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EXCEL - IDEA: XBRL DOCUMENT - POLYCOM INCFinancial_Report.xls

 

 

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 September 30, 2014

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: 000-27978

 

POLYCOM, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3128324

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification number)

 

6001 America Center Drive, San Jose, CA

 

 

95002

(Address of principal executive offices)

 

(Zip Code)

(408) 586-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  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

 

x

  

Accelerated filer

 

¨

 

 

 

 

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 in Exchange Act).    Yes  ¨    No   x

There were 136,482,766 shares of the Company’s Common Stock, par value $.0005, outstanding on October 24, 2014.

 

 

 

 

 


 

POLYCOM, INC.

INDEX

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED September 30, 2014

PART I FINANCIAL INFORMATION

 

Item 1 Financial Statements (unaudited):

  

3

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

  

3

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

  

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013

  

5

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

  

6

 

Notes to Condensed Consolidated Financial Statements

  

7

 

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

  

29

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk

  

44

 

Item 4 Controls and Procedures

  

45

 

PART II OTHER INFORMATION

 

Item 1—Legal Proceedings

  

47

 

Item 1A—Risk Factors

  

48

 

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

  

65

 

Item 3—Defaults Upon Senior Securities

  

65

 

Item 4—Mine Safety Disclosures

  

65

 

Item 5—Other Information

  

65

 

Item 6—Exhibits

  

66

 

SIGNATURES

  

67

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

 

Item 1. FINANCIAL STATEMENTS

POLYCOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

 

 

September 30,

2014

 

 

December 31,

2013

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

406,323

 

 

$

392,629

 

Short-term investments

 

151,069

 

 

 

134,684

 

Trade receivables, net of allowance for doubtful accounts of $3,105 and $2,827 at September 30, 2014 and December 31, 2013, respectively

 

181,447

 

 

 

183,369

 

Inventories

 

97,949

 

 

 

103,309

 

Deferred taxes

 

37,547

 

 

 

37,085

 

Prepaid expenses and other current assets

 

63,214

 

 

 

50,352

 

Total current assets

 

937,549

 

 

 

901,428

 

Property and equipment, net

 

106,081

 

 

 

115,157

 

Long-term investments

 

85,599

 

 

 

56,372

 

Goodwill

 

559,287

 

 

 

559,460

 

Purchased intangibles, net

 

27,734

 

 

 

37,458

 

Deferred taxes

 

47,416

 

 

 

51,398

 

Other assets

 

28,062

 

 

 

27,757

 

Total assets

$

1,791,728

 

 

$

1,749,030

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

94,478

 

 

$

84,640

 

Accrued payroll and related liabilities

 

34,785

 

 

 

40,162

 

Taxes payable

 

4,226

 

 

 

5,389

 

Deferred revenue

 

175,307

 

 

 

172,408

 

Current portion of long-term debt

 

6,250

 

 

 

6,250

 

Other accrued liabilities

 

78,479

 

 

 

77,744

 

Total current liabilities

 

393,525

 

 

 

386,593

 

Non-current liabilities

 

 

 

 

 

 

 

Long-term deferred revenue

 

82,101

 

 

 

87,467

 

Taxes payable

 

11,745

 

 

 

12,419

 

Deferred taxes

 

117

 

 

 

149

 

Long-term debt

 

237,500

 

 

 

242,188

 

Other non-current liabilities

 

47,651

 

 

 

43,849

 

Total non-current liabilities

 

379,114

 

 

 

386,072

 

Total liabilities

 

772,639

 

 

 

772,665

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.0005 par value; Authorized: 350,000,000 shares; Issued and outstanding:

   136,480,882 shares at September 30, 2014 and 135,159,966 shares at December 31, 2013

 

67

 

 

 

68

 

Additional paid-in capital

 

1,157,308

 

 

 

1,104,273

 

Accumulated deficit

 

(143,488

)

 

 

(132,348

)

Accumulated other comprehensive income

 

5,202

 

 

 

4,372

 

