IXIA - FORM 10-Q - November 7, 2016

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - IXIA	a2016q310-qex321.htm
EX-31.2 - EXHIBIT 31.2 - IXIA	a2016q310-qex312.htm
EX-31.1 - EXHIBIT 31.1 - IXIA	a2016q310-qex311.htm
EX-10.1 - EXHIBIT 10.1 - IXIA	a2016q3ex101separationa.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 September 30, 2016


[ ]	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 000-31523

IXIA

(Exact name of Registrant as specified in its charter)



California		95-4635982
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

26601 West Agoura Road, Calabasas, CA 91302

(Address of principal executive offices, including zip code)

(818) 871-1800

(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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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 definition of “large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



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 of the Exchange Act). Yes [ ] No [X]

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



	Common Stock			82,115,900
	(Class of Common Stock)			(Outstanding at 10/31/2016)

IXIA

TABLE OF CONTENTS



		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	1

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015	2

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015	3

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 5.	Other Information	33

Item 6.	Exhibits	33

SIGNATURES		34

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

IXIA

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)



	September 30, 2016			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	65,184		$	52,472
Marketable securities	56,362			14,504
Accounts receivable, net of allowances of $867 and $1,107, as of September 30, 2016 and December 31, 2015, respectively	95,926			121,932
Inventories	27,040			33,289
Prepaid expenses and other current assets	42,811			44,384
Total current assets	287,323			266,581
Property and equipment, net	37,872			36,536
Intangible assets, net	74,962			103,660
Goodwill	338,873			338,873
Other assets	30,716			34,227
Total assets	$	769,746		$	779,877
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	11,635		$	15,346
Accrued expenses and other	38,422			70,029
Deferred revenues	108,334			108,436
Term loan, net	4,548			3,045
Total current liabilities	162,939			196,856
Deferred revenues	30,407			22,117
Other liabilities	9,832			7,406
Term loan, net	29,924			34,487
Total liabilities	233,102			260,866
Commitments and contingencies (Note 10)
Shareholders’ equity:
Common stock, without par value; 200,000 shares authorized at September 30, 2016 and December 31, 2015; 81,594 and 80,805 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	201,803			201,087
Additional paid-in capital	238,057			225,432
Retained earnings	97,134			93,525
Accumulated other comprehensive loss	(350		)	(1,033		)
Total shareholders’ equity	536,644			519,011
Total liabilities and shareholders’ equity	$	769,746		$	779,877

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

IXIA

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues:
Products	$	81,005		$	85,861		$	229,482		$	264,571
Services	42,906			40,026			127,200			113,888
Total revenues	123,911			125,887			356,682			378,459
Costs and operating expenses: ⁽¹⁾
Cost of revenues – products ⁽²⁾	23,017			23,872			64,184			72,108
Cost of revenues – services	4,078			3,607			12,046			12,487
Research and development	25,584			28,538			77,519			83,923
Sales and marketing	40,036			37,920			118,024			113,880
General and administrative	15,001			18,486			44,871			54,274
Amortization of intangible assets	9,636			10,378			29,567			32,190
Acquisition and other related costs	—			(37		)	(22		)	646
Restructuring	(224		)	34			(381		)	(527		)
Total costs and operating expenses	117,128			122,798			345,808			368,981
Income from operations	6,783			3,089			10,874			9,478
Interest income and other, net	250			(313		)	423			(592		)
Interest expense	(473		)	(2,270		)	(1,457		)	(6,852		)
Income before income taxes	6,560			506			9,840			2,034
Income tax expense (benefit)	1,787			(3,502		)	6,231			1,834
Net income	$	4,773		$	4,008		$	3,609		$	200
Income per share:
Basic	$	0.06		$	0.05		$	0.04		$	0.00
Diluted	$	0.06		$	0.05		$	0.04		$	0.00
Weighted average number of common and common equivalent shares outstanding:
Basic	81,412			79,895			81,251			79,336
Diluted	82,839			81,929			82,586			81,085

⁽¹⁾Stock-based compensation included in:
Cost of revenues - products	$	80		$	62		$	203		$	233
Cost of revenues - services	31			24			78			89
Research and development	1,788			1,345			4,785			5,016
Sales and marketing	1,311			1,184			4,208			3,435
General and administrative	1,740			1,816			4,295			5,548


⁽²⁾	Cost of revenues – products excludes amortization of intangible assets related to purchased technologies of $6.3 million and $19.1 million for the three and nine months ended September 30, 2016, respectively, and $6.4 million and $19.3 million for the three and nine months ended September 30, 2015, respectively, which are included in Amortization of intangible assets.

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

IXIA

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016		2015
Net income	$	4,773	$	4,008		$	3,609	$	200
Unrealized gain (loss) on investments, net of tax	7		(37		)	88		(26		)
Foreign currency translation adjustment	58		67			595		102
Other comprehensive income	65		30			683		76
Comprehensive income	$	4,838	$	4,038		$	4,292	$	276

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

IXIA

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	3,609		$	200
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	13,596			12,629
Amortization of intangible assets	29,567			32,190
Realized gain on available-for-sale securities	(6		)	(61		)
Stock-based compensation	13,569			14,321
Deferred income taxes	(1,316		)	(1,124		)
Excess tax benefits from stock-based compensation	(353		)	—
Amortization of deferred issuance costs	338			1,237
Amortization of investment premiums	(21		)	54
Changes in operating assets and liabilities:
Accounts receivable, net	26,006			(6,135		)
Inventories	(2,294		)	6,948
Prepaid expenses and other current assets	6,910			(6,351		)
Other assets	3,734			3,414
Accounts payable	(3,870		)	(4,380		)
Accrued expenses and other	(34,713		)	13,692
Deferred revenues	8,188			7,474
Other liabilities	1,208			486
Net cash provided by operating activities	64,152			74,594
Cash flows from investing activities:
Purchases of property and equipment	(6,497		)	(6,025		)
Purchases of marketable securities	(50,053		)	(188,795		)
Proceeds from sale of marketable securities	8,307			179,065
Increase in restricted cash	—			(10,000		)
Purchases of other intangible assets	(869		)	(533		)
Net cash used in investing activities	(49,112		)	(26,288		)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan options	7,795			8,562
Proceeds from borrowings under term loan	—			40,000
Repayments of debt	(2,500		)	(66,163		)
Debt issuance costs	(897		)	(1,348		)
Cash paid for shares withheld for taxes	(227		)	—
Repurchase of common stock	(6,852		)	—
Excess tax benefits from stock-based compensation	353			—
Net cash used in financing activities	(2,328		)	(18,949		)
Net increase in cash and cash equivalents	12,712			29,357
Cash and cash equivalents at beginning of period	52,472			46,394
Cash and cash equivalents at end of period	$	65,184		$	75,751

Supplemental disclosure of non-cash investing activities:
Purchased and unpaid property and equipment	$	737		$	550
Transfers of inventory to property and equipment	$	8,543		$	5,356

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

IXIA

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Business

Ixia ("Ixia" or the "Company") was incorporated on May 27, 1997 as a California corporation. The Company provides application performance and security resilience solutions so that organizations can validate, secure, and optimize their physical and virtual networks. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on Ixia’s solutions to deploy new technologies and achieve efficient, secure ongoing operation of their networks. Ixia's product solutions consist of its high performance hardware platforms, software applications, and services, including warranty and maintenance offerings and professional services. The Company operates within one business segment.

2. Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements

Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of the Company's management, necessary for a fair statement of its financial position, operating results and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of results to be expected for the full year ending December 31, 2016 or any other future period.

These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2015 has been derived from the Company's audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K"), but does not include all disclosures required by GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's 2015 Form 10-K.

Significant Accounting Policies

The Company’s significant accounting policies are set forth in Note 1 to the audited consolidated financial statements included in its 2015 Form 10-K.

Recent Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16, Intra-Entity Transfers of Assets of Other Than Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 updates the current guidance by requiring that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for the income tax effects of an intra-entity transfer of inventory. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this accounting standard on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments - a consensus of the Emerging Task Force. ASU 2016-15. The standard provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. The standard is intended to reduce current diversity in practice. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 (as discussed below). The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 (as discussed below). The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this accounting standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal Versus Agent Considerations. ASU 2016-08 clarifies the implementation guidance for what the FASB calls principal-versus-agent considerations in the board's revenue recognition standard by instructing the participants in the sale to determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is not yet effective. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 (as discussed below). The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position. ASU 2016-02 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The standard will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which provides updated guidance that enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Except for the early application guidance, early adoption of the amendments is not permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred taxes in the statement of financial position. The updated guidance requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods, with early adoption permitted. The ASU may be adopted either prospectively or retrospectively. The Company plans on adopting this standard in the fourth quarter of 2016. This guidance impacts balance sheet presentation only, so the adoption of this standard will not impact the Company's results of operations or cash flows.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which provides new guidance regarding the measurement of inventory. The new guidance requires most inventory to be measured at the lower of cost and net realizable value. The standard defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The standard applies to companies other than those that measure inventory using last-in, first-out (LIFO) or the retail inventory method. The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this accounting standard on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides new guidance on the recognition of revenue and states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard was originally set to become effective in annual periods beginning after December 15, 2016 and for interim and annual reporting periods thereafter. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers; Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year, thereby delaying the effective date of the standard to January 1, 2018, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted. The Company has not yet evaluated the impact of the adoption of this accounting standard update on its consolidated financial statements.

