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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 1, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-26634
LeCROY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE | 13-2507777 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
700 CHESTNUT RIDGE ROAD CHESTNUT RIDGE, NEW YORK |
10977 | |
(Address of Principal Executive Office) | (Zip Code) |
(845) 425-2000
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark (X) 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 twelve 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 x NO ¨
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 ¨ NO ¨
Indicate by check mark (X) whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-Accelerated filer | x | Smaller Reporting Company | ¨ |
Indicate by check mark (X) whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of shares of common stock outstanding as of February 4, 2011 was 16,092,279.
Table of Contents
LeCROY CORPORATION
FORM 10-Q
Page No. | ||||||
PART I | ||||||
1 | ||||||
Item 1. |
1 | |||||
Consolidated Balance Sheets (Unaudited) as of January 1, 2011 and July 3, 2010 |
1 | |||||
2 | ||||||
3 | ||||||
4 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
20 | ||||
Item 3. |
26 | |||||
Item 4. |
27 | |||||
PART II | ||||||
28 | ||||||
Item 1. |
28 | |||||
Item 1A. |
28 | |||||
Item 6. |
29 | |||||
30 |
LeCroy ®, Wavelink®, WaveMaster®, WavePro®, WaveJet®, WaveRunner®, WaveScan, WaveSurfer, WaveExpert, MAUI, CATC, WaveAce® and QualiPHY® are our trademarks, among others not referenced in this document. All other trademarks or servicemarks referred to in this Form 10-Q are the property of their respective owners.
Table of Contents
ITEM 1. | FINANCIAL STATEMENTS |
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except par value and share data |
January 1 , 2011 |
July 3, 2010* |
||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 8,707 | $ | 7,822 | ||||
Accounts receivable, net of reserves of $273 and $499 at January 1, 2011 and July 3, 2010, respectively |
28,620 | 26,840 | ||||||
Inventories, net |
37,563 | 30,308 | ||||||
Other current assets |
12,361 | 9,654 | ||||||
Total current assets |
87,251 | 74,624 | ||||||
Property, plant and equipment, net |
22,988 | 20,806 | ||||||
Intangible assets, net |
579 | 409 | ||||||
Other non-current assets |
6,882 | 6,815 | ||||||
Total assets |
$ | 117,700 | $ | 102,654 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 18,772 | $ | 13,649 | ||||
Accrued expenses and other current liabilities |
21,468 | 12,327 | ||||||
Convertible notes, net of unamortized discount of $1,427 and $0, respectively |
28,223 | | ||||||
Total current liabilities |
68,463 | 25,976 | ||||||
Long-term bank debt |
| 17,000 | ||||||
Convertible notes, net of unamortized discount of $0 and $3,044, respectively |
| 36,606 | ||||||
Deferred revenue and other non-current liabilities |
3,690 | 3,296 | ||||||
Total liabilities |
72,153 | 82,878 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $.01 par value (authorized 5,000,000 shares; none issued and outstanding as of January 1, 2011 and July 3, 2010) |
| | ||||||
Common stock, $.01 par value (authorized 45,000,000 shares; 15,983,094 shares issued and outstanding at January 1, 2011 and 12,764,413 shares issued and outstanding at July 3, 2010) |
164 | 128 | ||||||
Additional paid-in capital |
149,908 | 125,392 | ||||||
Accumulated other comprehensive income |
4,175 | 1,992 | ||||||
Accumulated deficit |
(108,700 | ) | (107,736 | ) | ||||
Total stockholders equity |
45,547 | 19,776 | ||||||
Total liabilities and stockholders equity |
$ | 117,700 | $ | 102,654 | ||||
*Certain July 3, 2010 amounts have been revised. See Note 1 to consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended (13 weeks) | Two Quarters Ended | |||||||||||||||
In thousands, except per share data |
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
||||||||||||
Revenues: |
||||||||||||||||
Test and measurement products |
$ | 41,884 | $ | 28,384 | $ | 78,357 | $ | 54,191 | ||||||||
Service and other |
3,128 | 2,614 | 5,765 | 4,808 | ||||||||||||
Total revenues |
45,012 | 30,998 | 84,122 | 58,999 | ||||||||||||
Cost of revenues |
17,371 | 12,820 | 33,093 | 25,154 | ||||||||||||
Gross profit |
27,641 | 18,178 | 51,029 | 33,845 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
15,738 | 10,167 | 31,087 | 19,070 | ||||||||||||
Research and development |
9,430 | 6,839 | 18,032 | 12,958 | ||||||||||||
Total operating expenses |
25,168 | 17,006 | 49,119 | 32,028 | ||||||||||||
Operating income |
2,473 | 1,172 | 1,910 | 1,817 | ||||||||||||
Other (expense) income: |
||||||||||||||||
(Loss) gain on extinguishment of convertible notes, net of issue cost write-off |
(532 | ) | 247 | (532 | ) | 611 | ||||||||||
Interest income |
12 | 18 | 23 | 29 | ||||||||||||
Interest expense |
(622 | ) | (855 | ) | (1,412 | ) | (1,643 | ) | ||||||||
Amortization of debt discount on convertible notes |
(511 | ) | (605 | ) | (1,072 | ) | (1,210 | ) | ||||||||
Other, net |
(341 | ) | (138 | ) | (618 | ) | (270 | ) | ||||||||
Other expense, net |
(1,994 | ) | (1,333 | ) | (3,611 | ) | (2,483 | ) | ||||||||
Income (loss) before income taxes |
479 | (161 | ) | (1,701 | ) | (666 | ) | |||||||||
Provision (benefit) for income taxes |
179 | 120 | (737 | ) | 97 | |||||||||||
Net income (loss) |
$ | 300 | $ | (281 | ) | $ | (964 | ) | $ | (763 | ) | |||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.02 | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.06 | ) | |||||
Diluted |
$ | 0.02 | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.06 | ) | |||||
Weighted average number of common shares: |
||||||||||||||||
Basic |
14,577 | 12,387 | 13,622 | 12,323 | ||||||||||||
Diluted |
15,210 | 12,387 | 13,622 | 12,323 |
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
In thousands |
Two Quarters ended | |||||||
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (964 | ) | $ | (763 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
2,710 | 2,682 | ||||||
Share-based compensation |
9,117 | 1,976 | ||||||
Amortization of debt issuance costs |
270 | 239 | ||||||
Amortization of debt discount on convertible notes |
1,072 | 1,210 | ||||||
Deferred income taxes |
(751 | ) | (123 | ) | ||||
Loss (gain) on extinguishment of convertible notes, net of issue cost write-off |
532 | (611 | ) | |||||
(Gain) loss on disposal of property, plant and equipment |
(68 | ) | 5 | |||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
271 | 1,837 | ||||||
Inventories |
(8,502 | ) | 5,044 | |||||
Other current and non-current assets |
(1,729 | ) | (1,379 | ) | ||||
Accounts payable, accrued expenses and other liabilities |
5,246 | (5,038 | ) | |||||
Net cash provided by operating activities |
7,204 | 5,079 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property, plant and equipment |
(2,594 | ) | (1,167 | ) | ||||
Net cash used in investing activities |
(2,594 | ) | (1,167 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Borrowings under credit line |
3,500 | 2,500 | ||||||
Repurchase of convertible notes |
(10,175 | ) | (3,775 | ) | ||||
Payments made on capital leases |
(128 | ) | (124 | ) | ||||
Payment of debt issuance costs |
(625 | ) | | |||||
Proceeds from stock issuance, net of underwriters discount |
23,117 | | ||||||
Repayment of borrowings under credit line |
(20,500 | ) | | |||||
Proceeds from employee stock purchase and option plans |
687 | 262 | ||||||
Net cash (used in) provided by financing activities |
(4,124 | ) | 1,137 | |||||
Effect of exchange rate changes on cash and cash equivalents |
399 | 105 | ||||||
Net increase in cash and cash equivalents |
885 | 2,880 | ||||||
Cash and cash equivalents at beginning of the period |
7,822 | 6,413 | ||||||
Cash and cash equivalents at end of the period |
8,707 | $ | 9,293 | |||||
Supplemental Cash Flow Disclosure |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 1,171 | $ | 1,287 | ||||
Income taxes, net of refunds |
240 | 252 | ||||||
Non-cash transactions: |
||||||||
Transfer of inventory into property, plant and equipment |
1,375 | 331 | ||||||
Stock offering expenses unpaid |
418 | | ||||||
Property, plant and equipment acquired under capital lease |
794 | |
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying interim Consolidated Financial Statements include all the accounts of LeCroy Corporation (the Company or LeCroy) and its wholly-owned subsidiaries. These Consolidated Financial Statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the fiscal year ended July 3, 2010. The accompanying Consolidated Balance Sheet as of July 3, 2010 has been derived from those audited Consolidated Financial Statements.
The Companys Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP), which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements as well as the revenues and expenses reported during the period. The most significant of these estimates and assumptions relate to revenue recognition, reserves for accounts receivable, allowance for excess and obsolete inventory, uncertain tax positions, valuation of deferred tax assets, the effective income tax rate and geographical distribution of taxable income, valuation of long-lived assets, share-based compensation expense, estimation of warranty liabilities and the separation of the convertible notes between debt and equity. These estimates and assumptions are based on managements judgment and available information and, consequently, actual results could differ from these estimates.
These unaudited Consolidated Financial Statements reflect all adjustments of a normal recurring nature, that are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. Interim period operating results may not be indicative of the operating results for a full year. Inter-company transactions and balances have been eliminated in consolidation.
The Companys fiscal years end on the Saturday closest to June 30, resulting in an extra week of results every five or six years. Fiscal 2010 was a fifty-three week year and, as a result, the two quarters ended January 2, 2010 represented a 27-week period compared to a 26-week period for the two quarters ended January 1, 2011.
Correction of an immaterial error in the prior period consolidated financial statements
The Consolidated Balance Sheet as of July 3, 2010 reflects an immaterial correction of approximately $0.9 million to properly classify the deferred tax asset related to the Companys stock appreciation rights (SARs) as a current asset. The Companys SARs are liability classified awards and are reflected in the Consolidated Balance Sheets as current liabilities. The Company applied the concepts set forth in Staff Accounting Bulletin 99 (SAB 99) in order to assess materiality with respect to the balance sheet classification error and determined the impact on prior period financial statements was immaterial. Therefore, the deferred tax asset associated with the awards, which was previously classified as non-current as of July 3, 2010, has been reclassified from Other non-current assets to Other current assets to follow the current classification of the underlying award.
2. Share-Based Compensation
Total share-based compensation expense recorded in the Consolidated Statement of Operations for the quarter ended January 1, 2011 and January 2, 2010 is approximately $4.2 million and $1.1 million, respectively. For the two quarters ended January 1, 2011 and January 2, 2010, total share-based compensation is approximately $9.1 million and $2.0 million, respectively.
Stock Options
The table below presents the assumptions used to calculate the fair value of options granted during the quarter and two quarters ended January 1, 2011 and January 2, 1010:
Quarter Ended January 1, 2011 |
Two quarters Ended January 1, 2011 |
Quarter Ended January 2, 2010 |
Two quarters Ended January 2, 2010 | |||||
Expected holding period (years) |
5.0 | 5.0 | 5.0 | 5.0 | ||||
Risk-free interest rate |
1.13%-1.98% | 1.13%-1.98% | 2.19%-2.30% | 2.19%-2.57% | ||||
Dividend yield |
0.0% | 0.0% | 0.0% | 0.0% | ||||
Expected volatility |
57.09%-57.30% | 56.22%-57.30% | 56.36%-56.51% | 56.36%-59.01% | ||||
Weighted average fair value of options granted |
$4.45 | $3.06 | $1.96 | $1.97 |
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Changes in the Companys stock options for the quarter and two quarters ended January 1, 2011 were:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Terms (Years) |
Aggregate Intrinsic Value ($000) |
|||||||||||||
Outstanding at July 3, 2010 |
2,274,807 | $ | 6.89 | |||||||||||||
Granted |
459,000 | $ | 5.98 | |||||||||||||
Exercised |
(37,550 | ) | $ | 3.03 | ||||||||||||
Expired |
(5,160 | ) | $ | 7.27 | ||||||||||||
Forfeited |
(19,255 | ) | $ | 3.95 | ||||||||||||
Outstanding at October 2, 2010 |
2,671,842 | $ | 6.81 | 4.94 | $ | 8,067 | ||||||||||
Granted |
38,056 | $ | 8.96 | |||||||||||||
Exercised |
(69,557 | ) | $ | 3.38 | ||||||||||||
Expired |
(36,278 | ) | $ | 17.88 | ||||||||||||
Forfeited |
(11,351 | ) | $ | 4.03 | ||||||||||||
Outstanding at January 1, 2011 |
2,592,712 | $ | 6.79 | 4.78 | $ | 11,114 | ||||||||||
Vested and expected to vest at January 1, 2011 |
2,505,143 | $ | 6.85 | 4.58 | $ | 10,672 | ||||||||||
Exercisable at January 1, 2011 |
1,215,708 | $ | 9.42 | 3.71 | $ | 3,725 | ||||||||||
Approximately 8,100 immediately vested options were granted during the second quarter ended January 1, 2011, representing an annual grant to the board of directors.
The total intrinsic value of stock options exercised during the quarter and two quarters ended January 1, 2011 was approximately $0.2 million and $0.3 million, respectively, as compared to approximately zero for the quarter and two quarters ended ended January 2, 2010.
As of January 1, 2011, there was approximately $2.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under the plans. That cost is expected to be recognized over a remaining weighted-average period of approximately 3.0 years. Approximately $0.1 million and less than $0.1 million of compensation cost was capitalized in inventory for the quarters ended January 1, 2011 and January 2, 2010. For the two quarters ended January 1, 2011 and January 2, 2010, approximately $0.2 million and less than $0.1 million was capitalized in inventory.
Non-Vested Stock
The following table summarizes transactions related to non-vested stock for the quarter and two quarters ended January 1, 2011:
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
Non-vested stock at July 3, 2010 |
120,591 | $ | 9.44 | |||||
Granted |
| $ | | |||||
Vested |
(27,313 | ) | $ | 12.07 | ||||
Forfeited |
(137 | ) | $ | 8.62 | ||||
Non-vested stock at October 2, 2010 |
93,141 | $ | 8.67 | |||||
Granted |
45,623 | $ | 8.57 | |||||
Vested |
(55,372 | ) | $ | 8.91 | ||||
Forfeited |
| $ | | |||||
Non-vested stock at January 1, 2011 |
83,392 | $ | 8.46 | |||||
As of January 1, 2011, there was approximately $0.4 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock granted under the plans. That cost is expected to be recognized over a remaining weighted-average period of approximately 1.1 years.
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Employee Stock Purchase Plan (ESPP)
As of January 1, 2011 and July 3, 2010, there was approximately $0.1 million and less than $0.1 million, respectively, of liability classified share-based compensation expense for the ESPP included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.
Cash Settled Stock Appreciation Rights (SARs)
The Company records compensation expense ratably over the service period and adjusts for changes in the fair value of SARs at each reporting period. At January 1, 2011, there was approximately $7.2 million of unrecognized compensation cost, net of estimated forfeitures related to the SARs. That cost is expected to be recognized over a weighted average period of approximately 1.9 years.
The table below presents the assumptions used to remeasure the value of the SARs at each reporting period:
Quarter Ended January 1, 2011 |
Quarter Ended July 3, 2010 | |||
Expected holding period (years) |
3.2 | 3.7 | ||
Risk-free interest rate |
0.85% - 1.54% | 1.01% - 1.60% | ||
Dividend yield |
0.0% | 0.0% | ||
Expected volatility |
62.16% - 72.31% | 58.00% - 67.88% | ||
Weighted average fair value of SARs granted and outstanding |
$5.56 | $1.87 |
As of January 1, 2011 and July 3, 2010, there was approximately $10.5 million and $2.7 million, respectively, of liability classified share-based compensation expense for the SARs included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.
Changes in the Companys SARs for the quarter and two quarters ended January 1, 2011 are as follows:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Terms (Years) |
Aggregate Intrinsic Value ($000) |
|||||||||||||
Outstanding at July 3, 2010 |
3,329,000 | $ | 6.81 | |||||||||||||
Outstanding at October 2, 2010 |
3,329,000 | $ | 6.81 | 4.41 | $ | 4,264 | ||||||||||
Outstanding at January 1, 2011 |
3,329,000 | $ | 6.81 | 4.16 | $ | 10,089 | ||||||||||
Vested and expected to vest at January 1, 2011 |
3,284,925 | $ | 6.82 | 4.15 | $ | 9,905 | ||||||||||
Exercisable at January 1, 2011 |
1,574,250 | $ | 7.31 | 3.01 | $ | 3,984 | ||||||||||
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
3. Revenue Recognition
LeCroy recognizes product and service revenue, net of allowances for anticipated returns, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, or when services have been provided. The price is considered fixed or determinable when it is not subject to refund or adjustments.
Test and measurement products revenue
The Company generates Test and measurement product revenue from the sales of oscilloscopes and application solutions, protocol analyzers, probes and accessories. All sales of Test and measurement products are recorded as revenue according to the above revenue recognition criteria, net of any applicable sales or value added taxes.
Application solutions, which provide oscilloscopes with additional analysis capabilities, are either delivered via compact disc or are already loaded in the oscilloscopes and activated via a key code after the sale is made to the customer. No post-contract support is provided on the application solutions. Certain software is embedded in the Companys oscilloscopes, but the embedded software component is considered incidental.
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010, modified the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. Beginning on July 4, 2010, the Company prospectively applied the new revenue recognition guidance. Under the new guidance, the Companys protocol analyzer products are considered hardware, as the tangible product contains software components and non- software components that function together to deliver the products essential functionality. These products are excluded from the scope of software revenue recognition guidance and are subject to other relevant revenue recognition guidance, including the recognition criteria described above. Post-contract support (PCS) is provided on certain protocol analyzers. Under the new guidance, when vendor specific objective evidence (VSOE) or third party evidence (TPE) for deliverables in an arrangement cannot be determined, a best estimate of the selling price (ESP) is required to separate the deliverable and allocate arrangement consideration using the relative selling price method. Beginning in fiscal 2011, revenue recognition related to protocol analyzer sales for certain products includes an allocation for PCS, based on managements estimate of relative selling price, as VSOE is no longer established by the sale of maintenance agreements. Deferred revenue for PCS prior to adopting the new guidance will continue to be recognized, based on its initial deferral period, in accordance with the prospective adoption guidance. The amendments to the accounting and disclosure for revenue recognition did not have a material impact on the Companys consolidated financial position or results of operations, and therefore, did not require enhanced disclosures.
Revenue recognition requires judgment, including whether an arrangement includes multiple elements, and if so, whether VSOE, TPE or ESP of fair value exists for those elements. A portion of revenue may be recorded as unearned due to undelivered elements. Changes to the elements in an arrangement, the ability to identify VSOE, TPE or ESP for those elements, the fair value of the respective elements and changes to a products estimated life cycle could materially impact the amount of earned and unearned revenue. Judgment is also required to assess whether future releases represent new products, upgrades or enhancements to existing products.
In an effort to provide end-user customers an alternative to purchasing the Companys higher end products under its standard terms and conditions, the Company offers customers an opportunity to enter into sales-type or direct financing leases for these products. Lease and rental revenues are reported within Test and measurement product revenue and were approximately $0.1 million and $0.2 million for the quarter and two quarters ended January 1, 2011 as compared to approximately $0.1 million and $0.3 million for the quarter and two quarters ended January 2, 2010, respectively.
Service and other revenue
Service and other revenue includes extended warranty contracts, repairs and calibrations performed on instruments after the expiration of their normal warranty period, direct service accessories and packages, payments for research and development activities in accordance with a third party agreement, and software maintenance agreements. The Company records deferred revenue for extended warranty contracts, software maintenance agreements and calibration services and recognizes such revenue on a straight-line basis over the related service period.
The Company recognized approximately $0.3 million and $0.5 million in other revenue related to a research and development and distribution agreement for each of the quarter and two quarter periods ended January 1, 2011 and January 2, 2010, respectively. Revenue is being recognized ratably over the three year term of the agreement.
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
4. Business Realignment and Restructuring Initiatives
Fiscal 2010 Business Realignment
In the fourth quarter of fiscal 2010, as a result of changes in the selling organization, the Company recorded severance of approximately $0.1 million, which was expensed to Selling, general and administrative (SG&A), resulting from headcount reductions of four employees or approximately 1% of the workforce as compared to June 27, 2009. As of January 1, 2011, approximately $0.1 million has been paid in cash and no liability remains.
In the third quarter of fiscal 2010, as a result of administrative changes, the Company recorded severance of approximately $0.2 million, which was expensed to Selling, general and administrative (SG&A), resulting from a headcount reduction. As of January 1, 2011, approximately $0.2 million has been paid in cash and no liability remains.
Fiscal 2009 Restructuring Initiatives
In the fourth quarter of fiscal 2009, as a result of the economic downturn and resulting business realignment decisions affecting personnel in Europe, the Company vacated certain space at its Swiss facility. This resulted in a restructuring charge to SG&A expense of approximately $0.7 million, which represented the present value of the estimated future cash payments, net of estimated subrental income and expense, through the remainder of the lease term which will expire in the first quarter of Fiscal 2014. As of January 1, 2011, approximately $0.2 million remains in Accrued expenses and other current liabilities and approximately $0.3 million remains in Deferred revenue and other non-current liabilities on the Consolidated Balance Sheet.
Fiscal 2009 Business Realignment
In the third quarter of fiscal 2009, in an effort to further streamline expenses in response to the dramatic deterioration in economic and market conditions, the Company recorded severance of approximately $2.6 million, of which approximately $0.6 million was expensed to Cost of revenues, approximately $1.1 million was expensed to SG&A and approximately $0.9 million was expensed to Research and development. This resulted from headcount reductions of sixty-two employees or approximately 13.6% of the workforce as compared to June 28, 2008. As of January 1, 2011, approximately $2.4 million has been paid in cash, and approximately $0.2 million remains in Accrued expenses and other current liabilities and nearly zero remains in Deferred revenue and other non-current liabilities on the Consolidated Balance Sheet. Severance is estimated to be paid by the end of the third quarter of fiscal 2012.
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
5. Derivative Instruments and Fair Value
The effect of derivative instruments on the Consolidated Statement of Operations for the quarter and two quarters ended January 1, 2011 and January 2, 2010 is as follows (in thousands):
Derivatives |
Location of Gain/(Loss) Recognized in Income on Derivatives |
Quarter ended Amount of Gain/(Loss) Recognized in Income on Derivatives |
Two
quarters ended Amount of Gain/(Loss) Recognized in Income on Derivatives |
|||||||
Period ended January 1, 2011 |
Other, net | 582 | 908 | |||||||
Period ended January 2, 2010 |
Other, net | 154 | 441 |
The net gains resulting from changes in the fair value of these derivatives, as presented above, combined with the net losses resulting from transactions denominated in other than their functional currencies were net losses of approximately $0.3 million and $0.6 million for the quarter and two quarters ended January 1, 2011, as compared to net losses of approximately $0.1 million and $0.3 million for the quarter and two quarters ended January 2, 2010, respectively.
The U.S. dollar equivalent of outstanding forward foreign exchange contracts, all with maturities of less than six months, is summarized below (in millions):
Contracts |
Notional Amount at January 1, 2011 |
Notional Amount at July 3, 2010 |
||||||
Buy Swiss Francs for US Dollars |
$ | 9.6 | $ | 8.0 | ||||
Buy Japanese Yen for US Dollars |
2.4 | 2.8 | ||||||
Sell Euros for US Dollars |
5.7 | 4.2 | ||||||
Sell Euros for Swiss francs |
2.8 | 3.0 | ||||||
Other foreign currency forwards |
0.9 | 1.5 | ||||||
Total |
$ | 21.4 | $ | 19.5 | ||||
The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
| Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. |
| Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. |
| Level 3: Unobservable inputs reflecting managements own assumptions about the inputs used in pricing the asset or liability. |
As of January 1, 2011, the fair values of the Companys financial assets and liabilities are categorized as follows (in thousands):
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Other current assets: |
||||||||||||||||
Foreign exchange forward contracts |
$ | 27 | | $ | 27 | | ||||||||||
Accrued expenses and other current liabilities: |
||||||||||||||||
Foreign exchange forward contracts |
$ | 88 | | $ | 88 | |
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
The fair values above were based on observable market transactions of spot currency rates and forward currency prices. The net fair value of the open foreign exchange forward contracts is a net liability of $0.1 million and less than $0.1 million at January 1, 2011 and July 3, 2010, respectively.
6. Comprehensive Income (Loss)
Quarter ended | Two quarters ended | |||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 |
January 2, 2010 |
|||||||||||||
Net income (loss) |
$ | 300 | $ | (281 | ) | $ | (964 | ) | $ | (763 | ) | |||||
Foreign currency translation gain (loss) |
626 | (2 | ) | 2,183 | 909 | |||||||||||
Comprehensive income (loss) |
$ | 926 | $ | (283 | ) | $ | 1,219 | $ | 146 | |||||||
7. Inventories, net
Inventories consist of the following (in thousands):
January 1, 2011 |
July 3, 2010 |
|||||||
Raw materials |
$ | 9,656 | $ | 9,305 | ||||
Work in process |
9,519 | 6,416 | ||||||
Finished goods |
18,388 | 14,587 | ||||||
Total |
$ | 37,563 | $ | 30,308 | ||||
The value of demonstration units included in finished goods was approximately $13.4 million and $10.7 million at January 1, 2011 and July 3, 2010, respectively. The Companys demonstration units are held for sale and are sold regularly in the ordinary course of business through its normal sales distribution channels and to its existing customer base. The allowance for excess and obsolete inventory included above, amounted to approximately $3.4 million and $3.3 million at January 1, 2011 and July 3, 2010, respectively.
8. Other Current Assets
Other current assets consist of the following (in thousands):
January 1, 2011 |
July 3, 2010* |
|||||||
Deferred tax assets, net (see Note 1) |
$ | 5,780 | $ | 5,074 | ||||
Prepaid taxes |
618 | 375 | ||||||
Prepaid deposits |
534 | 656 | ||||||
Other receivables |
2,047 | 1,150 | ||||||
Value-added tax receivable |
984 | 490 | ||||||
Other |
2,398 | 1,909 | ||||||
Total |
$ | 12,361 | $ | 9,654 | ||||
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
9. Intangible Assets and Other Non-current Assets
Intangible Assets
The following table reflects the gross carrying amount and accumulated amortization of the Companys amortizable intangible assets (in thousands):
Original Weighted Average Lives |
January 1, 2011 |
July 3, 2010 |
||||||||||
Amortizable intangible assets: |
||||||||||||
Technology, manufacturing and distribution rights |
2.9 years | $ | 8,546 | $ | 8,296 | |||||||
Accumulated amortization |
(8,242 | ) | (8,188 | ) | ||||||||
Net carrying amount |
$ | 304 | $ | 108 | ||||||||
Patents and other intangible assets |
5.9 years | 1,592 | 1,592 | |||||||||
Accumulated amortization |
(1,317 | ) | (1,291 | ) | ||||||||
Net carrying amount |
$ | 275 | $ | 301 | ||||||||
Total net carrying amount |
3.4 years | $ | 579 | $ | 409 | |||||||
Other Non-Current Assets
Other non-current assets consist of the following (in thousands):
January 1, 2011 |
July 3, 2010 * |
|||||||
Deferred tax assets, net (see Note 1) |
$ | 5,802 | $ | 5,676 | ||||
Deferred financing costs on convertible note |
| 402 | ||||||
Deferred financing costs on credit agreement |
483 | 18 | ||||||
Other |
597 | 719 | ||||||
Total |
$ | 6,882 | $ | 6,815 | ||||
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
January 1, 2011 |
July 3, 2010 |
|||||||
Compensation and benefits, including severance (a) |
$ | 15,838 | $ | 7,343 | ||||
Warranty |
953 | 867 | ||||||
Deferred revenue, current portion (b) |
1,194 | 1,207 | ||||||
Accrued interest on debt |
254 | 380 | ||||||
Retained liabilities from discontinued operations |
160 | 160 | ||||||
Capital leases, current portion (c) |
254 | 66 | ||||||
Professional fees |
445 | 355 | ||||||
Deferred tax liabilities |
273 | 241 | ||||||
Other current liabilities |
2,097 | 1,708 | ||||||
Total |
$ | 21,468 | $ | 12,327 | ||||
(a) | Includes approximately $10.5 million and $2.7 million of SARs liability as of January 1, 2011 and July 3, 2010, respectively. |
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(b) | The long-term portion of Deferred revenue is approximately $0.8 million and $0.7 million as of January 1, 2011 and July 3, 2010, respectively, and is classified within Deferred revenues and other non-current liabilities on the Consolidated Balance Sheet. |
(c) | The long-term portion of Capital leases is approximately $0.5 million as of January 1, 2011 and is classified within Deferred revenues and other non-current liabilities on the Consolidated Balance Sheet. There was no long-term portion of Capital leases at July 3, 2010. |
11. Warranties
The following table is a reconciliation of the changes in the Companys aggregate product warranty liability (in thousands):
January 1, 2011 |
July 3, 2010 |
|||||||
Balance at beginning of period |
$ | 867 | $ | 905 | ||||
Accruals for warranties issued during the period |
615 | 732 | ||||||
Warranty costs incurred during the period |
(529 | ) | (770 | ) | ||||
Balance at end of period |
$ | 953 | $ | 867 | ||||
12. Debt and Capital Leases
Prior Credit Agreement
The Companys $50.0 million senior, secured, four-year credit agreement (Prior Credit Agreement) included a $5.0 million swingline loan subfacility and a $5.0 million letter of credit subfacility. The Prior Credit Agreement would have expired on July 15, 2011, unless, in the absence of any default it was extended by LeCroy to April 1, 2012, contingent on the waiver or extension of the first redemption date of the Companys convertible notes.