Total stockholders' equity

 

1,019,089

 

 

 

976,365

 

Total liabilities and stockholders' equity

$

1,791,728

 

 

$

1,749,030

 

 

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

 

 

 

3


 

POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

2014

 

 

September 30,

2013

 

 

September 30,

2014

 

 

September 30,

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

$

240,059

 

 

$

242,515

 

 

$

708,133

 

 

$

740,066

 

Service revenues

 

95,627

 

 

 

93,946

 

 

 

288,096

 

 

 

280,381

 

Total revenues

 

335,686

 

 

 

336,461

 

 

 

996,229

 

 

 

1,020,447

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

101,399

 

 

 

102,830

 

 

 

296,745

 

 

 

309,994

 

Cost of service revenues

 

37,617

 

 

 

38,587

 

 

 

115,607

 

 

 

114,714

 

Total cost of revenues

 

139,016

 

 

 

141,417

 

 

 

412,352

 

 

 

424,708

 

Gross profit

 

196,670

 

 

 

195,044

 

 

 

583,877

 

 

 

595,739

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

97,953

 

 

 

107,292

 

 

 

289,757

 

 

 

325,663

 

Research and development

 

51,024

 

 

 

54,220

 

 

 

148,202

 

 

 

164,782

 

General and administrative

 

25,746

 

 

 

28,468

 

 

 

74,175

 

 

 

76,461

 

Amortization of purchased intangibles

 

2,435

 

 

 

2,487

 

 

 

7,363

 

 

 

7,535

 

Restructuring costs

 

(2,631

)

 

 

24,887

 

 

 

36,887

 

 

 

34,639

 

Litigation reserves and payments

 

3,130

 

 

 

 

 

3,130

 

 

 

Transaction-related costs

 

 

 

39

 

 

 

156

 

 

 

3,411

 

Total operating expenses

 

177,657

 

 

 

217,393

 

 

 

559,670

 

 

 

612,491

 

Operating income (loss)

 

19,013

 

 

 

(22,349

)

 

 

24,207

 

 

 

(16,752

)

Interest and other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,470

)

 

 

(850

)

 

 

(4,404

)

 

 

(1,736

)

Other income (expense)

 

1,285

 

 

 

(784

)

 

 

1,828

 

 

 

(1,041

)

Interest and other income (expense), net

 

(185

)

 

 

(1,634

)

 

 

(2,576

)

 

 

(2,777

)

Income (loss) from continuing operations before provision for (benefit from) income taxes

 

18,828

 

 

 

(23,983

)

 

 

21,631

 

 

 

(19,529

)

Provision for (benefit from) income taxes

 

1,817

 

 

 

(5

)

 

 

54

 

 

 

(2,963

)

Net income (loss) from continuing operations

 

17,011

 

 

 

(23,978

)

 

 

21,577

 

 

 

(16,566

)

Gain from sale of discontinued operations, net of taxes

 

 

 

 

 

 

 

459

 

Net income (loss)

$

17,011

 

 

$

(23,978

)

 

$

21,577

 

 

$

(16,107

)

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations

$

0.12

 

 

$

(0.14

)

 

$

0.16

 

 

$

(0.10

)

Gain per share from sale of discontinued operations, net of taxes

 

 

 

 

 

 

 

Basic net income (loss) per share

$

0.12

 

 

$

(0.14

)

 

$

0.16

 

 

$

(0.09

)

Diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share from continuing operations

$

0.12

 

 

$

(0.14

)

 

$

0.15

 

 

$

(0.10

)

Gain per share from sale of discontinued operations, net of taxes

 

 

 

 

 

 

 

Diluted net income (loss) per share

$

0.12

 

 

$

(0.14

)

 

$

0.15

 

 

$

(0.09

)

Number of shares used in computation of net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

136,606

 

 

 

170,310

 

 

 

137,139

 

 

 

172,644

 

Diluted

 

142,176

 

 

 

170,310

 

 

 

142,406

 

 

 

172,644

 

 

Note that earnings per share amount for continuing operations, gain from sale of discontinued operations, and net income, as presented above, are calculated individually and may not sum due to rounding differences. As a result of the net loss from continuing operations for the three and nine months ended September 30, 2013, all potentially issuable common shares have been excluded from the diluted shares used in the computation of earnings per share as their effect was anti-dilutive.

