Attached files
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 2, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-26634
LeCROY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE | 13-2507777 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
700 CHESTNUT RIDGE ROAD CHESTNUT RIDGE, NEW YORK |
10977 | |
(Address of Principal Executive Office) | (Zip Code) |
(845) 425-2000
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark (X) whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨
Indicate by check mark (X) whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-Accelerated filer | x | Smaller Reporting Company | ¨ |
Indicate by check mark (X) whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of shares of common stock outstanding as of February 8, 2010 was 12,641,315.
Table of Contents
LeCROY CORPORATION
FORM 10-Q
Page No. | ||||
PART I |
1 | |||
Item 1. |
1 | |||
Consolidated Balance Sheets (Unaudited) as of January 2, 2010 and June 27, 2009 |
1 | |||
2 | ||||
3 | ||||
4 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||
Item 3. |
28 | |||
Item 4. |
29 | |||
PART II |
30 | |||
Item 1. |
30 | |||
Item 1A. |
30 | |||
Item 4. |
30 | |||
Item 6. |
31 | |||
32 |
LeCroy®, Wavelink, WaveMaster®, WavePro®, WaveJet®, WaveRunner®, WaveScan , WaveSurfer, WaveExpert, MAUI, CATC, WaveAce® and QualiPHY® are our trademarks, among others not referenced in this document. All other trademarks or servicemarks referred to in this Form 10-Q are the property of their respective owners.
Table of Contents
ITEM 1. | FINANCIAL STATEMENTS |
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except par value and share data |
January 2, 2010 |
June 27, 2009 As Adjusted (Note 12) |
||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 9,293 | $ | 6,413 | ||||
Accounts receivable, net of reserves of $657 and $692 at January 2, 2010 and June 27, 2009, respectively |
24,181 | 25,209 | ||||||
Inventories, net |
29,671 | 34,987 | ||||||
Other current assets |
12,144 | 11,564 | ||||||
Total current assets |
75,289 | 78,173 | ||||||
Property, plant and equipment, net |
20,739 | 21,817 | ||||||
Intangible assets, net |
455 | 502 | ||||||
Other non-current assets |
7,989 | 7,186 | ||||||
Total assets |
$ | 104,472 | $ | 107,678 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 9,612 | $ | 14,169 | ||||
Accrued expenses and other current liabilities |
11,536 | 12,983 | ||||||
Total current liabilities |
21,148 | 27,152 | ||||||
Long-term bank debt |
20,000 | 17,500 | ||||||
Convertible notes, net of unamortized discount of $4,654 and $6,277, respectively |
40,296 | 42,073 | ||||||
Deferred revenue and other non-current liabilities |
4,045 | 3,635 | ||||||
Total liabilities |
85,489 | 90,360 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $.01 par value (authorized 5,000,000 shares; none issued and outstanding as of January 2, 2010 and June 27, 2009) |
| | ||||||
Common stock, $.01 par value (authorized 45,000,000 shares; 13,043,214 shares issued at January 2, 2010 and 12,900,551 shares issued at June 27, 2009) |
130 | 129 | ||||||
Additional paid-in capital |
127,422 | 125,904 | ||||||
Accumulated other comprehensive income |
2,771 | 1,862 | ||||||
Accumulated deficit |
(108,242 | ) | (107,479 | ) | ||||
Treasury stock, at cost (403,215 shares at January 2, 2010 and June 27, 2009, respectively) |
(3,098 | ) | (3,098 | ) | ||||
Total stockholders equity |
18,983 | 17,318 | ||||||
Total liabilities and stockholders equity |
$ | 104,472 | $ | 107,678 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
In thousands, except per share data |
Quarter Ended (13 weeks) | Two Quarters Ended | ||||||||||||||
January 2, 2010 |
December 27, 2008 As Adjusted (Note 12) |
January 2, 2010 (27 weeks) |
December 27, 2008 As Adjusted (Note 12) (26 weeks) |
|||||||||||||
Revenues: |
||||||||||||||||
Test and measurement products |
$ | 28,384 | $ | 36,948 | $ | 54,191 | $ | 75,378 | ||||||||
Service and other |
2,614 | 2,159 | 4,808 | 4,453 | ||||||||||||
Total revenues |
30,998 | 39,107 | 58,999 | 79,831 | ||||||||||||
Cost of revenues |
12,820 | 18,838 | 25,154 | 36,528 | ||||||||||||
Gross profit |
18,178 | 20,269 | 33,845 | 43,303 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
10,167 | 12,839 | 19,070 | 25,422 | ||||||||||||
Research and development |
6,839 | 8,809 | 12,958 | 16,612 | ||||||||||||
Impairment of goodwill |
| 105,771 | | 105,771 | ||||||||||||
Total operating expenses |
17,006 | 127,419 | 32,028 | 147,805 | ||||||||||||
Operating income (loss) |
1,172 | (107,150 | ) | 1,817 | (104,502 | ) | ||||||||||
Other income (expense): |
||||||||||||||||
Gain on extinguishment of convertible debt, net of issue cost write-off |
247 | | 611 | 292 | ||||||||||||
Interest income |
18 | 26 | 29 | 61 | ||||||||||||
Interest expense |
(855 | ) | (912 | ) | (1,643 | ) | (1,766 | ) | ||||||||
Amortization of debt discount on convertible notes |
(605 | ) | (768 | ) | (1,210 | ) | (1,519 | ) | ||||||||
Other, net |
(138 | ) | 33 | (270 | ) | 289 | ||||||||||
Other expense, net |
(1,333 | ) | (1,621 | ) | (2,483 | ) | (2,643 | ) | ||||||||
Loss before income taxes |
(161 | ) | (108,771 | ) | (666 | ) | (107,145 | ) | ||||||||
Provision (benefit) for income taxes |
120 | (1,499 | ) | 97 | (968 | ) | ||||||||||
Net loss |
$ | (281 | ) | $ | (107,272 | ) | $ | (763 | ) | $ | (106,177 | ) | ||||
Net loss per common share: |
||||||||||||||||
Basic |
$ | (0.02 | ) | $ | (8.97 | ) | $ | (0.06 | ) | $ | (8.91 | ) | ||||
Diluted |
$ | (0.02 | ) | $ | (8.97 | ) | $ | (0.06 | ) | $ | (8.91 | ) | ||||
Weighted average number of common shares: |
||||||||||||||||
Basic |
12,387 | 11,962 | 12,323 | 11,922 | ||||||||||||
Diluted |
12,387 | 11,962 | 12,323 | 11,922 |
The accompanying notes are an integral part of these consolidated financial statements.
2
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
In thousands |
Two Quarters ended | |||||||
January 2, 2010 (27 weeks) |
December 27, 2008 As Adjusted (Note 12) (26 weeks) |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (763 | ) | $ | (106,177 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Impairment of goodwill |
| 105,771 | ||||||
Depreciation and amortization |
2,682 | 3,215 | ||||||
Share-based compensation |
1,976 | 1,032 | ||||||
Amortization of debt issuance costs |
239 | 269 | ||||||
Amortization of debt discount on convertible notes |
1,210 | 1,519 | ||||||
Deferred income taxes |
(123 | ) | (1,828 | ) | ||||
Gain on extinguishment of convertible debt, net of issue cost write-off |
(611 | ) | (292 | ) | ||||
Loss on disposal of property, plant and equipment |
5 | | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
1,837 | 444 | ||||||
Inventories |
5,044 | (2,634 | ) | |||||
Other current and non-current assets |
(1,379 | ) | (1,166 | ) | ||||
Accounts payable, accrued expenses and other liabilities |
(5,038 | ) | (1,400 | ) | ||||
Net cash provided by (used in) operating activities |
5,079 | (1,247 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property, plant and equipment |
(1,167 | ) | (2,067 | ) | ||||
Net cash used in investing activities |
(1,167 | ) | (2,067 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Borrowings under credit line |
2,500 | 7,500 | ||||||
Repurchase of convertible notes |
(3,775 | ) | (2,774 | ) | ||||
Payments made on capital leases |
(124 | ) | (115 | ) | ||||
Repayment of borrowings under credit line |
| (1,500 | ) | |||||
Proceeds from employee stock purchase and option plans |
262 | 397 | ||||||
Purchase of treasury shares |
| (677 | ) | |||||
Net cash (used in) provided by financing activities |
(1,137 | ) | 2,831 | |||||
Effect of exchange rate changes on cash and cash equivalents |
105 | (551 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
2,880 | (1,034 | ) | |||||
Cash and cash equivalents at beginning of the period |
6,413 | 10,224 | ||||||
Cash and cash equivalents at end of the period |
$ | 9,293 | $ | 9,190 | ||||
Supplemental Cash Flow Disclosure |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 1,287 | $ | 1,426 | ||||
Income taxes, net of refunds |
252 | 361 | ||||||
Non-cash transactions: |
||||||||
Transfer of inventory into property, plant and equipment |
331 | 458 |
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying interim Consolidated Financial Statements include all the accounts of LeCroy Corporation (the Company or LeCroy) and its wholly-owned subsidiaries. These Consolidated Financial Statements are unaudited and should be read in conjunction with the audited Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the fiscal year ended June 27, 2009. The accompanying Consolidated Balance Sheet as of June 27, 2009 has been derived from those audited Consolidated Financial Statements, as adjusted for the retrospective adoption of the Financial Accounting Standards Board (FASB) staff position related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), which was adopted by the Company on June 28, 2009. See Note 12 Debt and Capital Leases for further details regarding the adoption.
The Companys Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (US GAAP), which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements as well as the revenues and expenses reported during the period. The most significant of these estimates and assumptions relate to revenue recognition, reserves for accounts receivable, allowance for excess and obsolete inventory, uncertain tax positions, valuation of deferred tax assets, valuation of long-lived assets, share-based compensation expense, estimation of warranty liabilities and the separation of the convertible notes between debt and equity. These estimates and assumptions are based on managements judgment and available information and, consequently, actual results could differ from these estimates.
These unaudited Consolidated Financial Statements reflect all adjustments of a normal recurring nature, that are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. Interim period operating results may not be indicative of the operating results for a full year. Inter-company transactions and balances have been eliminated in consolidation.
The Companys fiscal years end on the Saturday closest to June 30, resulting in an extra week of results every five or six years. Fiscal 2010 is a fifty-three week year and, as a result, the two quarters ended January 2, 2010 represent a 27-week period compared to a 26-week period for the two quarters ended December 27, 2008.
