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EX-31.1 - SECTION 302 CEO CERTIFICATION - LIONBRIDGE TECHNOLOGIES INC /DE/dex311.htm
EX-10.8 - LEASE AGREEMENT - LIONBRIDGE TECHNOLOGIES INC /DE/dex108.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - LIONBRIDGE TECHNOLOGIES INC /DE/dex321.htm
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 June 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-26933

 

 

LIONBRIDGE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3398462
(State of Incorporation)   (I.R.S. Employer Identification No.)

1050 Winter Street, Waltham, MA 02451

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: 781-434-6000

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 31, 2011 was 61,986,901.

 

 

 


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

TABLE OF CONTENTS

 

          Page  
PART I: FINANCIAL INFORMATION   
ITEM 1    Condensed Consolidated Financial Statements:      3   
  

Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2011 and December 31, 2010

     3   
  

Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June  30, 2011 and 2010

     4   
  

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June  30, 2011 and 2010

     5   
  

Notes to Condensed Consolidated Financial Statements (unaudited)

     6   
ITEM 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations      15   
ITEM 3    Quantitative and Qualitative Disclosures About Market Risk      28   
ITEM 4    Controls and Procedures      29   
PART II: OTHER INFORMATION   
ITEM 1    Legal Proceedings      29   
ITEM 1A    Risk Factors      30   
ITEM 2    Unregistered Sales of Equity Securities and Use of Proceeds      30   
ITEM 6    Exhibits      31   
SIGNATURE      32   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

     June 30,
2011
    December 31,
2010
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 20,084      $ 28,206   

Accounts receivable, net of allowance of $500 at June 30, 2011 and December 31, 2010

     67,739        57,763   

Unbilled receivables

     17,346        17,471   

Other current assets

     12,840        9,585   
  

 

 

   

 

 

 

Total current assets

     118,009        113,025   

Property and equipment, net

     20,298        16,394   

Goodwill

     9,675        9,675   

Other intangible assets, net

     8,422        9,588   

Other assets

     8,126        8,294   
  

 

 

   

 

 

 

Total assets

   $ 164,530      $ 156,976   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 22,553      $ 18,185   

Accrued compensation and benefits

     18,598        17,080   

Accrued outsourcing

     12,928        9,506   

Accrued restructuring

     2,846        5,036   

Income taxes payable

     1,632        763   

Accrued expenses and other current liabilities

     9,564        10,587   

Deferred revenue

     11,245        11,073   
  

 

 

   

 

 

 

Total current liabilities

     79,366        72,230   
  

 

 

   

 

 

 

Long-term debt

     24,700        24,700   

Deferred income taxes, long-term

     730        730   

Other long-term liabilities

     15,265        14,142   

Contingencies (Note 11)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $0.01 par value; 100,000,000 shares authorized; 61,990,213 and 60,084,269 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

     620        601   

Additional paid-in capital

     264,412        262,540   

Accumulated deficit

     (240,428     (236,704

Accumulated other comprehensive income

     19,865        18,737   
  

 

 

   

 

 

 

Total stockholders’ equity

     44,469        45,174   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 164,530      $ 156,976   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2011      2010     2011     2010  

Revenue

   $ 113,245       $ 104,872      $ 212,897      $ 205,652   

Operating expenses:

         

Cost of revenue (exclusive of depreciation and amortization included below)

     78,808         69,643        150,544        138,588   

Sales and marketing

     8,701         7,465        16,979        14,433   

General and administrative

     18,657         18,698        37,282        37,490   

Research and development

     1,518         952        2,914        1,710   

Depreciation and amortization

     1,435         1,175        2,726        2,305   

Amortization of acquisition-related intangible assets

     583         1,223        1,166        2,446   

Restructuring and other charges

     643         666        2,746        1,855   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     110,345         99,822        214,357        198,827   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     2,900         5,050        (1,460     6,825   

Interest expense:

         

Interest on outstanding debt

     185         282        334        579   

Amortization of deferred financing costs

     25         44        50        88   

Interest income

     15         8        32        33   

Other (income) expense, net

     423         (731     881        (457
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     2,282         5,463        (2,693     6,648   

Provision for income taxes

     560         905        1,031        1,613   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 1,722       $ 4,558      $ (3,724   $ 5,035   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) per share of common stock:

         

Basic

   $ 0.03       $ 0.08      $ (0.06   $ 0.09   

Diluted

   $ 0.03       $ 0.08      $ (0.06   $ 0.09   

Weighted average number of common shares outstanding:

         

Basic

     57,815         56,619        57,671        56,495   

Diluted

     59,548         59,854        57,671        59,191   

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

     Six Months Ended
June 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ (3,724   $ 5,035   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Stock-based compensation

     2,479        1,994   

Amortization of deferred financing charges

     50        88   

Depreciation and amortization

     2,726        2,305   

Amortization of acquisition-related intangible assets

     1,166        2,446   

Non-cash restructuring charges

     —          331   

Deferred income taxes

     67        194   

Net realized and unrealized foreign currency (gains) losses on forward contracts

     607        (911

Other

     (23     28   

Changes in operating assets and liabilities:

    

Accounts receivable

     (7,556     (2,949

Unbilled receivables

     607        (2,678

Other current assets

     (3,178     (1,451

Other assets

     204        (791

Accounts payable

     2,386        (335

Income tax payable

     882        (1,105

Accrued compensation and benefits

     (110     2,272   

Accrued outsourcing

     3,015        2,171   

Accrued restructuring

     (2,400     (93

Accrued expenses and other liabilities

     161        3,677   

Deferred revenue

     (302     (1,068
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (2,943     9,160   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (6,698     (5,891

Payments of forward contracts

     (607     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,305     (5,891
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of short-term debt

     10,000        —     

Payments of short-term debt

     (10,000     —     

Proceeds from issuance of common stock under stock option plans

     93        198   

Payments of capital lease obligations

     (7     (5
  

 

 

   

 

 

 

Net cash provided by financing activities

     86        193   
  

 

 

   

 

 

 

Effects of exchange rate changes on cash and cash equivalents

     2,040        (2,042

Net increase (decrease) in cash and cash equivalents

     (8,122     1,420   

Cash and cash equivalents at beginning of period

     28,206        27,432   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 20,084      $ 28,852   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Nature of the Business

The accompanying condensed consolidated financial statements include the accounts of Lionbridge Technologies, Inc. and its wholly owned subsidiaries (collectively, “Lionbridge” or the “Company”). These financial statements are unaudited. However, in the opinion of management, the consolidated financial statements include all adjustments, all of a normal nature, necessary for their fair presentation. Interim results are not necessarily indicative of results expected for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the operations, financial position and cash flows of the Company in conformity with U.S. generally accepted accounting principles. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The Company’s preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Estimates are used when accounting for collectibility of receivables, calculating service revenue using a proportional performance assessment and valuing intangible assets and deferred tax assets. Actual results could differ from these estimates.

Out of Period Adjustment

During the three-month interim period ended March 31, 2011, the Company identified certain out of period immaterial errors related to revenue recognition in the fourth quarter of 2010 and certain gross receipts taxes for the period of fiscal years 2007 through 2010. The Company corrected these errors during the three-month interim period ended March 31, 2011, which had the effect of reducing net income by $320,000, comprised of a $108,000 reduction in revenue, a $30,000 increase in cost of revenue and a $182,000 increase in general and administrative expenses.

During the three-month interim period ended June 30, 2011, the Company identified certain out of period immaterial errors related to revenue recognition in the fourth quarter of 2010 and first quarter of 2011 and certain property tax accruals for the period of fiscal year 2007 through the first quarter of 2011. The Company corrected these errors during the three-month interim period ended June 30, 2011, which had the effect of decreasing net income by $16,000, comprised of a $210,000 reduction in revenue and a $194,000 decrease in general and administrative expenses.

The Company has evaluated these errors and does not believe the amounts are material to any periods impacted and the correction of these errors is not material to the condensed consolidated financial statements for the three and six months ended June 30, 2011 or to the projected annual results for the fiscal 2011 year.

Reclassification

Certain prior period cash flow amounts have been reclassified to conform to current year presentation.

2. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Stock Option Plans

The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock and stock units, and other stock-based awards. The plans are administered by the Nominating and Compensation Committee of the Board of Directors, which consists of non-employee directors.

 

 

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Table of Contents

On May 3, 2011, the stockholders of Lionbridge Technologies, Inc. approved the Lionbridge 2011 Stock Incentive Plan (the “2011 Plan”), which had been previously adopted by the Lionbridge Board of Directors on January 27, 2011 and replaces the Lionbridge 2005 Stock Incentive Plan (the “2005 Plan”). The 2011 Plan provides for the issuance of 4,500,000 shares of common stock to officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries in the form of stock options, shares of restricted stock, restricted stock units and other forms of equity. Options to purchase common stock under the 2011 Plan are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 2011 Plan vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five to seven years from the date of grant under the 2011 Plan. Under the terms of the 2011 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options granted under the 2011 Plan are amortized using a straight-line basis over the option vesting period. At June 30, 2011, there were 4,377,924 options available for future grant under the 2011 Plan.

In November 2005, the stockholders of Lionbridge Technologies, Inc. approved the 2005 Plan, which had been previously adopted by the Lionbridge Board of Directors on October 7, 2005, for officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries. On May 1, 2009, the stockholders of the Company approved an amendment to the 2005 Plan increasing the maximum number of shares of common stock available for issuance under the 2005 Plan by 4,500,000 shares to 8,500,000 shares. At June 30, 2011, there were no options available for future grant under the 2005 Plan because, in connection with the approval of the 2011 Plan, no further grants of equity under the 2005 Plan are to be made on or after May 3, 2011. Options to purchase common stock under the 2005 Plan are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 2005 Plan vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five to seven years from the date of grant under the 2005 Plan. Under the terms of the 2005 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options are amortized using a straight-line basis over the option vesting period.

Lionbridge’s 1998 Stock Plan (the “1998 Plan”) provides for the issuance of incentive and nonqualified stock options. The maximum number of shares of common stock available for issuance under the 1998 Plan is 11,722,032 shares and the 1998 Plan expired on January 26, 2008. At June 30, 2011 there were no options available for future grant under the 1998 Plan. Options to purchase common stock under the 1998 Plan had been granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 1998 Plan vested over a four-year period: 25% of the option shares vested one year from the date of grant and the remaining option shares vested at the rate of 12.5% each six month period thereafter. Stock options granted under the 1998 Plan generally expire ten years (five years in certain cases) from the date of grant. Under the terms of the 1998 Plan, the exercise price of incentive stock options granted must not be less than 100% (110% in certain cases) of the fair market value of the common stock on the date of grant, as determined by the Board of Directors. The exercise price of nonqualified stock options granted under the 1998 Plan may be less than the fair market value of the common stock on the date of grant, as determined by the Board of Directors, but in no case may the exercise price be less than the statutory minimum, the par value per share of Lionbridge’s common stock.