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

 

4


 

 

POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

2014

 

 

September 30,

2013

 

 

September 30,

2014

 

 

September 30,

2013

 

Net income (loss)

$

17,011

 

 

$

(23,978

)

 

$

21,577

 

 

$

(16,107

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

179

 

 

 

86

 

 

 

(907

)

 

 

579

 

Unrealized gains/losses on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

(43

)

 

 

96

 

 

 

(43

)

 

 

10

 

Net gains/losses reclassified into earnings

 

(7

)

 

 

(5

)

 

 

(9

)

 

 

66

 

Net unrealized gains (losses) on investments

 

(50

)

 

 

91

 

 

 

(52

)

 

 

76

 

Unrealized gains/losses on hedging securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized hedge gains (losses) arising during the period

 

2,573

 

 

 

(570

)

 

 

2,574

 

 

 

1,793

 

Net gains/losses reclassified into earnings for revenue hedges

 

(1,222

)

 

 

(716

)

 

 

3,052

 

 

 

(1,190

)

Net gains/losses reclassified into earnings for expense hedges

 

(120

)

 

 

(514

)

 

 

(3,837

)

 

 

(1,166

)

Net unrealized gains (losses) on hedging securities

 

1,231

 

 

 

(1,800

)

 

 

1,789

 

 

 

(563

)

Other comprehensive income (loss)

 

1,360

 

 

 

(1,623

)

 

 

830

 

 

 

92

 

Comprehensive income (loss)

$

18,371

 

 

$

(25,601

)

 

$

22,407

 

 

$

(16,015

)

 

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

 

 

 

5


 

POLYCOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

Nine Months Ended

 

 

September 30,

2014

 

 

September 30,

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

21,577

 

 

$

(16,107

)

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

43,201

 

 

 

49,607

 

Amortization of purchased intangibles

 

9,724

 

 

 

11,335

 

Amortization of capitalized software development costs for products to be sold

 

1,269

 

 

 

47

 

Amortization of debt issuance costs

 

400

 

 

 

52

 

Amortization of discounts and premiums on investments, net

 

1,440

 

 

 

1,323

 

Provision for doubtful accounts

 

600

 

 

 

 

Write-down of excess and obsolete inventories

 

3,682

 

 

 

5,625

 

Stock-based compensation expense

 

34,178

 

 

 

53,300

 

Excess tax benefits from stock-based compensation expense

 

(2,595

)

 

 

(780

)

Loss on disposal of property and equipment

 

4,987

 

 

 

3,658

 

Net gain on sale of discontinued operations

 

 

 

 

(459

)

Changes in assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

 

 

Trade receivables

 

1,432

 

 

 

21,857

 

Inventories

 

1,678

 

 

 

(13,346

)

Deferred taxes

 

(7,705

)

 

 

2,058

 

Prepaid expenses and other assets

 

(11,974

)

 

 

(18,915

)

Accounts payable

 

8,867

 

 

 

(1,118

)

Taxes payable

 

7,178

 

 

 

(4,006

)

Other accrued liabilities and deferred revenue

 

(3,290

)

 

 

24,661

 

Net cash provided by operating activities

 

114,649

 

 

 

118,792

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(36,847

)

 

 

(40,704

)

Capitalized software development costs for products to be sold

 

(3,069

)

 

 

(1,089

)

Purchases of investments

 

(220,575

)

 

 

(202,268

)

Proceeds from sales of investments

 

40,709

 

 

 

21,802

 

Proceeds from maturities of investments

 

132,753

 

 

 

185,634

 

Net cash received from sale of discontinued operations

 

 

 

 

556

 

Net cash paid in purchase acquisitions

 

 

 

 

(7,974

)

Net cash used in investing activities

 

(87,029

)

 

 

(44,043

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock under employee option and stock purchase plans

 

23,407

 

 

 

23,326

 

Proceeds from debt, net of debt issuance costs

 

 

 

 

247,582

 

Payments on debt

 

(4,688

)

 

 

 

Purchase and retirement of common stock

 

(35,240

)

 

 

(110,816

)

Excess tax benefits from stock-based compensation expense

 

2,595

 

 

 

780

 

Net cash provided by (used in) financing activities

 

(13,926

)

 

 

160,872

 

Net increase in cash and cash equivalents

 

13,694

 

 

 

235,621

 

Cash and cash equivalents, beginning of period

 

392,629

 

 

 

477,073

 

Cash and cash equivalents, end of period

$

406,323

 

 

$

712,694

 

 

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

 

 

 

6


 

POLYCOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements, consisting of the condensed consolidated balance sheet as of September 30, 2014, the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013, the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2014 and 2013, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013, have been prepared in accordance with accounting principles generally accepted in the United States of America in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In addition, the condensed consolidated balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements as of that date. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes typically found in the audited consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K of Polycom, Inc. and its subsidiaries (the “Company”). In the opinion of management, the accompanying unaudited financial statements have been prepared on a basis consistent with the Company’s December 31, 2013 audited financial statements and all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates and operating results for the three and nine months ended September 30, 2014 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Revision of Prior Period Financial Statements

During the three months ended December 31, 2013, the Company discovered an error that impacted the Company’s previously issued interim and annual consolidated statements of cash flows. The error was related to the net amortization of discounts and premiums on investments not being properly reported, which resulted in understated cash flows provided by operating activities and understated or overstated cash provided by or used in investing activities in the first three quarters of 2013 and full fiscal years 2012 and 2011.

In evaluating whether the Company’s previously issued condensed consolidated statements of cash flows were materially misstated, the Company considered the guidance in ASC Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1, Assessing Materiality and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The Company concluded that this error was not material to any of the prior reporting periods, and therefore, amendments of previously filed reports were not required. However, the consolidated statements of cash flow correction would impact comparisons to prior periods. As such, the revision for the correction is reflected in the financial information of the applicable prior periods and will be reflected in future filings containing such financial information.

The following table sets forth a summary of the revision to the condensed consolidated statement of cash flows for the following period (in thousands):

 

 

Nine Months Ended September 30, 2013

 

 

As Previously

Reported

 

 

Adjustment

 

 

As Revised

 

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Amortization of discounts and premiums on investments, net

$

 

 

$

1,323

 

 

$

1,323

 

Net cash provided by operating activities

$

117,469

 

 

$

1,323

 

 

$

118,792

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of investments

$

(200,945

)

 

$

(1,323

)

 

$

(202,268

)

Net cash used in investing activities

$

(42,720

)

 

$

(1,323

)

 

$

(44,043

)

 

 

7


 

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The new standard is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. Early application is permitted. The Company does not expect any impact on the adoption of this standard on its consolidated financial statements.

In May 2014, the FASB issued an accounting standard update which provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company has not yet selected a transition method nor has it determined the impact of adoption on its consolidated financial statements.

In July 2013, the FASB issued an accounting standard update which clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective prospectively for reporting periods beginning after December 15, 2013. The Company adopted the guidance in the three months ended March 31, 2014, and such adoption did not have a material impact on the Company’s condensed consolidated financial statements.

 

3. DISCONTINUED OPERATIONS

On December 4, 2012, the Company completed the disposition of the net assets of its enterprise wireless voice solutions (“EWS”) business to Mobile Devices Holdings, LLC, a Delaware limited liability corporation. The Company received cash consideration of approximately $50.7 million, resulting in a gain on sale of the discontinued operations, net of taxes, of $35.4 million, as reflected in its consolidated financial statements for the year ended December 31, 2012. In the nine months ended September 30, 2013, the Company recorded an additional gain on sale of discontinued operations, net of taxes, of approximately $0.5 million as a result of the final net working capital adjustment in accordance with the purchase agreement. Additional cash consideration of up to $37.5 million is payable to Polycom over the next three years subject to certain conditions, including meeting certain agreed-upon EBITDA-based milestones for the fiscal years ending December 31, 2014, 2015 and 2016. These conditions were not met for the fiscal year ended December 31, 2013. Such additional cash consideration will be accounted for as a gain on sale of discontinued operations, net of taxes, when it is realized or realizable. For the nine months ended September 30, 2014, there was no realized gain on sale of discontinued operations.

 

4. BUSINESS COMBINATIONS

On March 1, 2013 the Company completed its acquisition of certain assets of Sentri, Inc. (“Sentri”), a privately-held services company with expertise in Microsoft technologies, for approximately $8.0 million in cash, net of approximately $0.4 million cash released from an escrow account in September 2013, as a result of a net working capital adjustment. The total purchase price was allocated to the net tangible and intangible assets based upon their fair values at March 1, 2013, with the excess amount recorded as goodwill. The goodwill is primarily attributable to the expertise of former Sentri employees in Microsoft technologies and expected synergies from the combined company. The Company has included the financial results of Sentri in its condensed consolidated financial statements from the date of acquisition. Pro forma and actual results of operations of the acquisition were not material to the Company’s condensed consolidated financial statements.

 

8


 

5. ACCOUNTS RECEIVABLE FINANCING

In 2012, the Company launched a customer financing program and entered into a financing agreement (the “Financing Agreement”) with an unrelated third party financing company. The program offers with distributors and resellers direct or indirect financing on their purchases of the Company’s products and services. In return, the Company agrees to pay the financing company a fee based on a pre-defined percentage of the transaction amount financed. In certain instances, these financing arrangements result in a transfer of our receivables, without recourse, to the financing company. If the transaction meets the applicable criteria under Accounting Standards Codification (“ASC”) 860 and is accounted for as a sale of financial assets, the accounts receivable are excluded from the balance sheet upon the third party financing company’s payment remittance to the Company. In certain legal jurisdictions, the arrangement fees that involve maintenance services or products bundled with maintenance at one price do not qualify as a sale of financial assets in accordance with the authoritative guidance. Accordingly, accounts receivable related to these arrangements are accounted for as a secured borrowing in accordance with ASC 860, and the Company records a liability for any cash received, while maintaining the associated accounts receivable balance until the distributor or reseller remits payment to the third-party financing company.

In the three months ended September 30, 2014, total transactions entered pursuant to the terms of the Financing Agreement were approximately $48.8 million, of which $29.4 million was related to the transfer of the financial assets arrangement. In the three months ended September 30, 2013, total transactions entered were approximately $32.6 million, of which $27.9 million was related to the transfer of the financial assets arrangement. In the nine months ended September 30, 2014, total transactions entered pursuant to the terms of the Financing Agreement were approximately $132.6 million, of which $98.1 million was related to the transfer of the financial assets arrangement. In the nine months ended September 30, 2013, total transactions entered were approximately $83.3 million, of which $73.1 million was related to the transfer of the financial assets arrangement. The financing of these receivables accelerated the collection of the Company’s cash and reduced its credit exposure. The amount due from the financing company as of September 30, 2014 and December 31, 2013 was approximately $23.7 million and $22.9 million, respectively, of which $16.5 million and $21.6 million, respectively, was related to the accounts receivable transferred, and is included in “Trade receivables” in the Company’s condensed consolidated balance sheets. Fees incurred pursuant to the Financing Agreement were approximately $0.7 million and $0.5 million for the three months ended September 30, 2014 and 2013, respectively, and were approximately $1.8 million and $1.2 million for the nine months ended September 30, 2014 and 2013, respectively. Those fees were recorded as reductions to revenues.

 

6. GOODWILL, PURCHASED INTANGIBLES, AND SOFTWARE DEVELOPMENT COSTS

Goodwill

The following table presents the changes to the Company’s goodwill by segment during the nine months ended September 30, 2014 (in thousands):

 

 

Americas

 

 

EMEA

 

 

APAC

 

 

Total

 

Balance at December 31, 2013

$

308,159

 

 

$

101,882

 

 

$

149,419

 

 

$

559,460

 

Foreign currency translation

 

 

 

 

 

 

 

(173

)

 

 

(173

)

Balance at September, 30, 2014

$

308,159

 

 

$

101,882

 

 

$

149,246

 

 

$

559,287

 

 

9


 

 

Purchased Intangible Assets and Software Development Costs

The following table presents details of the Company’s total purchased intangible assets and capitalized software development costs for products to be sold as of the following periods (in thousands):

 

 

September 30, 2014

 

 

December 31, 2013

 

 

Gross

Value

 

 

Accumulated

Amortization

& Impairment

 

 

Net Value

 

 

Gross

Value

 

 

Accumulated

Amortization

& Impairment

 

 

Net Value

 

Core and developed technology

$

81,178

 

 

$

(79,256

)

 

$

1,922

 

 

$

81,178

 

 

$

(76,952

)

 

$

4,226

 

Customer and partner relationships

 

79,525

 

 

 

(55,749

)

 

 

23,776

 

 

 

79,525

 

 

 

(48,941

)

 

 

30,584

 

Non-compete agreements

 

1,800

 

 

 

(950

)

 

 

850

 

 

 

1,800

 

 

 

(500

)

 

 

1,300

 

Trade name

 

3,400

 

 

 

(3,194

)

 

 

206

 

 

 

3,400

 

 

 

(3,089

)

 

 

311

 

Other

 

4,462

 

 

 

(4,400

)

 

 

62

 

 

 

4,462

 

 

 

(4,343

)

 

 

119

 

Finite-lived intangible assets

 

170,365

 

 

 

(143,549

)

 

 

26,816

 

 

 

170,365

 

 

 

(133,825

)

 

 

36,540

 

Indefinite-lived trade name

 

918

 

 

 

 

 

 

918

 

 

 

918

 

 

 

 

 

 

918

 

Total acquired intangible assets

$

171,283

 

 

$

(143,549

)

 

$

27,734

 

 

$

171,283

 

 

$

(133,825

)

 

$

37,458

 

Capitalized software development costs for products to be sold

$

5,575

 

 

$

(1,465

)

 

$

4,110

 

 

$

2,365

 

 

$

(196

)

 

$

2,169

 

 

Purchased intangibles include a purchased trade name of $0.9 million with an indefinite life as the Company expects to generate cash flows related to this asset indefinitely. Consequently, this trade name is not amortized but is reviewed for impairment annually or sooner when indicators of potential impairment exist.

The following table summarizes the amortization expenses recorded in the following periods (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

2014

 

 

September 30,

2013

 

 

September 30,

2014

 

 

September 30,

2013

 

Amortization of purchased intangibles in revenues

$

19

 

 

$

19

 

 

$

57

 

 

$

56

 

Amortization of purchased intangibles in cost of product revenues

 

732

 

 

 

1,248

 

 

 

2,304

 

 

 

3,744

 

Amortization of purchased intangibles in operating expenses

 

2,435

 

 

 

2,487

 

 

 

7,363

 

 

 

7,535

 

Total amortization expenses of purchased intangibles

$

3,186

 

 

$

3,754

 

 

$

9,724

 

 

$

11,335

 

 

Amortization of purchased intangibles is not allocated to the Company’s segments.

The estimated future amortization expense as of September 30, 2014 is as follows (in thousands):

 

Year ending December 31,

 

Amount

 

Remainder of 2014

 

$

3,167

 

2015

 

 

10,495

 

2016

 

 

8,484

 

2017

 

 

4,670

 

2018

 

 

 

Total

 

$

26,816

 

In the nine months ended September 30, 2014 and 2013, the Company capitalized approximately $3.2 million and $1.2 million of software development costs, respectively, for internally developed software products to be marketed and sold to customers after the point that technological feasibility has been reached and before the products are available for general release. The capitalized costs are being amortized over the estimated product useful life, generally three years, beginning when the products are available for general release. Management expects that the capitalized software development costs are recoverable from future gross profits generated by these products and services.

 

10


 

7. RESTRUCTURING COSTS

The Company recorded a $2.6 million credit in restructuring costs, primarily due to changes in assumptions used in our facilities-related restructuring reserve estimate, and $24.9 million of charges during the three months ended September 30, 2014 and 2013, respectively, and $36.9 million and $34.6 million in restructuring charges during the nine months ended September 30, 2014 and 2013, respectively. Pursuant to the announcement in January 2014, management completed certain actions designed to better align expenses to the Company’s revenue and gross margin profile and position the Company for improved operating performance. These actions included the elimination of approximately six percent of the global workforce and reduction or elimination of certain leased facilities. The Company has recorded approximately $33.1 million in restructuring costs (net of adjustments related to the assumptions used in the estimate of the related liabilities reserves) as of September 30, 2014 in connection with these actions announced in January 2014 and does not expect any remaining charges to be material.

The following table summarizes the changes in the Company’s restructuring reserves during the nine months ended September 30, 2014 (in thousands):

 

 

Severance/Other

 

 

Facilities

 

 

Total

 

Balance at December 31, 2013

$

1,143

 

 

$

33,786

 

 

$

34,929

 

Additions to the reserve, net

 

11,106

 

 

 

23,991

 

 

 

35,097

 

Interest accretion

 

 

 

 

1,790

 

 

 

1,790

 

Non-cash write-offs

 

 

 

 

(2,576

)

 

 

(2,576

)

Cash payments and other usage

 

(10,790

)

 

 

(15,624

)

 

 

(26,414

)

Balance at September 30, 2014

$

1,459

 

 

$

41,367

 

 

$

42,826

 

 

As of September 30, 2014, the restructuring reserve was primarily comprised of facilities-related liabilities. The Company calculated the fair value of its facilities-related liabilities based on the discounted future lease payments less sublease assumptions. This fair value measurement is classified as a Level 3 measurement under ASC 820. The key assumptions used in the valuation model include discount rates, cash flow projections, and estimated sublease income. These assumptions involve significant judgment, are based on management’s estimate of current and forecasted market conditions and are sensitive and susceptible to change.

 

8. BALANCE SHEET DETAILS

Trade receivables, net consist of the following (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Gross accounts receivables

$

224,871

 

 

$

225,134

 

Returns and related reserves

 

(40,319

)

 

 

(38,938

)

Allowance for doubtful accounts

 

(3,105

)

 

 

(2,827

)

Total

$

181,447

 

 

$

183,369

 

 

Inventories consist of the following (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Raw materials

$

2,657

 

 

$

2,740

 

Work in process

 

1,018

 

 

 

840

 

Finished goods

 

94,274

 

 

 

99,729

 

Total

$

97,949

 

 

$

103,309

 

 

 

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Non-trade receivables

$

5,056

 

 

$

9,251

 

Prepaid expenses

 

42,548

 

 

 

31,164

 

Derivative assets

 

10,454

 

 

 

6,748

 

Other current assets

 

5,156

 

 

 

3,189

 

Total

$

63,214

 

 

$

50,352

 

11


 

 

Deferred revenue consists of the following (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Short-term:

 

 

 

 

 

 

 

Service

$

173,367

 

 

$

170,701

 

Product

 

112

 

 

 

307

 

License

 

1,828

 

 

 

1,400

 

Total

$

175,307

 

 

$

172,408

 

Long-term:

 

 

 

 

 

 

 

Service

$

78,495

 

 

$

83,092

 

Product

 

 

 

 

 

License

 

3,606

 

 

 

4,375

 

Total

$

82,101

 

 

$

87,467