2. Share-Based Compensation
Total share-based compensation expense recorded in the Consolidated Statement of Operations for the quarter ended January 2, 2010 and December 27, 2008 is approximately $1.1 million and $0.2 million, respectively. For the two quarters ended January 2, 2010 and December 27, 2008, total share-based compensation is approximately $2.0 million and $1.0 million, respectively.
Stock Options
The table below presents the assumptions used to calculate the fair value of options granted during the quarter and two quarters ended January 2, 2010 and December 27, 2008:
Quarter Ended January 2, 2010 |
Two Quarters Ended January 2, 2010 |
Quarter Ended December 27, 2008 |
Two Quarters Ended December 27, 2008 | |||||
Expected holding period (years) |
5.0 | 5.0 | 5.0 | 5.0 | ||||
Risk-free interest rate |
2.19%-2.30% | 2.19%-2.57% | 2.33%-2.71% | 2.33%-3.23% | ||||
Dividend yield |
0.0% | 0.0% | 0.0% | 0.0% | ||||
Expected volatility |
56.36%-56.51%% | 56.36%-59.01% | 42.13%-43.03% | 41.12%-43.03% | ||||
Weighted average fair value of options granted |
$1.96 | $1.97 | $1.61 | $1.63 |
4
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Changes in the Companys stock options for the quarter and two quarters ended January 2, 2010:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Terms (Years) |
Aggregate Intrinsic Value ($000) | ||||||||
Outstanding at June 27, 2009 |
2,426,394 | $ | 7.45 | ||||||||
Granted |
4,000 | $ | 3.89 | ||||||||
Exercised |
(3,351 | ) | $ | 0.45 | |||||||
Expired |
(44,829 | ) | $ | 17.00 | |||||||
Forfeited |
(11,535 | ) | $ | 2.49 | |||||||
Outstanding at October 3, 2009 |
2,370,679 | $ | 7.30 | 5.14 | $ | 1,154 | |||||
Granted |
126,429 | $ | 3.93 | ||||||||
Exercised |
(1,675 | ) | $ | 0.45 | |||||||
Expired |
(31,568 | ) | $ | 9.36 | |||||||
Forfeited |
(3,240 | ) | $ | 2.33 | |||||||
Outstanding at January 2, 2010 |
2,460,625 | $ | 7.11 | 5.09 | $ | 1,011 | |||||
Vested and expected to vest at January 2, 2010 |
2,359,071 | $ | 7.87 | 4.81 | $ | 987 | |||||
Exercisable at January 2, 2010 |
1,039,783 | $ | 12.14 | 3.62 | $ | 71 | |||||
Approximately 121,000 immediately vested options were granted during the current quarter, representing an annual grant to the board of directors.
As of January 2, 2010, there was approximately $1.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under the plans. That cost is expected to be recognized over a remaining weighted-average period of approximately 2.9 years. Less than $0.1 million of compensation cost was capitalized in inventory or any other assets for the quarter and two quarters ended January 2, 2010 and for the quarter and two quarters ended December 27, 2008.
Non-Vested Stock
The following table summarizes transactions related to non-vested stock for the quarter and two quarters ended January 2, 2010:
Number of Shares |
Weighted Average Grant Date Fair Value | |||||
Non-vested stock at June 27, 2009 |
251,784 | $ | 10.47 | |||
Granted |
| $ | | |||
Vested |
(35,816 | ) | $ | 12.32 | ||
Forfeited |
(2,608 | ) | $ | 11.53 | ||
Non-vested stock at October 3, 2009 |
213,360 | $ | 10.14 | |||
Granted |
47,702 | $ | 3.92 | |||
Vested |
(81,451 | ) | $ | 8.08 | ||
Forfeited |
(642 | ) | $ | 8.46 | ||
Non-vested stock at January 2, 2010 |
178,969 | $ | 9.43 | |||
Non-vested stock is included in the issued number of shares presented on the Consolidated Balance Sheets. Non-vested stock is not included in the weighted average share calculation for basic earnings per share. However, the dilutive effect of
5
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
the non-vested stock is included in the weighted average share calculation for diluted earnings per share. Non-vested stock granted in the current quarter ended January 2, 2010 represents the annual grant of immediately vested awards for the board of directors.
As of January 2, 2010, there was approximately $1.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock granted under the plans. That cost is expected to be recognized over a remaining weighted-average period of approximately 1.5 years.
Employee Stock Purchase Plan (ESPP)
As of January 2, 2010 and June 27, 2009, there was less than $0.1 million of liability classified share-based compensation expense for the ESPP included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.
Cash Settled Stock Appreciation Rights (SARs)
The Company records compensation expense ratably over the service period and adjusts for changes in the fair value of SARs at each reporting period. At January 2, 2010, there was approximately $2.5 million of unrecognized compensation cost, net of estimated forfeitures related to the SARs. That cost is expected to be recognized over a weighted average period of approximately 2.9 years.
The table below presents the assumptions used to remeasure the value of the SARs at each reporting period:
Quarter Ended January 2, 2010 |
Quarter Ended June 27, 2009 | |||
Expected holding period (years) |
4.2 | 4.4 | ||
Risk-free interest rate |
1.89% - 2.61% | 1.40% - 2.53% | ||
Dividend yield |
0.0% | 0.0% | ||
Expected volatility |
56.52% - 62.40% | 56.91% - 61.53% | ||
Weighted average fair value of SARs granted and outstanding |
$1.19 | $1.12 |
The fair value of the SARs is liability classified because the awards are payable in cash. As of January 2, 2010 and June 27, 2009, there was approximately $1.2 million and $0.7 million, respectively, of liability classified share-based compensation expense for the SARs included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets.
6
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Changes in the Companys SARs for the quarter and two quarters ended January 2, 2010 are as follows:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Terms (Years) |
Aggregate Intrinsic Value ($000) | |||||||
Outstanding at June 27, 2009 |
3,329,000 | $ | 6.81 | |||||||
Outstanding at October 3, 2009 |
3,329,000 | $ | 6.81 | 5.41 | $ | | ||||
Outstanding at January 2, 2010 |
3,329,000 | $ | 6.81 | 5.16 | $ | | ||||
Vested and expected to vest at January 2, 2010 |
3,181,984 | $ | 6.83 | 5.11 | $ | | ||||
Exercisable at January 2, 2010 |
742,000 | $ | 7.87 | 3.41 | $ | | ||||
3. Revenue Recognition
LeCroy recognizes product and service revenue, net of allowances for anticipated returns, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, or when services have been provided. The price is considered fixed or determinable when it is not subject to refund or adjustments.
Test and measurement products revenue
The Company generates Test and measurement product revenue from the sales of oscilloscopes and application solutions, protocol analyzers, probes and accessories.
Application solutions, which provide oscilloscopes with additional analysis capabilities, are either delivered via compact disc or are already loaded in the oscilloscopes and activated via a key code after the sale is made to the customer. No post-contract support is provided on the application solutions. Revenues from oscilloscope products are included in Test and measurement products in the Consolidated Statements of Operations, net of any applicable sales or value added taxes. Certain software is embedded in the Companys oscilloscopes, but the embedded software component is considered incidental.
Software maintenance support revenue on protocol analyzer products is deferred based on its vendor specific objective evidence of fair value (VSOE) and recognized ratably over the maintenance support periods. In limited circumstances where VSOE does not exist for software maintenance support, the Company recognizes revenues and accrues costs, if applicable, by the facts and circumstances of each transaction. Revenues from protocol analyzer products are included in Test and measurement products in the Consolidated Statements of Operations, net of any applicable sales or value added taxes.
In an effort to provide end-user customers an alternative to purchasing the Companys higher end products under its standard terms and conditions, the Company offers customers an opportunity to enter into sales-type or direct financing leases for these products. Lease and rental revenues are reported within Test and measurement product revenue and were approximately $0.1 million and $0.3 million for the quarter and two quarters ended January 2, 2010, respectively as compared to approximately $0.1 million and $0.2 million for the quarter and two quarters ended December 27, 2008, respectively.
Service and other revenue
Service and other revenue includes extended warranty contracts, software maintenance agreements, repairs and calibrations performed on instruments after the expiration of their normal warranty period, direct service accessories and packages and payments for research and development activities, in accordance with a third party agreement. The Company records deferred revenue for extended warranty contracts, software maintenance agreements and calibration services and recognizes such revenue on a straight-line basis over the related service period. When arrangements include multiple elements, the Company uses relative fair values to allocate revenue to the elements and recognizes revenue when the criteria for revenue recognition have been met for each element.
Effective in the first quarter of fiscal 2010, the Company entered into a research and development and distribution agreement with a third party. Both the Company and the third party are active participants in the development efforts and are exposed to risks and rewards dependent on the commercial success of the product development. LeCroy is solely responsible for providing the development efforts contemplated under the agreement and will retain all title and intellectual property rights for any product
7
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
developed under the agreement. The Company will utilize its own personnel, facilities, equipment, computer software and information in order to meet the obligations under the agreement. The payments owed by the third party are nonrefundable and are not based on milestone deliverables and are not tied directly to any development spending made by the Company. The Company recognized approximately $0.3 million and $0.5 million in other revenue related to this agreement in the quarter and two quarters ended January 2, 2010, respectively. Revenue is being recognized ratably over the three year term of the agreement. Any research and development costs incurred in conjunction with this arrangement are recognized as incurred.
Deferred license revenue
Revenue from license fees under agreements that have exclusivity clauses and, from the licensees perspective, have ongoing requirements or expectations that are more than perfunctory, are recognized on a straight-line basis over the terms of the related agreements. An ongoing requirement or expectation would be considered more than perfunctory if any party to the contract considers it to be essential to the functionality of the delivered product or service or failure to complete the activities would result in the customer receiving a full or partial refund or rejecting the products delivered or services performed to date.
4. Business Realignment and Restructuring Initiatives
Fiscal 2010 Business Realignment
In the second quarter of fiscal 2010, as a result of continued efforts to streamline expenses internationally, the Company recorded severance of approximately $0.1 million, which was expensed to Selling, general and administrative (SG&A). This resulted from headcount reduction of three employees or approximately 0.8% of the workforce as compared to June 27, 2009. As of January 2, 2010, approximately $0.1 million has been paid in cash and nearly zero liability remains.