3. Debt

Senior Secured Credit Agreements

2015 Credit Agreement

On March 2, 2015, the Company entered into an amended and restated credit agreement (as amended to date, the “Credit Agreement”) by and among the Company, as borrower, certain of the Company’s wholly owned direct and indirect subsidiaries, as guarantors, Silicon Valley Bank, as administrative agent, swingline lender and letter of credit issuer, and the other lenders party thereto (Silicon Valley Bank and the other lenders from time to time party thereto hereinafter collectively referred to as the “Lenders”). The Credit Agreement amended and restated the Company's prior credit agreement dated as of December 21, 2012, as amended, by and among the Company, the guarantors, Silicon Valley Bank, as administrative agent, swingline lender, and letter of credit issuer (as successor to Bank of America, N.A. in such capacities), and the other lenders party thereto.

The Credit Agreement originally provided for a (i) term loan (the “Term Loan”) in the aggregate principal amount of $40 million and (ii) revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facility”) in an aggregate amount of up to $60 million, with sub-limits of $25 million for the issuance of standby letters of credit and $15 million for swingline loans. On September 30, 2015, the Company entered into an amendment to the Credit Agreement which, among other modifications, increased the commitments under the Revolving Credit Facility to an aggregate amount of up to $75 million.

On January 25, 2016, the Company entered into an amendment to the Credit Agreement which, among other modifications, (i) increased the commitments under the Revolving Credit Facility to an aggregate amount of up to $150 million and (ii) extended the maturity date of the Revolving Credit Facility from February 15, 2018 to February 15, 2020. The maturity date of the Term Loan is February 15, 2018. The aggregate amount available under the Revolving Credit Facility is, upon the Company's request and subject to the receipt of increased commitments from the Lenders or additional lenders, subject to increase by an aggregate amount of up to $100 million.

The Company is permitted to prepay outstanding loans under the Credit Facility at any time without premium or penalty. The Company may re-borrow amounts under the Revolving Credit Facility, but the Company may not re-borrow amounts that it repays or prepays under the Term Loan.

Debt issuance costs were approximately $2.2 million, which were capitalized to deferred issuance costs and are being amortized to interest expense over the term of the Revolving Credit Facility. During the three and nine months ended September 30, 2016, amortization recorded to interest expense pertaining to deferred issuance costs was approximately $114,000 and $338,000, respectively. During the three and nine months ended September 30, 2015, amortization recorded to interest expense pertaining to deferred issuance costs was approximately $129,000 and $265,000, respectively.

The Term Loan required quarterly repayments of $500,000 for the first four quarters and requires repayments ranging from $1.0 million to $1.5 million for the quarters thereafter through December 31, 2017. The remaining principal balance will be due and payable on the maturity date of the Term Loan (i.e., February 15, 2018).

The Company’s and the guarantors’ obligations under the Credit Agreement are secured by (i) a first priority perfected security interest in substantially all existing and after acquired tangible and intangible personal property of the Company and the guarantors and (ii) the pledge by the Company and the guarantors of (a) all outstanding equity securities of their existing and future domestic subsidiaries, including, in the case of the Company, the outstanding equity securities of each of the guarantors, and (b) 65% of the outstanding equity securities of their existing and future respective first-tier foreign subsidiaries, including, in the case of Catapult Communications Corporation (one of the Company's wholly owned domestic subsidiaries), 65% of the outstanding equity securities of Ixia Technologies International Limited, a company organized under the laws of Ireland.

Interest rates for the Revolving Credit Facility and for the Term Loan are set, at the Company’s option, at a rate per annum based on the Eurodollar rate or a defined base rate. Prior to September 30, 2015, the interest rates were 4.25% above the Eurodollar rate or 3.25% above the defined base rate. After September 30, 2015, the interest rates for both the Term Loan and the Revolving Credit Facility range from 2.0% to 3.0% above the Eurodollar rate for Eurodollar-based borrowings and from 1.0% to 2.0% above the defined base rate for base rate borrowings, in each case depending on the Company’s leverage ratio. The Company is also required to pay a quarterly commitment fee, ranging from 0.30% to 0.50% per annum, on the undrawn portion of the Revolving Credit Facility. Letter of credit fees accrue based on the daily amount available to be drawn under outstanding letters of credit and range from 2.0% to 3.0%, depending on the Company’s leverage ratio. Swingline loans bear interest at the defined base rate plus the applicable margin for loans under the Revolving Credit Facility based on the defined base rate. If the Company defaults under the Credit Agreement, the Lenders may increase the interest rate(s) to 2.0% more than the rate(s) otherwise applicable. The weighted average interest rate applicable to the Term Loan for the fiscal quarter ended September 30, 2016 was 2.49%. As of September 30, 2016, the interest rate applicable to the amount outstanding under the Term Loan was 2.52%.

The Credit Agreement requires the Company to comply with certain covenants, including maintaining (i) a fixed charge coverage ratio (as defined in the Credit Agreement) of not less than 1.25 to 1.00 and (ii) a consolidated total leverage ratio (as defined in the Credit Agreement), of not greater 3.25 to 1.00 through June 30, 2018, and 3.00 to 1.00 thereafter, in each case measured quarterly on a trailing 12 month basis.

The Credit Agreement contains reporting covenants typical for transactions comparable to the Credit Facility, including covenants to furnish the lenders with financial statements, business plans, annual budgets, and other financial and business information and with notice of certain material events and information regarding collateral. The Credit Agreement also contains customary affirmative covenants, including covenants relating to the payment of obligations, preservation of the existence of and registrations for patents, trademarks, trade names and copyrights, maintenance of properties and insurance, compliance with laws and material contractual obligations, books and records, inspection rights, use of proceeds, addition of subsidiary guarantors, and security for the Credit Facility. The Credit Agreement contains customary negative covenants, including restrictions relating to liens and additional indebtedness, investments, mergers, liquidations and other fundamental changes, the sale and other disposition of properties and assets, restricted payments, changes in lines of business, transactions with affiliates, entering into certain burdensome agreements, and use of proceeds. The Credit Agreement permits the Company to fund cash acquisitions in an aggregate amount of up to $200 million, subject to certain limitations, including the requirement that, after giving effect to an acquisition, the Company’s available liquidity, as defined in the Credit Agreement, exceeds $50 million.

The Credit Agreement provides for customary events of default, including the non-payment of amounts due, failure to perform under covenants, breaches of representations and warranties, cross-defaults relating to certain indebtedness, institution of insolvency proceedings, inability to pay debts as they become due, entry of certain judgments, events relating to the Employee Retirement Income Security Act of 1974, as amended, invalidity of loan documents, change of control events, and ineffectiveness of subordination provisions. The occurrence of an event of default may result in the acceleration of all outstanding obligations under the Credit Agreement and in an increase in the applicable interest rate(s) as described above.

Unsecured Convertible Senior Notes

On December 7, 2010, the Company issued $200 million in aggregate principal amount of 3.00% Convertible Senior Notes (the “Notes”) due December 15, 2015 unless earlier repurchased or converted. The unsecured Notes were governed by the terms of an indenture dated December 7, 2010 between the Company and Wells Fargo Bank, N.A., as trustee.

In July 2015, the Company repurchased $65.0 million in aggregate principal amount of the Notes in a privately negotiated transaction for an aggregate cash purchase price of approximately $65.2 million plus accrued interest up to the date of repurchase in the aggregate amount of approximately $119,000. In December 2015, the remaining outstanding Notes in the aggregate principal amount of $135.0 million matured, and the Company repaid the Notes, together with accrued interest in the aggregate amount of approximately $2.0 million, in full.

Amortization of deferred issuance costs recorded to interest expense for the three and nine months ended September 30, 2015 was $372,000 and $972,000, respectively.

4. Selected Balance Sheet Data

Investments in Marketable Securities

Investments in marketable securities as of September 30, 2016 consisted of the following (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale – short-term:
U.S. Treasury, government and agency debt securities	$	29,880	$	32	$	(2	)	$	29,910
Corporate debt securities	26,456		12		(16		)	26,452
Total	$	56,336	$	44	$	(18	)	$	56,362

Investments in marketable securities as of December 31, 2015 consisted of the following (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale – short-term:
U.S. Treasury, government and agency debt securities	$	4,301	$	—	$	(13	)	$	4,288
Corporate debt securities	10,265		—		(49		)	10,216
Total	$	14,566	$	—	$	(62	)	$	14,504

As of September 30, 2016 and December 31, 2015, the Company's available-for-sale securities had a weighted remaining contractual maturity of 1.50 and 1.58 years, respectively. For the three and nine months ended September 30, 2016 and 2015, gross realized gains and losses were not significant. See Note 6 for information on the unrealized holding gains (losses) on available-for-sale securities reclassified out of accumulated other comprehensive loss into the condensed consolidated statements of operations.

The amortized cost and fair value of the Company's marketable securities at September 30, 2016, by contractual years-to-maturity, are as follows (in thousands):



	Amortized Cost		Fair Value
Due in less than 1 year	$	33,107	$	33,111
Due within 1-2 years	15,481		15,497
Due within 2-5 years	7,098		7,104
Due after 5 years	650		650
Total	$	56,336	$	56,362

Inventories

Inventories consist of the following (in thousands):



	September 30, 2016		December 31, 2015
Raw materials	$	109	$	3,864
Work in process	7,610		11,253
Finished goods	19,321		18,172
	$	27,040	$	33,289

Accrued expenses and other

As of September 30, 2016 and December 31, 2015, accrued compensation and related expenses totaled $12.5 million and $12.8 million, respectively, and accrued vacation totaled $9.3 million and $8.0 million, respectively. Accrued bonus expenses totaled $20.4 million as of December 31, 2015.

5. Goodwill and Other Intangible Assets

There was no activity related to goodwill for the three and nine months ended September 30, 2016. The Company has not had any historical goodwill impairment charges.

