive compensation |
$ | (607 | ) | $ | (4,249 | ) | ||
Stock-based compensation |
134 | (174 | ) | |||||
Integration-related compensation |
232 | 53 | ||||||
Consulting and professional services |
(45 | ) | (2,019 | ) | ||||
Facilities and depreciation |
(123 | ) | (1,000 | ) | ||||
Other |
303 | 452 | ||||||
Total |
$ | (106 | ) | $ | (6,937 | ) | ||
Research and development expenses remained comparable on a year-over-year basis during
the third quarter of 2010, with a slight reduction in employee related expenses mostly offset by
increases in integration related compensation and other expenses. The reduction in the employee
related expenses is primarily due to lower incentive compensation resulting from lower orders and
operating performance as compared to our incentive targets for the 2010 period, partially offset by
an increase in costs driven by the addition of the employees of Camiant and Blueslice to our
research and development team. The increase in other expenses is primarily due to the increase in
travel expenses due to increased activity related to our next generation products.
The decrease in research and development expenses for the first nine months on a
year-over-year basis was principally due to decreased expenses related to our employees, consulting
services, facilities and depreciation. In particular, salaries, benefits and incentive
compensation decreased as a result of lower incentive compensation recorded in the first nine
months of 2010 resulting from lower orders and operating performance as compared to our incentive
targets for the 2010 period, partially offset by an increase in employee related expenses
associated with our 2010 acquisitions. Also affecting our research and development expenses across
all categories was a reduction in our spending as a result of (i) completing many of the
International Telecommunication Union and local feature development projects necessary to win new
Eagle 5 customers in international markets, and (ii) our continued efforts to obtain better
efficiencies across our research and development activities. In particular, we are beginning to
see reductions in personnel and consulting costs associated with our Eagle 5 development efforts,
as we shift resources to our next generation products. Further, we have been able to reduce our
depreciation expense as a result of (i) our focus on deploying newer technologies that allowed us
to centralize and share our development equipment, and (ii) lower capital expenditures required to
support the development efforts of our next generation products as they are compatible with off the
shelf hardware, as compared to our Eagle 5 platform, which is based on proprietary hardware.
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Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs associated with our sales force and
marketing personnel, including: (i) salaries, commissions and related costs; (ii) outside contract
personnel; (iii) facilities costs; (iv) advertising and other marketing costs, such as tradeshows;
and (v) travel and other costs. The following table sets forth our sales and marketing expenses in
dollars and as a percentage of revenues for the three and nine months ended September 30, 2010 and
2009 (in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Sales and marketing expenses |
$ | 20,192 | $ | 17,168 | $ | 3,024 | 18 | % | ||||||||
Percentage of revenues |
19 | % | 15 | % | ||||||||||||
For the Nine Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Sales and marketing expenses |
$ | 55,858 | $ | 51,574 | $ | 4,284 | 8 | % | ||||||||
Percentage of revenues |
17 | % | 15 | % |
The following is a summary of the year-over-year fluctuation in our sales and marketing
expenses during the three and nine months ended September 30, 2010 as compared to the three and
nine months ended September 30, 2009 (in thousands):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 to 2010 | 2009 to 2010 | |||||||
Increase (decrease) in: |
||||||||
Salaries, benefits and incentive compensation |
$ | 1,015 | $ | 1,425 | ||||
Stock-based compensation |
250 | 393 | ||||||
Integration-related compensation |
1,232 | 1,725 | ||||||
Sales commissions |
(601 | ) | (1,457 | ) | ||||
Marketing and advertising |
85 | (18 | ) | |||||
Travel |
668 | 1,689 | ||||||
Other |
375 | 527 | ||||||
Total |
$ | 3,024 | $ | 4,284 | ||||
The increase in sales and marketing expenses in the third quarter and first nine months
of 2010 as compared to the same periods of 2009 was primarily attributable to additional sales and
marketing related personnel costs associated with the recent acquisitions of Camiant and Blueslice.
Additionally, in the three and nine months ended September 30, 2010, we incurred
integration-related compensation of $1.2 million and $1.7 million, respectively, associated with
cash compensation in lieu of stock options that were not assumed as part of the Camiant acquisition
and integration related bonuses for certain employees of both acquired companies. Also, impacting
our sales and marketing expenses were increases in our travel and employee related expenses as a
result of increased activities associated with our next generation products. Partially offsetting
these increases were (i) lower incentive compensation recorded in the first nine months of 2010
resulting from lower orders and operating performance as compared to our incentive targets for the
2010 period, and (ii) decreased sales commissions, primarily due to lower revenues.
