Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended April 1, 2012

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 0-02287

 

 

SYMMETRICOM, INC.

(Exact name of registrant as specified in our charter)

 

 

 

Delaware		No. 95-1906306
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2300 Orchard Parkway, San Jose, California 95131-1017

(Address of principal executive offices)

Registrant’s telephone number: (408) 433-0910

 

 

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 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. (Check one):

 

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

Indicate number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

 

Class		Outstanding as of April 29, 2012
Common Stock		41,618,098

 

 

 

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SYMMETRICOM, INC.

FORM 10-Q

INDEX

 

				Page
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Condensed Consolidated Balance Sheets— April 1, 2012 and July 3, 2011			3
		Condensed Consolidated Statements of Operations—Three and nine months ended April 1, 2012 and March 27, 2011			4
		Condensed Consolidated Statements of Cash Flows—Nine months ended April 1, 2012 and March 27, 2011			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			24
Item 4.		Controls and Procedures			24
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			25
Item 1A.		Risk Factors			25
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 3.		Defaults Upon Senior Securities			25
Item 4.		Mine Safety Disclosures			25
Item 5.		Other Information			25
Item 6.		Exhibits			26
SIGNATURES					27

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

SYMMETRICOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

		April  1, 2012				July  3, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	25,550			$	20,318
Short-term investments			35,957				43,340
Accounts receivable, net of allowance for doubtful accounts of $167 and $315			40,408				40,511
Inventories			56,786				62,622
Prepaids and other current assets			18,184				14,004
Total current assets			176,885				180,795
Property, plant and equipment, net			22,863				23,255
Intangible assets, net			3,719				2,429
Deferred taxes and other assets			26,042				29,361
Total assets		$	229,509			$	235,840
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	9,995			$	16,113
Accrued compensation			11,909				13,743
Accrued warranty			1,898				1,601
Other accrued liabilities			11,190				14,683
Total current liabilities			34,992				46,140
Long-term obligations			5,906				5,212
Deferred income taxes			334				334
Total liabilities			41,232				51,686
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 500 shares authorized, none issued			—				—
Common stock, $0.0001 par value; 70,000 shares authorized, 51,355 shares issued and 41,889 outstanding at April 1, 2012; 50,579 shares issued and 42,960 outstanding at July 3, 2011			197,843				201,002
Accumulated other comprehensive loss			(145	)			(29	)
Accumulated deficit			(9,421	)			(16,819	)
Total stockholders’ equity			188,277				184,154
Total liabilities and stockholders’ equity		$	229,509			$	235,840

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		April  1, 2012				March  27, 2011				April  1, 2012				March  27, 2011
Net revenue		$	60,438			$	51,234			$	175,110			$	147,457
Cost of sales:
Cost of products and services			35,638				26,778				97,693				76,606
Amortization of purchased technology			74				260				445				814
Restructuring charges			65				1,330				1,156				8,987
Total cost of sales			35,777				28,368				99,294				86,407
Gross profit			24,661				22,866				75,816				61,050
Operating expenses:
Research and development			7,129				6,717				20,575				20,061
Selling, general and administrative			14,281				13,592				43,955				39,987
Amortization of intangible assets			52				60				156				183
Restructuring charges			(76	)			(1,142	)			123				(1,985	)
Total operating expenses			21,386				19,227				64,809				58,246
Operating income			3,275				3,639				11,007				2,804
Interest income, net of amortization (accretion) of premium (discount) on investments			225				441				(5	)			664
Interest expense			—				—				—				(55	)
Income from continuing operations before taxes			3,500				4,080				11,002				3,413
Income tax provision			1,296				1,095				3,604				810
Income from continuing operations		$	2,204			$	2,985			$	7,398			$	2,603
Income from discontinued operations, net of tax			—				19				—				97
Net income		$	2,204			$	3,004			$	7,398			$	2,700
Earnings per share—basic:
Income from continuing operations		$	0.05			$	0.07			$	0.18			$	0.06
Income from discontinued operations			—				—				—				—
Net income		$	0.05			$	0.07			$	0.18			$	0.06
Weighted average shares outstanding—basic			41,795				43,153				42,258				43,285
Earnings per share—diluted:
Income from continuing operations		$	0.05			$	0.07			$	0.17			$	0.06
Income from discontinued operations			—				—				—				—
Net income		$	0.05			$	0.07			$	0.17			$	0.06
Weighted average shares outstanding—diluted			42,615				43,859				42,937				43,853

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Nine Months Ended
		April  1, 2012				March  27, 2011
Cash flows from operating activities:
Net income		$	7,398			$	2,700
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,163				5,174
Deferred income taxes			2,925				832
Loss on disposal of fixed assets			139				5
Stock-based compensation			4,581				3,004
Allowance for doubtful accounts			(102	)			61
Provision for excess and obsolete inventory			2,617				1,188
Changes in assets and liabilities:
Accounts receivable			205				3,236
Inventories			3,219				(9,008	)
Prepaids and other assets			(3,671	)			(407	)
Accounts payable			(6,226	)			8,655
Accrued compensation			(1,834	)			(6,124	)
Other accrued liabilities			(3,040	)			(1,521	)
Net cash provided by operating activities			10,374				7,795
Cash flows from investing activities:
Purchases of short-term investments			(20,171	)			(34,289	)
Maturities of short-term investments			26,816				40,313
Purchases of property, plant and equipment			(3,152	)			(3,556	)
Remaining cash proceeds from sale of discontinued operations			210				—
Payment to acquire business			(1,400	)			—
Net cash provided by investing activities			2,303				2,468
Cash flows from financing activities:
Proceeds from issuance of common stock			2,796				2,011
Repurchase of common stock			(10,115	)			(6,013	)
Net cash used for financing activities			(7,319	)			(4,002	)
Effect of exchange rate changes on cash			(126	)			328
Net increase in cash and cash equivalents			5,232				6,589
Cash and cash equivalents at beginning of period			20,318				21,794
Cash and cash equivalents at end of period		$	25,550			$	28,383
Non-cash investing and financing activities:
Unrealized gain on investments, net		$	10			$	45
Property, plant and equipment purchases included in accounts payable			185				410
Contingent consideration for acquisition of business			540				—
Cash payments for:
Income taxes			697				190

See notes to the condensed consolidated financial statements.

 

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SYMMETRICOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation and Recently Issued Accounting Pronouncements

The condensed consolidated financial statements of Symmetricom, Inc. (“Symmetricom,” “we,” “us,” the “Company,” or “our”) included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of the management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. In presenting the financial statements in accordance with accounting principles generally accepted in the United States (US GAAP), management makes certain estimates and assumptions that impact the amounts reported and related disclosures. Estimates, by their nature, are judgments based upon available information. Accordingly, actual results could differ from those estimates.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Symmetricom’s Annual Report on Form 10-K for the fiscal year ended July 3, 2011. The results of operations for the three and nine months ended April 1, 2012 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending July 1, 2012.

The condensed consolidated balance sheet as of July 3, 2011 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.

Fiscal Quarter

Our fiscal quarter is 13 weeks ending on the Sunday closest to the end of the calendar quarter.

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements for fair value measurements. The new guidance limits the highest-and-best-use measure to non-financial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. We adopted the new guidance effective beginning third quarter of fiscal 2012, and it had no impact on our financial position, results of operations or cash flows.

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance will be effective for us beginning first quarter of fiscal 2013, will require retrospective application, and will only affect presentation of comprehensive income (loss).

Note 2. Financial Instruments

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;

 

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

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Financial assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of April 1, 2012 and July 3, 2011:

 

		Fair Value as  of April 1, 2012				Quoted Prices in Active  Markets for Identical Assets (Level 1)				Significant Other Observable  Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
						(In thousands)
Assets:
Money market funds		$	11,977			$	11,977			$	—			$	—
Short-term investments:
Corporate debt securities			20,052				—				20,052				—
Government sponsored enterprise debt securities			12,935				—				12,935				—
Mutual funds			2,970				2,970				—				—
Total short-term investments			35,957				2,970				32,987				—
Total financial assets		$	47,934			$	14,947			$	32,987			$	—
Liabilities:
Contingent Consideration		$	540			$	—			$	—			$	540
Total financial liabilities		$	540			$	—			$	—			$	540
		Fair Value as of July 3, 2011				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
						(In thousands)
Assets:
Money market funds		$	12,630			$	12,630			$	—			$	—
Short-term investments:
Corporate debt securities			23,430				—				23,430				—
Government sponsored enterprise debt securities			16,456				—				16,456				—
Mutual funds			3,454				3,454				—				—
Total short-term investments			43,340				3,454				39,886				—
Total financial assets		$	55,970			$	16,084			$	39,886			$	—

Level 1 and 2 financial assets:

The fair values of our money market funds and mutual funds were derived from quoted market prices as active markets for these instruments exist. The fair values of corporate debt securities and government sponsored enterprise debt securities were derived from non-binding market consensus prices that are corroborated by observable market data.

The investments in mutual funds are held in a Rabbi trust to support the terms of our deferred compensation plan.

 

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The following table summarizes available-for-sale and trading securities recorded as cash and cash equivalents or short-term investments:

 

		Amortized Cost				Gross Unrealized Gains (Losses)				Fair Value
						(In thousands)
April 1, 2012
Money market funds		$	11,977			$	—			$	11,977
Corporate debt securities			20,031				21				20,052
Government sponsored enterprise debt securities			12,934				1				12,935
Mutual funds			2,970				—				2,970
Total financial assets		$	47,912			$	22			$	47,934
		Amortized Cost				Gross Unrealized Gains (Losses)				Fair Value
						(In thousands)
July 3, 2011
Money market funds		$	12,630			$	—			$	12,630
Corporate debt securities			23,424				6				23,430
Government sponsored enterprise debt securities			16,456				—				16,456
Mutual funds			3,454				—				3,454
Total financial assets		$	55,964			$	6			$	55,970

The following table summarizes the contractual maturities of fixed income securities (Corporate debt securities and Government sponsored enterprise debt securities) recorded as short-term investments as of April 1, 2012:

 

		Amortized Cost				Fair Value
		(In thousands)
Less than 1 year		$	16,361			$	16,375
Due in 1 to 3 years			16,604				16,612
Total		$	32,965			$	32,987

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

Level 3 financial liability:

The following table reconciles the beginning and ending balances for Level 3 liabilities for the third quarter of 2012 (in thousands):

 

		Contingent consideration
Balance as of Janaury 1, 2012		$	—
Acquired business-March 2012 (See Note 13)			540
Unrealized gains /losses			—
Balance as of April 1, 2012		$	540

 

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Contingent consideration on acquired business was measured at fair value on a recurring basis using Level 3 inputs as defined in the fair value hierarchy. The following table presents certain information about the significant unobservable inputs used in the fair value measurement for the contingent consideration measured at fair value on a recurring basis using significant unobservable inputs:

 

Description		Valuation Techniques		Significant Unobservable Inputs
Liabilities:Contingent consideration		Present value of a Probability Weighted Earnout model using an appropriate discount rate.		Estimate of future revenue associated with acquired technology. Revenue of $4.9 million over a range of 2.5 years to 3 years.

An increase in the revenue growth percentage could result in a significantly higher estimated fair value of the contingent consideration liability. Alternatively, a decrease in the revenue growth percentage could result in a significantly lower estimated fair value of contingent consideration liability.

The fair value of contingent consideration was derived from a probability weighted earn-out model of future contingent payments. The cash payments are expected to be made quarterly, based upon revenue generated from the acquired product line, starting in fiscal 2013. The valuation of this liability is estimated based upon a collaborative effort of the Company’s marketing and finance departments. These future contingent payments are calculated based on estimates of future revenue attributable to the acquired technology (Note 13). To obtain a current valuation of these projected cash flows, an expected present value technique is applied using an appropriate discount rate. The cash flow projections and discount rates will be reviewed quarterly and updated as and when necessary. Potential valuation adjustments will be made as future revenue projections are updated which affect the calculation of the related contingent consideration payments. These adjustments will be recorded in the income statement.

Note 3. Inventories

Components of inventories were as follows:

 

		April 1, 2012				July 3, 2011
		(In thousands)
Raw materials		$	25,358			$	27,206
Work-in-process			9,446				9,520
Finished goods			21,982				25,896
Inventories		$	56,786			$	62,622

Note 4. Intangible Assets

Intangible assets consist of:

 

		Gross Carrying Amount				Accumulated Amortization				Net Intangible Assets
						(in thousands)
Purchased technology		$	25,970			$	(23,671	)		$	2,299
Customer lists and trademarks			7,303				(5,883	)			1,420
Total as of April 1, 2012		$	33,273			$	(29,554	)		$	3,719
Purchased technology		$	24,357			$	(23,226	)		$	1,131
Customer lists and trademarks			7,025				(5,727	)			1,298
Total as of July 3, 2011		$	31,382			$	(28,953	)		$	2,429

 

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The estimated future amortization expense by fiscal year is as follows:

 

		(in thousands)
Fiscal year:
2012 (Remaining 3 months)		$	262
2013			1,044
2014			1,010
2015			635
2016			461
Thereafter			307
Total amortization		$	3,719

Intangible asset amortization expense for the third quarter of fiscal 2012 and 2011 was $0.1 million and $0.3 million, respectively. Intangible asset amortization expense for the first nine months of fiscal 2012 and 2011 was $0.6 million and $1.0 million, respectively.

Note 5. Warranty

Changes in our accrued warranty liability were as follows:

 

		Three Months Ended								Nine Months Ended
		April 1, 2012				March 27, 2011				April 1, 2012				March 27, 2011
		(In thousands)								(In thousands)
Beginning balance		$	1,835			$	2,002			$	1,601			$	2,900
Provision for warranty			717				(11	)			1,948				(9	)
Accruals related to change in estimate			54				105				397				527
Less: Actual warranty costs			(708	)			(509	)			(2,048	)			(1,831	)
Ending balance		$	1,898			$	1,587			$	1,898			$	1,587

Note 6. Long-term Obligations

Long-term obligations consist of:

 

		April 1, 2012				July 3, 2011
		(In thousands)
Long-term obligations:
Deferred revenue		$	2,290			$	2,131
Lease loss accrual, net			1,828				1,793
Rent accrual			1,120				1,088
Contingent consideration for acquired business			487				—
Post-retirement benefits			181				200
Total		$	5,906			$	5,212

 

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Note 7. Stockholders’ Equity

Stock Options and Awards Activity

Stock award activity for the nine months ended April 1, 2012 is as follows:

 

						Non Performance-based Options Outstanding								Restricted Stock Outstanding
		Shares Available For Grant				Number  of Shares				Weighted Average Exercise Price Per Share				Number  of Shares				Weighted Average Grant-Date Fair Value
		(In thousands, except per share amounts)
Balances at July 3, 2011			4,463				6,534			$	5.78				228			$	6.39
Granted - options			(2,053	)			2,053				5.15				—				—
Granted - restricted shares			(312	)			—				—				156				5.32
Exercised			—				(331	)			4.51				—				—
Vested			—				—				—				(123	)			6.53
Cancelled and Expired			623				(623	)			7.21				—				—
Balances at April 1, 2012			2,721				7,633			$	5.55				261			$	5.69

Stock options outstanding, vested and expected to vest, and exercisable as of April 1, 2012 were as follows:

 

Options		Number of Shares				Weighted Average Remaining Contractual Life				Weighted Average Exercise Price				Aggregate Intrinsic Value
		(In thousands)				(In years)								(In thousands)
Outstanding			7,633				4.74			$	5.55			$	4,242
Vested and expected to vest			7,278				4.66			$	5.56			$	4,072
Exercisable			3,581				3.45			$	5.71			$	2,285

The aggregate intrinsic value in the preceding table represents the total pre-tax value of stock options outstanding as of April 1, 2012, based on our common stock closing price of $5.77 on March 30, 2012, which would have been received by the option holders had all option holders exercised their options as of that date.

The total intrinsic value of options exercised during the third quarter of fiscal 2012 and 2011 was approximately $0.4 million and $0.2 million, respectively. The total intrinsic value of options exercised during the first nine months of fiscal 2012 and 2011 was approximately $0.5 million and $0.6 million, respectively.

For the third quarter of fiscal 2012 and 2011, the weighted-average estimated fair value of options granted was $2.57 and $3.09 per share, respectively. For the nine months ended April 1, 2012 and March 27, 2011, the weighted-average estimated fair value of options granted was $2.45 and $3.08 per share, respectively. Our calculations were made using the Black-Scholes option-pricing model. The fair value of Symmetricom stock-based awards to employees was estimated assuming no expected dividends and the weighted-average assumptions for the three and nine months ended April 1, 2012 and March 27, 2011 as follows:

 

		Three months ended								Nine months ended
		April  1, 2012				March  27, 2011				April  1, 2012				March  27, 2011
Expected life (in years)			4.4				4.6				4.9				5.1
Risk-free interest rate			0.7	%			1.3	%			0.7	%			1.2	%
Volatility			56.9	%			56.4	%			56.4	%			56.7	%

 

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We calculated the stock-based compensation expense in the third quarter of fiscal 2012 and 2011, using an estimated annual forfeiture rate of 6.6% and 8.0%, respectively. At April 1, 2012, the total cumulative compensation cost related to unvested stock-based awards granted to employees, directors and consultants under the Company’s stock option plans, but not yet recognized, was approximately $6.2 million, net of estimated forfeitures of $0.8 million. This cost will be amortized on an accelerated method basis over a period of approximately 1.4 years and will be adjusted for subsequent changes in estimated forfeitures.

The following table shows total stock-based compensation costs included in the condensed consolidated statements of operations:

 

		Three Months Ended								Nine Months Ended
		April 1, 2012				March 27, 2011				April 1, 2012				March 27, 2011
		(In thousands)								(In thousands)
Cost of sales		$	272			$	253			$	606			$	506
Research and development			312				240				896				562
Selling, general and administrative			1,154				1,055				3,079				2,050
Stock compensation expense from continuing operations			1,738				1,548				4,581				3,118
Stock compensation expense from discontinued operations			—				—				—				(114	)
Total		$	1,738			$	1,548			$	4,581			$	3,004

The above table includes expense of $0.1 million and $0.4 million, relating to the employee stock purchase plan (ESPP) for the third quarter and first nine months of fiscal 2012, respectively. ESPP expense in the third quarter and first nine months of fiscal 2011 was $0.1 million and $0.1 million, respectively.

Performance Awards

In the second quarter of fiscal 2012, the Company communicated its intention to grant 110,000 shares of performance based restricted stock to its executive management employees subject to the achievement of certain financial performance targets. The number of stock awards that will ultimately be granted depends on actual business performance measured for fiscal 2012 against certain targets for revenue and profitability for the Company’s business as well as continued employment with the Company.

Stock Repurchases

During the third quarter of fiscal 2012, the Company repurchased 665,300 shares of common stock pursuant to our repurchase program for an aggregate price of approximately $4.0 million.

On November 17, 2011, the Company’s Board of Directors authorized management to repurchase an additional 4.1 million shares of Symmetricom common stock in addition to the remaining shares available for repurchase under previously approved programs. As of April 1, 2012, the total number of shares available for repurchase under the repurchase program authorized by the Board of Directors was approximately 3.8 million.

 

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Note 8. Restructuring Charges

The following table shows the details of the restructuring cost accruals, which consist of facilities and severance costs, at April 1, 2012 and July 3, 2011:

 

		Balance at July  3, 2011				Expense Additions				Payments  and Non-cash Settlements				Balance at April  1, 2012
		(in thousands)
Lease loss accrual (fiscal 2004)		$	161			$	14			$	(29	)		$	146
All other restructuring changes (fiscal 2004)			50				36				(52	)			34
Lease loss accrual (fiscal 2009)			1,797				58				(309	)			1,546
All other restructuring changes (fiscal 2010)			409				101				(271	)			239
Lease loss accrual (fiscal 2011 and 2012)			403				710				(173	)			940
All other restructuring changes (fiscal 2011 and 2012)			979				360				(1,339	)			—
Total		$	3,799			$	1,279			$	(2,173	)		$	2,905

During the first nine months of fiscal 2012, we incurred approximately $1.3 million in lease loss charges, severance, consulting, and other charges in connection with restructuring activities associated with the shutdown of certain activities at our Santa Rosa facility.

The lease loss accruals are subject to periodic revisions based on current market estimates. The lease loss accruals as of April 1, 2012 will be paid over the next five years.

Note 9. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under US GAAP are recorded as an element of stockholders’ equity but are excluded from net income (loss). Other comprehensive income (loss) is comprised of unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale and foreign currency translation adjustments. The components of comprehensive income (loss), net of tax, are as follows:

 

		Three Months Ended								Nine Months Ended
		April, 1 2012				March  27, 2011				April, 1 2012				March  27, 2011
		(in thousands)								(in thousands)
Net income		$	2,204			$	3,004			$	7,398			$	2,700
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments			110				241				(126	)			328
Unrealized gain (loss) on investments			41				(8	)			10				45
Other comprehensive income (loss)			151				233				(116	)			373
Total comprehensive income		$	2,355			$	3,237			$	7,282			$	3,073

 

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Note 10. Net Income (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options, employee stock purchase plan and restricted stock using the treasury stock method, except when antidilutive.

The following table reconciles the number of shares utilized in the net income (loss) per share calculations:

 

		Three Months Ended								Nine Months Ended
		April 1, 2012				March 27, 2011				April 1, 2012				March 27, 2011
		(In thousands, except per share amounts)								(In thousands, except per share amounts)
Numerator:
Income from continuing operations		$	2,204			$	2,985			$	7,398			$	2,603
Income from discontinued operations			—				19				—				97
Net income		$	2,204			$	3,004			$	7,398			$	2,700
Shares (denominator):
Weighted average common shares outstanding			42,056				43,383				42,494				43,448
Weighted average common shares outstanding subject to repurchase			(261	)			(230	)			(236	)			(163	)
Weighted average shares outstanding—basic			41,795				43,153				42,258				43,285
Weighted average dilutive share equivalents from stock options			741				661				578				510
Weighted average dilutive common shares subject to repurchase			79				45				101				58
Weighted average shares outstanding— diluted			42,615				43,859				42,937				43,853
Earnings per share — basic:
Income from continuing operations		$	0.05			$	0.07			$	0.18			$	0.06
Income from discontinued operations			—				—				—				—
Net income		$	0.05			$	0.07			$	0.18			$	0.06
Earnings per share — diluted:
Income from continuing operations		$	0.05			$	0.07			$	0.17			$	0.06
Income from discontinued operations			—				—				—				—
Net income		$	0.05			$	0.07			$	0.17			$	0.06

Unvested restricted stock is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings per share.

The following common stock equivalents were excluded from the earnings (loss) per share calculation as their effect would have been anti-dilutive:

 

		Three Months Ended								Nine Months Ended
		April 1, 2012				March 27, 2011				April 1, 2012				March 27, 2011
		(In thousands)								(In thousands)
Stock options			4,310				3,081				4,028				2,603
Common shares subject to repurchase			—				—				—				17
Total shares of common stock excluded from diluted earnings per share calculation			4,310				3,081				4,028				2,620

Note 11. Litigation and Contingencies

Litigation —The Company is or was a party to the following material litigations:

Former Texas Facility Environmental Cleanup

We formerly leased a tract of land in Texas for our operations. Those operations involved the use of solvents and, at the end of the lease, we remediated an area where the solvents had been deposited on the ground and obtained regulatory approval for that remedial activity. In 1996, an environmental investigation of the property detected those same contaminants in groundwater in excess of then current regulatory standards. The groundwater contamination has migrated to some adjacent properties. We have entered into the Texas Natural Resource Conservation Commission’s Voluntary Cleanup Program (the “Voluntary Cleanup Program”) to obtain regulatory approval for closure of this site and a release from liability to the State of Texas for subsequent landowners and lenders. We have notified adjacent property owners affected by the contamination of participation in the Voluntary Cleanup Program. On May 20, 2004, we received a demand from the owner of several adjacent lots for damages in the amount of $1.3 million, as well as seeking an indemnity for the contamination and a promise to remediate the contamination. On March 14, 2006, the adjacent property owner filed

 

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suit in Probate Court No. 1, Travis County, Texas (Anna B. Miller, Individually and as Executrix of the Estate of Robert L. Miller, et al. vs. Austron, Inc., et al.), seeking damages. Symmetricom has not yet been served in this matter, but we intend to defend this lawsuit vigorously. We are continuing to work on the remediation of the formerly leased site as well as the adjacent properties, and have also taken steps to begin work on the Miller property. As of April 1, 2012, we had an accrual of $34,000 for remediation costs and other ongoing monitoring costs which has been included within “other accrued liabilities” on our condensed consolidated balance sheet.

Michael E. McNeil, et al. vs. Jason Book, et al.

On or around May 25, 2010, Symmetricom was served with the first amended complaint in the case of Michael E. McNeil, et al. vs. Jason Book, et al. (Case No. CV165643) filed in Santa Cruz County Superior Court, California. The first amended complaint added Symmetricom and several other parties to the lawsuit, which had been originally filed in 2009 by plaintiffs against their former attorney for legal malpractice in connection with certain settlement agreements in 1999 between plaintiffs and Datum (a company acquired by Symmetricom) in which they assigned to Datum certain intellectual property rights. The complaint has since been amended for the second time and Symmetricom was served with the second amended complaint on or around January 7, 2011. The second amended complaint alleges several causes of action, including claims against Symmetricom for contract rescission, breach of contract, conversion and unjust enrichment, and seeks unspecified monetary damages along with equitable relief. Management believes that this lawsuit has no merit or basis and intends to defend this lawsuit vigorously and as a result, no accrual has been made in relation to this litigation. Management believes the final outcome of this matter will not have a material adverse effect on our financial position and results of operations.

General

Under the indemnification provisions of our standard sales contracts, we agree to defend the customer against third party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/customer. The exposure to us under these indemnification provisions is generally limited to the total amount paid by the customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. We believe the estimated fair value of these indemnification agreements is not material.

We are also a party to certain other claims in the normal course of our operations. While the results of these claims cannot be predicted with any certainty, we believe that the final outcome of these matters will not have a material adverse effect on our consolidated financial position and results of operations.

Note 12. Business Segment Information

Symmetricom is organized into two operating segments: Communications and Government and Enterprise. These two operating segments are our reporting segments. The Chief Operating Decision Maker (CODM), as defined by authoritative accounting guidance on Segment Reporting, is our President and Chief Executive Officer (CEO). Our CEO allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes.

With the exception of intangible assets, we do not identify or allocate assets by operating segment, nor does our CEO evaluate operating segments using discrete asset information. We do not allocate restructuring charges, interest and other income, interest expense, or income taxes to operating segments.

The following describes our two reporting segments:

Communications

Our Communications business supplies timing technologies and services for worldwide communications infrastructure. Products include primary reference sources, synchronization distribution systems, embedded components and software, and test and measurement equipment, all of which support the timing and synchronization requirements of telecommunications and cable networks and equipment.

Government and Enterprise

Our Government and Enterprise business provides time technology products for aerospace/defense, IT infrastructure and science and metrology applications. Precision time and frequency systems enable a range of critical operations, including the international time scale, global navigation, the management of power grids, synchronization of complex control systems, and signals intelligence for securing communications in remote and hostile environments. Through fiscal 2011, we named this business as Government; however, in the first quarter of fiscal 2012, we changed the name to Government and Enterprise to more accurately reflect the business’ customers and initiatives.

 

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Segment revenue, gross profit and operating income (loss) were as follows during the periods presented:

 

Three months ended April 1, 2012
		Communications				Government and Enterprise				Corporate				Total
		(In thousands)
Net revenue		$	32,646			$	27,792			$	—			$	60,438
Cost of sales			16,672				19,041				64				35,777
Gross profit			15,974				8,751				(64	)			24,661
Operating expenses			9,121				6,697				5,568				21,386
Operating income (loss)		$	6,853			$	2,054			$	(5,632	)		$	3,275
Three months ended March 27, 2011
		Communications				Government and Enterprise				Corporate				Total
		(In thousands)
Net revenue		$	30,398			$	20,836			$	—			$	51,234
Cost of sales			14,941				12,097				1,330				28,368
Gross profit			15,457				8,739				(1,330	)			22,866
Operating expenses			8,471				5,820				4,936				19,227
Operating income (loss)		$	6,986			$	2,919			$	(6,266	)		$	3,639
Nine months ended April 1, 2012
		Communications				Government and Enterprise				Corporate				Total
		(In thousands)
Net revenue		$	99,523			$	75,587			$	—			$	175,110
Cost of sales			49,807				48,332				1,155				99,294
Gross profit			49,716				27,255				(1,155	)			75,816
Operating expenses			28,369				19,712				16,728				64,809
Operating income (loss)		$	21,347			$	7,543			$	(17,883	)		$	11,007
Nine months ended March 27, 2011
		Communications				Government and Enterprise				Corporate				Total
		(In thousands)
Net revenue		$	83,916			$	63,541			$	—			$	147,457
Cost of sales			42,188				35,232				8,987				86,407
Gross profit			41,728				28,309				(8,987	)			61,050
Operating expenses			25,654				17,590				15,002				58,246
Operating income (loss)		$	16,074			$	10,719			$	(23,989	)		$	2,804

The information in the Corporate category above represents corporate-related costs that are not allocated to either of our two segments for the purpose of evaluating their performance. The following table outlines our major corporate-related costs:

 

		Three Months Ended								Nine Months Ended
		April 1, 2012				March 27, 2011				April 1, 2012				March 27, 2011
		(In thousands)								(In thousands)
Selling, general and adminstrative costs		$	5,643			$	6,078			$	16,604			$	16,987
Restructuring charges			(11	)			188				1,279				7,002
Corporate-related total		$	5,632			$	6,266			$	17,883			$	23,989

 

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13. Business Combination

On March 20, 2012, the Company acquired a product line (existing technology, customer relationships, fixed assets and employees) to enhance the Company’s product offerings in embedded timing and synchronization solutions for residential small cell solutions. This transaction was recorded as an acquisition of a business. The transaction price was approximately $2.4 million of which $1.4 million was paid in cash and approximately $1.0 million is contingent consideration payable as a royalty upon future sales of such products.

The fair value of the contingent consideration arrangement at the acquisition date was $0.5 million. We estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model (See Note 2). The preliminary purchase price was determined as follows (amounts in thousands):

 

Initial cash payment		$	1,400
Fair value of contingent consideration			540
Total		$	1,940

This preliminary purchase price was allocated to fixed assets and intangible assets based on their estimated fair values as follows (amounts in thousands):

 

Fixed assets		$	50
Intangible assets			1,890
Total		$	1,940

The Company expects to complete the accounting for this transaction in the fourth quarter of fiscal 2012 after finalizing the estimated fair value of intangible assets and the estimated fair value of contingent consideration.

Preliminary estimated fair value of Intangible assets acquired under the transaction consists of the following (in thousands):

 

Existing technology (estimated useful live 4 years)		$	1,612
Customer relationships (estimated useful life 2 years)			278
Total		$	1,890

Pro forma results of operations have not been presented because the effect of the business combination described in this Note was not material to our condensed consolidated results of operations.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with the condensed consolidated financial statements and related notes included elsewhere in this report.

When used in this discussion or elsewhere in this report, the words “expects,” “anticipates,” “estimates,” “believes,” “plans,” “will,” “intend,” “can” and similar expressions are intended to identify forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks and uncertainties include, but are not limited to, risks relating to general economic conditions in the markets we address and the telecommunications market in general, risks related to the development of our new products and services, the reliance on our contract manufacturer, the effects of increasing competition and competitive pricing pressure, uncertainties associated with changing intellectual property laws, developments in and expenses related to litigation, inability to obtain sufficient amounts of key components, the rescheduling or cancellations of key customer orders, the loss of a key customer, the effects of new and emerging technologies, the risk that excess inventory may result in write-offs, price erosion and decreased demand, fluctuations in the rate of exchange of foreign currency, changes in our effective tax rate, market acceptance of our new products and services, technological advancements, undetected errors or defects in our products, the risks associated with our international sales, potential short-term investment losses and other risks due to credit market dislocation, geopolitical risks and risk of terrorist activities, the risks associated with attempting to integrate other companies and businesses we acquire, and the risks set forth below in Part II, Item 1A, “Risk Factors.”

 

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These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances or on which any such statement is based.

All references to “Symmetricom,” “we,” “us,” and “our” mean Symmetricom, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company. Dollar amounts in the tables in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are in thousands.

Overview

Symmetricom, a world leader in precise time solutions, sets the world's standard for time. We generate, distribute and apply precise time for the communications, aerospace/defense, IT infrastructure and metrology industries. Our customers, from communications service providers and network equipment manufacturers to governments and their suppliers worldwide, are able to build more reliable networks and systems by using the company's advanced timing technologies, atomic clocks, services and solutions. All products support today's precise timing standards, including GPS-based timing, IEEE 1588 (PTP), Network Time Protocol (NTP), Synchronous Ethernet and DOCSIS^® timing.

Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures at the date of our financial statements. On an ongoing basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that there have been no significant changes during the three and nine months ended April 1, 2012 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended July 3, 2011.

Known Trends and Uncertainties Impacting Future Results of Operations: Global Market and Economic Conditions

Current macro-economic factors are dynamic and uncertain and are likely to remain so for the remainder of fiscal year 2012. If economic conditions remain uncertain or worsen (for example, due to the ongoing financial crisis in Europe or a slowdown in the economic growth rate in China), or if there are reductions in government and/or defense spending, our customers may delay or reduce capital expenditures. Among other things, these factors could result in reductions in sales of our products, longer sales cycles, difficulties in collecting accounts receivable, additional excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies, increased price competition and supplier difficulties.

 

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Results of Operations

The following table presents selected items in our condensed consolidated statements of operations as a percentage of total net revenue for the three and nine months ended April 1, 2012 and March 27, 2011:

 

		Three Months Ended								Nine Months Ended
		April 1, 2012				March 27, 2011				April 1, 2012				March 27, 2011
Net revenue
Communications			54.0	%			59.3	%			56.8	%			56.9	%
Government and Enterprise			46.0	%			40.7	%			43.2	%			43.1	%
Total net revenue			100.0	%			100.0	%			100.0	%			100.0	%
Cost of products and services			59.0	%			52.3	%			55.8	%			52.0	%
Amortization of purchased technology			0.1	%			0.5	%			0.3	%			0.6	%
Restructuring charges			0.1	%			2.6	%			0.7	%			6.1	%
Gross profit			40.8	%			44.6	%			43.3	%			41.4	%
Operating expenses:
Research and development			11.8	%			13.1	%			11.7	%			13.6	%
Selling, general and administrative			23.6	%			26.5	%			25.1	%			27.1	%
Amortization of intangible assets			0.1	%			0.1	%			0.1	%			0.1	%
Restructuring charges			(0.1	)%			(2.2	)%			0.1	%			(1.3	)%
Operating income			5.4	%			7.1	%			6.3	%			1.9	%
Interest income, net of amortization (accretion) of premium (discount) on investments			0.4	%			0.9	%			0.0	%			0.5	%
Interest expense			—	%			—	%			—	%			(0.0	)%
Income from continuing operations before taxes			5.8	%			8.0	%			6.3	%			2.3	%
Income tax provision			2.1	%			2.1	%			2.1	%			0.5	%
Income from continuing operations			3.6	%			5.9	%			4.2	%			1.8	%
Income from discontinued operations, net of tax			—	%			—	%			—	%			0.1	%
Net income			3.6	%			5.9	%			4.2	%			1.8	%

 

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Net Revenue:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		April 1, 2012				March 27, 2011												April 1, 2012				March 27, 2011
Net Revenue (dollars in thousands):
Communications		$	32,646			$	30,398			$	2,248				7.4	%		$	99,523			$	83,916			$	15,607				18.6	%
Government and Enterprise			27,792				20,836				6,956				33.4				75,587				63,541				12,046				19.0
Total Net Revenue		$	60,438			$	51,234			$	9,204				18.0	%		$	175,110			$	147,457			$	27,653				18.8	%
Percentage of Revenue			100	%			100	%											100	%			100	%

Third Quarter of Fiscal 2012: Net revenue consists of sales of products, software licenses and services. In the third quarter of fiscal 2012, net revenue increased $9.2 million, or 18%, compared to the corresponding quarter of fiscal 2011. The increase in Communications revenue is due to higher sales of PackeTime™ and DOCSIS Timing Interface (DTI) products, partially offset by lower sales of traditional sync products. The increase in Government and Enterprise segment revenue is due to an increase in our government programs business, enterprise products and our Quantum™ Chip Scale Atomic Clocks (CSAC), partially offset by a decrease in sales of clocks.

First Nine Months of Fiscal 2012: In the first nine months of fiscal 2012, net revenue increased $27.7 million, or 18.8%, compared to the corresponding period of fiscal 2011. The increase in Communications revenue is due to the completion of our transition to an outsourced manufacturing and logistics model that adversely impacted revenue in the second quarter of fiscal 2011. Further, in the first nine months of fiscal 2012, Communication revenue increased due to higher sales of traditional sync, DTI and PackeTime™ products and higher installation revenues, offset by lower sales of embedded solutions products. The increase in Government and Enterprise segment revenue is due to an increase in our government programs business, enterprise products, and sales of our CSAC.

Gross Profit:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		April 1, 2012				March 27, 2011												April 1, 2012				March 27, 2011
Gross Profit (dollars in thousands):
Communications		$	15,974			$	15,457			$	517				3.3	%		$	49,716			$	41,728			$	7,988				19.1	%
Government and Enterprise			8,751				8,739				12				0.1				27,255				28,309				(1,054	)			(3.7	)
Corporate related			(64	)			(1,330	)			1,266				(95.2	)			(1,155	)			(8,987	)			7,832				(87.1	)
Total Gross Profit		$	24,661			$	22,866			$	1,795				7.9	%		$	75,816			$	61,050			$	14,766				24.2	%
Percentage of Revenue			40.8	%			44.6	%											43.3	%			41.4	%

Third Quarter of Fiscal 2012: Gross profit in the third quarter of fiscal 2012 increased by $1.8 million, or 7.9%, compared to the corresponding quarter of fiscal 2011. Gross profit as a percentage of revenue in the third quarter of fiscal 2012 decreased to 40.8% compared to 44.6% in the corresponding quarter of fiscal 2011 due to a product mix shift to lower margin products. Gross profit for our Communications segment increased by 3.3% in the third quarter of fiscal 2012 compared to the corresponding quarter of fiscal 2011 whereas the revenue in this segment increased by 7.4% due to an increase in sales mix of lower margin products. Gross profit for our Government and Enterprise segment increased by 0.1% in the third quarter of fiscal 2012 compared to the corresponding quarter of fiscal 2011 whereas the revenue in this segment increased by 33.4% due to a higher mix of government programs business and CSAC, which carry lower gross margins. Gross profit was also impacted in the third quarter of fiscal 2012 by higher manufacturing costs due to lower-than normal production and the production ramp-up of new products, principally CSAC.

Corporate related charges decreased by $1.3 million, or 95.2%, in the third quarter of fiscal 2012 due to higher restructuring charges in the third quarter of fiscal 2011 related to activities associated with the phased closure of our Puerto Rico manufacturing facility, which was completed in fiscal 2011.

We expect gross margins in the fourth quarter of fiscal 2012 to be slightly higher than the third quarter of fiscal 2012 as we continue to focus on returning to more normal production levels.

 

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First Nine Months of Fiscal 2012

Gross profit in the first nine months of fiscal 2012 increased by $14.8 million, or 24.2%, compared to the corresponding period of fiscal 2011. Gross profit as a percentage of revenue in the first nine months of fiscal 2012 increased to 43.3% as compared to 41.4% in the corresponding period of fiscal 2011 due primarily to a decrease in corporate-related restructuring charges.

Gross profit for our Communications segment increased by 19.1% in the first nine months of fiscal 2012 compared to the corresponding period of fiscal 2011, whereas the revenue in this segment increased 18.6% compared to the same period in the prior year due to product mix shift to higher margin products (PackeTime™ and DTI products). Gross profit for our Government and Enterprise segment decreased by 3.7% in the first nine months of fiscal 2012 compared to the corresponding period of fiscal 2011 whereas revenue increased 19% compared to the same period in the prior year, due to product mix shift to lower margin products (government programs business and CSAC) and higher manufacturing costs.

Corporate related charges decreased $7.8 million, or 87.1%, in the first nine months of fiscal 2012, due to higher restructuring charges in the first nine months of fiscal 2011 from activities associated with the phased closure of our Puerto Rico manufacturing facility, which was completed in fiscal 2011.

Operating Expenses:

Research and Development Expense:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		April 1,				March 27,												April 1,				March 27,
		2012				2011												2012				2011
Research and development expense (dollars in thousands)		$	7,129			$	6,717			$	412				6.1	%		$	20,575			$	20,061			$	514				2.6	%
Percentage of Revenue			11.8	%			13.1	%											11.7	%			13.6	%

Third Quarter of Fiscal 2012: Research and development expense consists primarily of salaries and benefits, prototype expenses and fees paid to outside consultants. Research and development expenses in the third quarter of fiscal 2012 were comparable to the same quarter of fiscal 2011. We expect that research and development expenses in the fourth quarter of fiscal 2012 will be consistent with the third quarter of fiscal 2012.

First Nine Months of Fiscal 2012: Research and development expense in the first nine months of fiscal 2012 were comparable to the same period of fiscal 2011.

Selling, General and Administrative:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		April 1,				March 27,												April 1,				March 27,
		2012				2011												2012				2011
Selling, general and administrative (dollars in thousands)		$	14,281			$	13,592			$	689				5.1	%		$	43,955			$	39,987			$	3,968				9.9	%
Percentage of Revenue			23.6	%			26.5	%											25.1	%			27.1	%

Third Quarter of Fiscal 2012: Selling, general and administrative expenses consist primarily of salaries, benefits, sales commissions and travel-related expenses for our sales and services, marketing, finance, human resources, information technology and facilities departments. These expenses were comparable to the same quarter of fiscal 2011. We expect that selling, general and administrative expenses in the fourth quarter of fiscal 2012 will be consistent with the third quarter of fiscal 2012.

First Nine Months of Fiscal 2012: Selling, general and administrative expenses in the first nine months of fiscal 2012 increased compared to the same period for fiscal 2011 due to an increase in employee compensation costs attributable to increases in base salary, bonus and head count. This increase was partially offset by lower facilities expenses.

 

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Amortization of intangible assets:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		April 1,				March 27,												April 1,				March 27,
		2012				2011												2012				2011
Amortization of intangible assets (dollars in thousands)		$	52			$	60			$	(8	)			(13.3	)%		$	156			$	183			$	(27	)			(14.8	)%
Percentage of Revenue			0.1	%			0.1	%											0.1	%			0.1	%

Amortization of intangibles decreased in the third quarter and first nine months of fiscal 2012 compared to the corresponding periods of fiscal 2011 due to certain assets being fully amortized before or during the first nine months of fiscal 2012.

Restructuring charges:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		April 1,				March 27,												April 1,				March 27,
		2012				2011												2012				2011
Restructuring charges (dollars in thousands)		$	(76	)		$	(1,142	)		$	1,066				(93.3	)%		$	123			$	(1,985	)		$	2,108				(106.2	)%
Percentage of Revenue			(0.1	)%			(2.2	)%											0.1	%			(1.3	)%

Restructuring charges in the third quarter and first nine months of fiscal 2012 consisted of a change in estimate by $0.1 million arising from sub-lease of a space that had previously been recorded as a lease loss at the time we ceased using the space. In the third quarter of fiscal 2011 and first nine months of fiscal 2011 restructuring charges consisted of a change in the estimate by $1.9 million for lease loss accruals due to utilization of a section of the San Jose facility that had previously been recorded as a lease loss at the time we ceased using the space.

Interest income, net of amortization (accretion) of premium (discount) on investments:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		April 1,				March 27,												April 1,				March 27,
		2012				2011												2012				2011
Interest income, net of amortization (accretion) of premium (discount) on investments (dollars in thousands)		$	225			$	441			$	(216	)			(49.0	)%		$	(5	)		$	664			$	(669	)			(100.8	)%
Percentage of Revenue			0.4	%			0.9	%											(0.0	)%			0.5	%

Interest income, net of amortization (accretion) of premium (discount) on investments decreased $0.2 million in the third quarter of fiscal 2012 compared to the same period of prior year due to higher amortization of premium on investments in the third quarter of fiscal 2012.

Interest income, net of amortization (accretion) of premium (discount) on investments decreased $0.7 million in the first nine months of fiscal 2012 compared to the same period of fiscal 2011 due to higher amortization of premium on investments in the first nine months of fiscal 2012 and a $0.3 million decline in the fair value of mutual funds in the first nine months of fiscal 2012.

Income tax provision:

 

		Three Months Ended								$ Change				% Change				Nine Months Ended								$ Change				% Change
		April 1,				March 27,												April 1,				March 27,
		2012				2011												2012				2011
Income tax provision (dollars in thousands)		$	1,296			$	1,095			$	201				18.4	%		$	3,604			$	810			$	2,794				344.9	%
Percentage of Revenue			2.1	%			2.1	%											2.1	%			0.5	%

Third Quarter of Fiscal 2012: Our income tax provision was $1.3 million in the third quarter of fiscal 2012, compared to $1.1 million in the corresponding quarter of fiscal 2011. Our effective tax rate in the third quarter of fiscal 2012 was 37.0%, compared to an effective tax rate of 26.8% in the corresponding quarter of fiscal 2011. The effective tax rate for the third quarter of fiscal 2011 benefitted from the reversal of a reserve for an uncertain tax position due to the expiration of the statute of limitation on that tax position.

First Nine Months of Fiscal 2012: Our income tax provision was $3.6 million in the first nine months of fiscal 2012, compared to $0.8 million in the corresponding period of fiscal 2011. Our effective tax rate in the first nine months of fiscal 2012 was 32.8%, compared to an effective tax rate of 23.7% in the corresponding period of fiscal 2011. The effective tax rate for the first nine months of fiscal 2011 benefitted from the reversal of a reserve on uncertain tax position due to the expiration of the statute of limitation on that tax position.

 

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Key Operating Metrics

Key operating metrics for measuring our performance include sales backlog and contract revenue. A comparison of these metrics at the end of the third quarter of fiscal 2012 with the end of fiscal 2011 is below:

Sales Backlog:

Our backlog consists of firm orders that have yet to be shipped to the customer, or may not be shippable to a customer until a future period. Most orders included in backlog can be rescheduled or cancelled by customers without significant penalty. Historically, a substantial portion of net revenue in any fiscal period has been derived from orders received during that fiscal period.

Our backlog amounted to $50.9 million as of April 1, 2012, compared to $60.3 million as of July 3, 2011. Our backlog, which is shippable within the next six months, was $37.1 million as of April 1, 2012, compared to $38.6 million as of July 3, 2011.

Contract Revenue:

As of April 1, 2012, we had approximately $14.7 million in contract revenue to be performed and recognized within the next 36 months, whereas as of July 3, 2011, we had approximately $16.1 million in contract revenue that was to be performed and recognized within 36 months following July 3, 2011. These amounts have been included in our sales backlog discussed above.

Liquidity and Capital Resources

Balance Sheet and Cash Flows

The following table summarizes our cash, cash equivalents and short-term investments:

 

		April 1, 2012				July 3, 2011				Change
Cash and cash equivalents		$	25,550			$	20,318			$	5,232
Short-term investments			35,957				43,340				(7,383	)
Total		$	61,507			$	63,658			$	(2,151	)

As of April 1, 2012, our principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $61.5 million and accounts receivable of $40.4 million.

As of April 1, 2012, working capital was $141.9 million compared to $134.7 million as of July 3, 2011. Cash, cash equivalents and short-term investments as of April 1, 2012 decreased to $61.5 million from $63.7 million as of July 3, 2011.

Our days sales outstanding in accounts receivable was 61 days as of April 1, 2012, compared to 65 days as of July 3, 2011.

Our principal uses of cash historically have consisted of the purchase of inventories, payroll and other operating expenses related to the manufacturing of products, development of new products and purchase of property and equipment.

Cash flows from operating activities

Net cash provided by operating activities in the first nine months of fiscal 2012 was $10.4 million. Net cash provided by operating activities consisted of net income of $7.4 million and non-cash charges of $14.3 million. The non-cash charges consisted of $4.2 million in depreciation and amortization, $4.6 million in stock-based compensation, $2.6 million in provision for excess and obsolete inventory and $2.9 million in deferred income taxes. Cash provided in the first nine months of fiscal 2012 was partially offset by $11.3 million of net changes in assets and liabilities. Those net changes consisted of a $6.2 million decrease in accounts payable, $3.7 million increase in prepaid and other assets, $3.0 million decrease in other accrued liabilities, $1.8 million decrease in accrued compensation, partially offset by a decrease in inventories of $3.2 million and accounts receivable of $0.2 million.

Cash flows from investing activities

Net cash provided by investing activities was $2.3 million in the first nine months of fiscal 2012, which represented sales/maturities of short-term investments of $26.8 million and $0.2 million from income on release of funds that were held in escrow to satisfy indemnification obligations to the buyer of our QoE business, partially offset by $20.2 million for the purchase of short-term investments, $3.2 million for property, plant and equipment, and $1.4 million for the acquisition of a business.

 

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Cash flows from financing activities

Net cash used for financing activities was $7.3 million in the first nine months of fiscal 2012, which was comprised of the repurchase of common stock for $10.1 million, and partially offset by cash generated from the issuance of common stock under our ESPP and by the exercise of common stock options for $2.8 million.

Contingencies

See Item 1 of Part I, Financial Statements — Note 11 — Litigation and Contingencies.

Recently Issued Accounting Pronouncements

See Item 1 of Part I, Financial Statements—Note 1—Basis of Presentation and Recently Issued Accounting Pronouncements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting Symmetricom see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended July 3, 2011. Our exposure to market risk has not changed materially since July 3, 2011.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the fiscal quarter covered by this report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended April 1, 2012 that have affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

See Item 1 of Part I, Financial Statements — Note 11 — Litigation and Contingencies.

 

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended July 3, 2011. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

a)

Not applicable.

 

b)

Not applicable.

 

c)

The following table provides monthly detail regarding our share repurchases during the three months ended April 1, 2012:

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Approximate Number of Shares That May Yet Be Purchased Under the Plans or Programs
January 2, 2012 through January 29, 2012			160,000			$	5.97				160,000				4,349,000
January 30, 2012 through February 28, 2012			210,000				6.31				210,000				4,139,000
February 29, 2012 through April 1, 2012			295,300				5.87				295,300				3,843,700
Total			665,300			$	6.03				665,300

During the third quarter of fiscal 2012, we repurchased 665,300 shares of common stock pursuant to our repurchase program for an aggregate price of approximately $4.0 million. On November 17, 2011, the Company’s Board of Directors authorized management to repurchase an additional 4.1 million shares of Symmetricom common stock in addition to the remaining shares available for repurchase under previously approved programs. As of April 1, 2012, the total number of shares available for repurchase under the repurchase program authorized by the Board of Directors was approximately 3.8 million.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

Not applicable.

 

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Item 6.

Exhibits

 

Exhibit Number		Description of Exhibits
31		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Interactive Data File.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

 

		SYMMETRICOM, INC.
		(Registrant)
Date: May 10, 2012		By:		/S/    DAVID G. CÔTÉ
				David G. Côté
				Chief Executive Officer (Principal Executive Officer) and Director
Date: May 10, 2012		By:		/S/    JUSTIN R. SPENCER
				Justin R. Spencer
				Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

 

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