The following table presents the Company's purchased intangible assets (in thousands) as of September 30, 2016:



	Weighted Average Useful Life (in years)	Gross		Accumulated Amortization			Net
Technology	5.5	$	185,665	$	(146,248	)	$	39,417
Customer relationships	6.0	71,700		(57,628		)	14,072
Service agreements	6.4	30,100		(16,794		)	13,306
Trademarks	5.1	11,300		(8,475		)	2,825
Non-compete agreements	4.0	8,000		(6,910		)	1,090
Other	4.6	6,619		(2,367		)	4,252
		$	313,384	$	(238,422	)	$	74,962

The following table presents the Company's purchased intangible assets (in thousands) as of December 31, 2015:



	Weighted Average Useful Life (in years)	Gross		Accumulated Amortization			Net
Technology	5.5	$	185,665	$	(129,509	)	$	56,156
Customer relationships	6.0	71,700		(51,533		)	20,167
Service agreements	6.4	30,100		(13,272		)	16,828
Trademarks	5.1	11,300		(7,000		)	4,300
Non-compete agreements	4.0	8,000		(5,641		)	2,359
Other	4.5	5,750		(1,900		)	3,850
		$	312,515	$	(208,855	)	$	103,660

The estimated future amortization expense of purchased intangible assets as of September 30, 2016 is as follows (in thousands):



Remaining in 2016	$	9,569
2017	32,017
2018	20,763
2019	7,546
2020	4,021
2021	845
Thereafter	201
	$	74,962

6. Shareholders’ Equity

Accumulated Other Comprehensive Loss

The following table summarizes the changes in Accumulated other comprehensive loss, by component, net of income taxes (in thousands):



	Gains (Losses) on Available-for- Sale Securities ^(a)			Foreign Currency Items			Total
Beginning balance, December 31, 2015	$	(88	)	$	(945	)	$	(1,033	)

Other comprehensive income before reclassifications	94			595			689
Amounts reclassified from accumulated other comprehensive loss ^(b)	(6		)	—			(6		)
Net current period other comprehensive income	88			595			683

Ending balance, September 30, 2016	$	—		$	(350	)	$	(350	)


(a)	All amounts are net-of-tax. Amounts in parentheses indicate reductions.


(b)	Amount represents gain on the sale of securities and is included as a component of Interest income and other, net in the condensed consolidated statements of operations.

Share Repurchase Program

In February 2016, the Company’s Board of Directors approved a share repurchase program (the "Program") authorizing the Company, over the 12 months following the date of announcement, to acquire up to $25 million of its common stock. Under the Program, the Company is authorized, from time to time, and subject to general business and market conditions, alternative investment opportunities, and other factors, to repurchase shares in open market purchases, privately negotiated transactions and/or through other means, and may include repurchases pursuant to a Rule 10b5-1 trading plan. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue or suspend repurchases at any time in the Company’s discretion. During the three months ended September 30, 2016, we did not repurchase any shares. During the nine month period ended September 30, 2016, the Company repurchased 707,332 shares of common stock for $6.9 million. All of the repurchased shares remain authorized, but are no longer issued and outstanding. As of September 30, 2016, $18.1 million remained available for share repurchases under the Program.

7. Earnings Per Share

Basic earnings per common share is computed by dividing income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by giving effect to all potential dilutive common shares, including stock-based awards, using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015 (in thousands, except per share data):



	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Basic presentation:
Numerator for basic earnings per share:
Net income	$	4,773	$	4,008	$	3,609	$	200
Denominator for basic earnings per share:
Weighted average common shares outstanding	81,412		79,895		81,251		79,336
Basic earnings per share	$	0.06	$	0.05	$	0.04	$	0.00

Diluted presentation:
Numerator for diluted earnings per share:
Net income	$	4,773	$	4,008	$	3,609	$	200
Denominator for dilutive earnings per share:
Weighted average common shares outstanding	81,412		79,895		81,251		79,336
Effect of dilutive securities:
Stock options and other share-based awards	1,427		2,034		1,335		1,749
Dilutive potential common shares	82,839		81,929		82,586		81,085
Diluted earnings per share	$	0.06	$	0.05	$	0.04	$	0.00

The diluted earnings per share computation for the three and nine months ended September 30, 2016 excludes the weighted average number of shares underlying the Company's employee stock options and other share-based awards of 3.3 million and 4.0 million shares, respectively, which were anti-dilutive because, in general, the exercise prices of these awards exceeds the average closing sales price per share of the Company's common stock during the applicable period.

The diluted earnings per share computation for the three and nine months ended September 30, 2015 excluded the weighted average number of shares underlying the Company's then outstanding notes of 7.2 million shares and 9.3 million shares, respectively, and the weighted average number of shares underlying the Company's employee stock options and other share-based awards of 2.1 million shares and 2.9 million shares, respectively, which were both anti-dilutive because, in general, the exercise prices of these awards exceeded the average closing sales price per share of the Company's common stock during the period.

8. Concentrations

Revenue by Product Line

The Company has two product lines: Network Test Solutions and Network Visibility Solutions. The Company's Network Test Solutions products include its multi-slot test chassis and appliances, traffic generation interface cards, and suite of test applications, and the related technical support, warranty, and software maintenance services, including the Company's Application and Threat Intelligence (ATI) service. The Company's Network Visibility Solutions products include the Company's network packet brokers, bypass switches, and virtual and physical taps, and the related technical support, warranty, and software maintenance services. The following table presents revenue by product line (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Network Test Solutions	$	87,655	$	92,504	$	261,050	$	280,652
Network Visibility Solutions	36,256		33,383		95,632		97,807
	$	123,911	$	125,887	$	356,682	$	378,459

International Data

For the three and nine months ended September 30, 2016 and 2015, international revenues, based on customer location, as a percentage of total revenues were as follows:



	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
International revenues	41.9	%	36.1	%	43.6	%	37.6	%

As of September 30, 2016 and December 31, 2015, the Company's property and equipment, net were geographically located as follows (in thousands):



	September 30, 2016		December 31, 2015
United States	$	23,813	$	23,654
Romania	6,699		6,542
India	3,484		3,576
Other	3,876		2,764
Total	$	37,872	$	36,536

9. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. 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. The Company categorizes each of its 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. This hierarchy prioritizes the inputs into three broad levels as follows:


Level 1.	Observable inputs such as quoted prices in active markets;


Level 2.	Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and


Level 3.	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Financial assets carried at fair value as of September 30, 2016 are classified in the table below in one of the three categories described above (in thousands):



	September 30, 2016
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds	$	1,669	$	1,669	$	—	$	—
Corporate debt securities	6,944		—		6,944		—
Short-term marketable securities:
U.S. Treasury, government and agency debt securities	29,910		—		29,910		—
Corporate debt securities	26,452		—		26,452		—
Total financial assets	$	64,975	$	1,669	$	63,306	$	—

Financial assets carried at fair value as of December 31, 2015 are classified in the table below in one of the three categories described above (in thousands):



	December 31, 2015
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
Money market funds	$	284	$	284	$	—	$	—
Short-term marketable securities:
U.S. Treasury, government and agency debt securities	4,288		—		4,288		—
Corporate debt securities	10,216		—		10,216		—
Total financial assets	$	14,788	$	284	$	14,504	$	—

The Company's cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The fair values of the Company's money market funds, U.S. treasury, government and agency debt securities, and corporate debt securities are based on quoted market prices as shown in its investment brokerage/custodial statements. To the extent deemed necessary, the Company may also obtain non-binding dealer quotes to corroborate the estimated fair values reflected in its investment brokerage/custodial statements.

There were no transfers of assets between levels within the fair value hierarchy for the three and nine month periods ended September 30, 2016, and there were no Level 3 assets held at September 30, 2016.

The carrying value of the Company's Term Loan at September 30, 2016 and December 31, 2015 was $36.0 million and $38.5 million, respectively. The carrying value of the Term Loan approximates fair value as the interest rate is variable over the selected interest period and is similar to current rates at which the Company can borrow funds.

10. Commitments and Contingencies

Securities Class Action

On November 14, 2013, a purported securities class action complaint captioned Felix Santore v. Ixia, Victor Alston, Atul Bhatnagar, Thomas B. Miller, and Errol Ginsberg was filed against the Company and certain of its current and former officers and directors in the U.S. District Court for the Central District of California. The lawsuit purports to be a class action brought on behalf of purchasers of the Company’s securities during the period from April 10, 2010 through October 14, 2013. The initial complaint alleged that the defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by making materially false and misleading statements concerning the Company’s recognition of revenues related to its warranty and software maintenance contracts and the academic credentials and employment history of the Company’s former President and Chief Executive Officer, Victor Alston. The complaint also alleged that the defendants made false and misleading statements, and failed to make certain disclosures, regarding the Company’s business, operations and prospects, including regarding the financial statements and internal financial controls that were the subject of the Company’s April 2013 restatement of certain of its prior period financial statements. The complaint further alleged that the Company lacked adequate internal financial controls and issued materially false and misleading financial statements for the fiscal years ended December 31, 2010 and 2011, and the fiscal quarters ended March 31, 2011; June 30, 2011; September 30, 2011; March 31, 2012; June 30, 2012; and September 30, 2012. The complaint, which purported to assert claims for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, sought, on behalf of the purported class, an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief.

On March 24, 2014, following a proceeding to select a lead plaintiff in the matter, the court issued an order appointing Oklahoma Firefighters Pension & Retirement System and Oklahoma Law Enforcement Retirement System (the “Oklahoma Group”) as lead plaintiffs.

On June 11, 2014, the Oklahoma Group filed a first amended complaint, which asserted claims against the same defendants under the same legal theories set forth in the initial complaint. The first amended complaint also contained allegations that certain of the individual defendants increased their trading in the Company’s stock during February, March, April, and May of 2011 and during February and March of 2013, and that the defendants sought to inflate the Company’s reported deferred revenues during the period of February 4, 2011 through April 3, 2013.