General and Administrative Expenses
General and administrative expenses are composed primarily of costs associated with our
executive and administrative personnel (e.g., legal, business development, finance, information
technology and human resources personnel) and consist of: (i) salaries and related compensation
costs; (ii) consulting and other professional services (e.g., litigation and other outside counsel
fees, and audit fees); (iii) facilities and insurance costs; and (iv) travel and other costs. The
following table sets forth our general and administrative expenses in dollars and as
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a percentage
of revenues for the three and nine months ended September 30, 2010 and 2009 (in thousands, except
percentages):
For the Three Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
General and administrative expenses |
$ | 13,219 | $ | 13,148 | $ | 71 | 1 | % | ||||||||
Percentage of revenues |
12 | % | 11 | % | ||||||||||||
For the Nine Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
General and administrative expenses |
$ | 39,176 | $ | 40,288 | $ | (1,112 | ) | (3 | )% | |||||||
Percentage of revenues |
12 | % | 12 | % |
The following is a summary of the year-over-year fluctuation in our general and
administrative expenses during the three and nine months ended September 30, 2010 as compared to
the three and nine months ended September 30, 2009 (in thousands):
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 to 2010 | 2009 to 2010 | |||||||
Increase (decrease) in: |
||||||||
Salaries, benefits and incentive compensation |
$ | (575 | ) | $ | (1,725 | ) | ||
Stock-based compensation |
(810 | ) | (843 | ) | ||||
Integration-related compensation |
203 | 552 | ||||||
Consulting and professional services |
315 | 478 | ||||||
Facilities and depreciation |
109 | 32 | ||||||
Bad debt expense |
633 | 158 | ||||||
Other |
196 | 236 | ||||||
Total |
$ | 71 | $ | (1,112 | ) | |||
General and administrative expenses in the third quarter of 2010 remained comparable to the
third quarter of 2009, and decreased on a year-to-date basis, with reductions in employee related
costs offsetting increases in the remaining expense categories. For both the three and nine months
periods, our employee related costs decreased as a result of (i) reduced incentive compensation
resulting from lower orders and operating performance as compared to our incentive targets for the
2010 period, and (ii) realizing the benefits of our cost control initiatives, partially offset by
an increase in employee-related costs as a result of the addition of Camiant and Blueslice
employees to our management team. The decreases in stock-based compensation expense were primarily
due to the lower orders and operating performance which affected the expected outcome of our grants
with performance conditions.
Offsetting these decreases were increases across the remaining expense categories for both the
three and nine month periods. In particular, bad debt expense increased in 2010 due to our
increased activities in emerging markets where credit conditions have deteriorated. Our
integration related compensation increased due to cash compensation in lieu of stock options that
were not assumed as part of the Camiant acquisition and integration related bonuses for certain
employees of both Camiant and Blueslice. Other expenses increased due to increased travel activity
related to our new acquisitions.
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Amortization of Intangible Assets
As a result of our acquisitions, we have recorded various intangible assets including
trademarks, customer relationships and non-compete agreements. Amortization of intangible assets
related to our acquisitions is as follows (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Camiant |
$ | 1,261 | $ | | $ | 1,997 | $ | | ||||||||
mBalance |
273 | 238 | 715 | 694 | ||||||||||||
Blueslice |
79 | | 152 | | ||||||||||||
Steleus |
| 89 | | 266 | ||||||||||||
Total |
$ | 1,613 | $ | 327 | $ | 2,864 | $ | 960 | ||||||||
Amortization of intangible assets increased primarily due to the increase in our
intangible assets as a result of acquiring Camiant and Blueslice in the second quarter of 2010.