Borrowings under the Prior Credit Agreement, bore interest at variable rates, based upon LeCroys senior leverage ratio, equal to, at the Companys election, (1) the higher of (a) the prime rate or (b) the federal funds rate plus 0.5%, or (c) one-month London Interbank Offering Rate (LIBOR) as defined in the Prior Credit Agreement, plus an applicable margin of between 1.75% and 2.75%, or (2) LIBOR plus an applicable margin of between 2.75% and 3.75%. The Prior Credit Agreement provided for a LIBOR floor of 1.50% and required the Company to pay commitment fees on unused revolver borrowings during the term of the Prior Credit Agreement at rates between 0.25% and 0.5% dependent upon its senior leverage ratio.
New Credit Agreement
On July 29, 2010, LeCroy Corporation entered into an Amended and Restated $50.0 million Senior Secured Credit Agreement (the New Credit Agreement) with the lenders listed therein and Manufacturers and Traders Trust Company, as administrative agent for such lenders. The New Credit Agreement amends LeCroys Prior Credit Agreement that was entered into on March 30, 2007 and subsequently amended. The terms of the New Credit Agreement provide LeCroy with a $50.0 million revolving credit facility, which includes a $5.0 million swingline loan subfacility and a $5.0 million letter of credit subfacility. LeCroy has the right to increase the total revolving commitment to $60.0 million within the first twenty-four months of the New Credit Agreement upon meeting certain conditions. The performance by LeCroy of its obligations under the New Credit Agreement is secured by all of the assets of LeCroy and its domestic subsidiaries, and is guaranteed by LeCroys domestic subsidiaries.
The New Credit Agreement will mature on January 1, 2014. However, if a default or event of default exists or is continuing the maturity date will become July 15, 2011. At the time of expiration all outstanding amounts under the New Credit Agreement will be due and payable. Under certain conditions, the lending commitments under the New Credit Agreement may be terminated by the lenders and amounts outstanding under the New Credit Agreement may be accelerated.
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Borrowings under the Agreement (except swing line loans) bear interest at variable rates equal to, at LeCroys election, (a) a rate based on LIBOR or (b) Base Rate, as defined, plus a margin based on the total leverage ratio. Swing line loans bear interest at the Base Rate plus the Applicable Margin, as defined. In addition, LeCroy must pay commitment fees during the term of the New Credit Agreement at rates dependent on the Companys leverage ratio.
Subject to complying with applicable covenants, the proceeds of the borrowings under the New Credit Agreement have and will be used to refinance existing debt, including the ability to retire the outstanding Notes which have a first put or redemption date in October 2011, fund short-term and long-term working capital, for issuance of Letters of Credit and general corporate purposes.
The New Credit Agreement contains, among other things, conditions precedent, affirmative and negative covenants, representations and warranties and events of default. Negative covenants include certain restrictions or limitations on, among other things, the incurrence of indebtedness; pledges, liens and encumbrances; mergers and acquisitions; loans, advances and investments; sales of assets and sale leaseback arrangements; and restricted payments, including distributions, dividends, stock repurchases and the repayment of the Convertible notes. The New Credit Agreement prohibits repayment of the Convertible notes until (i) the total leverage ratio is less than 3.00 to 1.00, (ii) after giving effect to the repurchase the total leverage ratio is less than 3.00 to 1.00 and (iii) LeCroy is in compliance with all of the terms and conditions in the New Credit Agreement prior to and after giving effect to the repurchase.
The Company is required to comply with certain financial covenants, measured quarterly, including, as defined: a total leverage ratio, a senior leverage ratio, a minimum consolidated EBITDA, a minimum fixed charge ratio, a maximum capital expenditure, a maximum debt outstanding and a minimum liquidity. The senior leverage ratio, maximum debt outstanding and minimum liquidity covenants were eliminated under the Second Modification effective January 11, 2011.
First Modification of New Credit Agreement
Effective as of September 28, 2010, LeCroy entered into a First Modification Agreement to modify the maximum debt outstanding financial covenant of its New Credit Agreement, prior to its removal under the Second Modification effective January 11, 2011.
The Company incurred approximately $0.6 million of financing costs in connection with the New Credit Agreement which will be deferred and amortized, on a straight line basis, over the term of the New Credit Agreement, along with the remaining unamortized fees associated with the Prior Credit Agreement of approximately $0.2 million. At January 1, 2011, approximately $0.3 million of deferred financing costs were included in Other current assets and approximately $0.5 million were included in Other non-current assets.
As of January 1, 2011, the Company had no balances outstanding against the credit facility, the letter of credit subfacility or the swingline loan subfacility. As of January 1, 2011, the Company was in compliance with its financial covenants.
Second Modification of New Credit Agreement
Effective January 11, 2011, the Company entered into a Second Modification Agreement to modify certain terms and provisions of its New Credit Agreement as described in Note 19 Subsequent Events.
Convertible Notes
On October 12, 2006, the Company sold and issued $72.0 million in convertible senior subordinated notes to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the Notes). The Notes bear interest at a rate of 4.00% per annum, payable in cash semi-annually in arrears on each April 15 and October 15. The Notes are direct, unsecured, senior subordinated obligations of the Company and rank: (i) subordinate in right of payment to all of the Companys existing and future secured indebtedness; (ii) equal in right of payment with all of the Companys existing and future senior unsecured indebtedness, and (iii) senior in right of payment to all of the Companys existing and future subordinated indebtedness. In connection with the issuance and sale of the Notes, the Company entered into an indenture dated as of October 12, 2006, with U.S. Bank National Association as trustee. The terms of the Notes are governed by the indenture.
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
The Notes mature on October 15, 2026 unless earlier redeemed, repurchased or converted. Holders of the Notes will have the right to require the Company to repurchase for cash, all or a portion of their Notes on each of October 15, 2011, October 15, 2016 and October 15, 2021, at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, up to but not including, the repurchase date. The Company may, from time to time, at its option repurchase the Notes in the open market. In addition, the Company may redeem the Notes for cash, either in whole or in part, anytime after October 20, 2011 at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest, if any, up to but not including the redemption date. The Notes are convertible into Company common stock by the holders at an initial conversion rate equal to 68.7285 shares per $1,000 principal amount of the Notes (equal to an initial conversion price of approximately $14.55 per share), subject to adjustment as described in the indenture. Upon conversion, the Company will deliver for each $1,000 principal amount of Notes, an amount consisting of cash equal to the lesser of $1,000 and the conversion value (as defined in the indenture) and, to the extent that the conversion value exceeds $1,000, at the Companys election, cash or shares of Company common stock in respect of the remainder. Prior to September 15, 2026, holders may convert their notes into cash and shares of the Companys common stock, if any, at the applicable conversion rate, at their option, only under limited circumstances described in the indenture. On or after September 15, 2026, holders may convert their notes into cash and shares of the Companys common stock, if any, at the applicable conversion price, at the Companys option, at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion of each $1,000 principal amount of the notes, the holder will receive an amount in cash equal to the lesser of (i) $1,000 or (ii) the conversion value, as described in the indenture; if the conversion value exceeds $1,000 on the conversion date, the Company will also deliver, at the Companys election, cash or common stock or combination of each with a value equal to such excess.
As of January 1, 2011 and July 3, 2010, the market value of the Notes was approximately $30.3 million and $37.5 million, respectively. Fair value is determined through information obtained from a third party, using the latest available market data.
As of January 1, 2011, approximately $0.2 million of unamortized fees related to the Notes were included in Other current assets. At July 3, 2010, approximately $0.4 million of unamortized fees were included in Other non-current assets on the Consolidated Balance Sheet.
Below is a summary of the Companys repurchases of the Notes for the quarter and two quarters ended January 1, 2011 and January 2, 2010 (in thousands):
Quarter ended | Two quarters ended | |||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||||||||
Face value repurchased |
$ | 10,000 | $ | 2,400 | $ | 10,000 | $ | 3,400 | ||||||||
(Loss) gain on extinguishment of convertible notes, net of issue cost write-off |
(532 | ) | 247 | (532 | ) | 611 |
The carrying amount of the equity component of the Notes and the principal amount, unamortized discount and net carrying amount of the liability component of the Notes as of January 1, 2011 and July 3, 2010 were as follows (in thousands):
January 1, 2011 |
July 3, 2010 |
|||||||
Equity component of Notes |
$ | 8,326 | $ | 8,493 | ||||
Principal amount of Notes |
$ | 29,650 | $ | 39,650 | ||||
Unamortized discount of Notes |
(1,427 | ) | (3,044 | ) | ||||
Liability component of Notes |
$ | 28,223 | $ | 36,606 | ||||
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
The effective interest rate, contractual interest expense and amortization of debt discount for the Notes for the quarter and two quarters ended January 1, 2011 and January 2, 2010 were as follows:
Quarter ended | Two quarters ended | |||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||||||||
Effective interest rate |
10.5 | % | 10.5 | % | 10.5 | % | 10.5 | % | ||||||||
(in thousands): |
||||||||||||||||
Interest expensecontractual |
$ | 297 | $ | 454 | $ | 694 | $ | 970 | ||||||||
Amortization of debt discount |
$ | 511 | $ | 605 | 1,072 | 1,210 |
Other
During fiscal 2008, the Company acquired a software license under a capital lease agreement for approximately $0.7 million. The lease bears interest at 7.75% with a three-year term. During the first quarter of 2011, the Company renewed the software license for approximately $0.8 million. The lease bears interest at 5.25% with a three-year term. As of January 1, 2011, approximately $0.3 million was included in Accrued expenses and other current liabilities and approximately $0.5 million was included in Deferred revenue and other non-current liabilities on the Consolidated Balance Sheet.
The Companys Swiss subsidiary has an overdraft facility totaling 1.0 million Swiss francs for which approximately 0.4 million Swiss francs are being held against supplier obligations, leaving an available balance of 0.6 million Swiss francs under this facility at January 1, 2011. The outstanding balance under this facility remains unchanged from July 3, 2010.
13. Commitments and Contingencies
The Companys contractual obligations and commitments include obligations associated with employee severance agreements, supplier agreements, operating leases, capital leases, revolving credit and convertible note obligations, as set forth in the Contractual Obligations and Other Commitments table in the Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The Company expensed approximately $0.7 million and $1.4 million related to operating leases for the quarter and two quarters ended January 1, 2011, respectively, and approximately $0.6 million and $1.2 million for the quarter and two quarters ended January 2, 2010, respectively.
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters which arise in the ordinary course of business. There are no matters currently pending that the Company expects to have a material adverse affect on its business, results of operations, financial condition or cash flows.
In November 2010, as resolution to an ongoing matter, the Company entered into a confidential intellectual property settlement agreement with an entity and several of its employees. Under the terms of the agreement, the Company will receive a series of scheduled payments which will in effect reimburse the Company for legal expenses incurred related to this matter. As payments become virtually certain to be received, the amounts will be credited against Selling, general and administrative (SG&A) expenses in the Consolidated Statement of Operations. For the quarter ended January 1, 2011, the Company recorded approximately $0.3 million as a credit to SG&A expenses for the reimbursement of fees and $0.1 million of this amount is included in Other current assets on the Consolidated Balance Sheet. The $0.1 million was received subsequent to the quarter ended January 1, 2011.
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
14. Common Stock and Net Income (Loss) Per Common Share (EPS)
On November 9, 2010, the Company closed an underwritten public offering of 2,990,000 shares of its common stock at $8.25 per share, raising aggregate proceeds of approximately $22.7 million after deducting the underwriting discount of approximately $1.5 million and other offering related expenses of $0.4 million. The Company used $15.5 million of the proceeds from the offering to repay indebtedness outstanding under the credit facility, in accordance with the provisions of the New Credit Agreement.
The following is a presentation of the numerators and the denominators of the basic and diluted net income (loss) per common share computations for the quarter and two quarters ended January 1, 2011 and January 2, 2010:
Quarter ended (13 weeks) | Two quarters ended | |||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | 300 | $ | (281 | ) | $ | (964 | ) | $ | (763 | ) | |||||
Denominator: |
||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
14,577 | 12,387 | 13,622 | 12,323 | ||||||||||||
Employee stock options and other |
633 | | | | ||||||||||||
Diluted |
15,210 | 12,387 | 13,622 | 12,323 | ||||||||||||
The computations of diluted EPS for the quarters ended January 1, 2011 and January 2, 2010 do not include approximately 0.7 million and 2.2 million, respectively, of stock options and non-vested stock, as the effect of their inclusion would have been anti-dilutive to EPS. The computations of diluted EPS for the two quarters ended January 1, 2011 and January 2, 2010 do not include approximately 1.0 million and 2.1 million, respectively, of stock options and non-vested stock, as the effect of their inclusion would have been anti-dilutive to EPS. Additionally, the convertible notes had no impact on the diluted EPS calculations because the average share price during the periods was below $14.55 per share (the initial conversion price), and accordingly, the Notes, if converted, would have required only cash at settlement.
15. Employee Benefit Plans
The following table represents consolidated disclosure of the Companys Swiss defined benefit pension plan, as described in the 2010 Annual Report on Form 10-K.
Components of Net Periodic Benefit Cost
The components of net periodic benefit cost for the quarter and two quarters ended January 1, 2011 and January 2, 2010 are as follows (in thousands):
Quarter ended (13 weeks) | Two quarters ended | |||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||||||||
Service cost |
$ | 105 | $ | 69 | $ | 204 | $ | 132 | ||||||||
Interest cost |
81 | 78 | 158 | 153 | ||||||||||||
Expected return on plan assets |
(81 | ) | (65 | ) | (157 | ) | (128 | ) | ||||||||
Net periodic pension benefit cost |
$ | 105 | $ | 82 | $ | 205 | $ | 157 | ||||||||
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
16. Income Taxes
The effective income tax rates for the quarter and two quarters ended January 1, 2011 were 37.4% and 43.3%, respectively, compared to an effective income tax rate of (74.5)% and (14.6)%, for the quarter and two quarters ended January 2, 2010, respectively. The effective income tax rate for the quarter and two quarters ended January 1, 2011 includes the write-off of deferred tax assets related to equity-based compensation of less than $0.1 million, and a tax benefit of approximately $0.3 million related to a retroactive reinstatement of the federal research and development tax credit as a result of the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 passed into law on December 17, 2010. The effective income tax rate for the quarter and two quarters ended January 2, 2010 includes the write-off of deferred tax assets related to equity-based compensation of approximately $0.1 million and $0.2 million, respectively.
The Company calculates income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year. The differences between the effective tax rate and the U.S. federal statutory rate of 35% principally result from the Companys geographical distribution of taxable income, state and local taxes, graduated federal tax rate reductions, research tax credits, domestic production activities deductions and non-deductible expenses.
At January 1, 2011, the Companys net U.S. deferred tax assets amounted to approximately $11.5 million. Management has considered the realizability of the deferred tax assets and has concluded that a domestic valuation allowance of approximately $1.4 million should be recorded, mainly related to certain tax credit carryforwards that are not anticipated to be realized. Although management determined that a valuation allowance was not required with respect to the remaining net U.S. deferred tax assets, realization of these assets is primarily dependent on achieving the forecast of future taxable income, as well as prudent and feasible tax planning strategies. Based upon the projections, the domestic net operating loss carryforwards and federal tax credit carryforwards would be fully utilized before expiration.
The Company operates in multiple taxing jurisdictions, both within the United States and outside of the United States, and faces audits from various tax authorities regarding the deductibility of certain expenses, intercompany transactions, as well as other matters. At January 1, 2011, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes and accrued interest was approximately $10.7 million of which approximately $1.3 million was reflected as a non-current liability and approximately $9.4 million was reflected as a reduction of gross deferred tax assets, all of which would impact the effective tax rate, if recognized.
The Company believes it is reasonably possible that approximately $0.1 million of net unrecognized tax benefits will be recognized during the next twelve months due to the expiration of the statute of limitations and impact the Companys effective tax rate. However, actual results could differ from those currently anticipated.
The Company recognizes interest and, if applicable, penalties which could be assessed related to unrecognized tax benefits in income tax expense. As of January 1, 2011, the total amount of accrued interest and penalties, before federal and, if applicable, state effect, was approximately $0.1 million.
The Company files income tax returns in the U.S., various states and in foreign jurisdictions. For federal and foreign income tax purposes, the fiscal 2007 through 2010 tax years remain open for examination by the tax authorities. For state tax purposes, (principally California and New York) fiscal 2006 through 2010 tax years remain open for examination by the tax authorities.
17
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
17. Geographic Revenue and Assets
The Company operates in a single-reportable segment in the test and measurement market. Revenues are attributed to countries based on customer ship-to addresses. Revenues by geographic area are as follows (in thousands):
Quarter Ended (13 weeks) | Two Quarters Ended | |||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||||||||
Americas |
$ | 12,601 | $ | 13,387 | $ | 25,584 | $ | 26,616 | ||||||||
Europe/Middle East |
18,978 | 11,955 | 31,154 | 19,912 | ||||||||||||
Asia/Pacific |
13,433 | 5,656 | 27,384 | 12,471 | ||||||||||||
Total revenues |
$ | 45,012 | $ | 30,998 | $ | 84,122 | $ | 58,999 | ||||||||
Total assets by geographic area are as follows (in thousands):
January 1, 2011 |
July 3, 2010 |
|||||||
Americas |
$ | 95,630 | $ | 85,088 | ||||
Europe/Middle East |
14,108 | 11,131 | ||||||
Asia/Pacific |
7,962 | 6,435 | ||||||
Total assets |
$ | 117,700 | $ | 102,654 | ||||
Total property, plant and equipment, net by geographic area are as follows (in thousands):
January 1, 2011 |
July 3, 2010 |
|||||||
Americas |
$ | 22,101 | $ | 19,892 | ||||
Europe/Middle East |
395 | 471 | ||||||
Asia/Pacific |
492 | 443 | ||||||
Total property, plant and equipment |
$ | 22,988 | $ | 20,806 | ||||
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LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
18. New Accounting Pronouncements
Recent pronouncements adopted
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010, modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company adopted the guidance in the first quarter of fiscal 2011 and it did not have a material impact on the Companys consolidated financial position or results of operations. See Note 3, Revenue Recognition for further details.
Recent pronouncement not yet adopted
There have been no accounting pronouncements recently issued that are expected to materially affect the Companys consolidated financial position or results of operations.
19. Subsequent Events
On January 11, 2011, LeCroy Corporation entered into a Second Modification of the New Credit Agreement which amends the Companys existing credit facility that was entered into on July 29, 2010 and subsequently amended by the First Modification on September 28, 2010.
Under the Second Modification, certain covenants and terms have been revised. The Company is now required to comply with certain financial covenants, measured quarterly, including, as defined: a total leverage ratio, a minimum consolidated EBITDA, a fixed charge coverage ratio and maximum capital expenditures. This modification lowers certain interest rates and fees payable under the New Credit Agreement and includes a provision for a LIBOR floor of 0.375% per annum. The Applicable Rate Margins for borrowings associated with each leverage ratio tier have been lowered from a range of 2.25%-4.25%, to a new range of 1.0%-3.0%. Additionally, the Second Modification amended restrictive covenants that limited the Companys ability to make investments, acquisitions and stock repurchases.
The Company incurred approximately $0.1 million of financing costs in connection with the Second Modification which will be deferred and amortized, on a straight line basis, over the term of the New Credit Agreement.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the audited Consolidated Financial Statements, Notes, MD&A, Risk Factors and Business Risks included in our Annual Report filed on Form 10-K for the fiscal year ended July 3, 2010. Our discussion and analysis is an integral part of understanding our financial results. Also refer to Basis of Presentation in the Notes to the Consolidated Financial Statements.
Our Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are based on managements judgment and available information and, consequently, actual results could differ from these estimates.
The accounting policies that we believe are the most critical to understanding and evaluating our reported financial results include: revenue recognition; reserves on accounts receivable; allowance for excess and obsolete inventory; uncertain tax positions; valuation of deferred tax assets; the effective income tax rate and geographical distribution of taxable income; valuation of long-lived assets; share-based compensation expense; estimation of warranty liabilities and the separation of convertible notes between debt and equity.
Fiscal Year
Our fiscal years end on the Saturday closest to June 30, resulting in an extra week of results every five or six years. Fiscal 2010 was a fifty-three week year and, as a result, the two quarters ended January 2, 2010 represented a 27-week period compared to a 26-week period for the two quarters ended January 1, 2011.
Recent Accounting Pronouncements
There have been no accounting pronouncements recently issued that are expected to materially affect the Companys consolidated financial position or results of operations.
Consolidated Results of Operations
The following table indicates the percentage of total revenues represented by each item in the Companys Consolidated Statements of Operations for the quarter and two quarters ended January 1, 2011 and January 2, 2010.
(Unaudited) |
Quarter ended (13 weeks) | Two quarters ended | ||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||||||||
Revenues: |
||||||||||||||||
Test and measurement products |
93.1 | % | 91.6 | % | 93.1 | % | 91.9 | % | ||||||||
Service and other |
6.9 | 8.4 | 6.9 | 8.1 | ||||||||||||
Total revenues |
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Cost of revenues |
38.6 | 41.4 | 39.3 | 42.6 | ||||||||||||
Gross profit |
61.4 | 58.6 | 60.7 | 57.4 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
35.0 | 32.8 | 37.0 | 32.3 | ||||||||||||
Research and development |
20.9 | 22.1 | 21.4 | 22.0 | ||||||||||||
Total operating expenses |
55.9 | 54.9 | 58.4 | 54.3 | ||||||||||||
Operating income |
5.5 | 3.7 | 2.3 | 3.1 | ||||||||||||
Other (expense) income: |
||||||||||||||||
(Loss) gain on extinguishment of convertible notes, net of issue cost write-off |
(1.2 | ) | 0.8 | (0.6 | ) | 1.0 | ||||||||||
Interest income |
| 0.1 | | 0.1 |
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(Unaudited) |
Quarter ended (13 weeks) | Two quarters ended | ||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||||||||
Interest expense |
(1.4 | ) | (2.8 | ) | (1.7 | ) | (2.8 | ) | ||||||||
Amortization of debt discount |
(1.1 | ) | (2.0 | ) | (1.3 | ) | (2.1 | ) | ||||||||
Other, net |
(0.7 | ) | (0.3 | ) | (0.7 | ) | (0.4 | ) | ||||||||
Other expense, net |
(4.4 | ) | (4.2 | ) | (4.3 | ) | (4.2 | ) | ||||||||
Income (loss) before income taxes |
1.1 | (0.5 | ) | (2.0 | ) | (1.1 | ) | |||||||||
Provision (benefit) for income taxes |
0.4 | 0.4 | (0.9 | ) | 0.2 | |||||||||||
Net income (loss) |
0.7 | % | (0.9 | )% | (1.1 | )% | (1.3 | )% | ||||||||
Comparison of the Quarter Ended January 1, 2011 and January 2, 2010
Total revenues were approximately $45.0 million for the quarter ended January 1, 2011, compared to $31.0 million for the comparable prior year period, representing an increase of approximately 45.2%, or $14.0 million, primarily as a result of an increase in sales of Test and measurement products. We have benefited from the surge in the deployment of mobile devices and the bandwidth utilization of these mobile devices. This surge has driven customer demand for our highest speed oscilloscopes and has positively impacted our sales. Demand and sales for our mid-range oscilloscopes have increased as well, as design engineers are faced with greater signal integrity challenges when using new devices and working with higher speed standards. Our customers investments in research and development remain strong, as the economic recovery gains momentum in the technology sector.
Service and other revenues consist primarily of service revenue and maintenance fees. Service and other revenues were approximately $3.1 million for the quarter ended January 1, 2011, representing an increase of approximately 19.7% or $0.5 million, compared to approximately $2.6 million for the comparable prior year period. The increase was primarily the result of higher customer demand for ancillary service orders.
Revenues by geographic location expressed in dollars (in thousands) and as a percentage of total were:
Quarter Ended January 1, 2011 |
percentage | Quarter Ended January 2, 2010 |
percentage | |||||||||||||
Americas |
$ | 12,601 | 28.0 | % | $ | 13,387 | 43.2 | % | ||||||||
Europe/Middle East |
18,978 | 42.2 | 11,955 | 38.6 | ||||||||||||
Asia/Pacific |
13,433 | 29.8 | 5,656 | 18.2 | ||||||||||||
Total revenues |
$ | 45,012 | 100.0 | % | $ | 30,998 | 100.0 | % | ||||||||
For the quarter ended January 1, 2011, revenues in Europe/Middle East and Asia/Pacific increased due to unprecedented customer demand, predominantly in Japan and China. The net increase in revenues was slightly offset by a decrease in Americas due to timing of shipments. For the quarter ended January 1, 2011, foreign currency fluctuations negatively impacted revenue by approximately $0.6 million.
Gross profit for the quarter ended January 1, 2011 was approximately $27.6 million, or 61.4% gross margin, compared to approximately $18.2 million, or 58.6% gross margin, for the comparable prior year period. The gross margin for the quarter ended January 1, 2011 was positively impacted by additional operating leverage from higher volumes and favorable product mix, with increased sales of higher margin oscilloscopes. Share-based compensation expense for the quarter ended January 1, 2011 was approximately $0.1 million compared to less than $0.1 million for the prior comparable period.
Selling, general and administrative (SG&A) expense was approximately $15.7 million for the quarter ended January 1, 2011 as compared to approximately $10.2 million for the quarter ended January 2, 2010, representing an increase of approximately 54.8% or $5.6 million. The current quarter reflects increased selling expenses as a result of new hires and variable selling and marketing expenses incurred to achieve the higher level of sales, slightly offset by the reimbursement of certain legal expenses. Share-based compensation expense was approximately $3.5 million in the current period as compared to $0.8 million in the second quarter of fiscal 2010, driven by an increase in the fair value of the SARs.
Research and development (R&D) expense was approximately $9.4 million for the quarter ended January 1, 2011, compared to approximately $6.8 million for the comparable prior year period, an increase of approximately 37.9% or $2.6 million. The increase in R&D was attributable to incremental charges associated with our new products and expenditures for ongoing initiatives. Share-based compensation for the quarter ended January 1, 2011 and January 2, 2010 was approximately $0.6 million and $0.3 million respectively, and was primarily impacted by the increase in the fair value of the SARs.
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Other expense, net, which consists primarily of: losses and gains on the extinguishment of debt, net of issue cost write-off, interest income and expense, foreign exchange gains and losses and amortization of debt discount on convertible notes was an expense of approximately $2.0 million for the quarter ended January 1, 2011 compared to an expense of approximately $1.3 million for the second quarter ended January 2, 2010. The increase is predominantly due to an approximate $0.5 million loss incurred on the extinguishment of convertible notes for the quarter ended January 1, 2011, as we repurchased $10.0 million face value of our outstanding notes, versus a gain of approximately $0.2 million on the extinguishment of convertible notes for the quarter ended January 2, 2010, when we repurchased $2.4 million face value of the outstanding notes. Accounting for the extinguishment of convertible notes requires the application of derecognition guidance where upon repurchase, the fair value of the liability component immediately prior to the extinguishments is measured first and the difference between the fair value of the aggregate consideration paid and the fair value of the liability component is attributed to the reacquisition of the equity component. The derecognition guidance resulted in a loss in the consolidated statement of operations that differed from the cash loss, which we measure as the difference between the cash paid and the principal face value amount repurchased. The after-tax impact resulting from the difference between the cash loss and the accounting loss is approximately $0.2 million. Additionally, there was a net foreign exchange loss of approximately $0.3 million for the quarter ended January 1, 2011 as compared to a net loss of approximately $0.1 million for the comparable prior period. Net interest expense was approximately $0.6 million for the quarter ended January 1, 2011 as compared to approximately $0.8 million for the comparable prior year period as a result of a decreased debt position.