On July 18, 2014, all named defendants moved to dismiss the first amended complaint for failure to state a claim under the Federal Rules of Civil Procedure and the Private Securities Law Reform Act of 1995 (“PSLRA”). After briefing and a hearing on October 6, 2014, the court issued an order dismissing the first amended complaint in its entirety without prejudice. The court gave the Oklahoma Group 30 days in which to file an amended complaint.

On November 5, 2014, the Oklahoma Group filed a second amended complaint. On January 6, 2015, the named defendants moved to dismiss the second amended complaint. After briefing and a hearing on April 13, 2015, the court issued an order dismissing the second amended complaint in its entirety without prejudice. The court gave the Oklahoma Group 30 days in which to file an amended complaint.

On April 24, 2015, the court issued an order staying the class action until July 31, 2015, pending the outcome of a voluntary, non-binding mediation scheduled for July 23, 2015 to explore a possible settlement of both the purported securities class action and the shareholder derivative action discussed below. On July 23, 2015, the parties conducted the scheduled mediation with respect to the purported class action but did not reach an agreement to resolve and settle the litigation. However, settlement discussions continued after the mediation session, and on August 14, 2015, the parties agreed in principle to settle the purported securities class action litigation.

On November 17, 2015, the Company entered into a Stipulation and Agreement of Settlement, dated November 11, 2015 relating to the proposed settlement of the class action (the “Class Action Settlement Agreement”). This Class Action Settlement Agreement would resolve all of the claims asserted against the defendants in the class action and was entered into subject to the Court’s preliminary and final approval. The Class Action Settlement Agreement provided, among other terms, for a settlement payment of $3.5 million. The Class Action Settlement Agreement does not include any admission of wrongdoing or liability on the part of the Company or the individual defendants, and upon final approval of the settlement by the Court, provides for a dismissal of, and a release of all claims asserted against the defendants in, the class action. In February 2016, the Court granted preliminary approval of the Class Action Settlement Agreement and scheduled a hearing for July 29, 2016 to consider final approval of the Class Action Settlement Agreement. In March 2016, the Company's insurer funded the payment of $3.5 million into an escrow account established pursuant to the Class Action Settlement Agreement.

Following a hearing on July 29, 2016, the Court on August 1, 2016 entered an order granting final approval of the Class Action Settlement Agreement. The final order also approved the award of attorneys’ fees and expenses to Plaintiffs’ counsel in the amount of $1.1 million, which was paid from the settlement payment of $3.5 million held in the escrow account established pursuant to the Class Action Settlement Agreement. The deadline to appeal the Court’s order was August 31, 2016. As the deadline to appeal has expired and there was no appeal, the settlement became final on August 31, 2016.

Shareholder Derivative Action

A consolidated shareholder derivative action, captioned In re Ixia Shareholder Derivative Litigation, is pending in the U.S. District Court for the Central District of California. This action is the consolidation of two lawsuits, namely: (i) Erie County Employees' Retirement System, Derivatively on behalf of Nominal Defendant Ixia v. Victor Alston, Errol Ginsberg, Laurent Asscher, Jonathan Fram, Gail Hamilton, Jon Rager, Atul Bhatnagar, and Thomas B. Miller, defendants, and Ixia, nominal defendant and (ii) Colleen Witmer, derivatively on behalf of Ixia v. Victor Alston, Atul Bhatnagar, Thomas B. Miller, Errol Ginsberg, Jonathan Fram, Laurent Asscher, Gail Hamilton, Jon F. Rager, Christopher Lee Williams, Alan Grahame, Raymond De Graaf, Walker H. Colston II, and Ronald W. Buckly, defendants, and Ixia, nominal defendant. Both were filed in the U.S. District Court for the Central District of California in May 2014.

Co-lead plaintiffs Erie County Employees’ Retirement System and Colleen Witmer filed a consolidated complaint on September 2, 2014. The consolidated complaint includes many allegations similar to those made in the purported class action complaint described above. Among other things, the complaint alleges that some or all (depending upon the claim) of the individual defendants breached their fiduciary duties to the Company by causing or allowing the Company to disseminate misleading financial statements, ignoring problems with the Company’s financial controls, making stock sales on the basis of material non-public information, and violating the Company’s code of conduct. As relief, among other things, the complaint sought an unspecified amount of monetary damages, disgorgement and restitution of stock sale proceeds and an award under California Corporations Code Sections 24502 and 25502.5, as well as unspecified equitable and declaratory relief.

On October 15, 2014, the Company, on whose behalf the derivative action claims are purportedly brought, moved to dismiss the consolidated complaint on the grounds that the derivative plaintiffs did not file the claims in accordance with applicable laws governing the filing of derivative actions. The individual defendants joined in that motion and also filed motions to dismiss the claims against them for failure to state a claim. Before any ruling by the court on those motions, the plaintiffs filed an amended consolidated complaint on January 26, 2015. On March 12, 2015, the Company filed a motion to dismiss the amended consolidated complaint on the same grounds as it had set forth with respect to the first consolidated complaint, and the individual defendants joined in that motion and also filed motions to dismiss the claims against them for failure to state a claim. On April 24, 2015, before the scheduled hearing on the motion to dismiss, the Court issued an order staying the shareholder derivative action until July 31, 2015, pending the outcome of a voluntary, non-binding mediation scheduled for July 23, 2015 in connection with both the derivative action and the purported securities class action discussed above.

On July 23, 2015, the parties participated in the scheduled voluntary, non-binding mediation with respect to the derivative action and agreed in principle to resolve and settle the litigation. On November 17, 2015, the Company entered into a Stipulation and Agreement of Settlement, dated November 17, 2015, relating to the proposed settlement of the derivative action (the “Derivative Action Settlement Agreement”). The Derivative Action Settlement Agreement would resolve all of the claims asserted against the defendants in the derivative action and was entered into subject to preliminary and final approval by the Court. The Derivative Action Settlement Agreement provides, among other terms, for the Company to implement certain corporate governance measures and for the plaintiffs' counsel to apply to the Court for an award of attorneys’ fees and expenses in an amount of up to $575,000. The Derivative Action Settlement Agreement does not include any admission of wrongdoing or liability on the part of the Company or the individual defendants and provides for a dismissal of, and a release of all claims asserted against the defendants in, the derivative action. In February 2016, the Court granted preliminary approval of the Derivative Action Settlement Agreement and scheduled a hearing for May 27, 2016 to consider final approval of the Derivative Action Settlement Agreement.

On June 1, 2016, following a hearing on May 27, 2016, the Court entered an order granting final approval of the Derivative Action Settlement Agreement. The order also approved the award of attorneys’ fees and expenses to Plaintiffs’ counsel in the amount of $575,000, which has been paid by one of the Company’s insurance carriers. The deadline to appeal the Court’s order was July 1, 2016. As the deadline to appeal has expired and there was no appeal, the settlement became final on July 1, 2016.

SEC Investigation

In July 2014, the Staff of the SEC’s Division of Enforcement (the “Staff”) requested that the Company produce certain documents and information in connection with an investigation of the Company. The SEC subsequently issued subpoenas to the Company seeking certain additional documents and to certain of the Company’s current and former employees seeking certain documents and their testimony. Based on the documents requested by the Staff, the Company believes that the SEC’s investigation relates to the matters addressed by (i) the previously disclosed accounting-related investigation conducted by the Audit Committee of the Company’s Board of Directors (the “Board”) that was completed in February 2014, and (ii) a separate internal investigation conducted by a Special Committee of the Board of stock sales during February and March 2013 by then current executive officers and directors of the Company. The Special Committee, which completed its investigation in June 2014, did not find with respect to such sales that there had been any insider trading based upon material non-public information. The Special Committee, however, made no finding with respect to the Company's former President and Chief Executive Officer, Victor Alston, because he declined to be interviewed by the Special Committee's counsel (both the Special Committee and the Audit Committee were assisted by independent counsel in their investigations).

The Company is continuing to cooperate fully with the SEC in its investigation and is in discussions with the Staff concerning a proposed settlement of the investigation as it pertains to the Company. Based on oral communications with the Staff, the Company understands that the proposed settlement would require the Company, without admitting or denying any allegations by the SEC, to consent to the SEC’s issuance of an administrative order with non-fraud charges involving violations of Section 13 of the Exchange Act and rules promulgated by the SEC thereunder. The Company understands that the charges would relate to the Company’s books and records, internal controls, and disclosures (not including financial statements) for the year ended December 31, 2012, and books and records, internal controls, and disclosures (including financial statements) for the first and second quarters of 2013. The Company would be required to pay a civil penalty in the amount of $750,000. The proposed settlement is subject to the Company’s receipt of, and agreement to, written settlement documentation from the Staff. In the event the Company and the Staff agree on such documentation, the settlement would then be subject to approval by the SEC Commissioners, and there can be no assurance that the SEC Commissioners would approve the proposed settlement. The proposed settlement would resolve Ixia’s potential liability with respect to the SEC investigation. Current or former employees, officers, and/or directors of the Company are not addressed by this proposed settlement.

The Company has accrued a liability of $750,000 related to this matter as a component of Accrued expenses and other in the accompanying condensed consolidated balance sheets as of September 30, 2016.

Indemnifications

In the normal course of business, the Company provides certain indemnifications, commitments and guarantees of varying scope to customers, including against claims of intellectual property infringement made by third parties arising from the use of the Company's products. The Company also has certain obligations to indemnify its officers, directors and employees for certain events or occurrences while the officers, directors or employees are or were serving at the Company's request in such capacity. The duration of these indemnifications, commitments and guarantees varies and in certain cases is indefinite. Many of these indemnifications, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. However, the Company's director and officer insurance policy may enable it to recover a portion of any future payments related to its officer, director or employee indemnifications. Historically, costs related to these indemnifications, commitments and guarantees have not been significant. With the exception of the product warranty accrual associated with the Company's initial standard warranty, no liabilities have been recorded for these indemnifications, commitments and guarantees.