Other Income and Expense
For the three and nine months ended September 30, 2010 and 2009, other income and expenses
were as follows (in thousands, except percentages):
For the Three Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Interest income |
$ | 28 | $ | 282 | $ | (254 | ) | (90 | )% | |||||||
Interest expense |
(64 | ) | (67 | ) | 3 | (4 | )% | |||||||||
Impairment of investment in privately held company |
| (10,829 | ) | 10,829 | (100 | )% | ||||||||||
Gain on investments carried at fair value, net |
| 288 | (288 | ) | (100 | )% | ||||||||||
Foreign currency loss, net |
(790 | ) | (628 | ) | (162 | ) | 26 | % | ||||||||
Other, net |
(247 | ) | 288 | (535 | ) | (186 | )% | |||||||||
Other expense, net |
$ | (1,073 | ) | $ | (10,666 | ) | $ | 9,593 | (90 | )% | ||||||
For the Nine Months Ended | ||||||||||||||||
September 30, | Change | |||||||||||||||
2010 | 2009 | 2009 to 2010 | ||||||||||||||
Interest income |
$ | 297 | $ | 916 | $ | (619 | ) | (68 | )% | |||||||
Interest expense |
(185 | ) | (179 | ) | (6 | ) | 3 | % | ||||||||
Impairment of investment in privately held company |
| (13,587 | ) | 13,587 | (100 | )% | ||||||||||
Gain on investments carried at fair value, net |
118 | 1,723 | (1,605 | ) | (93 | )% | ||||||||||
Foreign currency loss, net |
(2,230 | ) | (1,332 | ) | (898 | ) | 67 | % | ||||||||
Other, net |
(932 | ) | (828 | ) | (104 | ) | 13 | % | ||||||||
Other expense, net |
$ | (2,932 | ) | $ | (13,287 | ) | $ | 10,355 | (78 | )% | ||||||
Interest Income and Expense. Interest income decreased during the three and nine months
ended September 30, 2010 due to (i) a shift during 2009 from higher yielding investments into lower
yielding cash and cash equivalents as we sought to reduce our exposure to the credit and liquidity
crisis in the financial markets, and (ii) our purchase of Camiant and Blueslice in May 2010 for
approximately $162.0 million and the resulting reduction of our interest bearing cash balances.
Impairment of investment in privately held company. During the second and third quarters of
2009, we recorded impairment charges of $2.8 million and $10.8 million, respectively, related to
our investment in a privately held company. These charges represented the difference between our
$15.0 million cost basis in this investment and its estimated fair value of $1.4 million as of
September 30, 2009 as we deemed the decline in the value of this asset to be other-than-temporary.
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Gain on investments carried at fair value, net. Gain on investments carried at fair value,
net represents the net gain resulting from changes in the fair value of our formerly held ARS
portfolio and the related Put right. Our ARS portfolio was classified as trading securities and,
accordingly, changes in its fair value were recorded in the corresponding period earnings (i.e.,
marked to market). The UBS Put right was recorded at fair value in accordance with the
provisions of the authoritative guidance for investments, and changes in the fair value were also
recorded in the corresponding period earnings. We exercised the Put right on June 30, 2010,
requiring UBS to purchase our remaining ARS portfolio at par value plus accrued interest.
Foreign currency loss, net. Foreign currency loss, net for the three and nine months ended
September 30, 2010 and 2009 consists primarily of (i) the net cost of our hedging program related
to foreign currency risk, including the gains and losses on forward contracts on foreign currency
exchange rates used to hedge our exposure to foreign currency risks, (ii) foreign currency gains
and losses associated with the underlying hedged item (principally accounts receivable), and (iii)
remeasurement adjustments resulting from consolidating our international subsidiaries. As we
expand our international business further, we will continue to enter into a greater number of
transactions denominated in currencies other than the U.S. Dollar and will be exposed to greater
risk related to exchange rate foreign currency fluctuations and translation adjustments.
Provision for Income Taxes
The income tax provisions for the three months ended September 30, 2010 and 2009 were
approximately ($0.5) million and $1.4 million, respectively, resulting in income tax expense
(benefit) as a percentage of pre-tax income, or an effective tax rate, of 80% and 13%,
respectively. The income tax provisions for the nine months ended September 30, 2010 and 2009 were
approximately $9.4 million and $14.1 million, respectively, resulting in income tax expense as a
percentage of pre-tax income, or an effective tax rate, of 29% and 31%, respectively.
The differences in the effective rates for the three and nine months ended September 30, 2010,
as compared to the same periods in 2009, are primarily due to (i) a higher percentage of our
projected income for the full year 2010 being derived from international locations with lower tax
rates than the U.S., and (ii) the cumulative effect of reducing our full year estimated effective
tax rate as a result of the shift of income to such jurisdictions, offset by tax expense resulting
from employee stock option cancellations and the required tax treatment under the authoritative
guidance for stock-based compensation as discussed in detail below. While the impact in terms of
absolute dollars of shifting additional income to jurisdictions with lower tax rates was
insignificant, due to the low amount of taxable income this shift had a disproportional impact on
our overall effective tax rate, resulting in the unusually high effective tax rate of 80% during
the third quarter of 2010.