In the first quarter of fiscal 2010, as a result of a further effort to streamline expenses internationally, the Company recorded severance of approximately $0.1 million, which was expensed to SG&A. This resulted from headcount reductions of four employees or approximately 1.0% of the workforce as compared to June 27, 2009. As of January 2, 2010, approximately $0.1 million has been paid in cash and no liability remains.
Fiscal 2009 Restructuring Initiatives
In the fourth quarter of fiscal 2009, as a result of the current economic downturn and resulting business realignment decisions affecting personnel in Europe, the Company vacated certain space at its Swiss facility. This resulted in a restructuring charge to SG&A expense of approximately $0.7 million, which represented the present value of the estimated future cash payments, net of estimated subrental income and expense, through the remainder of the lease term which will expire in the first quarter of fiscal 2014. As of January 2, 2010, approximately $0.2 million remains in Accrued expenses and other current liabilities and approximately $0.5 million remains in Deferred revenue and other non-current liabilities on the Consolidated Balance Sheet.
Fiscal 2009 Business Realignment
In the fourth quarter of fiscal 2009, in an effort to further streamline expenses in response to the current economic environment, the Company recorded severance of approximately $0.2 million, of which less than $0.1 million was expensed to Cost of revenues, approximately $0.1 million was expensed to SG&A and less than $0.1 million was expensed to Research and development. This resulted from headcount reductions of twelve employees or approximately 2.6% of the workforce as compared to June 28, 2008. As of January 2, 2010, approximately $0.2 million has been paid in cash and no liability remains.
In the third quarter of fiscal 2009, in an effort to further streamline expenses in response to the dramatic deterioration in economic and market conditions, the Company recorded severance of approximately $2.6 million, of which approximately $0.6 million was expensed to Cost of revenues, approximately $1.1 million was expensed to SG&A and approximately $0.9 million was expensed to Research and development. This resulted from headcount reductions of sixty-two employees or approximately 13.6% of the workforce as compared to June 28, 2008. As of January 2, 2010, approximately $2.1 million has been paid in cash, and approximately $0.4 million remains in Accrued expenses and other current liabilities and approximately $0.1 million remains in Deferred revenue and other non-current liabilities on the Consolidated Balance Sheet. Severance is estimated to be paid by the end of the third quarter of fiscal 2012.
In the second quarter of fiscal 2009, in an effort to streamline expenses in anticipation of further deterioration in the economic environment, the Company recorded severance of approximately $1.5 million, of which approximately $0.1 million was expensed to Cost of revenues, approximately $0.8 million was expensed to SG&A and approximately $0.6 million was expensed to Research and development. This resulted from headcount reductions of ten employees or 2.2% of
8
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
the workforce as compared to June 28, 2008. As of January 2, 2010, approximately $1.5 million has been paid in cash and nearly zero liability remains.
5. Derivative Instruments and Fair Value
The Company is exposed to global market exchange rate risks and, as a result, enters into forward foreign exchange contracts to manage financial exposures resulting from changes in foreign currency rates. These forward exchange agreements are generally 30-day forward contracts, which are monitored and updated on a monthly basis, and used to reduce exposure to fluctuation on foreign currency exchange rates on assets and liabilities denominated in currencies other than the Companys functional currency. The Company does not use derivative financial instruments for trading or other speculative purposes.
The Companys forward contracts are not accounted for as hedges. The Company records these short-term forward exchange agreements on the balance sheet at fair value in Other current assets and Accrued expenses and other current liabilities. The changes in the fair value are recognized in Other, net in the Consolidated Statement of Operations. The net gains or losses resulting from changes in the fair value of these derivatives and on transactions denominated in other than their functional currencies were net losses of approximately $0.1 million and $0.3 million for the quarter and two quarters ended January 2, 2010, respectively, as compared to net gains of approximately zero and $0.3 million for the quarter and two quarters ended December 27, 2008, respectively.
The effect of derivative instruments on the Consolidated Statement of Operations for the quarter and two quarters ended January 2, 2010 is as follows (in thousands):
Derivatives |
Location of Gain/(Loss) Recognized in Income on Derivatives |
Quarter ended January 2, 2010 Amount of Gain/(Loss) Recognized in Income on Derivatives |
Two Quarters ended January 2, 2010 Amount of Gain/(Loss) Recognized in Income on Derivatives | |||||
Foreign exchange forward contracts |
Other, net | $ | 154 | $ | 441 |
The U.S. dollar equivalent of outstanding forward foreign exchange contracts, all with maturities of less than six months, is summarized below:
Contracts |
Notional Amount at January 2, 2010 |
Notional Amount at June 27, 2009 | ||||
Buy Swiss Francs for US Dollars |
$ | 9.1 | $ | 9.4 | ||
Sell Euros for US Dollars |
6.0 | 3.1 | ||||
Sell Euros for Swiss francs |
2.6 | 3.2 | ||||
Other foreign currency forwards |
2.2 | 1.8 | ||||
Total |
$ | 19.9 | $ | 17.5 | ||
The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
| Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. |
| Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. |
| Level 3: Unobservable inputs reflecting managements own assumptions about the inputs used in pricing the asset or liability. |
As of January 2, 2010, the fair values of the Companys financial assets and liabilities are categorized as follows (in thousands):
9
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Total | Level 1 | Level 2 | Level 3 | |||||||
Other current assets: |
||||||||||
Foreign exchange forward contracts |
$ | 25 | | $ | 25 | | ||||
Accrued expenses and other current liabilities: |
||||||||||
Foreign exchange forward contracts |
$ | 26 | | $ | 26 | |
The fair values above were based on observable market transactions of spot currency rates and forward currency prices. The net fair value of the open foreign exchange forward contracts is a net asset of almost zero at January 2, 2010 as compared to a net asset of approximately $0.1 million at June 27, 2009.
6. Comprehensive (Loss) Income
Quarter ended | Two Quarters ended | |||||||||||||||
January 2, 2010 |
December 27, 2008 |
January 2, 2010 |
December 27, 2008 |
|||||||||||||
Net loss, as adjusted (Note 12) |
$ | (281 | ) | $ | (107,272 | ) | $ | (763 | ) | $ | (106,177 | ) | ||||
Foreign currency translation (loss) gain |
(2 | ) | (68 | ) | 909 | (1,417 | ) | |||||||||
Comprehensive (loss) income |
$ | (283 | ) | $ | (107,340 | ) | $ | 146 | $ | (107,594 | ) | |||||
7. Inventories, net
Inventories consist of the following (in thousands):
January 2, 2010 |
June 27, 2009 | |||||
Raw materials |
$ | 7,460 | $ | 8,351 | ||
Work in process |
6,296 | 6,590 | ||||
Finished goods |
15,915 | 20,046 | ||||
$ | 29,671 | $ | 34,987 | |||
The value of demonstration units included in finished goods was approximately $10.9 million and $11.3 million at January 2, 2010 and June 27, 2009, respectively. The Companys demonstration units are held for sale and are sold regularly in the ordinary course of business through its normal sales distribution channels and to its existing customer base. The allowance for excess and obsolete inventory included above, amounted to approximately $5.0 million and $5.8 million at January 2, 2010 and June 27, 2009, respectively.
8. Other Current Assets
Other current assets consist of the following (in thousands):
January 2, 2010 |
June 27, 2009 | |||||
Deferred tax assets, net |
$ | 5,739 | $ | 6,399 | ||
Prepaid taxes |
582 | 619 | ||||
Prepaid deposits |
879 | 729 | ||||
Other receivables |
1,241 | 776 | ||||
Value-added tax receivable |
517 | 820 | ||||
Other |
3,186 | 2,221 | ||||
$ | 12,144 | $ | 11,564 | |||
10
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
9. Intangible Assets and Other Non-current Assets
Intangible Assets
The following table reflects the gross carrying amount and accumulated amortization of the Companys amortizable intangible assets (in thousands):
Original Weighted Average Lives |
January 2, 2010 |
June 27, 2009 |
||||||||
Amortizable intangible assets: |
||||||||||
Technology, manufacturing and distribution rights |
2.9 years | $ | 8,296 | $ | 8,296 | |||||
Accumulated amortization |
(8,168 | ) | (8,147 | ) | ||||||
Net carrying amount |
$ | 128 | $ | 149 | ||||||
Patents and other intangible assets |
5.9 years | 1,592 | 1,592 | |||||||
Accumulated amortization |
(1,265 | ) | (1,239 | ) | ||||||
Net carrying amount |
$ | 327 | $ | 353 | ||||||
Total Net carrying amount |
3.4 years | 455 | 502 | |||||||
Amortization expense for intangible assets, all with finite lives, was almost zero for the quarter and two quarters ended January 2, 2010, as compared to approximately $0.1 million and $0.3 million for the quarter and two quarters ended December 27, 2008, respectively. The cost of an amortizable intangible asset is expensed on a straight-line basis over the estimated economic life of the asset.
Other Non-Current Assets
Other non-current assets consist of the following (in thousands):
January 2, 2010 |
June 27, 2009 | |||||
Deferred tax assets, net, as adjusted (Note 12) |
$ | 6,583 | $ | 5,646 | ||
Deferred financing costs on convertible notes, as adjusted (Note 12) |
606 | 784 | ||||
Other |
800 | 756 | ||||
$ | 7,989 | $ | 7,186 | |||
The Company recorded a goodwill impairment charge of approximately $105.8 million in the quarter ended December 27, 2008.