11. Income Taxes

The Company accounts for its provision for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes. In accordance with ASC 740, the Company uses an estimate of its annual effective rate for the full fiscal year in computing the year-to-date provision for income taxes for the interim periods, including federal, foreign, state, and local income taxes.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. On February 19, 2016, the I.R.S. filed a notice of appeal with respect to such opinion in the U.S Ninth Circuit Court of Appeals. The Company concluded that no adjustment to its consolidated financial statements is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.

On September 26, 2016, the Company was notified by the IRS of its proposal ("Proposal") on the Company’s Advance Pricing Agreement ("APA") filed on January 15, 2013. Management is currently assessing the Proposal and expects to respond to the IRS sometime during the fourth quarter of 2016. If the Company were to accept the Proposal, it would be subject to the IRS's final review and approval. Management believes that it has sufficient reserves to offset any additional assessments as result of the proposed APA.

As of September 30, 2016 and December 31, 2015, current deferred tax assets totaled $14.9 million and $14.5 million, respectively, and were included within Prepaid expenses and other current assets on the Company's condensed consolidated balance sheets. At each of September 30, 2016 and December 31, 2015, long-term deferred tax assets totaled $18.9 million and were included within Other assets on the Company's condensed consolidated balance sheets.

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

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Form 10-Q and the "Safe Harbor under the Private Securities Litigation Reform Act of 1995" section at the end of this Item 2, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”), including the “Risk Factors” section and the consolidated financial statements and notes included therein.

Business Overview

Ixia was incorporated in 1997 as a California corporation. We help customers validate the performance and security resilience of their applications and networks. Our test, visibility and security products help organizations make their and their customers' physical and virtual networks stronger. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on our solutions to validate new products before shipping and secure ongoing operation of their networks with better visibility and security. Our product solutions consist of our high performance hardware platforms, software applications, and services, including warranty and maintenance offerings.

Our cash, cash equivalents, and marketable securities, in the aggregate, increased by $20.7 million to $121.5 million at September 30, 2016 from the $100.8 million reported at June 30, 2016. This increase was primarily due to $21.9 million in cash provided by operating activities and $1.5 million in proceeds received from issuances of stock under our employee stock purchase plan, partially offset by the use of $1.6 million for purchases of property and equipment and $1.0 million for the repayment of debt. Total revenues decreased 1.6% to $123.9 million during the three months ended September 30, 2016, compared to $125.9 million during the three months ended September 30, 2015, primarily due to lower shipments of our network test products.

While we remain confident in our competitive position and our opportunities for long-term growth in both our network test solutions and network visibility solutions businesses, we believe there continues to be some near term uncertainty and softness in our markets, such as the capital spending plans of large service providers and network equipment manufacturers. This uncertainty and softness may adversely impact our sales, results of operations and financial position over the near term.

Establishment of Senior Secured Revolving Credit Facility. On March 2, 2015, we entered into an amended and restated credit agreement (as amended to date, the “Credit Agreement”) with certain institutional lenders, which amended and restated our prior 2012 credit agreement, as amended. The Credit Agreement originally provided for (i) a term loan (the “Term Loan”) in the aggregate principal amount of $40 million and (ii) revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facility”) in an aggregate amount of up to $60 million, with sub-limits of $25 million for the issuance of standby letters of credit and $15 million for swingline loans. On September 30, 2015, we entered into an amendment to the Credit Agreement which, among other modifications, increased the commitments under the Revolving Credit Facility to an aggregate amount of up to $75 million.

On January 25, 2016, we entered into an amendment to the Credit Agreement which, among other modifications, increased the commitments under the Revolving Credit Facility to an aggregate amount of up to $150 million and (ii) extended the maturity date of the Revolving Credit Facility from February 15, 2018 to February 15, 2020. The maturity date of the Term Loan is February 15, 2018. The aggregate amount available under the Revolving Credit Facility is, upon our request and subject to the receipt of increased commitments from the Lenders or additional lenders, subject to increase by an aggregate amount of up to $100 million.

We are permitted to prepay outstanding loans under the Credit Facility at any time without premium or penalty. We may re-borrow amounts under the Revolving Credit Facility, but we may not re-borrow amounts that we repay or prepay under the Term Loan.

Revenues are principally derived from the sale and support of our network test and network visibility product solutions.

Sales of our network test hardware products primarily consist of the sale of traffic generation and analysis hardware platforms containing multi-slot chassis and interface cards. Our primary network test hardware platform is enabled by our operating system software that is essential to the functionality of the hardware platform. Sales of our network visibility hardware products typically include the sale of an integrated, purpose-built hardware appliance with essential, proprietary software. Our software products consist primarily of a comprehensive suite of technology-specific applications for certain of our network test hardware platforms. Our software products are typically installed on and work with our hardware products to further enhance the core functionality of the overall network test system, although some of our software products can be operated independently from our network test platforms.

Our service revenues primarily consist of technical support, warranty and software maintenance services revenues related to our network test and visibility hardware and software products. Most of our products include up to one year of these services with the initial product purchase, and our customers may separately purchase extended services for annual or multi-year periods. Our technical support, warranty and software maintenance services include assistance with the set-up, configuration and operation of our products, repair or replacement of defective products, bug fixes, and unspecified when and if available software upgrades. For certain network test products, our technical support and software maintenance service revenues also include revenues from the sale of our Application and Threat Intelligence ("ATI") service, which provides a comprehensive suite of application protocols, software updates and technical support. The ATI service provides full access to the latest security attacks and application updates for our customers' use in real-world test and assessment scenarios. Our customers may purchase the ATI service for annual or multi-year periods. Service revenues also include training and other professional services revenues.

To date, we have generated the majority of our revenues from sales to network equipment manufacturers, but this percentage has been declining over the past several years. While we expect that we will continue to have some customer concentration with network equipment manufacturers, we expect to continue to see declines in those sales as a percentage of total revenues, given that we expect to sell our products to a wider variety and increasing number of service provider, enterprise and government customers. To the extent that we develop a broader and more diverse customer base, our reliance on any one customer or customer type should diminish. No one customer accounted for 10% or more of our total revenues for the three and nine months ended September 30, 2016.

From a geographic perspective, we generated revenues from shipments to international locations of $51.9 million, or 41.9% of our total revenues, and $45.4 million, or 36.1% of our total revenues, for the three month periods ended September 30, 2016 and 2015, respectively, and $155.5 million, or 43.6% of our total revenues, and $142.4 million, or 37.6% of our total revenues, for the nine month periods ended September 30, 2016 and 2015, respectively. The increase in international revenues as a percentage of our total revenues for the nine months ended September 30, 2016 compared to the prior year period was primarily due to a decrease in sales to customers based in the United States and revenue growth in the Asia Pacific and Europe regions.

Cost of Revenues. Our cost of revenues related to the sale of our hardware and software products includes materials, payments to third-party contract manufacturers, royalties, and salaries and other expenses related to our manufacturing and supply operations personnel. We outsource the majority of our manufacturing operations. Accordingly, a significant portion of our cost of revenues related to our products consists of payments to our contract manufacturers. Cost of revenues related to the provision of services includes salaries and other expenses associated with technical support services, professional services, and extended warranty and maintenance services. Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines, and technologies of $6.3 million and $6.4 million for the three months ended September 30, 2016 and 2015, respectively, and $19.1 million and $19.3 million for the nine months ended September 30, 2016 and 2015, respectively, which are included within our Amortization of intangible assets line item on our condensed consolidated statements of operations included in this Form 10-Q.

Our cost of revenues as a percentage of total revenues is primarily affected by the following factors:


•	our pricing policies and those of our competitors;


•	the pricing we are able to obtain from our component suppliers and contract manufacturers;


•	the mix of customers and sales channels through which our products are sold;


•	the mix of products and services sold, such as the mix of software versus hardware sales and the mix of product versus services sales;


•	new product introductions by us and by our competitors;


•	demand for and quality of our products; and


•	shipment volume.

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat, we expect to continue to experience pricing pressure, particularly on larger transactions and from larger customers, as a result of competition.

Operating Expenses. Our operating expenses are generally recognized when incurred and consist of research and development, sales and marketing, and general and administrative expenses, amortization of intangible assets, acquisition and other related costs, and restructuring expenses. In dollar terms, we expect total operating expenses on an annual basis, excluding stock-based compensation, amortization of intangible assets, acquisition and other related costs, and restructuring expenses, each discussed below, to decrease slightly in 2016 when compared to 2015.

•

Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing, and enhancement of our products. We expense our research and development costs as they are incurred. We also capitalize and depreciate over a five-year period costs of our products used for internal purposes. We plan to continue to strategically invest in research and development and new products and technology as we believe that such investment is critical to attaining our strategic objectives and will further differentiate us in the marketplace.

•

Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in direct sales, sales support and marketing functions, as well as tradeshow, promotional and advertising expenditures. We also capitalize and depreciate over a two-year period costs of our products used for sales and marketing activities, including product demonstrations for potential customers.

•

General and administrative expenses consist primarily of salaries and related expenses for certain executive, finance, legal, human resources, information technology, and administrative personnel, as well as professional fees (e.g., legal and accounting), facility costs related to our corporate headquarters, insurance costs, and other general corporate expenses. General and administrative expenses also include costs related to internal and other investigations, shareholder litigation and related matters.

•

Amortization of intangible assets consists of the recognition of the purchase price of various intangible assets over their estimated useful lives. The future amortization expense of acquired intangible assets depends on a number of factors, including the extent to which we acquire additional businesses, technologies and product lines or are required to record impairment charges related to our acquired intangible assets. See Note 5 to the condensed consolidated financial statements included in this Form 10-Q.