Additionally, we did not reflect a benefit for the U.S. federal research and development tax
credit as part of our anticipated annual effective rate for the third quarter of 2010 because the
U.S. Congress had not extended this tax credit as of September 30, 2010. A benefit for this credit
was reflected in the projected annual effective rate as of the end of the third quarter of 2009. A
cumulative benefit resulting from this credit will be recognized in the quarter, if any, in which
the U.S. Congress enacts the related legislation. Please refer to Note 9 of the accompanying
unaudited condensed consolidated financial statements for a discussion of the reconciliations of
our effective tax rates for the three and nine months ended September 30, 2010 and 2009 to the
statutory rate of 35%.
We no longer have a pool of windfall tax benefits as defined by the authoritative guidance
for stock-based compensation. As a result, future cancellations or exercises that result in a tax
deduction that is less than the related deferred tax asset recognized under the authoritative
guidance will negatively impact our effective tax rate and increase its volatility, resulting in a
reduction of our earnings. The authoritative guidance for stock compensation requires that the
impact of such events be recorded as discrete items in the quarter in which the event occurs.
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Liquidity and Capital Resources
Key measures of our liquidity are as follows (in thousands):
September 30, | December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
Cash and cash equivalents |
$ | 222,715 | $ | 277,259 | $ | (54,544 | ) | (20 | )% | |||||||
Short-term investments |
$ | | $ | 92,857 | $ | (92,857 | ) | (100 | )% | |||||||
Working capital |
$ | 297,093 | $ | 441,277 | $ | (144,184 | ) | (33 | )% | |||||||
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Cash provided by operating activities continuing operations |
$ | 20,202 | $ | 46,928 | $ | (26,726 | ) | (57 | )% | |||||||
Cash provided by (used in) investing activities |
$ | (83,038 | ) | $ | 2,059 | $ | (85,097 | ) | (4,133 | )% | ||||||
Cash provided by financing activities |
$ | 8,850 | $ | 8,364 | $ | 486 | 6 | % |
Liquidity
We derive our liquidity and capital resources primarily from our cash flows from operations
and from our working capital. The significant components of our working capital are liquid assets
such as cash and cash equivalents and accounts receivable, and deferred costs and commissions,
reduced by trade accounts payable, accrued expenses, accrued compensation and related expenses, and
the current portion of deferred revenues. Our working capital decreased by $144.2 million, from
$441.3 million as of December 31, 2009 to $297.1 million as of September 30, 2010, primarily due to
a reduction in cash as a result of acquiring Camiant and Blueslice in the second quarter of 2010
for $162.0 million in total net cash consideration. This decrease in cash balances was partially
offset by cash inflow from operating activities of $20.2 million.
We have a line of credit facility of $50.0 million and a letter of credit facility of $10.0
million with Wells Fargo Bank, National Association that was originally with Wachovia Bank,
National Association. The line of credit is unsecured except for our pledge of 65% of the
outstanding stock of certain subsidiaries, while the letter of credit facility requires certain
levels of cash collateral for outstanding letters of credit. There were no outstanding borrowings
under the line of credit facility at September 30, 2010. As of September 30, 2010, there were
approximately $0.8 million of borrowings outstanding under the letter of credit facility, all of
which were fully collateralized by us.
We also had a letter of credit facility in the maximum amount of $5.0 million with Wells Fargo
which also required cash collateral. This letter of credit facility expired on December 31, 2009
and can no longer be used to issue new letters of credit. As of September 30, 2010, there were
letters of credit of approximately $1.4 million outstanding under this facility, all of which were
fully collateralized by us.
As of December 31, 2009, we held $81.8 million of ARS recorded at fair value, which
represented a decline of $11.2 million below our cost basis, and an associated UBS Put right,
recorded at an estimated fair value of $11.1 million. Prior to and throughout the second quarter
of 2010, issuers called certain ARS securities which reduced the investment in our ARS portfolio.
On June 30, 2010, we exercised our UBS Put right requiring UBS to purchase the remaining balance of
our ARS portfolio at par value plus accrued interest. As a result of the issuer calls and our
exercising the UBS Put right, we received cash proceeds of $79.6 million during the second quarter
of 2010 and thus liquidated our ARS portfolio.