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
January 2, 2010 |
June 27, 2009 | |||||
Compensation and benefits, including severance |
$ | 5,947 | $ | 6,479 | ||
Income taxes |
| 135 | ||||
Warranty |
846 | 905 | ||||
Deferred revenue, current portion (a) |
1,339 | 1,366 | ||||
Accrued interest on debt |
522 | 447 | ||||
Retained liabilities from discontinued operations |
160 | 160 | ||||
Capital leases |
195 | 253 | ||||
Professional fees |
331 | 896 | ||||
Other current liabilities |
2,196 | 2,342 | ||||
$ | 11,536 | $ | 12,983 | |||
11
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(a) | The long term portion of Deferred revenue is approximately $0.8 million and $0.9 million for the period ended January 2, 2010 and June 27, 2009, respectively, and is classified within Deferred revenues and other non-current liabilities on the Consolidated Balance Sheet. |
11. Warranties
The following table is a reconciliation of the changes in the Companys aggregate product warranty liability (in thousands):
January 2, 2010 |
June 27, 2009 |
|||||||
Balance at beginning of period |
$ | 905 | $ | 1,313 | ||||
Accruals for warranties issued during the period |
283 | 538 | ||||||
Warranty costs incurred during the period |
(342 | ) | (754 | ) | ||||
Change in accrual estimate |
| (192 | ) | |||||
Balance at end of period |
$ | 846 | $ | 905 | ||||
12. Debt and Capital Leases
Credit Agreement
The Company has a $50.0 million senior, secured, four-year credit agreement which includes a $5.0 million swingline loan subfacility and a $5.0 million letter of credit subfacility. The Credit Agreement will expire on July 15, 2011, unless, in the absence of any default it is extended by LeCroy to April 1, 2012, contingent on the waiver or extension of the first redemption date of the Companys convertible notes. As of January 2, 2010, the Company had $20.0 million outstanding against the credit facility and zero outstanding against the letter of credit subfacility and the swingline loan subfacility.
Borrowings under the credit facility bear interest at variable rates equal to, at LeCroys election, (1) the higher of (a) the prime rate or (b) the federal funds rate plus 0.5% plus an applicable margin based on LeCroys leverage ratio or (2) LIBOR plus an applicable margin based on LeCroys leverage ratio. In addition, LeCroy must pay commitment fees during the term of the Credit Agreement at rates dependent on LeCroys leverage ratio.
The Company is required to comply with certain financial covenants, measured quarterly, including a minimum interest coverage ratio, minimum total net worth, maximum leverage ratio, minimum fixed charge coverage ratio and limitations on capital expenditures. As of January 2, 2010, the Company was in compliance with its financial covenants.
Convertible Debt
On October 12, 2006, the Company sold and issued $72.0 million in convertible senior subordinated notes to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the Notes). The Notes bear interest at a rate of 4.00% per annum, payable in cash semi-annually in arrears on each April 15 and October 15. The Notes are direct, unsecured, senior subordinated obligations of the Company and rank: (i) subordinate in right of payment to all of the Companys existing and future secured indebtedness; (ii) equal in right of payment with all of the Companys existing and future senior unsecured indebtedness, and (iii) senior in right of payment to all of the Companys existing and future subordinated indebtedness. In connection with the issuance and sale of the Notes, the Company entered into an indenture dated as of October 12, 2006, with U.S. Bank National Association as trustee. The terms of the Notes are governed by the indenture.
The Notes mature on October 15, 2026 unless earlier redeemed, repurchased or converted. Holders of the Notes will have the right to require the Company to repurchase for cash, all or a portion of their Notes on each of October 15, 2011, October 15, 2016 and October 15, 2021, at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, up to but not including, the repurchase date. The Company may, from time to time, at its option repurchase the Notes in the open market. In addition, the Company may redeem the Notes for cash, either in whole or in part, anytime after October 20, 2011 at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest, if any, up to but not including the redemption date. The Notes are convertible into Company common stock by the holders at an initial conversion rate equal to 68.7285 shares per $1,000 principal amount of the Notes (equal to an initial conversion price of approximately $14.55 per share), subject to adjustment as described in the indenture. Upon conversion, the Company will deliver for each $1,000 principal amount of Notes, an amount consisting of cash equal to the lesser of $1,000 and the conversion value (as defined in the indenture) and, to the extent that the conversion value exceeds $1,000, at the Companys election, cash or shares of Company common stock in respect of the remainder. Prior to September 15, 2026, holders may convert their notes into cash and shares of the Companys
12
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
common stock, if any, at the applicable conversion rate, at their option, only under limited circumstances described in the indenture. On or after September 15, 2026, holders may convert their notes into cash and shares of the Companys common stock, if any, at the applicable conversion price, at the Companys option, at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion of each $1,000 principal amount of the notes, the holder will receive an amount in cash equal to the lesser of (i) $1,000 or (ii) the conversion value, as described in the indenture; if the conversion value exceeds $1,000 on the conversion date, the Company will also deliver, at the Companys election, cash or common stock or combination of each with a value equal to such excess.
Accounting for Convertible Debt Instruments
During the first fiscal quarter of 2010, ending on October 3, 2009, LeCroy was required to adopt new accounting guidance which requires issuers of certain types of convertible notes to separately account for the liability and equity components of such convertible notes in a manner that reflects the entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Prior to adoption, the liability of the convertible notes was carried at its principal value and only the contractual interest expense was recognized in LeCroys Consolidated Statements of Operations. Because the new guidance requires retrospective application, LeCroy was required to adjust all periods for which the convertible notes were outstanding prior to the date of adoption.
Upon adoption and effective as of the issuance date of the convertible notes, LeCroy recorded approximately $17.9 million of the principal amount to equity, representing a debt discount for the difference between LeCroys estimated nonconvertible debt borrowing rate of 10.5% at the time and the 4.0% coupon rate of the convertible notes. This debt discount is amortized as interest expense over the contractual term of the notes using the effective interest method. In addition, LeCroy allocated approximately $0.7 million of the issuance costs to the equity component of the convertible notes and approximately $2.3 million of the issuance costs to the debt component of the convertible notes. The issuance costs were allocated pro rata based on the initial allocation of debt and equity components. The approximate $2.3 million of debt issuance costs allocated to the debt component is amortized as interest expense over the contractual term of the convertible notes using the effective interest method, while the portion allocated to the equity component was charged to Additional paid-in capital at issuance date. The term of the convertible notes for amortization purposes is considered to be five years, as that is the first period in which the redemption feature of the notes can be executed by either the Noteholders or LeCroy and therefore is considered the mandatory redemption date. As of January 2, 2010, approximately $0.6 million of unamortized fees related to the Notes was included in Other non-current assets on the Consolidated Balance Sheet.
The Company also retroactively applied the derecognition guidance. Upon repurchase, the fair value of the liability component immediately prior to extinguishment was measured first and the difference between the fair value of the aggregate consideration paid and the fair value of the liability component was attributed to the reacquisition of the equity component. In the first quarter of fiscal 2010, the Company repurchased $1.0 million of the outstanding convertible notes for a gain of approximately $0.4 million, net of issue cost write-off. In the second quarter ended January 2, 2010, the Company repurchased $2.4 million of the outstanding convertible notes for a gain of approximately $0.2 million, net of issue cost write-off.
13
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
The carrying amount of the equity component of the convertible notes and the principal amount, unamortized discount and net carrying amount of the liability component of the convertible notes as of January 2, 2010 and June 27, 2009 were as follows (in thousands):
January 2, 2010 |
June 27, 2009 (As adjusted) |
|||||||
Equity component of convertible notes |
$ | 8,673 | $ | 8,849 | ||||
Principal amount of convertible notes |
$ | 44,950 | $ | 48,350 | ||||
Unamortized discount of convertible notes |
(4,654 | ) | (6,277 | ) | ||||
Liability component of convertible notes |
$ | 40,296 | $ | 42,073 | ||||
The effective interest rate, contractual interest expense and amortization of debt discount for the convertible notes for the quarter and two quarters ended January 2, 2010 and December 27, 2008 were as follows:
Quarter ended | Two Quarters ended | |||||||||||||||
January 2, 2010 (13 weeks) |
December 27, 2008 (As adjusted) (13 weeks) |
January 2, 2010 (27 weeks) |
December 27, 2008 (As adjusted) (26 weeks) |
|||||||||||||
Effective interest rate |
10.5 | % | 10.5 | % | 10.5 | % | 10.5 | % | ||||||||
(in thousands): |
||||||||||||||||
Interest expense - contractual |
$ | 454 | $ | 656 | $ | 970 | $ | 1,312 | ||||||||
Amortization of debt discount |
$ | 605 | $ | 768 | $ | 1,210 | $ | 1,519 |
14
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Retrospective Adoption
The retrospective adoption of the new convertible debt accounting guidance resulted in the following adjustments to the Companys Consolidated Balance Sheet as of June 27, 2009:
As of June 27, 2009 | ||||||||||||
(in thousands): |
As Previously Reported |
Adjustments | As Adjusted |
|||||||||
Current assets |
$ | 78,173 | $ | 78,173 | ||||||||
Property, plant and equipment, net |
21,817 | 21,817 | ||||||||||
Intangible assets, net |
502 | 502 | ||||||||||
Other non-current assets |
9,545 | (2,359 | )(1) | 7,186 | ||||||||
Total assets |
$ | 110,037 | $ | (2,359 | ) | $ | 107,678 | |||||
Current liabilities |
$ | 27,152 | $ | $ | 27,152 | |||||||
Long-term bank debt |
17,500 | 17,500 | ||||||||||
Convertible notes, net of unamortized discount |
48,350 | (6,277 | )(2) | 42,073 | ||||||||
Deferred revenue and other non-current liabilities |
3,635 | 3,635 | ||||||||||
Total liabilities |
96,637 | (6,277 | ) | 90,360 | ||||||||
Commitments and contingencies |
||||||||||||
Common stock |
129 | 129 | ||||||||||
Additional paid-in capital |
117,055 | 8,849 | (3) | 125,904 | ||||||||
Accumulated other comprehensive income |
1,862 | 1,862 | ||||||||||
Accumulated deficit |
(102,548 | ) | (4,931 | )(4) | (107,479 | ) | ||||||
Treasury stock, at cost |
(3,098 | ) | (3,098 | ) | ||||||||
Total stockholders equity |
13,400 | 3,918 | 17,318 | |||||||||
Total liabilities and stockholders equity |
$ | 110,037 | $ | (2,359 | ) | $ | 107,678 | |||||
The retrospective adoption of the new convertible debt accounting guidance resulted in the following adjustments to the Companys Consolidated Statements of Operations for the quarter ended December 27, 2008 (13 weeks):