•

Acquisition and other related costs are expensed as incurred and consist primarily of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting, tax, due diligence, valuation, and other related services, change in control payments, amortization of deferred compensation, consulting fees, regulatory costs, certain employee, facility and infrastructure transition costs, and other acquisition related expenses. We expect our acquisition and other related expenses to fluctuate over time based on the timing of our acquisitions and related integration activities.


•	Restructuring expenses consist primarily of employee severance costs and other related charges, as well as facility-related charges to exit certain locations.

Stock-Based Compensation. Share-based payments, including grants of stock options, restricted stock units, and employee stock purchase rights, are required to be recognized in our financial statements based on their estimated fair values for accounting purposes on the grant date. For the three months ended September 30, 2016 and 2015, stock-based compensation was $5.0 million and $4.4 million, respectively. For the nine months ended September 30, 2016 and 2015, stock-based compensation was $13.6 million and $14.3 million, respectively. The increase in stock-based compensation for the three months ended September 30, 2016 compared to the same period in the prior year is primarily due to an increase in the number of restricted stock unit awards granted in the current year period. The decrease in stock-based compensation for the nine months ended September 30, 2016 compared to the same period in the prior year is primarily due to a reduction in expense associated with certain performance-based restricted stock unit awards. As of September 30, 2016, the aggregate amount of gross unrecognized stock-based compensation to be expensed in the years 2016 through 2020 related to unvested share-based awards is $19.3 million. To the extent that we grant share-based awards, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will continue to grant additional share-based awards in the future as part of our long-term incentive compensation programs. The impact of future grants cannot be estimated at this time because it will depend on a number of factors, including the number of share-based awards granted and the then current fair values of such awards for accounting purposes.

Interest income and other, net consists of interest on cash and a variety of securities, including money market funds, U.S. government and government agency debt securities, and corporate debt securities; realized gains/losses on the sale of investment securities; certain foreign currency gains and losses; and other non-operating items.

Interest expense consists of interest on our Term Loan, amortization of debt issuance costs, commitment fees on the unused portion of current and prior revolving credit facilities, and interest on our previously outstanding convertible senior notes in the prior year periods. Our previously outstanding convertible senior notes matured and were repaid in full in 2015. See Note 3 to the condensed consolidated financial statements included in this Form 10-Q.

Income tax expense (benefit) is determined based on the amount of earnings and enacted federal, state, and foreign tax rates, adjusted for allowable credits and deductions, and for other effects of equity compensation plans. Our income tax provision may be significantly affected by changes to our estimates of tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and the recording of valuation allowances against certain deferred tax assets, and changes to those valuation allowances in future periods. We re-evaluate the judgments surrounding our estimates and make adjustments, as appropriate, each reporting period.

Our effective tax rate differs from the federal statutory rate due to significant permanent differences, research and development tax credits, foreign rate differential, and inter-company royalties. Significant permanent differences arise due to stock-based compensation expenses that are not expected to generate a tax deduction, such as stock-based compensation on grants to employees in foreign locations, and non-deductible amortization, partially offset by tax benefits from disqualifying dispositions.

Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence. Objectively verifiable evidence includes our realization of tax attributes, assessment of tax credits, and utilization of net operating loss carryforwards during the year. As of September 30, 2016, we believe that it is more likely than not that our deferred tax assets, with the exception of our capital loss carry-forwards, are fully realizable.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements included in this Form 10-Q which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to: revenue recognition; allowance for doubtful accounts; write-downs for obsolete or excess inventory; income taxes; acquisition purchase price allocation; impairments of long-lived assets, goodwill and marketable securities; stock-based compensation; and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. None of these accounting policies and estimates has significantly changed from those reflected in our 2015 Form 10-K. Critical accounting policies and estimates are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Form 10-K. Actual results may differ from estimates under different assumptions or conditions.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is included in Note 2 to the condensed consolidated financial statements included in this Form 10-Q.

Results of Operations

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated.



	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Revenues:
Products	65.4	%	68.2	%	64.3	%	69.9	%
Services	34.6		31.8		35.7		30.1
Total revenues	100.0		100.0		100.0		100.0
Costs and operating expenses:⁽¹⁾
Cost of revenues – products ⁽²⁾	18.6		19.0		18.0		19.1
Cost of revenues – services	3.3		2.9		3.4		3.3
Research and development	20.6		22.7		21.7		22.2
Sales and marketing	32.3		30.1		33.1		30.1
General and administrative	12.1		14.7		12.6		14.3
Amortization of intangible assets	7.8		8.2		8.3		8.5
Acquisition and other related costs	—		0.0		0.0		0.2
Restructuring	(0.2	)	0.0		(0.1	)	(0.1	)
Total costs and operating expenses	94.5		97.6		97.0		97.5
Income from operations	5.5		2.4		3.0		2.5
Interest income and other, net	0.2		(0.2	)	0.1		(0.2	)
Interest expense	(0.4	)	(1.8	)	(0.4	)	(1.8	)
Income before income taxes	5.3		0.4		2.8		0.5
Income tax expense (benefit)	1.4		(2.8	)	1.7		0.5
Net income	3.9	%	3.2	%	1.0	%	0.0	%



⁽¹⁾ Stock-based compensation included in:
Cost of revenues – products	0.1	%	0.0	%	0.1	%	0.1	%
Cost of revenues – services	0.0		0.0		0.0		0.0
Research and development	1.4		1.1		1.3		1.3
Sales and marketing	1.1		0.9		1.2		0.9
General and administrative	1.4		1.4		1.2		1.5

⁽²⁾Cost of revenues – products excludes amortization of intangible assets related to purchased technologies of 5.0% and 5.4% for the three and nine months ended September 30, 2016, respectively, and 5.1% and 5.1% for the three and nine months ended September 30, 2015, respectively, which is included in Amortization of intangible assets.

Comparison of Three Months Ended September 30, 2016 and 2015

Revenues. During the three months ended September 30, 2016, total revenues decreased 1.6% to $123.9 million from the $125.9 million recorded in the three months ended September 30, 2015.

The following table presents revenue by product line (in thousands):



	Three months ended September 30,
	2016		2015
Product Revenues	$	56,482	$	62,676
Service Revenues	31,173		29,828
Total Network Test Solutions Revenues	87,655		92,504

Product Revenues	24,523		23,185
Service Revenues	11,733		10,198
Total Network Visibility Solutions Revenues	36,256		33,383
Total Revenues	$	123,911	$	125,887

During the three months ended September 30, 2016, revenues from our Network Test Solutions product line decreased 5.2% to $87.7 million compared to $92.5 million recorded in the three months ended September 30, 2015. This decrease in revenue for Network Test Solutions was primarily driven by a decrease in product revenues as a result of a lower volume of shipments of our 10G Ethernet interface cards.

During the three months ended September 30, 2016, revenues from our Network Visibility Solutions product line increased 8.6% to $36.3 million compared to $33.4 million recorded in the three months ended September 30, 2015. This increase in revenue for Network Visibility Solutions was driven by an increase in product sales, primarily to enterprise customers, and an increase in revenues recognized on technical support, warranty and software maintenance services.

Cost of Revenues. As a percentage of total revenues, our total cost of revenues remained relatively consistent at 21.9% for the three months ended September 30, 2016 compared to 21.8% for the three months ended September 30, 2015.

Research and Development. During the three months ended September 30, 2016, research and development expenses decreased 10.4% to $25.6 million compared to $28.5 million in the three months ended September 30, 2015. This decrease was primarily due to lower bonus accruals in the current year period, partially offset by increases in salaries and stock-based compensation.

Sales and Marketing. During the three months ended September 30, 2016, sales and marketing expenses increased 5.6% to $40.0 million compared to $37.9 million in the three months ended September 30, 2015. This increase was primarily due to an increase in sales and marketing headcount, increased expenditures for various marketing programs, and higher consulting costs in the current year period, which were partially offset by a reduction in bonus accruals.

General and Administrative. During the three months ended September 30, 2016, general and administrative expenses decreased 18.9% to $15.0 million compared to $18.5 million in the three months ended September 30, 2015. This decrease was primarily due to decreases in bonus accruals and professional fees in the current year period.

Amortization of Intangible Assets. During the three months ended September 30, 2016, amortization of intangible assets decreased to $9.6 million compared to $10.4 million in the three months ended September 30, 2015. This decrease was primarily due to the completion of amortization periods for certain intangible assets.

Interest Income and Other, Net. During the three months ended September 30, 2016, interest income and other, net was income of $250,000 compared to an expense of $313,000 for the three months ended September 30, 2015. The income increase in interest income and other, net in the current year period was primarily due to foreign currency translation gains in the current year period compared to foreign currency translation losses in the same period in the prior year.

Interest Expense. During the three months ended September 30, 2016, interest expense was $473,000 compared to $2.3 million for the three months ended September 30, 2015. This decrease was primarily due to the 2015 repayment of our previously outstanding convertible notes, on which we incurred $1.1 million in interest expense and $534,000 for the amortization and write-off of debt issuance costs in the prior year period.

Income Tax Expense. For the three months ended September 30, 2016, we recorded an income tax expense of $1.8 million on a pre-tax income of $6.6 million, or an effective rate of 27.2%, compared to an income tax expense of $3.5 million on a pre-tax income of $506,000, or an effective rate of (692.1)%, for the three months ended September 30, 2015. Our effective tax rate differs from the federal statutory rate due to significant permanent differences, research and development tax credits, foreign rate differential, and inter-company royalties. Significant permanent differences arise due to stock-based compensation expenses that are not expected to generate a tax deduction, such as stock-based compensation on grants to employees in foreign locations, and non-deductible amortization, partially offset by tax benefits from disqualifying dispositions.

Comparison of Nine Months Ended September 30, 2016 and 2015

Revenues. During the nine months ended September 30, 2016, total revenues decreased 5.8% to $356.7 million from the $378.5 million recorded in the nine months ended September 30, 2015.

The following table presents revenue by product line (in thousands):



	Nine months ended September 30,
	2016		2015
Product Revenues	$	168,774	$	195,118
Service Revenues	92,276		85,534
Total Network Test Solutions Revenues	261,050		280,652

Product Revenues	60,708		69,453
Service Revenues	34,924		28,354
Total Network Visibility Solutions Revenues	95,632		97,807
Total Revenues	$	356,682	$	378,459

During the nine months ended September 30, 2016, revenues from our Network Test Solutions product line decreased 7.0% to $261.1 million compared to $280.7 million recorded in the nine months ended September 30, 2015. This decrease in revenue for Network Test Solutions was principally driven by a decrease in product revenues as a result of a lower volume of shipments of our Ethernet interface cards to network equipment manufacturer customers, partially offset by higher service revenues resulting from an increase in revenues recognized on technical support, warranty and software maintenance services.

During the nine months ended September 30, 2016, revenues from our Network Visibility Solutions product line decreased 2.2% to $95.6 million compared to $97.8 million recorded in the nine months ended September 30, 2015. This decrease in revenue for Network Visibility Solutions was driven primarily by a decrease in product shipments to certain service provider customers, partially offset by an increase in revenues recognized on technical support, warranty and software maintenance services.

Cost of Revenues. As a percentage of total revenues, our total cost of revenues decreased to 21.4% during the nine months ended September 30, 2016 compared to 22.4% in the nine months ended September 30, 2015. This percentage decrease, and corresponding increase in gross margin, was primarily due to the mix of products sold, as a higher percentage of our revenues in the current year period was derived from service revenues, which generate higher gross margins than our product revenues.

Research and Development. During the nine months ended September 30, 2016, research and development expenses decreased 7.6% to $77.5 million compared to $83.9 million in the nine months ended September 30, 2015. This decrease was primarily due to lower bonus accruals in the current year period, partially offset by an increases in outside services and facilities expenses.

Sales and Marketing. During the nine months ended September 30, 2016, sales and marketing expenses increased 3.6% to $118.0 million compared to $113.9 million in the nine months ended September 30, 2015. This increase was primarily due to an increase in sales and marketing headcount, consulting costs, stock-based compensation, and certain marketing programs and meeting costs, including those related to our global sales meeting held in the first quarter of 2016, partially offset by a reduction in bonus accruals and lower commissions expense in the current year period.

General and Administrative. During the nine months ended September 30, 2016, general and administrative expenses decreased 17.3% to $44.9 million compared to $54.3 million in the nine months ended September 30, 2015. This decrease was primarily due to decreases in bonus accruals, professional fees, and stock-based compensation in the current year period.

Amortization of Intangible Assets. During the nine months ended September 30, 2016, amortization of intangible assets decreased to $29.6 million compared to $32.2 million in the nine months ended September 30, 2015. This decrease was primarily due to the completion of amortization periods for certain intangible assets.

Acquisition and Other Related Costs. During the nine months ended September 30, 2016, acquisition and other related costs decreased to a credit of $22,000 compared to an expense of $646,000 in the nine months ended September 30, 2015. Acquisition and other related costs primarily relate to integration activities and other related costs associated with our December 2013 acquisition of Net Optics. We do not expect significant costs related to our prior acquisitions to be incurred going forward.

Restructuring. During the nine months ended September 30, 2016 and 2015, we recorded restructuring credits of $381,000 and $527,000, respectively. These credits were primarily related to favorable lease buyouts occurring in each of the nine month periods, and the receipt of proceeds from an insurance settlement in the nine months ended September 30, 2015.

Interest Income and Other, Net. During the nine months ended September 30, 2016, interest income and other, net was income of $423,000 compared to an expense of $592,000 for the nine months ended September 30, 2015. The income increase in interest income and other, net in the current year period was primarily due to foreign currency translation gains in the current year period compared to foreign currency translation losses in the same period in the prior year.

Interest Expense. During the nine months ended September 30, 2016, interest expense was $1.5 million compared to $6.9 million for the nine months ended September 30, 2015. This decrease was primarily due to the 2015 repayment of our previously outstanding convertible notes, on which we incurred $4.1 million in interest expense and $1.1 million for the amortization and write-off of debt issuance costs in the prior year period.

Income Tax Expense. For the nine months ended September 30, 2016, we recorded an income tax expense of $6.2 million on a pre-tax income of $9.8 million, or an effective rate of 63.3%, compared to an income tax expense of $1.8 million on a pre-tax income of $2.0 million, or an effective rate of 90.2%, for the nine months ended September 30, 2015. Our effective tax rate differs from the federal statutory rate due to significant permanent differences, research and development tax credits, foreign rate differential, and inter-company royalties. Significant permanent differences arise due to stock-based compensation expenses that are not expected to generate a tax deduction, such as stock-based compensation on grants to employees in foreign locations, and non-deductible amortization, partially offset by tax benefits from disqualifying dispositions.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities, in the aggregate, increased by $20.7 million to $121.5 million at September 30, 2016 from the $100.8 million reported at June 30, 2016, primarily due to $21.9 million in cash provided by operating activities and $1.5 million in proceeds received from issuances of stock under our employee stock purchase plan, partially offset by the use of $1.6 million for purchases of property and equipment and $1.0 million for the repayment of debt.

Of our total cash, cash equivalents and investments, $31.7 million and $21.5 million were held outside of the United States in various foreign subsidiaries as of September 30, 2016 and December 31, 2015, respectively. Under current tax laws and regulations, if our cash, cash equivalents or investments associated with our subsidiaries’ undistributed earnings were to be repatriated in the form of dividends or deemed distributions, we would be subject to additional U.S. income taxes and foreign withholding taxes. We consider these funds to be indefinitely reinvested in our foreign operations and do not intend to repatriate them. We had no exposure to European sovereign debt as of September 30, 2016 and December 31, 2015.

The following table sets forth our summary cash flows for the nine months ended September 30, 2016 and 2015 (in thousands):



	Nine months ended September 30,
	2016			2015
Net cash provided by operating activities	$	64,152		$	74,594
Net cash used in investing activities	(49,112		)	(26,288		)
Net cash used in financing activities	(2,328		)	(18,949		)

Cash Flows from Operating Activities

Net cash provided by operating activities was $64.2 million during the nine months ended September 30, 2016 and $74.6 million during the nine months ended September 30, 2015. The decrease in cash provided by operating activities was primarily due to the effects of working capital changes on cash. The most significant change was a larger decrease in accrued expenses and other liabilities in the current year as compared to the prior year, which had a negative impact on cash. This decrease was primarily due to payment in the current year of bonuses accrued for in the prior year and lower bonus accruals in the current year. These changes were partially offset by a positive impact on cash from a larger decrease in accounts receivable in the current year when compared to the prior year. The larger decrease in accounts receivable in the current year was due, in part, to improved cash collections in the current year.

Cash Flows from Investing Activities

Net cash used in investing activities was $49.1 million during the nine months ended September 30, 2016 compared to $26.3 million during the nine months ended September 30, 2015. Net cash used in investing activities for the nine months ended September 30, 2016 was primarily due to the use of $41.7 million for net purchases of marketable securities and $6.5 million for purchases of property and equipment. Net cash used in investing activities in the nine months ended September 30, 2015 was primarily due to the use of $9.7 million for net purchases of marketable securities and $6.0 million for purchases of property and equipment. In addition, $10.0 million was reclassified from cash to restricted cash.

Cash Flows from Financing Activities

Net cash used in financing activities was $2.3 million during the nine months ended September 30, 2016 and $18.9 million during the nine months ended September 30, 2015. Net cash used in financing activities for the nine months ended September 30, 2016 was primarily due to the use of $6.9 million for the repurchase of common stock and $2.5 million for debt repayments under our Term Loan, partially offset by proceeds from the exercise of stock options and employee stock purchase plan options of $7.8 million. Net cash used in financing activities for the nine months ended September 30, 2015 was primarily due to the use of $66.2 million for repayments of debt, partially offset by net proceeds of $38.7 million from borrowings under our Term Loan and $8.6 million in proceeds from the exercise of stock options and employee stock purchase plan options.

Historically, cash inflows from financing activities have been principally related to proceeds from the exercise of stock options and employee stock purchase plan options. In December 2010, we raised $194 million in net proceeds from the issuance of $200 million in aggregate principal amount of convertible senior notes, which, to the extent they remained outstanding, matured and were repaid on December 15, 2015. On March 2, 2015, we entered into our Credit Agreement that provides for the Term Loan in the amount of $40 million and the Revolving Credit Facility currently in the maximum aggregate amount of $150 million. The original $60 million maximum amount of the Revolving Credit Facility was increased to $75 million in September 2015 and to the current amount of $150 million in January 2016. The maturity date of the Term Loan is February 15, 2018. The maturity date of the Revolving Credit Facility was extended in January 2016 from February 15, 2018 to February 15, 2020. The Revolving Credit Facility may, upon our request and subject to the receipt of increased commitments from existing lenders or additional lenders, be increased by the aggregate amount of up to $100 million.

The Term Loan requires quarterly repayments of principal of $1.0 million each for the next two quarters, and $1.5 million each for the three quarters thereafter. The remaining principal balance of the Term Loan will be due and payable on February 15, 2018. We are permitted to prepay outstanding loans under the Credit Facility at any time without premium or penalty. We may re-borrow amounts under the Revolving Credit Facility, but we may not re-borrow amounts that we repay or prepay under the Term Loan. For additional information regarding the Term Loan and the Revolving Credit Facility, see Note 3 to the condensed consolidated financial statements included in this Form 10-Q.