We believe that our current working capital position, available line of credit and anticipated
cash flow from operations will be adequate to meet our cash needs for our daily operations and
capital expenditures for at least the next 12 months. Additionally, we believe these resources
allow us to continue to invest in further development of our technology and, when necessary or
appropriate, make selective acquisitions to continue to strengthen our product portfolio. Our
liquidity could be negatively impacted by a decrease in revenues resulting from a decline in demand
for our products or a reduction of capital expenditures by our customers.
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Operating Activities
Net cash provided by operating activities from continuing operations was $20.2 million and
$46.9 million for the nine months ended September 30, 2010 and 2009, respectively. The decrease in
our cash flows from continuing operations was primarily the result of (i) lower net income for the
period, and (ii) lower cash collections of accounts receivable in the first nine months of 2010 as
compared to the first nine months of 2009. Our cash collections were negatively affected by the
deterioration of credit conditions in the emerging markets, as well as a year-over-year decline in
orders and associated billing activity.
We currently anticipate that we will continue to operate our business with positive cash flows
from operations. Our ability to meet these expectations depends on our ability to achieve positive
earnings. Our ability to generate future cash flows from operations could be negatively impacted
by, among other factors, a decrease in demand for our products, which are subject to technological
changes and increasing competition, or a reduction of capital expenditures by our customers should
they continue to remain cautious with their spending.
Investing Activities
Net cash provided by (used in) investing activities was ($83.0) million and $2.1 million for
the nine months ended September 30, 2010 and 2009, respectively. Our cash flows from investing
activities primarily relate to (i) purchases and sales of investments, (ii) strategic acquisitions,
and (iii) purchases of property and equipment.
In the first nine months of 2010, acquisition related net cash outflows were $162.0 million
for the purchase of Camiant and Blueslice. Our investment in property and equipment was $14.1
million during the first nine months of 2010. Offsetting these investing cash outflows was $93.0
million in proceeds from issuer calls of ARS and the exercise of our UBS Put right discussed
previously. For the nine months ended September 30, 2009, our investing activities consisted of
property and equipment purchases of $14.6 million, offset by the call of $16.6 million of ARS by
the issuers.
We continue to closely monitor our capital expenditures, while making strategic investments in
the development of our existing products and the replacement of certain older computer and
information technology infrastructure to meet the needs of our workforce. Accordingly, we expect
our total capital expenditures to be between $18.0 million and $20.0 million for 2010.
Financing Activities
Net cash provided by financing activities was $8.9 million and $8.4 million for the nine
months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30,
2010, our financing activities primarily consisted of proceeds of $11.8 million from net issuances
of common stock pursuant to the exercise of employee stock options and purchase under our employee
stock purchase plan, including the excess tax benefit on those exercises and purchases, partially
offset by $2.9 million of employee withholding tax payments made as a result of net share
settlements of equity awards.
For the nine months ended September 30, 2009, our financing activities consisted primarily of
the proceeds of $10.5 million from the issuance of common stock pursuant to the exercise of
employee stock options and purchases under our employee stock purchase plan, including the excess
tax benefit on those exercises and purchases, partially offset by $2.1 million of employee
withholding tax payments made as a result of net share settlements of equity awards.
Critical Accounting Policies and Estimates
For information about our critical accounting policies and estimates, see the Critical
Accounting Policies and Estimates section of Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in our 2009 Form 10-K. In addition, please refer to
Note 1 of the accompanying unaudited condensed consolidated financial statements and to Recent
Accounting Pronouncements below for information regarding our adoption of new revenue recognition
guidance.
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Recent Accounting Pronouncements
Revenue Recognition for Arrangements with Multiple Deliverables
In September 2009, the Financial Accounting Standards Board (FASB) amended the accounting
standards for revenue recognition to remove tangible products containing software components and
non-software components that function together to deliver the products essential functionality
from the scope of industry-specific software revenue recognition guidance. As a result, these
arrangements are accounted for in accordance with the new non-software guidance for arrangements
with multiple deliverables.
The FASB also amended the accounting standards for revenue recognition for arrangements with
multiple deliverables. The new authoritative guidance for arrangements with multiple deliverables
requires that arrangement consideration be allocated at the inception of an arrangement to all
deliverables using the relative selling price method. It also establishes a selling price
hierarchy for determining the selling price of a deliverable, which includes: (i) vendor-specific
objective evidence (VSOE) if available; (ii) third-party evidence (TPE) if vendor-specific
objective evidence is not available; and (iii) best estimated selling price (BESP) if neither
vendor-specific nor third-party evidence is available. The new guidance eliminates the residual
method of allocation for multiple-deliverable revenue arrangements which we used historically when
we applied the software revenue recognition guidance to our multiple element arrangements.