Restricted Stock Awards

Lionbridge issued 1,797,000 and 231,826 shares of restricted common stock and restricted stock units, respectively, under the 2005 Plan and the 2011 Plan, during the six-month period ended June 30, 2011 with a fair market value of $7.4 million. Of the total 2,028,826 shares of restricted common stock and restricted stock units issued in the six-month period ended June 30, 2011, 1,632,750 have restrictions on disposition which lapse over four years from the date of grant, 56,076 have restrictions on disposition which lapse over thirteen months from the date of grant, and 340,000 restricted shares were granted to certain employees through the long-term incentive plan (the “LTIP”) as long-term performance-based stock incentive awards under the 2005 Plan. Pursuant to the terms of the LTIP, restrictions with respect to the stock will lapse upon the achievement of revenue and/or profitability targets within the two calendar years from and including the year of grant. The grant date fair value of the shares is recognized over the requisite period of performance once achievement of criteria is deemed probable. On a quarterly basis, the Company estimates the likelihood of achieving performance goals and records expense accordingly. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates. If the targets are not achieved, the shares will be forfeited by the employee.

 

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Table of Contents

Stock-based Compensation

The Company recognizes expense for stock options, performance-based restricted stock awards and time-based restricted stock awards pursuant to the authoritative guidance of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation”. Total compensation expense related to stock options, performance-based restricted stock awards and time-based restricted stock awards was $1.4 million and $1.1 million for the three-month periods ended June 30, 2011 and 2010, respectively, and $2.5 million and $2.0 million for the six-month periods ended June 30, 2011 and 2010, respectively, classified in the statement of operations line items as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Cost of revenue

   $ 28,000       $ 19,000       $ 52,000       $ 39,000   

Sales and marketing

     247,000         163,000         444,000         314,000   

General and administrative

     1,097,000         893,000         1,949,000         1,592,000   

Research and development

     16,000         24,000         34,000         49,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,388,000       $ 1,099,000       $ 2,479,000       $ 1,994,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011, future compensation cost related to non-vested stock options, less estimated forfeitures, is approximately $1.3 million and will be recognized over an estimated weighted average period of approximately 2.8 years. Lionbridge currently expects to amortize $9.2 million of unamortized compensation in connection with restricted stock awards outstanding as of June 30, 2011 over an estimated weighted average period of approximately 2.8 years.

3. UNBILLED RECEIVABLES

Unbilled receivables represent revenue recognized not yet billed. Unbilled receivables are calculated for each individual project based on the proportional delivery of services at the balance sheet date. Billing of amounts in unbilled receivables occurs according to customer-agreed payment schedules or upon completion of specified project milestones. All of Lionbridge’s projects in unbilled receivables are expected to be billed and collected within one year.

4. DEBT

On September 30, 2010, the Company entered into Amendment No. 3 (the “Amendment”) with HSBC Bank USA, National Association (“HSBC”) to extend the term for an additional four years to 2014 on its revolving credit agreement dated as of December 31, 2006, as the amended to date (the “Credit Agreement”), which had been scheduled to expire in December 2011. In addition, under the terms of the Amendment, the Credit Agreement was amended to reflect that HSBC is the sole lender under the Credit Agreement. The Credit Agreement provides for a $50.0 million revolving credit facility and establishes interest rates in the range of LIBOR plus 1.75% – 2.50%, depending on certain conditions. At June 30, 2011, $24.7 million was outstanding with an interest rate of 2.2%. The Company is required to maintain leverage and fixed charge coverage ratios and to comply with other covenants in its revolving credit agreement. The leverage ratio is calculated by dividing the Company’s total outstanding indebtedness at each quarter end by its adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses during the four consecutive quarterly periods then ended. The fixed charge coverage ratio is calculated by dividing the Company’s adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses minus capital expenditures for each consecutive four quarterly periods by its interest paid and cash paid on taxes during each such consecutive four quarterly periods. The Company was in compliance with both of these ratios as well as all other bank covenants as of June 30, 2011.

5. COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) consists of net income (loss), the net change in the funded status of defined benefit postretirement plans, unrealized gains and losses on a cash flow hedge and the net change in foreign currency translation adjustment. Total comprehensive income was $2.2 million and $3.7 million for the three-month periods ended June 30, 2011 and 2010, respectively. Total comprehensive loss was $2.6 million for the six-month period ended June 30, 2011 and total comprehensive income was $3.7 million for the six-month period ended June 30, 2010.

6. NET INCOME (LOSS) PER SHARE

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. For the purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and unvested restricted stock, as determined using the treasury stock method.

 

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Table of Contents

Shares used in calculating basic and diluted earnings per share for the three and six-month periods ended June 30, 2011 and 2010, respectively, are as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Weighted average number of shares of common stock outstanding—basic

     57,815,000         56,619,000         57,671,000         56,495,000   

Dilutive common stock equivalents relating to options and restricted stock

     1,733,000         3,235,000         —           2,696,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares of common stock outstanding—diluted

     59,548,000         59,854,000         57,671,000         59,191,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options and unvested restricted stock to purchase 5,316,000 and 3,046,000 shares of common stock for the three-month periods ended June 30, 2011 and 2010, respectively, and 7,924,000 and 3,380,000 for the six-month periods ended June 30, 2011 and 2010, respectively, were not included in the calculation of diluted net income per share, as their effect would be anti-dilutive.

7. RESTRUCTURING CHARGES

During the six-month period ended June 30, 2011, Lionbridge recorded $2.7 million of restructuring charges. The $2.7 million of restructuring charges recorded in the six-month period ended June 30, 2011 included $2.5 million for workforce reductions in Europe, the Americas and Asia consisting of 24 technical staff, 3 administrative staff and 1 sales staff, $140,000 recorded for vacated facilities and associated site closure costs, $97,000 of additional costs recorded for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions, recorded pursuant to the guidance of ASC 420, “Exit or Disposal Cost Obligations” (“ASC 420”) and ASC 712, “Compensation—Nonretirement Postemployment Benefits” (“ASC 712”), and related literature. Of these charges, $2.7 million related to the Company’s Global Language and Content (“GLC”) segment and $9,000 related to the Interpretation segment. The Company made $4.8 million of cash payments in the six-month period ended June 30, 2011 with $4.8 million and $9,000 related to the GLC and Interpretation segments, respectively.

During the six-month period ended June 30, 2010, Lionbridge recorded $1.9 million of restructuring charges. The $1.9 million of restructuring charges recorded in the six-month period ended June 30, 2010 included $1.1 million for workforce reductions in Europe and the United States consisting of 11 technical staff, 1 administrative staff and 1 sales staff, $362,000 recorded for vacated facilities and $331,000 for the accelerated amortization of long-lived assets in connection with vacated facilities, recorded pursuant to the guidance of ASC 420 and ASC 712, and related literature. Of these charges, $1.6 million related to the Company’s GLC segment and $171,000 related to the GDT segment. The Company made $2.4 million of cash payments in the six-month period ended June 30, 2010 with $2.3 million and $81,000 related to the GLC and GDT segments, respectively.

The following table summarizes the accrual activity (excluding the $331,000 long-lived asset accelerated amortization in the six-month period ended June 30, 2010) for the six months ended June 30, 2011 and 2010, respectively, by initiative:

 

     2011     2010  

Beginning balance, January 1

   $ 6,607,000      $ 3,261,000   

Employee severance:

    

Restructuring charges recorded

     2,504,000        1,111,000   

Cash payments related to liabilities recorded on exit or disposal activities

     (4,520,000     (1,682,000
  

 

 

   

 

 

 
     (2,016,000     (571,000
  

 

 

   

 

 

 

Vacated facility/Lease termination:

    

Restructuring charges recorded

     140,000        192,000   

Revision of estimated liabilities

     97,000        170,000   

Cash payments related to liabilities assumed and recorded on business combinations

     —          (60,000

Cash payments related to liabilities recorded on exit or disposal activities

     (313,000     (680,000
  

 

 

   

 

 

 
     (76,000     (378,000
  

 

 

   

 

 

 

Ending balance, June 30

   $ 4,515,000      $ 2,312,000   
  

 

 

   

 

 

 

 

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At June 30, 2011, the Company’s consolidated balance sheet includes accruals totaling $4.5 million primarily related to employee termination costs and vacated facilities. Lionbridge currently anticipates that $2.8 million of these will be fully paid within twelve months. The remaining $1.7 million relates to lease obligations on unused facilities expiring through 2026 and is included in long-term liabilities.

8. INCOME TAXES

The provisions for income taxes for the three-month periods ended June 30, 2011 and 2010 were $560,000 and $905,000, respectively. The provisions for income taxes for the six-month periods ended June 30, 2011 and 2010 were $1.0 million and $1.6 million, respectively. The tax provisions for the three and six-month periods ended June 30, 2011 consisted primarily of taxes on income in foreign jurisdictions, a deferred tax benefit related to the recognition of deferred tax assets and a reduction in deferred tax liabilities in certain foreign jurisdictions, as well as a tax benefit for the release of certain existing reserves for uncertain tax positions, primarily due to expiration of statutes of limitations, and taxes, interest and penalties recorded in relation to the Company’s uncertain tax positions. The tax provision for the six-month period also includes a foreign tax benefit of $415,000 related to a refund received for an amended 2008 tax filing.

The tax provisions for the three and six-month periods ended June 30, 2010 consisted primarily of taxes on income in foreign jurisdictions, a deferred tax benefit related to the recognition of deferred tax assets and reduction in deferred tax liabilities in certain foreign jurisdictions, and taxes, interest and penalties recorded in relation to the Company’s uncertain tax positions.

The balance of unrecognized tax benefits at June 30, 2011, not including interest and penalties, was $5.9 million, which, if recognized, would affect the effective income tax rate in future periods. Lionbridge also recognizes interest and penalties related to unrecognized tax benefits in tax expense. At June 30, 2011, Lionbridge had approximately $2.2 million of interest and penalties accrued related to unrecognized tax benefits.

In connection with the Company’s 2005 acquisition of Bowne Global Solutions (“BGS”), Bowne & Co., Inc. (“Bowne”) (which has since been acquired by R.R. Donnelley & Sons Co.) agreed to indemnify the Company for any tax liabilities accruing on or prior to the acquisition date of September 1, 2005. At June 30, 2011 $1.4 million of the gross unrecognized tax benefits and $536,000 of the accrued interest and penalties related to the acquisition of BGS are subject to indemnification. The Company believes that it is reasonably possible that approximately $1.3 million of its unrecognized tax benefits, consisting of several items in various jurisdictions, may be recognized within the next twelve months.