Going forward, we expect our cash flows from financing activities to fluctuate based on (i) the number of exercises of share-based awards, which is partially dependent on the performance of our stock price, and (ii) the utilization of our Revolving Credit Facility. If deemed appropriate and approved by our Board of Directors, we may from time to time raise capital through debt or equity financings; refinance our existing debt under the Credit Agreement; and/or initiate additional stock buyback programs or modify or terminate our existing program.

We believe that our existing balances of cash, cash equivalents, and investments, cash flows expected to be generated from our operations, and amounts available under our Credit Agreement will be sufficient to satisfy our operating requirements for the next 12 months. We also may seek additional sources of capital as necessary or appropriate to fund acquisitions or to otherwise finance our growth or operations; there can be no assurance that such funds, if needed, will be available on favorable terms, if at all. Our access to the capital markets to raise funds, through the sale of equity or debt securities, is subject to various limitations, including conditions in U.S. capital markets.

Share Repurchase Program

On February 23, 2016, we announced that our Board of Directors had authorized a share repurchase program (the "Program") under which we are authorized, over the 12 months following the announcement, to acquire up to $25 million of our common stock. Under the Program, we are authorized, from time to time and subject to general business and market conditions, alternative investment opportunities, and other factors, repurchase shares in open market purchases, in privately negotiated transactions, and/or through other means, including pursuant to trading plans intended to comply with Rule 10b5-1 under the Exchange Act. Under a Rule 10b5-1 trading plan, purchases are made pursuant to pre-determined metrics set forth in the plan. The Program may be suspended or discontinued at any time in our discretion. Repurchases under the Program have been and will be funded using our available cash and cash equivalents, including cash available under our Revolving Credit Facility. During the three months ended September 30, 2016, we did not repurchase any shares. During the nine months ended September 30, 2016, we repurchased 707,332 shares of common stock for $6.9 million. All of the repurchased shares remain authorized, but are no longer issued and outstanding. As of September 30, 2016, $18.1 million remained available for share repurchases under the Program.

Safe Harbor under the Private Securities Litigation Reform Act of 1995

Statements that are not historical facts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q may be deemed to be forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, and are subject to the safe harbor created by those Sections. Words such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "potential," and variations of these words and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. These risks and uncertainties, as well as other factors, may cause our future results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors that could cause the actual results to differ materially from those expressed or implied in such forward-looking statements include, among others: our success in developing, producing and introducing new products and in keeping pace with the rapid technological changes that characterize our market; our success in developing new sales channels and customers; market acceptance of our products; competition; changes in the global economy and in market conditions; consistency of orders from significant customers; our success in leveraging our intellectual property portfolio, expertise and market opportunities; our expectations regarding the transition into Software Defined Networks (SDN), Network Functions Virtualization (NFV) and virtualized networks; with respect to our share repurchase program, any decision to delay, suspend, or discontinue the program, the market price of our common stock prevailing from time to time, the availability of funding for share repurchases, and the availability and nature of alternative investment opportunities presented to us; changes in general business and market conditions; a material weakness in our internal controls; and war, terrorism, political unrest, natural disasters, cybersecurity attacks, and other circumstances that could, among other consequences, reduce the demand for our products, disrupt our supply chain, and/or impact the delivery of our products. The factors that may cause future results to differ materially from our current expectations also include, without limitation, the risks identified in our 2015 Form 10-K, in Part I, Item 1A, “Risk Factors,” and in our other filings with the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our 2015 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2015.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), of the effectiveness, as of the end of the period covered by this report (i.e., as of September 30, 2016), of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated by the SEC under the Exchange Act. Based upon that evaluation, our CEO and our CFO concluded that due to a material weakness in our internal control over financial reporting, our disclosure controls and procedures, as of September 30, 2016, were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.

Notwithstanding the ineffectiveness of our disclosure controls and procedures as of September 30, 2016 due to the material weakness in our internal control over financial reporting that is discussed below, management believes that (i) this Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this Form 10-Q, and (ii) the condensed consolidated financial statements, and other financial information, included in this Form 10-Q fairly present in all material respects in accordance with GAAP our financial condition, results of operations, and cash flows as of, and for, the dates and periods presented.

Material Weakness

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Our management has concluded that we do not maintain effective internal control over financial reporting because of deficiencies that constitute a material weakness in our internal control over financial reporting related to revenue recognition. Specifically, our internal controls are not designed to appropriately identify each deliverable, including those deliverables within related orders, to allocate the arrangement consideration and assess the accounting impact of certain multiple-element sales arrangements. In addition, our controls over the completeness and accuracy of information used in the execution of internal controls within the revenue recognition process are not properly designed. As a result of these design deficiencies, our policies and controls related to our revenue recognition practices are not effective in ensuring that revenue is properly accounted for.

The control deficiencies described above could result in a material misstatement of our annual and interim consolidated financial statements that would not be prevented or detected. Accordingly, we have determined that these control deficiencies constitute a material weakness.

Remediation Efforts to Address Material Weakness

Our management has worked, and continues to work, to strengthen our internal control over financial reporting. We are committed to ensuring that such controls are designed and operating effectively. Our Board of Directors and management take internal controls over, and the integrity of, our financial statements seriously and believe that the remediation steps described below are essential to maintaining strong and effective internal controls over financial reporting and a strong internal control environment. The following steps are being taken to address our material weakness:


•	We are in the process of designing and implementing controls related to identification of deliverables and allocation of consideration in arrangements.


•	We are in the process of designing and implementing controls over the completeness and accuracy of information used in the execution of internal controls within the revenue recognition process.

The Audit Committee continues to monitor the implementation of our remediation efforts set forth above. We are committed to maintaining a strong internal control environment, and believe that our remediation actions will result in significant improvements in our controls. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2016, we made the following changes in our internal control over financial reporting, all of which related to revenue recognition, that materially affected or are reasonably likely to materially affect our internal control over financial reporting:


•	We have designed and implemented appropriate controls to identify and account for modifications to approved sales orders.


•	We have designed and implemented appropriate general information technology controls around certain licensing systems as well as improved the design of certain manual controls associated with licensing revenue.

Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting are, or will be capable of, preventing or detecting all errors and all fraud. Any control, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control will be met. The design of controls must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all controls, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Discussion of legal matters is incorporated by reference from Part I, Item 1, Note 10, “Commitments and Contingencies,” included in this Form 10-Q, and should be considered an integral part of this Part II, Item 1, “Legal Proceedings.”

Item 1A. Risk Factors

In addition to the information provided in this Form 10-Q, information regarding risk factors appears in Part I, “Item 1A. Risk Factors,” in our 2015 Form 10-K. There have been no material changes to our risk factors previously disclosed in the 2015 Form 10-K.

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

On February 23, 2016, we announced a share repurchase program authorizing the repurchase of up to $25 million of our common stock.

For the three months ended September 30, 2016, we did not repurchase any shares of our common stock pursuant to the program. As of September 30, 2016, a total of approximately $18.2 million (exclusive of brokers' commissions) remained available for future repurchases under the program.

Under the program, we may, from time to time and subject to general business and market conditions, alternative investment opportunities, and other factors, repurchase our shares in open market purchases, in privately negotiated transactions, and/or through other means, including pursuant to trading plans intended to comply with Rule 10b5-1 under the Exchange Act. The program expires on February 22, 2017, but may be earlier suspended or discontinued at any time in our discretion.

The following table summarizes our stock repurchase activity for the three months ended September 30, 2016:



Period	Total Number of Shares Purchased	Average Price Paid Per Share ⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Program	Approximate Dollar Value of Shares that may yet be Purchased under the Program
July 1, 2016 - July 31, 2016	—	$	—	—	$	18,161,932
August 1, 2016 - August 31, 2016	—	—		—	18,161,932
September 1, 2016 - September 30, 2016	—	—		—	18,161,932
	—			—

Item 5. Other Information

Our policy governing transactions in our securities by our directors, officers and employees permits such persons to adopt stock trading plans pursuant to Rule 10b5-1 promulgated by the SEC under the Exchange Act. Our directors, officers and employees may from time to time establish such stock trading plans. We do not undertake any obligation to disclose, or to update or revise any disclosure regarding any such plans and specifically do not undertake to disclose the adoption, amendment, termination, or expiration of any such plans.

Item 6. Exhibits

See the Exhibit Index following the signature page to this Form 10-Q for a list of exhibits filed or furnished with or incorporated by reference as part of this report, which Exhibit Index is incorporated herein by reference.

SIGNATURES

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



			IXIA

Date:	November 7, 2016	By:	/s/ Bethany Mayer
			Bethany Mayer President and Chief Executive Officer



Date:	November 7, 2016	By:	/s/ Brent Novak
			Brent Novak Chief Financial Officer

EXHIBIT INDEX



Exhibit No.	Description	Incorporated by reference from a previous filing, or filed or furnished herewith, as indicated below

10.1	Employment Separation Agreement dated as of September 9, 2016 between Ixia and Hans-Peter Klaey	Filed herewith

31.1	Certification of Chief Executive Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification of Chief Financial Officer of Ixia pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.1	Certifications of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith

101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Document
101.LAB*	XBRL Taxonomy Label Linkbase Document
101.PRE*	XBRL Taxonomy Presentation Linkbase Document

The following financial information in the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, is formatted in Extensible Business Reporting Language (XBRL) and electronically submitted herewith: (i) unaudited condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015, (ii) unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, (iii) unaudited condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015, (iv) unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015, and (v) notes to unaudited condensed consolidated financial statements.

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