Quarter ended December 27, 2008 | |||||||||||
(in thousands): |
As Previously Reported |
Adjustments | As Adjusted |
||||||||
Total revenues |
$ | 39,107 | $ | 39,107 | |||||||
Costs and expenses |
146,257 | 146,257 | |||||||||
Operating loss |
(107,150 | ) | (107,150 | ) | |||||||
Gain on the extinguishment of convertible debt, net of issue cost write-off |
| | |||||||||
Interest income |
26 | 26 | |||||||||
Interest expense |
(942 | ) | 30 | (6) | (912 | ) | |||||
Amortization of debt discount on convertible notes |
| (768 | )(7) | (768 | ) | ||||||
Other, net |
33 | 33 | |||||||||
Loss before income taxes |
(108,033 | ) | (738 | ) | (108,771 | ) | |||||
Benefit for income taxes |
(1,237 | ) | (262 | )(8) | (1,499 | ) | |||||
Net loss |
(106,796 | ) | (476 | ) | (107,272 | ) | |||||
Net loss per share - basic |
$ | (8.93 | ) | (0.04 | ) | $ | (8.97 | ) | |||
Net loss per share - diluted |
$ | (8.93 | ) | (0.04 | ) | $ | (8.97 | ) |
15
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
The retrospective adoption of the new convertible debt accounting guidance resulted in the following adjustments to the Companys Consolidated Statements of Operations for the two quarters ended December 27, 2008 (26 weeks):
Two Quarters ended December 27, 2008 | |||||||||||
(in thousands): |
As Previously Reported |
Adjustments | As Adjusted |
||||||||
Total revenues |
$ | 79,831 | $ | 79,831 | |||||||
Costs and expenses |
184,333 | 184,333 | |||||||||
Operating loss |
(104,502 | ) | (104,502 | ) | |||||||
Gain on the extinguishment of convertible debt, net of issue cost write-off |
252 | 40 | (5) | 292 | |||||||
Interest income |
61 | 61 | |||||||||
Interest expense |
(1,825 | ) | 59 | (6) | (1,766 | ) | |||||
Amortization of debt discount on convertible notes |
| (1,519 | )(7) | (1,519 | ) | ||||||
Other, net |
289 | 289 | |||||||||
Loss before income taxes |
(105,725 | ) | (1,420 | ) | (107,145 | ) | |||||
Benefit for income taxes |
(464 | ) | (504 | )(8) | (968 | ) | |||||
Net loss |
(105,261 | ) | (916 | ) | (106,177 | ) | |||||
Net loss per share - basic |
$ | (8.83 | ) | (0.08 | ) | $ | (8.91 | ) | |||
Net loss per share - diluted |
$ | (8.83 | ) | (0.08 | ) | $ | (8.91 | ) |
(1) | This amount represents the cumulative adjustments to debt issuance costs associated with the convertible notes and the cumulative impact on the net deferred tax asset related to the amortization of the debt discount. |
(2) | This amount represents the remaining unamortized debt discount on the convertible notes. |
(3) | This amount represents the equity component of the convertible notes, net of tax adjustments, due to the amortization of the debt discount. |
(4) | This amount represents the cumulative net income impact of the amortization of debt discount, the adjustment to the gain on the extinguishment of convertible debt, net of issue cost write-off (see explanation (6) below) and the associated tax adjustments since inception of the convertible notes. |
(5) | This amount represents the adjustment to the gain on the extinguishments of debt, net of issue cost write-off in accordance with the derecognition guidance. |
(6) | This amount represents a decrease in interest expense associated with the debt issuance costs, as a portion was written-off to Additional paid-in capital at issue date and a portion is written off at each extinguishment date. |
(7) | This amount represents the amortization of the debt discount. |
(8) | This amount represents the tax effect of the amortization of the debt discount, debt issuance costs and gain on extinguishment of debt, net of issue cost write-off. |
LeCroys retrospective adoption does not affect LeCroys balance of Cash and cash equivalents and as a result did not change its Net cash flows from operating, investing or financing activities in its Consolidated Statement of Cash Flows for the two quarters ended December 27, 2008.
16
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
The retrospective adoption resulted in the following adjustments to our Consolidated Statements of Stockholders Equity:
(in thousands) |
Additional Paid-In Capital |
Retained Earnings (Accumulated Deficit) |
||||||
Balance at June 30, 2007, as reported |
$ | 108,713 | $ | 2,486 | ||||
Equity component of convertible notes |
17,929 | |||||||
Equity component of debt issuance costs |
(748 | ) | ||||||
Amortization of debt discount |
(2,077 | ) | ||||||
Amortization of debt issuance costs, net of reversal of previously recorded amortization of debt issuance costs |
97 | |||||||
Tax adjustments |
(6,099 | ) | 703 | |||||
Balance at June 30, 2007, as adjusted |
119,795 | 1,209 | ||||||
Fiscal 2008 equity activity, as reported |
4,980 | 1,616 | ||||||
Reacquisition of conversion option |
(739 | ) | ||||||
Amortization of debt discount |
(3,083 | ) | ||||||
Amortization of debt issuance costs, net of reversal of previously recorded amortization of debt issuance costs |
203 | |||||||
Gain on extinguishment of convertible debt, net of issue cost write-off, net of reversal of previously recorded gain on extinguishment of convertible debt, net of issue cost write-off |
(46 | ) | ||||||
Tax adjustments |
262 | 1,039 | ||||||
Balance at June 28, 2008, as adjusted |
124,298 | 938 | ||||||
Fiscal 2009 equity activity, as reported |
3,362 | (106,650 | ) | |||||
Reacquisition of conversion option |
(2,722 | ) | ||||||
Amortization of debt discount |
(2,872 | ) | ||||||
Amortization of debt issuance costs, net of reversal of previously recorded amortization of debt issuance costs |
111 | |||||||
Gain on extinguishment of convertible debt, net of issue cost write-off, net of reversal of previously recorded gain on extinguishment of convertible debt, net of issue cost write-off |
21 | |||||||
Tax adjustments |
966 | 973 | ||||||
Balance at June 27, 2009, as adjusted |
$ | 125,904 | $ | (107,479 | ) | |||
17
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Upon the adoption of the new convertible debt accounting guidance and effective as of the issuance date of the convertible notes, LeCroy recorded, as adjustments to additional paid-in capital, deferred taxes for the differences between the carrying value and tax basis that resulted from allocating approximately $17.9 million of the principal amount of convertible notes and approximately $0.7 million of the associated issuance costs to equity. In subsequent periods, the Company recorded adjustments to the deferred taxes to reflect the tax effect of the amortization of the debt discount, debt issuance costs and gains on the extinguishments of convertible notes, net of issue cost write-offs.
Other
During fiscal 2008, the Company acquired a software license under a capital lease agreement for approximately $0.7 million. The lease bears interest at 7.75% with a three-year term. As of January 2, 2010, the Companys outstanding balance under this agreement was approximately $0.2 million, included in Accrued expenses and other current liabilities on the Consolidated Balance Sheet.
The Companys Swiss subsidiary has an overdraft facility totaling 1.0 million Swiss francs for which approximately 0.4 million Swiss francs are being held against supplier obligations, leaving an available balance of 0.6 million Swiss francs under this facility at January 2, 2010. The outstanding balance under this facility remains unchanged from June 27, 2009.
13. Commitments and Contingencies
The Companys contractual obligations and commitments include obligations associated with employee severance agreements, supplier agreements, operating leases, capital leases, revolving credit and convertible note obligations, as set forth in the Contractual Obligations and Other Commitments table in the Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The Company expensed approximately $0.6 million and $1.2 million related to operating leases for the quarter and two quarters ended January 2, 2010, respectively, and approximately $0.7 million and $1.3 million for the quarter and two quarters ended December 27, 2008, respectively.
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters which arise in the ordinary course of business. There are no matters currently pending that the Company expects to have a material adverse affect on its business, results of operations, financial condition or cash flows.
14. Net Loss Per Common Share (EPS)
The following is a presentation of the numerators and the denominators of the basic and diluted net loss per common share computations for the quarter and two quarters ended January 2, 2010 and December 27, 2008:
Quarter ended (13 weeks) | Two Quarters ended | |||||||||||||||
January 2, 2010 |
December 27, 2008 |
January 2, 2010 (27 weeks) |
December 27, 2008 (26 weeks) |
|||||||||||||
Numerator: |
||||||||||||||||
Net loss, as adjusted (Note 12) |
$ | (281 | ) | $ | (107,272 | ) | $ | (763 | ) | $ | (106,177 | ) | ||||
Denominator: |
||||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
12,387 | 11,962 | 12,323 | 11,922 | ||||||||||||
Employee stock options and other |
| | | | ||||||||||||
Diluted |
12,387 | 11,962 | 12,323 | 11,922 | ||||||||||||
The computations of diluted EPS for the quarters ended January 2, 2010 and December 27, 2008 do not include approximately 2.2 million and 1.9 million, respectively, of stock options and non-vested stock, as the effect of their inclusion would have been anti-dilutive to EPS. The computations of diluted EPS for the two quarters ended January 2, 2010 and December 27, 2008 do not include approximately 2.1 million and 1.6 million, respectively, of stock options and non-vested stock, as the effect of their inclusion would have been anti-dilutive to EPS. Additionally, the convertible notes had no impact on the diluted EPS calculations because the average share price during the periods was below $14.55 per share (the initial conversion price), and accordingly, the Notes, if converted, would have required only cash at settlement.
18
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
15. Income Taxes
The effective income tax rate for the quarter and two quarters ended January 2, 2010 was (74.0)% and (14.4)%, respectively, compared to an effective income tax rate of 1.1% and 0.4% for the quarter and two quarters ended December 27, 2008, respectively. The effective tax rate for the quarter and two quarters ended January 2, 2010 includes the write-off of deferred tax assets related to equity-based compensation of approximately $0.1 million and $0.2 million, respectively. The effective income tax rate for the quarter and two quarters ended December 27, 2008 includes the effect of a non-deductible goodwill impairment charge of $103.8 million, the write-off of a deferred tax asset related to equity-based compensation of $0.4 million, partially offset by a reduction of tax expense of $0.2 million related to a retroactive reinstatement of the federal research and development tax credit as a result of the Emergency Economic Stabilization Act of 2008 (The Act), passed into law on October 3, 2008.
The Company calculates income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year. The differences between the effective tax rate and the U.S. federal statutory rate of 35% principally result from the Companys geographical distribution of taxable income, and differences between the book and tax treatment of certain items.
At January 2, 2010, the Companys net domestic deferred tax assets amounted to approximately $12.3 million. Management has considered the realizability of the deferred tax assets and has concluded that a domestic valuation allowance of approximately $1.4 million should be recorded, mainly related to certain state investment tax credit carryforwards that are not anticipated to be realized. Although management determined that a valuation allowance was not required with respect to most of the net domestic deferred tax assets, recovery is primarily dependent on achieving the forecast of future operating income, as well as prudent tax planning strategies. Based upon the projections, the domestic net operating loss carryforwards and federal tax credit carryforwards would be fully utilized before expiration.
The Company operates in multiple taxing jurisdictions, both within the United States and outside of the United States, and faces audits from various tax authorities regarding the deductibility of certain expenses, intercompany transactions, as well as other matters. At January 2, 2010, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes and accrued interest was approximately $10.9 million, approximately $2.1 million are reflected as a non-current liability and approximately $8.8 million are reflected as a reduction of gross deferred tax assets, all of which would impact the effective tax rate, if recognized.
The Company believes it is reasonably possible that approximately $0.5 million of net unrecognized tax benefits will be recognized during the next twelve months and impact the Companys effective tax rate. However, actual results could differ from those currently anticipated.
The Company recognizes interest and, if applicable, penalties which could be assessed related to unrecognized tax benefits in income tax expense. As of January 2, 2010, the total amount of accrued interest and penalties, before federal and, if applicable, state effect, was approximately $0.1 million.
The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. For federal income tax purposes, fiscal 2006 through 2009 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. For state tax purposes, (principally California and New York) fiscal 2005 through 2009 tax years remain open for examination by the tax authorities under a four year statute of limitations.
16. Geographic Revenue and Assets
The Company operates in a single-reportable segment in the test and measurement market, in which it develops, manufactures, sells and licenses high-performance oscilloscopes, serial data analyzers and global communication protocol test solutions. These products are used by design engineers and researchers to measure and analyze complex electronic signals in order to develop high performance systems, to validate electronic designs and to improve time to market. Revenue from the sale of the Companys products, which are similar in nature, are reflected as Test and measurement product revenue in the Consolidated Statements of Operations.
19
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Revenues are attributed to countries based on customer ship-to addresses. Revenues by geographic area are as follows (in thousands):
Quarter Ended (13 weeks) | Two Quarters Ended | |||||||||||
January 2, 2010 |
December 27, 2008 |
January 2, 2010 (27 weeks) |
December 27, 2008 (26 weeks) | |||||||||
North America |
$ | 13,387 | $ | 11,469 | $ | 26,616 | $ | 22,970 | ||||
Europe/Middle East |
11,955 | 16,817 | 19,912 | 32,268 | ||||||||
Japan |
1,149 | 3,803 | 2,120 | 6,618 | ||||||||
Asia/Pacific |
4,507 | 7,018 | 10,351 | 17,975 | ||||||||
Total revenues |
$ | 30,998 | $ | 39,107 | $ | 58,999 | $ | 79,831 | ||||
Total assets by geographic area are as follows:
January 2, 2010 |
June 27, 2009 | |||||
North America |
$ | 85,527 | $ | 91,597 | ||
Europe/Middle East |
12,885 | 11,169 | ||||
Japan |
2,187 | 1,541 | ||||
Asia/Pacific |
3,873 | 3,371 | ||||
Total assets |
$ | 104,472 | $ | 107,678 | ||
Total Property, plant and equipment, net by geographic area are as follows:
January 2, 2010 |
June 27, 2009 | |||||
North America |
$ | 19,727 | $ | 20,795 | ||
Europe/Middle East |
529 | 644 | ||||
Japan |
230 | 217 | ||||
Asia/Pacific |
253 | 161 | ||||
Total long-lived assets |
$ | 20,739 | $ | 21,817 | ||
20
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
17. New Accounting Pronouncements
Recent pronouncements adopted
In September 2006, FASB issued new accounting guidance on fair value measurements, effective beginning in fiscal 2009. This guidance establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. The FASB deferred the effective date until the beginning of the Companys 2010 fiscal year, as it relates to fair value measurement requirements for non-financial assets and liabilities that are not remeasured at fair value on a recurring basis. This includes fair value calculated in impairment assessments of long-lived assets. The Company adopted the new guidance as it relates to non-financial assets and liabilities and it did not have any impact on the Companys consolidated financial position and results of operations at the date of adoption, although it may impact the way that fair value for non-financial assets and liabilities is determined in future periods.
In December 2007, the FASB issued new guidance on business combinations. It established the principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date fair value. Further, it required that acquisition-related costs be expensed as incurred, restructuring costs be expensed in periods subsequent to the acquisition date and changes in accounting for deferred income tax asset valuation allowances and acquired income tax uncertainties after the measurement period be included in income tax expense. Additionally, disclosure requirements were established to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The new accounting guidance applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with the exception of adjustments made to valuation allowances on deferred taxes and acquired tax contingencies. The Company will apply the provisions under the new guidance to future adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the beginning of the Companys 2010 fiscal year. At January 2, 2010, approximately $2.5 million of unrecognized tax benefits are related to a prior acquisition and would impact the effective tax rate, if recognized.
In May 2008, the FASB issued a staff position on new accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). The staff position requires cash settled convertible debt to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the cash proceeds and this estimated fair value will be recorded as a debt discount, with an offset to equity, and will be amortized to interest expense, using the effective interest method, over the life of the convertible notes. The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008 and for interim periods within those years and required retrospective application. The Company adopted the staff position in fiscal 2010 and has retrospectively applied it to prior periods (See Note 12 Debt and Capital Leases for additional information).
In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The guidance was effective for interim reporting periods ending after June 15, 2009. The Company adopted the enhanced disclosures required in the first quarter of fiscal 2010 and adoption did not have any impact on the Companys consolidated financial position or results of operations.
In June 2009, the FASB Accounting Standards Codification (Codification) was issued. The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification does not change U.S. GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification, which changes the referencing of financial standards, becomes effective for interim and annual periods ending on or after September 15, 2009. The implementation of the Codification did not have any impact on the Companys consolidated financial position or results of operations.
21
Table of Contents
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Recent pronouncement not yet adopted
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010, modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. Early adoption is permitted. The Company is currently assessing the impact on its consolidated financial position and results of operations.
18. Subsequent Events
Management has evaluated events and transactions subsequent to January 2, 2010 through February 11, 2010, which is the date the financials statements were issued and has determined that no additional disclosures are required.
22
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the audited Consolidated Financial Statements, Notes and MD&A included in our Annual Report filed on Form 10-K for the fiscal year ended June 27, 2009. Our discussion and analysis is an integral part of understanding our financial results. Also refer to Basis of Presentation and Use of Estimates in the Notes to the Consolidated Financial Statements.
Our Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are based on managements judgment and available information and, consequently, actual results could differ from these estimates.
The accounting policies that we believe are the most critical to understanding and evaluating our reported financial results include: revenue recognition; reserves on accounts receivable; allowance for excess and obsolete inventory; uncertain tax positions; valuation of deferred tax assets; valuation of long-lived assets; share-based compensation expense; estimation of warranty liabilities and the separation of convertible notes between debt and equity.
We recorded a goodwill impairment charge of approximately $105.8 million in the quarter ended December 27, 2008.
Fiscal Year
Our fiscal years end on the Saturday closest to June 30, resulting in an extra week of results every five or six years. Fiscal 2010 is a fifty-three week year and, as a result, the two quarters ended January 2, 2010 represented a 27-week period compared to a 26-week period for the two quarters ended December 27, 2008.
Business Realignment Initiatives
In the first quarter of fiscal 2010, as a result of a further effort to streamline expenses internationally, we recorded severance of approximately $0.1 million, which was expensed to Selling, general and administrative (SG&A) . This resulted from headcount reductions of four employees or approximately 1.0% of the workforce as compared to June 27, 2009.
In the second quarter of fiscal 2010, as a result of a continued effort to streamline expenses internationally, we recorded severance of approximately $0.1 million, which was expensed to SG&A. This resulted from headcount reductions of three employees or approximately 0.7% of the workforce as compared to June 27, 2009.
Our Business Risks
Our results of operations and financial position are affected by a variety of factors. We believe the most significant recurring factors are the economic strength of the technology markets into which we sell our products, our ability to identify market demands and develop competitive products to meet those demands, the announcements and actions of our competitors and our ability to enter into new markets and broaden our presence in existing markets. Our sales are largely dependent on the health and growth of technology companies whose operations tend to be cyclical. Consequently, demand for our products tends to coincide with the increase or decrease in capital spending in the Computer/Semiconductor/Consumer Electronics, Data Storage, Automotive/Industrial, and Military/Aerospace industries.
Recent Accounting Pronouncements
See Note 17 New Accounting Pronouncements for additional information on recent pronouncements adopted and not yet adopted. Currently we have not adopted the new accounting guidance on revenue recognition effective for fiscal years beginning on or after June 15, 2010, which permits early adoption.
In May 2008, the FASB issued a staff position on new accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). The staff position requires cash settled convertible debt to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the cash proceeds and this estimated fair value will be recorded as a debt discount, with an offset to equity, and will be amortized to interest expense, using the effective interest method, over the life of the convertible notes.
23
Table of Contents
The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008 and for interim periods within those years and required retrospective application. We adopted the staff position in fiscal 2010 and have retrospectively applied it to prior periods. See Note 12 Debt and Capital Leases for additional information.
Consolidated Results of Operations
The following table indicates the percentage of total revenues represented by each item in the Companys Consolidated Statements of Operations for the quarter and two quarters ended January 2, 2010 and December 27, 2008.
(Unaudited) |
Quarter ended (13 weeks) | Two Quarters ended | ||||||||||
January 2, 2010 |
December 27, 2008 (as adjusted) |
January 2, 2010 (27 weeks) |
December 27, 2008 (26 weeks) (as adjusted) |
|||||||||
Revenues: |
||||||||||||
Test and measurement products |
91.6 | % | 94.5 | % | 91.9 | % | 94.4 | % | ||||
Service and other |
8.4 | 5.5 | 8.1 | 5.6 | ||||||||
Total revenues |
100.0 | 100.0 | 100.0 | 100.0 | ||||||||
Cost of revenues |
41.4 | 48.2 | 42.6 | 45.8 | ||||||||
Gross profit |
58.6 | 51.8 | 57.4 | 54.2 | ||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative |
32.8 | 32.8 | 32.3 | 31.8 | ||||||||
Research and development |
22.1 | 22.5 | 22.0 | 20.8 | ||||||||
Impairment of goodwill |
| 270.5 | | 132.5 | ||||||||
Total operating expenses |
54.9 | 325.8 | 54.3 | 185.1 | ||||||||
Operating income (loss) |
3.7 | (274.0 | ) | 3.1 | (130.9 | ) | ||||||
Other income (expense): |
||||||||||||
Gain on extinguishment of convertible debt, net of issue cost write-off |
0.8 | | 1.0 | 0.4 | ||||||||
Interest income |
0.1 | 0.1 | 0.1 | 0.1 | ||||||||
Interest expense |
(2.8 | ) | (2.3 | ) | (2.8 | ) | (2.2 | ) | ||||
Amortization of debt discount |
(2.0 | ) | (2.0 | ) | (2.1 | ) | (1.9 | ) | ||||
Other, net |
(0.3 | ) | 0.1 | (0.4 | ) | 0.3 | ||||||
Other expense, net |
(4.2 | ) | (4.1 | ) | (4.2 | ) | (3.3 | ) | ||||
Loss before income taxes |
(0.5 | ) | (278.1 | ) | (1.1 | ) | (134.2 | ) | ||||
Provision (benefit) for income taxes |
0.4 | (3.8 | ) | 0.2 | (1.2 | ) | ||||||
Net loss |
(0.9 | )% | (274.3 | )% | (1.3 | )% | (133.0 | )% | ||||
Comparison of the Quarter Ended January 2, 2010 and December 27, 2008
Total revenues were approximately $31.0 million for the quarter ended January 2, 2010, compared to $39.1 million for the comparable prior year period, representing a decrease of 20.7%, or approximately $8.1 million, primarily as a result of a measurable decline in sales of Test and measurement products. High-end oscilloscope sales increased over the prior year period and favorable foreign currency impacted revenue by approximately $1.3 million. However, these gains were more than offset by declines in both mid-range and low-end oscilloscope sales, which were more heavily impacted by the economic downturn.
Service and other revenues consist primarily of service revenue and maintenance fees. Service and other revenues were approximately $2.6 million for the quarter ended January 2, 2010, representing an increase of approximately 21.1% or $0.5 million, compared to approximately $2.2 million for the comparable prior year period. The increase was primarily the result of revenue earned from a research and development arrangement entered into in the first quarter of fiscal 2010 and other services.
24
Table of Contents
Revenues by geographic location expressed in dollars (in thousands) and as a percentage of total were:
Quarter Ended January 2, 2010 |
percentage | Quarter Ended December 27, 2008 |
percentage | |||||||||
North America |
$ | 13,387 | 43.2 | % | $ | 11,469 | 29.3 | % | ||||
Europe/Middle East |
11,955 | 38.6 | 16,817 | 43.1 | ||||||||
Japan |
1,149 | 3.7 | 3,803 | 9.7 | ||||||||
Asia/Pacific |
4,507 | 14.5 | 7,018 | 17.9 | ||||||||
Total revenues |
$ | 30,998 | 100.0 | % | $ | 39,107 | 100.0 | % | ||||
For the quarter ended January 2, 2010 geographic revenues were lower in terms of dollars and percentages in all regions, except North America, due to the worldwide economic downturn, despite positive foreign exchange impact. Gains in North America were attributable to increased sales of our high-end oscilloscopes, driven more by the technological advantages we are providing to our customers than the negative impact of the economic environment.
Gross profit for the quarter ended January 2, 2010 was approximately $18.2 million, or 58.6% gross margin, compared to approximately $20.3 million, or 51.8% gross margin, for the comparable prior year period. The gross margin for the quarter ended December 27, 2008 was negatively impacted by an approximate $2.7 million charge for the write-down of inventory and approximately $0.1 million of severance costs, as a result of realignment initiatives and change in product strategy. The gross margin for the quarter ended January 2, 2010 was positively impacted by revenue earned from a research and development arrangement entered into in the first quarter of fiscal 2010. Absent these charges, the gross margin percentage was slightly less than the prior year comparable period.
Selling, general and administrative (SG&A) expense was approximately $10.2 million for the quarter ended January 2, 2010 as compared to approximately $12.8 million for the quarter ended December 27, 2008, representing a decrease of approximately 20.8% or $2.7 million. The decrease was mainly attributable to our extensive cost-reduction program that began during the prior year comparable period which included reductions in workforce, compensation and other employee benefits. Business realignment charges for the quarter ended January 2, 2010 were approximately $0.1 million as compared to approximately $0.8 million for the quarter ended December 27, 2008, offset by an increase to share-based compensation expense in the current quarter. In the second quarter of fiscal 2010, share-based compensation expense was approximately $0.8 million as compared to $0.1 million in the second quarter of fiscal 2009. As a percentage of total revenues, SG&A expense remained flat at approximately 32.8% in both comparable quarters.
Research and development (R&D) expense was approximately $6.8 million for the quarter ended January 2, 2010, compared to approximately $8.8 million for the comparable prior year period, a decrease of approximately 22.4% or $2.0 million. The decrease resulted primarily from our extensive cost-reduction program that began in the second quarter of fiscal 2009 and no business realignment charges in the current quarter as compared to approximately $0.6 million for the quarter ended December 27, 2008. Share-based compensation increased from approximately $0.1 million for the quarter ended December 27, 2008 to approximately $0.3 million for the quarter ended January 2, 2010. As a percentage of total revenues, R&D expense decreased slightly over the prior year comparable quarter.
Other expense, net, consists primarily of gains on the extinguishment of our convertible debt, net of issue cost write-off, interest income and expense, foreign exchange gains and losses and amortization of debt discount on convertible notes. Other expense, net was approximately $1.3 million in the second quarter of fiscal 2010 compared to approximately $1.6 million for the second quarter of fiscal 2009. Net interest expense was approximately $0.8 million for the quarter ended January 2, 2010 as compared to approximately $0.9 million for the comparable prior period. In addition, there was a foreign exchange loss of approximately $0.1 million in the second quarter of fiscal 2010 as compared to almost zero foreign exchange impact in the second quarter of fiscal 2009, resulting from the changes in our foreign exchange forward contracts and on transactions denominated in other than our functional currencies. The current quarter also includes a gain on the extinguishment of convertible debt, net of issue cost write-off of approximately $0.3 million, as we repurchased $2.4 million of our outstanding convertible notes. Due to the adoption of new accounting guidance related to our convertible notes, we recorded approximately $0.6 million of non-cash amortization expense in the second quarter of fiscal 2010 compared to approximately $0.8 million of non-cash amortization expense in the second quarter of fiscal 2009. The decrease is due to the impact of convertible note repurchases more than offsetting the accretion of the debt discount. See Note 12 Debt and Capital Leases for further details related to the retrospective adoption.
25
Table of Contents
Comparison of the Two Quarters Ended January 2, 2010 and December 27, 2008
Total revenues were approximately $59.0 million for the two quarters ended January 2, 2010, compared to $79.8 million for the comparable prior year period, representing a decrease of approximately $20.8 million, or 26.1%, primarily as a result of a measurable decline in sales of Test and measurement products, driven by the worldwide economic downturn. This decrease was only slightly offset by an additional week of sales in our fiscal 2010 year, as the two quarters ended January 2, 2010 included 27-weeks versus 26-weeks for the two quarters ended December 27, 2008, along with positive foreign currency impact of approximately $0.6 million. Our sales were impacted by our customers reducing staffing levels and therefore their need for capital equipment, as well as postponing and reducing spending.
Service and other revenues consist primarily of service revenue and maintenance fees. Service and other revenues were approximately $4.8 million for the two quarters ended January 2, 2010, representing an increase of approximately 8.0% or a $0.4 million, compared to $4.5 million for the comparable prior year period. The increase was primarily the result of revenue earned from a research and development arrangement and other services, slightly offset by a decline in customer upgrade purchases furthered by the economic downturn.
Revenues by geographic location expressed in dollars (in thousands) and as a percentage of total were:
Two Quarters Ended January 2, 2010 (27 weeks) |
percentage | Two Quarters Ended December 27, 2008 (26 weeks) |
percentage | |||||||||
North America |
$ | 26,616 | 45.2 | % | $ | 22,970 | 28.8 | % | ||||
Europe/Middle East |
19,912 | 33.7 | 32,268 | 40.4 | ||||||||
Japan |
2,120 | 3.6 | 6,618 | 8.3 | ||||||||
Asia/Pacific |
10,351 | 17.5 | 17,975 | 22.5 | ||||||||
Total revenues |
$ | 58,999 | 100.0 | % | $ | 79,831 | 100.0 | % | ||||
For the two quarters ended January 2, 2010, geographic revenues were lower in terms of dollars and percentages in all regions, except North America, due to the worldwide economic downturn. North America gains were attributable to strong sales of our high bandwidth oscilloscopes.
Gross profit for the two quarters ended January 2, 2010 was approximately $33.8 million, or 57.4% gross margin, compared to $43.3 million, or 54.2% gross margin, for the comparable prior year period. The gross margin for the two quarters ended December 27, 2008 was negatively impacted by an approximate $2.7 million charge for the write-down of inventory and approximately $0.1 million of severance costs, as a result of realignment initiatives and change in product strategy. The gross margin for the two quarters ended January 2, 2010 was positively impacted by revenue earned from a research and development arrangement entered into in the first quarter of fiscal 2010. Absent these charges, the gross margin percentage was slightly less than the prior year comparable period.
Selling, general and administrative (SG&A) expense was approximately $19.1 million for the two quarters ended January 2, 2010 compared to approximately $25.4 million for the two quarters ended December 27, 2008, representing a decrease of approximately $6.4 million or 25.0%. The decrease was mainly attributable to our extensive cost-reduction program that began during the second quarter of fiscal 2009, along with a decrease in business realignment charges of approximately $0.6 million. These reductions were partially offset by an increase in stock-based compensation expense of approximately $0.7 million and an additional week of compensation expense, as the current fiscal year period represented a 27-week period versus a 26-week period in the prior comparable period. As a percentage of total revenues, SG&A expense remained relatively flat at approximately 32.0% in both periods.
Research and development (R&D) expense was approximately $13.0 million for the two quarters ended January 2, 2010, compared to $16.6 million for the comparable prior year period, a decrease of approximately 22.0% or $3.7 million. The decrease primarily resulted from our extensive cost-reduction program that began during the second quarter of fiscal 2009 along with no business realignment charge in the current period, as compared to an approximate $0.6 million charge in fiscal 2009, partially offset by an increase in share-based compensation expense of approximately $0.2 million and an additional week of compensation expense, as the two quarters ended in fiscal 2010 represent a 27-week period versus a 26-week period in fiscal 2009. As a percentage of total revenues, R&D expense increased from 20.8% for the two quarters ended December 27, 2008 to 22.0% for the two quarters ended January 2, 2010, primarily as a result of a lower sales base.
Other expense, net, consists primarily of gains on the extinguishment of our convertible debt, net of issue cost write-off, interest income and expense, foreign exchange gains and losses and amortization of debt discount on convertible notes. Other expense, net was approximately $2.5 million in for the two quarters ended January 2, 2010 compared to approximately
26
Table of Contents
$2.6 million for the two quarters ended December 27, 2008. Net interest expense was approximately $1.6 million for the two quarters ended January 2, 2010 as compared to approximately $1.7 million for the comparable prior period. In addition, there was a foreign exchange loss of approximately $0.3 million for the two quarters ended in fiscal 2010 as compared to a foreign exchange gain of approximately $0.3 million for the two quarters ended in fiscal 2009, resulting from the changes in our foreign exchange forward contracts and on transactions denominated in other than our functional currencies. The current fiscal quarters of 2010 also included a gain on the extinguishment of convertible debt, net of issue cost write-off of approximately $0.6 million, as we repurchased $3.4 million of our outstanding convertible notes as compared to approximately $0.3 million for the two quarters ended December 27, 2008. Due to the adoption of new accounting guidance related to our convertible notes, we recorded approximately $1.2 million of non-cash amortization expense on a year to date basis in fiscal 2010 as compared to approximately $1.4 million of non-cash amortization expense in the two quarters ended in fiscal 2009. The decrease is due to the impact of convertible note repurchases more than offsetting the accretion of the debt discount. See Note 12 Debt and Capital Leases for further details related to the retrospective adoption.
Income Taxes
Our effective income tax rate for the quarter and two quarters ended January 2, 2010 was (74.0)% and (14.4)%, respectively, compared to an effective income tax rate of 1.1% and 0.4% for the quarter and two quarters ended December 27, 2008, respectively. Our effective tax rate for the quarter and two quarters ended January 2, 2010 includes the write-off of deferred tax assets related to equity-based compensation of approximately $0.1 million and $0.2 million, respectively. Our effective income tax rate for the quarter and two quarters ended December 27, 2008 includes the effect of a non-deductible goodwill impairment charge of $103.8 million, the write-off of a deferred tax asset related to equity-based compensation of $0.4 million, partially offset by a reduction of tax expense of $0.2 million related to a retroactive reinstatement of the federal research and development tax credit as a result of the Emergency Economic Stabilization Act of 2008 (The Act), passed into law on October 3, 2008.
We calculate income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year. The differences between the effective tax rate and the U.S. federal statutory rate of 35% principally result from our geographical distribution of taxable income, and differences between the book and tax treatment of certain items.
At January 2, 2010, our net domestic deferred tax assets amounted to approximately $12.3 million. We have considered the realizability of the deferred tax assets and concluded that a domestic valuation allowance of approximately $1.4 million should be recorded, mainly related to certain state investment tax credit carryforwards that are not anticipated to be realized. Although we determined that a valuation allowance was not required with respect to most of the net domestic deferred tax assets, recovery is primarily dependent on achieving the forecast of future operating income, as well as prudent tax planning strategies. Based upon the projections, the domestic net operating loss carryforwards and federal tax credit carryforwards would be fully utilized before expiration.
Liquidity and Capital Resources
Cash and cash equivalents at January 2, 2010 were approximately $9.3 million compared to approximately $6.4 million at June 27, 2009.
Net cash provided by operating activities was approximately $5.1 million for the two quarters ended January 2, 2010 compared to net cash used in operating activities of approximately $1.2 million in the same period last year. The net cash provided by operating activities in fiscal 2010 was attributable to working capital contributions of approximately $0.5 million. The fiscal 2010 net loss of approximately $0.8 million and non-cash gain on the extinguishment of convertible debt, net of issue cost write-off of approximately $0.6 million was offset by non-cash depreciation and amortization of approximately $2.7 million, share-based compensation expense of approximately $2.0 million and debt related amortization of approximately $1.4 million. The net cash used in operations in fiscal 2009 was due to net loss of approximately $106.2 million, working capital requirements of approximately $4.8 million and deferred income taxes of approximately $1.8 million, partially offset by a non-cash goodwill impairment charge of approximately $105.8 million, non-cash depreciation and amortization of approximately $3.2 million, debt related amortization of approximately $1.8 million and share-based compensation of approximately $1.0 million.
Net cash used in investing activities was attributable to the purchase of property, plant and equipment of approximately $1.2 million in the two quarters ended January 2, 2010 compared to approximately $2.6 million in the same period in fiscal 2009. This decrease was due to less discretionary capital spending under our cost-reduction program.
Net cash used in financing activities was approximately $1.1 million in the two quarters ended January 2, 2010 compared to net cash provided by financing activities of approximately $2.8 million in the same period in fiscal 2009. Net
27
Table of Contents
cash used in financing activities was primarily due to the repurchase of convertible notes of approximately $3.8 million (cash payments for principal), partially offset by borrowing of approximately $2.5 million under our line of credit. Net cash provided by financing activities in fiscal 2009 was primarily the result of net borrowings under the credit line of $6.0 million, partially offset by the repurchase of convertible notes of approximately $2.8 million (cash payments for principal) and the purchase of treasury shares for approximately $0.7 million.
We believe that our cash and cash equivalents on hand, cash flow expected to be generated by our operations and availability under our revolving credit line will be sufficient to fund our operations, working capital, share repurchases and capital expenditure requirements for the foreseeable future and provide funds for potential acquisition opportunities. We believe that the repayment of debt maturing in fiscal 2012 will be done through a combination of cash generated from operations and working capital, and will also include possible future financing sources such as: (i) new secured bank debt; (ii) the sale or monetization of certain assets; (iii) new unsecured debt; and (vi) issuance of equity and/or equity-like securities.
Contractual Obligations and Other Commitments
Our contractual obligations and commitments include obligations associated with our employee severance agreements, supplier agreements, operating and capital leases, revolving credit and convertible note obligations, as set forth in the table below (in thousands):
Payments due by Period as of January 2, 2010 | |||||||||||||||
Total | Less than 1 Year |
1-3 Years | 3-5 Years | More than 5 Years | |||||||||||
Severance |
$ | 557 | 431 | 126 | | | |||||||||
Supplier agreements |
903 | 903 | | | | ||||||||||
Operating lease obligations |
5,594 | 2,051 | 2,548 | 995 | | ||||||||||
Vendor supplied capital lease agreement |
195 | 195 | | | | ||||||||||
Convertible notes (1) |
44,950 | | 44,950 | | | ||||||||||
Revolving credit obligation (2) |
20,000 | 20,000 | |||||||||||||
Total (3) |
$ | 72,199 | $ | 3,580 | $ | 67,624 | $ | 995 | $ | | |||||
(1) | The Convertible notes mature on October 15, 2026. Holders of the Convertible notes have the right to require us to repurchase all or a portion of the Convertible notes on October 15, 2011, which is reflected above. |
(2) | The revolving credit facility expires on July 15, 2011, unless, in the absence of any default, extended by us to April 15, 2012, contingent on the waiver or extension of the first redemption date of our Convertible notes. |
(3) | The Contractual Obligations and Other Commitments table does not include any reserves for income taxes because we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves. |
Forward-Looking Information
We discuss expectations regarding our future performance in our annual and quarterly reports, press releases, and other written and oral statements. These forward-looking statements are based on currently available information, business plans and projections about future events and trends. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations. When used in this Form 10-Q, the words anticipate, believe, estimate, will, plan, intend, expect and similar expressions identify forward-looking statements. Except as required by federal securities law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. When evaluating our business, the Risk Factors included in Item 1A. of our Annual Report filed on Form 10-K for the fiscal year ended June 27, 2009 should be considered in conjunction with all other information included in our filings.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in market risk since the filing of the Companys Annual Report on Form 10-K for the fiscal year ended June 27, 2009.
28
Table of Contents
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There have been no changes in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended January 2, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
29
Table of Contents
LeCROY CORPORATION
ITEM 1. | LEGAL PROCEEDINGS |
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters which arise in the ordinary course of business. There are no matters currently pending that the Company expects to have a material adverse affect on its business, results of operations, financial condition or cash flows.
ITEM 1A. | RISK FACTORS |
There has been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 27, 2009.
The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The Companys 2009 annual meeting of stockholders was held on November 18, 2009. At the meeting, our stockholders approved two proposals presented pursuant to the vote totals indicated below:
Proposal 1
Election of Directors
Nominees |
For | Withheld | ||
William G. Scheerer |
10,062,410 | 1,115,017 | ||
Allyn C. Woodward, Jr. |
10,061,819 | 1,115,608 |
Proposal 2
To approve amendments to the Companys Amended and Restated 1995 Employee Stock Purchase Plan to extend the termination date of the plan to November 30, 2015 and to increase by 800,000 shares the number of shares of Common Stock reserved for issuance under the plan.
For |
Against |
Abstain* |
Broker Non-Votes* | |||
8,108,940 |
250,303 | 12,000 | 2,806,184 |
* | Shares that reflect abstentions or broker non-votes are counted for purposes of determining whether a quorum is present for the transaction of business at the annual meeting, but are not counted as votes on any proposals presented at the annual meeting. |
As of the close of business on September 23, 2009, the record date, we had outstanding 12,498,110 shares of Common Stock, $0.01 par value. Proxies representing 11,177,427 shares or approximately 89% of the eligible voting shares were tabulated. For information regarding the vote required for the approval of the matters voted on at the annual meeting, please see the Companys 2009 Proxy Statement.
30
Table of Contents
ITEM 6. | EXHIBITS |
The following exhibits are filed herewith.
Exhibit Number |
Description |
Filed Herewith | ||
31.1 | Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | x | ||
31.2 | Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | x | ||
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350. | x | ||
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350. | x |
31
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 11, 2010 | LeCROY CORPORATION | |||
/s/ SEAN B. OCONNOR | ||||
Sean B. OConnor | ||||
Vice President and Chief Financial Officer, Secretary and Treasurer |
32