We elected to early adopt, as permitted, the new authoritative guidance on January 1, 2010, on
a prospective basis for applicable transactions originating or materially modified after January 1,
2010. As substantially all of our telecommunications products include both tangible products and
software elements that function together to deliver the tangible products essential functionality,
the existing software revenue recognition guidance no longer applies to the majority of our
transactions. The adoption of the new non-software revenue recognition guidance did not have a
material impact on the timing, pattern, or amount of revenue recognized in the third quarter and
nine months of 2010, primarily due to (i) a portion of third quarter and first nine months 2010
revenue being derived from the backlog of orders which were received prior to January 1, 2010 and
therefore did not fall under the new non-software revenue recognition guidance, and (ii) the new
non-software revenue recognition guidance not differing significantly from the software revenue
recognition guidance when applied to acceptance based arrangements and arrangements that are
received and fulfilled within the same quarter. Based on currently available information, we
anticipate that the impact of adopting this guidance on revenue recognition will not be material
for our 2010 results. However, this assessment may change because such impacts depend on terms and
conditions of arrangements in effect in those future periods.
Please refer to Note 1 to the accompanying unaudited condensed consolidated financial
statements for additional information about this new revenue recognition guidance.
Fair Value Measurements and Disclosures
In January 2010, the FASB issued Accounting Standards Update 2010-06 Improving Disclosures
about Fair Value Measurements. This Update amends the authoritative guidance for fair value
measurements and disclosures by adding new disclosure requirements with respect to transfers in and
out of Levels 1 and 2 fair value measurements, as well as by requiring gross basis disclosures for
purchases, sales, issuances, and settlements included in the reconciliation of Level 3 fair value
measurements. This Update also amends the authoritative guidance by providing clarifications to
existing disclosure requirements. The new disclosures and clarifications of existing disclosures
are effective for interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements which are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. Early adoption is permitted.
We adopted this new guidance, including the guidance related to the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements, on January 1, 2010. The adoption of this guidance did not have a material impact on
our financial position or results of operations.
Disclosure Requirements related to Financing Receivables and Allowance for Credit Losses
In July 2010, the FASB issued Accounting Standard Update No. 2010-10 Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses, which updates the
authoritative guidance for receivables. The new disclosures will require disaggregated information
related to financing receivables and
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will include for each class of financing receivables, among
other things: a roll forward for the allowance for credit losses, credit quality information,
impaired loan information, modification information, and non-accrual and past-due information. The
disclosures as of the end of a reporting period are effective for interim and annual reporting
periods ending on or after December 15, 2010. The disclosures about activity that occurs during a
reporting period are effective for interim and annual reporting periods
beginning on or after December 15, 2010. Accordingly, we will implement the guidance for
period-end disclosures effective as of the end of our fourth quarter of 2010, with the guidance for
period activity disclosures to be implemented during our first quarter of 2011. We believe the
adoption of this update will primarily result in increased disclosures, but will not have any other
impact on our financial statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The statements that are not historical facts contained in this Managements Discussion and
Analysis of Financial Condition and Results of Operations and other sections of this Quarterly
Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as may, will, intend, should, could, would,
expect, plan, anticipate, believe, estimate, project, predict, potential, and
variations of these words and similar expressions are sometimes used to identify forward-looking
statements. These statements reflect the current belief, expectations, estimates, forecasts or
intent of our management and are subject to and involve certain risks and uncertainties. There can
be no assurance that our actual future performance will meet managements expectations. As
discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 and our other
filings with the Securities and Exchange Commission, our future operating results are difficult to
predict and subject to significant fluctuations. Factors that may cause future results to differ
materially from managements current expectations include, among others:
| the effect of the recent economic crisis on overall spending by our customers, including increasing pressure from our customers for us to lower prices for our products and warranty services, access to credit markets by our customers and the impact of tightening credit on capital spending, and further changes in general economic, social, or political conditions in the countries in which we operate; | ||
| the continued decline in sales of our Eagle 5 related products, including the ability of carriers to utilize excess capacity of signaling infrastructure and related products in their networks; | ||
| our ability to compete, particularly on price, with other manufacturers that have lower cost bases than ours and/or are partially supported by foreign government subsidies or employ unfair trade practices; | ||