The Company conducts business globally and in the normal course of business is subject to examination by local, state and federal jurisdictions in the United States as well as in multiple foreign jurisdictions. Currently, no Internal Revenue Service audits are underway and audits in foreign jurisdictions are in varying stages of completion. Open audit years are dependent upon the tax jurisdiction and range from 2003 to 2010.

At June 30, 2011, no provision for U.S. income and foreign withholding taxes has been made for unrepatriated foreign earnings because it is expected that such earnings will be reinvested indefinitely.

Through March 31, 2011, Lionbridge’s Indian subsidiary had a tax holiday granted by the Indian government and was exempt from corporate income tax on its operating profits. This tax holiday expired at the end of the Indian subsidiary’s March 31, 2011 tax year and the Indian subsidiary is subjected to corporate income tax effective April 1, 2011.

Under the provisions of the Internal Revenue Code, certain substantial changes in Lionbridge’s ownership may limit in the future the amount of net operating loss carryforwards that could be used annually to offset future taxable income and income tax liability.

9. SEGMENT INFORMATION

Lionbridge has determined that its operating segments are those that are based on its method of internal reporting, which separately presents its business based on the service performed by individual geographical location. The Company is reporting its results among the following three business segments:

Global Language and Content (“GLC”)—this segment includes solutions and software services that enable the translation, localization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its

 

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GLC solutions, Lionbridge also develops technical documentation and eLearning content. Lionbridge GLC solutions are based on the Company’s Software-as-a-Service (“SaaS”)-based language technology platforms and applications, and its global service delivery model which make the translation and localization processes more efficient for Lionbridge clients and subscribers.

Global Development and Testing (“GDT”)—this segment includes Lionbridge’s development, engineering and testing services for software, hardware, websites, search engines and content. Specifically, through its GDT solutions, Lionbridge develops, optimizes and maintains IT applications and performs testing to ensure the quality, interoperability, usability and performance of clients’ software, search engines, consumer technology products, web sites, and content. Lionbridge’s testing services, which are offered under the VeriTest brand, also include product certification and competitive analysis. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model. Lionbridge also provides professional global crowdsourcing including specialized search relevance testing, keyword optimization and related services for clients with global search engines and online marketing initiatives.

Interpretation—this segment includes interpretation services for government and business organizations that require experienced linguists to facilitate communication. Lionbridge provides interpretation communication services in more than 360 languages and dialects, including onsite interpretation, over-the-phone interpretation and interpreter testing, training, and assessment services.

The Company’s internal reporting does not include the allocation of certain expenses to the operating segments but instead includes those other expenses in unallocated other expense. Unallocated expenses consist of depreciation and amortization, interest expense and income tax. Other unallocated items primarily include corporate expenses, such as merger and restructuring, foreign exchange gains and losses and governance expenses, as well as finance, information technology, human resources, legal, treasury and marketing expenses. The Company determines whether a cost is charged to a particular business segment or is retained as an unallocated cost based on whether the cost relates to a corporate function or to a direct expense associated with the particular business segment. For example, corporate finance, corporate information technology and corporate human resource expenses are unallocated, whereas operating segment finance, information technology and human resource expenses are charged to the applicable operating segment.

The table below presents information about the reported net income (loss) of the Company for the three and six-month periods ended June 30, 2011 and 2010. Asset information by reportable segment is not reported, since the Company does not produce such information internally.

 

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     GLC      GDT      Interpretation      Corporate and
Other
    Total  

Three Months Ended June 30, 2011

             

External revenue

   $ 79,523,000       $ 27,589,000       $ 6,133,000       $ —        $ 113,245,000   

Cost of revenue (exclusive of depreciation and amortization)

     53,729,000         19,716,000         5,363,000         —          78,808,000   

Depreciation and amortization

     1,014,000         256,000         26,000         722,000        2,018,000   

Other operating expenses

     18,980,000         3,707,000         397,000         —          23,084,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

     5,800,000         3,910,000         347,000         (722,000     9,335,000   

Interest expense and other unallocated items

     —           —           —           (7,053,000     (7,053,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     5,800,000         3,910,000         347,000         (7,775,000     2,282,000   

Provision for income taxes

     —           —           —           (560,000     (560,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

     5,800,000         3,910,000         347,000         (8,335,000     1,722,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended June 30, 2010

             

External revenue

   $ 75,202,000       $ 24,582,000       $ 5,088,000       $ —        $ 104,872,000   

Cost of revenue (exclusive of depreciation and amortization)

     49,131,000         16,242,000         4,270,000         —          69,643,000   

Depreciation and amortization

     806,000         226,000         34,000         1,332,000        2,398,000   

Other operating expenses

     17,823,000         2,835,000         578,000         —          21,236,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

     7,442,000         5,279,000         206,000         (1,332,000     11,595,000   

Interest expense and other unallocated items

     —           —           —           (6,132,000     (6,132,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     7,442,000         5,279,000         206,000         (7,464,000     5,463,000   

Provision for income taxes

     —           —           —           (905,000     (905,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

     7,442,000         5,279,000         206,000         (8,369,000     4,558,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2011

             

External revenue

   $ 148,630,000       $ 52,299,000       $ 11,968,000       $ —        $ 212,897,000   

Cost of revenue (exclusive of depreciation and amortization)

     102,800,000         37,243,000         10,501,000         —          150,544,000   

Depreciation and amortization

     1,946,000         440,000         53,000         1,453,000        3,892,000   

Other operating expenses

     37,436,000         7,063,000         1,065,000         —          45,564,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

     6,448,000         7,553,000         349,000         (1,453,000     12,897,000   

Interest expense and other unallocated items

     —           —           —           (15,590,000     (15,590,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     6,448,000         7,553,000         349,000         (17,043,000     (2,693,000

Provision for income taxes

     —           —           —           (1,031,000     (1,031,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

     6,448,000         7,553,000         349,000         (18,074,000     (3,724,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2010

             

External revenue

   $ 147,740,000       $ 47,928,000       $ 9,984,000       $ —        $ 205,652,000   

Cost of revenue (exclusive of depreciation and amortization)

     98,314,000         31,530,000         8,744,000         —          138,588,000   

Depreciation and amortization

     1,562,000         463,000         69,000         2,657,000        4,751,000   

Other operating expenses

     35,615,000         5,702,000         1,114,000         —          42,431,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

     12,249,000         10,233,000         57,000         (2,657,000     19,882,000   

Interest expense and other unallocated items

     —           —           —           (13,234,000     (13,234,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     12,249,000         10,233,000         57,000         (15,891,000     6,648,000   

Provision for income taxes

     —           —           —           (1,613,000     (1,613,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

     12,249,000         10,233,000         57,000         (17,504,000     5,035,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

10. GOODWILL AND OTHER INTANGIBLE ASSETS

Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price to a price near or below the book value of the Company for an extended period of time. When Lionbridge determines that the carrying value of goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition, in accordance with ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”), goodwill is reviewed for impairment on an annual basis. At December 31, 2010, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was recorded for the year ended December 31, 2010. There were no events or changes in circumstances during the six months ended June 30, 2011 which indicated that an assessment of the impairment of goodwill and other intangible assets was required.

The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets in accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), if circumstances indicate that a possible impairment may exist. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset grouping are less than its carrying value. If it is determined that the asset is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of acquired customer relationships (recorded with the acquisition of BGS in September 2005) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships.

Other intangible assets arose from the acquisition of BGS and consisted of BGS customer relationships, which are being amortized using an economic consumption method over an estimated useful life of 3 to 12 years.

 

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The following table summarizes other intangible assets at June 30, 2011 and December 31, 2010, respectively.

 

     June 30, 2011      December 31, 2010  
     Gross
Carrying
Value
     Accumulated
Amortization
    Balance      Gross
Carrying
Value
     Accumulated
Amortization
    Balance  

BGS acquired customer relationships

   $ 32,000,000       $ (23,578,000   $ 8,422,000       $ 32,000,000       $ (22,412,000   $ 9,588,000   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 32,000,000       $ (23,578,000   $ 8,422,000       $ 32,000,000       $ (22,412,000   $ 9,588,000   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Lionbridge currently expects to amortize the following remaining amounts of intangible assets held at June 30, 2011 in the fiscal periods as follows:

 

Year ending December 31,

      

2011

   $ 1,167,000   

2012

     1,921,000   

2013

     1,583,000   

2014

     1,304,000   

2015

     1,075,000   

Thereafter

     1,372,000   
  

 

 

 
   $ 8,422,000   
  

 

 

 

11. CONTINGENCIES

On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants).

On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. On July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants.

In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on, among other things, a ruling by the District Court that the claims against Lionbridge and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that

 

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the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Lionbridge.

On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The issuer defendants and the underwriter defendants separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases.

On February 25, 2009, the parties advised the District Court that they had reached an agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the District Court on April 2, 2009. On June 9, 2009, the District Court preliminarily approved the proposed global settlement. Notice was provided to the class, and a settlement fairness hearing, at which members of the class had an opportunity to object to the proposed settlement, was held on September 10, 2009. On October 6, 2009, the District Court issued an order granting final approval to the settlement. Ten appeals were been filed objecting to the definition of the settlement class and fairness of the settlement, five of which were dismissed with prejudice on October 6, 2010. On May 17, 2011, the Court of Appeals dismissed four of the remaining appeals and remanded the final appeal to the District Court to determine whether the appellant has standing to object to the settlement. The District Court has yet to rule on that issue. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. While Lionbridge cannot guarantee the outcome of these proceedings, the Company believes that the final result of this lawsuit will have no material effect on its consolidated financial condition, results of operations, or cash flows.

The Company does not expect any liability from these proceedings, if any, to have a material adverse effect on its financial position, results of operations or liquidity.

12. FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that Lionbridge uses to measure fair value, as well as the assets and liabilities that the Company values using those levels of inputs.

 

Level 1:    Quoted prices in active markets for identical assets or liabilities. The Company did not have any financial assets and liabilities at either June 30, 2011 or December 31, 2010 designated as Level 1.
Level 2:    Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Lionbridge’s Level 2 assets and liabilities are an interest rate swap and foreign exchange forward contracts whose fair value were determined using pricing models predicated upon observable market spot and forward rates. The interest rate swap is designated as a cash flow hedge under the guidance of ASC 815, “Derivatives and Hedging” (“ASC 815”) and changes in the fair value are recorded to other comprehensive income. On July 31, 2010, the Company’s interest rate swap matured. Changes in the fair value of foreign exchange forward contracts are recorded in the Company’s earnings as other (income) expense. The Company did not have any foreign exchange forward contracts outstanding at either June 30, 2011 or December 31, 2010.
Level 3:    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company did not have any financial assets and liabilities at either June 30, 2011 or December 31, 2010 designated as Level 3.

13. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”), authoritative guidance which allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This

 

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authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity. This authoritative guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Although the Company will need to modify the presentation of certain information to comply with the requirements of this guidance, the Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”), an amendment to achieve common fair value measurement and disclosure requirements in GAAP and international financial reporting standards (“IFRS”). The amendments explain how to measure fair value and will improve the comparability of fair value measurement presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. This authoritative guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combinations” “(ASU 2010-29”)”, an amendment to goodwill impairment testing. The amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have an impact on the Company since it did not have any reporting units with zero or negative carrying amounts at June 30, 2011.

In January 2010, the FASB issued ASU 2010-06, “Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), that amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, and requires reporting entities to disclose (1) the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) separate information about purchases, sales, issuance and settlements in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). ASU 2010-06 also requires reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and disclose the inputs and valuation techniques for fair value measurements that fall within Levels 2 and 3 of the fair value hierarchy. These disclosures and clarification were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuance, and settlements in the rollforward of activity in Level 3 fair value measurements. These additional disclosures were effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the further provisions of ASU 2010-06 on January 1, 2011 which did not have a material impact on its consolidated financial statements.

In October 2009, the Emerging Issues Task Force (“EITF”) reached final consensus on ASU 2009-13, “Revenue Recognition: Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”), which addresses the issue related to revenue arrangements with multiple deliverables. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. This issue is effective for the Company’s revenue arrangements entered into or materially modified on or after January 1, 2011. The Company adopted this guidance and concluded it did not have a material impact on its financial statements.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Lionbridge’s Annual Report on Form 10-K, filed March 15, 2011 (SEC File No. 000-26933) and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form 10-Q could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The forward-looking statements in this Form 10-Q are made as of the date of this filing only, and Lionbridge does not undertake to update or supplement these statements due to changes in circumstances or otherwise, except as required by law.

 

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Introduction

Lionbridge is a leading provider of language, development and testing solutions that enable clients to develop, release, manage and maintain their technology applications and content globally. Lionbridge Global Language and Content (“GLC”) solutions enable the translation, localization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Lionbridge GLC solutions involve translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, Lionbridge also develops technical documentation and eLearning content. Lionbridge GLC solutions are based on the Company’s Web-based language technology platforms and global service delivery model which make the translation and localization processes more efficient for Lionbridge clients and translators. Certain of these Web-based language technologies are also available on a subscription basis to translators, enterprises and other third parties.

Through its Global Development and Testing (“GDT”) solutions, Lionbridge develops, optimizes and maintains IT applications and performs testing to ensure the quality, interoperability, usability, relevance and performance of clients’ software, consumer technology products, web sites and content. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model. Lionbridge also provides professional global crowdsourcing including specialized search relevance testing, keyword optimization and related services for clients with global search engines and online marketing initiatives.

Lionbridge also provides interpretation services to government organizations and businesses that require human interpreters for non-English speaking individuals.

Lionbridge provides a full suite of language, testing and development solutions to businesses in diverse end markets including technology, mobile and telecommunications, internet and media, life sciences, government, automotive, retail and aerospace. Lionbridge’s solutions include: translation and localization; interpretation; language technology; technical authoring and eLearning; product engineering; application development and maintenance and testing; and global professional crowdsourcing. Lionbridge’s services enable global organizations to increase market penetration and speed adoption of global content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs.

During 2010 and the first six months of 2011, Lionbridge has invested in technology development, infrastructure, sales and marketing to support the development and commercialization of GeoFluent™, a SaaS-based, customizable, real-time automated translation technology that instantly translates content and communications into multiple languages. GeoFluent is based on IBM’s machine translation engine and is the result of a technology partnership between Lionbridge and IBM. GeoFluent offers enterprises the ability to increase their multilingual communications through an easy-to-use application that translates online chat sessions, Websites and documents in real-time. In May 2011 the Company announced general availability of the GeoFluent application and expects to enter into subscription agreements for the technology in the coming quarters. The Company has also continued to develop and market Translation Workspace™, its SaaS-based translation productivity technology for translators and agencies. By introducing GeoFluent as a real-time automated translation application and continuing to enhance Translation Workspace, Lionbridge believes it will effectively reach its goals of transforming the Lionbridge business to incorporate both services and technology, which in turn may allow it to expand its market leadership and increase growth opportunities.

For the six-month period ended June 30, 2011, Lionbridge’s loss from operations was $1.5 million, with a net loss of $3.7 million. For the year ended December 31, 2010, the Company’s income from operations was $3.0 million with a net loss of $1.3 million. As of June 30, 2011, the Company had an accumulated deficit of $240.4 million.

Certain segments of Lionbridge’s business, its GLC segment in particular, are sensitive to fluctuations in the value of the U.S. Dollar relative to the Euro and other currencies, as a large portion of its cost of revenue and general and administrative expenses are payable in Euros and other currencies, while the majority of its revenues are recorded in U.S. Dollars. During the three and six months ended June 30, 2011, the value of the U.S. Dollar relative to other currencies weakened by approximately 11.8% and 8.4%, respectively, from the corresponding periods of 2010. This resulted in favorable foreign currency impact on revenue for the three and six months ended June 30, 2011, particularly in the GLC segment. In addition, the Company’s operating income and net income for the three and six-month periods ended June 30, 2011 were negatively impacted by weakening in the U.S. Dollar against other currencies as compared to the corresponding period of 2010, particularly in the GLC segment.

Revenue Recognition

Lionbridge recognizes revenue as services are performed and amounts are earned in accordance with ASC 605-20, “Services” (“ASC 605-20”). Lionbridge considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees.

 

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Lionbridge’s revenue is recorded from the provision of services to customers for GLC, GDT and Interpretation services which include content development, product and content globalization, interpretation, software and hardware testing, product certification and application development and maintenance.

Content development, software and hardware testing, interpretations and application development and maintenance projects are normally time and expense priced contracts, and revenue is recognized using a time and expense basis over the period of performance, primarily based on labor costs incurred to date.

Product and content globalization and product certification projects are fixed price contracts and revenue is recognized as services are delivered. Depending on specific contractual provisions and the nature of the deliverable, revenue is recognized (1) on a proportional performance model based on level of effort, (2) as milestones are achieved or (3) when final deliverables have been met. Amounts billed in excess of revenue recognized are recorded as deferred revenue.

The delivery of Lionbridge’s GLC services involves and is dependent on the translation and development of content by subcontractors and in-house employees. As the time and cost to translate or produce each word of content within a project is relatively uniform, labor input is reflective of the delivery of the contracted service and an appropriate metric for the measurement of proportional performance in delivering such services. The use of a proportional performance assessment of service delivery requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, anticipated increases in employee wages and prices for subcontractor services, and the availability of subcontractor services. When adjustments in estimated project costs are identified, anticipated losses, if any, are recognized in the period in which they are determined.

Lionbridge’s GLC agreements with its customers may provide the customer with a fixed and limited time period following delivery during which Lionbridge will attempt to address any non-conformity to previously agreed upon objective specifications relating to the work, either in the form of a limited acceptance period or a post-delivery warranty period. Management believes recognition of revenue at the time the services are delivered is appropriate, because its obligations under such provisions are limited in time, limited in scope, and historically have not involved significant costs. In the future, if the post delivery acceptance or warranty provisions become more complex or include subjective acceptance criteria, Lionbridge may have to revise its revenue recognition policy appropriately, which could affect the timing of revenue recognition.

Lionbridge’s GLC segment includes Translation Workspace, the Company’s hosted proprietary, internet-architected translation memory application that simplifies translation management. This SaaS-based application is available to translators on a subscription basis. Access revenue is billed in advance and generally recognized over the subscription period. Incremental overage fees are recognized in the period incurred.

Lionbridge provides integrated full-service offerings throughout a client’s product and content lifecycle, including GLC and GDT services. Such multiple-element service offerings are governed by ASC 605-25, “Multiple-Element Arrangements” (“ASC 605-25”). For these arrangements where the GLC and GDT services have independent value to the customer, and there is evidence of fair value for each service, the combined service arrangement is bifurcated into separate units for accounting treatment. In instances where it is not possible to bifurcate a project, direct and incremental costs attributable to each component are deferred and recognized together with the service revenue upon delivery. The determination of fair value requires the use of significant judgment. Lionbridge determines the fair value of service revenues based upon its recent pricing for those services when sold separately and/or prevailing market rates for similar services. Upon adoption of ASU 2009-13, “Revenue Recognition: Multiple-Deliverable Revenue Arrangements”, there has been no material change to the determination of units of accounting or timing of revenue recognition.

Revenue includes reimbursement of travel and out-of-pocket expenses and certain facilities costs with equivalent amounts of expense recorded in cost of revenue.

Estimates for incentive rebates and other allowances are recorded as a reduction of revenues in the period the related revenues are recorded. These estimates are based upon contracted terms, historical experience and information currently available to management with respect to business and economic trends. Revisions of these estimates are recorded in the period in which the facts that give rise to the revision become known.

 

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Valuation of Goodwill and Other Intangible Assets

Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include: an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price to a price near or below the book value of the Company for an extended period of time. When Lionbridge determines that the carrying value of goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition, in accordance with ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”), goodwill is reviewed for impairment on an annual basis. At December 31, 2010, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was recorded for the year ended December 31, 2010. Estimating future cash flows requires management to make projections that can materially differ from actual results. There were no events or changes in circumstances during the six months ended June 30, 2011 which indicated that an assessment of the impairment of goodwill and other intangible assets was required.

The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets in accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), if circumstances indicate that a possible impairment may exist. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset grouping are less than its carrying value. If it is determined that the asset is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of acquired customer relationships (recorded with the acquisition of BGS in September 2005) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships.

Restructuring Charges

During the six-month period ended June 30, 2011, Lionbridge recorded $2.7 million of restructuring charges. The $2.7 million of restructuring charges recorded in the six-month period ended June 30, 2011 included $2.5 million for workforce reductions in Europe, the Americas and Asia consisting of 24 technical staff, 3 administrative staff and 1 sales staff, $140,000 recorded for vacated facilities and associated site closure costs, and $97,000 of additional costs recorded for a previously vacated facility in order to reflect changes in initial estimates of a sublease arrangement due to current economic conditions, recorded pursuant to the guidance of ASC 420, “Exit or Disposal Cost Obligations” (“ASC 420”) and ASC 712, “Compensation—Nonretirement Postemployment Benefits” (“ASC 712”), and related literature. Of these charges, $2.7 million related to the Company’s Global Language and Content (“GLC”) segment and $9,000 related to the Interpretation segment. The Company made $4.8 million of cash payments in the six-month period ended June 30, 2011 with $4.8 million and $9,000 related to the GLC and Interpretation segments, respectively.