Comparison of the Two quarters Ended January 1, 2011 and January 2, 2010
Total revenues were approximately $84.1 million for the two quarters ended January 1, 2011, compared to $59.0 million for the comparable prior year period, representing an increase of approximately $25.1 million, or 42.6%, primarily due to intense customer demand for high-end and mid-range oscilloscopes. The additional week of sales in our fiscal 2010 year had a negligible impact on the year-to-date revenue comparisons.
Service and other revenues consist primarily of service revenue and maintenance fees. Service and other revenues were approximately $5.8 million for the two quarters ended January 1, 2011, representing an increase of approximately 19.9 % or $1.0 million, compared to $4.8 million for the comparable prior year period. The increase was primarily the result of increased demand for ancillary services in the current period.
Revenues by geographic location expressed in dollars (in thousands) and as a percentage of total were:
Two Quarters Ended January 1, 2011 (26 weeks) |
percentage | Two Quarters Ended January 2, 2010 (27 weeks) |
percentage | |||||||||||||
Americas |
$ | 25,584 | 30.4 | % | $ | 26,616 | 45.2 | % | ||||||||
Europe/Middle East |
31,154 | 37.0 | 19,912 | 33.7 | ||||||||||||
Asia/Pacific |
27,384 | 32.6 | 12,471 | 21.1 | ||||||||||||
Total revenues |
$ | 84,122 | 100.0 | % | $ | 58,999 | 100.0 | % | ||||||||
For the two quarters ended January 1, 2011, revenues were higher in terms of dollars and percentages in Europe/Middle East and Asia/Pacific due to increased customer demand. The decrease in terms of dollars and percentages in Americas was attributable to the timing of shipments. For the two quarters ended January 1, 2011, unfavorable foreign currency fluctuations impacted revenue by approximately $1.0 million.
Gross profit for the two quarters ended January 1, 2011 was approximately $51.0 million, or 60.7% gross margin, compared to $33.8 million, or 57.4% gross margin, for the comparable prior year period. The gross margin for the two quarters ended January 1, 2011 was positively impacted by higher volumes and favorable product mix, slightly offset by an increase of approximately $0.1 million of share-based compensation expense. The additional week of cost of sales in our fiscal 2010 year had a negligible impact on the year to date gross profit comparisons.
Selling, general and administrative (SG&A) expense was approximately $31.1 million for the two quarters ended January 1, 2011 compared to approximately $19.1 million for the two quarters ended January 2, 2010, representing an increase of approximately $12.0 million or 63%. The increase was mainly attributable to an increase in stock-based compensation expense of approximately $6.2 million driven by the higher fair value of SARs along with higher selling and marketing expenses incurred as a direct result of the 42.6% increase in sales for the period ended January 1, 2011 compared to the period ended January 2, 2010. The additional week of SG&A expenses in our fiscal 2010 year had a negligible impact on the year to date SG&A expense comparisons.
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Research and development (R&D) expense was approximately $18.0 million for the two quarters ended January 1, 2011, compared to $13.0 million for the comparable prior year period, an increase of approximately 39.2% or $5.1 million. The increase primarily resulted from costs associated with our new products and an increase in share-based compensation expense of approximately $0.8 million for the two quarters ended January 1, 2011 versus January 2, 2010, as a result of the higher fair value of the SARs. The additional week of R&D expenses in our fiscal 2010 year had a negligible impact on the year to date R&D expense comparisons.
Other expense, net, which consists primarily of: losses and gains on the extinguishment of our convertible notes, net of issue cost write-off, interest income and expense, foreign exchange gains and losses and amortization of debt discount on convertible notes was approximately $3.6 million for the two quarters ended January 1, 2011 compared to approximately $2.5 million for the two quarters ended January 2, 2010, an increase of approximately $1.1 million or 45.4%. The increase is predominantly due to the loss on the extinguishment of convertible notes, net of issue cost write-off, of approximately $0.5 million for the two quarters ended January 1, 2011 as compared to a net gain of approximately $0.6 million for the prior comparable period when we repurchased $3.4 million of the outstanding notes. Additionally, foreign currency headwinds contributed to the loss by approximately $0.6 million for the two quarters ended January 1, 2011 compared to approximately $0.3 million in the comparable prior period. Other expense, net was slightly offset by a decrease in interest expense of approximately $0.2 million to approximately $1.4 million for the two quarters ended January 1, 2011 as compared to approximately $1.6 million for the two quarters ended January 2, 2010 due to the combined effects of a lower borrowing base and favorable interest rates.
Income Taxes
Our effective income tax rate for the quarter and two quarters ended January 1, 2011 was 37.4% and 43.3%, respectively, compared to an effective income tax rate of (74.5)% and (14.6)%, for the quarter and two quarters ended January 2, 2010, respectively. Our effective income tax rate for the quarter and two quarters ended January 1, 2011 includes the write-off of deferred tax assets related to equity-based compensation of less than $0.1 million, and a tax benefit of approximately $0.3 million related to a retroactive reinstatement of the federal research and development tax credit as a result of the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 passed into law on December 17, 2010. Our effective income tax rate for the quarter and two quarters ended January 2, 2010 includes the write-off of deferred tax assets related to equity-based compensation of approximately $0.1 million and $0.2 million, respectively.
We calculate income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year. The differences between our effective tax rate and the U.S. federal statutory rate of 35% principally result from our geographical distribution of taxable income, state and local taxes, graduated federal tax rate reductions, research tax credits, domestic production activities deductions and non-deductible expenses.
Liquidity and Capital Resources
Cash and cash equivalents at January 1, 2011 were approximately $8.7 million compared to approximately $7.8 million at July 3, 2010. We have no borrowings outstanding under the existing credit facility and approximately $29.7 million principal outstanding under the Notes at January 1, 2011. The Notes mature on October 15, 2026 unless earlier redeemed, repurchased or converted. Holders of the Notes will have the right to require us to repurchase for cash all or a portion of their Notes on October 15, 2011, at a repurchase price equal to 100% of the principal plus accrued and unpaid interest, if any.
On July 29, 2010, we reached an agreement with our lending partners, M&T Bank, RBS Citizens Bank and Capital One, to amend and extend our $50 million revolving line of credit through January 2014. We believe the amendment and extension of our credit facility will provide long-term liquidity and position us to augment our internal cash generation capabilities. The repurchase or retirement of the Notes will be done through a combination of cash generated from operations, working capital and the New Credit Agreement, subject to financial covenants.
Effective September 28, 2010 and January 11, 2011, we modified the New Credit Agreement, resulting in revised covenants and terms. The modifications, as discussed in Note 12 Debt and Capital Leases and Note 19 Subsequent Events offer less restrictive covenants and improved credit terms.
On November 9, 2010, we completed an underwritten public offering of 2,600,000 shares of our common stock, par value $0.01 per share. The offering price to the public was $8.25 per share, and the Underwriters purchased shares from us at a price of $7.7385 per share. The Underwriters also exercised their option to purchase 390,000 additional shares. The net proceeds from the sale of 2,990,000 shares of common stock were approximately $22.7 million, after deducting the underwriters discount and direct offering expenses. We used $15.5 million of proceeds from this offering to repay indebtedness outstanding under our revolving credit facility.
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We believe that our cash and cash equivalents on hand, cash flow expected to be generated by our operations and availability under our revolving credit line will be sufficient to fund our operations, working capital and capital expenditure requirements for the foreseeable future, as well as repurchase or retire our Notes.
Operating Activities
Net cash provided by operating activities was approximately $7.2 million for the two quarters ended January 1, 2011 compared to net cash provided by operating activities of approximately $5.1 million in the same period last year. The fiscal 2011 net cash provided by operating activities was attributable to net loss, working capital consumption and deferred income taxes of approximately $1.0 million, $4.7 million and $0.8 million, respectively, more than offset by share-based compensation expense of approximately $9.1 million, non-cash depreciation and amortization of approximately $2.7 million, debt related amortization of approximately $1.3 million and loss on extinguishment of convertible notes, net of issue cost write-off, of approximately $0.5 million. The net cash provided by operating activities in fiscal 2010 was in part attributable to working capital contributions of approximately $0.5 million. The fiscal 2010 net loss of approximately $0.8 million and non-cash gain on extinguishment of convertible notes, net of issue cost write-off of approximately $0.6 million was offset by non-cash depreciation and amortization of approximately $2.7 million, share-based compensation of approximately $2.0 million and debt related amortization of approximately $1.4 million.
Investing Activities
Net cash used in investing activities was attributable to the purchase of property, plant and equipment of approximately $2.6 million for the two quarters ended January 1, 2011 compared to approximately $1.2 million in the comparable prior year period. As a result of our improving financial condition, we have increased discretionary capital spending which had been significantly impacted by our cost-reduction program initiated in fiscal 2009.
Financing Activities
Net cash used in financing activities was approximately $4.1 million for the two quarters ended January 1, 2011, compared to net cash provided by financing activities of approximately $1.1 million in the same period in fiscal 2010. Net cash used in financing activities was primarily due to the repayment of borrowings under the revolving credit line of approximately $20.5 million, repurchase of convertible notes of approximately $10.2 million and payment of debt issuance costs of approximately $0.6 million in connection with the New Credit Agreement entered into on July 29, 2010 and subsequent modifications. Net cash used in financing activities was partially offset by proceeds from our stock issuance, net of underwriters discount of approximately $23.1 million, borrowings under our credit line of approximately $3.5 million and proceeds from employee stock purchase and option plans of approximately $0.7 million. Net cash used in financing activities in fiscal 2010 was primarily due to the repurchase of convertible notes of approximately $3.8 million, partially offset by borrowings of approximately $2.5 million under our line of credit and proceeds from employee stock purchase and option plans of approximately $0.3 million.