| risks related to our international sales, markets and operations, including among others, import regulations, limited intellectual property protection, including limited protection of our software source code, withholding taxes and their effect on cash flow timing, and increased costs and potential liabilities related to compliance with current and future security provisions in customer contracts and government regulations, including in particular those imposed by the government of India; | ||
| exposure to increased bad debt expense and product and service disputes as a result of general economic conditions and the uncertain credit markets worldwide; | ||
| the timely development and acceptance of our new products and services, including the timing of demand for integrated next generation signaling solutions, the training of our employees on new products, our product mix and the geographic mix of our revenues and the associated impact on gross margins and operating expenses, and the effect of any product that fails to meet one customers expectations on the sale of that or any other products to that or other customers; | ||
| uncertainties related to the timing of revenue recognition due to the increasing percentage of next generation solutions in our backlog, as we have a limited history of the order to revenue conversion cycle; | ||
| the onerous terms and conditions, including liability provisions, imposed by our customers in connection with new product deployments; | ||
| our ability to gain the benefits we anticipate from our acquisitions, including our acquisitions of Camiant and Blueslice and including expected sales of new products and synergies between the companies products and operations; | ||
| continuing financial weakness in the telecommunications equipment sector, resulting in pricing pressure on our products and services, as certain of our competitors consolidate, reduce their prices, lengthen their payment terms and enter into terms and/or conditions that are generally less favorable to them; | ||
| the risk that continued service provider consolidation or outsourcing of network maintenance and operations functions will insert a potential competitor between us and our customers and/or erode our level of service to such service providers and/or negatively affect our margins; | ||
| the risk that our financial results for the full year 2010 will not meet our expectations; | ||
| the timing of significant orders and shipments, the timing of revenue recognition under the residual |
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method of accounting, and the effect of the new non-software revenue recognition guidance adopted in the first quarter of 2010; | |||
| the lengthy sales cycles for our products, particularly for our new or acquired products; | ||
| the availability and success or failure of advantageous strategic and vendor relationships; | ||
| litigation, including patent-related litigation, and regulatory matters and the costs and expenses associated therewith; and | ||
| other risks described in this Form 10-Q and in our Form 10-K for 2009 and in our other Securities and Exchange Commission filings. |
Many of these risks and uncertainties are outside of our control and are difficult for us to
forecast or mitigate. Actual results may differ materially from those expressed or implied in such
forward-looking statements. We do not assume any responsibility for updating or revising these
forward-looking statements. Undue emphasis or reliance should not be placed on any forward-looking
statements contained herein or made elsewhere by or on behalf of us.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Item 7A, Quantitative and
Qualitative Disclosures about Market Risk, included in our 2009 Form 10-K. Our exposures to
market risk have not changed materially since December 31, 2009 other than as discussed in Note 4
Fair Value of Financial Instruments to the accompanying unaudited condensed consolidated
financial statements and under the caption Critical Accounting Policies and Estimates in Part I,
Item 2 of this Form 10-Q.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on our managements evaluation (with the participation of our Chief Executive Officer
and Chief Financial Officer), as of the end of the quarter covered by this report, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)), are effective in that they provide reasonable assurance that
information required to be disclosed by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the period covered
by this report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does
not expect that our disclosure controls and procedures or our internal control over financial
reporting are or will be capable of preventing or detecting all errors and all fraud. Any control
system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the control systems objectives will be met. The design of a control system must
reflect the fact that there are resource constraints and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in the description of material legal proceedings as
reported in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in Part 1,
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 5. Other Information
Our policy governing transactions in our securities by our directors, executive officers and
certain other employees permits such persons from time to time to adopt stock trading plans
pursuant to Rule 10b5-1 promulgated by the Securities and Exchange Commission under the Exchange
Act. As of September 30, 2010, each of the following persons had adopted a Rule 10b5-1 stock
trading plan that was then in effect: Hubert de Pesquidoux, director, Carol Mills, director, Krish
Prabhu, director, Michael Ressner, director, Franco Plastina, President, Chief Executive Officer
and a director, and Ronald J. de Lange, Executive Vice President, Global Product Solutions. The
Company does not undertake any obligation to disclose, or to update or revise any disclosure
regarding, any such plans and specifically does not undertake to disclose the adoption, amendment,
termination or expiration of any such plans.