During the six-month period ended June 30, 2010, Lionbridge recorded $1.9 million of restructuring charges. The $1.9 million of restructuring charges recorded in the six-month period ended June 30, 2010 included $1.1 million for workforce reductions in Europe and the United States consisting of 11 technical staff, 1 administrative staff and 1 sales staff, $362,000 recorded for vacated facilities and $331,000 for the accelerated amortization of long-lived assets in connection with vacated facilities, recorded pursuant to the guidance of ASC 420 and ASC 712, and related literature. Of these charges, $1.6 million related to the Company’s GLC segment and $171,000 related to the GDT segment. The Company made $2.4 million of cash payments in the six-month period ended June 30, 2010 with $2.3 million and $81,000 related to the GLC and GDT segments, respectively.

Stock Option Plans

The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock and stock units, and other stock-based awards. The plans are administered by the Nominating and Compensation Committee of the Board of Directors, which consists of non-employee directors.

 

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On May 3, 2011, the stockholders of Lionbridge Technologies, Inc. approved the Lionbridge 2011 Stock Incentive Plan (the “2011 Plan”), which had been previously adopted by the Lionbridge Board of Directors on January 27, 2011 and replaces the Lionbridge 2005 Stock Incentive Plan (the “2005 Plan”). The 2011 Plan provides for the issuance of 4,500,000 shares of common stock to officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries in the form of stock options, shares of restricted stock, restricted stock units and other forms of equity. Options to purchase common stock under the 2011 Plan are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five to seven years from the date of grant under the 2011 Plan. Under the terms of the 2011 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options granted under the 2011 Plan are amortized using a straight-line basis over the option vesting period. At June 30, 2011, there were 4,377,924 options available for future grant under the 2011 Plan.

In November 2005, the stockholders of Lionbridge Technologies, Inc. approved the 2005 Plan, which had been previously adopted by the Lionbridge Board of Directors on October 7, 2005, for officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries. On May 1, 2009, the stockholders of the Company approved an amendment to the 2005 Plan increasing the maximum number of shares of common stock available for issuance under the 2005 Plan by 4,500,000 shares to 8,500,000 shares. At June 30, 2011, there were no options available for future grant under the 2005 Plan because, in connection with the approval of the 2011 Plan, no further grants of equity under the 2005 Plan are to be made on or after May 3, 2011. Options to purchase common stock under the 2005 Plan are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 2005 Plan vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five to seven years from the date of grant under the 2005 Plan. Under the terms of the 2005 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options are amortized using a straight-line basis over the option vesting period.

Lionbridge’s 1998 Stock Plan (the “1998 Plan”) provides for the issuance of incentive and nonqualified stock options. The maximum number of shares of common stock available for issuance under the 1998 Plan is 11,722,032 shares and the 1998 Plan expired on January 26, 2008. At June 30, 2011 there were no options available for future grant under the 1998 Plan. Options to purchase common stock under the 1998 Plan had been granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options granted under the 1998 Plan vested over a four-year period: 25% of the option shares vested one year from the date of grant and the remaining option shares vested at the rate of 12.5% each six month period thereafter. Stock options granted under the 1998 Plan generally expire ten years (five years in certain cases) from the date of grant. Under the terms of the 1998 Plan, the exercise price of incentive stock options granted must not be less than 100% (110% in certain cases) of the fair market value of the common stock on the date of grant, as determined by the Board of Directors. The exercise price of nonqualified stock options granted under the 1998 Plan may be less than the fair market value of the common stock on the date of grant, as determined by the Board of Directors, but in no case may the exercise price be less than the statutory minimum, the par value per share of Lionbridge’s common stock.

Restricted Stock Awards

Lionbridge issued 1,797,000 and 231,826 shares of restricted common stock and restricted stock units, respectively, under the 2005 Plan and 2011 Plan, during the six-month period ended June 30, 2011 with a fair market value of $7.4 million. Of the total 2,028,826 shares of restricted common stock and restricted stock units issued in the six-month period ended June 30, 2011, 1,632,750 have restrictions on disposition which lapse over four years from the date of grant, 56,076 have restrictions on disposition which lapse over thirteen months from the date of grant, and 340,000 restricted shares were granted to certain employees through the long-term incentive plan (the “LTIP”) as long-term performance-based stock incentive awards under the 2005 Plan. Pursuant to the terms of the LTIP, restrictions with respect to the stock will lapse upon the achievement of revenue and/or profitability targets within the two calendar years from and including the year of grant. The grant date fair value of the shares is recognized over the requisite period of performance once achievement of criteria is deemed probable. On a quarterly basis, the Company estimates the likelihood of achieving performance goals and records expense accordingly. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates. If the targets are not achieved, the shares will be forfeited by the employee.

Stock-based Compensation

The Company recognizes expense for stock options, performance-based restricted stock awards and time-based restricted stock awards pursuant to the authoritative guidance of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation”. Total compensation expense related to stock options, performance-based restricted stock awards and time-based restricted stock awards was $1.4 million and $1.1 million for the three-month periods ended June 30, 2011 and 2010, respectively, and $2.5 million and $2.0 million for the six-month periods ended June 30, 2011 and 2010, respectively, classified in the statement of operations line items as follows:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  

Cost of revenue

   $ 28,000       $ 19,000       $ 52,000       $ 39,000   

Sales and marketing

     247,000         163,000         444,000         314,000   

General and administrative

     1,097,000         893,000         1,949,000         1,592,000   

Research and development

     16,000         24,000         34,000         49,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,388,000       $ 1,099,000       $ 2,479,000       $ 1,994,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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As of June 30, 2011, future compensation cost related to non-vested stock options, less estimated forfeitures, is approximately $1.3 million and will be recognized over an estimated weighted average period of approximately 2.8 years. Lionbridge currently expects to amortize $9.2 million of unamortized compensation in connection with restricted stock awards outstanding as of June 30, 2011 over an estimated weighted average period of approximately 2.8 years.

Results of Operations

The following table sets forth for the periods indicated certain unaudited consolidated financial data as a percentage of total revenue.

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2011     2010     2011     2010  

Revenue

     100.0     100.0     100.0     100.0

Operating expenses:

        

Cost of revenue (exclusive of depreciation and amortization included below)

     69.6        66.4        70.7        67.4   

Sales and marketing

     7.7        7.1        8.0        7.0   

General and administrative

     16.4        17.9        17.5        18.3   

Research and development

     1.3        0.9        1.3        0.8   

Depreciation and amortization

     1.3        1.1        1.3        1.1   

Amortization of acquisition-related intangible assets

     0.5        1.2        0.6        1.2   

Restructuring charges

     0.6        0.6        1.3        0.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     97.4        95.2        100.7        96.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     2.6        4.8        (0.7     3.3   

Interest expense:

        

Interest on outstanding debt

     0.2        0.3        0.2        0.3   

Amortization of deferred financing costs

     —          —          —          —     

Interest income

     —          —          —          —     

Other (income) expense, net

     0.4        (0.7     0.4        (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     2.0        5.2        (1.3     3.2   

Provision for income taxes

     0.5        0.9        0.5        0.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1.5     4.3     (1.8 )%      2.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue. The following table shows GLC, GDT, and Interpretation revenues in dollars and as a percentage of total revenue for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

GLC

   $ 79,523,000         70   $ 75,202,000         72   $ 148,630,000         70   $ 147,740,000         72

GDT

     27,589,000         24     24,582,000         23     52,299,000         25     47,928,000         23

Interpretation

     6,133,000         6     5,088,000         5     11,968,000         5     9,984,000         5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 113,245,000         100   $ 104,872,000         100   $ 212,897,000         100   $ 205,652,000         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Revenue for the quarter ended June 30, 2011 was $113.2 million, an increase of $8.4 million, or 8.0%, from $104.9 million for the quarter ended June 30, 2010. Lionbridge conducts a large portion of its business in international markets. Approximately 38.5% of its revenue for the quarter ended June 30, 2011 is denominated in foreign currencies. The principal foreign currency applicable to Lionbridge’s business is the Euro. Approximately 28.4% of revenue for the quarter ended June 30, 2011 was denominated in Euro, and a majority of this revenue is concentrated in the GLC business. Accordingly, volatility in foreign currency exchange rates primarily affects the GLC business. During the quarter ended June 30, 2011, the U.S. Dollar was significantly weaker against most foreign currencies, in particular the Euro, as compared to the quarter ended June 30, 2010. The increase of $8.4 million consists of $4.3 million, $3.0 million and $1.1 million of revenue growth in GLC, GDT, and Interpretation, respectively. As compared to the three months ended June 30, 2010, revenue increased approximately $3.8 million, or 3.6%, as the result of organic growth and approximately $4.6 million, or 4.4%, due to the significant decline in the exchange rate of the U.S. Dollar against most foreign currencies period-over-period. Revenue for the six months ended June 30, 2011 was $212.9 million, an increase of $7.2 million, or 3.5%, from $205.7 million for the six months ended June 30, 2010. The increase of $7.2 million consists of $890,000, $4.4 million and $2.0 million of revenue growth in GLC, GDT, and Interpretation, respectively. As compared to the six months ended June 30, 2010, revenue increased approximately $2.6 million, or 1.3%, as the result of organic growth, and approximately $4.6 million, or 2.2%, due to the impact of foreign exchange rate fluctuations. The U.S. Dollar was significantly weaker against certain foreign currencies, in particular the Euro, during the six months ended June 30, 2011, as compared to the six months ended June 30, 2010. A significant portion of Lionbridge’s revenue is linked to the product release cycles and production schedules of a limited number of large clients in the technology sector. During the six months ended June 30, 2011, the Company’s year-over-year revenue growth was negatively impacted by a decline in the scope and number of projects from a certain large customer in the technology sector, particularly impacting its GLC segment, and was attributable to changes in that customer’s product release cycles and other customer-related cost-containment initiatives, particularly during the first quarter of 2011. This decline was partially offset by an increase in revenue related services for other new and existing customers.

Revenue from the Company’s GLC business for the quarter ended June 30, 2011 increased $4.3 million, or 5.8%, to $79.6 million from $75.2 million for the quarter ended June 30, 2010 primarily due to the decline in the foreign exchange rate between U.S. Dollar and other currencies, in particular the Euro, and to a lesser extent an increase in revenue related to new customer programs. For the six months ended June 30, 2011, revenue from the Company’s GLC business was $148.6 million, an increase of $890,000, or 0.6%, from $147.7 million for the six months ended June 30, 2010. As compared to the six months ended June 30, 2010, revenue increased approximately $4.5 million due to the impact of the weakened U.S. Dollar against most foreign currencies, while organic growth declined by approximately $3.6 million during the six months ended June 30, 2011 due to decreased revenue from a certain large customer in the technology sector.

Revenue from the Company’s GDT segment was $27.6 million for the quarter ended June 30, 2011, an increase of $3.0 million, or 12.2%, from $24.6 million for the quarter ended June 30, 2010. For the six months ended June 30, 2011, revenue from the Company’s GDT segment was $52.3 million, an increase of $4.4 million, or 9.1%, from $47.9 million for the six months ended June 30, 2010. The period-over-period increases in GDT revenue were primarily due to new or expanded customer engagements. Revenue in the GDT segment is not materially impacted by fluctuations in foreign currency exchange rates.

Revenue from the Company’s Interpretation segment was $6.1 million for the quarter ended June 30, 2011, an increase of $1.0 million, or 20.5%, from $5.1 million for the quarter ended June 30, 2010. For the six months ended June 30, 2011 revenue from the Company’s Interpretation business was $12.0 million, an increase of $2.0 million, or 19.9%, from $10.0 million for the six months ended June 30, 2010. The period-over-period increases in Interpretation revenue were primarily due to increased revenue and more favorable terms from one large customer engagement. Revenue in the Interpretation segment is not materially impacted by fluctuations in foreign currency exchange rates.

Cost of Revenue. Cost of revenue, excluding depreciation and amortization, consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client engagements. The following table shows GLC, GDT and Interpretation cost of revenues, the percentage change from the three and six-month period of the prior year and as a percentage of revenue for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three Months
Ended
June 30,
2011
    % Change
Q2 10 to  Q2 11
    Three Months
Ended
June 30,
2010
    Six Months
Ended
June 30,
2011
    % Change
Six  Months
10 to Six
Months 11
    Six Months
Ended
June 30,
2010
 

GLC:

            

Cost of revenue

   $ 53,729,000        9.4   $ 49,131,000      $ 102,800,000        4.6   $ 98,314,000   

Percentage of revenue

     67.6       65.3     69.2       66.5

GDT:

            

Cost of revenue

     19,716,000        21.4     16,242,000        37,243,000        18.1     31,530,000   

Percentage of revenue

     71.5       66.1     71.2       65.8

Interpretation:

            

Cost of revenue

     5,363,000        25.6     4,270,000        10,501,000        20.1     8,744,000   

Percentage of revenue

     87.4       83.9     87.7       87.6
  

 

 

     

 

 

   

 

 

     

 

 

 

Total cost of revenue

   $ 78,808,000        $ 69,643,000      $ 150,544,000        $ 138,588,000   
  

 

 

     

 

 

   

 

 

     

 

 

 

Percentage of revenue

     69.6       66.4     70.7       67.4

 

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For the quarter ended June 30, 2011, as a percentage of revenue, cost of revenue increased to 69.6% as compared to 66.4% for the quarter ended June 30, 2010 primarily due to the negative impact of the decline in the exchange rate of the U.S. Dollar against most foreign currencies and changes in the revenue and service mix. The increased cost of revenue percentage was partially offset by cost saving initiatives implemented in 2010 in the Company’s GLC segment, and continued benefits realized from the deployment and use of Lionbridge’s language management technology platform.

For the quarter ended June 30, 2011, cost of revenue increased $9.2 million, or 13.2%, to $78.8 million as compared to $69.6 million for the corresponding period of the prior year. The increase was primarily in support of the $8.4 million increase of incremental revenue as compared to the corresponding period of the prior year and is inclusive of approximately $5.5 million attributable to the depreciation of the U.S. Dollar against foreign currencies as noted above, with the balance due to changes in the revenue and service mix period-over-period. For the six months ended June 30, 2011, cost of revenue was $150.5 million, an increase of $12.0 million, or 8.6%, as compared to $138.6 million for the same period of 2010. This increase was primarily in support of the $7.4 million increase of incremental revenue as compared to the six months ended June 30, 2010. Approximately $6.0 million of the increase is attributable to depreciation of the U.S. Dollar against certain currencies as noted above.

For the quarter ended June 30, 2011, cost of revenue as a percentage of revenue in the Company’s GLC business increased to 67.6% as compared to 65.3% for the quarter ended June 30, 2010. For the quarter ended June 30, 2011, GLC cost of revenue increased $4.6 million, or 9.4%, to $53.7 million as compared to $49.1 million for the same quarter of the prior year. This increase reflects the negative impact of the decline in the exchange rate of the U.S. Dollar against most foreign currencies and the higher costs for translation outsourcing due to work mix changes. For the six months ended June 30, 2011, GLC cost of revenue increased $4.5 million, or 4.6%, to $102.8 million as compared to $98.3 million for the corresponding period of the prior year. This increase is primarily attributable to the $5.2 million impact of the depreciation of the U.S. Dollar against foreign currencies, as compared to the six months ended June 30, 2010. The increased cost of revenue was partially offset by cost saving initiatives implemented in 2010 in the Company’s GLC segment, and continued benefits realized from the deployment and use of Lionbridge’s language management technology platform.

For the quarter ended June 30, 2011, cost of revenue as a percentage of revenue in the Company’s GDT segment increased to 71.5% as compared to 66.1% for the quarter ended June 30, 2010. For the quarter ended June 30, 2011, GDT cost of revenue increased $3.5 million, or 21.4%, to $19.7 million as compared to $16.2 million for the corresponding period of the prior year. For the six months ended June 30, 2011, cost of revenue was $37.2 million, an increase of $5.7 million, or 18.1%, as compared to $31.5 million for the same period of 2010. These increases were primarily attributable to significant changes in customer work mix, and to a lesser extent the $4.4 million increase in revenue period-over-period.

For the quarter ended June 30, 2011, cost of revenue as a percentage of revenue in the Company’s Interpretation segment increased to 87.4% as compared to 83.9% for the quarter ended June 30, 2010. This decrease is primarily attributable to pricing and work mix variations in services, partially offset by increased revenue period-over-period. For the quarter ended June 30, 2011, Interpretation cost of revenue increased $1.1 million, or 25.6%, to $5.4 million as compared to $4.3 million for the corresponding period of the prior year. The increase is primarily due to increased revenue levels, partially offset by pricing and work mix variations in services as compared to the prior year. For the six months ended June 30, 2011, cost of revenue as a percentage of revenue in the Company’s Interpretation segment increased to 87.7% as compared to 87.6% for the corresponding period of the prior year. For the six months ended June 30, 2011, Interpretation cost of revenue increased

 

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$1.8 million, or 20.1%, to $10.5 million as compared to $8.7 million for the corresponding period of the prior year. These increases are primarily due to increased revenue levels, partially offset by pricing and work mix variations in services as compared to the prior year. The Company’s Interpretation segment is not materially impacted by foreign currency exchange rate fluctuations.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel, promotional expenses, sales force automation expense, training, and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table shows sales and marketing expenses in dollars, the dollar change from the three and six-month period of the prior year and as a percentage of revenue for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Total sales and marketing expenses

   $ 8,701,000      $ 7,465,000      $ 16,979,000      $ 14,433,000   

Increase from prior year

     1,236,000          2,546,000     

Percentage of revenue

     7.7     7.1     8.0     7.0

Sales and marketing expenses increased $1.2 million, or 16.6%, for the three months ended June 30, 2011 as compared to the corresponding period of 2010. As a percentage of revenue, sales and marketing expenses increased to 7.7% for the three months ended June 30, 2011 as compared to 7.1% for the three months ended June 30, 2010. These increases are primarily attributable to increased compensation related to the Company’s investment in sales and marketing, approximately $321,000 of increased expenses attributable to the depreciation of the U.S. Dollar’s exchange rate against most foreign currencies, and increased compensation to support the $8.4 million increase in revenue period-over-period.

Sales and marketing expenses increased $2.5 million, or 17.6%, for the six months ended June 30, 2011 as compared to the corresponding period of 2010. As a percentage of revenue, sales and marketing expenses increased to 8.0% for the six months ended June 30, 2011 as compared to 7.0% for the six months ended June 30, 2010. These increases are primarily attributable to increased compensation related to the Company’s investment in sales and marketing, approximately $382,000 of increased expenses attributable to the depreciation of the U.S. Dollar’s exchange rate against most foreign currencies, and increased compensation to support the $7.2 million increase in revenue, year-over-year.

General and Administrative. General and administrative expenses consist of salaries of the management, purchasing, process and technology, finance and administrative groups, and associated employee benefits and travel; facilities costs; information systems costs; professional fees; business reconfiguration costs and all other site and corporate costs. The following table shows general and administrative expenses in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Total general and administrative expenses

   $ 18,657,000      $ 18,698,000      $ 37,282,000      $ 37,490,000   

Decrease from prior year

     41,000          208,000     

Percentage of revenue

     16.4     17.9     17.5     18.3

General and administrative expenses decreased $41,000, or 0.2%, for the three months ended June 30, 2011 as compared to the corresponding period of 2010 despite approximately $1.0 million of increased expenses due to the depreciation of the U.S. Dollar against certain foreign exchange currencies as compared to the corresponding period of 2010. As a percentage of revenue, general and administrative expenses decreased to 16.4% for the quarter ended June 30, 2011, as compared to 17.9%, for the same period of the prior year. These decreases are primarily attributable to the increase in revenue period-over-period.

General and administrative expenses decreased $208,000, or 0.6%, for the six months ended June 30, 2011 as compared to the corresponding period of 2010 despite approximately $1.2 million of increased expenses due to the depreciation of the U.S. Dollar against certain foreign exchange currencies as compared to the corresponding period of 2010. Approximately 56.6% of general and administrative expenses are denominated in non-U.S. Dollars and of that amount a majority of these expenses related to rent and compensation expense. This decrease reflects reduced expenses as the result of cost saving initiatives implemented in 2010, primarily employee compensation and benefits expense. As a percentage of revenue, general and administrative expenses decreased to 17.5% for the six

 

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months ended June 30, 2011, as compared to 18.3%, for the same period of the prior year. This decrease is primarily associated with the $7.2 million increase in revenue for the six months ended June 30, 2011, as compared to the corresponding period of the prior year and the result of the cost saving initiatives implemented during 2010.

Research and Development. Research and development expenses relate primarily to the Company’s web-based hosted language management technology platform used in the globalization process and the research and development of a globalization management system, its Translation Workspace SaaS-based offering, and development of GeoFluent based on automated machine translation technology licensed from IBM. The cost consists primarily of salaries and associated employee benefits and third-party contractor expenses. The following table shows research and development expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Total research and development expense

   $ 1,518,000      $ 952,000      $ 2,914,000      $ 1,710,000   

Increase from prior year

     566,000          1,204,000     

Percentage of revenue

     1.3     0.9     1.3     0.8

Research and development expenses increased $566,000 for the three months ended June 30, 2011 as compared to the corresponding period of 2010. This increase is primarily attributable to an increase in headcount to support the development of the Company’s web-based hosted language management technology platform, its Translation Workspace SaaS-based offering and development of automated machine translation technology licensed from IBM (known as GeoFluent). Approximately $92,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies period-over-period.

Research and development expenses increased $1.2 million for the six months ended June 30, 2011 as compared to the corresponding period of 2010. This increase is primarily attributable to increase headcount to support the development of the Company’s web-based hosted language management technology platform, its Translation Workspace SaaS-based offering and its GeoFluent real-time machine translation technology offering. Approximately $91,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies, year-over-year.

Depreciation and Amortization. Depreciation and amortization consist of the expense related to property and equipment that is being depreciated over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Total depreciation and amortization expense

   $ 1,435,000      $ 1,175,000      $ 2,726,000      $ 2,305,000   

Increase from prior year

     260,000          421,000     

Percentage of revenue

     1.3     1.1     1.3     1.1

Depreciation and amortization expense increased by $260,000 for the three months ended June 30, 2011 as compared to the corresponding period of 2010. This increase is primarily the result of depreciation of the increased investment in internal and external capitalized costs for the Company’s web-based hosted management technology platform and SaaS-based offering. During the second quarter of 2011, the Company announced general availability of its customizable real-time automated machine translation technology known as GeoFluent. Amortization of capitalized costs related to GeoFluent was initiated during the second quarter of 2011. Approximately $66,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies, period-over-period.

Depreciation and amortization expense increased by $421,000 for the six months ended June 30, 2011 as compared to the corresponding period of 2010. This increase is primarily the result of depreciation of the increased investment in internal and external capitalized costs for the Company’s web-based hosted management technology platform and SaaS-based offering and the amortization of capitalized costs related to the Company’s customizable real-time automated machine translation technology as noted above. Approximately $73,000 of the increase is due to the depreciation of the U.S. Dollar against most foreign currencies, year-over-year.

Amortization of Acquisition-related Intangible Assets. Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets resulting from acquired businesses. Amortization expense for the three

 

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months ended June 30, 2011 and 2010 of $583,000 and $1.2 million, respectively, and for the six months ended June 30, 2011 and 2010 of $1.2 million and $2.4 million, respectively, relate solely to the amortization of identifiable intangible assets acquired from BGS in 2005.

Interest Expense. Interest expense primarily represents interest paid or payable on debt and the amortization of deferred financing costs. Interest expense for the quarter ended June 30, 2011 of $210,000 decreased $116,000 from $326,000 for the quarter ended June 30, 2010. The decrease reflects the impact of lower interest rates for the quarter ended June 30, 2011 as compared to the quarter ended June 30, 2010. This decrease also reflects the impact of the maturity of the Company’s interest rate swap in July 2010. Interest expense for the quarter ended June 30, 2010 included $128,000 for the Company’s interest rate swap. Interest expense for the six months ended June 30, 2011 of $384,000 decreased $283,000 from $667,000 for the six months ended June 30, 2010. The decrease reflects the impact of lower interest rates during the six-month period, year-over-year. This decrease also reflects the impact of the maturity of the Company’s interest rate swap in July 2010. Interest expense for the six months ended June 30, 2010 included $251,000 for the Company’s interest rate swap.

Other Expense, Net. Other expense, net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions denominated in currencies other than the functional currencies of the countries in which the transactions are recorded. The Company recognized $423,000 and $881,000 in other expense, net, in the three and six months ended June 30, 2011, respectively, as compared to $731,000 and $457,000 in other income, net, in the corresponding periods of the prior year. The variations are primarily attributable to net realized and unrealized foreign currency gains of $28,000 and net realized and unrealized foreign currency losses of $607,000 on forward contracts recorded in the three and six-months periods ended June 30, 2011 as compared to net realized and unrealized foreign currency gains of $911,000 and $910,000 on forward contracts recorded in the three and six-month periods ended June 30, 2010, respectively. In addition, the variations are due to differences among the Euro and other currencies against the U.S. Dollar in the periods, as compared to the net position and variance during the corresponding periods of the prior year.

Provision for Income Taxes. The following table shows the provision for income taxes expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Total provision for income taxes

   $ 560,000      $ 905,000      $ 1,031,000      $ 1,613,000   

Decrease from prior year

     345,000          582,000     

Percentage of revenue

     0.5     0.9     0.5     0.8

The provision for income taxes consists primarily of taxes resulting from profits in foreign jurisdictions, taxes, interest and penalties associated with uncertain tax positions, a deferred tax benefit for the recognition of deferred tax assets and a reduction of deferred tax liabilities related to the intangible assets from the BGS acquisition. The tax provision decreased $345,000 to $560,000 for the quarter ended June 30, 2011 from $905,000 in the corresponding period of 2010 and $582,000 to $1.0 million for the six months ended June 30, 2011 from $1.6 million in the corresponding period of the prior year. These decreases are primarily due to lower foreign profits which are subject to tax by the foreign jurisdictions due to treatment of the foreign subsidiaries as service providers that earn a profit based on a cost-plus model, a foreign tax benefit of $415,000 related to a refund received for an amended 2008 tax filing, and the release of certain existing reserves for uncertain tax positions, primarily due to expiration of statutes of limitations.

Out of Period Adjustment

During the three-month interim period ended March 31, 2011, the Company identified certain out of period immaterial errors related to revenue recognition in the fourth quarter of 2010 and certain gross receipts taxes for the period of fiscal years 2007 through 2010. The Company corrected these errors during the three-month interim period ended March 31, 2011, which had the effect of reducing net income by $320,000, comprised of a $108,000 reduction in revenue, a $30,000 increase in cost of revenue and a $182,000 increase in general and administrative expenses.

During the three-month interim period ended June 30, 2011, the Company identified certain out of period immaterial errors related to revenue recognition in the fourth quarter of 2010 and first quarter of 2011 and certain property tax accruals for the period of fiscal year 2007 through the first quarter of 2011. The Company corrected these errors during the three-month interim period ended June 30, 2011, which had the effect of decreasing net income by $16,000, comprised of a $210,000 reduction in revenue and a $194,000 decrease in general and administrative expenses.

 

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The Company has evaluated these errors and does not believe the amounts are material to any periods impacted and the correction of these errors is not material to the condensed consolidated financial statements for the three and six months ended June 30, 2011 or to the projected annual results for the fiscal 2011 year.

Liquidity and Capital Resources

On September 30, 2010, the Company entered into Amendment No. 3 (the “Amendment”) with HSBC Bank USA, National Association (“HSBC”) to extend the term for an additional four years to 2014 on its revolving credit agreement dated as of December 31, 2006, as the amended to date (the “Credit Agreement”), which had been scheduled to expire in December 2011. In addition, under the terms of the Amendment, the Credit Agreement was amended to reflect that HSBC is the sole lender under the Credit Agreement. The Credit Agreement provides for a $50.0 million revolving credit facility and establishes interest rates in the range of LIBOR plus 1.75% – 2.50%, depending on certain conditions. At June 30, 2011, $24.7 million was outstanding with an interest rate of 2.2%. The Company is required to maintain leverage and fixed charge coverage ratios and to comply with other covenants in its revolving credit agreement. The leverage ratio is calculated by dividing the Company’s total outstanding indebtedness at each quarter end by its adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses during the four consecutive quarterly periods then ended. The fixed charge coverage ratio is calculated by dividing the Company’s adjusted earnings before interest, taxes, depreciation and certain other non-cash expenses minus capital expenditures for each consecutive four quarterly periods by its interest paid and cash paid on taxes during each such consecutive four quarterly periods. The Company was in compliance with both of these ratios as well as all other bank covenants as of June 30, 2011.

The following table shows cash and cash equivalents and working capital at June 30, 2011 and at December 31, 2010:

 

     June 30, 2011      December 31, 2010  

Cash and cash equivalents

   $ 20,084,000       $ 28,206,000   

Working capital

     38,643,000         40,795,000   

Lionbridge’s working capital decreased $2.2 million to $38.6 million at June 30, 2011, as compared to $40.8 million at December 31, 2010; accounts receivable and unbilled receivables totaled $85.1 million, an increase of $9.9 million as compared to December 31, 2010; and other current assets increased by $3.3 million as compared to December 31, 2010. Current liabilities totaled $79.4 million at June 30, 2011, an increase of $7.1 million from December 31, 2010.

The following table shows the net cash provided by (used in) operating activities, net cash used in investing activities, and net cash provided by financing activities for the six months ended June 30, 2011 and 2010, respectively:

 

     Six Months Ended June 30,  
     2011     2010  

Net cash provided by (used in) operating activities

   $ (2,943,000   $ 9,160,000   

Net cash used in investing activities

     (7,305,000     (5,891,000

Net cash provided by financing activities

     86,000        193,000   

Net cash used in operating activities was $2.9 million for the six months ended June 30, 2011, as compared to net cash provided by operating activities of $9.2 million for the corresponding period of 2010. The $2.9 million net cash used in operating activities was due to a net loss of $3.7 million (inclusive of $6.9 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $6.9 million net increase in accounts receivable and unbilled receivables, a $2.9 million increase in other operating assets, a $4.0 million increase in accounts payable, accrued expenses and other operating liabilities, and a $302,000 decrease in deferred revenue. Lionbridge has not experienced any significant trends in accounts receivable and unbilled receivables other than changes relative to the change in revenue, as previously noted. Fluctuations in accounts receivable from period to period relative to changes in revenue are a result of timing of customer invoicing.

In the six months ended June 30, 2010, net cash provided by operating activities was $9.2 million. Net cash provided by operating activities was due to net income of $5.0 million (inclusive of $6.3 million in depreciation, amortization, stock-based compensation and other non-cash expenses), a $5.6 million net increase in accounts receivable and unbilled receivables, a $2.0 million increase in other operating assets, a $6.6 million increase in accounts payable, accrued expenses and other operating liabilities, and a $1.1 million decrease in deferred revenue.

Net cash used in investing activities increased $1.4 million to $7.3 million for the six months ended June 30, 2011, as compared to $5.9 million for the corresponding period of 2010. The primary investing activity in the six months ended June 30, 2011 was $6.7 million for the purchase of property and equipment and $607,000 for payments of forward contracts.

 

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In the six months ended June 30, 2010, net cash used in investing activities was $5.9 million, primarily for the purchase of property and equipment.

Net cash provided by financing activities for the six months ended June 30, 2011 was $86,000, a decrease of $107,000 as compared to $193,000 for the corresponding period of 2010. Net cash provided by financing activities consisted of $93,000 of proceeds from the issuance of common stock under option plans, $7,000 for payments of capital lease obligations, $10.0 million proceeds from the issuance of short-term debt and $10.0 million payments of short-term debt.

In the six months ended June 30, 2010, net cash provided by financing activities was $193,000. Net cash provided by financing activities consisted of $198,000 of proceeds from the issuance of common stock under option plans and $5,000 for payments of capital lease obligations.

On May 5, 2010, Lionbridge filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (SEC File No. 333-166529), covering the registration of debt and equity securities (the “Securities”), in an aggregate amount of $100.0 million. The registration statement was declared effective by the Commission on May 13, 2010. The Company may offer these Securities from time to time in amounts, at prices and on terms to be determined at the time of sale. The Company believes that with this Registration Statement, it has additional financing flexibility to meet potential future funding requirements and the ability to take advantage of potentially attractive capital market conditions.

Lionbridge anticipates that its present cash and cash equivalents position and available financing under its Credit Agreement should provide adequate cash to fund its currently anticipated cash needs for the at least the next twelve months.

Contractual Obligations

As of June 30, 2011, there were no material changes in Lionbridge’s contractual obligations as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Tax provisions during the six months ended June 30, 2011, primarily related to taxes , accrued interest, and the release of existing reserves for uncertain tax positions, which have increased the balance of unrecognized tax benefits by an insignificant amount to $8.1 million.

Approximately $2.0 million of this balance is related to tax liabilities accruing on or prior to the acquisition of BGS on September 1, 2005. Bowne & Co., Inc. (which has since been acquired by R.R. Donnelley & Sons Co.) agreed to indemnify Lionbridge for these amounts. The Company believes that it is reasonably possible that approximately $1.3 million of its unrecognized tax benefits, consisting of several items in various jurisdictions, may be recognized within the next twelve months.

Off-Balance Sheet Arrangements

The Company does not have any special purpose entities or off-balance sheet financing arrangements.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”), authoritative guidance which allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity. This authoritative guidance is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Although the Company will need to modify the presentation of certain information to comply with the requirements of this guidance, the Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”) an amendment to achieve common fair value measurement and disclosure requirements in GAAP and international financial reporting standards (“IFRS”). The amendments explain how to measure fair value and will improve the comparability of fair value measurement presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. This authoritative guidance is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combinations” “(ASU 2010-29”)”, an amendment to goodwill impairment testing. The amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those

 

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reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have an impact on the Company since it did not have any reporting units with zero or negative carrying amounts at June 30, 2011.

In January 2010, the FASB issued ASU 2010-06, “Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), that amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall”, and requires reporting entities to disclose (1) the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) separate information about purchases, sales, issuance and settlements in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). ASU 2010-06 also requires reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and disclose the inputs and valuation techniques for fair value measurements that fall within Levels 2 and 3 of the fair value hierarchy. These disclosures and clarification were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuance, and settlements in the rollforward of activity in Level 3 fair value measurements. These additional disclosures were effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the further provisions of ASU 2010-06 on January 1, 2011 which did not have a material impact on its consolidated financial statements.

In October 2009, the Emerging Issues Task Force (“EITF”) reached final consensus on ASU 2009-13, “Revenue Recognition: Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”), which addresses the issue related to revenue arrangements with multiple deliverables. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. This issue is effective for the Company’s revenue arrangements entered into or materially modified on or after January 1, 2011. The Company adopted this guidance and concluded it did not have a material impact on its financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Lionbridge conducts its business globally and its earnings and cash flows are exposed to market risk from changes in interest rates and currency exchange rates. The Company manages its risk to foreign currency transaction exposure and interest rates through risk management programs that include the use of derivative financial instruments. Lionbridge operates these programs pursuant to documented corporate risk management policies. Lionbridge does not enter into any derivative transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset gains and losses on underlying hedged exposures.

Interest Rate Risk. Lionbridge is exposed to market risk from changes in interest rates with respect to its revolving loan facility which bears interest at Prime or LIBOR (at the Company’s discretion) plus an applicable margin based on certain financial covenants. As of June 30, 2011, $24.7 million was outstanding under this facility. A hypothetical 10% increase or decrease in interest rates would have approximately a $54,000 impact on the Company’s interest expense based on the $24.7 million outstanding at June 30, 2011 with an interest rate of 2.2%. On July 20, 2007, the Company entered into a three-year amortizing interest rate swap with a notional amount of $20.0 million that corresponds to a portion of the Company’s floating rate credit facility. On July 31, 2010, the interest rate swap matured. The notional amount effectively converted that portion of the Company’s total floating rate credit facility to fixed rate debt. Additionally, Lionbridge is exposed to market risk through its investing activities. The Company’s portfolio consists primarily of short-term time deposits with investment grade banks and maturities less than 90 days. A hypothetical 10% increase or decrease in interest rates would not have a material impact on the carrying value of Lionbridge’s investments due to their immediately available liquidity.

Foreign Currency Exchange Rate Risk. Lionbridge conducts a large portion of its business in international markets. Although a majority of Lionbridge’s contracts with clients are denominated in U.S. Dollars, 64% and 65% of its costs and expenses for the six-month periods ended June 30, 2011 and 2010, respectively, were denominated in foreign currencies, primarily operating expenses associated with cost of revenue, sales and marketing and general and administrative. In addition, 14% and 17% of the Company’s consolidated tangible assets were subject to foreign currency exchange fluctuations as of June 30, 2011 and December 31, 2010, respectively, while 15% and 16% of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of June 30, 2011 and December 31, 2010, respectively. In addition, net inter-company balances denominated in currencies other than the functional currency of the respective entity were approximately $48.1 million and $57.9 million as of June 30, 2011 and December 31, 2010, respectively. The principal foreign currency

 

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applicable to the Company’s business is the Euro. The Company has implemented a risk management program that partially mitigates its exposure to assets or liabilities (primarily cash, accounts receivable, accounts payable and inter-company balances) denominated in currencies other than the functional currency of the respective entity which includes the use of derivative financial instruments principally foreign exchange forward contracts. These foreign exchange forward contracts generally have less than 90-day terms and do not qualify for hedge accounting under the ASC 815 guidance. The Company had no foreign exchange forward contracts outstanding at June 30, 2011.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Lionbridge maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2011.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

LIONBRIDGE TECHNOLOGIES, INC.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants).

On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. On July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants.

In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on, among other things, a ruling by the District Court that the claims against Lionbridge and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

 

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On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Lionbridge.

On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The issuer defendants and the underwriter defendants separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases.

On February 25, 2009, the parties advised the District Court that they had reached an agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the District Court on April 2, 2009. On June 9, 2009, the District Court preliminarily approved the proposed global settlement. Notice was provided to the class, and a settlement fairness hearing, at which members of the class had an opportunity to object to the proposed settlement, was held on September 10, 2009. On October 6, 2009, the District Court issued an order granting final approval to the settlement. Ten appeals were filed objecting to the definition of the settlement class and fairness of the settlement, five of which were dismissed with prejudice on October 6, 2010. On May 17, 2011, the Court of Appeals dismissed four of the remaining appeals and remanded the final appeal to the District Court to determine whether the appellant has standing to object to the settlement. The District Court has yet to rule on that issue. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. While Lionbridge cannot guarantee the outcome of these proceedings, the Company believes that the final result of this lawsuit will have no material effect on its consolidated financial condition, results of operations, or cash flows.

The Company does not expect any liability from these proceedings, if any, to have a material adverse effect on its financial position, results of operations or liquidity.

 

Item 1A. Risk Factors

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Lionbridge’s Annual Report on Form 10-K, filed March 15, 2011 (SEC File No. 000-26933) (the “2010 Annual Report”) and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form 10-Q, could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements. There have been no material changes in Lionbridge’s risk factors from those disclosed in Lionbridge’s 2010 Annual Report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended June 30, 2011, the Company withheld 46,803 restricted shares from certain employees to cover certain withholding taxes due from the employees at the time the shares vested. The following table provides information about Lionbridge’s purchases of equity securities for the quarter ended June 30, 2011:

 

Period

   Total Number of
Shares  Purchased
     Average Price
Paid Per  Share
 

May 1, 2011 – May 31, 2011

     46,353       $ 3.37   

June 1, 2011 – June 30, 2011

     450       $ 2.99   
  

 

 

    

 

 

 

Total

     46,803       $ 3.36   
  

 

 

    

 

 

 

 

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In addition, upon the termination of employees during the quarter ended June 30, 2011, 17,063 unvested restricted shares were forfeited. The following table provides information about Lionbridge’s forfeited restricted shares for the quarter ended June 30, 2011:

 

Period

   Total Number of
Shares  Forfeited
 

April 1, 2011 – April 30, 2011

     688   

May 1, 2011 – May 31, 2011

     16,375   
  

 

 

 

Total

     17,063   
  

 

 

 

 

Item 6. Exhibits

 

  (a) Exhibits.

 

10.1**   Amended and Restated Non-Employee Director Compensation Plan (Filed as Exhibit 10.1 to the Current Report Form 8-K (File Number: 000-26933) filed on May 6, 2011) and incorporated herein by reference.
10.2   Lionbridge Technologies, Inc. 2011 Stock Incentive Plan (the “2011 Plan”) (Filed as Exhibit 10.1 to the Registration Statement Form S-8 (File Number: 000-26933) filed on May 16, 2011) and incorporated herein by reference.
10.3   Form of Non-Qualified Stock Option Agreement (For Officers and Employees) under the 2011 Plan (Filed as Exhibit 10.2 to the Registration Statement Form S-8 (File Number: 000-26933) filed on May 16, 2011) and incorporated herein by reference.
10.4   Form of Non-Qualified Stock Option Agreement (For Non-Employee Directors) under the 2011 Plan (Filed as Exhibit 10.3 to the Registration Statement Form S-8 (File Number: 000-26933) filed on May 16, 2011) and incorporated herein by reference.
10.5   Form of Restricted Stock Agreement under the 2011 Plan (Filed as Exhibit 10.4 to the Registration Statement Form S-8 (File Number: 000-26933) filed on May 16, 2011) and incorporated herein by reference
10.6   Form of Restricted Stock Unit Agreement under the 2011 Plan (Filed as Exhibit 10.5 to the Registration Statement Form S-8 (File Number: 000-26933) filed on May 16, 2011) and incorporated herein by reference.
10.7   Form of Restricted Stock Unit Agreement for Non-Employee Directors under the 2011 Plan (Filed as Exhibit 10.6 to the Registration Statement Form S-8 (File Number: 000-26933) filed on May 16, 2011) and incorporated herein by reference.
10.8*   Lease executed June 28, 2011 between Margot og Thorvald Dreyers Fond (the Margot and Thorvald Dreyer Foundation), Chalotte Dreyer and Susan Dryer and Lionbridge Denmark A/S.
31.1*   Certification of Rory J. Cowan, the Company’s principal executive officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Donald M. Muir, the Company’s principal financial officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*†   Certifications of Rory J. Cowan, the Company’s principal executive officer, and Donald M. Muir, the Company’s principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101††   The following financial information from Lionbridge Technologies, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, as filed with the SEC on August 8, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statement of Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged in summary and detail.

 

 

* Filed herewith.
Furnished herewith.
†† As provided in Rule 406T of regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 f the Securities and Exchange Act of 1934.

 

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LIONBRIDGE TECHNOLOGIES, INC.

SIGNATURE

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.

 

LIONBRIDGE TECHNOLOGIES, INC.
By:  

/S/    DONALD M. MUIR        

  Donald M. Muir
 

Chief Financial Officer

(Duly Authorized Officer and Principal

Financial Officer)

Dated: August 8, 2011

 

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