Contractual Obligations and Other Commitments
Our contractual obligations and commitments include obligations associated with our employee severance agreements, supplier agreements, operating and capital leases, revolving credit and Convertible note obligations, as set forth in the table below (in thousands):
Payments due by Period as of January 1, 2011 | ||||||||||||||||||||
Total | Less than 1 Year |
1-3 Years | 3-5 Years | More than 5 Years |
||||||||||||||||
Severance |
$ | 195 | $ | 185 | $ | 10 | $ | | $ | | ||||||||||
Supplier agreements |
1,308 | 1,048 | 260 | | | |||||||||||||||
Operating lease obligations |
5,628 | 2,218 | 2,720 | 690 | | |||||||||||||||
Vendor supplied capital lease agreement |
791 | 288 | 503 | | | |||||||||||||||
Convertible notes, principal amount (1) |
29,650 | 29,650 | | | | |||||||||||||||
Convertible notes, contractual interest (1) |
1,186 | 1,186 | | | | |||||||||||||||
Total (2) |
$ | 38,758 | $ | 34,575 | $ | 3,493 | $ | 690 | $ | | ||||||||||
(1) | The Convertible notes mature on October 15, 2026. Holders of the Convertible notes have the right to require the Company to purchase all or a portion of the Convertible notes on October 15, 2011, which is reflected above. The Convertible notes bear interest at a rate of 4% per annum, payable in cash semi-annually in arrears on each April 15 and October 15. The contractual interest assumes the Convertible notes principal amount remains unchanged (see Note 12 Debt and Capital Leases). |
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(2) | The Contractual Obligations and Other Commitments table does not include any reserves for income taxes because we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves. Additionally, as of January 1, 2011, there are no amounts outstanding under our revolving credit facility. |
Reconciliation of U.S. GAAP and Non-GAAP Information
The following table provides a reconciliation of EBITDA and Adjusted EBITDA for the periods indicated to net income (loss), which is the most directly comparable financial measure presented in accordance with U.S. GAAP (in thousands):
Quarter ended (13 weeks) | Two quarters ended | |||||||||||||||
January 1, 2011 |
January 2, 2010 |
January 1, 2011 (26 weeks) |
January 2, 2010 (27 weeks) |
|||||||||||||
Net income (loss) |
$ | 300 | $ | (281 | ) | $ | (964 | ) | $ | (763 | ) | |||||
Interest expense, net |
610 | 837 | 1,389 | 1,614 | ||||||||||||
Amortization of debt discount on convertible notes |
511 | 605 | 1,072 | 1,210 | ||||||||||||
Income tax provision (benefit) |
179 | 120 | (737 | ) | 97 | |||||||||||
Depreciation and amortization |
1,363 | 1,340 | 2,710 | 2,682 | ||||||||||||
EBITDA |
2,963 | 2,621 | 3,470 | 4,840 | ||||||||||||
Share-based compensation |
4,248 | 1,083 | 9,117 | 1,976 | ||||||||||||
Business realignment |
49 | 61 | 49 | 129 | ||||||||||||
Loss on foreign exchange, net |
344 | 148 | 615 | 279 | ||||||||||||
Loss (gain) on extinguishment of convertible notes, net of issue costs |
532 | (247 | ) | 532 | (611 | ) | ||||||||||
Other (income) expense |
(3 | ) | (10 | ) | 3 | (9 | ) | |||||||||
Adjusted EBITDA |
$ | 8,133 | $ | 3,656 | $ | 13,786 | $ | 6,604 | ||||||||
EBITDA and Adjusted EBITDA are not defined under generally accepted accounting principles as applied in the United States. We define EBITDA as net income (loss) before interest (including the amortization of the debt discount on convertible notes), income taxes and depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for share-based compensation, business realignment and other, net. Under our New Credit Agreement, we are required to comply with certain financial covenants, including a minimum consolidated EBITDA as such term is defined in that agreement and may differ from the calculation presented above. We use EBITDA and Adjusted EBITDA as tools to evaluate our operating performance. We believe that EBITDA and Adjusted EBITDA provide useful information to management, investors and prospective investors by excluding certain charges and other amounts that relate to capital structure (affecting interest expense), tax positions (such as the impact of changes in effective tax rate, net operating losses and uncertain tax positions or valuation allowance), the age and book depreciation of property and equipment (affecting depreciation expense), and share-based compensation. EBITDA and Adjusted EBITDA are included in this presentation to provide management, our investors and prospective investors with an alternative method for assessing our operating results in a manner that is focused on the performance of our operations and to provide a consistent basis for comparison between periods. We believe EBITDA and Adjusted EBITDA when viewed with both our U.S. GAAP results and the reconciliation to net income (loss) provides a more complete understanding of our business than could otherwise be obtained absent this disclosure. Items excluded from EBITDA and Adjusted EBITDA, such as interest, income taxes, depreciation and amortization and share-based compensation, are significant components in understanding our financial performance. EBITDA and Adjusted EBITDA as calculated by us are not necessarily comparable to similarly titled measures used by other companies or terms defined in our New Credit Agreement.
There are material limitations associated with the use of EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA do not represent and should not be considered as alternatives to net income (loss) as determined by U.S. GAAP. Furthermore, EBITDA and Adjusted EBITDA do not necessarily indicate whether cash flows will be sufficient for cash requirements because the measures do not include reductions for cash payments for our obligation to service our debt, fund our working capital, pay for the exercise of stock appreciation rights, make capital expenditures and make acquisitions or pay our income taxes; nor are they measures of our profitability because they do not include costs and expenses identified above.
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Forward-Looking Information
We discuss expectations regarding our future performance in our annual and quarterly reports, press releases, and other written and oral statements. These forward-looking statements are based on currently available information, business plans and projections about future events and trends. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations. When used in this Form 10-Q, the words anticipate, believe, estimate, will, plan, intend, expect and similar expressions identify forward-looking statements. Except as required by federal securities law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. When evaluating our business, the Risk Factors included in Item 1A. of our Annual Report filed on Form 10-K for the fiscal year ended July 3, 2010 should be considered in conjunction with all other information included in our filings.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in market risk since the filing of the Companys Annual Report on Form 10-K for the fiscal year ended July 3, 2010.
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There have been no changes in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended January 1, 2011 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters which arise in the ordinary course of business. There are no matters currently pending that the Company expects to have a material adverse affect on its business, results of operations, financial condition or cash flows.
ITEM 1A. | RISK FACTORS |
There has been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended July 3, 2010, other than an addition to the risk factor below.
Our common stock price and Convertible notes valuation may be subject to significant fluctuations and volatility.
The market price of our common stock and valuation of our Convertible notes fluctuates significantly. The stock price and Convertible notes valuation could fluctuate in the future due to a number of factors, some of which are beyond our control. These factors include:
| historically low trading volume in our stock and Convertible notes relative to alternative investments; |
| announcements of developments related to our business, including additions or departures of key personnel; |
| announcements of technological innovations or new products or enhancements by us or our competitors; |
| sales by competitors, including sales to our customers; |
| sales of common stock into the public market, including those by directors and members of management; |
| developments in our relationships with our customers, partners, distributors and suppliers; |
| shortfalls or changes from analysts expectations in revenue, gross profits, earnings or losses, or other financial results; |
| changes to or discontinuance of our stock or Convertible note repurchase programs; |
| regulatory developments; |
| fluctuations in results of operations; |
| failure to meet our financial obligations and covenants under any loans or financing agreements; |
| the availability and terms of future financing options, in order to refinance existing debt; |
| trends in the seasonality of our sales; and |
| general conditions in our market or the markets served by our customers. |
In addition, in recent years the stock market in general and the market for shares of technology stocks in particular have experienced extreme price fluctuations, which have often been due, in part, to factors other than the operating performance of the affected companies. We cannot ensure that the market price of our common stock and valuation of our Convertible notes will not decline substantially, or otherwise continue to experience significant fluctuations in the future, including fluctuations that are unrelated to our operating performance.
Such significant fluctuations in our stock price could unexpectedly materially increase or decrease our costs. We have used stock appreciation rights (SARs) as a component of our executive compensation, as we believe that SARs awards motivate our executives to maximize long-term shareholder value. We record share-based compensation expense in the Consolidated Statements of Operations, using the fair value method. We cannot predict the market value of our common stock at the time of the exercise of these grants, nor the magnitude of cash settlement at any particular time over the terms of these grants. Our SARs, which are classified as liability awards, have been and will continue to be, re-measured at fair value at each reporting period until all awards are settled. Fluctuations in the fair value of our SARs are recorded as increases or decreases in share-based compensation expense. The volatility of our common stock price impacts our ability to provide accurate guidance on our future reported financial results, as it drives the fair value of the SARs. To the extent that there are significant fluctuations in our common stock price, the re-measurement of the SARs liability could have a material impact on our reported results, financial position and cash flows.
The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
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ITEM 6. | EXHIBITS |
The following exhibits are filed herewith.
Exhibit Number |
Description |
Filed Herewith |
||||
31.1 | Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | x | ||||
31.2 | Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | x | ||||
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350. | x | ||||
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350. | x |
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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.
Date: February 9, 2011 | LeCROY CORPORATION | |
/s/ SEAN B. OCONNOR | ||
Sean B. OConnor | ||
Vice President and Chief Financial Officer, Secretary and Treasurer |
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