On
August 13, 2010, our Board of Directors adopted advance notice bylaws, which require that
proposals and director nominations (other than proposals and director nominations submitted
pursuant to Exchange Act Rule 14a-8) for our 2011 Annual Meeting of Shareholders (along
with all required information and representations) be in writing and be received by our
Secretary no earlier than January 14, 2011 and no later than February 14, 2011. The
February 14, 2011 deadline supersedes the February 21, 2011 deadline disclosed in our
proxy statement for our 2010 Annual Meeting of Shareholders, which we filed with the
Securities and Exchange Commission on April 7, 2010.
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Item 6. Exhibits
Exhibit | Description | |||
3.1 | Amended and Restated Bylaws of the Company(1) |
|||
10.1 | Seventh Amendment, dated as of October 1, 2010, to Credit
Agreement dated as of October 2, 2008 by and among Tekelec,
Tekelec International, SPRL, the lenders from time to time parties
thereto, and Wells Fargo Bank, N.A. (as successor to Wachovia
Bank, National Association), as Administrative Agent, Swingline
Lender, Issuing Lender and Lender(2) |
|||
31.1 | Certification of Chief Executive Officer of Tekelec pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(2) |
|||
31.2 | Certification of Chief Financial Officer of Tekelec pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(2) |
|||
32.1 | Certifications of Chief Executive Officer and Chief Financial
Officer of Tekelec pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002(2) |
|||
101 | The following financial information from the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2010
(filed with the Securities and Exchange Commission on November 4,
2010), is formatted in Extensible Business Reporting Language
(XBRL) and electronically submitted herewith: (i) unaudited
condensed consolidated balance sheets as of September 30, 2010 and
December 31, 2009, (ii) unaudited condensed consolidated
statements of operations for the three and nine months ended
September 30, 2010 and 2009, (iii) unaudited condensed
consolidated statements of comprehensive income for the three and
nine months ended September 30, 2010 and 2009, (iv) unaudited
condensed consolidated statements of cash flows for the nine
months ended September 30, 2010 and 2009, and (v) notes to
unaudited condensed consolidated financial
statements(3) |
(1) | Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K (File No. 0-15135) dated August 13, 2010, as filed with the Securities and Exchange Commission on August 18, 2010. | |
(2) | Filed herewith. | |
(3) | The XBRL information in Exhibit 101 shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of that Section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
46
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TEKELEC |
||||
Date: November 4, 2010 | /s/ FRANCO PLASTINA | |||
Franco Plastina | ||||
President and Chief Executive Officer | ||||
Date: November 4, 2010 | /s/ GREGORY S. RUSH | |||
Gregory S. Rush | ||||
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
||||
Date: November 4, 2010 | /s/ PAUL J. ARMSTRONG | |||
Paul J. Armstrong | ||||
Vice President and Corporate Controller |
47
Table of Contents
EXHIBIT INDEX
Exhibit | Description | |||
10.1 | Seventh Amendment, dated as of October 1, 2010, to Credit
Agreement dated as of October 2, 2008 by and among Tekelec,
Tekelec International, SPRL, the lenders from time to time
parties thereto, and Wells Fargo Bank, N.A. (as successor to
Wachovia Bank, National Association), as Administrative Agent,
Swingline Lender, Issuing Lender and Lender |
|||
31.1 | Certification of Chief Executive Officer of Tekelec pursuant
to Rule 13a-14(a) under the Exchange Act, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer of Tekelec pursuant
to Rule 13a-14(a) under the Exchange Act, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certifications of Chief Executive Officer and Chief Financial
Officer of Tekelec pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
101 | The following financial information from the Companys
Quarterly Report on Form 10-Q for the quarter ended September
30, 2010 (filed with the Securities and Exchange Commission on
November 4, 2010), is formatted in Extensible Business
Reporting Language (XBRL) and electronically submitted
herewith: (i) unaudited condensed consolidated balance sheets
as of September 30, 2010 and December 31, 2009, (ii) unaudited
condensed consolidated statements of operations for the three
and nine months ended September 30, 2010 and 2009, (iii)
unaudited condensed consolidated statements of comprehensive
income for the three and nine months ended September 30, 2010
and 2009, (iv) unaudited condensed consolidated statements of
cash flows for the nine months ended September 30, 2010 and
2009, and (v) notes to unaudited condensed consolidated
financial statements(1) |
(1) | The XBRL information in Exhibit 101 shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of that Section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |